D&L Industries, Inc. (DNL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to D&L Industries FY 2019 Results Briefing and Outlook. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. Alvin Lao, President and Chief Executive Officer, D&L Industries. Thank you. Please go ahead.

Good morning, everyone. Thank you for coming today. We are going to present the 2019 results for D&L Industries. So I hope everyone has a copy of the presentation. All right. So let's get to it. So for 2019, our net income came in at PHP 2.6 billion. This is 18% lower than the net income from the previous year. We did have a fairly rough 2019. I don't think this is a surprise to anyone. We have been talking a lot about this, about what we have gone through during the year, issues like inflation, late passage of the budget and, of course, trade war. So what we see, if you look at highlight #3, however, is that the fourth quarter, and I'll go into more details later, but the fourth quarter, we started seeing some signs that things have started to pick up. In point #4, we see that our revenue share continues to be -- the mix continues to be quite good in terms of the share of high-margin versus our low-margin business. And the high-margin segment, gross margins remain quite good at above 25%. And our expectation for 2020 -- it should have been better because we don't see a lot of the factors that affected the company in 2019. However, with what's going on with coronavirus, things are more uncertain now. All right. So into the details, Page 3 just shows you the drop in income for year 2019. And on the right side, you see the breakdown of income. So Food, the biggest contributor to net income, followed by Chemrez, and then third, Specialty Plastics for Aerosols. Slide #4 gives you a snapshot of the income statement. So net income down 18%, earnings per share also lower. If you look at the fourth quarter, we did have weaker -- much weaker fourth quarter this year than -- or 2019 compared to 2018 with net income in the fourth quarter down by 25% versus the fourth quarter of 2018. However, if you look at the fourth quarter versus the third quarter of 2019, you will see a few positive things. So first, you can see that in terms of revenue -- so we don't really look much at revenue or compare revenue because revenue is highly affected by the movement of commodity prices. And what we have seen in the fourth quarter, is that for many of the commodities that we use raw materials, especially coconut oil, palm oil, prices did start to move up in the fourth quarter or towards the end of 2019 versus 2018. I'll show a slide later that shows that. So we have seen that effect as well on our revenues, where you see that there is an improvement in revenues by 6%. So one big reason for that is because of the increase in commodity prices, especially coconut oil and palm oil, but -- it is something different that you see versus previous periods where because of the big drop in commodity prices, like coconut oil, palm oil, our revenue numbers have been falling. So that is one big change. Going to Slide #5. This gives you an overall view of what happened in each segment. So you can see that for our Food and Aerosols businesses, income was actually up for the year. For those of you who have looked at the 9 months number, you might recall that the overall income for Food and Aerosol were actually down first 9 months of the year. So that's one positive thing to see that, in the fourth quarter, we actually had pretty good performance from our Food and Aerosols business, which made up for the weak first 9 months of the year and therefore, ending the year positive. However, the big drag on our income came from the non-food, you could say, the most B2B part of our business, which is the chemical side. So both Plastics and Chemrez, net income were down quite a lot for 2019. In terms of why, so we've listed the reasons here. We do see 2020 being better for a lot of these factors that affected us in 2019, they are not there or the situation has improved a lot in 2020. Page 6 shows you the volume change across the group for our high-margin business, so just the high-margin business. So from 2017 up to the fourth quarter 2019, on a quarterly basis, so you can see that the weakness in our business really started in the fourth quarter of 2018. That was the height of the high inflation environment we were experiencing in the Philippines. That high inflation or the fears of inflation really only started to dissipate towards the second quarter of the year. But then we have the other factors coming in, such as late passage of the national budget and, of course, the disruption from the trade war and other global protectionist movements. So you can see that the worst quarter for us was really the second quarter of last year. Although the third and fourth quarters are still negative. What we can see -- the positive thing I see is that the drop in volume growth is not as big. And so -- and what I showed you earlier in the previous slide, at least for 2 -- for Aerosols, we were already positive in the fourth quarter. So we do see the momentum slowly changing. And -- so that's why we were quite confident about our prospects in 2020 until at the end of January and then all things changed when the coronavirus issue really ramped up. Page 7 just shows you the product mix between high margin and low margin. So this is something that we already started seeing in the second half of 2019. The share of high-margin revenue across our business is the -- is up, it's at the highest point. And we do feel that this can still improve so at least on a margin basis. So the margins of the high-margin segment has been going up, I'll show that in a while, but the overall margin has also been going up. And this is one reason why the overall margin has been going up because the share of high-margin business has gone up. Page 8 shows you the volume change across the different segments split between the high- and the low-margin segments. So overall, for Plastics and for Chemrez, volumes are down significantly. However, for the high-margin Food as well as for Aerosols, you can see volumes are actually up. And I mentioned earlier, in the first 9 months of 2019, things were actually not that good overall. But we really did see an improvement in the fourth quarter, and it had an effect. The effect was big enough to affect the -- or have an impact on the full year figures for those segments. From a margin perspective, on the right side, you can see that overall margins are at or near the peak for pretty much -- for almost all of the segments. Page 9, just looking at the high-margin segment. So you can see that we've been able to maintain the growth of our gross profit margins for the high-margin segment. We are continuing to spend on R&D. You'll see later the slide where we show that our R&D spend in 2019 was higher -- or our tech spend. So R&D -- spending on R&D, IT and so forth was higher in 2019 by 30% versus the previous year. So it's doubling roughly every 4 years or so, our technology spend. And that is translating to higher margins, especially for our high-margin business. And for me, there is still room for that GPM to grow higher in the future. For the commodity business. So a few years ago or roughly 2 years ago, after our commodity business margins went to almost 4%, we made a conscious decision to be less aggressive in the lowest margin segments that we're in. So this would include our food, oil trading business as well as bio-diesel. So as you can see, since then, the average margin of our commodity business has ramped up. So as long as we keep it within the 7% to 10% range so much better, more than double what it used to be at 4%. That is the target for the commodity business. And the commodity business is a part of our business that we continue to support because this is a big feeder of raw materials for our high-margin business. Next slide, Slide 11, shows you the quarterly change in the margins for our commodity business. So we reached the peak of 15% in the end of 2018, although that was then the -- it's clearly not a regular margin for a commodity business because, by nature, commodity means there's a lot of competition, there's not much ability to differentiate your product. So price is really the main differentiator. So margins have pretty much normalized. So like