D&L Industries, Inc.

Good morning, everyone. Welcome to the first quarter 2024 briefing of D&L Industries. To discuss the results, here with us today is Mr. Alvin Lau, President and CEO of D&L Industries. After the presentation, we will have time for the questions and answers portion. Alvin?

Morning, everyone. Thanks for joining us this morning. We're going to discuss the first quarter results of BNL. So our highlights, we did pretty okay, I think, in the first quarter. Though net income was up by 4% year on year to 618 million pesos, we did see the Batangas plant almost breaking even in the quarter. And our EBITDA actually increased by 17% year-on-year to 1.2 billion pesos. In terms of our high-margin products, we saw margins for the quarter up by 4.5% to 26.3%. And this is the highest level for our margins for the high-margin specialty products ever. Volumes for the high margin specialty products also increased by 13%. So it's a third consecutive quarter where volumes are up significantly for that segment. In terms of export sales, we are almost at the peak that we hit before. So currently exports make up 32% of revenues. But point number four there, we had pretty good free cash flow. In fact, the free cash flow for the quarter came in at 2.7 billion pesos, which exceeds the free cash flow for the whole of 2023. And then proud to say that we also won an award from the Intellectual Property Office of the Philippines. Okay, so into the details. So here's the slide showing net income from the last couple of years, as well as comparing first quarter of this year to first quarter of last year. And in the next slide, you can see the, so we had a lot of expenses, amortization, which are related to the Batangas plant. The amortization were all capitalized before start of commercial operations. But when we started operations in July, as you can see there in the third quarter, all of the expenses started to kick in. And then you did see an improvement in the fourth quarter. And then in the first quarter, you can see there that so with all of these expenses, including interest, expense, amortization, now being offset by revenue and income generated by the plant, you can see that we're almost at break even. So this is coming in. earlier than we anticipated. So it's good news. And we hope to see more improvements in the next couple of quarters. So the next slide shows you. So these are updated pictures from the plant. We are starting plant tours this month. We're going to be starting them for analysts and media in the next couple of weeks. So we'll be scheduling that soon. And so this is something that we had talked about in the previous quarter in terms of our commitments to PESA. The Philippine Export Zone Authority, we have already surpassed the commitments. Of course, we didn't overpromise when it came to our commitments to PESA, but it's still good to see that we've been able to comfortably reach that commitment. The next slide is a look at the condensed income statement. So some interesting things here. So you can see the overall revenue was up by 5%. You can also see that there's a huge jump in interest expense. So this is expected. We've been adding debt for the construction of the plant. We even issued bonds three years ago. But what's interesting, though, there's a big increase in the interest expense year on year. If you look at the quarter on quarter interest expense, you'll see that there's actually a slight or a small decrease here. So it looks like at least the interest expense has already peaked. And with lower interest rates being planned or expected for the next couple of quarters or within before the end of the year and early next year, that should bode well for us in terms of our interest expense. And then you can also see there in terms of net income, we were up by 4% year on year. But again, on a quarter-on-quarter basis, we're actually up by 23%. So part of this is low base effect. The fourth quarter last year, because of inflation and high interest rates, we had a pretty weak fourth quarter last year. In the next slide, you can see there the revenue mix between high margin and commodities. So we came in at 57% contribution margin. in terms of high margin specialty products. So in terms of commodity products, it's currently at 43%. So lower compared to year end last year, but still up compared to the low from the COVID, from the decrease that we saw that happened during We do expect as the production from the new plant stabilizes that we are expecting to see more growth in the high margin products. So that ratio should continue to improve. In the next slide, we see there the volume change across the four segments. So our three biggest segments, we see pretty good volume growth with the biggest volume increase coming from the food segment, particularly on the low margin side with volume up by 56%. The fourth segment, for our consumer products ODM segment, volume came down by 12%. Part of this is from a high base effect. We did very well last year. But unfortunately, with inflation and high interest rates, it looks like it is having an impact on consumer spending. And we are seeing a bit of impact on that segment as well. In terms of the just looking or isolating high margin specialty products. So here we can see the volume growth for high margin specialty products across the last seven years and six or seven years. And you can see that there the drop during the high inflation period in 2019 and also, of course, during COVID-19. particularly in 2020. A bit of recovery started in 2021, but it wasn't very stable yet. But as you can see, starting the third quarter 2023, or last year, we're now on