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

Good morning, everyone. Thank you for joining us. We're going to be discussing the results of D&L Industries for the full year 2020. So good morning, everyone. My name is Alvin Lao. I am the CEO and President of D&L. Together with me this morning is our Investor Relations Manager, Crissa Bondad; and our Finance and Investment Manager Officer, Ainslee Lao. So good morning, everyone. Okay. Crissa, please go to next slide. So the highlights of our 2020 results. So you see that for the fourth quarter, we were able to increase net income by 8% compared to the fourth quarter of 2019. So this is pretty good news for us because 2019, we didn't have the pandemic or lockdowns yet. So it is a good reflection of indication that we may be seeing recovery already. Our second half net income results were at PHP 1.2 billion, which is 51% higher than the first half results. We were actually targeting to hit at least PHP 1 billion in net income for the second half. So we did better than that. So similar to what we saw in the third quarter, it was really our nonfood segments. So our nonfood segment makes up less than half of the revenue of the group. But currently, they make up 3/4 of the earnings of the whole group. And we'll show later more information about this. Currently, our nonfood segments are operating at above where they were pre-COVID. Point number four, our high margin specialty product margins bounced back. So we were in the first half of the year, the margins were -- our high-margin products were lower by around 1%. In the second half, they went back up by 2%. So we ended the year at the same margins as the previous year. And finally, our cash conversion cycle, so a big improvement, thanks to better receivables and inventory rates. So you can see from this slide that full year, we hit net income of PHP 2 billion, which is 23% lower than 2019. However, here you see second half net income higher by 51% and also fourth quarter 2020 higher by 8% versus fourth quarter 2019 and fourth quarter higher by 11% compared to the third quarter. And on the right side, you see there the net income breakdown by the different groups. So food usually is #1 net income contributor. So now it's tied for #2 with Chemrez Group being the largest contributor of net income. Okay. Next slide, please. This shows you, on a quarterly basis, a comparison of 2020 versus 2019. So we already started feeling the effects of the lockdown in the first quarter. Those last 2 weeks in March when there was really very minimal activity in the Philippine economy. So our first quarter net income year-on-year, down by 31%. In the second quarter, it was much worse with net income year-on-year down by 57%. And then third quarter, we started to see a recovery, so still down but by a much lower number, down by just 7% year-on-year. And then finally, in the fourth quarter, we were able to have a higher net income compared to fourth quarter 2019, higher by 8%. So this is a look at the fourth quarter 2020 versus 2019, and you could see that the -- for the food segment, it's still quite a long way away from where we were the previous year, with net income lower by 45%. And I don't think this is any surprise as everything from restaurants operating at 50% banking capacity, there's still a lot of hesitation by people to go out, dine out. And this is really still hurting the food industry. However, we are in a good spot with regards to our nonfood businesses, as you can see, with Chemrez, specialty plastics and the consumer products' ODM businesses, all doing much better in the fourth quarter compared to the fourth quarter last year. Next slide, please. So this is a quick look at our summarized version of our income statement. So for the full year, revenue, we ended with revenues down by 3%, net income down by 23%. Our margins were also lower. However, here, when you look at fourth quarter comparing year-on-year, where you see that revenues are actually almost flat and net income higher by 8%. And also on the last columns, you'll see compared to the third quarter with fourth quarter earnings higher by 11%. As far as volume growth, we saw volumes come down across the board for our high-margin businesses. And overall, for commodities, volumes are up primarily because of the big increase in the commodities segment of our food business. And this is something that we actually saw -- it started really in the second quarter when ECQ started. But as you can see, if you compare the numbers now versus what we saw in the second quarter, the numbers are starting to normalize or stabilize. So that's a good sign. But this change in the product mix does explain -- or it's the biggest reason why our average margins have come down. On the right side, you see there the historical margins across the different segments. So for our food business, margins are significantly lower. And again, this is mostly because of the big shift in the product mix. This is something we do expect to see recover once things are back to normal. The good news is if you look at the other 3 segments, you will see that our margins for the nonfood segments have either been quite steady or are actually even better than the margins from the previous year. And that's -- we take that as good news. In terms of the volume growth on a quarterly basis, so just focusing on the high margin specialty products. So you see there the huge decline in volume in the second quarter. There were still declines in the third and the fourth quarter, but as you can see, the rate of decline has been slowing down. So in effect, this low base effect is something we should be benefiting from in the next couple of quarters. And so that's something, I guess, we should be looking forward to. In terms of exports, so continuing the good performance we started seeing in the second quarter. Export revenues for the year are higher by 34% in terms of contribution to overall revenue, exports now make up 29% of revenue compared to 21% the previous year. In the fourth quarter, export revenues were higher by 29%. And as a percent of revenue, exports make up 31% of total revenue in the fourth quarter versus 24% in the fourth quarter of last year. And on the right side, you can see there the breakdown of exports. It's still mostly food, but oleochemicals have done very well. So the increased interest in health awareness, safety, that has really benefited the oleochemical exports. In terms of the ratio between high-margin and commodity businesses, so this is something -- so we ended up with 63%, high-margin, versus 30% -- 37% for the commodity business. And this is -- this decline is really a result of the change in the product mix. And it's something that we expect. It's something that we saw -- it started in the second quarter when the lockdown started, and it is something we expect to normalize when things get back to normal. So again, another thing to look forward to. Here's a very focused look at the high margin specialty products segment. So overall, revenue is down by 11%. And for the year, you saw that volumes are down for the year. But if you look at the bottom left of the slide, you will