I mentioned earlier, somewhere along 7% to 10%, that would be the more normal range for our commodity business. And as we can see, that's pretty much going back to normal by the time we hit the fourth quarter. Page 12, a look at our exports. So our export numbers from a peso perspective, very -- was lower by 26%, which was -- so what makes it look worse was the drop in coconut oil prices. So as you're probably familiar, we do export a lot of products which use coconut oil as a base. And so when our selling prices fell because of the drop of coconut oil, that also resulted in our export revenues falling a lot. So in other words, our export business did not -- overall, the volume did not fall 26%. The 26% is really a much bigger reflection of the fall in coconut oil prices overall in 2019 versus 2018. Page 13, just a look at the overall numbers. So we see lower revenue and income, but an improvement in our gross profit margins, improvement in the sales mix. Our free cash flow, still positive, very healthy. So despite the higher CapEx we've been spending on our expansion in Batangas, you can see that our net gearing's actually gone down. And of course, because of lower profitability, our returns have come down, but still at fairly healthy levels. Page 14, is a look at our cash flow. So overall, 2019, we saw commodity prices lower and that translated to negative working capital environment, again, in 2019, similar to 2018. In fact, the impact was bigger in 2019 versus 2018. That's the row here, change in working capital. Then you also see a big jump in CapEx. So our Batangas plant, you can see in the videos earlier, it showed the pictures of the recent -- what the recent plant looks like as well as perspective. So that construction is ongoing. You can see CapEx is almost double in 2019 versus 2018. If you look at the previous years' presentations, our regular CapEx have been hovering around PHP 400 million to PHP 500 million range. So we had started construction towards the end of 2018. We ramped up in 2019, but we'll be spending a lot also in 2020 for the CapEx. So that has not -- we have not adjusted a timetable for that, that's still ongoing, on schedule, to be finished by the end of the first half of next year. Page 15. So my favorite slide in the whole presentation. This shows in the middle how coconut oil and palm oil prices have moved over the last 10 years. And below that is the dollar-peso exchange rate. So we look at coconut oil and palm oil, in particular, because together they make up roughly half of our raw materials. And we also consider the dollar-peso exchange rate because roughly half of our raw materials are imported, and that importation is predominantly in U.S. dollars. So just to show these -- what these 2 charts show, is that there is a lot of volatility in our raw materials, in our costings. But at the top, as you can see, there -- the volatility is not reflected at all in our margins. Our margins are fairly smooth and they have been going up. So from 12% in 2010, it's now almost 21% the GPM level this year, or as of 2019. And as I mentioned earlier, as long as we are able to continue to innovate for our customers, coming up with new products, new solutions for them, that is allowing us to charge higher prices. So that spend in R&D is the way for us to come up with more innovative products. So Page 16, overall snapshot of the group. So we see that from a revenue and income perspective, Food is the biggest of our business. Another way to look at this is over 60% of net income of the group comes from non-Food. So although Food is definitely a significant part of our business, we're not that dependent on Food only because over 60% of our income comes from the non-Food business. Okay, from a revenue perspective, all of our businesses did not grow. They have negative growth from a revenue perspective. But again, a big factor here, it's not just the volume growth or lack of volume growth, but lower commodity prices. Almost all our businesses experienced higher margins in 2019, again, reflecting our ability to keep prices or to protect our margins, even with volatile commodity price movement. And then here, you can see the breakdown in net income. So -- and again, the big drop came from Oleochemicals and Plastics. But overall for the year, we've actually seen growth in our Food and Aerosols businesses. So just a look at the Food segment, in particular. So you see volume overall down by 4%. But if you look at the 4 divisions of our Food segment, so the second box, that's our commodity business. So look at the GPM, 6.5% much healthier than it was, I think, 2 or 3 years ago. This GPM had fallen below 2%. I can clearly remember that, and I can clearly -- I remember thinking, "Oh, my gosh, I don't think we're making money anymore in this segment." So we have dropped a lot of the customers that we were just not making enough money on. And as you can see, the margins have been brought back up. However, for the other segment, they're all much higher margins, 22% for specialty fats and oils, 32% for specialty ingredients and 34% for food safety products. And you can also see that, although -- so overall, volume dipped by 4% for food, and that was mostly because of the drop in volumes for our commodity business, volumes fell by 10%. But if you look at the volume change for all of our high-margin segments for Food, they are all up, up by 3% for specialty fats and oils, up by 7% for food safety, up by 11% for specialty ingredients. So what it means? It means we're continuing to grow, especially our highest margin Food businesses. It also means we're continuing to grab market share mostly from the large multinational specialty food manufacturers and food raw material suppliers. So that's one big positive. And that's a growth we've been seeing for a couple of years now. I remember, when we introduced food safety, the contribution of volume to revenue, we have to indicate less than 1% because they were so much smaller. And as you can see now, they really have grown. And they will continue to grow, maybe not making as much contribution yet, but that will continue to change over time. And that's another reason why the overall margin of the Food business will grow as these higher margin segments grow faster than the commodity segment. Slide 18 is a look at Chemrez. So Chemrez, for many reasons, the hardest hit among our segments. So net income overall was down by 35%. Volumes down across the board so for our Oleochemicals business. So the biggest part of Chemrez for Oleochemicals would be bio-diesel business. So we have seen a reduction in our bio-diesel sales. So we also saw a big drop in revenue. And this is small -- this is where you can see the really big impact of the fall in coconut oil prices in 2019 versus 2018. I mean for revenues to fall that much, it's really an indication of how much coconut oil prices have moved. So conversely, the coconut oil prices will not fall forever. When coconut oil prices move back up, you will likely see this revenue number reverse. So that's not something that we are that worried about in terms of revenue anyway for Oleochemicals. Other positive, for both segments of Chemrez, you can see that margins are still continuing to improve. So -- and margins -- I can remember D&L bought Chemrez, maybe 4 or 5 years ago -- or it bought out the shareholders that -- or the share of Chemrez that we didn't own already. The average GPM of Chemrez back then was, I think, around 13% and now it's at 22%. So we have continued to transform Chemrez into a higher -- a much higher margin business that is not just reliant on bio-diesel, which was like -- so bio-diesel was probably 80% to 90% of the Chemrez business 10 years ago. It clearly is not as dependent on bio-diesel now. And it's one part of our business that we are confident of being able to continue to invest in, especially on the innovation side. And so you will -- this is one segment we're very confident you will continue to see margins moving up. Page 19, our Specialty Plastics business. So also affected by a lot of the factors that I have mentioned earlier in 2019. 