our third straight quarter of volume growth for the high-margin specialty products category. So we're quite... pleased with that, and we are hoping that we will see more volume growth in that category going forward. The next slide is a closer look at the high margins specialty product segment. So, you can see there on the bottom left, the margins for that category. We have, we're now above The margins that we saw even before COVID when we peaked were at a much higher level, at above 26%. We do believe that there is still some room for increase in the margins. So together with the improvement in the product mix, that should translate to an overall increase in the gross profit margins for the company as a whole. Looking at the commodity segment, so margins are slightly lower at 6%. But if you look at historical margins for commodities, so the low would be around 4%, the high would be at around 10%. Midpoint is somewhere between 6% to 7%. So we're actually doing pretty okay, or the margins are currently where we would expect it. So the next slide. So we did pretty well in our exports coming from 27% of revenue coming from exports last year. We're currently at 32% of revenue coming from exports. So this is very close to the peak that we hit in 2021 when we had 33% of revenue coming from exports. As the but Angus Plant is in a pet zone, we are committed to export at least 50% of what we produce there. Although we are currently doing much better than that, but as the production from the plant continues to increase, we should see this export ratio continue to go up. And one of our long-term goals is to hit that 50% export level eventually. Here's looking at the cash flows. So you can see here quite the biggest differences coming from change in working capital. So with raw material prices fairly steady and for a lot of the raw material prices, for at least the raw materials we use, prices have actually decreased. So that has contributed to negative working capital. So as you can see, there are big positive change in terms of working capital. And then in terms of capex, that has continued to wind down. So the result is overall free cash flow coming in at almost 2.7 billion pesos, which is way above the whole year cash flow from last year. And looking at the next slide, you can see that our capex, so we started construction of the plant end of 2018, and capex started to increase after that, peaked in 2022, and started to drop last year as we opened the plant. And you can see the trend is still for lower capex going forward. Although for 2024, the bulk of the capex is the release of the 10% retention. So this is what we are giving back to our or paying back to our suppliers. Usually it's paid back a year after commissioning of what we procure or buy from the suppliers. By next year, the bulk of that retention should already be paid, and the expected capex for next year should be lower again. The next slide, so just to demonstrate our ability to pass on price changes to our customer, you can see that in the last almost 15 years, despite the volatility of in the raw materials we use. So, coconut oil, palm oil together make up for over 50% of the raw materials we use. The chart below, that's the dollar peso exchange rate. So, we import or we pay in dollars roughly 40% of our raw materials. So, despite the volatility, you can see that our margins, they actually reflect more the product mix that we showed earlier. So this is the difference between high margin and low margin, and not so much reflecting the change in our costs. And to further show how our revenue and price pass-through is affected by the change in the raw material prices here you can see our quarterly revenue and there really is a high correlation as raw material prices change our selling prices change as well the next slide we take a look at the four segments in more detail so here you can see that Our biggest segment continues to be the food ingredients segment, coming in at 65% of revenue and 41% of net income. But number two, currently specialty plastics make up just 10% of revenue, but it makes up for a much larger share of net income coming in at 40%. Okay, in terms of the details, so you can see food ingredients did quite well. Volume overall up by 35%. Revenue up 13%. Net income up 24%. So there was a very large increase in the volume of the low margin. That's the second box. The commodity oils volume up by 56%. The high margin segments, which are the other three remaining boxes, volume was up overall by roughly 6%. That's the info that we showed in the volume chart a couple of slides back. But a couple of other good results here with overall revenue up also. And margins overall up by 1%. So there's a lot of increased activity, especially from new customers, as well as market share grab that occurred with our food segment. For ChemRes, so it's starting to stabilize. ChemRes had the biggest drop in net income last year, but as you can see, net income is still down by 9% this quarter, but it's down by a much lower number. And we do have a lot of reasons to be optimistic about ChemRes. For example, on a quarter-and-quarter basis, we are starting to see improvements in profitability. And this is one segment where we have invested a lot in terms of marketing, especially for exports. And so we are expecting to see the fruits of these efforts coming forward in the next couple of months. And in the next slide, you will also see that we've been at a 2% biodiesel blend in the country for the last 15 years, so since 2009. We understand from the Department of Energy that the plan to increase the 2% blend of biodiesel to 3% is pushing through, though it has been