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

Good morning, everyone. Can you all hear me?

Yes.

Okay. We can start? Okay. Good morning, everyone. Thanks for attending our results presentation for the full year for D&L Industries. So just to show you our cover slide for the deck, this is a picture taken about maybe 1 or 2 weeks ago of the construction in Batangas. So as you can see, it is going quite well. At least externally, a lot of the structure is almost done. Okay, without further ado, let's get the show on the road. So next slide, please. So the highlights for our results. For 2021, we did achieve higher net income by 31% versus the previous year. And this is slightly ahead of pre-COVID 2019. We also saw our high margin specialty products, or HMSP, volume higher by 13% year-on-year in the fourth quarter due to lower quarantine levels. And then our exports, continuing to do well with the value of exports reaching over PHP 10 billion and exports now making up 1/3 of overall revenue. And in general, we do feel that there does seem to be a lot of momentum and optimism from the lower COVID alert levels. Okay, next slide, please. So showing you the net income figures. So for the year 2021, we hit PHP 2.64 billion in net income, 31% higher than the PHP 2 billion that we reported in the previous year and slightly ahead of the PHP 2.62 billion reported in 2019, which is pre COVID. And on the right side, you can see there the breakdown of net income: Chemrez group, number one; food, a close number two; and then specialty plastics, third; and then consumer products ODM at the fourth. Okay. Next slide, please. So this is a look at the condensed income statement. So we hit -- I believe it's a record in terms of our revenues. For 2021, we exceeded the PHP 30 billion in revenues, 42% higher than the year before. Although the bulk of this is from higher prices, passing on higher prices. And later on, we'll show a couple of slides that gives a sense of how prices have been continually moving up. Actually, not just recently but even in pretty much the last 2 years, prices have been continuously moving up for various reasons. And compared to your 2019, you can see the growth there as well. However, on a quarter-on-quarter basis, so fourth quarter of 2020 was relatively -- had relatively lower COVID restrictions. And it was also not as volatile in terms of raw material price volatility. So in terms of the -- of net income and margins, we did see lower net income and net margins in the fourth quarter of 2021 versus 2020 and even compared to the third quarter. We're going to go into more details in the next couple of slides. Next, please. So a quick look at the high margin specialty products volume. So this is where the bulk of our profits come from. So you can see from this slide that we were doing quite well 2017 and then -- and even in 2018. Although 2018, when inflation fears started, I remember food inflation at that time went above 10%. And even towards the end of 2018, early part of 2019, that had an effect. So you can see there our high margin products volume starting to drop. And 2019 was also affected by the late passage of the national budget. Normally, the budget is passed around December or January. That year, it was passed in April. And there were the trade wars as well that also negatively affected our business. And of course, you have COVID in 2020. But you can see there the recovery starting in 2021. Although if you go through the numbers, since the beginning of 2020, you can kind of calculate that we're more or less still around roughly 20% below pre-COVID levels. If you just add up all of the negative and positive changes, we're still roughly 20% below pre COVID. But good to see that the recovery is continuing. Okay, next slide, please. So this is a look at our volumes across the different businesses, so our four major segments. Across all segments, you can see positive increases in the high margin volume with average volume up by 12% for high margin. For our commodity side, the commodity business, which is roughly 40% of revenues, you can see that food commodity volume was up. However, biodiesel, which is the low-margin segment of Chemrez, volumes slightly down, just down by 2%. Overall volume is actually still up by 11%. Okay, next slide, please. For our exports, which have done very well during COVID, with last year, exports as a percent of revenue reaching 29% and -- sorry, in 2020 and then in 2021, reaching 33%. And on the right side, you can see there. So I remember from a couple of years ago, our exports, about half were from the specialty plastics business. But as you can see, the food side of our business has done very well in exports as well as the oleochemicals as well. So these two segments, there's a lot of awareness especially on health and safety during COVID. And this was something that our company benefited from in the last 2 years, especially on the export side. Okay. A look at our product mix. So one impact we have really seen during COVID for a lot of our customers, they really focused on their core products. They were not as eager or as ready to go into a lot of new formulations, customization. And so a lot of their requests -- so normally, we will get a lot of requests to come up with new products for them to launch. This went to virtually 0 at the beginning of COVID. And it's still -- although it has -- a lot of it has come back, it's still quite far from the levels we were seeing before. So all of these -- all of this reduction in requests for new formulations, new products, it just affected -- had a negative effect on our product mix as you can see. So right now, we're actually at the worst in terms of our product mix comparing to the last 12 years. So the bright side of this, or I guess, the other