May 5, 2020 – D&L Industries’ recurring income reached P515 million, or earnings per share of P0.07, in the first quarter of 2020 (1Q20). This is 13% lower quarter-on-quarter and 31% lower than for the same period last year. The income decline on a year-on-year comparison appears steeper as the first quarter of 2019 (1Q19) was the best quarter recorded last year, when earnings still managed to inch up. Meanwhile, earnings before interest and taxes (EBIT) in 1Q20 was lower by 26% at P719 million. Revenues for the period declined by 3% y-o-y to P5.7 billion.
“The COVID-19 pandemic has disrupted many aspects of our daily lives and how businesses operate,” remarked President & CEO Alvin Lao. “However, just like any other crisis that we’ve gone through in the past, this is also an opportunity for our business to build long-term resilience. We believe that we are fundamentally equipped to weather this storm given our strong balance sheet and the essential nature of the businesses we’re in, which should see continued demand even in this challenging environment. Additionally, our extensive investments in R&D will allow us to reinvent ourselves and pursue opportunities that may have high value-added potential in the current situation. We are committed to our Batangas expansion, as we see its long-term investment merits remaining intact. In our 57-year history, we’ve faced many, many adversities – may it be a severe natural calamity, political disruption, or a financial crisis. What has allowed us to survive and grow our business to where it is today are the decisions we’ve made that were anchored on our long-term strategic view. In our view, the current market sell-off is a limited window of opportunity for shareholders who, like us, seek long-term value.”
Resilient operations and robust balance sheet
Despite the various restrictions imposed during the Enhanced Community Quarantine (ECQ) in Luzon, the company remains mostly operational. This has helped to prevent major disruptions in the supply of essential raw materials in the food and sanitation chemicals industry in the country.
With the ECQ in place, the company is able to operate at around 50-60% utilization vs. utilization of around 75-80% prior to COVID-19, for its businesses that are allowed to operate. About 27% of its workforce are able to physically report to work while another 20% are able to work from home in various capacities. In addition, the company has provided sleeping quarters at the plant for about 60% of those who are reporting to work. These provisions were put in place due to the unavailability of public transportation under the ECQ and to limit exposure when commuting.
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. 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.
From a capital structure perspective, the company is in a solid position to withstand external pressure. As of end-March 2020, it remained lightly geared with net debt at just 12% and interest cover at 18x. In addition, the cash conversion cycle for the period was lower at 141 days vs 161 days in 2019. This resulted from an improvement in AR days and inventory days.
COVID-19 pandemic resulted in shift in sales mix and lower HMSP volume
The earnings decline for the period mainly stemmed from the unprecedented disruptions caused by the COVID-19 pandemic. Indications of a general market weakness was seen as early as February, as consumers started going out less, due to the growing fear of possible local transmissions in the country. The disruption came in full swing as local cases grew and with the government placing the entire island of Luzon under ECQ by mid-March.
For the first quarter of the year, the company saw its sales mix tilt towards commodities as demand focused on basic raw materials. Commodity sales accounted for 36% of total revenues compared to just 31% in full-year 2019. The remaining 64% of revenues were accounted for by the High Margin Specialty Products (HMSP) segment.
HMSP volume for the period declined by 9% YoY in 1Q20. Most of the decline was observed after the implementation of the ECQ. In March alone, HMSP volume was down by 22% YoY as many customers were either closed or were 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.
Gross profit margin for the period declined by 3.5 ppts to 17.5% given less favorable sales mix and as both HMSP and commodities saw margin compression. HMSP margins declined by 1.0 ppt 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 6.1 ppts YoY, given the ample available supply amidst the closure of various establishments.
Overall, the company remains profitable. Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 11.7% and 14.3%, respectively, for the first quarter of 2020.
Opportunities in crisis
While the pandemic presented several challenges, the company believes that the situation has also presented various opportunities. As many businesses are unable to operate, including some of the company’s competitors, many of whom are more reliant on imported raw materials and finished products, the current situation has provided a window of opportunity to grab market share and increase relevance to customers.
The company’s extensive investments in R&D and in-depth technical knowledge allow it to pursue product developments which have high value-added potential in the current environment. For instance, the company has been doing work on various additives with antiviral, antimicrobial and antifungal properties that can be used for medical, F&B packaging, and other industrial applications.
In terms of business processes, the current situation prompted the company to look at the various aspects of operations and see where efficiencies can be introduced. For instance, the company has been doing more transactions online, such as payments, remittances, and group meetings.
Lastly, this crisis has demonstrated the company’s commitment in fulfilling its crucial role in the Philippine manufacturing sector by ensuring that there will be no disruption in the supply of much needed raw materials in the country. This was viewed positively by various stakeholders including the National Government as well as Local Government Units. Meanwhile, the financial assistance and donations made to various institutions have likewise demonstrated the company’s alignment with the communities where it operates and that the company remains united with the public in fighting COVID-19.
Long-term growth story remains intact
The disruptions brought by the pandemic might be felt in the near to medium-term. Nonetheless, the company believes that its long-term growth story is intact. The company remains committed to its expansion plan in Batangas. We understand that construction will resume once the government lifts the ECQ, as construction in PEZA is likely allowed under a General Community Quarantine or GCQ.
This expansion facility will be instrumental in the company’s long-term growth strategy. This will give the company the capability to 1) add value to its current product line-up by offering more sophisticated and customized formulations, and 2) increase its export sales to 50% of total revenues. The new facility will also introduce a meaningful de-risking of operations as the company’s current manufacturing facilities are heavily concentrated in Metro Manila.
Export revenues for the period remained relatively resilient as it managed to grow by 12% YoY. Food ingredients accounted for the bulk of exports. Export contribution to total revenues increased to 22% compared to 19% over the same period last year. The company remains optimistic that it will reach its long-term target export contribution of 50%. The new plants will add a significant amount of new capacity, focusing mainly on higher value and higher margin products which will allow the company to cater to more customers in both local and overseas markets in the future.
The food ingredients segment posted a 34% YoY decline in net income in 1Q20. 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 transmission. Furthermore, the implementation of ECQ in Luzon by mid-March resulted in the temporary closure of hotels, restaurants, and caterers which, in turn, resulted in lower demand across the various subsegments of food ingredients. HMSP volume fell by 6% YoY, while commodity volume jumped by 53% 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 5.8 ppts for the period.
Oleochemicals and Other Specialty Chemicals
Chemrez group saw its total volume decline by 26% in 1Q20. 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. On a year-on-year basis, export sales were down 3%. However, on a quarter-on-quarter basis, export sales were already up 60% from a slump recorded in the last quarter of 2019. Meanwhile, the segment recorded a higher effective tax rate with the income tax holiday expiration of Oleochemicals in March 2019. Overall, the group posted a 36% decline in income for the period.
Specialty plastics net income was down 28% YoY in 1Q20. This was mainly due to the 8% 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.
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 48% YoY and net income jumped by 44% YoY in 1Q20.
-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 longstanding 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 www.dnl.com.ph.