D&L Industries, Inc.

analyst briefing for the full year results of D&L Industries for 2023. So we'll drop straight to the highlights. We saw the full year 2023 earnings come in at 2.3 billion pesos. So we saw a couple of factors, but it was really higher interest expense and operating expenses that lowered earnings for our company. These are all related to the new plant that we built in Batangas. We also saw just like what we saw in the first three quarters, higher raw material prices and higher interest rates that also had a big effect on not just on us, but on the consumer economy as well. And that had a big impact on companies like us. So one piece of good news, as of this month, we have seen the exports from the new plant. We've already achieved the target for the first year for the Batangas plant. This is the commitment that we made to PESA in our registration. So in that sense, we're at least ahead of what we committed to PESA. We also saw in terms of our HMSPR, high margin specialty products, the volume went up quite nicely, up by 40% in the fourth quarter. So the outlook for this year with interest rates rising, not going up anymore and likely starting to come down, as well as with inflation, pretty much looks like it's fairly muted this year compared to the last two years. We are quite optimistic about our prospects for this year. And of course, longer term, we will start to see the fruits of our investment in the new plant in Batangas. And we're also expecting cash flow to be positive in a big way. And you'll see that for 2023, we are reporting positive free cash flow. And that is something we anticipate will continue to happen for the next couple of years. And we've got some bonds... one series of our bond maturing this year, we have the highest confidence that we will be able to service those bonds. Okay, into the next slide, just a couple of pictures of, at least from the outside, you can see different views of the new plant. So We started commercial operations in July last year. So that means that we issued our first commercial invoice. There have still been some more works being done for some of the other lines inside the plant. We expect to be finishing the bulk of these works in the next couple of months. And we are aware that some of you are hoping to come and visit and see the new plant. We will be scheduling that in the next couple of months. So just to graphically picture in terms of our export commitments to PESA. So as part of the PESA or Philippine Economic Zone Authority registration, so a company that's registered, you get incentives like income tax holidays, benefits. duty and VAT-free importation of machines as well as raw materials. In exchange, you need to comply with certain conditions and that includes having export commitments and at least for the first year, So first year would be reckoned from July 2023 to June 2024. But as of Feb, we've already surpassed our export commitment. So it's a good thing, at least from a PESA perspective, we are ahead. Okay, so here's a look at the figures. So no surprises in a sense that we really ended the year pretty much how the first three quarters, how we did for the first three quarters of the year in terms of revenue. So we did see In the first three quarters, raw material prices stabilizing. It was a pretty high base coming from 2022. There was really the war in Ukraine that triggered a huge jump in raw material prices across the board. And so we were affected by that. But raw material prices have since stabilized, come back down. And so since we pass on a lot of these price changes to our customers, our revenues also trended lower. However, we did see muted volume increases. muted demand from some of our customers, especially on the food side, as well as in the oleochemical side. And we will go into more details in the next couple of slides. But here you'll see also that there is that big difference coming from the impact of the start of operations of the Batangas plant. So it is a big investment. We do have a lot of costs associated with it. So everything from depreciation, of course, as well as costs, other costs raised at startup, including ramping up inventory for the working capital. So we will see the impact of that in the next couple of slides. Sorry, so one thing I One thing that we have seen is there is an improvement in the gross profit margins, as you can see there. So last year, we were tracking below 14%. So for 2022, below 14%. For 2023, we're at above 17% gross margin. So it's not all good. We are seeing quite a few signs that there are some things that are really better and that reflect a better outlook for us as a company. So in terms of full year net income compared to the previous two years, here we can see a comparison. So down by 31% versus 2022. But if you were to exclude the effects of the new plant, we are still down, but by a lower number, by 15%. In terms of the net income breakdown that you can see on the right of the slide, so biggest income contributors, still food, but specialty plastics, close, and then oil and chemicals, which is ChemRes, third, and then consumer products, fourth. Okay, in terms of the condensed income statement, so a little more details here. So you'll see quite a few things. So in terms of our cost of goods sold, the drop is also significant. However, you do see in terms of interest expense, there is a big jump. And that really is a factor of not just the debt that we have, but higher interest expenses as well. So we're currently tracking at most of the loans that we take in now. as of today, are coming in at roughly around 6.25%, compared to where it was, say, two years ago, we were still below 3%, I believe. So quite a big jump. And of course, a lot of the expenses related to the Batangas Plat. So here's another example. Here's something positive that in terms of the product mix, so the lower portion, the darker portion, that would be what we would classify as the high margin parts of revenue. And the lighter portion at the top would be the commodity or lower margin part of our revenue. So the product mix, as you can see, pre-COVID, was pretty steady and was actually slowly improving at almost 70% high margin, 30% low margin. As you can see during COVID, there was a steady deterioration in the product mix. And it's natural to expect that with a lot of companies really focusing on well, at the beginning of COVID, it was really focusing on survival and later on just focusing on the most important parts of their businesses. We were not getting such good demand for our high margin products, but the situation has pretty much started to normalize, as you can see, in 2023, with over 60% of our revenue coming from high margin, much better compared to where it was before. not just for 2022, but even for 2021. And we hope to see that product mix be back to pre-COVID levels, if not this year, then within next year, by next year. So in this slide, we can see a breakdown between the different business segments, as well as between high margin and commodities. And so volume growth is really how we would measure growth. And as you can see, for everything that would be classified as high margin volume, there was volume growth. However, this was more than offset by the drop in our commodity business, which is not surprising. wholly negative because the difference in margins between the two is quite significant. So part of the big drop in volume in commodities is tied to the high base effect. During COVID, we saw our commodities volume jump or increase by quite a lot. So in a way, this is just giving back a lot of that market share grab that happened during COVID. But the impact on the company, I would say, is not that significant. What's more relevant, I would say, is really the positive impact of the volume growth across the board for our high margin segment. And it's been a while since we've seen our high margin businesses, not just growing in terms of volume, but growing significantly as well, from 6% all the way up to, as you can see there, double digits, 40%. So speaking of high margin, so with the bulk of our income really coming from our high margin business. So here we can see what happened in the last six years in terms of what was happening with our high margin products. So relatively good growth, 2017, 2018, then 2019, the country was hit by high inflation, late passage of the national budget, as well as the trade wars that were happening globally. So we were negatively impacted in 2019. 