perspective, despite this deterioration in the product mix, our business is pretty much back to pre-COVID levels. So you can just imagine once restrictions are further eased, people go out more and the economy opens up more and once COVID goes away, then we do expect this product mix to revert back to where it was before. And that means it's going -- it will be positively accretive for our earnings. So that's something we are looking forward. Okay, next slide, please. So a quick look at our high margin segment. So we can focus straight on to the lower left portion of the chart. This shows that during periods of very volatile, or to be specific, rapidly increasing raw material prices, there is a lag. We've talked about this before. There's a roughly maybe 30- to 45-day lag in terms of passing on price changes to our customers. So that is something we are seeing currently. It is something we do experience. And it's something we talk about in general. And it is something we expect when prices stabilize because there is no -- eventually prices will stop going up. Eventually, they will stabilize. It's just the way economics work. Either supply catches up or demand will decrease. Then at that point in time, we do expect margins to revert back to where they were and to go back up. So this is not -- this is something that we do see happen when higher prices -- when prices are accelerating very quickly. And it is something we do see and we do expect to correct once prices stabilize. Okay. A quick look at the commodity business. So there is a similar effect, although not as -- the difference is not as big, primarily because margins for the commodity business are already much lower compared to the high margin part of our business. But it is much easier to -- or more the norm or expected for prices to be changed much quicker on the commodity side. So there is that slight difference between the commodity side of our business and the high margin side of our business. Okay, next slide, please. So a quick look at our cash flows. So no surprises, more cash tied up in inventory receivables. So that's what you see in that big change in working capital. And then you do also see the big amount spent in CapEx. So the bulk of CapEx in the last couple of years has been spent on our expansion in Batangas. And this is something that we -- so we expect that spending to continue towards the end of the year and to start tapering off by next year. In our press release, we did touch on there is a slight increase in the CapEx spend for the plant, primarily from new equipment and new functions we added in recently as well as some upgrades of some of the things that we wanted to build into the plant. Very little effect from increase in prices of materials for construction as the bulk of the plant -- since the construction of the plant has started towards the end of 2018 and the bulk of it was already committed with contractors as early as 2019, we were not affected much by the recent escalation in construction material prices. But there is an increase, expect from the roughly PHP 8 billion, an increase to approximately PHP 9.1 billion for us to complete the construction of the plant. Okay, next slide, please. So if you look at the period before 2020 in this chart, you will see that -- so the middle portion of the chart would be our two most used raw materials, coconut oil and palm oil, which together make up around 2/3 of the raw materials we use as a company. And you can see there that in terms of our raw material -- of the raw materials that we use and also in terms of the dollar-peso exchange rate, which is the chart at the bottom, which is important. Because roughly half or a little over half of the raw materials we use are imported and mostly denominated in U.S. dollars. But for those two reasons, either raw material price or ForEx exchange, we do experience a lot of volatility in our costs. And if you focus on just the period before COVID, you can see that our margins have been fairly steady before. Now the big difference now, aside from the -- there is some lag in the price pass-through. But the other difference is if you recall the chart we discussed earlier on the deterioration in the product mix, that also has had an impact on our margins this year. So -- but we are looking forward to when the restrictions are eased and when COVID goes away, we do expect the product mix to revert back to where it was before. We also do expect the volatility in raw material prices or at least the rapidly increasing raw material prices to eventually stop increasing. There's no way they can continue to increase forever. And so that should also lead to margin stabilizing later on. Okay, next slide, please. So a quick look at overall group results. So you can see from this chart that food continues to be #1 in terms of revenue contribution, although -- so food was the #1 contributor of net income as well before. But as you can see now, it's down to #2. Food actually fell to the #3 spot in terms of net income contribution when COVID started. That's how badly affected the food industry was in general at the beginning of COVID. But as you can see, it has recovered. And no surprises, as restrictions are eased, people are going out more, and we do expect this improvement to continue. So this is a good sign. Okay, next slide is a look at just the food category or food division. So you can see across the board generally good increases in terms of volume and revenue, although overall margins are lower by 2%. And this is again a result of the lag in price pass-through that we experienced, especially for our high margin products. And again, this is something we do expect to be able to catch up to eventually when the prices stop increasing as rapidly as they have been. Okay, next is the -- this