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

[Audio Gap] a good rise in net income. And then fifth, our exports are continuing to do quite well with revenue higher by 70% year-on-year and contribution of exports to overall revenue at around 1/3. Okay. Next slide, please. Okay. So here, we see the annual income from 2014. So you see there is a dip in 2019 and 2020. On the right of that, you see higher income in first half as well as the second quarter year-on-year. Okay. Next, please. Some details. So comparing first half year-on-year, higher by 74%. Second quarter year-on-year, higher by 134%. Quarter-on-quarter, net income is lower in the second quarter versus the first quarter. But take a look at interest expense. Interest expense is higher in the second quarter. So that did have an impact. We are -- we did borrow more in the second quarter, added debt mostly from the increased spending for our expansion in Batangas. But I believe EBIT for the second quarter versus first quarter was lower by a smaller amount, I think, roughly 2% or 3%. So it's -- well, Easter was also a factor. And of course, there was ECQ as well. But what we're seeing is that ECQ that was announced, which mostly hit in the second quarter of this year, was not -- it didn't affect us as badly as we expected. And then, of course, on the last 2 columns, you see comparison to the second quarter and first half of 2019. And you see there the difference is not that big. So our first half 2021, tracking really closely to what happened in 2019, which is pre-pandemic. Okay. Next. So annualizing the -- or comparing first half numbers to full year 2019, 2018 numbers. You can see that we are on track to at least hit 2019 net income, if not maybe exceed it by a little, but still behind -- slightly behind 2018. So that would be our target for next year, I guess. Okay. Next, please. So here's one very welcome development. If you take a look at what we classify as high-margin products, take a look at the 2020 volumes really dropping but slowly getting better as each quarter passed. And you can see that there is actually a positive gain as of the first quarter, with volume up by 7%. And then in the second quarter, we see volume much higher, up by 36%. So I believe, overall, we're still below what -- or where we were pre-pandemic. But definitely, we can really see the recovery has come a long way. So comparing all the different segments, you can see that all segments compared to last year doing really well. Food ingredients coming from a very low base. So this was the category that hadn't fallen the most last year. So it has seen the biggest increase, still below where we were in 2019, [ I believe ], but it's come up a lot. And there's a lot of -- there's a lot more optimism. Even with all the lockdowns we're experiencing, a lot of our food customers are slowly finding ways to continue to serve their customers. Next, please. So this is a look at volume change across our different segments. So good to see that between all our different segments and even split between high margin and low margin, you can see that there is volume growth across the board for all of our segments. So our food category, especially for the high-margin, had been experiencing negative volume pretty much for the whole of last year. But this year, things have started to normalize, as you can see. Our nonfood side, definitely doing much better, and we'll go into more details in the next couple of slides. So for our exports, export revenue up by 70% in the first half. You can also see the contribution to overall revenue is quite good at roughly 1/3. So this is something we are working hard on, and we expect once the expansion plant in Batangas is up and running, that we should see good growth -- continue to see good growth for our exports. So in terms of revenue mix, so we did see deterioration in the mix from the pandemic. Things have not really gotten better. So this -- so the way I look at this, this is actually something we can look forward to in the sense that once the pandemic is over, then this revenue mix should revert back to where we were before. And so it should translate to higher profits down the road. So something to look forward to. So just focusing on the high-margin segment, you can see that revenues are higher, but a lot of this is from price pass-through. So a lot of our raw material prices have gone up by quite a lot in the last year. And that is the main explanation why the margins are slightly lower this year versus last year. So there is some delay when we pass on price changes. Normally, it takes us anywhere from 1 to 2 months to pass on price changes. But with prices going up so quickly, it does mean that there is some delay. But we do expect, as we have done in the past, any time there are price changes, we are eventually able to pass it on. So we do expect that eventually the margins should stabilize back to where they were before. For our commodity business. So still growing, although I believe in the second quarter, it may not have grown as much. But the good news is compared to last year, as far as margins are concerned, you can see that we're doing much better. And margins have trended more towards what -- where we would normally consider commodity margins to be at on average. So last year was really more of an anomaly because of the pandemic. Most of our margins really shrunk last year, but good to see that this year, margins have come back up. So far our cash flows. So you can see there the big change in working capital, which is really mostly a result of higher raw material prices. So meaning more cash tied up in inventory as well as receivables. But we still ended up with slightly positive net operating cash flow. And then you see there is a huge amount continually being spent on CapEx. So this is mostly for our expansion in Batangas and resulting in negative free cash flow for the first half. And we will likely continue to see negative free cash flow for the rest of the year. My favorite slide in the presentation. So just to show you, so in the middle of the chart, you see there how our 2 most used raw materials, coconut oil and palm oil, which together make up around 2/3 of our raw material costs. So a lot of volatility in these 2 commodities. Below that, the dollar-peso exchange rate, which is significant for us because around half of our raw materials are imported. So you can see continued volatility in a lot of our costs, but over the last 10 years, our margins absolutely do not reflect any volatility in our costs. So the negative margins that you saw in last year and this year really correlates with the change in the product mix that we saw earlier and not so much reflecting the volatility in our costs. Okay. Next. So a snapshot of our first half group results. Food, it's continuing to be our biggest revenue driver. It is unlike last year where food, I believe, went to as low as #3 in terms of net income contribution. It's back to #1 but just slightly ahead of Chemrez, the second column. And good to see that our Consumer Products ODM business, which we used to call Aerosol, the fourth column, continues to do well. So punching above its weight, contributing 11% of net income. So at the bottom row, you can see there the increase in net income across all of the segments in the business. Next, please. So a closer look at our food business. So overall, volume is