2020, we were -- because of -- so a lot of those factors aren't around anymore. So we don't have high inflation fears anymore. The budget, the national budget was passed early January. Trade war is not going to get any worse. In fact, there are signs that things are slowly -- supposed to get better. So similar to Chemrez, for Special Plastics, we are expecting 2020 -- we were expecting 2020 to be a much better year until, of course, this coronavirus issue started to ramp up. Then Aerosols. So Aerosols had a very healthy jump in margins, now at 33% . And overall, so the biggest segment now being the personal care side of Aerosols growing very well and maintenance chemicals also growing. This is one segment that was only contributing probably 3% of income to the company or maybe even -- that's maybe 2% when D&L did its IPO in 2012, now it's contributing at least 6%, 7% of net income. This is one segment that we are also confident that will be well positioned for growth, not just in 2020, but for the next couple of years. Page 21 is a look at the balance sheet of D&L. So take a look at the debt. Our debt level end of 2019 did not change from 2018. Of course, on a daily basis, this does change. But we are able to maintain that low level of debt. I showed earlier that in terms of -- also you can see here in terms of debt equity ratio, things are quite manageable. Later on, I'll show a slide that says our net gearing is actually lower at 8%. Over on the left side, you see the big jump in CapEx from our construction in Batangas for expansion. And here at the right side, you see interest cover has come down mostly because of higher interest rates and interest expense and also because of lower income. But at 18x, interest cover, still quite healthy, still quite conservative. Page 22. So yes, net gearing 8%. So with our equity of PHP 17 billion, debt at PHP 3.5 billion, so we have made an announcement before that our spending for the expansion would cost around -- was it PHP 10 billion we said before? 8, sorry, PHP 8 billion. So it's PHP 8 billion plus PHP 2 billion from the property side, total of PHP 10 billion. But PHP 8 billion for D&L lease spend probably, already, maybe, PHP 2.5 billion, PHP 3 billion. So maybe another PHP 5 billion left. So if you have the PHP 5 billion to existing -- if you just assume we borrowed the whole PHP 5 billion, added to our existing debt of PHP 3.5 billion, an PHP 8.5 billion total debt, hypothetically, that debt will still be just around half of the equity. So in other words, even if we had to fund our -- all of the remaining CapEx with pure debt, the debt ratios or the debt levels, so will still be very manageable. The good news, I don't know if there are any bankers in the room, but our average cost of debt has been coming down. The recent loan interest rate we got was 4%, and this was before the U.S. Fed reduced their [ overages ] by 50 basis points. I understand that our own Bangko Sentral is looking at -- or considering further cuts in our borrowing rates as well. So that's the good news. We should see our cost of debt continue to come down. But in any case, we're definitely not over-geared or over-leveraged by any means. And we have a lot of banks giving us more lines if we need for our capital purposes. Page 23, a look at the related party transactions in reference to the fees that D&L pays to affiliates. So the property side of the group's business. This provides the bulk of the buildings, property, facilities and even barges that the D&L group uses. So there is a related party expense. So still at roughly 1% of overall costs and expenses. On the flip side, D&L also earns related party income from shared services, like HR, accounting, MIS, and so forth, and this helps offset the related party expense. So we update this every quarter just to continue to be transparent with our investors. Page 24, a look at the cost structure of the overall group. So no major surprises in terms of our costs. Raw materials still make up the biggest chunk of our total -- so total cost and expenses includes cost of goods sold as well as OpEx. And so raw materials, number one, 80%, labor, second, at 7%, pretty much consistent with what we've seen in the past, no major changes. And here at the bottom, you can see what we spend on technology. So R&D, IT increasing quite well across the last couple of years and up by 30% in 2019 versus the previous year. On the right side, so the bulk of our raw material is still coming, of course, from the Food side, 57% of revenue. So -- and even for our Oleochemicals, the bulk of it comes from coconut oil. So coconut oil together with palm oil being our 2 most used raw materials. From a working capital perspective, so in first half of 2019, we were buffering a lot of our stocks because of issues at the port. Those -- the tightness at the ports, I understand, is gone. Utilization of the ports has normalized. But a lot of people are talking about the late shipments of raw materials from China for their operations. We don't have as big an issue. Number one, we don't buy that much from China. Second, we do have a big buffer for inventory because we normally stock up for -- inventory to -- because we have a lot of very unique raw materials that it's not so easy to buy big quantities at good prices. Plus, we had also stocked up because of Chinese New Year or the Lunar New Year holidays, which does usually cause a disruption in the supply chain. But yes, we have stock. So we're not expecting any major issues as far as the supply chain goes, at least, due to the tightness of what's going on in China. Receivables at roughly 60 days, which is more or less in line with where this has been in the past. Same with payables, more or less in line at 60 days, okay. But we do expect over the next quarter for this inventory number to further come down and back to our target of at least 90 days. From -- so this is interesting. I checked yesterday, so we've seen a lot of [Technical Difficulty] So I checked yesterday, and in terms of -- okay, you guys can see me anyway. I'll just talk louder. In terms of foreign participation in the trading of our shares, what we've seen is that we're net positive foreign buying since the start of 2020. We're also net foreign buying even since the start of Chinese New Year. So the market -- Philippine market, as a whole, so net foreign selling since the start of the year and also since Chinese New Year end of January. So at least from a confidence perspective, we've seen that, even if the overall market, there's been a lot of foreign selling, we have not seen that in the shares of D&L. So the drop in share price we've seen for the company is really domestic selling, not so much from the foreign investors. And this slide just shows -- so you can pretty much ignore the bottom part of the slide because pretty much all the conferences have been postponed or canceled. So we're not expecting much activity, at least, for the first half of the year. So Page 28 is a look at what we expect in 2020. So we're actually quite positive, early passage of the budget, inflation staying low, interest rates also looking like they're going to be low, cuts in the reserve -- further cuts in reserve ratio requirements and then less uncertainty after the, hopefully, eventual passage soon of the CITIRA bill or TRAIN 2. But of course, we now have COVID-19, which has thrown a big monkey wrench on everyone's operations. So that -- so that has really put a big cloud over what to expect in 2020. And just to show you some slides of what we have been doing. So we are on track to complete our -- what we're building now in Batangas. Our target is to complete it by the first half of next year. So you can see now that the bulk of the storage tanks are pretty much done. So the rest of the sites, a lot of the preparation is being done, a lot of the works you will see start to ramp up over the next couple of months. So this is something we're very excited about because we're really planning a -- it's going to be a big improvement in terms of operations over what -- over the much older sites that we're continuing to operate mostly in Metro Manila. We're building an observation deck that should be finished before the end of the year. So -- and we will be inviting members from the investor community to come and take a look. So for those, who are interested, that will be something we'll be scheduling towards the end of the year. Page 31, picture of what it should look like when it's done. And yes, we're now in questions and answers. So would anyone like to start? So for those on the call, we're open to Q&A now.