2020, of course, COVID. 2021, you do see some recovery, partly because of the low base from the lockdowns, the full lockdowns that happened in 2020. But you could say that we really didn't see the recovery start until pretty much last year. And as you can see in the fourth quarter last year, very good growth in volumes. Well, it partly is due to the low base effect because we did see a big drop in volumes in the fourth quarter of last year. But good growth nevertheless. So just focusing on the high margin segments. So in terms of volume, we saw in the earlier slides that volumes are up by 9%. Although, as you can see, revenues are down. And this really is more an effect of lower raw material prices and us passing on lower selling prices. So that's why revenue is down. But on the bottom left there, you can see that in terms of margins, margins did drop during COVID from above 25% pre-COVID to below 22%. So we're currently, or we hit 23% in terms of margins, gross margins for COVID. for last year, and we do expect that positive or increasing trend to continue. So hopefully we will see, just like the recovery in our product mix, we are hoping to see the recovery in the margins for high margin as well in the next year or two. For the commodity segment, And so we did see a big drop in volume. We also have the price pass through with lower selling prices. So consequentially, the big drop in revenue from the commodity business. But in terms of margins, so similar to the high margin segment, good recovery in margins also for the commodity business. So both high margin as well as commodity or overall, there is that overall trend of margins getting better for us. In terms of exports, so we did see a drop in exports, although we're still ahead of where of exports as a percent of revenue compared to a couple of years ago, but it is a drop. As you can see on the right there, the breakdown in terms of exports, it's really food and oleochemicals together accounting for 80% of our exports. Part of it is what's going on globally in terms of trade wars. There's minor impact from China. China's not a huge export market for us, but there is, still some impact. But this is something we expect to improve on. We are quite aggressively wrapping up our export efforts to a lot of markets all over the world, not just in Asia, but in North America and Europe as well. In terms of the cash flow, so during the construction of the plant, we saw a lot of capex and that had a net negative impact on our free cash flow. And in the last two years, we also, sorry, 2022 especially, we saw raw material prices increased dramatically because of the, mostly because of the war in Ukraine. And that also had a net negative impact on our free cash flows. But as you can see, in 2023, raw material prices have stabilized, although we do have some impact from increasing inventory growth. with the startup of the new plant. And you also see the lower impact of CapEx last year compared to the previous year. So big positive free cash flow number for last year. And that is something we expect to be maintained for the next couple of years. So positive free cash flow for us for starting 2023 and for the next couple of years. So speaking of CAPEX, so we started the construction of the new plant at the end of 2018. And as you can see here, CAPEX, mostly from the new plant, ramping up, peaking in 2020. 2022 at almost 3.5 billion pesos last year's capex coming in at less than that at just a little over 1.4 billion pesos and we expect capex even this year to be still lower so for a lot of our suppliers involved in the construction of the plant we retain a 10% a part of their fee, of their charges. That's just to make sure that they really fulfilled what was committed to us. So that 10% retention the bulk of that will start to be released within this year and some flowing even into next year. So there will still be some... capex related to the construction even this year and next year. So it will really be probably 2025 before we could see a really significantly lower and I would say normalized capex that's really not associated anymore with construction at least of the new plant. So on this chart, so what we do is we plot our costs, our main costs, which are really coconut oil and palm oil together making up... over half or close to 60% of the raw materials we use. So that's the middle chart. So the brown line, coconut oil, the blue line would be palm oil. And then below that, the dollar peso exchange rate, roughly half of the raw materials we use are imported. So these two at the bottom combined would be would be quite a significant factor in terms of the movements in our costs. The chart at the top where we show our margins. So what we're trying to convey or communicate here is that our margins don't necessarily move together with how our costs move. And this really is more a reflection of number one, our ability to pass on raw material prices. And second, you do see a lot of correlation with the product mix chart. that we showed earlier. So that does have a big impact on our margins as well. Okay, so in terms of our revenues, so another way to see that we are able to pass on price changes to our customers, and it's both up and down. So you can see here, again, coconut oil, the brown line, palm oil, the blue line. As these prices have moved, our revenues move similarly. So quick look at the different segments. So here's an overall snapshot. So in terms of revenue, the biggest business is still food, but in terms of income contributions, so surprising that plastics actually came in as the number one income contributor or the highest net income contributor. Normally it's, It's at number three below oil chemicals and other specialty products. So it's just, I would say, a reflection more of how much the food ingredient segment and how much ChemRest results have lagged last year compared to our other segments. But nevertheless, in terms of margins, you can see that overall margins have held up pretty well, except for Chemres margins are down by 3%. Even for consumer products, ODM margins are still down, although at 27% margins are still where we would classify it as very healthy margins. Overall margins were still much higher at over 17%. Now, looking at the food segment in more detail. So overall volume down by 18%. But as we had seen in the earlier slide, the high margin part of food was actually up. It was the drop in the commodity volumes that really pulled down overall volume for food ingredients. Overall revenue down. So this is partly from volume, partly from passing on lower raw material prices. However, net income is down, down by 18%. But one positive thing that you can see across the four food segments, you will see that