higher. And across all 4 segments of our food business, volumes were higher. Revenues were all higher as well. Very much -- low base effect from last year very much a factor here, although you do see overall margins are higher. So what -- we have been able to come back by quite a bit compared to last year's big drop, but still more to come, meaning we do still have some room to grow both margins as well as volumes, which right now is being challenged by the pandemic. So there's -- we're back to ECQ in the Philippines, no dine-in allowed in NCR Plus. And even alfresco dining actually is not allowed. So food companies are really limited to just delivery and takeout. So a very challenging environment indeed. But I think it's just something to look forward to. When things recover, we will see this segment definitely get much better. Okay. Next, please. So for Chemrez, good growth in volume and revenue compared to last year. Margins are lower, especially for our oleochemicals business. So this segment uses mostly coconut oil as its raw material. And just like most commodities, coconut oil prices have been trending up by quite a lot. So it increased by quite a lot, as you had seen in the earlier slide we have shown. So lower margins there really explained by the delay in passing on prices. So again, this is something that the delay in passing on price changes is something we would see when price changes go up really quickly. But it is something we expect to be able to pass on eventually. And so we do expect those margins to rise and stabilize as the price of coconut oil stabilizes. Our plastics business continues to do well. It's really a reflection of how we are catering to very basic industries in the Philippines for most of our segments, plastics being one of them. So we do have a lot of demand that we're seeing from our customers on the plastics side, and this is being reflective of the type of industries that we serve here in the Philippines. And then fourth segment would be consumer products ODM. So what we used to call Aerosol continuing to do well. One big change that you'll see compared to last year is that personal care. Finally, you see the numbers higher. This segment really crashed last year. So consumer products ODM overall last year did well except for that second box of personal care business. Last year, that segment fell by a lot. So the recovery this year is really from -- just reflective of the fall that we saw last year. And you could say that this is a reflection of people starting to go out again. They need to groom themselves and so on. So more people are buying personal care products. Okay. So a look at the related party expenses that our company pays to affiliate companies. So no major changes in the sense that it's still roughly 1% of overall costs and expenses, similar to previous periods. So that's on the left side. On the right side, you see there what we could classify as related party income. So these would be in the form of management and service fees charged to affiliates, and this helps offset the related party expenses on the left side. So a quick look at our overall cost structure. So on the top left, you'll see that D&L, the bulk of its costs are coming from raw materials. But overall, variable costs coming in at 80%, 85% of overall costs and expenses. So fixed costs make up probably less than 15% of overall costs and expenses. So this is really what saves us every time there is a crisis because our fixed costs are such a small part of our overall costs. On the right side, the top right, you see there the breakdown of our largest raw material costs. So you can see palm and coconut oil together making up roughly 2/3 of our overall raw material costs. And the note there that almost half of our raw materials are imported. On the bottom left, something good to see, our tax spend. So that's spending on R&D, IT and related expenses, lower in 2020. Understandably, for a lot of our customers, they weren't focusing on launching new products last year. And so correlated to that, our R&D expenses were lower last year. But if you take a look at this year, you can see that tax spend is higher by 11%. So we are getting more requests from companies now, at least more compared to last year in terms of new product development. So it's a welcome sign. Next slide is a look at our balance sheet. So higher debt because of the higher spending on CapEx for our expansion in Batangas. We are in the process of issuing a bond. So we are expecting to price the bond in around a week's time -- a couple of days' time. And we'll -- we're targeting to issue the bond around the first week of September. So you can see our debt to equity higher but still not that significantly -- not so high. So we're still moderately geared at this point in time. You can see on the bottom right there, our interest cover is quite comfortable at 29x, really. So even if we are borrowing much more, we have seen lower interest rates this year compared to last year, and that has helped us have a much higher interest cover than before. Okay. Next. So another way to look at our capital structure. Debt levels are going up. But as you can see, net gearing is still quite low at 25%. So very moderate level of debt. And average cost of debt there includes the cost of documentary stamp tax coming in at 2.77%. Okay. Our working capital cycle, you can see. So no blowout in receivables. We continue to be conservative when it comes to giving payment terms to our customers. Our inventory levels are at fairly normal levels. Normally, we try to keep it between 90 to 100 days. Again, around half of our raw materials are imported. So you could just imagine the nightmare that's being experienced in logistics right now with all the shipping delays globally. So it is challenging. But as you can see, our inventory levels are still at where we would classify them as healthy levels. Base payables, slightly higher than before. So that's a good sign. And you can see overall cash conversion coming down by quite a bit. So here's a look at the stock. We're currently ranked #47 among the top listed companies -- Filipino companies by market cap. Daily trading average, around USD 0.5 million. On the right, you can see there floats around 29%. And out of 100%, foreigners own 16.4% of the company. So we are continuing to join different conferences from the brokers. As you can see, over the next couple of months, they're all online. So no traveling for us for the next couple of months still. Just a look at our expansion in Batangas. So just some pictures to show the progress. So this is from the end of April. So you can see, if you take a look there on the left side, so our expansion occupies the 2 green rectangles, the big yellow rectangle in the middle. And you can see there as of April, for D&L Premium Foods, the bulk of the roof for the buildings have been completed. But for the structure on the left, very little had been done by April. Next picture, please. So you can see there a picture from a couple of weeks ago. Much more construction done for all buildings, but particularly that rectangle -- the green rectangle on the left, there's more construction that's being done. We are expecting Natura Aeropack, that operation, to start by May next year. And for the food expansion, we're targeting to start that by January of 2023. And that is it for the presentation. So we are open to Q&A.