[Operator Instructions] So your first question comes from the line of [indiscernible].

Thank you very much for the update. Just 2 questions. I think I'll ask them both and give you a chance to answer in whatever order. So the first was regarding this point about the government bill passage being delayed and that having an impact in terms of demand, especially on your non-food chemicals. But I'm just curious like it seems that should have been more a first half impact than a second. And I'm just curious as to why we saw a sustained impact into the second half, whether there were any other factors around it, such as competition or whatever else. And second question is more about your net operating cycle. So you mentioned the need to buffer stocks, which was in relation to the port congestion, which actually was quite a long time ago. But anyway, even removing the higher inventory levels, we see that your receivables and payables have led to an increasing of your cash conversion cycle. I'm just curious as why that might be and whether that's a determinant of your mix or whatever else. But I'll give you a chance to answer.

Okay. [ Charles ], thanks for the question. So the first question about the government budget delay. So not only in most countries, you would expect that. So like in the U.S., for example, if there is delay or even a government shutdown, things do stop. But once the shutdown ceases and money starts flowing, things get back up to normal pretty quickly. Unfortunately, we didn't really see that immediate recovery in our businesses in the country. I think it's a matter of timing. So there are several factors: first, you have the elections in 2019. So I don't know if the delayed passage of the budget was caused by the elections or it was just weird timing. But essentially, when you have no approved budget and then you have a whole slew of leaders in the government changing -- so you're talking about pretty much a lot of the mayors, congressmen and half the senate and so forth changing, that alone is already going to cause confusion. But when you have no money going around, that confusion, that disruption is very much amplified. And I believe that, that has a very big impact on 2019. So that's why -- so the budget was passed, I believe, in the middle of April, but because of the elections in May and the subsequent change in the guard for a lot of the different government institutions, I believe that had a big impact, not just at the beginning of the year, but even in the second half of 2019. Does that make sense?

Yes. I think you're saying there was a transition impact from the election, which basically elongated the weakness in demand. Is that what you're saying?

Yes, I believe so. So that -- so it's kind of like a weird thing to have a budget delayed for so long. I can't remember the last time it happened. And I believe the timing of the elections made that impact worse. Okay. Now your second question about net operating cycle, that we can see more details in Page 25. So I get what you mean about port congestion. And the port congestion issue, so maybe the word port congestion was a wrong word to use because we did experience severe port congestion several years ago. The port congestion we're referring to that happened in the first half of 2019 was really more tightness at the port. So we experienced it. A lot of my friends who have businesses that import a lot also experienced this, where -- so normally in the ports, if it takes you anywhere from 3 days to a week to clear cargo, people were seeing delays of 10 days up to 2 weeks. So definitely not as bad as the -- so the biggest port congestion, which was caused when the Mayor of the city of Manila imposed a truck ban in Manila, that resulted in 2 to 3 months delay in clearing cargo. It wasn't that bad, but it was still severe enough. And so that was one of the factor that -- to head off disruption, because we have the balance sheet, we made that conscious decision in the first half to bring in more inventory. So that was a move to head off any supply chain disruption for us. So it was really an insurance, if you like to think about it, just to make sure that we don't run out of goods.