Chemrez. So we also see here increases in volume as well as revenue. Although if you take a look at the box on the left for oleochemicals, that is where we are seeing that lag in price pass-through again. But to put things into context, the gross margins that you see there of 16% and overall gross margins of Chemrez of almost 19%, these margins are still higher than where the margins were the time when D&L wholly acquired the business of Chemrez around -- I think it was around 2015, so for a couple of years after our IPO. So yes, margins are lower, but this is temporary. We do expect margins to go back up to where they were once the rapidly increasing prices -- well, the prices of raw materials, especially coconut oil, stabilize. Okay. Next is for our plastics business. In general, it's steadier, increases in volume, revenue and even a slight increase in the margins. So we continue to look at ways our -- so plastics in general is still very relevant. We're doing a lot less in terms of the single-use plastics business, more on the specialty plastics, so everything from automotive applications, parts of appliances for packaging and so forth. Okay. And then finally, we have consumer products ODM. So this segment, if you look at the middle box there, personal care, you can see, is the largest in terms of volume growth. But this personal care division was the one that had fallen the most in the previous year. I think at one point, at the start of COVID, volumes for personal care were down by as much as 80%. So people weren't going out and people needed to prioritize their spending. And so people stopped spending on personal care products. But as you can see, since people are going out again, people are spending again on personal care products, and that's why you see that big increase. So a bit of a low base effect there. This chart or this page shows you the related party transactions related to the fixed assets. So a lot of the land buildings, barges that we use as a company are leased from affiliate companies. So that is our related party expense. So that's on the left side. On the right side, D&L performs a lot of shared services within the group, so everything from HR, admin, finance, accounting, legal and so forth. And net of consolidation, you do see there what is classified as related party income, which helps offset the related party expenses. Okay. Next is our cost structure. So no major changes with raw materials, still making up the bulk of our costs and expenses as a company. And if you were to add up variable costs, so things like -- sorry, if you were to add the fixed costs such as labor, depreciation, rental, maybe half the others, you can see that our fixed costs as a company as a whole probably make up just or around 10% of our total cost and expenses. So we're a very low fixed cost company. So that's what allows us to pivot very fast every time a crisis happens. On the lower left of this slide, you can also see that technology spend, so what would be classified or what would include R&D as well as IT spend. It did dip last year understandably. Since we were doing a lot less new product formulations and R&D for customers, spending is lower or was lower in 2020. But as you can see, some of that has been coming back. So the spend for tech is higher in 2021, not just versus 2020 but also versus 2019. Okay. Next slide shows you a quick look at our balance sheet. So we did raise a -- we issued our first bond in September, 3-year and 5-year. So borrowings are up, cash is up as well, although our debt ratio is still relatively conservative with debt to equity at 0.72x. And you can see there, interest cover is still quite conservative at 27x. You can see in the next slide that our cost of borrowing still remains -- on average, it's still quite low. We have seen in the market that long-term borrowing costs have gone up as far as the BVAL is concerned. But in terms of our short-term borrowings for all of our banks, all our short-term loan rates are still pretty much the same from where they were last year with our average short-term borrowing costs somewhere between 1.9% and 2%, so -- and the other thing you'll notice from this slide, our net gearing has gone up quite substantially, currently at 45%. But even at 45%, still relatively moderately geared. Next slide is our cash conversion. So inventory is still roughly the same from previous periods. We try to keep it at 90 days. Receivables, we have seen a slight improvement and an improvement in payables as well. So overall, an improvement in cash conversion to 120 days. And the next slide shows you -- so as far as the stock, D&L currently ranks #52 in terms of the largest companies in the Philippines, largest listed companies by market cap. And roughly 14% of the company, owned by foreigners. And we are continuing to participate in various conferences, albeit most of them are online. We are planning an NDR in the U.S. in May. So this is -- well, as travel is allowed again, it is something we are looking to do in May. And then a quick look at our expansion plant in Batangas. So from a week ago, the yellow rectangles here are the nonfood expansion plant and the blue rectangle is the food expansion plant and a couple more pictures. But sorry, I think that's -- that's it, sorry, no more pictures. But you can see here really how big this expansion plant is. Just to give you an idea, the whole area of this expansion is double the size of all of our existing facilities. So this expansion plant, the area covers -- the land area covers 26 hectares. And if you're familiar with SM Megamall, SM Megamall land area is about 10 hectares. So this land area is over 2.5x the size of where SM Megamall is. Okay. So that's it in terms of my -- what I wanted to show you in the deck. We're open to Q&A.