[Operator Instructions]

We have a question from Cristina Ulang. Understood that margin improvement is just a matter of time. But she's curious about pricing power. So the ability to pass on costs, whether it's a bit weaker now given the lockdown measures. How will this affect income if there is a delayed effect and the degree of cost you're able to pass on may not be as big as before?

Sorry, I was muted. So we don't -- I don't think we have any issue in terms of passing on price changes. The reality is that one thing we saw during the pandemic last year for other companies, they really had to rely on their strong suppliers because a lot of companies last year were not able to bring in products or were not able to perform for various reasons. This is something we normally see. In the Philippines, unfortunately, we've had so many crises in the last 30, 40 years. And every time there is a crisis, we do see a lot of companies just not able to perform. So that was really the charge for us, how could we continue to help our customers, especially during this time. What this means is that for a lot of our customers, they really differentiated between the strong and not so strong suppliers. I believe we were able to demonstrate that we were still able -- we are still able to serve our customers' requirements. And that does, I believe, allow us to really not exactly impose but at least maintain the level of pricing that we need. And so I believe that did -- that type of high level of service and attention to customers' needs, it does allow us to continue to extract or at least justify to our customers why we need to charge prices how they are. And it's really a matter of explaining how raw material costs have gone up. We really have increased prices. So they understand that. At the same time, eventually, it's only a matter of time, prices do go down. And when prices go down, we also extend lower prices to our customers. So there is that trust eventually developed with our customers that we are passing on price changes, and we will also pass on lower prices when that time comes.

Okay. We have a question about shipping logistics issues from Joyce at CLSA. Can you talk about global and national shipping and logistics issues right now and how it's affecting both you and your customers?