margins have a very healthy trend. jump and overall margins we do see are much higher. So we're trending back towards the margins that we saw pre-COVID. For those of you who have been following us for or since COVID, you'll likely recall that during COVID, our food segment was hit hardest and the margins had dropped by a lot. So it's very encouraging to see that the margins have started to recover and we hope to continue to move them back up. So here's a look at cameras. So, Similar to the food segment, we saw an increase in volumes for high margin, but a drop in low margin. So the low margin part of ChemRes is really the bi-diesel segment. So there's a lot of competition in that segment. And the margins there are very, I would say, close to the all-time lows. It's a very difficult environment to be in now for the biodiesel business. But speaking of the biodiesel business, in the next slide, we are quite optimistic. The government has been more vocal about the plans to finally increase the blend. So this is something we had been expecting for the last couple 17 years, 16, 17 years. Current blend is at 2%. The communication that we saw is that we are looking at an increase to 3%. So from 2% to 3%. by the middle of this year, and then by a further 1% for each of the next two years. So that means going up from 2% currently up to 5% by 2026. So we're looking forward to that. Okay, for the plastics business, so good growth in terms of volume. We don't have any commodity sales or commodity products in this segment. It's all high margin. And even though it's a fairly small business in terms of revenue, it's probably accounting for roughly 10% of overall revenue. But in terms of net income contribution, it's coming in way higher at 31%. So, yeah. This was actually the first business that we started with 60 years ago when the company started. So it's still around in terms of overall revenue. It's not as big, but in terms of impact on income, it's still very significant. And then finally, consumer products ODM. So this was a segment that in terms of personal care, saw a huge drop when COVID started because people were not going out anymore. They weren't buying deodorants, shampoos and other personal care products anymore. But the home care product segment did see a huge jump thanks to sales of things like alcohol, disinfectant and other cleaning chemicals. Last year, everything did relatively well. All segments, as you can see, saw big jumps in volume as well as revenue for this segment. So a quick look at some of our related party expenses. So D&L on its balance sheet, it does not own any property. So all of these large fixed assets are leased, mostly from affiliated companies or companies owned by the family. So that's on the left side, you can see related party expenses coming in at roughly 2% of costs and expenses at 645 million pesos. On the right side, so the right side would be management fees that D&L charges not just the subsidiaries, but also all other affiliate companies. So to perform shared services, so things like HR, IT, legal, finance, accounting, even management, and these fees come in. So they would be classified as related party income, which does help offset the related party expense on the left. A quick look at the cost structure. So no major changes, 80% of our costs coming in from raw materials. Next highest cost will be coming in from labor, currently at 6%. And then third would be depreciation and rental. So if you were to look at what would be classified as fixed costs, it's pretty much just a depreciation and rental, maybe part of utilities and maybe half of the other costs. So that's probably coming in at around 10% of our costs coming in as fixed. So 90% of our costs, would be classified as floating or variable. And that's pretty much the reason why we can be quite nimble. Even though we're not a small company anymore, we can react very quickly and we're not stuck with a lot of legacy expenses. On the right, you see there the breakdown of raw materials. So fairly consistent. Coconut oil, number one. Palm oil, number two. Together, making up half or a little over half. And overall... 40% of raw materials imported. On the bottom left, you can see there, so what we call technology spend or what we spend on IT and R&D spending has increased. been increasing for many years. In fact, it was only really during COVID or sorry, the start of COVID in 2020 when requests from customers to do special formulations and other special requests that really went down to pretty much zero. So that is really the main reason why our spending back then had a drop. But as you can see, spending has resumed the upward trend and is still going up. Okay, in terms of the balance sheet, no major surprises. Debt is slightly up. Our debt to equity ratio from 0.75 the year before, we ended last year at 0.82. And interest cover coming in at six times. In terms of net gearing, we are at 69%. So this is higher compared to the last couple of years, but I would say even at 69%, our debt's still fairly moderate. It does mean we have a lot of capacity if we needed to bring in capital more just through debt. We have a lot of lines with our banks. We don't even use up We use up less than half of the lines we have with our banks. So quite a lot of leeway there. In terms of average cost of debt, so this has gone up significantly. Currently, so for last year, we were at 5.7%. I mentioned earlier, current borrowings were coming in at roughly between 6% to 6.25%. waiting for... Well, at least it doesn't look like rates will go up anymore. And as we have free cash flow coming in in a positive way, not just last year, but for the next couple of years, we will be using a bulk of that free cash flow to start paying down our debts. So you should see... going forward, debt numbers going down. And this is just historical on a quarterly basis from 2016, fourth quarter, just how our debt has moved and together with effective interest rates. So that would be the light green line. So that That went up in 2019 during the high inflation period, came back down during COVID and is back up today. And interest cover, which has gone down as we took on a lot of borrowing to finish our new plant. In terms of cash conversions, so no major surprises. Inventory is up mostly because of the additional raw material that we had to bring on board because of the new plant. But even at 111 days, it's not too far from where we have been in the past. And we should start seeing that number normalize going forward as production of the new plant continues to ramp up. So one good thing we do see, sorry, back to the work capital cycle slide. One good thing we see is that accounts payables going up to 24 days. So we're getting better terms from our suppliers. In terms of receivables, it is higher compared to before, but it's still within the range. We try to keep it below 60 days as much as possible. And at 55 days, that's still a fairly good number to be at in terms of receivables. Okay, in terms of the stock, D&L is ranked number 50 across all the Filipino companies in the Philippine Stock Exchange. Market cap is at roughly 50 billion pesos. 12 months. Trading average at roughly $250,000. In terms of the float, we're at 27%, with about half of the float being owned by foreigners. And in terms of our activities, as in terms of investor relations, we do continue to join various events, conferences, both inside the Philippines as well as outside. So quite getting back to being busy, meeting with investors and communicating what's happening with the company. Okay, so that is the deck. We are open to Q&A.