[Operator Instructions] We have a couple of questions in the Q&A section. The first one from Koh Sang Lim. Because of the price lag, we have seen margins overshoot to the downside this quarter. Will margins overshoot on the way up when prices have normalized?

That's a great question. However, in our experience, margins don't tend to go up too much. At the end of the day, we don't want to be seen as opportunistic and -- what I mean is -- and you'll see clearly in this chart, when costs are going up, we pass on the price changes, although there is a lag. However, when prices start coming down, we are -- we do pass on lower prices as well. And it helps continue to build that trust with the customer. And so it does mean that there is little chance of margins going up too much. So at the end of the day, the idea is whichever way raw material prices move, we will pass on price changes, so whether it's up or down. And that way, the customers trust that we're not just passing on higher prices when raw material prices are going up, but they don't want us and we don't want to be seen as not passing on lower prices when prices go down.

Okay. We have another question on margins from Joyce. Can you give a bit more color on the timing of the margin recovery? And at what level are your margins -- sorry, at what level are your margins? When you say recover, do you mean the margins back to pre-COVID levels, say, 2019, which was the peak?

So it's -- in terms of the price change, just looking at what we were able to achieve historically, yes, we do have a lot of confidence of being able to go back to where they were. In terms of the timing, it really depends on how soon the rapidly increasing prices stabilize. And so this -- so all of what we're showing you today is really based on 2021. So this has nothing to do with what's happening in Ukraine at the moment. So you can just imagine the effects of -- on raw material prices and on our margins. So you're going to see the same thing again. But in terms of recovery. That is something we do expect. However, in terms of timing, it's much harder to predict. And as much as I'd love to be able to predict when margins will come back to where they were, it's not something -- it's just not something in general we would have knowledge about. But what I can be sure of is that when -- sorry, when prices do stabilize, the margins will come back. And that's something I'm pretty sure will happen.

Okay. We have two questions on earnings guidance, so basically asking what our earnings guidance is in 2022 in terms of growth, rising domestic inflation and geopolitical headwinds.

