D&L Industries, Inc.

Hello and good morning to everyone. Welcome to the results presentation for the first nine months of the year for D&L Industries. Okay, let's get started. So our highlights. So it was this quarter when we started the commercial operations of our new plant in Tanawan in Batangas. So our first invoice was issued in July of this year. For the first nine months of the year, our net income came in at 1.8 billion pesos, which is down 29% year on year. However, excluding expenses related to the new plant, our earnings were down by 11% to 2.3 billion pesos. We did see in the third quarter that things did show some improvement compared to the second quarter. For example, quarter on quarter, there was higher volumes for our high margin specialty products, as well as for our commodity segment. And we also saw the earnings excluding the expenses from the Batangas plan. Earnings were up quarter and quarter by 11%. And we'll go into more details in the next couple of slides. So we are confident that we will continue to be able to service our bonds that are coming due in 2024, next year, and 2026. as we are seeing lower debt levels as well as better free cash flow. So here in this slide, you can see updated pictures from our plant. And although from the outside, Pretty much everything looks like they're done. There is still some work being done inside. So we are still ramping up production and it is taking a while. And as we are planning to conduct plant tours for this new facility in the next couple of months. So we will be inviting investors to take a look for themselves. So here are the key figures comparing first nine months of this year to the same period last year. So you can see there with Our net income comparing both with and excluding as well as excluding the expenses from our new plan. and So you can see there, excluding expenses from the new plant, net income was down by 11% year on year versus third quarter last year, it was down by 6%. So by a lesser number, the decrease was less. And comparing to the second quarter of this year, we were actually up by 11%. So again, that's for net income, excluding the expenses from the new Batangas plant. On the bottom, you can see there in terms of free cash flow, positive for all the periods in 2023 compared to negative free cash flows in 2022. So this just shows in graphical form the income both comparing first nine months to last year as well as the year before. And if you were to exclude the expenses from the Batangas plan, our income actually came in even higher than that in 2021. So just to show that things are, well, of course, with the weaker economy and the expenses related to the new plant, we are seeing a weaker year, but at least compared to 2021, we are still doing better. On the right side, you see there the breakdown of net income. So number one is still the food ingredients. Cameras, which used to be number two, slipped to number three, slightly behind specialty plastics. And then consumer products, ODM, which used to be a single digit contributor of net income, now contributing 12% of net income. Okay, next slide, please. So this is just to show how compared to the second quarter, we actually did better in the third quarter. Again, this is excluding expenses from the new Batangas Plat. So 11% higher net income compared to the second quarter of this year. So this is more details from the income statement, at least the highlights of the income statement. So again, comparing to first nine months of last year, as well as the year on year comparison for the third quarter, and also comparing to the second quarter. So one very welcome development, which we also saw in the second quarter of this year, the product mix of our revenue has almost reverted back to where it was pre-COVID. So we can see Before COVID, we were actually making very good progress with high margin specialty products peaking at almost 70% of revenue. But due to COVID and the various supply chain issues during COVID, that ratio deteriorated at one point to almost 50-50. But as you can see, as of the first nine months of the year, we are at over 60-40. And we do expect this trend to continue, meaning that we do expect the revenue from high-margin specialty products to continue to increase faster. than that for our commodity division or business. And so that ratio should continue to improve over time. So here's a look at the breakdown of our different segments by volume and then split between high margin and commodities. So a couple of highlights here. First, you'll see that for our... high-margin segment. Overall, volume was down by 1%, but this was mostly from ChemRes, that second row. But for all the other segments, the high-margin specialties volume actually saw increases from as low as 2% for food to as high as 65% for Aeropack. our consumer products ODM segment. In terms of the commodity segment, biodiesel volumes are flat. So that's why you see there the 0%, no change, substantial no change. But in terms of food ingredients, our food ingredients volume is down by 34%. This is not as alarming as it looks in the sense that we're basically just giving back the increase that we saw in 22 compared to 2021. So essentially, we're back to around the same levels as 2021 for the food commodity segment. This is really a reflection of or a correction from a situation where we saw last year, due to various supply chain difficulties our competitors were having, we ended up gaining a lot of market share, not intentionally, but it was really more because of the absence of competition. But with the commodity segment being a low margin segment, This is a part of the business where we're relatively okay with not increasing or even giving up. So that's actually not that negative development for us. Okay, next slide please. So this is a look at just the high margin specialty products and how volumes have grown over the last five years. And as you can see, the good volume growth in 2018 was disrupted towards the end of that year when we started seeing high inflation the effects of the global trade wars, as well as the late passage of the national budget in 2019. And of course, you have COVID in 2020, which led to a lot of volatility. But as you can see, it took a while for volumes to recover, but this So if you look at our volume growth, we did experience 6% volume growth