Globally, I think everyone -- so many companies, so many industries that have been affected, part of it was really just how everyone thought that demand was going to be so low as to the effects of the pandemic with the lockdowns and so forth. I think everyone was caught by surprise how quickly some economies start to ramp back up, especially the U.S. And so a bottleneck was created. But I think this is really just a supply-demand issue, meaning there's a lot of demand now. Supply of shipping and logistics [ is just taking time to ] catch up. But eventually, it will catch up. For us, I guess being in the Philippines, where we're kind of used to inefficient infrastructure and bottlenecks and the tightness of the ports, we're kind of -- you could say we're kind of used to it, unfortunately. So yes, as you saw from the earlier slide where we showed the inventory levels, our inventory levels are not really -- they're not really out of norm. So you could say that we we're always constantly paying attention to what's happening, both locally and internationally, and we're constantly preparing ourselves for what could be happening. So if there's more shipping delays or higher shipping costs, we were able to manage.

Okay. Another question on exports. Given that the company is an importer and an exporter, is D&L a net dollar earner?

Good question. So I believe -- okay. So in the past, we would import over 60 -- sometimes up to 80% of our raw materials, and exports would be only around 15% of revenue. So maybe 5 years ago or more, we would definitely import by quite a lot, much bigger than our exports. I'd say within the last year, this has really changed a lot. So according to the numbers, we actually -- I believe we are -- it's quite close now, the amount we import and we export. So it means that the ForEx does not make that much of a difference for us from a risk perspective. What also helps -- so something we were already doing when we were importing much more than we were exporting is that price pass-through mechanism, just from the chart that we showed earlier -- or maybe -- sorry, if you could take a look at the chart again, so you can see that from the last 10 years, where the dollar-peso exchange rate would be quite volatile. And even also from the raw material perspective, raw material prices keep being even more volatile. As you can see from this chart here, the fact that our margins didn't really reflect any of the volatility -- so we -- that's the main reason why we tried to really pass on and justify to our customers why we need to pass on price changes to our customers. We couldn't bear that risk. We had to pass that risk on to our customers and primarily because most of what we sell to our customers, these products make up such a small portion of their costs. And I believe also our customers in general put a lot of importance for the products we sell to them. It means that it's a little easier for us to convince our customers to absorb that ForEx risk instead of us absorbing that risk. But essentially, it's something that we are -- that we're always trying to do. But in essence, things have changed. And we'll -- so once that expansion plant in Batangas is up and running, we'll definitely -- I have a feeling we'll be exporting more than we're importing already. So that will be the change that we'll see once the plant is up and running.

Okay. Another question from Joyce. What is your outlook on CPO and CNO prices? So let's look at palm oil prices as well as other input costs.

As -- I think it was JPMorgan who said it. Prices will fluctuate and that's pretty much the outlook. It can go any way. And so prices are on the uptrend, just like for most commodities. So I guess the safe answer to say is in the short term, it may still go up, but supply and demand tend to correct themselves over time. Imbalances tend to correct themselves over time. So it's only a matter of time when prices will go back down, supply increases or demand will stabilize. But yes, it's very hard to predict.

Okay. A question from Miguel. Can you talk about your current market position for the exports of coconut-based products? And where do you see this going over the medium term, especially once the Batangas plant starts?

So this is something that if you look at coconut oil and other coconut-related products, the market is pretty big. I mean just the Philippines alone exports, I think, over 1 million tons of coconut oil -- crude coconut oil a year. And this is on processed crude form. So if you look at what we're doing, it's much smaller. So we're -- it's something that we have seen grow a lot, but it's something that we're just touching the surface. But it's something we want to do more of, especially on the high-margin part. So -- and that is one of the goals we have for that new plant in Batangas, for exports from higher value-added products, especially from those which use coconut oil as the raw material. So in medium term, this -- well, it can only go up because for us, it's still quite small. But we have been able to make good inroads. And so we're not -- we're trying to export value-added products. And in a way, it is a new market not just for us but for the industry in general. But it is quite -- the future is quite right, and we are quite optimistic about this side of our business.

Okay. Next question again on expansion. Can you please elaborate on the expansion in terms of the amount of CapEx to be spent from here on in? And how much will your overall capacity be expanded by? When will we see the start of production? And are there any customer orders being secured for the new capacity yet?

