Fast-growing aerosol business helps drive D&L profit higher in 3rd quarter

D&L INDUSTRIES, Inc. realized 14% more earnings during the third quarter, with the aerosol business leading the growth and food ingredient exports accelerating through a supply deal with a United States-based firm for Asia and the Pacific.

In a media briefing in Makati City on Tuesday, the food and plastic input manufacturer said its net income increased to P671 million from the P587 million booked for the same-three month period last year. This tracks the 14% improvement in sales to P5.67 billion.

The quarterly results brought D&L Industries’ year-to-date net income 19% higher at P1.93 billion. This compares with the P1.62 billion booked for the first nine months of 2015 that witnessed non-recurring expenses totaling P47 million.

Still, the company would have grown its earnings 16% without the one-time taxes and filing costs arising from the increase in authorized capital stock in June 2015, as sales have accumulated to P15.95 billion or 10% above the year-ago level.

D&L Industries attributed the jump in revenues to a broad-based increase in sales volume and higher prices of palm oil and coconut oil, particularly in the third quarter. High-margin specialties accounted for 61% of revenues, bringing the overall gross profit margin to 18.7% from 17.8%.

In the food ingredients business that contributed over half the year-to-date revenues, specialties volume expanded by double digits. This reflects a higher volume base for specialty ingredients in the third quarter due to customers’ limited time offerings and a seasonal bump in the second quarter.

Overall revenues and net income from the food ingredients business rose 11% and 12% partly on the increase in vegetable oil prices.

The oleochemicals and other specialty chemicals segment, meanwhile, has increasingly shifted to specialties whose end markets are faster-growing, higher-margin and less volatile for revenues, according to D&L Industries. 

The segment’s nine-month sales volume, however, increased moderately despite an “exceptionally strong” comparative period for biodiesel.

Higher coconut oil prices helped D&L industries grow its revenues by 7% and net income by 15% from oleochemicals and other specialty chemicals. The segment accounted for about a third of the total revenues.

The specialty plastics operation posted double-digit growth in sales volume, as wire harness-related exports bounced back and local sales to the food and beverage along with appliance markets improved. It accordingly registered a 9% increase in revenues and 25% in net income.

The aerosols business likewise accelerated, posting an all-time high sales volume as it moved into the seasonally strong second half in July. Its revenues and net income have jumped 19% and 42% by end-September.

“When we did our IPO (initial public offering) four years ago in 2012, the aerosol business was contributing 2% of revenues of the whole of D&L and 3% of net income of the whole of D&L,” Alvin D. Lao, company president and chief executive officer, said during the briefing

“Today, the aerosol business contributes 3% of the revenues of the whole of D&L and 6% of the net income of the whole of D&L — meaning, the aerosol business has grown faster than the other businesses,” he added. 

In the first nine months, D&L Industries exported 18% of the products. Outbound sales generated P2.85 billion, a 12% increase from last year’s P2.54 billion that represented 17% of the company’s revenues at the time.

Specialty plastics accounted for 42%; oleochemicals and other specialty chemicals for 39%; food ingredients for 19% and aerosols for less than 1% of the exports.

The share of food ingredients in the export business widened from the 15% recorded at end-June, as D&L Industries started selling products to the customers of Ventura Foods LLC in Asia-Pacific under a supply agreement signed in 2014.

“We are now selling to Ventura’s customers in China, Hong Kong, Japan and Indonesia. And we think this is just a start. It is likely that over time we will be able to add customers and more countries and more products so that export business should continue to grow,” Mr. Lao said. 

D&L industries expects to further expand its distribution network in Asia and the Pacific going forward, as product testing continues for the other customers of Ventura in the region.

“You’ll expect by the fourth quarter most likely this number will be even higher and by next year that momentum will continue. Two years ago, food ingredients was probably just 5% of our exports; now it’s 19%. Next year, it will be significantly higher,” Mr. Lao said. 

The company also banks on distribution agreements signed between its subsidiary Oleo-Fats, Inc. (OFI) and Agribusiness Singapore Pte Ltd., a subsidiary of New York-listed Bunge Limited, for the food service, retail and food processor industries in Asia-Pacific.

The agreements announced in late September make OFI the exclusive commercial partner of Agribusiness Singapore in importing, marketing, selling and distributing packaged softseeds oils into the Philippines. Bunge, in turn, will exclusively export, market, sell and distribute D&L Industries’ coconut oil under the Farm Origin brand in Asia-Pacific.

“Our target for growth for net income for this year is mid to high teens — meaning 15% to 19% — so, in the first nine months of the year, we grew net income by 16% so it’s within our target and we’re maintaining our target,” Mr. Lao noted.

The volatility in foreign exchange rates and commodity prices present major risks to the profitability of D&L Industries whose 55% of raw materials consist of exports and 68% of palm oil and coconut oil. The company, however, supposedly tackles them with a “fair price pass-though mechanism.”

“When we make products for our clients, we pass on price changes so what that means is when our costs go up, we pass it on. When our costs come back down, we also lower our selling prices and that allows us to keep our margins stable,” Mr. Lao said. 

D&L Industries said it manages to attract and keep customers despite passing through increases in raw material prices and other costs because it develops the formulation of products for particular customers. 

“What we do is when we agree to develop a product for our client we spend on the R&D (research and development). We don’t charge the customer for the R&D,” Mr. Lao said.

“It means that we get to own the formulation. Since we own the formulation, it’s given us ownership of that product… We’re the exclusive supplier for that product so it gives us more leverage over the customer,” the executive added.

Shares in D&L industries closed 26 centavos or 2.30% lower at P11.04 apiece on the Philippine Stock Exchange on Tuesday.