in our high margins compared to last year. And if you look at third quarter of the previous year, there was growth as well. So our growth this year, it's not just because of a low base effect, because we did have growth in the third quarter of last year as well. Okay, for the next slide, just looking at the high margin specialty products. So the highlight here for me would be the continued recovery in margins. So as you can see, during COVID, we saw margins drop from almost 26% to below 22%. But since then, margins have started to recover. And you can actually see there in that box, even quarter on quarter this year, the margins for the high margin specialty products continue to increase. And in the third quarter, we're actually at 25.8%, the gross profit margin, as of the third quarter is higher than the peak or highest gross margin we had, which was in 2020. So that's definitely good news in terms of the recovery in margins. for the commodity segment. So similar to what we saw in high margin, we saw the margins in our commodity business drop as well during COVID. And so earlier I had shared that we didn't totally see the growth in volumes last year as all good news, as you can see with lower margins, even if our volumes are higher, you may not be making that much net profit. So even with the lower volumes, a very big recovery in margins that we saw in this year, that's much more welcome. And it's more, our commodity business is operating at the margin that we are more comfortable with. For our exports, so this is one area where we are seeing continued weakness. So revenue from exports down by 40% and contribution of exports are also lower from 33% last year. We're down to 27%. On the right, you can see there the contribution of exports. our exports so food still being the biggest uh followed by other chemicals and then by specialty plastics we are diverting more of our resources into our exports business not just on the manufacturing side so our new plant in batangas is uh in a pesa zone so that is positioning us to take advantage of incentives for exports. So as a Filipino company being located in the PESA zone, we are required to export at least 50% of the production of that new plant in FIT in Tanawan in Batangas. We are also increasing our presence overseas, attending more conferences, trade shows, exhibits, visiting potential customers. And we do expect to see the impact of these new efforts in the next couple of quarters. In terms of free cash flow, so there's a couple of significant developments. First with lower raw material prices, as you can see there that line for change in working capital, we were seeing very big negative numbers the last couple of years with raw material prices increasing substantially. However, this year we are seeing raw material prices being not just less volatile, but actually in general lower compared to the last couple of years. So we're actually in a negative working capital position at the moment. So it means there's more cash coming in to the business from lower cash tied up in receivables and inventory. You can also see there that we're spending a lot less in capex. And this is just to be expected as we are winding down the construction of the new plant in Batangas. So even if you were to annualize that nine-month figure of 1.1 billion pesos, we are going to come in at less than half. of the capex from last year. And the result is that big free cash flow number, positive free cash flow number at the bottom. And this is something we expect to continue, not just for the rest of the year, but even towards next year as well. So in the next slide, you can see that in terms of capex. So we started the construction of the plant at the end of 2018. And you can see there the capex starting to ramp up and peaking last year. But it has started to come down by a lot. And so it will be significantly lower. CapEx will be significantly lower this year and again, lower again by next year. So this slide, we track how our two most used raw materials, coconut oil and palm oil, which are in the middle of the chart, they do continue to be volatile. So you can see there the massive price increase that happened during COVID. And then we can see how prices recovered towards the end of last year. And you can also see at the bottom there, the volatility in a dollar peso exchange rate, which is significant for us because a little over half of our raw materials are imported At the top, you can see there our margins absolutely do not reflect the volatility. At least you don't see our margins going up or down by three times compared to the volatility in our raw material prices. In fact, the change in our margins is more reflective of the change in the product mix that we showed in the earlier slides. Here, so just to show again our ability to pass on price changes. So what we did is we overlaid the change in price for coconut oil and palm oil. And you can see there that our revenues on a quarterly basis actually do reflect that ability for us to change prices. And it is something we are able to continually do. So a look at the segments in more details in terms of the numbers. So in terms of revenue, food is still the biggest at 60%. Number two is Chemres or oleochemicals and other specialty chemicals. Third, specialty plastics. Fourth, consumer products, ODM. However, in terms of net income contribution, food... is the biggest, but number two, ChemRest has switched to number three. Plastics is number two. And consumer products, ODM, which used to contribute mid single digits or even low single digits in terms of income, is up now at 12%. Okay, next slide, please. So for the food ingredients, volume overall down by 24%, but the big drop is really due to the drop in the commodity volume. The high margin volume overall is actually up, slightly up, I think by 2%. And net income is actually up by 1% for this segment. Overall margins are actually doing much better compared to before. Okay, in terms of ChemRes, so this segment, this is a segment that we are seeing the most weakness, this time with net income down by 53%, volume down by 4%, and margins slightly lower by 0.6%. Our drop in exports, actually, a big chunk of that drop is also attributable to the weakness that we are seeing in ChemRes. We are... As I mentioned earlier, we are putting more efforts into various export