Thank you, Alvin. We have a couple of outstanding questions here. So let me just read them. So the first question comes from Jason Mock. So how much is the first year export commitment to PESA for the new Batangas plant? How much of the export D&L did for is coming from orders from the older plants being shifted to the newer plants versus new export orders from new customers that we didn't have before?

So we're currently not disclosing any numbers with regards to new plant. And the reason for that mainly is there's a lot of competitors who are very keen to see what we're doing and to get information. And we want to hit that balance of giving sufficient information disclosure to investors, but without revealing too much that it's going to hurt our business. So for now, what we're comfortably saying is that we comfortably are achieving at least our commitments with PESA. So the other thing in terms of PESA, we whatever you build in PESA, the rule in general is you cannot just shift what you're doing before and shift it into a PESA zone. That's not allowed by PESA. So these exports are new. I mean, one way to look at it, if you were to look at the... So I can see this. You guys can't. But when I look at the export business, what we were doing with a new plant the first month, so July, August, September, it was really very low numbers. If it was a matter of easily shifting what we were exporting before to a new plant, you would have seen a big jump in the numbers immediately. And we didn't see that.

Okay, there's another question from Jason. Could you update us on the progress of the ramp up in new plant? How much backlog or order visibility do we have, if you could share? Do we expect any more headwinds regards to the operations for the plant to fully ramp up, such as last year, the difficulty in getting the different approvals, or is it the bottleneck just finding demand for the new plants?