I think I was probably asking also, removing the impact of inventories on the net operating cycle, your payable days also decreased and your receivable days also increased over the past few years. I'm just wondering what's been resulting...

Okay. So in terms of receivables, so actually if you look back 5 years ago, receivables have hit 60 days. So they have come back down. They are now back at 60 days. So number one, it's not really that far out of norm for us. And from what I'm aware, if you go around other companies, most manufacturing companies in the Philippines, I'd say 60 days is actually on the pretty good side. I know a lot of my friends have receivables of 90 to 120 days is more normal for them. I know some companies with receivables of even 6 months. So I'm not saying that -- we could have done a better job, but I think in terms of where the norms for receivables go, we're not that far out of the norm in terms of our history. I think the other factor here is because 2019, in general, business-wise, was not as good, as what a lot of businesses were expecting. It made it harder to collect from some of our customers. So that, I believe, had an impact on our receivables as well. So it is possible even in 2020 because business is challenging, we will face a lot of difficulty collecting from our customers. So one thing we're doing in 2020, we are ramping up our credit and collection efforts in terms of people and in systems and in processes to watch out and make sure that this increase in receivables doesn't go out of hand. So in terms of payables. So again, looking back at history, just one of the slides, you can see, yes, payables have been as low as 13 days, but also in the past, we have gone up to 21 days. So we're trying to ramp that up as well. But we're now in an environment where, for some of our suppliers, we may not have much of a choice in terms of selecting suppliers, especially with a lot of the supply knocked out of China. We're able to find alternate substitutes or other suppliers for many of our products. But because there's less competition among our suppliers, we may not have that leverage to be able to get better terms. So that's going to be a little challenging. But what I can tell you is that at least for the last 2 years, we have gotten better payment terms on average. So from 13 days, it's now 16 days. It's still something we want to continue to work on to get better terms.

Okay. And maybe one quick follow-up on the receivables side. Could you share what portion is sort of past due?

I believe the number is less than 5%. That's more than 120 days, I believe. So however, this isn't the first time we've encountered crises. If anything, Filipinos are kind of used to dealing with crisis. And everything from coup d'etats to volcanic eruptions, earthquakes and so forth, so this coronavirus impact, for the Philippines, doesn't seem to be as severe as what we're seeing in most other countries. So I think we're in a good spot pretty much as a country and, thankfully, because the bulk of the economy of the Philippines is really more domestically driven or indoor-driven better than export or an external-driven economy. I think we should fare relatively well compared to some other economies, which are probably more exposed and would be more vulnerable with this coronavirus situation.

Your next question comes from the line of Joyce Ramos.

Any indications on how your customers are reacting given the COVID-19, like any changes in requirements or volumes, whatsoever? And then also, can we expect any changes in your logistics cost potentially due to more stringent measures by different governments, whatsoever? So there.

Okay. So hang on a second, let me write that down. Okay. So from a customer perspective, we don't anticipate losing market share or business because, thankfully, when we analyze our supply chain we're not overly reliant on China as a supplier. And even for those products or raw materials that we buy from China, we are able to find substitutes from other countries. So the impact on us is not so bad. So actually, if you recall, the earthquake and tsunami in Japan that happened several years ago, what happened there was that a lot of supply got knocked out of Japan, and so a lot of the car companies, diverted their supply out of Japan to other countries, and we were a net beneficiary there. We don't know if that will happen this time with a lot of the supply knocked out of our competitors based in China, but we are already getting some indications that we have customers who, because they can't buy from their existing China sources, who are our competition, they are now more open to talking to us. So we're seeing that more in terms of communication activity. I can't tell you yet whether it's resulting in more orders, but it looks like there's a good chance we'll be able to gain market share as a result of what's going on with the disruption caused by the coronavirus. Your second question about logistics and increased cost, if any. We don't see anything much yet. So -- well, ships that travel from China, they have a 14-day count before they're allowed to arrive here in Manila. But you're going to spend a few days on the ocean anyway coming from China to Manila. But I can tell you that -- so early in February when this was -- when we started looking at this, we really had concerns. We didn't know when Chinese factories will open. We didn't know if there's any shipments arriving from China. I can tell you now that as of the end of Feb, so last week, we already started receiving some shipments from China. So there are already factories opening, operating there, maybe not at full capacity [Foreign Language] and the ships are also starting to move. So we have already started receiving some shipments. So overall impact, from a supply chain perspective, not that heavy; from a logistics perspective, I don't anticipate any major increases in costs, at least not from -- not caused by the disruption from the coronavirus. Any questions from -- sorry, we can take one more on the call.

We've got another question from the line of [ Alvin Wee ].

So this is Arvind Monie from Wellington. Alvin, so the first one is on your heightened inventory. Can you just give us a sense of what's the breakup between the imported commodity and exported finished product? And that to be answered with the perspective of once Batangas does come online full swing maybe by 2021, how do you think about the export logistics given that you want 50% of your revenue to come from Philippines over the ensuing period. Do you foresee any infrastructure bottlenecks to ship exported product out? So that's sort of the first question. And the next one is if you could just sort of remind me the translation impact of a change, either higher or lower, of coconut oil prices on your business, both in terms of volumes as well as in terms of margins from an export as well as from a domestic perspective. I do understand, I guess, it's more export-oriented, but I want to just hear what the impacts are in a scenario where coconut oil prices change.