efforts, and this is also being done for cameras as well. So we are expecting the benefits of that increased focus on exports to be coming online in the next couple of quarters. for one development that we have been starting to hear about recently. So the pie fuels law, which was passed in 2006, came into effect with a 1% biodiesel blend in 2007. And that 1% was increased to 2% in 2009. There have been talks that due to several factors such as higher crude oil prices, as well as a desire to reduce reliance on imported fuel, there's been talk to increase the blend possibly to 3%. So various media have reported this, reports from the DOE and even the president has mentioned this. So the overall impact, of course, aside from higher volume, we are expecting for margins to be better as well. Hopefully overall industry profitability. For specialty plastics, overall volumes up 6%, although net income is slightly down by 5%. And we are still continuing to develop a lot of new products for our specialty plastics group. This is actually the first business that we started with 60 years ago. So this was D&L's first business when it started, but still a lot of potential, especially on the engineered polymer segment. And then finally, for the consumer products ODM, so Aeropack is continuing to see very good numbers, volume, revenue, as well as net income up substantially. So this is one segment that really suffered during the pandemic as people were not going out anymore. So everything from lower consumption of shampoo, deodorants and so forth. But as people really are going out right now, as we can see from the worsening traffic situation in our major cities, So these numbers are reflective of not just the increased or improving consumer economy, but also the efforts that we are continuing to make in developing new products in this segment. in terms of our related party expenses with rentals of fixed assets. So if you look at the balance sheet of D&L, you'll see that we do not own any property. um all of the ppne there it's really just plant and equipment um so almost all of the property the the company uses are leased from affiliate companies uh and that's the left side of this chart so those are related party expenses which come up to roughly two percent of overall costs and expenses so that's pretty much in line with where it has been in the past On the right side of the chart, you can see there. So D&L performs shared services across all of our businesses and including businesses that are not under LISTCO. So services would include things like HR, IT, finance, accounting, legal, admin, and so forth. And so the fees for these services would be classified as related party income, and they do offset the related party expenses. in terms of cost structure and R&D spend. So you can see here on the upper left, you can see the overall, in terms of contribution to cost, raw materials by far is number one at 80%. with a foreign number two being labor at 6%. And overall, if you were to just look at what's considered fixed costs, so that would primarily be labor, depreciation and rental, and maybe half of others. So more or less below 15% of our costs and expenses classified as fixed. So with over 85% of our costs classified as variable, that gives us a lot of flexibility and ability to adapt and move very quickly. On the top right, you can see there in terms of the breakdown of raw materials we use, edible fats and oils make up over half, with the biggest chunk coming from palm oil and coconut oil. More or less around 55% of our raw materials are imported. And then on the bottom left, in terms of R&D and IT spend, we lump it together as tech spend. You can see there the numbers continue to gradually increase over the years. And in terms of tech spend, the increase compared to last year is 14%. Okay, a quick look at our balance sheet. So a few things that you'll see in terms of borrowings, overall, it is lower compared to last year. And in terms of debt to equity, there's also an improvement from 0.75 to 0.7 times. Interest cover on the bottom right, we are coming in lower now at seven times. However, at seven times interest cover, I would say that's still classified as moderately geared. Okay, and more look at our gearing. So net gearing is coming in at 55%, better than the 59% at the end of last year. Net debt at 11.2 billion. And with interest rates having gone up substantially from a year ago, our average cost of debt has gone up as well with a 5.65% average cost of debt. So out of our debt, approximately 5 billion is from the bonds. However, 3 billion out of the 5 billion is maturing in September of next year. So we are... By the end of this year, we will be classifying that portion of our fixed income as short-term debt because there's less than one year left to maturity. So the remaining 2 billion, which is maturing in September of 2026, that is continuing to be classified as long-term debt. The short-term debt sorry, the 3 billion interest rate is at 2.8% with the, that's the 2024 maturity, the 2026 maturity coming in at 3.6% interest. So here's a look at how our debt or overall net debt compares to our interest rates and interest covers. So net debt started going up as we were constructing our plant. and spending more in capex. Interest rates are back to where they were from the 2018 figures. Interest cover are lower currently at seven times. In terms of cash conversion, so receivables at 55 days, Inventory at 107 days, payables at 24 days, overall cash conversion at 138 days, still relatively within the metrics that we normally look at for cash conversion and for working capital. In terms of the stock, we are number 52 when you rank Philippine largest companies by market cap. In terms of trading volume, currently at a little over $300,000 a day. There's not much change in the foreign ownership of the company. And you can see there in the bottom right, currently at 14% foreign ownership, roughly half of our float held by foreigners. And that's been pretty steady last two years. In terms of investor relations, there's still a lot less conferences currently compared to pre-COVID. Although, as you can see, we are still continuing to join conferences and even individually meet with investors as well in NDRs. Okay, so that's the end of the presentation for the first nine months of the year. We are open to Q&A.

