Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- D&L Industries Inc (DLNDY, Financial) reported a 6% increase in net income for the first half of 2024 compared to the previous year, with a 13% increase quarter-on-quarter.
- High margin specialty products volume increased by 33% year-on-year, marking the fourth consecutive quarter of growth in this segment.
- Export sales contributed 33% to total sales, matching a previous record high, indicating strong international demand.
- The company achieved a free cash flow of PHP2.4 billion for the first half of the year, more than doubling the free cash flow from the entire previous year.
- The new plant in Batangas has become profitable, contributing positively to the company's financial performance.
Negative Points
- The sales mix is still not optimal, with a higher-than-desired proportion of low-margin commodity sales compared to high-margin products.
- The consumer products ODM segment experienced a decline, attributed to higher inflation and increased product costs.
- There is a lag in passing on increased coconut oil prices to customers, affecting margins in the high-margin specialty products segment.
- Utilization of the new Batangas plant is still below 50%, indicating underutilization of capacity.
- The company faces challenges in ramping up high-margin exports due to the time required for certification and client qualification processes.
Q & A Highlights
Q: Given the exports revenue contribution to total revenue has increased considerably, why have we only seen a slight increase in HMSP revenue while commodity revenue is growing significantly?
A: Alvin Lao, CEO, explained that the volatility in commodity prices, particularly a 50% increase in coconut oil prices, has led to a significant jump in commodity revenue. The company is exporting a lot of coconut oil, which has contributed to the profitability of the Batangas plant. While there is more export growth from commodities than initially anticipated, the company is focusing on quick wins with commodity exports while high-margin exports ramp up over time.
Q: Why is the food low-margin commodity segment growing much faster than HMSP, and what does this indicate about customer trends?
A: Alvin Lao noted that there is high demand for coconut oil exports, and the company is leveraging this to offset high depreciation costs. The strategy involves starting with commodity products to build relationships with new customers, eventually transitioning to high-margin products. The company controls the volume of low-margin sales and will reduce them if margins fall below a certain threshold.
Q: Can you provide more color on what changes are driving optimism for further improvements in product mix?
A: The company has increased spending on R&D and IT, which has doubled since pre-COVID levels. This investment is aimed at customizing products for clients, which allows for higher pricing. The company expects the product mix to improve as customer interest in new developments has rebounded strongly post-COVID.
Q: What is stopping export customers from placing HMSP orders quickly?
A: Alvin Lao explained that new plants require a new set of certifications and standards, which takes time. The company is currently focusing on selling commodity products to build relationships while working on certifications for high-margin products. This process is expected to take six to nine months on average.
Q: What factors are driving strong export growth, and from which regions is this demand coming?
A: Export growth is driven by demand across various regions, including Southeast Asia, North Asia (China, Japan, Korea), Australia, New Zealand, Europe, and the Americas. The company benefits from being a new player with large capacity, as not many companies have built up capacity in recent years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