Sure. Okay. So -- sure. So the first question was about possible bottlenecks from our exports. So maybe just a little business background. From an import perspective, so if you turn to Slide 24, it shows you, on the top right, 56% of raw materials are imported. And on the left, you'll see 80% are costs -- 80% of our costs are raw materials. So more or less around 0.8 times 0.56 is roughly half, half of our total cost expenses are U.S. dollar-denominated or imported. Then if you turn to our exports slide, which is 10? No? Sorry, which slide? Page 12, sorry. Page 12. So 21% of our revenue exported. So our -- so one thing is clear, when FIT -- our plant, our expansion is operating. Because we're a PEZA zone, so we need to comply with the PEZA requirement unless they change us again into [indiscernible]. For now, we're assuming -- we need to comply with the 50% export requirement of what we make in FIT and that expansion. But we are still going to continue to operate our existing operations. So we have 6 existing plants, 1 in Laguna, in Canlubang and 5 in Metro Manila. So they will still be running, and they have no such export requirement. So in other words, we don't necessarily -- we will not necessarily see our export as a percent of revenue jumping to 50% immediately. But logically, it will be something that will be going up over time. Now in terms of bottlenecks, we, of course, the Philippines, in terms of infrastructure investment, has been so low for so many years, and there are a lot of bottlenecks by default. So we don't expect smooth sailing as far as our logistics, especially for exports. However, what we do see is that spending has been ramping up, especially in infrastructure, especially with this current administration. And we do -- we're also seeing a lot of investment and intent by the port operators to continue to improve their operations. So yes, on one hand, we have tightness and congestion and inefficiency, but this is kind of the norm already in the Philippines. Anyway, on the other hand, we are seeing improvement, especially in spending and intentions to invest, especially by the port operators. So plus coupled with the fact that we're not going to stop operating our existing plants. So we're not going to be totally beholden to our exports. So we will -- from what we have seen from our planning there is room for our exports to grow because we know -- we've talked to a lot of exporters. We've looked at their systems, what issues they go through. There's -- it's really part or the course for the Philippines. There's a lot of -- more things that have to -- that we have to go through as a business, but it's pretty normal for us. Second question about coconut oil price movement and how it might change volume and margin. So if you go to my favorite slide, Page 15. So if you look at the second chart on that page, from 2010 until 2011, the brown line, coconut oil prices tripled in 1 year and then, in 2 years, fell back down or dropped over 16% and then still continuing to be volatile, up down, up down. But look at our margins, barely any impact of that volatility. So I think we've been able to demonstrate that even with severe volatility in -- and this is -- so we didn't even show crude oil and all the other factors that go into our costings. But essentially, we're able to pass on price changes to our customers. And these price changes are brought about by the volatility in our costs, whether it's from the price of the raw materials or even from the ForEx. So that's not something that -- it's a risk that we're able to manage, and we've shown that we're able to manage that risk.

So just a couple of follow-ups. So I just wanted to understand volume impact because I do understand your customers would be price-sensitive. So on a margin perspective, yes, you've demonstrated good margin improvement. But what was sort of the volume trend at that point in time? So that's my first follow-up. And the second one is just on inventory. So maybe today, if you could break up inventories in terms of finished goods days as opposed to inventory of raw material. And once you do get to 50% -- eventually get to 50% export or whatever, 30% export, higher than what it is today, do you expect it to be incrementally more difficult? Or would your inventory days of finished goods for export market go up?

Okay. So the first question regarding volume. So volatility in our commodities like coconut oil may not impact volumes so much because, for a lot of our customers, they really need coconut oil or a coconut oil-based raw material. So in other words, we're not easily replaceable as a raw material for most of our customers. I think the economists use a term inelastic to mean that regardless of the price, they're going to buy it anyway. So one, that's the reflection of the special properties of coconut oil and that it is not an easy -- so the only substitute of coconut oil really is palm kernel oil, which chemically has pretty much the same characteristics as coconut oil and price-wise moves the same. But in any case, the customer would need to rely on that. And I think the Philippines being the world's largest exporter of coconut oil is just where the industry is. So I think from that perspective, it gives us volume protection in a sense. There's really -- so number one, the customer really can't switch to different product; and two, there really isn't any other country that would be able to meet the ability to export as much coconut oil. And I think, third, if you look at coconut oil exports the Philippines does, the bulk of it is still on a crude form, meaning no value add. Whereas in our case, we ship a lot of higher value-added products, which does use coconut oil. But in other words, it's not just crude, low-margin, simple coconut oil. And more and more, we're getting a lot of customers that are reliant on this, and it's not something that they could easily switch a supplier. So price may not be a factor. And if I may add one more. For most of our customers, what they sell, the amount of coconut oil or the cost of the coconut oil is a very small part of their overall cost or even their overall revenue. So even if there's a lot of volatility in coconut oil prices, even if the price, let's say, tripled again -- if coconut oil is just 2% or 3% of their overall cost of their product, then the impact is not as severe. And keep in mind their desire to use coconut oil because it's the best for their purposes, there's little chance of them switching. Second question about inventory days for raw materials finished goods. So it will depend on -- across the board, food, chemicals and so forth, plastics. But in our case, more or less it's 50-50 between raw materials and finished goods. For our exports, so what we have seen -- so we barely did much exports so let's say 10 years ago. We're doing a lot more now. I would say that from -- there's not much change in terms of an inventory perspective or even a receivables perspective. If anything, we actually see better collection days for our exports, again because, for many of our customers, we're either the sole supplier or there's not much supply for the specialty chemicals that we export. It means that we are able to negotiate good payment terms. So I know that our payment terms for our exports are actually better than for our domestic sales. So if anything, it would be net positive for our receivables if we were to increase our exports. From an inventory perspective, it's not -- I don't see that having a big impact as well, even if we were to increase our exports. So yes, from both perspectives -- from a working capital perspective, no negative -- major negative impact if our exports were to go up as a percent of revenue. Any questions from the people in the room? Okay, any more questions from the call?