delayed. The original plan was to do it in July, but I understand it's been pushed back to October of this year. And the increase will further continue to 4% next year and 5% the year after. So let's see. That should have a positive impact on the overall biodiesel industry as well as on us. Specialty Plastics, so this is the first business that we started with as a company 61 years ago. So very good results, volume up by 10%, revenue of 13%, net income up 76%, and margins up by 8.5%. So we did see a lot of volatility in this segment the last couple of years. So thankfully, it looks like things have started to... stabilize, and we did also see a bit of new orders coming from new customers here in this segment as well, which explains the good growth. So in terms of consumer products ODM, This segment did spectacularly well during COVID and even last year, so a bit of high base created. But unfortunately, with inflation and it seems that there is really weakness in the consumer economy, this has impacted this segment as well. But we are going forward. This is still something we are positive about, especially with the expected gradual decrease in interest rates going forward. We do expect that to have positive impact on this segment. So the next slide, just looking at the related party expenses. So D&L on its balance sheet does not own property. And a lot of the other large fixed assets that the company uses are also rented and not owned by the company. And these are mostly fixed. rented from affiliate companies. So that's the left side. So these are related party expenses, translating to roughly 2% of total costs and expenses. On the right side, we have D&L providing a lot of shared services, which you could say can be interpreted as related party income. So that helps offset the related party expense. The next slide, we look at the cost structure of the company. So overall, you can see in the top left there, raw materials make up 79% of total costs and expenses. So still by far the largest costs of the company. Number two, far number two is labor coming in at 6%. Overall, we can say that what would be classified as fixed costs, so that would be labor, depreciation rental, maybe half of the other. So below 15% of the company's costs classified as fixed, meaning over 85% of the company's costs classified as variable. So that's what gives us the flexibility to change and adapt as needed. On the right side there, you can see in terms of raw materials that we use, So over half coming from coconut oil and palm oil. Coconut oil is 100% domestically sourced. Palm oil, as well as some of the other raw materials are imported. So over or approximately 40% of raw materials denominated in US dollars. And on the bottom left, you can see there technology spending. So this includes IT as well as R&D. So this has gradually been increasing over time with the exception of year 2020 when there was so much uncertainty during COVID. But as you can see, we are still continuing to spend on IT as well as R&D with spending up by 32% versus last year. In terms of the balance sheet, no major surprises. So you do see, so one other reason why interest expenses started to come down is you can take a look at the fourth line there. Borrowings are lower from $17.1 billion. End of last year, for the quarter, we ended at roughly 15.5 billion or a change of 1.6 billion pesos. As the cash flow situation continues to get better and as we're able to afford it, we will likely continue to slowly pay down our debt. So you can see there in terms of debt equity, The ratio has improved from 0.82 to 0.72. And in the next slide, you can see there, in terms of interest cover, we're at five times. Net debt is at 11.9 billion, coming from over 14 billion pesos last year. Average cost of debt is at 5.6%, which is among the highest interest rates that we've seen for a while. And we'll see more details in the next slide. So here we can see compared to the last eight years, our changes in net debt. So that's the green bar. So you can see how debt started to increase as we constructed the plant, but it's already peaked. Net debt has already started to come down and will continue to come down going forward. Consequently, interest cover did drop. So currently at five times from a peak of over 30 times three years ago. And interest expense, sorry, interest, our effective interest rate has been going up. But not much higher than the peak that we saw in the last couple of quarters as well as during that high inflation period in 2019. In terms of working capital, no major surprises. Accounts payable steady at 24 days. Inventory actually slightly better at 101 days compared to 111 days before. Receivables also fairly steady, up by one day compared to last year. Overall cash conversion, we did see a slight improvement by 10 days, currently at 133 days. Here's a little more detail about the award that we were given by the Intellectual Property Office. So it's called the Gawad Yamang Award. ESIP award. So basically it deals with having inventions that were able to commercialize and benefiting the country. There's a lot more detail of this in our press release. In terms of the stock, so currently D&L is ranked number 55 among the largest Philippine stock or listed companies by market cap. Average daily trading average is at roughly 230 000 us dollars in terms of ownership so the public float is at 27 but roughly half is owned by foreigners and um you can see the next slide that uh we are continuing to participate in various investor events, either conferences or roadshows. So, both abroad as well as in the Philippines. That's it for the presentation. So, we're open to Q&A.

