Export business continues to post resilient growth
While the domestic business has faced adversities on various fronts, the company’s export business continues to show resilient growth. In the second quarter alone, export sales grew by 41% y-o-y, bringing 1H20 growth to 25% YoY. Export contribution to total revenues in 2Q20 posted a record high of 31%. This brings 1H20 export contribution to 26% compared to just 19% over the same period last year.
Coconut-based products under food and oleochemicals were the main drivers behind the robust export growth. Coconut oil continues to gain traction in the global market due to its perceived natural antiviral, antibacterial, and antifungal properties. In addition, coconut-based products are great organic and sustainable substitutes for many petroleum-based raw materials used in personal hygiene and home cleaning products. The company sees continued strong coconut oil exports, which should offset some of the weakness in the domestic market in the near term.
Management Perspective: Second half of the year likely better
“The weak earnings for the period mainly stemmed from the unprecedented economic disruptions caused by the COVID-19 pandemic. Results for the second quarter didn’t come as a surprise as the months of April and May were placed under strict lockdown measures. The month of April was likely the worst month for our business as it was the only month to-date when Metro Manila was under 100% Enhanced Community Quarantine (ECQ). Nonetheless, our business remained profitable in April, and we didn’t have any month in the first half where net income was negative,” remarked President & CEO Alvin Lao.
“In June, we started seeing a pick up in activity, albeit still lower than pre-quarantine levels, due to pent-up demand and as the government started easing restrictions by shifting Metro Manila to a General Community Quarantine (GCQ). Despite the challenging first half of the year, we remain optimistic and see a gradual recovery as restrictions ease in the country. We continue to sense that things are getting better each month as more and more of our customers are able to ramp up operations under the new normal. A possible monkey wrench, however, is a second wave that can return us to a stricter quarantine,” Lao added.
Batangas expansion comes at an opportune time
D&L remains committed to its Batangas expansion which is deemed to come at an opportune time. The said expansion facility will mainly cater to D&L’s growing export businesses in the food and oleochemicals segments. It will add the capability to manufacture downstream packaging and will allow the company to capture a bigger part of the production chain. For instance, while the company primarily sells raw materials to customers in bulk, the new plants will allow it to “pack at source”. This means that D&L will have the ability to process the raw materials and package them closer to finished consumer-facing products. This will enable D&L to move a step closer to its customers by providing customized solutions and simplifying their supply chain which is of high importance given logistical challenges in general.
D&L’s Batangas expansion will be instrumental to its future growth as it plans to develop more high value-added coconut-based products and penetrate new international markets. The company to-date has successfully made in-roads in supplying various raw materials and even finished products in the most relevant fast-moving consumer goods (FMCG) categories in the new normal. It plans to further expand its global footprint and target export sales to account for 50% of its total sales in the long-term.
The Batangas plant was originally slated to be completed by the middle of next year. However, given the delays associated with the community quarantine, construction completion and start of operations have been pushed back by several months, likely to end-2021.
Pandemic resulted in shift in sales mix and lower HMSP volume but operations remain resilient
For the first half of the year, the company saw its sales mix tilt towards commodities as demand focused on basic raw materials. Commodity sales accounted for 37% of total revenues, compared to just 31% in full-year 2019. The remaining 63% of revenues were accounted for by the High Margin Specialty Products (HMSP) segment.
HMSP volume for the period declined by 16% YoY in 1H20. The sudden decline in volume was observed after the implementation of the ECQ in mid-March. HMSP volume was unchanged for the months of January and February but fell 22% YoY in March and 25% YoY in 2Q20 as many customers were either closed or buying much less than normal. In addition, certain business segments of the company, such as those that involve construction as well as the manufacturing of industrial products, were deemed non-essential and were not allowed to operate during the ECQ which lasted until mid-May.
Gross profit margin for the period declined by 5.1 ppts to 16.7% given less favorable sales mix and as both HMSP and commodities saw margin compression. HMSP margins declined by 1.4 ppts YoY mainly due to the shift in sales mix within HMSP itself, as much of the demand also focused on the lower margin HMSP. Meanwhile, commodity margins dropped by 8ppts YoY, given the ample available supply amidst the closure of various establishments.
With appropriate adjustments and operational contingencies in place, the company believes that its operations will remain resilient amidst the possibility of further extensions in the quarantine period and protracted weakness in economic activity. Moreover, as the majority of the products that the company manufactures cater to basic industries such as food ingredients and sanitation chemicals which are considered essential, the company sees continued demand ahead.
From a capital structure perspective, the company is in a solid position to withstand external pressure. As of end-June 2020, it remained lightly-geared with net debt at just 8% and interest cover at 14x. In addition, the cash conversion cycle for the period was lower at 155 days vs 161 days in 2019 as AR days remained stable.
Overall, the company remains profitable. Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 9% and 11.8%, respectively, for the first half of 2020.
Segment Results
Food Ingredients
The food ingredients segment posted a 60% YoY decline in net income in 1H20. While January sales were steady, general market weakness was felt as early as February as people started going out less with the growing fear of local virus transmissions. Furthermore, the implementation of ECQ in Luzon by mid-March which lasted until mid-May resulted in the temporary closure of hotels, restaurants, and caterers which, in turn, resulted in lower demand across the various subsegments of food ingredients. Under GCQ, restaurants continue to operate below capacity with only 50% utilization allowed. HMSP volume for the period fell by 12% YoY, while commodity volume jumped by 47% YoY, as demand focused on basic raw materials. Some of the HMSP food ingredients that the company manufactures go into higher-end products that were deemed non-essential during the quarantine. Overall, food ingredients margins compressed by 7.9 ppts for the period.
Oleochemicals and Other Specialty Chemicals
Chemrez group saw its total volume decline by 28% in 1H20. This was mainly due to lower volumes for biodiesel and other specialty chemicals, which are chemicals used in various construction and industrial applications that were deemed as non-essential during ECQ. Meanwhile, HMSP Oleochemicals which are coconut-based products used for personal, home and health care, remained a bright spot as volume and revenues increased by 5% YoY and 17% YoY, respectively, for the period. Overall, the group posted a 36% decline in income in 1H20. The segment also recorded a higher effective tax rate with the income tax holiday expiration of Oleochemicals in March 2019.
Specialty Plastics
Specialty plastics net income was down 37% YoY in 1H20. This was mainly due to the 29% decline in total volume, as demand for engineered polymers and colorants and additives remained soft. This segment continues to feel the effects of the slowdown and supply chain disruption in the global auto industry as about half of its sales come from export-oriented raw materials for automotive wire harness applications. Moreover, many of the local plastic molders, who are the main customers for the colorants and additives segment, were not operating during the ECQ.
Aerosols
The aerosols segment experienced significant growth in its business, as demand for sanitation chemicals such as disinfectant sprays and alcohol saw a notable surge. Revenues grew by 19% YoY and net income jumped by 20% YoY in 1H20.
-end-
D&L Industries is a Filipino company engaged in product customization and specialization for the food, chemicals, plastics, and aerosol industries. The company’s principal business activities include manufacturing of customized food ingredients, specialty raw materials for plastics, and oleochemicals for personal and home care use. Established in 1963, D&L has the largest market share in each of the industries it serves, as well as long-standing customer relationships with the Philippines’ leading consumer and chemical companies. It was listed on the Philippine Stock Exchange in December 2012. For more information, please visit //dnl.com.ph/investors/INVESTOR RELATIONS CONTACT
Crissa Marie U. Bondad
Investor Relations Manager- D&L Industries, Inc.
+632 8635 0680
crissabondad@dnl.com.ph / ir@dnl.com.ph