see that compared to first half, where we saw margins were lower by around 1%. You now see that margins are flat compared to previous year. So it means that in the second half, we start to see higher margins for our high-end margin specialty product segment. So this is good news. We do think that these higher margins are sustainable, meaning going forward, you should see us reporting higher margins for this part of our business compared to this -- the last year. In terms of commodities, so we ended with commodity margins lower from 10.4% last year. It's at 6.5%, but there is good news here, if you'll see at the next slide. So when the pandemic and the lockdown started, our commodity margins really collapsed. We were barely making money. We did have to provide a lot of support for our customers. A lot of our customers were either closed or not able to operate at a sufficient level to be able to overcome all of their costs. So we provided a lot of support. And the lower margins in the second quarter reflects the support we were giving. As you can see, the margins start to recover in the third and the fourth quarter. So in terms of our commodity business, even though it's not -- the margins are much lower than our high-margin segment, you can see that at least the margins for the quality segment have recovered, and we do think that we will be able to maintain decent margins for the commodity business. In terms of our cash flow, so higher commodity prices across the board, reversed the negative working capital environment that we saw in 2019. So there was more cash tied up in working capital for the year 2020. Although we still ended up with a positive net operating cash flow, we do also see there a large increase in CapEx. So when the pandemic started and the lockdown started, construction activity was suspended for around 2 months. And even when construction was allowed to resume, it still took us a while to get everything ready and to comply with all the requirements. As you can see there, we really are back on full blast. And our expectation is that the expansion in Batangas, where the bulk of this CapEx spend is being done, the target is still to be completed by the end of this year. So in terms of -- you can see there in the second chart on this slide, coconut and palm oil together, they make up, I think, roughly, now it's around 2/3 of our total raw material SKUs. And you can see their prices have gone up quite a bit from where they were last year. And then below that, from last year, the peso is stronger compared to the dollar, although for the last week or so, the peso has weakened. But nevertheless, what you can see from the 2 bottom charts is that there is a lot of volatility in terms of our costs. At the top, you see there that the fall in margins we saw in 2020 is really explained mostly by the change in the product mix and not so much by the volatility in our costs. So still reflecting the fact that we are able to pass on price changes to our customers. Okay. Next slide, please. So this is a look in summary at the different segments and contribution by revenue, net income, we can see that food is still by far our biggest revenue contributor. And normally, the food segment is also the biggest contributor to net income. However, because of the difficulties that the industry is having in general, things are still quite weak for our food segment with net income lower by 50% for the year and margins lower as well because of that change in product mix that we saw earlier. But here, you can see the nonfood side doing quite well. So Chemrez now being our largest net income contributor at 40%. The Specialty Plastics segment is contributing the same level of income as our food business and consumer products will be up, which we used to call aerosol. So I remember when we did our IPO 8 years ago, this segment was contributing around 2% to 3% of net income. Currently contributes 13% of net income, so reflecting quite a good growth in this segment. And we are confident that this segment will still continue to grow. In this -- sorry, in this slide, you will see that as far as net income, Chemrez actually was able to slightly increase net income by 2%, but the biggest increase in net income really came from the Consumer Products ODM segment, where net income for the year went up by 35%. For a closer look at our food segment. So box number 2, that's the commodity business. Box numbers 1, 3 and 4, these are the higher-margin businesses. And so across the board for the high-margin businesses, you can see volumes down and no surprises for a lot of our customers' business in 2020 was really affected by the pandemic, the lockdowns. But I guess the bright side here is that when things recover, you can expect these segments to recover quite nicely as well. So things are quite weak still, and it will only get better really when the pandemic goes away and when things normalize. So that is still pretty much reflecting the weak outlook in general for the food industry, especially for our customers that have -- or that rely on dine-in business. For Chemrez, so we did pretty well. Thankfully, the heightened or increased awareness about health, safety, sustainability, that benefited us in terms of the high-margin oleochemicals that we sell. So that's the first box on the left. So for oleochemicals, the bulk of that would still be going into biodiesel. And no surprise with -- in general, public transport still below the levels where it was before and, in general, people not traveling as much as they did before. The consumption of fuel is still lower compared to pre-pandemic levels. So overall, for oleochemicals, it's not because biodiesel sales are down quite a lot. But the high-margin -- for high-margin oleochemicals sales are actually up, and that is one reason why you see overall revenues up for oleochemicals. You'll also see that margins are higher for oleochemicals with margins almost hitting 27%. For those of you who have been following the company for a while, you might recall that when D&L fully acquired Chemrez, I think it was in 2014 or 2015, the average margin of Chemrez was only in the mid-teens, around 15%, 16%. So this -- they moved into high-margin specialty oleochemicals, it be -- led to that big increase in our margins, as you can see there. Okay. For our plastics business, this is, no surprise, negatively affected. So everything from the slowdown in the automotive sector for exports to slowdown in manufacturers of different industries that rely -- that the plastic industry serves. But at least in terms of margins, we were able to still maintain the same margins. So we do believe that when business returns, once the pandemic is over, that this side of our business should also recover. And at least the good news here is that even when things are bad, we're able to maintain our margins. So when things do get better, you should see much better net income contribution from this segment as well. The last segment, which is what we now call Consumer Products ODM. So we changed the name from Aerosol because we are selling more non-aerosol products in this category. So basically, it's a one-stop shop. So everything