Thank you, Alvin. So, to our participants, if you would like to ask a question, you might either raise your hand via the Zoom app or type your question in the Q&A box below. We have a couple of questions here. So the first one comes from Joyce and Ramos. So can you share what would be a normalized CAPEX moving forward?

So it's a little hard to predict because we know what our CAPEX was before. uh, before the start of the construction of the new plant. Um, sorry, Krista, could you please show that there? Thank you. So that was coming in at roughly 450 million pesos. Um, the new plant, um, so here's the thing, uh, with a new plant, you're not expected to be, um, upgrading anything in terms of what you recently bought and commissioned. Um, However, as much as we tried to plan and... build everything that we expected to use. You know, a lot of this initial planning took place seven years ago, 2017, 2018. So fast forward, we have the plan up and running now, and slowly more lines are starting up. So it's ramping up. But as we are doing this, we're getting more feedback from our customers in terms of what they need, what they want to use. And some of that feedback, the understanding is what we expected seven years ago and what the customers need today. Some of them have changed. So it means that there may be a few, so it won't be super expensive. It won't be in the same magnitude of what we've been spending the last five years, but there will, there are some new equipment, some new lines, which we didn't anticipate having to buy now, which we are actually looking at procuring. So there will still be some of that. Um, However, as you can see, it will still be at a much lower pace compared to before. But what the new plant, one thing it does give us, it gives us the room to add a lot of these new lines because we have a lot more space to do it with the new plant. That's one of the things that we... have learned in over 60 years of manufacturing, which is when you build a facility, it's much better to build it extra large so that there's a lot of room for future growth. So we've done that with our new plant. It means that when you want to add more capacity, the cost isn't as much. So sorry for the long answer, but essentially what it means that it's still a little hard to peg down what the going like stable run rate for CapEx will be just because we have this new plan and we have a lot of new feedback from clients since they know that we now have this new capability with the new plan then the demand and the interest has changed and so there are more things that we can do

Thank you. The next question comes from Jason Mock. It seems that utilization of the new Batangas plant has been increasing given the narrowing of the quarterly losses coming from the new plant. Would it be fair to comment that the plant should be profitable next quarter with even more volumes? At current break-even levels, what would be the rock utilization level of the plant? And to add on, what utilization rate should we aim to achieve next? or desired level of profitability and by when?

That's a great question, Jason. Thanks for that. I don't want to commit yet that the new plant will be profiled by next quarter because that would be extremely fast. To have it profitable in less than one year from commissioning is way ahead of our expectations. But the marching orders are there in terms of what we've told the guys running the plant, the marketing guys. uh, everyone is aware that the load is very heavy in terms of amortization in terms of depth. Uh, so, uh, we are trying, um, uh, it is possible, but at this point, I, I don't think I should make any such commitment yet. Um, in terms of break even levels, um, good question. Uh, Currently, we're at below 50% utilization, and we're almost breaking even. So, sorry, Krista, could you go back to that slide, please, that shows the plants almost reaching break-even? There you go. I would say once we hit 50%, we're probably at break-even already. That's a rough approximation. And yeah, hopefully we hit within the year. So that means by second half, the new plant, Knock On Wood, would already be positively accretive to our income.

Thank you. There's a follow-up question from Joyce. So notice a divergence in price movement of coconut and palm oil. So coconut oil prices are picking up. Can you share color and why you think that's the case? Is it a factor of El Nino? And do you think this will persist for the balance of the year?

You know, there are a lot of factors affecting both coconut and palm. But if you look at the... 12 year chart. So that's the middle part of this chart. You can see that the gap between coconut and palm oil. So it recently did increase, but I think the bigger factor here is that gap became almost nothing two years ago. But if you look at the historical difference in price, there usually is a gap between coconut and palm, and usually the gap is much bigger. So, I think the anomaly isn't so much that the gap is wider now. The anomaly is more that the gap became almost zero two years ago.

Okay, thank you. Another follow-up from Joyce. For HMSP, which segment should drive the margin expansion? Where do you expect product mix to end this year?