Okay. So we haven't disclosed any numbers yet in terms of expansion, volume or capacity. We will be disclosing those in the next couple of months. What I can share with you is that the land area of this expansion site is double the size of all our existing sites. So 26 hectares versus roughly 13 hectares for all of our existing sites. So it's pretty big. We -- although we aren't building on 100% of the expansion site, as you can see from this picture, there -- we are leaving some space for future expansion. But you can just imagine a lot of our existing plants, some of them are quite old, built over 20, 30 years ago. So you can just imagine the efficiencies and better processes that we're using for the new sites. So capacity in terms of the increase will be quite significant. Start of production. The nonfood will be -- for the expansion, we're targeting to start May next year. The food, targeting to start January of 2023. In terms of customer orders, there's been a lot of communication with potential customers. We haven't taken any orders yet because it's still quite a long way away, but we've gotten a lot of encouraging indications from potential customers. So there is a lot of interest. That's what I can disclose.

Okay. We have a few questions on F&B customers. So we'll take this in part. So the first part of the question is, have you looked at your customer base and tried to analyze the risk in buckets, for example, the customers with no problems, the customers with a shrinking business and lastly, the customers with high chances of going out of business? And would you say your customers are better off today than versus the end of 2020?

We always look at how our customers are doing, not just to assess their ability to pay us in the credit terms but really also in terms of how we see our production and what we'll be buying from us and should we be looking at expanding certain areas of our businesses. So definitely assessing how our customers and how their prospects are. That's definitely something we pay a lot of attention to. And so in terms of communication, in terms of knowing what's happening in the industry, it's something we're very much involved in. And it's not just domestically, also overseas because we can see -- excuse me, we can sometimes see a lot of trends happening in other markets that we can kind of predict might be happening here as well. And so that's something we would also be looking at. In terms of margins, I'm not so sure our customers are better off now. Well, definitely, last year was very bad for all our customers, in particular our food customers. What we have seen for a lot of our food customers over the last year, a big change has been their acceptance of not having to realize so much on dine-in. So that would include takeout, delivery, being able to market online, take orders online and accept payments online and all the fulfillment that goes along with it. So definitely, a change in a lot of our customers' way of doing business. I'm not necessarily sure -- I don't know, though, if this necessarily meant better margins because change -- that kind of change may have necessitated other costs. So I guess we'd have to look at some of the listed food service companies' numbers to see if things have gotten better. But I wouldn't be able to tell you, though, at this point in time how the margins are doing.

Okay. Another question on F&B customers from Arvind. I am sure F&B customer -- companies are innovating based on the change of business conditions. How is this innovation impacting you? Do the overall realizations go down as the focus is more on value while R&D spend continues to go up like it did -- increased 11% in the first half?

So I would say for most of our customers, their level of R&D would be on a much simpler level compared to ours. In general, they wouldn't hire as much R&D staff. They wouldn't have as much R&D equipment as we would have. And because we reach out across so many customers and so many industries with so many applications, we'll be able to spread the cost out over a much bigger base. And that -- so in other words, because of that ability to spread it out over a wider audience, we'd have more capacity and conviction to really spend on R&D versus most of our customers. That, by nature, just means that we can just do a lot more R&D and innovation and experimenting compared to pretty much all of our customers. And so I don't think there's any -- I don't think we have any customers that would not be interested in innovation and improvements. If you go to a lot of food service companies, the menus might be the same, the food offerings might look the same. But I can tell you that underneath, things are changing all the time. It's a matter of not just cutting costs but eating healthier, reducing some of -- there's been a big trend the last couple of years for healthier foods, so reducing salt, sugar, oil, artificial trans fats and so on. So a lot of this needs R&D. And that need is, I believe, still going to continue. So that capability, I would say, most of our customers wouldn't have a high level of capability, and that's where we would come in. And I don't see that role diminishing over time. If anything, it will likely increase over time.

Okay. Last question on food ingredient customers. Did you add any new food ingredient customers in the first half this year?

Yes, we did. We've -- there are some new concepts out like cloud kitchens. You do see some brands -- some new brands opening as well. So a lot of -- so the problem with -- the problem that a lot of food concepts faced over the last couple of years was that they didn't have space in malls and other places to open new stores because all of the existing spaces were already taken up. So one effect of the pandemic last year, a lot of players closed stores in a lot of locations. And so some businesses took that as an opportunity to open up. So we have seen some new concepts, expansion being done. So some of them are our customers. And we've also seen other concepts like cloud kitchens, like this big, what do you call it, outdoor dining market. [ Grab ] just launched a cloud kitchen recently. Everything is done online. You can order from different brands, all from one site and so forth. So the industry is definitely adapting and changing. And a lot of this new change -- these new concepts are our customers now.