Good morning, everyone. If you have a question, please feel free to raise your hand. Or if you would like to write it in the Q&A chat box, we can read it up for you. So to kick us off, we have a question from Jojo Abad. What is your earnings guidance for 2023 and 2024, given your nine months results?

Hey, Jojo. So normally we would discuss our guidance every year when we announce our full year results. However, for 2023, actually ever since COVID, we had not been giving any guidance just because there was just too much volatility, too many factors that we had to address. look into that were so unpredictable. And even for this year, we had not been given any guidance. The fourth quarter, I think what we can see, so we can see that in terms of traffic, in terms of people being out, it's almost at the same levels compared to pre-COVID. But if you were to look at the numbers coming from a lot of consumer companies, there seems to be a lot of weakness, especially from the B2C companies. So a lot of what we do is very much related or supplied to these same companies or at least the same industries. So I don't think we're going to be any different in that sense. For next year, still very difficult to say, but we may be able to give more color when we release our full year results in the first quarter of next year.

Another question from Jojo. Moving forward, do you have any plans of reissuing fixed corporate bonds to refinance maturing debt?

Great question. So we've got 3 billion maturing next year, September, and then another 2 billion maturing in 2026. At this point in time, as we are seeing very good improvement in our cash flows, we're in a pretty good position in the sense that we're able to, as you saw, our debt levels actually lower compared to last year. And as long as we continue to see improvements in the cash flow, we will have, it's just the ability of having a lot more cash means ability to pay down debt more. um so there's less and less chance that we would need to issue um uh bonds uh so probably not anymore well the other factor is the interest rates for bonds have just gone up so much i mean we did the three year 2.8 percent the five year at 3.6 percent if we were to do the same now we'd be paying anywhere from probably six and a half seven or even higher which is not really that appetizing for us. So there's less incentive for us to fix the debt and combine that with the fact that we have so much in lines available with all of our banks. So I'd say there's very little chance that we'd be issuing bonds again, at least in terms of just to refinance the maturing debt. It doesn't look like we will need to.

Okay, thank you. Yeah, that's actually all the questions, but if maybe you can give a couple more minutes to anyone who would like to type a question in the Q&A box or raise your hand and we can unmute you.

Yes, let me unmute you. I have allowed you to talk.

Thank you for allowing me. Good morning, guys. Thank you for this call. Maybe two questions from me. One, can you... Give more color on what factors drove the softness in ChemRest. Was it more exports or domestic driven and any particular industries that slowed down that caused the impact to your own orders? And then secondly, on the Batangas plant, you mentioned that the first invoice had already been issued I think sometime in July or August. Can you talk about any updates since then or outlook for the balance of the year in terms of potential new orders or revenue contribution? Thank you.