Thanks, Joyce. So, that's like asking me which is my favorite child. In terms of margin expansion, overall, we are optimistic that all of our segments they do have room for margin expansion. And it's really a function of not just our specialty nature, not just the fact that we customize a lot of the products for our customers. It's also a factor of the investments that we make in R&D in terms of the capability that we introduce that can really set apart our products from our competitors. And more importantly, how we can fill the needs of our customers. So I would say pretty much all of our segments do have that ability to have margins still go up. So, in fact, Krista, could you go to the food slide, please? I think it's slide 19. You can see here. So if you just. uh focus on the first the third and the fourth box so box one three and four so take a look at the gross margin there so it starts at 22 percent for specialty facet oils to over 30 percent For the other two boxes, the margins for these segments were at low double digits maybe 20 years ago. They're significantly higher now. As we do more specialty products and do more customization, Those margins can continue to go up, and we believe that there's still room to go up. As an example, that's just food, but that same example we would like to see across the other segments as well.

Okay, thank you. Next question from ariankomarvigeria.com. So two questions. One, how competitive are your products in the overseas market? Second, what arrangements do you have for the export of your products to the US, Europe, and Canada?

First question, in terms of competitiveness, we're very competitive, especially when it comes to products. where there's a unique ingredient in it or an ingredient where we have an advantage for example coconut oil um with the philippines being the largest export of coconut oil and with our you know we've been working with coconut oil for over 40 years so we have Everything from the very good contact with suppliers and the supply chain. We have world-leading testing equipment, R&D, and so forth. So that's one side of our ability to increase our exports. Number one, we are very competitive. Number two, we're just... starting in exports. So we're just a drop in the bucket in terms. So for example, if you look at coconut oil exports, so the Philippines is the world's largest exporter of coconut oil. But if you look at what's being exported by the country, it is mostly coconut oil in crude form. Crude meaning it's just the oil that's a result of crushing the copra and and it's packed and then shipped as simple as that so a lot of value add is being done outside of philippines what we are interested in doing is doing a lot of the value add here in the philippines controlling the quality and adding further value add by even going into formulations and even the packaging so removing a lot of the headaches for the export customer so there's a lot of potential from that the second question is about exports to us europe and canada uh We have a lot of our guys traveling around the world, meeting customers. And we've even gone outside of the expected markets, so markets as far as Eastern Europe, Latin America, of course, Asia, Pacific, from China all the way down to Australia, New Zealand. There is a lot of interest in products which are sustainable and which have unique properties. And we believe coconut oil can contribute. And in terms of an ingredient, there's a lot of interest in it.

Okay, thank you, Alvin. Sir Jun now has some inputs in the chat box. Sir Jun is the president and CEO of Chemez. Sir Jun, would you like to share some of your insights to our investors?

Yes, thank you, Krista. Thanks, Alvin. One thing that's quite important to our strategy, being a B2B company, is we are trying also to... make sustainability an easier choice for consumers. While we are not serving consumers direct, we are working with retailers who can make finished products ready for consumers. The retailers are the ones who we are working with who like carbon footprint. Eventually, what they are going to offer their consumers would be products that are more conscientiously sourced, and we provide that with our Batangas facility. That's part of the strategy to go downstream to add a bit more value to our product range. We go from selling ingredients to semi-finished or finished products.

Thank you. Thank you, Sergine. The next question comes from Brad Verbitsky. Do you expect to continue to have a positive working capital cash contribution for the whole year or will the positive cash flow from the first quarter reverse in the coming quarters?

Hey, Brad. So if you look at where the positive free cash flow is coming from, it's mainly from... the change in working capital and the capex. So in terms of change in working capital, as long as raw material prices are stable, or as long as there are no huge spikes upwards, then we do expect that it may not be as big as going forward, but at least it won't be a drain. So what we saw in the last couple of years with raw material prices going up, just a huge amount of cash being taken up in working capital and that literally sucked out a lot of cash from us. So as long as raw material prices are stable and it doesn't look like there are any reasons why there would be any volatility or any reason why raw material prices would rapidly increase. So assuming that happens, then we should be fine there. Then if you look at CapEx, we're not expecting major spending. Even if we do end up spending a couple of million on a couple of lines here and there, it's not going to be a huge number. So when you look at all of these expenses, CapEx and so on, not being so big and with EBITDA coming in quite nicely, then we should, we're expecting, so short answer, we're expecting free cash flow to remain positive not just for this year but for for quite a while okay thank you next question comes from christina ulang what's the outlook for commodity prices relevant import and selling prices impact on your profitability for the rest of the year um you know i wish i had a crystal ball and i'd make a lot of money if i if i could forecast where prices are going um So hard to say, but I think we came from a with a lot of the difficulty supply chain, the last couple of years with prices peaking as well. Two years ago, I think that period might be over. There doesn't seem to be a lot of reason. So So there's a lot of talk about El Nino affecting agricultural output. But then again, you have weak consumer economies, which means demand might not be so strong. So overall, the two might be balancing each other out. But, you know, it's just something that's impossible to predict, unfortunately.