Okay. We have a question regarding domestic recovery. So on high-margin volume growth, would you say that the heavy lifting came from exports or domestic? So they want to gauge how demand for high-margin products have improved through the first half from our [ domestic customers ].

Definitely. So if you take a look at the product mix of our exports versus our domestic business, we'd see a higher level -- high margin on the exports compared to the domestic business. So our revenues for exports were higher by 70%. This year, our revenue for domestic side -- I'm not sure how much -- sorry, I forgot how much revenue we're higher first half because we don't really look at revenue increases. But I don't think it was 70% up. There you go, 37%. So our exports grew twice as fast as our overall business. So that means domestic business grew less than half the rate of our export business. So I would say -- so if you go -- sorry, Crissa, can you please go to the volume change chart? You'll see that our high-margin business volume-wise grew faster than our low-margin segment, I believe -- sorry, not this one. There you go. So high-margin overall volume, up 19%; commodity, up 4%. So clearly, the heavy lifting is really from the high-margin side. And just because for exports, the product mix for high margin would be higher than domestic. So yes, exports definitely added a lot to our -- to the growth of our income. So yes, that's something to look forward to for our expansion in Batangas. The other part -- sorry, I lost the question. The other part of your question...

Yes. It was more on domestic mix. So can you share color on the mix of orders of your domestic customers? And has this proportion of customized product relative to commodities risen significantly in second quarter 2021?

So for our domestic customers, well, compared to pre-pandemic, nonfood is pretty much, I would say, back to normal, if not even slightly ahead. From a volume perspective, from a margin perspective, almost the same as pre-pandemic or actually slightly ahead. Food, still down. So that would be one big overview of how things are from a domestic perspective. But what we saw last year was that our high-margin numbers really shrank for domestic. Our low-margin business did very well last year, primarily because a lot of our customers just focused on basic businesses. And a lot of our competitors were not able to perform last year for various reasons. But that's something I don't expect -- as the economy opens up, our low-margin business, we'll see more competition in that. That's normally what happens. But then we'll also start seeing our high-margin -- demand for our high-margin products starting to go back up. So that's something we're hoping to see over the next couple of months.

Okay. Just to wrap up on higher margin, there's another question about volume growth. So what is the overall volume growth of high-margin specialties in first half 2021 versus first half 2019?

Okay. Crissa, do you have that number? Actually, if you look at -- sorry, the previous slide you showed with the quarterly high-margin volume change. There you go. So you can kind of work it out from here. So if you take a look at the big drop in 2020, if you add all those numbers up -- or sorry, not add, but if you do the calculations there, you can kind of see that the growth in 2021 probably doesn't make up for the big drop that we saw last year yet. So [ Cristi ], sorry, I can't do the calculation yet, but it does look like we're still some ways away. Maybe, Crissa, could you do some...

Yes. Yes. So Alvin is right. It's still slightly lower compared to 2019, but I believe the figure is -- the gap isn't that high anymore. I can give you the figures after the call.

Okay. Let's see. Okay. We can go to -- there are some questions about gearing and expansion. So what is the comfortable range of net gearing?

Convertible range where we could sleep soundly at night, I guess. So our -- I guess one way to be comfortable would be do I have -- do I make enough money to pay my debt and my interest expense, amortization and so forth. And currently, with interest cover at 29x, the answer is the definitely yes. So it means even if my debt doubles to, what's that, 15 billion from the current 7.5 billion, that means my interest cover will go down by half. Is that right? I don't -- so yes, my interest cover would still be quite comfortable. So the other factor here is maybe it's only a matter of time before interest rates start to go up. So if my interest rate cover was 15x and interest rates doubled, that means my interest cover goes down to 7.5x. So I would say that would still be comfortable. For most banks, I believe they would mandate interest cover to not go below 2x or 3x. But for us, in general, we're quite conservative. I think anything below maybe 4 or 5x, we might start losing sleep. But at this level, we're quite far from that.

Okay. There's more questions on the Batangas expansion. So there's a question here. Why did D&L move the start of commercial operations for its new plants?