I would say, okay, so the other way, I guess, to look at this is where are we with regards to how we expected the plan to perform? Or how are we with respect to at least what we wanted to achieve? So earlier we had So earlier we mentioned that in terms of at least the commitments to PESA, we are ahead. So at least in a way, we're doing okay in terms of what we were expecting. Admittedly, there were a lot more... certifications that uh we were there was more than what we expected and the delays were more than what we expected that is true um but i would say they're getting uh fixed uh and we are in a position to really um start seeing the fruits coming from the new plant um So something I kind of glossed over, and Chris, if you could go back to the condensed income statement. So if you take a look at the last column here, which is fourth so the quarter on quarter number so fourth quarter versus third quarter and if you take a look at net income both with and without the effect of the new plan you'll see that the net income drop overall is actually lower if you include the effect of the new plant. So it means that in the fourth quarter, the new plant is not as negative. um and it is so that's actually much earlier than what we expected um okay we have to verify these numbers admittedly uh but um uh it is a sign at least one sign that uh the new plant is performing and uh you know i'm i'm not saying there are no backlogs anymore or you know there's still you know it's only been six months, seven months since we started the operations. Um, I mean, if you've, I guess one analogy, imagine building a new house. Um, you've lived in it for a couple of months. You're still going to see a few things here and there that aren't right. You want to get right. You want to fix, um, there's still some furniture that you want to buy, um, And then, so it's kind of the same thing. There will still be a couple of things that we still need to fix up, get right, some more certifications we didn't expect. Of course, more export customers that we want to bring in as well. I mean, that's all part of it. But yeah. We've been in business for 60 years. This is not a new industry for us. It's still pretty much a lot of new products. It's a lot of high tech as well. That part is new. But in terms of a lot of the fundamental foundational work, it's very similar to what we've been doing in the past.

so uh it we're getting it done thank you um last question for now from jason for the domestic customers could you talk about the outlook and consumption and if there are any new key accounts that might be meaningful such as dali um okay uh

I need to be careful here because every customer we have, pretty much every new customer we have, we sign an NDA or non-disclosure agreement. If you notice, in none of our press releases, in none of our disclosures, we discuss specific customers. In our deck, which came, part of our deck would be information that came from when we did our IPO in 2012. And we do mention, there's one page there that has a list of customers. But since then, we don't really... talk specifically about customers. Number one, it's really to protect that confidentiality that we have with our customers to keep things confidential. So I cannot confirm or deny any specific businesses that we're doing with any specific customers, especially if it's from a source that didn't officially come from us. And that article that mentioned some of these customers, that was not something officially coming from us. So But what I can say is that there are a lot of opportunities, not just in exports, but also domestically that we are exploring. There's still a lot of things that we can do. And what was holding us back before was really a lack of capacity or a lack of capability. this new plant that we've built addresses a lot of the capability and capacity constraints that we had before. So I would say we're in a pretty good spot. There's a lot of things that we can do, a lot of customers that we can serve. we're also lucky in the sense that there aren't many, there weren't many new build outs that were done in the last couple of years because, you know, no one really thought of building something huge from a CapEx perspective during COVID. And so that's kind of a, you know, we were lucky that we started before COVID. I'm pretty sure the decision would have been very different if the timing was, if we had started during COVID. So I hope that answers your question. Thanks, Jason.

Okay, next question from Gina Kim. Hello, can you explain why your fourth quarter GPM dropped to 16% from over 17% year-on-year when your high margin specialty products volumes improved by 40% year-on-year? Can I take this question?

Yes, I will call a friend. Okay.

All right. So in the fourth quarter, the increase in volume mainly came from the new production from the Batangas plant. And as you know, we are just ramping up manufacturing or operations from our Batangas plant. So part of the depreciation, it gets allocated or goes to the cost of goods sold, which is being taken into account in the computation of the gross profit margins. So that means that for the initial production that we will manufacture from the Batangas plant, naturally, even though it's a high margin product, if you compute for the GPM, the initial gross profit margin will still be lower because we need to account for that increased depreciation. However, when we reach a certain economy of scale, then over time, as we ramp up the operations in our botanicals plant, we can expect this margin to go up. So I hope that answers your question. Do you have anything to add?

Nope. You explained it succinctly and completely. Thank you.

All right. Okay. Next question from Stephen Oliveros. Hi, a couple of questions from me. One, in your experience, how long does it take for your plants to reach optimal utilization? Second, any color you can provide with respect to demand indications for the new plant?