Hey, Aaron. So in terms of the weakness in ChemRes, it's really a combination of many factors, kind of a perfect storm. So first, in terms of exports, it's definitely a much weaker export environment. So I'm not sure if you guys monitor things like container shipping rates. So container shipping rates, which really went up by a huge amount during COVID. They've essentially collapsed. It's down something like 80%, 85% the rates to ship a container across the world. So global shipping, there's really been a huge drop. And we also continue to hear a lot of weakness across very many sectors, everything from chemicals, even EV sales. In the US, there's a lot of weakness being reported. So domestically, we're also, again, just relying on the results from the various listed companies, especially the consumer companies. Pretty much anyone that is in manufacturing, retail, consumer branded goods, whether here in the Philippines, there's really a lot of weakness being reported. So what we're seeing happening in Chemres is really reflective of what's happening in that part of the economy overall. In terms of the Padangas plant, so yes, we issued our first commercial invoice in July. And it's just been slow to get started, slower than we expected, admittedly. However, we are encouraged in the sense that there's a lot of customers doing audits, visiting us, meeting with us, because compared to the period before we had this plant, we didn't have the capacity. We didn't have the ability to serve exports in large numbers. Now we do. But it's just getting through. There's a lot of things you have to get right. You have to get certification. So even if you're already approved to sell to a customer, So we have a lot of exports that are currently being served with our old facilities, or I wouldn't say old, but previous facilities. But this new plant, we had to get new certification even for those old customers. You can't use the same certification because it's a new plant. So that process is taking a little longer than we expected. And then what you'd see in a normal new plant, it's just a lot of debugging that's taking place. We're using a lot of newer machines, newer technology, newer processes, and getting it all up and running as smoothly as possible, getting the kinks out, reducing issues, various issues in the production lines. That's just taking a little more time. um but that's pretty much it uh we are expecting we're actually quite optimistic in the next couple of months to be able to really ramp up production that's something we're quite optimistic about thank you alvin okay thanks aaron we have a couple of questions here in the q a section um so the first one is from stephen uh can you share what led to hire

HMSP volumes for third quarter 2023? And do you expect to sustain this over the coming quarters?

Well, if you see the breakdown of the volumes we showed earlier, the higher HMSP came primarily from food, plastics, and consumer products ODM. So food was a segment that suffered the most during COVID. Everything was closed down, even the malls. I think it was two months when the malls were closed. So if you were a restaurant, if you were in the mall, you couldn't open. You could only open if you were on your own outside. So it really suffered. That segment really suffered. And it is recovering, but I won't say it's anywhere near full recovery yet. So I would say that segment can only get better. So the big surprise or the biggest jump in terms of volume change, you can see there 65% is really from the consumer products ODM business. Sorry, Krista, can you go to that slide for Aeropack, please? So everything from personal care, home care, even the maintenance chemicals like lubricants and other chemicals, that segment is doing very, very well. And so that's really where the gains are coming from. In terms of, so part of our question was, are we able to, do we expect to sustain this? I think so. I think food definitely should be getting better. So one thing we saw that changed during COVID was we saw a lot of our food customers shift to Basically, it's trying to survive. So that behavior is slowly reverting back to more investments and growth rather than just keeping things conservative. That's a change in behavior that we are starting to see with some of our customers. So at least from the food side, that's something we're quite optimistic that will be improving. And food with 60% of revenue, small changes there can translate to, that's going to have the biggest impact on the overall business. Sorry, I'm not sure if the second question was read, but I can read it out.

Not yet. OK, go ahead.

Yeah, so the question of Stephen is, how do you plan to navigate 2024 given expectations of higher for longer inflation and interest rates? So this is something I constantly remind the younger staff. You know, it's inflation and higher interest rates. It looks scary now because we were at 2% and below two years ago. We're now at 6%, 7%, 8%. It looks really scary. But, you know, for old timers like myself, we remember, you know, I remember when I joined the company in 1997, we were paying... I think 12 or 14% for short-term money. I remember in the year 2000, you could buy a two-year bond of San Miguel paying 14%. So, you know, for old timers like us, sure, the increase is rapid and scary and it's definitely big in magnitude, but we're used to this. So I would say any business that's been around for a long time like us, we're used to dealing with higher interest rates. So I think we'll be okay.

So the next question is from Rainier. What caused the quarter-on-quarter decline of 190 bits in GPM from second quarter this year to third quarter this year?

OK, I'm drawing a blank. Krista, I need your help.

Okay, actually it's because of the drop in the margins for the commodity segment. So if we can go back to the slide on commodities, let me just move this to slide number 12. you would see here that in the third quarter, there's been a drop in commodity margins. But by nature, that's normal because commodities, it's heavily influenced by various market factors. And that's just really it. But if you turn to the high margin specialty products, there's a positive development here, which you can see that the margins continue to inch up. quarter on quarter.

Hey, thanks for the save, Krisa.

Thanks, Krisa. Okay, the next question is from Pon. Hi, Pon, good morning. He says, could you provide how new customers are viewing the Patangas plant in terms of quality control progress, etc.?

