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

Good morning, everyone. Thank you for joining us. We are here to present the Third Quarter Results of D&L Industries. I am Alvin Lao, the CEO and President of D&L. Okay. Let's get going. So first bullet point, you can see there. We're happy to report that for the first 9 months of the year, we hit record earnings of PHP 2.5 billion, which is higher by 17% versus the year before. For the third quarter, we earned PHP 910 million, which is also a record, and that's higher by 18% compared to the previous year. Second bullet point, our margins for our HMSP or high-margin specialty products has continued to recover and is -- so the HMSP margin is higher by 2.5% from the low that was hit in the first quarter of this year. The third bullet point, we did also see a good recovery in our return on equity and return on invested capital. So ROE is currently at 17%. ROIC is at 13.8%. Number four, with a strong momentum, we do see that earnings are on track to possibly exceed the full year income which we hit in 2018. So in this slide, you can see that -- so what we just wanted to show is the income from the first, second and third quarter of the year, displayed against the background where you see causes of volatility, which are volatile raw material prices, inflation and interest rates -- sorry, and also the dollar-peso exchange rate. So it has been quite a challenging year in terms of a lot of these factors. But despite that, we were able to continue to see improvements in our income every quarter this year so far. In the next slide, you can see the quarterly net income starting from 2016. So you can see there the gradual improvement up to 2018. And then the challenges in 2019 was the late passage of the budget, inflation in 2019 as well as the trade wars, of course, COVID in 2020. But then after recovery started already, as soon as the third quarter of 2020, you see the numbers improving. We did see a blip last quarter of last year. But since then, things have been improving. The next slide shows you the first 9 months of the year versus previous years. So just to reiterate that it is a record net income for us for the first 9 months of the year. The next slide is a comparison of the numbers. 9 months versus the previous year as well as the 2 years before COVID. And then third quarter comparing third quarter last year as well as through the second quarter. So across the board, good increases in both revenue as well as net income. And therefore, we do also see the highest earnings per share for the quarter at [ PHP 0.127 ] for the first 9 months of the year at [ PHP 0.356 ]. Here, we see full year comparison of full year net income. So there you see the peak in 2018. And then you also see 9 months this year, higher by 17% versus last year. So we are tracking ahead of the record that we hit in 2018. So there is a likelihood or possibility that for this year, we will exceed that record net income hit in 2018. Next page for our high-margin specialty volume growth. So we can see there the drop in volume from 2019. So actually, it started at the end of 2018 with a peak of inflation back then. And then 2019, the late passage of the Philippine budget, 2020, of course, COVID, 2021 start of the recovery. And 2022, at least for the third quarter, 6% growth in volume for high-margin specialty products. So very encouraging. For the next slide, you can see there the different segments of our businesses, split between high margin and low margin overall for high margin for the first 9 months of the year. Although for the third quarter, high-margin specialty products volume was actually up by 6%. We were down in the first half. So that's why overall, it's still relatively flat, up by just 0.4%. And overall, as you can see, volume for high-margin food is still down. In fact, all are down except for Chemrez, high-margin volume for Chemrez for the first 9 months of the year, up by 16%. For the commodity side, that part of our business has done well from a volume perspective. For food, it's up 40%, for Chemrez, this is really biodiesel, volume is up by 58%. Overall, for the first 9 months of the year, commodities volume is up by 43%. On the next slide, you can see the product mix and -- due to COVID, you can see starting in 2020, the sales mix did deteriorate up until this year. So we like to view this -- the positive way of looking at this is that when COVID finally goes away and things are back to normal, then we should expect -- we do expect the product mix to revert to where it was before. So that is something that we are looking forward to. On the next slide, you can see there the high-margin specialty products. And you can see at the bottom left, for the margins, for the first 9 months of the year, we are flat or pretty much stable compared to the margins from the previous year. But in that circle, you can see there the breakdown on a quarterly basis. The margins have