Um, so, uh, in our recent history, um, so we finished the biodiesel plant in 2006. Um, thanks to the biofuels law, which passed in 2006 and, uh, the 1% blend started in 2007. We were at full capacity two years after we started construction, but that was luck. I mean, that was the new law, uh, all diesel sold in the Philippines effectively was forced to comply with the 1% limit. Our more recent large capex would be the two food plants that we built in 2012 and 2013, thereabouts. It took us a couple of years for full capacity to be reached. Here's the thing. Our experience with building CapEx like this has consistently been that We want to build our plants extra large with extra space so that if we want to add new capacity, new lines, new machines, the incremental cost is not as much as having to build a whole new plant. So we've done this with this new plant and we've done it really with extra, extra room. So it means that there's a lot of upfront costs, but over time, we will still be able to add more capacity and that the cost of adding this new capacity will be much lower than if we had not had that provision of being able to add more lines. So this new plant is... I would say quite different from what we've done before because we're hoping this will last us for at least ten years or so, not just three years, not just five years. And so it might take longer because of that. but from a long-term perspective, from a value perspective, this is really how we felt we wanted to go. So, yeah, I hope that answers your question, the first question. Second question about demand indications for the new plant. So far, I think it's okay. We... We actually have, and I think I mentioned this in previous briefings, we've actually had interest even before from export customers, but the bottleneck was always we didn't have the capacity. Now that we have the capacity, those customers who were interested before are definitely interested. still interested and they're doing plant audits um and we're undergoing certification as well um i would say i mean that was part of the reason why we built the new plant is because we we kind of knew that the demand was there so um uh yeah we we uh because we had We already knew that demand was there. I mean, it kind of made sense to go ahead and to build it in a big way.

Okay. Next question comes from Joyce Ramos. There seems to be less drug from the Batangas plant in fourth quarter 2023 versus third quarter 2023. Can you share indications on where you see this is going? When do you expect margins to be at par with the rest of the existing facilities?

um it's still too early for us to say that you know fourth quarter may have been just uh just a uh a blip i mean uh fourth quarter last year was pretty horrible i mean that's one factor um low base because of a horrible fourth quarter last year um You know, there's the war in Ukraine, although it looks like most commodity prices, except for cocoa, which is still hitting records. Rice prices, I think, are up something like 20 or 25 percent year on year. Pretty much everything else, prices are stable. But yes, if you were to compare second quarter, third quarter, fourth quarter, the trend is encouraging. So there is a positive trend in that sense. In our experience, it really is just every time we build a new plant, it's only a matter of time before it will be net accretive. We're hoping maybe within the year, it can be net accretive, but I wouldn't be able to commit that yet. There's still a lot of things that aren't finished yet. Still a lot of contracts and customers that we're still discussing with too many things that can change in terms of margins to be at par with the rest of the businesses. That will also take a while. The costs of the new plant, being a much bigger facility, it's really a huge cost. So the margins will likely take a while before they would look like the margins we have. But again, from a long-term perspective, it's only a matter of time and we will get there. We have no doubts about that.

Okay, thank you. Next question comes from Jojo Abad. Have raw material prices eased in the first two months of the year relative to the same period in 2023? Related to this question, what's the outlook for the next six months and its impact on operating margins?

Yeah, pretty much except for cocoa, rice. So we don't use rice, but it is a benchmark for a lot of agricultural products. Cocoa we use a little bit, but everything else, prices have stabilized. I understand even crude oil. Even with what's happening in Gaza, at least energy prices seem to be stable. Yeah. And so, yes, the answer for the first question is pretty much yes, for the most part, raw material prices have pretty much eased. And that contributes to the positive outlook in terms of inflation and, consequentially, in terms of interest rates. With lower inflation, we're hopeful that interest rates uh will start to be uh adjusted downwards so that's something we're we're looking forward to um outlook for the next six months and impact on operating margins um you know if knock on wood material prices are stable or maybe even lower inflation is lower interest rates are lower it can only be positive for the economy in general since we have a sizable debt that will be positive from us, from an interest expense perspective, even if we're paying down some of the remaining debt, we will still see an impact. So overall, the impact should be positive.

Okay, thank you. The next question comes from Rainier Yu. What's causing the drop in oleochemicals, especially in margins if HMSP volumes up 13% and growing better than the commodities? So I can...

Okay, go.

Thank you. Okay, so for oleochemicals, similar to what I mentioned before, so the plant in Batangas that we've built, it's really for food, oleochemicals, and our consumer products ODM business because of the higher depreciation that gets allocated to the cost of goods sold, the overall margins would still be lower even if we have new volumes coming out of the Batangas plant. So yeah, that's really it. The next question comes from Gab Aguila. Can we look at the utilization of the new Batangas plant from a percentage perspective and expectations for utilization in full year? Sorry, I think this is for full year 2024.

Okay, so I had mentioned earlier that we need to balance the information that we give out with regards to the new plant because there are a lot of people looking at us, including our competitors. So we don't want to talk about utilization yet, but understandably, it's still quite low because it's only been seven months since we started in terms of expectations for this year, I mean, we're trying to ramp up the utilization and it looks like we're doing okay from that perspective. You know, we're getting a lot of the bugs fixed. We're getting, in terms of certification, a lot of them are getting passed, but there's still a couple more that we need. In terms of demand, Some of the audits are passed already, but some are still incoming. So, you know, that's part of the ramping up But yeah, unfortunately, I can't give any specific info, any more specific info at this time. But the trend is positive. And it is, I would say we are doing okay. And in terms of what we expected, some parts are good. we wish would be faster, but, uh, overall, um, uh, it's not too bad.