? I'd say it's very positive because we're... So this is not a new business for us in the sense that we've been making a lot of these products for some as long as 50, 60 years. And so all of the learnings from the decades of manufacturing have gone into this new plant. So everyone looks at it positively. Everyone is very excited. And everyone wants to start buying from us. So it's just going to take a little more time. But yeah, we just have to wait. So it's just a matter of time.

Next question is from Denise. Could you help us understand the higher effective tax rate recognized in third quarter?

Okay, I'll take this question if that's okay.

Thank you.

So if we can go to the slide on the condensed income statement. So you're right, the effective tax rate in the third quarter, it's around 30% versus the around 20% recognized in the previous quarters. And that's because in the third quarter, we recognized losses from the Batangas plant. So if you compute for the effective tax rate, which is the income tax payable over the profit before interest and taxes, the EBIT or profit before interest and taxes, it's actually kind of distorted. So your base is distorted, which in turn made the effective tax rate looks like it's higher this quarter. But moving forward, it should normalize back and there's actually room for effective tax rates to go down once the Batangas plant has ramped up fully because once you recognize earnings from that plant, it's non-taxable for the first four years and can be extended up to six years.

I'm not sure if it was mentioned, Krista, when you talked about the lower margins this quarter versus last quarter. I think another impact might have been the higher depreciation from the new plant. Am I correct there?

Or is that an effect? Well, I think that would have an effect in the EBIT margin. But I think on the gross, maybe slightly, slightly.

OK. All right. OK. Thanks.

OK. Thanks, Krista. So a question from Daryl. How long does it typically take for customer certifications for facilities like the Patangas one?

How long does it take? You know, sometimes it depends on the mood of the auditor. So during COVID, everything was so nice because suddenly these auditors were fine to do everything online. Now that there's really, well, COVID's still around, but it's not as bad as before. So everything's back in person. So that's one issue. a lot of these firms that are doing the audits are shifting back to in-person audits, and it's taking them a while to get the processes started again. So in some cases, it means bringing in new auditors, retraining them, or there's just not enough of them. So scheduling the audits, it's taking longer. So typically, it can take anywhere from a couple of weeks to three months, four months. Sometimes it can take as long as that. So what we're trying to do is to... And so the other problem here is that it's a much bigger plant compared to what we had before. And when you have something that's a bigger size, bigger scale, more complex, there's just more things to look at, more things to check, more things to clarify and wait for results. And then sometimes if the results are not convincing, they want another test and more results to be seen. it's you know it's something we're used to that really takes time uh it's it's just we've never had something so big come online so quickly at one go that's why it's just taking a little longer unlike with our previous plants you know We've had them for years. And every time we get a new customer, that's the only time we'd have to do the audit. We didn't have to do the audits all in the beginning. We were doing the audits over time as we were gathering the new customers. So with this new plant, we have to do the audits all in the beginning. And you can just imagine all that scheduling. It's a lot more complex.

Thanks. Next question from Melissa, how much income contribution do you expect from the plant?

Ooh, okay. We haven't really talked much about details in terms of capacity or revenue or income contribution of the new plant. We'd like to hold off for now. So what we can normally discuss would be more towards scale. So this new facility, occupies a land area that's double the size of all our existing plants combined. However, if you think about it, being located in one massive location. In theory, you're supposed to get and you have better and newer technology, newer processes, newer machines. So in theory, you're supposed to be able to get better yield, lower waste, more efficiency. Margins should be better. So those are the pros that should give you better margins and better profits. On the other hand, your costs, everything from the construction cost to all the implementation costs, they're definitely much more expensive now compared to like 20, 30 years ago. So that's something that will weigh on the costs more. So in terms of where the profitability of the new plant will come in, that's really more in line of what we're willing to discuss at the moment. But maybe the next couple of months we can give more insights. But as of now, that's pretty much it.

The next question is from Daphne. What caused the high effective tax rate? Also for third quarter, we've already answered that. But how should we look at full year 2023 effective tax rate going forward?

Thanks. Okay, can I take this again?

Yes, go ahead.

So for the income tax rate, just to put it in context, the income tax payable, we compute on a per company basis. What you see that we present is is DNL on a consolidated basis. So that's why if you take a look at it on a consolidated basis, there's some sort of distortion as far as the effective income tax rate is concerned. But for easier computation, for the purposes of your financial modeling, I think it would be better or more stable if we compute it as a percentage of the gross profit. Because also in some business segments, we use the OSD or Optional Standard Deduction. So effectively, that's gross profit times 15%. More or less, that's where the effective tax rate will fall.