So we've got two factors that are kind of pulling against each other at the moment. One is a lot of volatility in terms of prices, in terms of the ForEx as well. So costs are going up and margins are being pressured. And I'm sure -- well, it's happening to pretty much everyone. So that's one factor that is -- that would be -- that would lead to higher costs and therefore decreasing profits. However, the other factor, which is more -- well, mostly domestic, but you could say happening in many parts of the globe as well, at least for the Philippines and for some other markets, it does look like COVID is becoming more manageable in terms of no more surges, no more lockdowns, less restriction. You can see people going out more. If you look at Facebook and Instagram posts, people are really going out a lot more. Traffic is getting worse. So that means higher demand. So is one stronger than the other? But -- so on the short term, I think this pent-up demand from people who are not able to go out, not able to travel in the last 2 years, I think that force seems to be stronger at the moment. But longer term, can it keep up? So that's the question. So in terms of the 2022 forecast, we've been doing a lot of timing or forecasting since last year for 2022. And because of what's been happening recently, we've had to throw everything out and start from scratch again. So I am not as brave at the moment to be able to be as -- I don't have as much confidence now to be able to really give a forecast on how well we will do this year. So at this point in time, we are not ready to give any forecast. It really depends a lot not just on what happens to COVID, but what happens in Ukraine as well and how it's dealt with. So it's unfortunate, but that is leading to a lot of uncertainty. And because of this, right now, we really aren't in a position to give any forecasts.

Okay. Another question from Rainier Yu. For fourth quarter 2021 record-high revenues, how much came from passed-on prices? And how much came from volume growth?

So revenue is up by -- in the fourth quarter is up by 60%. And in the chart, one of the charts for volume growth, higher volume -- well, volume is higher by 11% overall for the company. So you could say the bulk of that increase in revenue is from passing-on of higher prices.

Okay. We have a question from [ David Ro ]. Can you provide a general road map on expected CapEx and free cash generation over the next few years as Batangas begins operations?

David, great question. So once the plant is finished by the end of this year, there will still be some -- a little spending for the expansion plant as we start operating it, as we start to debottleneck but definitely not the same levels that we're seeing as we are seeing now. So we are expecting CapEx numbers this year, it may not be -- actually, even for 2022, the CapEx number would likely -- it may not be as high as it was in 2021. It may be a little lower, but it will definitely be a lot lower after 2022. We -- and since this is a huge plant with a lot of excess capacity, we don't expect to be -- to have major CapEx going forward for the next couple of years. So in terms of CapEx, quite light 2023 onwards. So therefore -- so lower CapEx should be cash flow positive. However, with the -- so what -- so that big increase in working capital I showed earlier, that was just for 2021. It does not take into account the increases in prices because of what's happening in the Ukraine. So we do -- it's something you will definitely see at least in the first quarter. And if prices continue to go up in the succeeding quarters, that will still have an impact in the next quarters as well. However, just looking at past history and looking at economic theory, there's no way prices will go up forever, right? Eventually, new supply will come in or demand will decrease and eventually prices will go down. So eventually, even the increase in working capital situation, that should subside as well. And that's something we do expect. So I'm not sure how long it will take. But it is, I would say, just a matter of time before we're back to a situation where we will be positive free cash flow again in a big way. Thanks, Dave.

We have a question from Cristina Ulang. Can you share a sense of how much more extra production and sales volumes would the plant enable among -- upon its operations commencing? And what is the post-expansion product mix and potential margin upside resulting from the expansion?

So we haven't made any disclosures in terms of what the new plant can do. And this is something where we tend to be a little more careful about just from a technology perspective, from a confidentiality perspective. What I can do is to give you a sense of scale. I did mention earlier this location, although we're not building on 100% of the land area for this expansion. We are building on maybe 60% of the land area. But you can also appreciate that in terms of a lot of our plants' existing facilities were built over 10, 20 years ago. Technology today is newer. The processes are newer. It's more -- things are more efficient because it is a new build catering to a certain volume, unlike our old plants, where we would be bolting on new additions, which are not as efficient compared to a new build. So for many reasons, efficiencies are higher with this new build, lower waste as well. So in terms of capacity, definitely, there will be -- definitely is going to mean a big increase. So actually, our challenge is how quickly can we ramp up or add new business, new customers, new orders for this new plant so that when it's up and running, that we cannot only offset the new depreciation coming on to our books but offset that and have it become income positive or accretive as soon as possible. So that's really the big challenge for us.