from making the formulations to the packaging. So you can see that the second box there, personal care, so no surprise, people were just not going out or going out much less. So the sales of personal care products or for that industry has really come down by quite a bit. But everything else, so home care would be things like everything from disinfectants and other aerosol and non-aerosol products used in the house, that did very well in 2020. And then maintenance chemicals. So this would also be other cleaning and sanitation chemicals, alcohol. So this segment also did very well. Overall, that can come up [ 65% ] and margins also higher by 1.7%. So I looked at our expenses, which are paid to affiliates. So these are mostly rentals for facilities such as land buildings and some barges. This expense for the year. Similar to previous years, comes out to roughly 1% of total cost and expenses. So the left side, that would be classified as related party expenses. On the right side, these would be related party income. So D&L charges other companies in the group for services, such as finance, accounting, HR, legal, IT support and so forth. So this related party income helps offset related party expense. This is a look at our cost structure and our R&D spend. No major changes in terms of our cost structure. The bulk of our spending is still going into raw materials and our fixed costs overall coming in around mid-teens. And that's pretty much what saves us every time there's a crisis. We are not a high fixed cost operation. And that's why we're in the full year 2020. On a monthly basis, we did not see any month where we lost money. So we were profitable for every month of the year despite COVID and the lockdown. On the upper right portion of the slide, you will see there the breakdown of raw materials. So together, palm and coconut oil make up roughly 2/3 of all raw materials used. And you can see the note there on the right side, around 45% of our raw materials are important. On the bottom left, you'll see there what we call tech spend. So this goes to R&D and IT. It is lower in 2020 compared to 2019 because we just had a lot less customers asking us to develop new products for them. And that would explain the drop in spending, but the drop was just 10%. And this is something -- so in other words, even if demand fell like quite a lot, the spend on R&D and IT fell by a much lower number. And so it's -- so technology is still something that we do spend a lot of money. In terms -- so a quick snapshot of our balance sheet. The biggest change here would be in terms of our borrowings, higher by roughly 50% compared to the previous year. But despite that increase in borrowings, overall, you can see that our interest cover is still the same from the previous year at 18x. That's on the bottom right. And it's really a reflection of lower interest expense. So even if our overall borrowing level is higher, the lower interest rates that we're getting now helped offset that and the effects. Overall, it just didn't have any effects on our interest cover. Okay, next slide, please. So our net gearing has gone up. It's at 17% at the moment, which I would think that is still quite conservative. So all of our debt is currently short term in nature. We are looking at tapping the credit markets to do something more long term. So discussions are currently ongoing. And that's something we expect to be discussing more in the next couple of months. So you see there, the average cost of debt includes doc stamps, so it is real cost -- overall net cost of debt. Our borrowing rates with our banks for short term, we were able to borrow as low as 2.3% recently. So it's a good sign. Even if inflation has picked up and may come up a bit in the next few months, I believe overall the outlook for interest rates, even if they slightly go up, they will still be quite low compared to the previous years. So I look at our cash conversion. So the good news, you see -- so despite the lockdown and the pandemic, we actually saw an improvement in our accounts receivables. So this, I believe, reflects -- we've always been quite conservative when it comes to extending payment terms to our customers. We've always struck that balance between providing support for our customers but also having that need to make sure we're able to collect. And that we were able to benefit, as you can see, with actually better days receivables. So an improvement from 60 days the previous year to 52 days in 2020. In terms of inventory, so the tightness of the ports we are experiencing in the last couple of years. So we don't see tightness at the ports now, but what's happening globally is that there is more limits or restrictions overall globally in the supply chain. But despite that, our inventory numbers, you can see improving. And 90 days is pretty much a comfortable level for us. Overall, across our businesses, we try to keep inventory days anywhere from 50 to 90 days. It's -- for many of the raw materials that we transact in, especially the non-commodity specialty raw materials, you don't want to leave yourself too short. It's not just the issues in logistics, but just sometimes when it comes to suppliers being able to provide particular specialty materials, there are no guarantees. So having extra inventory on hand, it's sort of a benefit and we try to balance that need of being smart about where our money is going and invested in versus the criticality of having sufficient raw materials on that. In terms of accounts payables, you can see that days are pretty much stable from the last couple of years. So in terms of Investor Relations, so D&L is currently #48 among the largest domestic companies listed in stock exchange, market cap, a little over PHP 50 billion, about 12-month daily trading average, slightly over USD 400,000. In terms of the float, public float is at 28%, and foreign ownership is a little below 17%. So this is how the share price has done since the IPO. So including the effect of the 100% stock dividend that we did, I think it was in 2016, so the share price is, yes, up by more than 2x. We are still continuing to participate in broker conferences. However, they're pretty much all virtual. As you can see, I guess it's earnings season, so a lot of the brokers have scheduled their conferences in the last -- sorry, in the next 2 weeks, and we're going to be quite active there. So here's a look at what we're doing in our expansion. So you can see that this picture was taken 4 months ago, 5 months ago. So the yellow rectangle, that's the food business, D&L Premium Foods. And then the 2 green rectangles, one on the left, one on the right, you can see there that in October, there was already quite a bit of activity. And then fast forward to -- this was taken 2 weeks ago. You can see now much more progress, more parts of the roofs completed and more parts of the building is done. So we've got a little under 10 months left before the end of the year. And I would say we're on track to finish this by the end of the year. And this is perspective of what the plant would look like once it gets completed. I think that's the end of the presentation. So we're open to Q&A.