Okay, thanks, Krista. Okay. Let's go to the next question from Adrian. Do you expect high margin volume growth in fourth quarter 2023 to mirror what happened in fourth quarter in 2022? Where customers seem to stock up on inventory in the third quarter last year, which resulted in lower volumes in the quarters that followed. Given the current economic weakness, could we see a repeat of this or will it be better given a low base in fourth quarter last year?

Yeah, you know, we didn't really see any stocking up this year. So I don't see that behavior repeating. So that was really more, I would say, reaction last year to supply chain problems and COVID and all that. But I don't think that's going to repeat this year anymore. So fourth quarter this year should be pretty much, well, normal in that sense, or at least more normal.

Ain, sorry, you're on mute.

Sorry. The next question is from Joyce. How long do you think it will take to iron out the kinks and get the pedangas plant to operate more smoothly? And when do you think its operating margin will start to be more at par with your existing facilities, i.e. no more ramp-up margin drag from the botanist plant?

In our experience, new plants really take a while to iron out. So it might take a couple of months. And well, what we know is that some parts of the plant in the next one to two months will be okay already. because they came online earlier. However, we have some lines where the construction and the completion are actually still coming online, so they will take longer. So that process will be... ongoing for at least, I would say, till the middle of next year at least. So it's still going to be a while before we can say that the plant is truly done with construction. Okay. So here's the other complication. Whenever we build new plants, our experience has been just to build it much bigger and have spare space to add more lines in the future. And we've done that with this new plant. So what that means is that if there are opportunities we can see sooner rather than later, we may start adding more of these new lines as well. And from that perspective, it means as we are adding more capacity, then we can't say that we're done with construction because we've just added new construction. But at least in terms of what we have already now, I expect by the middle of next year, hopefully we should be done. That's what we're expecting. Second question was about operating margin. When will it be at par with our existing facilities? If we can get utilization to around, I would say, 60, 70 percent, that I think would give us a good shot at having the margins be comparable already with our existing facilities. So it's going to take a while. That's going to take a while.

Okay, thank you. That's actually all the questions we have in the Q&A section. Again, if you want to ask a question, you can raise your hand, we can unmute you, or you can type in your question in the Q&A chat box. Okay, follow-up question from Joyce. When do you expect to hit 60% utilization?

I can tell you that the sales guys are working really hard, especially on the export side, to promote exports. So the minimum... For us, being a Filipino company in the Pez zone, we need to hit at least 50% of the production or revenue from this new plant coming from exports. But we're actually targeting higher than that if we can. So understandably, before our exports were around 25, 30% of our revenue. So now it's required us to have that change in mindset that we really need to dedicate more in exports. So that's one perspective. The other perspective is that we're actually so in the Philippines, we would be considered a big fish in a small pond. But overseas, we are a tadpole in a huge pond. So there's a lot of customers, a lot of potential, a lot of business that we can get. In terms of how long to hit that 60%, even at 60%, that's a huge increase from where we are now. I would say that's more than double of our peak from last year. So for us to double from our peak last year, it's going to take a little while longer. I don't want to preempt, but it's a massive effort on our part. And it is something that we want to line up. And we're trying really hard, but it's going to take a while. Sorry, Joyce. It's not an easy question to answer, but it's a huge jump from where we are.

Thanks. Thanks for answering that. That's the last question we have in the Q&A box.

There's someone raising hand.

Yes, yes. So, okay, Joyce, you raised your hand. Do you have any follow-up questions? Okay, I've allowed you to talk now.

Hi, hi, thanks. Just a follow-up. So if 60% is more than double your peak previously, and as you mentioned, it will take a lot of effort, would it be safe to say that it will probably take a couple of years for the Patangas plan to stop being a margin drag to your overall business?

Um... When you put it that way, it sounds depressing. It's a big plant. You can't expect to build something so huge, something so expensive, and not expect it to be a temporary drag in terms of expenses and costs. It will take a while. But we're very comfortable with that because we're really looking at the long term. I think we started talking about this in the last briefing. There's really short-term pain when it comes to a massive undertaking like this, but we're really looking at the long term, five, ten years out. Anything to do with constructing a new plant, buying all the machines, putting it together, getting the certification, Looking back, you know, five, 10 years ago, we are so happy that we did it because, you know, things were much cheaper then. And as time goes by, it's also harder. It's getting much and much harder. to get certified and to satisfy the different standards because standards are getting, you know, for compliance, for different reasons, they're getting harder and the manuals are getting thicker, the rules are getting longer. So yeah, it's short-term pain, but long-term gain. That's really what we're looking at.

