D&L Industries Inc.’s (PSE: DNL) recurring income reached PhP3.2 billion in 2018, up by 10% year-on-year (YoY). Earnings before interest and taxes were higher by 8% at PhP4 billion. In the last quarter of 2018, net income reached PhP785 million, flat YoY.
Blended gross profit reached a record high of 22% in 4Q18, bringing the full year blended margin at 19%, up 2.3 ppts YoY. The margin expansion is a result of the company’s increased focus on R&D and demonstrates the company’s ability to effectively pass on price changes to customers. The company aims to further grow both margins and market share, by continuing to develop specialized products in accordance to specific customer needs.
High Margin Specialty Products (HMSP) accounted for 63% of total revenues in 2018, an increase from 58% in 2017. While HMSP margins contracted by 0.7 ppts in FY18, a significant improvement was observed in the last quarter of the year. In 4Q18 alone, HMSP margins rose to 26% from a low of 22% in 2Q18. Meanwhile, the commodity segment, which accounted for 37% of total revenues, saw its average margin expand by 6 ppts as the company consciously focuses on margin-accretive commodity sales.
Exports as percentage of total revenues stood at 24% in FY18. In the fourth quarter alone, exports as percentage of total revenues reached a high of 27%. In peso terms, export revenues declined by 8%, mainly due to lower commodity prices which were passed on to customers. Coconut oil and palm oil average prices were down 39% and 14% in 2018, respectively.
Food ingredients segment remains the largest contributor to group exports, accounting for 39% of total export sales. This was followed by Specialty Plastics , at 31% of total export sales. Moving forward, the company will continue to work towards its target of having export sales account for 50% of total sales.
The company’s return ratios remain healthy. In 2018, Return on Equity (ROE) and Return on Invested Capital (ROIC) stood at 19.2% and 22.1%, respectively. Meanwhile, the balance sheet remains robust with net gearing at 10% and interest cover at a comfortable 25x. As of end-December 2018, net debt stood at PhP1.6 billion with average cost of debt at 5.43% (inclusive of DST). The company generated positive free cash flows of PhP4.1 billion for the period.
Higher inflation in 2018 peaked in the fourth quarter, translating to generally negative consumer sentiment for the year. The impact was most pronounced in the group’s food ingredients business where net profits dropped by 3% y-o-y. Nonetheless, the continued growth in the HMSP food segment (which managed to post 10% y-o-y volume growth) remains encouraging, representing the continued strength of recurring business. In addition, the average margin of specialty fats and oils showed signs of recovery, expanding 5.7 ppts in 4Q18 alone vs. the first nine months of the year. HMSP food now accounts for 57% of total revenues, a meaningful improvement from just 51% in FY17.
The export business remains one of the growth drivers for the food segment. Exports as percentage of total food revenues stood at 17% in FY18, a sharp improvement from just 6% two years ago. This was largely driven by partnerships with foreign principals such as Ventura and Bunge. Going forward, the company will focus on further growth in exports through direct sales, as well as through other partnerships.
In line with the company’s export target, the group has embarked on an expansion plan for the food business. The new facility will be located in First Industrial Township, a Special Economic Zone in Batangas. The project broke ground in August 2018, with completion targeted for 2021.
Oleochemicals and Other Specialty Chemicals
Chemrez delivered 30% earnings growth in FY18. This was largely driven by the strong performance of the Oleochemicals segment which more than offset the weakness in the Other Specialty Chemicals segment.
Oleochemicals refer to chemical compounds derived from vegetable or animal fats and oil. Chemrez manufactures oleochemicals that are solely derived from coconut oil. The Oleochemical segment of Chemrez includes both high margin oleochemicals (surfactants, foaming agents, MCT oil) which are mostly exported and commodity biodiesel which is exclusively sold domestically.
With the increasing appreciation of coconut-based products globally, HMSP oleochemicals volume grew by 29% y-o-y. In the beauty industry, coconut oil has increasingly been used as hydrating and moisturizing components in hair and skin care products, in line with purported anti-aging, anti-bacterial, and anti-inflammatory benefits. Meanwhile, commodity biodiesel volume increased by 14% y-o-y in 2018, a recovery from the 18% volume decline posted in 2017.
Overall margins for the segment expanded by 4.5 ppts, largely driven by the 8.3 ppts margin expansion in the Oleochemicals space. This has more than offset the margin contraction of 3.2 ppts in Other Specialty Chemicals that resulted from higher prices of petrochemical-based raw materials.
Together with expanded facilities for the food business, new production capacity for this segment is being planned as part of the group’s expansion project in First Industrial Township.
The specialty plastics group grew net income by 13% YoY in 2018, despite higher prices of petrochemical-based raw materials for the year. Total volume for the period declined by 1%. Meanwhile, the colorants and additives segment saw its gross profit margins expand by 2.4 ppts which was more than enough to offset the 3.2 ppts margin contraction in the engineered polymers segment. Overall margins are expected to recover once raw material prices start to stabilize. The company’s price pass-through mechanism allows it to pass on changes in raw material prices and forex to customers. It normally takes the company 30-45 days to adjust its selling prices.
Aerosols group posted 12% YoY net income growth in 2018, with volumes growing faster at 29% YoY. Meanwhile, the blended gross profit margin contracted by 4.3 ppts due to higher raw material prices. The company’s price pass through mechanism is uniformly applied across all of its businesses; thus, margins in aerosols are also expected to recover once underlying raw material prices start to stabilize.