There is a question in the chat from Sir Ed. So the question is what brands we have in personal Care and are the margins good? So in general, we don't have our own brands. We don't own our own brands. We manufacture products for other brands. And the brands go across many different segments for personal care. And maybe, Crissa, if you could please go back to that slide that shows the ODM segment. You can see that margins across this division are quite good. So for personal care, in particular, the margins are at 34.5% on a gross basis, with overall margins for Consumer Products ODM at 34.9%. Okay. Yes, you can put your questions in the chat or if you like, you can also unmute your mic. And okay, there's a question.

Yes, if you want to -- there's a question. [Operator Instructions]

So we have a question here about biodiesel. Will biodiesel be affected when and if oil refineries just import finished diesel?

Oh, so to us, it doesn't matter whether the oil is -- whether diesel is finished here or if it's imported as a finished product. The law -- the biofuels law requires the 5% blend -- sorry, I'm jumping ahead. It's actually just a 2% blend. The 2% blend is one of the requirements is that biodiesel must be indigenous. So in other words, the -- in quarter, even if they -- and a lot of oil is actually finished oil is already imported into the country. The biodiesel, the compliance to the biodiesel blend has to be done domestically. So it doesn't really matter. There's no effect, in other words, whether the oil is imported or finished domestically.

Okay. We have a raised hand. So I'll allow [ Thomas Wang ] to talk. Thomas, go ahead with your question.

Can you hear me?

Yes, yes, go ahead.

Yes.

Yes. Congrats on the recovery in 4Q. Yes. Given that recovery, would management happen to have guidance for FY '21 outlook when it comes to earnings growth you used to give in the past? Also, should we expect dividend payout to return to historical averages given the 4Q '20 performance?

Thomas, straight to the point. Okay. I think there's a lot more optimism now. There's reason to expect earnings to be really higher in 2021. We're going to try our best to hit the earnings that we achieved in 2019. So -- but it's really going to -- the country started vaccinations a couple of days ago. Although COVID cases are back above 2,000 level on a daily basis. And I think the other day, it hit 2,009. But then went back to around 2,001. For us as long as the number of cases don't shoot up again. And I think the other thing that we're seeing more relief on is that globally, COVID cases are down a lot from a couple of months ago. I think the U.S. is actually a couple of months ahead of their target to roll out vaccines. I heard this morning on Bloomberg that the U.S. is actually looking at being able to have over 300 million vaccine doses administered by May. So they're quite ahead of their schedule. So there's a lot of optimism and a lot of reason to believe that globally, and I believe, domestically, things will get better. There's a lot of talk in the news about more businesses opening up. I think yesterday, there was an announcement that starting the end of this week, more public places like libraries and other places being allowed to open again. I think even cinemas are being allowed to open, I think at 25% level. So yes, if anything, 2021 will definitely be better than 2020. And so yes, we're going to try to meet at least the same income level that we were -- that we got in 2019. In terms of the dividend, it's still a little early. We normally don't finalize a decision until close to the shareholders' meeting in June. But what we saw -- what we did last year is we went ahead and paid out the 50% from earnings from the previous year. So that is our dividend policy. We didn't pay out a special dividend last year, understandably because things were so uncertain. I think it's fair to say, though, if things are looking good, then it should give us more confidence that the business will recover and profits will come back. And so that should also give us more confidence to being more confident in terms of the dividend. But in the next couple of months, we'll probably be able to give more information about that.