Several reasons. One is the -- one is COVID. So lockdowns saw work stop, and after -- so every time there's a lockdown, work stops. People can't come in or our products take longer time to arrive from the ports or from other places. And then every time someone tests positive for COVID, we have to shut down the site and do disinfecting and so on. So that causes quite a lot of delays. So COVID would be the biggest factor, the main factor. In a way related to that, the shipping delays we're experiencing globally has also impacted the arrival times of some of the equipment and parts of the plant that we're putting in. And that's another reason for the delay. So those were the main reasons why the delay is happening.

Okay. We have an export-related question. Can you please elaborate on the drivers for export volume growth and the outlook for exports for second half?

So if you look at the exports slide, you will see that food is still our biggest export product or segment. Over half of our export is coming from food. Then you'd see oleochemicals next and specialty plastics next. So specialty plastics used to be half of our exports. But food and oleochem have come up a big way. And I would say going forward, due to the fact that our expansion in Batangas is just for food and for oleochemicals, that's really where you wouldn't see the growth in exports coming from going forward. And the outlook for the second half, I would say, still pretty much where we saw exports coming in, in the first half and from last year. So the outlook is still fairly positive.

Okay. We have a question regarding revenue mix. What is the target revenue mix between high-margin specialties and commodities in the longer term, for example, 3 years?

So we did see almost 70-30 pre-pandemic. I wouldn't say that's a good target to have in the next year or so to get back to that 70-30 level, which we saw pre-pandemic. And I would say you wouldn't see that fairly quickly. The problem is we don't know when COVID will end. So for now, that's probably something that we're going to have to stick with for the next couple of years.

Okay. There's a question on the impact of ECQ. So what is the expected impact of ECQ now? And the Delta surge in other countries compared to second quarter, will that affect exports to existing customers?

What we saw in the -- so we had 2 weeks of ECQ starting the end of March until, I think, April 11. There you go. So yes, and then MECQ after that. But if you take a look at the second quarter numbers, net income was lower by 7%. But if you take into account higher interest expense from higher borrowings or higher debt -- thanks, Crissa. There you go. EBIT or profit before tax is lower by 3%. And then take into account that Easter, which started at the beginning of April this year, that always has an effect on business. So it looks like ECQ may not have had that big effect, at least from our numbers. Will it be the same this time? It's possible, although we don't know how long this ECQ will last. The Delta variant definitely is something new. And I've heard there's Lambda, Epsilon. And hopefully, they don't run out of Greek alphabet for all the new variants. But yes, there's still a lot of uncertainty definitely. But at least from a second quarter perspective, if ECQ is for only 2 weeks, it may not be that negative for us. And so third quarter, hopefully, will still be okay.

Okay. Just a related question on Q-on-Q growth. What's the typical pattern for second quarter? Is it usually higher than the first quarter?

Second quarter, normally, we would have Easter. It's also when the strong rains start and typhoon season starts, in the second quarter. And so for various reasons, second quarter may not be as strong. But that's a good question. We'll have to compare pre-pandemic how second quarter usually does against first quarter. But yes, you would see issues like Easter and the typhoons really having an impact on second quarter. But usually...

And also summer break.

There you go. Summer break as well.

Summer break for schools. So yes, normally, it's lower than the first. The peak would be fourth quarter maybe for us.

Okay. There you go. Thanks, Crissa.

Okay. So it's part of the same question. You've been through a few downturns in economic cycles. Would you call the current downturn the biggest given the impact on restaurants?

Okay. So I wasn't around in the '80s. I wasn't working yet in the company. What I understand in the '80s, business was so bad. So our whole street -- so our street where our head office is, is called Calle Industria. And it's named that way because this area was the first economic zone in Metro Manila. And here at Calle Industria in the '80s, I understand the time after Ninoy Aquino was assassinated in 1983, for a couple of years, I understand all companies on the street had shut down except for 2. And we were one of them. But we were only operating maybe 2 or 3 days a week. And we also, in the '90s, had the power crisis. So basically, we were having no power for about half a day every day. And then we also have the Asian financial crisis in the '90s. What we're experiencing with COVID now, from a human perspective, I think, has a much bigger impact. But from a profitability and revenue perspective, it's not as bad as many of the crises we've had in the past.