Okay. Thank you. Um, next question comes from Kimberly now. Would you be able to share the business segment breakdown for the new export orders? Which segments are seeing better demand among the new export orders?

Um, so if you're specifically talking about the new plant, uh, It's all of the above. So we have our food and our oleochemicals, as well as the ODM manufacturing business. All of them are seeing good demand and good interest from our export customers. I can't share specific numbers. But they are all seen. So it's not a case of just one or two parts that are doing well. They're all doing well.

Thank you. Next question. What's the level of utilization are we looking at for the GPM from HMSPs coming out of the new plant to be at par or higher than the older plants?

I think, Krista, you answered this earlier.

Yeah, so I think that level of utilization would be a utilization that allows us to break even at the very least. So I think Alvin has mentioned this a couple of times in the past that when we did our IPO process, back in 2012 our utilization rate at that time was just about 25% and at 25% we were already profitable with a new plant having a cost structure that is similar if not better with our existing plants so meaning the fixed cost as percentage of total cost and expenses is low maybe less than 10-15%, the short answer to this question is that it would not take a very high utilization for the new Batangas plant to at least break even or start contributing to our income. Next question from Gina, any guidance for 2024?

Yeah, I almost forgot. So we did mention in the highlights page that we're quite optimistic about 2024 with interest rates coming down, raw material prices being stable, and we're seeing more... benefit from the new plant. And I would say there's a low base effect as well, just because 2023 numbers came in quite low. So 2024 in terms of net income growth, I would say it's fairly... We would easily be able to do at least a double-digit increase in net income, at least. That means 10 plus percent increase just because of how... I won't call 2023 horrible, but it was just too many things going on that hit us. You know, interest rates, raw material prices, and then the costs of new plant kind of triple whammy there. But, you know, 2024, things are looking much better. So we're quite optimistic about So I would say before I would... I would tone it down and I would say we're cautiously optimistic. I mean, in the past, that's what I would have said. But looking at where we are now, the mood is so different. The feeling that we have is 2024 is really going to be a better year. So we have a lot more confidence for 2024. So yeah, at least double digit income growth for 2024.

Okay, next question comes from Stephen again. Do you think the increase in biodiesel blend this year and over the coming years will delay product mix and margin recovery given it's a commodity-based nature?

The biodiesel blend increase... Well, so what we're trying to balance is the need to service a market where the margin is, you know, it's barely there for us. So even if the, so, okay, what am I saying? What the impact of the increased blend is that demand goes up. Supply, assuming supply doesn't change, it's overall positive for all the biodiesel manufacturers. And with demand going up, we are anticipating that margins will go up and, you know, selling prices will go up, margins will go up. And this will be the impact across the board for everyone. So we will still be mindful, of course, and not sell just because we need to sell or just looking for market share. But overall, I would say that would be the... the main sentiment that this would be a 50% automatic increase in demand, which would be net positive for margins overall for all the players.

Okay, thank you. Next question. Can you provide guidance on how first quarter 2024 has looked so far and how is demand from the Philippines food customers faring? Are your customers expecting to see better demand locally or do you expect better volumes this year versus last year?

Okay, first quarter, I would say it's still too early. But definitely, the mood is different from last year. I would say the mood last year, there was a lot of fear. You know, price of everything went up. For those of you from the Philippines, onion prices went up to 200 pesos a kilo. I mean... you know, how ridiculous, it was unbelievable how much prices went up. We do not see, knock on wood, as long as we don't see that type of rapid price escalation anymore. So with stable prices, prices of commodities in general, again, except for cocoa and rice, that would mean inflation would be low and that would hopefully mean interest rates lower. So yeah, that's what we're seeing so far in the first quarter. So it's very positive in that sense. The second question about demand from Philippine food customers. Last year was... So COVID, it really collapsed. Our food customers did zero, pretty much zero request. They had zero requests for new formulations. They were just focused on survival, really, because their fixed costs are so high. Last year... they were maybe not as bad as COVID, but it was still pretty bad for our food customers because the price of everything went up. I would say this year, things are a lot... They're less fearful. They're a lot more optimistic. And so we're starting to see more requests for new formulations. We're starting to see them... at least discussing with us plans for expansion. So that's fairly encouraging. The second part of the question, are we expecting to see better demand locally? And do you expect better volumes this year versus last year? The answer is yes. We are seeing a better domestic business for the food segment.

