November 5, 2019 – D&L Industries’ recurring income reached P2.0 billion, or earnings per share of P0.28, in the first nine months of 2019 (9M19). This is 15% lower than last year. Earnings before interest and taxes was lower by 10% at P2.7 billion. In the third quarter alone (3Q19), net income fell 29% y-o-y to P617 million, or earnings per share of P0.09. Earnings before interest and taxes for the quarter was lower by 21% y-o-y to P849 million.
“The company has faced a challenging environment in 2019, brought on by a confluence of external factors,” remarked President & CEO Alvin Lao. “However, we look forward to focusing our efforts, harnessing the recent gains in sales mix and high margin products as a foundation for long-term growth. Over our 56-year history, we have navigated through several economic cycles and have transformed ourselves with increased resilience along the way. We believe that we are at the bottom of the cycle in terms of net income decline, with 2019 marking the first year, since the IPO, in which D&L may post a decline in full-year net income.Consequently, a further sell-off in the stock presents a limited window of opportunity for shareholders who, like us, seek long-term value. We’re already seeing signs of our business picking up, especially in the food segment where margins and sales mix are continuing to improve. Our expanded production capacity planned for 2021, with its improved capabilities, will place us in a strong position to increase our value to customers and further expand our export business.”
Emerging signs of recovery; 2020 on track to be a better year
3Q19 results showed emerging signs of recovery. For instance, total HMSP (High Margin Specialty Products) volume in 3Q19 was up 15% quarter-on-quarter, coming from a slump in 2Q19.
The food ingredients business has started to pick up. In 3Q19 alone, HMSP food ingredients volume grew by 7% y-o-y, coming from a decline of 8% y-o-y in 2Q19. The Specialty Ingredients segment within the food business, which has higher average margins, posted a 39% y-o-y increase in volume for the quarter.
Moving into 2020, on the macro front, optimism stems from 1) continued easing in inflation, 2) lower interest rates and reserve ratio requirement, 3) ramp up in government spending, 4) much less port congestion compared to last year, 5) expectations of lower crude oil prices, and 6) expected passage of the CITIRA bill in the next few months, which will address several uncertainties.
Looking internally, the company has made progress in key strategic initiatives which are fundamental and are indicative of future growth. The impact of the company’s investments in R&D can be seen in the margin recovery in several business segments. This is also a sign of the company steadily progressing up the value chain. In 9M19, blended gross profit margins expanded by 3 ppts to 21.2%. HMSP margins for the period stood at 25.5%, up 2.1 ppts y-o-y, while commodity margins stood at 11.7%, up 3.3 ppts y-o-y.
D&L Historical Blended Margins
Another area of progress is the improvement in HMSP sales contribution which stood at a record-high of 72% in 3Q19, bringing 9M19 contribution to 71%. The company continues to focus much of its resources in growing the high margin side of the business. Assuming improvement in the macro environment, positive momentum in both margins and HMSP revenue contribution should translate to better growth moving forward.
The company’s return ratios remain healthy. In 9M19, Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 16% and 20%, respectively. Meanwhile, the balance sheet remains robust with net gearing at 9% and interest cover still comfortable at 17x. As of end-September 2019, net debt stood at P1.6 billion with average cost of debt at 5.08% (inclusive of DST). The company generated positive free cash flows of P2.9 billion for the period as commodity prices continue to decline.
Long-term growth story remains intact
Overall, the company continues to believe that its long-term growth story remains intact and its prospects remain stable. The expansion plan in Batangas is on schedule to be completed and operational in 2021. This will support the company’s long-term strategy 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 upcoming facilities 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. All these investments and strategic efforts should lead to a more entrenched relationship with customers while providing an additional runway for growth.
While export sales were down 28% y-o-y in 9M19 largely due to 1) indirect effects of trade war, 2) slowdown in global auto industry, and 3) lower coconut (down 35% y-o-y) and palm (down 16% y-o-y) oil prices which were passed on to customers, it remains as one of the key pillars of growth. 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 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.
Confluence of external factors dragged earnings growth in 9M19
The decline in earnings for the period mainly stemmed from the weak performance of the non-food businesses – Chemrez & Specialty Plastics – which were more closely affected by the 1) lower infrastructure spending due to the delayed passage of the budget 2) uncertainties in the global trade market due to lingering effects of the trade war, and 3) slowdown in the global auto industry.
While total government spending reportedly picked up in September this year, it was not enough to reverse the effects of the underspending in the first eight months of the year. For instance, the year-to-date government infrastructure spending figure as of September still showed a contraction of 4% YoY. This had a more direct impact on the demand for industrial and construction-related chemicals where Chemrez is currently exposed to, and an indirect impact on general economic activity and consumption.
Meanwhile, the uncertainties brought about by the US-China trade war continue to linger. While D&L does not export US-bound products to China and vice-versa, overall negative sentiment resulted in cautious demand and uncertain projections from customers across various industries regionally and in the Philippines as well. This has exacerbated the effects of the slowdown in the global auto industry which has put pressure on the company’s specialty plastics business. About half of specialty plastics’ revenues come from export-oriented raw materials used in wire harnesses for automotive applications.
Because of negative impact that the above adverse conditions caused, D&L’s total volume for the first nine months of the year fell by 10% y-o-y with High Margin Specialty Products (HMSP) and commodities posting a decline of 3% y-o-y and 18% y-o-y, respectively.
Segment Performance Summary
Weakness in non-food business dragged profit in 9M19
The food ingredients segment posted meaningful margin expansion for the period, as both HMSP and commodity margins showed improvements. Blended margins expanded by 4.1ppts y-o-y in 9M19. Meanwhile, total volume fell 10% y-o-y, as HMSP volume increased by 2% while commodity volume fell 21% y-o-y. The decline in commodity volume was a conscious effort to focus only on margin-accretive commodity sales which, in turn, resulted to a margin expansion of 1.8ppts in the commodity business. Total gross profit for the segment increased by 9% y-o-y but lower forex gains and higher interest expense resulted in a 2% y-o-y decline in net income in 9M19.
Oleochemicals and Other Specialty Chemicals
Chemrez group saw its margins expand by 4.5ppts in 9M19. This was fueled by margin expansion within both Oleochemicals (+6.2ppts) and Other Specialty Chemicals (+2.9ppts) segments. However, margin expansion was not enough to offset the 9% decline in volume. As a result, the group posted a 16% y-o-y decline in net income for the period.
Specialty plastics net income was down 18% y-o-y in 9M19. This was mainly due to the 13% decline in total volume as demand for both engineered polymers and colorants and additives remained soft. This segment continues to feel the effects of the slowdown in global auto industry as about half of its sales come from export-oriented raw materials for automotive wire harness applications.
Aerosols segment has shown signs of recovery from earlier this year, posting a 2% y-o-y volume growth in 9M19, from a decline of 10% y-o-y recorded in 1Q19. Meanwhile, blended margins improved by 1.5ppts in 9M19, primarily driven by the 2.9-ppt margin expansion on the maintenance chemicals segment. Overall, net income for the period declined by 2% y-o-y.
-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.