Okay. We have some macro questions. So firstly, regarding GDP. There's been a lot of negativity about second quarter GDP and many views it as largely base effect-driven. Corporate earnings have also jumped sharply due to the CREATE law. Did we have real growth in second quarter in the economy and for corporates? So what perspectives are your results giving you? And do you expect this trajectory to be sustainable? Yes, let's do that first.

I think definitely, last year was bad. And the theme of this year for us was really rising back up and recovering as much as we could. In the broad economy, however, I don't think that's really possible with so many segments of the economy still shut down and under a lot of fear and uncertainty. So it's really how it is with COVID, lack of vaccines. There's really not much we can do. What is encouraging is that vaccination drive has been accelerating. I understand that daily vaccination rate has gone up to over 500,000. I also read in the papers a few days ago that Metro Manila vaccination rate has reached 40% of herd immunity levels needed. So that's, I think, encouraging. And it is better than -- much better than what we were facing just a couple of months ago. But it is unfortunate, some segments in our economy, hospitality, tourism, construction, real estate, really still suffering and may take a while to recover. But it is the effect of the pandemic. But I can tell you now, a lot of people are itching to travel. I talked to so many friends. I see it on their Instagram, Facebook. Some have traveled, but some -- a lot want to, both domestically and internationally. Once COVID is over, you can expect a lot of revenge spending. So it's definitely going to come back. In terms of perspective from our results, I'm not sure we necessarily reflect the economy in general, again, because a lot of what we make and sell -- the customers we sell to, they do reflect more very basic industries, not necessarily the general part of the economy. So our -- but our company, I would say it's encouraging because if we're growing or if we're not -- if we're recovering at least from the down -- the lower business last year, I'm sure there are other basic segments or basic -- or companies catering to basic industries who are probably doing just as well as us, if not better. Income trajectory, it went down so much last year. I can only see it going up. So yes, expectation is it should sustain just because it's low. Our income, we're still below 2018 levels and so -- before the pandemic. So January and February of 2020, we were seeing better numbers compared to 2019. So numbers close to 2018 numbers. So yes, definitely, we do expect income trajectory to be sustainable at least. Earnings guidance for 2021. So far, the first half numbers show that we're going to match, if not be slightly ahead of 2019 numbers. And that's probably where we'll end up with, slightly ahead of 2019. And I do believe the growth is sustainable going into 2022. One big factor is vaccinations. I read a report that herd immunity might be reached as soon as March or February of next year. I mean that's pretty exciting. So hopefully, the -- I think we're -- the arrival of vaccines are starting to ramp up and will reach, I believe, 20 million per month on average from the government's numbers. So that's very encouraging. Thanks, [ Cristi ].

Okay. We have a final question here on inflation. Okay. It's quite a long question. May I get your view on elevated inflation we're having in which your case is evident in the higher commodity costs and the margin squeeze might persist for longer in the medium term? Does this warrant some adjustments in raw material content sourcing, substituting supply chain structure or even product offerings and sales mix? So basically, the question is, how are you strategizing about inflation?

We don't see the margin squeeze persisting. If you look at our historical or last 10 years, you can see palm, coconut oil prices from 2010 had almost tripled by the following year and then in the next 2 years, going all the way back down. Sorry, Crissa, if you could please show that slide. And then if you take a look at our margins that year, you will see that our margins actually didn't really move commensurate to the change in raw material prices. So at least for us, it's not -- we can manage that risk. We can pass on price changes, and we can -- it's not something that we believe will impact us significantly, at least eventually. Sometimes, we will have some periods where there will be some delays in passing on the price changes. But eventually, we are able to pass it on. In terms of adjustments in raw material content sources, substitution and so forth, we're -- that's something we're always studying even if prices are not changing because -- so we're always anticipating higher prices or problems from our suppliers. So we always have to be ready in case a particular raw material becomes either too expensive or unavailable and we need to switch. So that's something that we are -- that's normal for us to always be studying alternative formulations, and it's really part of what we do as a business.

Okay. We have no more questions in the Q&A box. Yes. [Operator Instructions]

Okay. It looks like there's no further questions. So if none, that concludes our second quarter briefing. And as always, if you have further questions later on, you can always reach out to our IR team. So we would be happy to answer your questions, and you can always schedule a call with us anytime you want to get more information. So again, thank you for joining our briefing this morning. Stay safe, everybody, and see you next briefing.

Thanks, guys. Bye.

Thanks, everyone.