Another few questions from Cristina. Can you share some insights on the Philippine coconut market conditions, foreign palm oil market in light of the surging commodity prices and how you're navigating raw material procurement, managing costs? What strategies are you using?

So the chart -- one of the charts we showed earlier showed how volatile prices have always been for vegetable oils. And -- sorry, Crissa, could you please go back to that chart? Thank you. The middle portion there, the brown line, so that's coconut oil. If you take a look at the period between 2010 and 2011, you can see that in a 1-year period, coconut oil prices actually tripled and then fell all the way back down in 2 years. I think we have a chart -- a 2-year chart for coconut and palm oil. We can show that now as well. Thank you. So here, you can see that this is a 2-year chart. And from 2020, the -- which one is coconut oil? Is it the blue line? Okay, it's the blue line. You can see that -- or even for palm -- so this is actually coconut oil is the blue line. Palm oil is the white line. Sorry -- or did I get -- yes, okay, that's correct. You can see that prices have almost tripled in the last 2 years from roughly, what's that, PHP 65. Coconut oil went up to PHP 200. So this is actually a normalized chart just so that we could put the two together. But they do move -- there is a very high correlation with coconut oil and palm oil. So in general, the vegetable oil market is heavily influenced by the price of crude oil, especially after biofuels -- the biofuel industry started. But the big effect actually starts from soybean oil. And then soybean oil affects palm oil and palm oil prices then affect coconut oil. But when the price of one goes up, pretty much everything else starts to follow. So there is a lot of correlation. In terms of strategy and what we can do, so it's very tempting to speculate. But the problem with speculating is if you get it wrong, you can also lose a lot of money. So we would rather be a steady business that passes on that difference in margin, whether it's going up or going down, rather than taking big bets and possibly getting large gains but also risking large losses as well. Because from what we've seen in the past, yes, prices can go up like we have been in the last 3 years. But you never know when that will peak and you don't also know how quickly it will go down when it does go down. So we'd rather be safe and steady rather than making big swings.

Okay. Another question from Cristina. What foreign markets are you developing at the moment? What growth do you foresee in these markets? And what are the product offering performances in these markets? And another part of the question is how much would the global slowdown impact the export business?

So we're actually okay as far as exports even before this new expansion plant is completed. If you look at our exports, we're now at roughly 1/3 of our revenue coming from exports, so -- and we have been exporting for quite a while, as you can see from this chart, averaging about 20% of our revenue coming from exports the last couple of years. So we have a lot of customers that we know who have been buying from us. But the bottleneck has always been our capacity. We've never had sufficient capacity to take on large export orders. So that is the main reason why we built this new expansion plant to allow us to tap into this large export market. We know it's there because we've been talking to these customers and serving their requirements for a while but in a much smaller way. So our expansion plant is located in a PEZA, or Philippine Export Zone Authority, site. So we are required to export a minimum of 50% of what we make to comply with the PEZA requirements. And so that is -- so we do have relationships. But our bottleneck or what was holding us back was really the lack of capacity. And it is something we are able to address with the expansion. In terms of which markets, we go as far as Americas, Western Europe and Asia Pacific, which is China all the way down to Australia, New Zealand. We already have existing customers and we want to add more.

Okay. We have a question from [ Krisela Canuat ] How is the company hedging against the depreciating pesos, given that you source your raw materials from abroad?