We have a question in the chat from [ Fabrice ]. Can you talk about the most recent spike in soft commodities and the impact on your margin?

Sure. So Crissa, could you turn back to that slide showing the higher commodity prices? So yes, recently -- so what's been in the news is that oil, I guess, crude oil usually gets the most attention. It went back above $60 a barrel. But if you look at this chart, for a lot of commodities like the food commodities, such as coconut oil and palm oil, prices have actually been going up for the last couple of months. Palm oil prices, I believe, are at, I think, 4- or 5-year high. And the increase is similarly felt across the board, across many, many commodities as well. For us, you just have to look at this chart again. Look at the period between 2010 and 2012, when both coconut and palm oil prices tripled within the year. So from 2010 to 2011, prices tripled. But you look at our margins, our margins were pretty much stable. So we managed this volatility by constantly changing our selling prices. So therefore, there's really not much effect on our margins. Crissa, if you could please turn to the slide for the high-margin business, showing the margins there? So here's another way to look at this. Our margins have been quite steady for the high-margin segment. And this is the source of the bulk of our profits. So it's 63% of revenue as of 2020. But the margins here are 2.5x that of the commodity business. So in terms of profit contribution, HMSP contribute, I would guess, anywhere from 85% to 90% of overall margins. And as you can see, it's quite steady. So really, the impact on our margins -- Crissa, could you please turn to the volume slide, the volume change? Not this one. The -- yes, that one. So this is really where the changes in the margins where -- this is what's causing the change in our margins. It's really the change in the product mix. And if you do the math, you can clearly see it's the decrease in the volume of high margin. It's the increase overall in the volume of commodities. So this clearly explains the drop in margins in 2020. It has nothing to do with the increase in commodity prices. And we've shown historically that's something we're able to deal with. Thank you, [ Fabrice ], for that question.

Okay. We have quite a lot of questions on food and what we're seeing in volume trends for commodity food versus high-margin food segments. That question is from [ Aaron ] of Deutsche.

So commodity is just a business that's going to be there. And as you can see, even in the crisis that business trends along. It goes through very basic segments of the food industry. But what happened at the height of the pandemic, a lot of the suppliers of this commodity segment, they were not able to perform. So it was either -- so for a lot of businesses that operate in this segment, they outsource their logistics. And when there's no public transportation and there's limited movement, a lot of the suppliers in this industry were not able to operate as simply as that. But for us, since we own a lot of the trucks, the delivery vehicles, and we -- at one point, we had 400 people sleeping in our plants. So it means our people were able to come in. We were able to continue to service our customers. Even those that normally don't buy from us, they have no choice. They didn't have that many suppliers to turn to. We were one of the few suppliers left operating. So that's why you see the big jump in volume for the commodity business. And it's the reverse for the high-margin segment. Reverse, meaning in terms of demand, the demand just collapsed. No one -- none of the large chains were able to really operate at a high level. A lot of the malls were closed at one point. And so we just saw volumes collapse. So I guess what I'm trying to say, we're here for our customers, but there's just so much we can do. If the customers' demands are affected, then our volume will fall, and that's what happened for the high-margin business. But the -- for the commodity business, that volume was, I would say, pretty steady, but it was really the drop among our competitors in that space that led to us providing more sale for that side of the business. What it means, though, is when things normalize and public transportation is back to normal, there's no more COVID. You will likely see the volume for the commodity business come back down because, at the end of the day, a 3%, 4% GPM business is really not that interesting for us. We don't -- in terms of our resources, we don't really devote a lot of management time or energy into this segment. We'd rather spend our time focused on the higher-margin parts of the business. So what you will see once COVID is gone is the volumes for the commodity business, that should go back down as other players come back in. And we're okay to let go of the volumes on that side of the business. But the good news is that you will see the volumes for the high-margin side go back up, and that's something we're looking forward to. So thanks, Aaron, for your question.

We have another question on food. So this question is from Miguel, and he's asking what we've been seeing recently in fourth quarter, January and February, in terms of high-margin demand. Are we seeing a rotation back to customized products from commodities?