There's no more question from the line.

Okay. We have one question.

I'm [ Justin ] from COL Financial. Just a question on volume. Could you give us some more color on HMSP volumes for the oleochem business. Seems like if you apply the [indiscernible] decline in the fourth quarter on HMSP volumes. So if you could give some detail both on domestic and export...

Okay. So I believe we had some customers who -- from a timing perspective, they bought less in the fourth quarter of last year. So but the orders are back. So that was really a timing issue. And I don't -- so they ordered less in the fourth quarter. But from what I know in 2020, the orders are back.

Quick question for me. The first one is on the receivables. Just wondering why it will be difficult to collect from clients if you say that D&L is just 2% to 3% of their cost. That's the first question. And the second question was have you seen customers here see an impact on you on probably lower sales because of the virus? And then what do you mean by port congestion here on the COVID-19. And I think if there's a sort of difficult supply chain, then there's nothing -- there's no traffic in the port.

So I will repeat the questions for the benefit of the call -- people on the call. So your first question was about accounts receivable. Why would it be difficult to collect? Well, the reasons I talked about earlier -- so when business is tough, which is what a lot of businesses went through in 2019 and even now, the owners of the businesses -- you don't have unlimited cash. And in many cases, not only do you have limited cash but you also have pressure from your lenders and from your investors in terms of profitability, in terms of paying back your loans. So usually, the first thing that gets affected would be the ability to collect from a supplier perspective because suddenly your customers are not willing to pay or release cash or they're not as willing and it's getting harder to collect. So it -- I believe it was a factor in 2019 because the business environment in 2019 was not as positive as what a lot of people were expecting. 2018 was a fantastic year for everyone. Everyone was expecting 2019 to be a great year as well. So a lot of businesses invested for growth. They had more stores, they had more menu items. But when business did not grow as much as they thought -- they already invested. They either borrowed money or they got money from investors. But suddenly, they are not -- they are having problems paying back their investors or paying interest to their banks. Usually, the first thing that they will do is to pull back on paying their suppliers. So I believe that this affect us. But as you can see, it wasn't as bad of an effect. I can tell you that I have a lot of friends who are complaining about their customers not paying them, some as long as 6 months, some as long as 1 year. And there are a lot of those. So on hindsight, yes, it was bad for everyone, but I think it wasn't as bad for us. Second question had to do with customers and if there are lower sales as a result of coronavirus. So as of January -- so at the beginning of every year, I start to think about how the rest of the year is looking. And as of January, actually, things are looking pretty good. If you have -- if I was asked in January if we were really in a position to talk about the expectations for the year, I might have said we're back to double-digit growth. But with what's going on now -- so one -- so although we have a lot of confidence in our ability to recover and our ability to manage risk, we can't -- we don't have control over some other things, what's happening in the market, what's happening with our customers, what's happening with the consumer economy. So what we're seeing is that people are going out less, people are traveling less. So there may be less demand from that perspective. However, as I mentioned earlier, we are also starting to hear from some of our customers who didn't buy as much from us because they were importing from China or they are buying from a trader that was importing from China. Suddenly, that stopped. Suddenly, they can't source from the China-based source anymore, and they're now buying more from us. So there's a crisis. There is a potential loss of business, but there is also an opportunity. I can't tell you yet how big that market is going to shrink. I also can't tell you how big that opportunity will be because of the market share grab. It's too early. I think by Q1, we will have a good indication. But if you look at -- so the last pandemic, big pandemic that really affected the markets was really SARS. If you look at SARS, it started in November and peaked in April and ended around July. COVID-19 started December. It hasn't peaked yet, number of cases, number of deaths still going up. But if it follows the SARS pattern, hopefully, it will end by July. So what does it mean? It means first half, there will be an impact. But as I can see it, it's not all negative for us. There are some opportunities. So we are continuing to explore how to exploit those opportunities. Third question about port congestion. So again, maybe not the same port congestion that we saw when Manila imposed the truck ban and it was taking 2 to 3 months to clear cargo. But at one point, early in 2018, from the normal 3 to 7 days cargo clearing time, it became 1, 2 weeks. But that's not there anymore. But now we're back to the normal 3 days plus. However -- so there's no congestion at the port itself, but there is tightness in the logistics sector because of what's happening with the disruption caused by COVID-19. So we have a lot of ships which were meant to travel to China or from China, which are stuck. They can't -- either they can't dock in China or they're not departing China because there's no goods on board. So you have a lot of the shipping and storage capacity that is utilized but not moving. So goods are coming in or not coming in and goods are also not being taken off storage vessels, storage tanks and so forth. So that is another issue that's affecting all manufacturers. We haven't -- for us, personally, we haven't seen any negative impact yet. There's -- so we don't even know which way commodity prices will go because, on one hand, if there's not enough product available, prices might go up. But on the other hand, with -- technically, there's also a lot of these products available, they're just not moving. But if we can get to them, maybe we can get a lower price because there's just so much available. So if they're real, question mark. But what I do know is if you look at Bloomberg and look at the price of commodities like steel, oil, copper, and so forth, prices are down a lot. I think crude oil prices are down 25% from the peak 2 months ago. The same for copper and so forth in general. So maybe there's tightness to get material. But the good things is at least tightness has come down a lot. So that's something we can exploit as well because raw materials make up 80% of our cost. So there's a lot of things moving, but in essence we're not that pessimistic about how things are going. Yes? Sure.