Thank you. The next question is a follow-up question from Christina. Any supply contracts already for the plant in place? For what product and with whom? Any hedging strategy for input cost? Appreciate if you can elaborate.

Thank you. Okay, so the first part of the question, we typically don't sign supply contracts with our customers. First, we don't want to be tied down. We want some flexibility, especially in terms of changing prices. And I guess the other way to look at this, even though there's no explicit written contract, implicitly, For a lot of our customers, we end up with a lot of commitment and a lot of stickiness because of the type of products that we make and the customization that we do. So what it means that even though there may not be a contract implicitly because of the stickiness, our customers usually end up continuing to come back and buy from us. I can't mention, I'm not at liberty to mention any names currently, but if and when there's something large enough that merits disclosure, we will be disclosing that. In terms of hedging strategies, we find that the best way to hedge is just to really move our selling prices every time raw material prices move. So essentially passing on price changes to customers. That's not a perfect hedge, but it's pretty close. And it's better than speculating on where prices are going, which can get very dangerous.

Okay, thank you. Follow-up question from Joyce. How much of the growth in exports business is related to Ventura or Bungi versus new customers?

So Ventura and Bungi are still there. And we're also exploring a lot of new things with them. But the export growth is benefiting a lot from new customers.

Okay. Thank you. The next question comes from Stephen Oliveros. Can you provide more color on how H&SP and commodity volumes are faring so far in the second quarter of 2024?

It's too early. It's only May. But what I can tell you is that in the first quarter, January was fantastic. So you guys probably remember when we disclosed the results end of Feb, we were quite optimistic in our tone. We even mentioned we were confident about net income hitting double-digit growth rate for the year. And that was because we saw what happened in January. However, Feb and March was another story. Feb and March, you know, we saw inflation really kicking in, still pretty high. I think for April, inflation came in at 3.8%, but food inflation was above, I think, 6%. So it's still really hitting the consumer economy. And as long as that's happening, it will have an impact. on our business still so uh um so we're still cautiously optimistic i guess but in terms of uh you know optimism um it's not things are not as optimistic as we are not as uh as positive compared to what we saw in January, just because Feb, March, and what we saw in April, the inflation report, inflation is still pretty high.

Okay, thank you. The next question comes from Daryl Wong, referring to your recent press release on your upcycling technologies. Could you share what are the growth plans for this segment? What are you excited about for this product? Separately, how much does it contribute to revenue now and how much do you think it could be in the future?

So overall, Plastics makes up 10% of total revenue. So just carving out the upcycling portion, it's still fairly small, but it is growing, particularly because of the interest from our customers and our own interest as well to make a difference and to make use of what's already there instead of using new material were able to reuse a lot of material that people thought didn't have a use anymore and were costing a zero or throwing away. That will only grow, not just because of pressure from environmentalists and ESG initiatives and so forth, but it just makes sense that if there's low-cost raw material that you can use to make something of value, then the margins are better. So there's a lot of that that we are continuing to explore. So currently, it's still very small, but the growth potential is there.

Thank you. The next question comes from Prashant Premkumar. As demand is so strong, is there any timeline available timeline for one, acquiring more land in Batangas, and two, potentially shutting down some of the older plants in Chezon City?