So there is more activity definitely. So when you look at our R&D, at one point in April, we had pretty much 0 interest from customers to develop new products, new formulations. Everyone was just scrambling and focusing on survival, more than anything. I think the mood now is different. The mood now is preparing for opening up. And you get a hint of this when you look at the disclosures of the different QSR operators -- sorry, QSR, quick service restaurants, where they talk about -- they're talking about expansion plans again. They're talking about rolling out new products. So the tone has changed. And so I would say, similarly, our business is similarly affected as well. So definitely, the mood is better. In terms of converting customers from commodity back to high margin, yes, I would say that has started. So again, early on, in the pandemic, the focus was really on survival. I remember around April, I visited a KFC branch. And the menu board just had the basic fried chicken. And I think it was fried chicken, french fries and soft drinks, and that was it. There's nothing else. None of the special sandwiches and desserts and so forth. They were just focused on what their basic selling popular item was. And later on, as companies figured out their supply chains and they're able to get more people to come to work, so they were more active in selling other products. So yes, definitely, that rotation is something we now have start to see, and we will likely continue to see as well.

Okay. The next question is about exports, also from Miguel. Are there any particular export markets in the Asia Pacific that you're looking at in terms of expansion, apart from the current markets that we're in?

Well, we -- we're really not that choosy. In other words, we really want to focus on where the products will sell. But I think it's fair to say at the moment, we're more focused on places that have managed the pandemic very well and where the economy has already opened up. So I regularly reach out to friends in different countries. The news from China is that things are almost normal now, et cetera. So what's not normal is that there's just a bunch of restrictions when it comes to travel, when you want to go from one region of China to another. But aside from that, within the cities, activity in China is pretty much back to normal. And so it's markets like these where we think that there's just a higher chance of us doing better there. But I guess one big difference is whereas before the pandemic, we would be doing a lot of visiting to these countries to meet with people and communicate. Right now, everything is limited to just online. But I think we got one big change we have accepted and we are likely going to continue to do, but a lot more meetings done online. And so that's helping us reach out to more parties or more markets than we were able to reach out to before.

Okay. The next question is from [ Stephen ]. He's asking about income taxes and why they declined in the fourth quarter despite having flat revenues.

So I have to confess. I haven't looked into that. So all the numbers we reported are based on the old or the previous tax regiment. There is a new CREATE bill, a tax bill that would reduce income taxes from 30 -- corporate income taxes go down from 30% to 25% effective supposedly July 1, 2020. However, all these numbers are still based on the 30% corporate income tax. For the fourth quarter, I'm not sure, Crissa, would you have...

Can I add? Yes. So for the fourth quarter, the decline in effective tax rate, that's really because of our high-margin oleochemicals business because that business enjoys a certain tax incentive, but we are only entitled to avail of that tax incentive once we reach a revenue threshold. And by the third quarter, we have already reached that. So for the entire fourth quarter for the high-margin oleochemicals, I believe our effective tax rate was just maybe 10%. So for that particular period, because it's lower, so that brought down the effective tax rate for the entire company for the fourth quarter. So that's really because of oleochemical business. But starting first quarter again of 2021, we have to, again, reach that threshold for us to be able to take advantage of a lower tax rate for the incremental income over that threshold.

Thanks, Crissa.

Okay. We have a raised hand. [ Karthik ], go ahead.

Yes. So I have 2 questions. Firstly, Alvin, if we go to Slide 17, and especially on the Food Ingredients segment. If you look at the specialty facts and oils division, the drop in volume is very similar to the drop in revenue. This would imply that pricing, by and large, held quite firm. Why is it that despite pricing being almost flat and the degrowth mainly coming from volume, there is a 370 basis points drop in gross margins?

It's just when -- so our -- so within that segment, we will have some products selling at 40% margin. You'll have some products selling at 12% margin. The higher-margin products just sold a lot less than the lower-margin products within that segment. And so -- and it's really an effect of that big drop in demand across our key customers.

Okay. That's quite logical. But I'm just curious why it did not reflect in an inferior mix with the revenue dropping more than the volume. Because in this case, it looks like the mix, more or less, held up.

Yes, that's a good question. I haven't looked at the detail for this segment. Crissa, would you have any info?

Well, I think for the specialty fats and oils, that's really because first half is very challenging for us. So for the companies that we were supplying to, many of them, one, they required more of the lower-margin product within the specialty fats and oil segment; and second, because it was a very difficult time, many of them were asking for concessions, et cetera, lower prices. But we've made it a point that we want to show our customers that we will always be here for them. So that when the good times come back, they know the companies that supported them during the tough times. So admittedly, this segment experienced lower gross profit margin for the first half. But I think that's done and over with in 2020. Moving forward, with indications that dining-in capacity is now much higher, our customers for the high-margin products have started to reorder again for the high-margin products or specialty fats and oils that they get from us. Then moving forward, this should be much better.

Okay. Great, great. Yes, I was just curious how the mix held up so firmly despite this state. Just related to this, Alvin, if we just go back to the point that you made on the gross margins on the high margin specialty products, which has held up pretty well on an overall basis year-on-year at around 25.6%, if we go back to that slide. Now given that almost half of the high-margin segment is from Food Ingredients, and that segment saw gross margin compression, that would -- would that imply then that it is actually the remaining segments, which is Oleochemicals and Specialty Plastics actually saw proportionate gross margin expansion to compensate for it, which is why the gross margin for the overall segment and high margin is stable?