Yes. [ Aaron ] from [indiscernible]. Just 2 questions. Can you give a sense of how the supply-demand dynamics really benefits your biodiesel? And then I know you mentioned that there's only -- you only [indiscernible] the growth of China. Could you give us a broad sense what specifically importers for raw materials [indiscernible].

So first question was supply/demand picture for biodiesel. So recently, there's been more talk in the press about the biodiesel blend being increased from 2% to 5%. What we have heard is that the government is now more open to increasing the blend primarily because of the big drop in coconut oil prices that has really affected coconut farmers. And coconut -- so coconut farmers and their families still make up, I believe, something like -- it's a big number, it's like 20% of the Philippine population. So there's talk about increasing the blend. But honestly, we don't know if it will happen and when it will happen. So for us, I mean from a -- from an expectation perspective, 10 years ago, we thought -- everyone in biodiesel thought the blend was going to increase 5%. It was a given. But in 10 years, it's been stuck at 2%. So what happened is, for a lot of the biodiesel manufacturers, capacities have been ramped up. So in other words, everyone is now operating at roughly 40% utilization, which is where roughly we're operating as well. So us and our competitors are operating at very low utilization. So it's caused a lot of issues. I know some of our competitors actually went bankrupt and closed down. But we're chugging along. So that's on the supply side. On the demand side, the one factor is the increase -- potential increase to 5%. And the other factor is the economy. If people are traveling less or if people are buying less diesel, then demand would not be growing as well. So there's a lot of moving parts, but I think the mood now may be a little different compared to last year, primarily caused by how the government is looking at the blend. Last year, if you were to ask me, the chance of getting a higher blend was probably less than 10%. This year, I'd say it's now above 50% because we are getting feelers from government, from various stakeholders that there seems to be more interest to increase the blend. So it's still unknown, but I think the base case for increase of blend seems to have moved up. Okay. Second question about what we buy from China. No food raw materials, I believe. It's really on the chemical side, so colorants, resin, [ methane dioxide ] and other chemicals, maybe a few raw materials for the Aerosols business like the thin plates. But all of these raw materials, you can find. That's why we were able to easily find substitutes from other countries because you can find them in other countries. Yes?

Do you have a breakdown [indiscernible] exports by countries?

We don't provide breakdown by country for our exports, primarily because we don't want to give our competitors any ideas of what we're doing where. So yes, we don't -- but I can tell you that the bulk are still -- from a geographic perspective, it's still mostly Asia. Are there any more questions from the call?

There is a follow-up question from the line of [ Alvin Wee ].

This is Arvind Monie from Wellington. Alvin, could you isolate what the exposure of the company is to the auto sector maybe through your, I guess, your pigment business for wire harnesses, but also if you do paints for cars? And just after isolating that, is it mostly export-oriented? Or is it a mix between domestic and exports?

Great. So our...

So just a background, the reason for this question, to put into perspective, the China auto sales for Feb, I mean, given all that's happening there, it's pretty obvious, but the sales were down 80%. And I kind of see that as a reflection of people are not going out or going out less. And I guess, they'll have varying impacts across the team. But clearly, autos is a sector that doesn't really get traded online, so it gets impacted the most. So I'm just trying to figure out and isolate what the impact is on the business?

Sure. Okay. So for our exported auto exposure -- okay, so first of all, we don't have -- we don't make anything for cars or that go into cars aside from the biodiesel and the chemicals used in the wire harnesses. So that's on the plastics side. So nothing from Chemrez for paints. We don't make paint for cars. It's a special kind of paint. So from the wire harness side, basically the automotive wiring, 100% of the sales are exports. And we -- right now, from what I've seen, there may be an impact because of a lot of, not just because of the closure of a lot of the plants, but also because of weaker demand. However, I mentioned earlier that we may have some opportunity here because the plant that closed in China -- then what happened with the tsunami in Japan before, when those plants in Japan closed, the car companies then started to source for more that's in other countries. And we are looking or seeing some interest to do the same, meaning the plants that are not operating in China, those car companies are now looking at sourcing from factories in other countries. And we may be a net beneficiary of that. So some reason for lower sales for us, primarily because of lower car sales. But some reason where we may actually gain from this, which is customers or business in China that we were not selling to might be diverted to us, and that would benefit us.

Okay. Great. And so this would be in the range of 5% to 10% of your total revenue or whatever you're comfortable giving us?

I'm not so -- no, not 10%. So if you look at our total revenues about PHP 21 billion, plastics is PHP 3 billion, so that's about 14%. And engineered polymers makes up half, so half of 7%, roughly 3.5%. So the whole engineered polymer business is roughly 3.5% of our overall group revenue, the right business [indiscernible]. Anyway, and we're talking about single digits for wire harnesses. And so that might be the impact if it was to go to 0. But I don't see it, I mean, talking to the sales guys, it's not like the business fell 90% of what you sold with the China car sales. It's not -- the impact -- I mean our customers aren't just China--based. We're selling to customers that sell all over Asia, U.S., Europe and so on. So the impact is not as severe.

There's no more question at this time. Presenter, please continue.

Okay. From the floor, are there any more questions? [Foreign Language] Okay. So thank you very much, everyone, for coming. And of course, feel free to reach out to myself or to Crissa for any further questions. And have a good morning. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.