I would say we're okay in terms of land. We still have some space in our Batangas site. We haven't fully built out on it. So there's still a lot of room. And you'll see this when we do the plant tour. So there's no pressure for us to have more land. So you can see here actually in this picture, there's still that space on the left outside of the rectangle. There's a big chunk of land still that we have control over, but we haven't built on yet yet. So we're still okay. And in terms of shutting down older plants in Quezon City, no plants, everything. So what we built in Batangas does not replace everything. any of our existing facilities um our existing facilities located in the middle of metro manila mostly from a logistics perspective uh have an advantage they're closer to the port they're closer to the north uh and you know with the traffic in metro manila um it you do have an advantage being and being more flexible with more locations uh but uh no we're happy with the way things are but what we built in batangas is really supplementary and it it's to add and not replace capacity okay thank you the next question comes from jojo abad how do you plan to fund your three-year maturing bond this year So we have the three-year bonds maturing September, and we issued that at 2.8%. I wish I could issue another three-year bond at 2.8%. There's no way that's happening. Yeah, as you can see there, it's 6.5% for three years. Is that bivalve or...?

This one is BVAL.

Okay. So that means we'd have to be a premium over BVAL. So you're close to 7% if you issue. That's a non-starter for us because our short-term rates are not that high. So financing will just be through internally generated cash flow and short-term debt.

Okay, thank you. There are no more outstanding questions that I see from my end. So again, to our participants, if you would like to ask a question, you may either raise your hand via the Zoom app or type your questions in the chat box. Okay, there's a question from Denise. Could you share your outlook expectations on cameras this year? Are customers already preparing ahead of the effectivity of the higher biodiesel blend? And if so, how significant could this be?

I think it's fair to say that everyone is preparing. But to be honest, a lot of the suppliers were already preparing 15 years ago. So the biofuels law started in 2006, or the law was passed in 2006. The 1% came into effect 2007. The 2% came into effect 2009. And the expectation was the blend would increase to 5% in a short period of time. So that didn't happen. um but because of that expectations the blend going up since back then um at least from the suppliers perspective everyone so the last thing we wanted was for anyone to say that the suppliers were not ready to supply b3 b4 b5 so the whole biodiesel industry in terms of supply already ramped up capacity um that's why the biodiesel business is in is fairly weak now because it's in an oversupply situation uh capacity utilization across the board probably at around 30 percent roughly So, oh, yeah. So, yeah, the answer is we are definitely ready on the supply side. On the customer side, it's just a matter of, you know, they're already buying 2%. It's just a matter of adding 1%. It's not a major issue.

Okay, thank you. I don't see any more questions from my end, but in case our investors have some last minute questions, let's give them maybe one more minute. Okay, there's a question from Rainier. I didn't catch why HMSP shifted back to 15%. Was it a ramp up in commodities? Yes.

The answer is yes. So Chris, if you go back to the volume change slide, please. So that's the answer there. Commodities volume grew by 36%. High margin also grew, but by a lower 13%. And that's the main reason why there's a change in the mix. It's really much faster growth in commodities. But both did grow.

Okay, thank you. Another question from Miguel Reyes. So what is the bulk of the interest expense incurred in the quarter related to?

Oh, just debt. So we ramped up debt as we were building the plant. And so that debt peaked last year at 14 billion. I think that's in slide... 28 um so there you go so so we started construction end of 2018 so initially we were using internally generated cash flow to pay for the construction but uh After a while, we had to slowly add debt. Then we issued the new bonds in 2021. So that added to the debt as well. And we finished construction last year. So that's why the debt peaked. But essentially, that's what the bulk of the interest expense went to. It's really the debt incurred from the construction of the new plant.

And can I add something? So that's right, the debt has increased significantly over the past couple of years. In the third quarter of 2023, so we declared the start of commercial operations. Accounting-wise, during the construction of a new plant, interest expenses are capitalized. But once the plant started commercial operations, we are now required to book the interest expenses in our income statement. So that's why you see here, you see that in the first quarter of 2024 there, interest expense... Sorry, 2023, first quarter of 2023, it was only 97 million. And that's because part of the actual interest expenses that we pay are still being booked in our balance sheet as part of the cost of the new plant. So now in the first quarter of 2024, since we are already operating the plant, we can no longer capitalize that. So that's why there's a big jump there.

Thanks, Rizal.

I don't see any more questions from my end. So if no more questions, that concludes our first quarter briefing for the year. So as usual, if you have any more questions or clarifications, you can always reach out to our IR team. So again, thank you for joining the briefing and see you next quarter.