Yes, that's a pretty good assessment. It's just basically food as an has really been weak. The nonfood, especially our oleochemicals segment, continues to be quite strong. And it's really just that.

Okay. Great. And I noticed that in the other specialty chemicals segment, probably it has been one of the sharpest gross margin expansion among all categories, almost 700 basis points. Any color on what drove that?

Sorry, which segment is that?

Okay. That's Slide 18. There is a segment which is like other specialty chemicals, which actually saw a 700 basis points gross margin expansion. I'm just curious to understand what drove such a sharp expansion in that segment.

So this segment, I remember for the last couple of years, the margins of this segment had been falling because everything from construction, manufacturing, just wasn't that -- it wasn't growing that much in the last couple of years. I think -- so this is related to the lack of available supply overall. So similar to how commodity prices have gone up, the price of a lot of raw materials have gone up. And so that has allowed us to also raise prices as well because at the end of the day -- so this segment caters to segments like construction and manufacturing. And if you look at us, we are also classified as providers of raw materials. So in other words, what we call finished products is actually raw materials of someone else. So I think what's happened is because, in general, there have been strong demand in some industries, basically on the nonfood side, it allowed us to raise a lot of prices back to where they were before. And it's really a function of us having or showing lower margins across this segment. Margins have dropped a bit before so it's really us just catching back up.

Yes. Because one part my intention is for a segment which is down 70% in volume terms and almost 27% in revenue terms, to see such a sharp margin expansion seemed a bit [ convoluted ].

We also have a raised hand from [ Louie Bate ].

[ Louie ]? No more raised hand.

Okay. [Operator Instructions]

There's a question in the Q&A.

Yes, Q&A. So what are we expecting -- what are you expecting when law on 5% biodiesel is implemented?

What will likely happen? So the question is -- I think the question is more of when more than if. There's a lot of talk about -- from politicians, the DOE, the interest to increase the blend. So just a little background. The biofuels law was passed in 2006. And in 2007, all diesel sold in the Philippines was mandated by law to have a 1% biodiesel mix. That 1% increased to 2% in 2009, and the expectation was that 2% would eventually go up to 5%. Currently, the mandate for the blend is still at 2%. Recently, there have been various politicians, as well as the Department of Energy, talking about increasing the blend to 5%. If you look at our neighbors, so the Philippines was the first country in Asia to pass a mandate for biofuels. And so we were the first, but we are now the laggard. If you look at countries like Malaysia, Indonesia, they're at 20% and they're talking about increasing it to 30%, and we're still stuck at 2%. So we don't know when this increase will happen, but we think it's more a matter of when than if. And what will likely happen with this increase is that it will likely be a gradual increase. Meaning from 2, it will go up to 3, and then 4 and then 5 over a period of time. What we know of the industry is that the industry overall is operating at below 40% utilization. So in other words, there is sufficient capacity already in the industry to serve a 5% blend. And we are -- we also believe that there is sufficient supply of coconut oil to service the 5% blend. So yes, that, in general, is where it is at the moment for biodiesel. Thanks, [ Ranier ], for that question.

Okay. There are no other questions in the Q&A box or the chat. Oh, here, we have one. Given the improving outlook, can you comment on your CapEx plans? Okay, let's do that first.

So we had earlier disclosed that the total spend for the new plant in Batangas would be around PHP 8 billion, and that is still the same amount. So that is likely -- sorry, Crissa, could you change to that slide that shows the net gearing at 17%? So our net gearing has gone up from -- there you go, thank you. And you can see that the debt level is now at PHP 5 billion. We have roughly around PHP 4 billion, PHP 4.5 billion left to spend on that expansion. So even if you tack on or add, assuming we were not able to utilize any cash flow from operations and just -- it's 100% going to be debt financed, that PHP 4.5 billion, when you add it on there, you would see our debt-to-equity ratio at roughly 50%, so still quite comfortable. And so that would be a very big CapEx spend for us for the -- from 2018 until the end of this year. And actually, some of that spend will likely slide to next year as well because, normally, you don't fully pay the supplier until the commissioning and so on is complete. And likely, what you will see is this big CapEx will then be followed by a period of much lower CapEx because we'll have so much capacity, our utilization will be very low. And so going forward, the next couple of years, you may not see CapEx at such a large number until we decide to go with the next large flat or ancillary or another operation that would need large CapEx.

Okay. There's also a question on rising commodity prices. With this in mind, do you need to increase inventory for raw materials?