So we do have a slightly natural hedge. So Crissa, could you turn to the cost structure slide, please? So you'll see from the cost structure slide that a little over half of our raw materials are imported. And if you recall from the earlier export slide, about 1/3 of our revenue is exported. So if you do some quick back of the envelope calculations, you can actually calculate or deduce that the peso value of our exports has -- our peso value of exports was actually much less than the peso value of our imports before. But more recently, our exports have actually caught up. In fact, I believe in the last 2 years, our value of exports have even started to exceed the value for imports. So you could say that, in a way, we already have a natural hedge. Almost all of our importations are denominated in U.S. dollars. And the same, almost all of our exports are also denominated in U.S. dollars. So that's one way we're able to hedge. And the other way we hedge is we pass on price changes. So we do have facilities set up to do paper hedging. I remember signing this really thick ISDA document with one of our banks. And I believe we did, I think, one transaction many, many years ago to -- as far as the ForEx was concerned. But we haven't done any since then. We're more comfortable -- if the opportunity presents itself and if we do need to -- if we see that there seems to be an imbalance, let's say, in the exchange rate, it's something we can exploit, we can do it. The facilities are set up. But at this point in time, we'd rather just have the natural hedge as well as the price pass-through. That's good enough for us.

Okay. And we have a question from [ Steven Aliperos ]. He wanted to ask how much the remaining CapEx is to be spent for the EBITDA on this plant.

Great question. I think we spent PHP 6.2 billion as of the end of 2021. So that leaves a balance of roughly PHP 2.9 billion, or let's round it up, PHP 3 billion for the -- to complete everything. So that adds up to the PHP 9.1 billion. So I mean, just looking at that and looking at how much we spent in 2021, we will be spending less already compared. So the peak of the CapEx spend was in 2021.

Okay. A question from [ Justin Cheng ]. Can you talk a bit more about the main reasons for the delay to the start of commercial operations of the new plant and whether we could see more delays due to the tensions in Ukraine?

So delays, several reasons, COVID, of course. Every time you have a lockdown or when people catch COVID, you have to isolate, people can't go to work. So a lot of the delays were from that. And we were also seeing a lot of supply chain issues even last year, not just because of what happened with Ever Given in the Panama Canal (sic) [ Suez Canal ]. But in general, again a lot of it traced to COVID, a lot of manufacturing around the world had slowed down. People were not expecting the economy to pick up as quickly as it did. And when it did, the surge in demand, the supply could not keep up with the surge in demand. And so that was also a factor. There was another effect, also COVID-related. A lot of the permit certification that we needed to get, we were not able to get in time. A lot of the delays again due to COVID restrictions and people getting sick and so forth. So quite a few reasons. Now in terms of COVID, it doesn't seem to be as big a factor anymore in terms of supply chain bottlenecks. The bulk of what we needed to put the plant up, it has -- we've already received them. So that should not be a factor anymore. Price increases, that's not a factor really for us because the bulk of these costs as far as the plant is concerned were made quite early on, over 2 years ago, 3 years ago. So we didn't want to see these delays. But one effect of the delay, of course, is that the depreciation, the start of the depreciation is also delayed because we only start depreciating once the plant starts to operate. So it's not all negative. But we are very much looking forward to getting this plant up and running. We've been planning it for, what's that, more than 3 years, almost 4 years. And it's something we are quite excited to get up and running. Sorry, the second part of your question, could we see more delays due to the tensions in the Ukraine? Not so much because pretty much everything that we needed is already -- has already arrived. We're putting it together. And so we don't think there's going to be any reason for delay because of what's happening in Ukraine. However, if there is -- if there are more variants of COVID and if more -- if we do see more restrictions or lockdowns, that could be one possible reason for delays. Not just that people can't get to work, but when it comes to -- so a new plant like this, you need a lot of certification. You need a lot of audits. And that will be affected if there are lockdowns and restrictions. So thanks, Justin.