Okay, thank you. Next question. What's the current utilization of existing biodiesel plants and your peers in the industry, if you can share?

Okay, so we built our plant in 2006 and the law back then was already implying an increase. So the blend started at 1% in 2007, went up to 2% in 2009 and was supposed to go up to 5% within the next couple of years, we are still at 2%. In the meantime, everyone, including us, had built up capacity to 5%. So it means the industry is operating at roughly 40% utilization, two out of five. And that's more or less where we are at. Yeah.

Okay, thank you. So we have a question from the audience. So Brian has raised his hand. Brian, I've already allowed you to talk, so you can just unmute and ask your question.

Hi, Brian. Hi, Alvin. Thanks for your time. This first question is more of a housekeeping question. If you look at the Q4 2023 for your oleochemicals division, were there any reclassifications between the types of products? Because it seems like the specialty chemicals had a pretty low quarter.

Classification, sorry, I'm not sure what you mean by classifications. Okay, so yeah, Krista, you can take this.

Sorry, you mean reclassification of products between commodities and high margin? Is that what you meant?

Yes, correct.

Okay. There was no reclassification under oleochemicals for the fourth quarter. But what happened was we had new volumes coming in in the fourth quarter for oleochemicals. And that's coming from the new Batangas plant. That new volume, though, had lower margins, but still they were recorded under high-margin specialty products because these are specialty chemicals customized for our customers, but they just happen to have lower margins because of higher depreciation allocated on a per-unit basis currently for the Batangas plant.

Okay, okay. The second question I had was maybe a longer term question because of various calls in the past, you'd have mentioned certain utilization targets for the new Batangas plant. Can you just help us refresh what those targets would be today and compared to where you were a couple of months back, are you more or less confident that you will hit these targets compared to right now?

I think what I mentioned in the past is we are hoping to hit full utilization within the next maybe three, four years from the start. That hasn't really changed in the sense that... We, and in the past, that's what we usually are able to do. So, but I believe I also clarified when we say full utilization, it's with regards to what's currently installed in the plant. But we do have a lot of spare space where we can add more machines. and that will add new capacity. And that new capacity, the period of reaching full utilization, that would be incremental. So if the question is, has our view changed in terms of how quickly we can reach full utilization? I'd say we're actually ahead versus what we were expecting, let's say, a year ago. What do I mean by that? There are parts of the plant that we were not expecting to grow. produce so much for now, but we already hit the limit and we have to import some new machines to add more capacity. Okay, I'm trying to be very careful here because the last thing I need is, you know, our competitors being alerted in terms of how we're doing, but it's fair to say that some of the lines that we have in the plan are already running ahead of what we expected. So it caught us by surprise and we have to now use up that extra space to add some new lines.

Yeah. Right. And how much of your space have you basically put up lines for really in terms of the total size of the site?

I don't know the exact... I don't know the detail. It's less than half. It's less than half. So we still have easily... We could easily double... the capacity but we can actually squeeze out more so I mean I'll give you an example our biodiesel plant I think when we first built it it was designed to be a I think it was 45 or 60,000 metric ton a year we were able to almost double it I think After like one or two years. So every time we have a new plant, you know, we size it and the manufacturer, the supplier tells us, okay, this is the capacity. So we say, okay, that's the capacity. Let's put it in. And then once it's running, we start to see, oh, we can actually increase the motor here, run this faster, do something better here. And sure enough, so we're tweaking the process especially with a new plant, and we can run it at a much higher capacity than what the manufacturer specified. Think of it like overclocking your cell phone. I mean, if some of you are techies, you can overclock a computer or a cell phone to run faster. It's something like that. So that's the next stage. That's one of the things we're also looking at to increase capacity. So it's not just adding new lines. It's other things like tweaking the process, tweaking the machines to run faster than what the specs of the, what the commitment of the supplier made to us. These are some of the things that we're able to do. Great. Thank you. Sure. Okay. Welcome, Brian.

Thank you, Brian. Next question from Rainier. Given the current trends and increasing utilization, safe to assume that things have bottomed out in 2020?

Oh, yeah. Oh, my gosh. Well, I mean, knock on wood. Hopefully, globally, nothing worse happens. I mean, if Iran gets involved with what's happening with Israel, and then November, we have We may have a new U.S. president, someone who's very different from the current U.S. president. Who knows, right? But we're hopeful that things are really on the way to recovery. We're very hopeful. Yeah.

Okay, thank you. I don't see any more outstanding questions from my end, but maybe we can give our investors maybe just 10 more seconds in case they have further questions that they would like to ask. Okay, seems like no more questions from our attendees. So this concludes our full year briefing for the year 2023. Thank you for attending and we'll see you again in our next briefing. So stay safe, everyone.

Thanks, everyone. Stay safe and see you guys next time. Thank you. Bye-bye.