I guess the expected drag will probably diminish over time.

Yeah. It will be. And you can see it. There's a big difference between the income with and without the expenses for the new plant. The difference is big. And we can see it. We can feel it. It is a heavy burden on us.

Got it. Thank you.

Thank you.

I think another person raised their hand.

Yes, Ipavi.

Yes, Ipavi, I have allowed you to talk. So you may ask your question now.

Yeah, sorry, I don't hear any audio.

Yeah, we can't hear anything. So if you have any questions. You may speak now or you may either type your question in the chat box.

Hi, sorry, can you hear me?

Yes. Hi, this is Brian Lee here. So I just have a quick question for you because clearly there's a lot of excess capacity now due to this massive undertaking with the Tangas plant. So understandably, it takes a period of ramp up. But will you be able to share with us in terms of the product lines or whether the split or maybe the split between specialty and commodity And so what do you think is your focus on when you want to really ramp this up quickly? At the same time, given that it is also a financial burden for the time being, how do you think about pricing, especially when you try to ramp up capacity?

Okay, that's a great question. So we want to hit the low hanging fruit first and get revenue started. And by having more throughput as well and increasing it over time, it gives us more opportunity to get the bugs out of the manufacturing lines. So definitely you will start seeing more commodity coming out of the new plant in the beginning. But of course, the focus for us will always continually be to prioritize the specialty. But the commodity side, it's there for the taking. It gives us that ability to absorb a lot of the fixed costs, ramping it up very quickly. So it's likely that's where we will go initially. But over time, the focus is really more, it's really higher on the specialty and that's where we will be focused a lot on. So you can expect that. Um, so it's similar to how we grew all of our other businesses, starting with the lower margin, first grabbing market share, grabbing awareness and visibility with the customers and over time shifting to the higher margin. Um, in terms of, uh, specialty. So, yeah, so that's, um, what we will, what we are expecting to do in terms of the ratio or the product mix. Uh, sorry, what was the second part of your question?

It's really on pricing there, as in, would you engage in a bit more, say, competitive pricing to try and bring up the capacity utilization a little more quickly? And if I may just jump in with a quick follow-up there, in terms of the commodity market, how would you characterize it in the sense that Is there a lot of volume for the taking if you try it and present your new capacity to the clients? Or do you think it's going to be a gradual ramp that takes time?

GARY ILLYES- OK, so in terms of pricing, It will depend on various factors such as the state of the commoditization of what we're selling as well as the requirements for quality. That's usually where there's some variability in pricing. But I think it's safe to assume that if we are selling more commodity, we're really going to more or less follow the pricing that the market's dictating. So we don't expect to be giving too much of a discount. So in other words, we don't necessarily need to sell at the lower price just to sell more because by nature, we're not adding such a big discount chunk of volume to the overall market that's going to cause a distortion where everyone has lowered their price. In terms of the behavior of the commodity market, I would say the food commodity market in general just went through so much disruption the last couple of years because of COVID. And then there was the war in Ukraine as well, which caused prices to at one point go up massively and suddenly they're collapsing. So I would say that the external factors would play a bigger factor rather than just the fact that we're coming online with a big new plant. So in essence, not much impact from our new plant just as a new plant, but it's really what's happening globally. That, I think, would be the bigger factor.

I guess where I was coming from is if you presented this capacity to your clients, are they willing to quickly switch to your plant versus taking it from other competitors or would they be quite sticky in terms of where they produce from?

Okay. So we're very focused on clients that really want us because of our proven track record, our ability to extract and convert products that we have that natural advantage. So everything like coconut oil, for example, and other such similar products, we do have that advantage being located in the Philippines. So we're trying to be selective. We're trying to focus on those businesses where we do have that natural advantage and where the demand is very high. We're not so focused on chasing after other markets where we don't have that advantage.

Great. Thank you so much. Okay. Thanks, Brian.

Joyce, did you raise your hand again? Do you have any follow-up questions? Sorry. Thanks. Okay. Yeah, so we don't see any more outstanding questions from our end. So if no more questions, then that concludes our third quarter briefing. As always, you can always reach out to our IR team. So that's Alvin, Ainsley, and myself if we have further questions in the future. So again, thank you for joining our briefing and see you next quarter.

Thanks, everyone. Good morning.

Thank you.

Thanks, everyone.

Bye-bye. Bye. Thank you.