Okay. And there's a question from -- there's a question actually from one of the attendees, [ Arvin ]. Okay, maybe that was just a mistake. All right. We have a question from Daryl Wong in the Q&A chat. On the PEZA requirement to export more than 50%, is there a time requirement when you must hit this figure? Also, can I confirm that this is 50% of production/sales? Are there penalties involved for noncompliance if it appears?

Daryl, great question. So PEZA usually can give some leeway, maybe a year, before you need to comply with a 50% export requirement. So I have heard that it is something PEZA can give a little flexibility on, so maybe 1 year. The question of whether it's 50% of volume production or of peso sales, usually, it's of peso sales. In terms of penalties, if we don't comply, we don't qualify. We could possibly be disqualified from the incentives. So that would mean income tax holidays and all the other incentives. Or it could mean payment of duties, VATs and other expenses for the importation and the revenue as well.

Okay. We have another question from Cristina. The coconut water market abroad is expanding. Are you keen on it? Is it something that would be worth your while in terms of allotting some capacity for it and selling? Do you have desiccated coconut production? Or are there any coconut byproducts or base products you're launching soon?

Okay, this is a great question. And I do admit, it is tempting to go into all of these byproducts because there's a lot of demand. It seems to be very much aligned to what we're doing. However, we are really more a company that uses chemistry and innovation to come up with new products. There really is not much chemistry or R&D involved with things like coconut water or desiccated coconut. And in -- from that sense, it's kind of not aligned with what we want to do, our direction of where we want to go as a company. So -- and I'd say if this was something we were interested in, we should have gone into this much earlier or way before. Because when the opportunity presented itself back many years ago, there weren't that many players involved in these industries. But I'd say now there are a lot more players, so there's a lot more competition, not sure how long these margins can hold up. But in general, we'd rather stick to the chemistry side, the innovation side, even for things like coconut oil rather than going into the -- just selling byproducts but not much innovation involved. Thanks for your question.

Okay. We have a question from [ Arvin ]. What has changed in the supply chain since the announcement of Batangas, for example, companies looking outside of China as a more reliable sourcing base?

Wow, this is a good question. So we did start getting hints from a lot of manufacturing companies who had large plants in China. And this happened, I think, even several years ago, that there were -- so a lot of companies were starting to comment that they had too much capacity concentrated in China, and so they want to start exploring sites outside of China for manufacturing capacity, whether it was new builds. Some of them, I believe, even -- some of them may even have closed down some of their facilities in China. But I think it's still fair to say that there is a lot happening in China. And China itself is also -- it also represents a very large market even for a company like us. So in that sense, it would be what I would call still very relevant for us. Other changes in the supply industry, I think in general, any company that before would use just-in-time or lean manufacturing as a core competency, I believe what's happened in the last couple of years with a lot of the disruption in the supply chains, having excess inventory isn't such a sin or such a bad thing anymore. So we've always had anywhere from 3 to 4 months of inventory. And a lot of that was due to the inefficient infrastructure in the Philippines, everything from congested ports, traffic, high cost of transportation and so forth. We've -- as a company, to be able to continuously serve our customers and to be able to assure our customers that we will not run out of the products they need, we always -- we ended up being the buffer between our customers and our suppliers. So we always had to have that little extra material just in case. Would operating leaner and having less inventory translate to lower working capital and better use of cash? Sure, definitely. But on the other hand, what we've seen with the supply chain issues is that being caught without inventory can actually cost a lot more than having excess inventory. So it's that balance that we continually need to have. And so far, knock on wood, it looks like we do seem to have gotten that balance right. But it's something that we will continue to evaluate.

Okay. That seems to be our last question in the Q&A chat.

[Operator Instructions] Okay. So if there are no questions, so that concludes our full year 2021 briefing. As usual, you can always reach out to our IR team, so Alvin, Ainslee and myself, whenever you have any questions. So once again, thank you for joining the call, and have a nice day. You may now disconnect.

Thank you, everyone. Thank you.

Thank you.