By James A. Loyola
D&L Industries, Inc., the country’s largest specialty foods ingredients, plastics and oleochemicals firm, is spending more on capital expenditures to ramp up its expansion project as it sees recovery in the market and a better performance in 2020.
The firm has so far spent ₱1.4 billion from capital expenditures in the first nine months of 2019, triple the ₱456 million spent in the same period last year and it expects to spend about ₱2 billion by the end of the year, mainly for its Batangas expansion.
In a press briefing, D&L President Alvin Lao said “we believe that we are at the bottom of the cycle in terms of net income decline… 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,” he added.
Lao said their domestic business is seen to start recovering in the fourth quarter although exports may not bounce back as fast.
He said this optimism is due to the continued easing in inflation, the boost in the economy due to lower interest rates and reserve requirements, and the reduction in port congestion.
Also seen to improve their business is the ramping up of government spending, the generally low oil prices and the likely passage of the Corporate Income Tax and Incentive Rationalization Act (CITIRA) bill in the next few months which will address uncertainties faced by D&L’s customers.
Lao noted that, “2019 will mark the first year, since the IPO, in which D&L may post a decline in full-year net income.”
D&L reported that its recurring income reached ₱2.0 billion in the first nine months of 2019, 15 percent lower than last year. In the third quarter alone, net income fell 29 percent to ₱617 million.
Sales dropped 18 percent to ₱16.56 billion in the first nine months of 2019 from ₱20.17 billion in the same period last year.
“The company has faced a challenging environment in 2019, brought on by a confluence of external factors. 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,” Lao said.
D&L’s third quarter results showed emerging signs of recovery. For instance, total HMSP (High Margin Specialty Products) volume during the period was up 15 percent quarter-on-quarter, coming from a slump in the second quarter of 2019.
The food ingredients business has started to pick up. In the third quarter alone, HMSP food ingredients volume grew by 7 percent y-o-y, coming from a decline of 8 percent y-o-y in the second quarter.
The Specialty Ingredients segment within the food business, which has higher average margins, posted a 39 percent y-o-y increase in volume for the quarter.
The decline in earnings for the period mainly stemmed from the weak performance of the non-food businesses – Chemrez & Specialty Plastics.
These were more closely affected by the lower infrastructure spending due to the delayed passage of the budget, uncertainties in the global trade market due to lingering effects of the trade war, and 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,” said Lao.
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.