So the tricky part about buying so much now is you never really know when raw material prices will come back down. Sorry, Crissa, could you go back to that slide which shows the volatility in raw material prices? So the trick is to buy enough for you to use and to buy less when prices are on the way down, right? I mean, at the end of the day, you don't want to be stuck with a lot of high-priced inventory when prices are coming down. So it is something that I would say we're experts, but I would say that we've had such a long experience in this business. And we don't gamble. We don't speculate. We don't take unnecessary risk. So what we'll do is we'll have enough inventory to make sure we don't run out and we don't disappoint our customers, but not so much where it would present a risk in the sense that having too much inventory is actually not good when prices were going down. So it's a balance that we need to take. But having been in this business, it's -- and it's not just food. That volatility in raw material prices is present even in the older side of our business with plastics and chemicals and so forth. So we've been -- essentially, we have been leading with volatile raw material prices for over 50 years. It's something we're very familiar with, and we will just keep doing what we've done before.

Okay. So we have another question regarding cash conversion. So this improved in 2020 with improving business outlook. Can this level be maintained in 2021 onwards?

Okay. So it's actually not that difficult to reign in accounts receivables and inventory. You have the choice always to extend less payment -- lower payment terms to your customers. But there's the risk that your competitor would use longer payment terms to grab market share. So I would say we're at or near the optimal point where once business recovers and demand starts to grow and all the competitors start to come back in a big way, we do need to maintain that balance in terms of good service, good pricing, but having payment terms as well. But at the same time, similar to what I talked about earlier, we want to be able to extend credit terms only to customers where we have a lot of confidence that we're going to get paid back. So that is likely something we will continue to do. So there is a chance that the receivables in terms of days might go back to 60 and that's really just a function of the industry we're in. Being too tight is not necessarily a good thing. And with the cost of money so low now, and our debt level being not that high, it may not make that much sense for us to be too tight with credit as far as our customers are concerned. Now inventory is a much trickier question. So in the past, we've had a lot of restrictions when it comes to logistics domestically. There were -- there's congestion at the port, there's traffic. So at the end of the day, what's important for us is to be able to have sufficient inventory to service our customers and to be able to assure them that as their businesses grow, we will always be there for them. And that's actually -- so that's a value that we carry forward in the good times and even in the bad times. So that's why during this lockdown period, even when a lot of our competitors either shut down or trying their operation, they really either reduce their presence in the market or they left the market, but we did not want to do that to our customers. We wanted to communicate to our customers that we're always here, and we are always ready to serve them. So that's a trickier part as far as inventory is concerned. Of course, at the end of the day, we want to minimize the level of inventory we have and anywhere from 50 to 90 days would be comfortable for us, but having that priority of having enough raw materials to service our customers. If you can just imagine, when COVID goes away and everyone starts to go out, businesses start booming, you can just imagine that big jump in orders we're going to see. We don't want to be in a situation where we don't have enough inventory on hand. We want to have higher levels of inventory to cater to growing business. So again, the key word for me would be balance, just making sure we have enough inventory to serve our customers. One, we don't want to disappoint them. Two, we want to avoid them going to our competitors because we don't have enough capacity or inventory to serve them. So what I can say is that we will constantly pay attention to our working capital. But with interest rates so low and our debt levels quite conservative, there's really room for us to be more aggressive and that could mean either extending longer payment terms or having more inventory on hand to take advantage of opportunities as they come.

Okay. There's another question from [ Vena ]. What is the number of new inquiries we're getting relative to second and third quarter last year when things were very quiet?

So on the food side, it's still much lower than where it normally is, although it's definitely gotten a lot better compared to when the pandemic first started. On the nonfood side, you can see from the numbers, it's pretty much almost back to normal. I think, one, if you look at what we do and the products that we make, they go to very basic industries. And I believe the economic activity in the country as far as the basic industry, so if you take a look at infrastructure spending and the roads, the bridges, the subway and so on, the push is there, the growth, the activity is back. And in a lot of ways, what we make in the nonfood side caters very much to these basic categories. So there's really much more activity on the nonfood side. So that's why you see that recovery in the fourth quarter. And likely -- so it's clear that when COVID goes away, the nonfood side will most likely recover pretty fast. I am also confident that the nonfood side will also grow, meaning what we're seeing now is actually more, I would classify as, forced growth. Even though there's still a pandemic, even though we still have 2,000 new COVID cases a day, the government is accepting what's there. And despite that allowing activity to continue in basic industries like infrastructure and so forth. But you can just imagine once COVID goes away, everyone else will be spending on other parts of the economy. So the non -- both the food side and the nonfood side going forward, when COVID is over, you will see much more significant growth. So we're quite optimistic in that sense.

Okay. Q&A is still open. [Operator Instructions] Okay. I got it that there are no more questions. So maybe we can wrap up here.

So if there are no more questions, so that concludes our full year 2020 briefing. And as usual, if you have any further questions, you can always reach out our IR team, Alvin, Ainslee and myself. So once again, thank you for joining our briefing, and stay safe, everybody.

Thanks, everyone.

Thank you.

Thank you.