been improving from 20.4% in the first quarter, it is now at almost 3% as of the third quarter. So as raw material prices stabilize and also as ForEx stabilizes, this is something we expect that margins will eventually go towards where they were before. And going forward, that is our expectation. For commodities, not much we can do there because that is very much a market where we don't have much control over pricing. And currently, it is a tough market with margins down at around 4%. It likely will not get any lower because at that price or margin pretty much everyone is just at breakeven at that point. For exports, you can see that we are continuing to be steady in the sense that exports as a percent of sales is maintained at 33%, so same as last year. Full year last year was also 33%. You can see that export value is higher by 60%. So this is a combination of price pass-through from higher raw material prices as well as the FX. In the next page, you can see our cash flows. So as what you've seen from last year, a lot of cash tied up in working capital. So that's that big PHP 3.2 billion negative change -- sorry, change in working capital is negative PHP 3.2 billion. And then in CapEx, PHP 2.5 billion spend. So overall, free cash flow is negative PHP 2.2 billion. In the next slide, you can see there the breakdown of CapEx. So we started the construction of our new plant in Tanauan, Batangas at the end of 2018. And that's why you can see there a lot of the spend really starting in 2019, but accelerating as the years went by, we believe the CapEx has already peaked. It likely peaked early this year in the first quarter. As you can see, the CapEx spend has started to slow down. So we are expecting to end the year roughly at around the same CapEx number as last year, but it will likely be significantly lower in the next year and the year after. In terms of price pass-through, so this chart shows you in the middle, the 2 most used raw material prices we use are coconut oil and palm oil. Together, they make up roughly 2/3 of the raw materials we use as a company. And below that is a dollar-peso exchange rate, which is significant for us because around half of the raw materials we use as a company are dollar-denominated. Above, you can see our margins and even with the volatility in the last 12 years in the raw material prices or the FX, you can see that pre-COVID, there was not much effect on our margins from this volatility. So the change in our margins is really more an impact from the product mix slide that I showed earlier, but not so much from volatility in the raw materials or the FX. Next slide. So just showing, again, our ability to pass on higher raw material prices. You can see here revenues compared to pre-COVID by the second quarter of the year, had doubled and with a lot of raw material prices starting to come down. In the third quarter, you can see there that revenues are slightly down in the third quarter. Okay. A quick look at how the different segments did for our businesses. So here's an overall snapshot. And you can see here the 4 main segments. So Food Ingredients remains to be the largest in terms of revenue contribution at 25 -- sorry, at 65%, with oleochemicals second, so that's Chemrez, 26%. However, Food is #2 in terms of net income contribution. Oleochemicals and Chemrez is the far #1 net income contribution at 44% and Plastics is third at 23%. Fourth is Consumer Products ODM at 6%. A quick look at the Food Ingredients business. So the bulk of the growth has really been in the commodity business, refined vegetable oils, with Specialty Ingredients also contributing good growth, food safety growing as well. However, for specialty fats and oils, volume is still down by 6%. And we also see there the drop in margins from several reasons there. One is the big jump in the commodity volume that had -- that resulted in a drop in the overall margins. Second, we also did see margins for specialty fats and oils down by around 2%. We are expecting this segment to continue to recover, especially as the economy opens up and as other factors like international -- international tourism once they start coming in and the hotels start reporting better business, then we should see improvements in that Food segment. For Chemrez, Chemrez did quite well. Overall, volume up 32%, revenue up 63%, net income, up 53%. Although overall margins were down now slightly below 20%, but still overall, quite a good performance. And that jump in performance is really mostly contributed by oleochemicals. So it's not just biodiesel that grew, but the high-margin specialty oleochemicals also did quite well. For Specialty Plastics, we did see a drop in volume of 18%. However, we did see overall margin still up by over 1%. And so what really happened here is we sold less of the lower-margin specialty plastics but that was offset by higher sales of higher margin Specialty Plastics. So overall effect, there was an improvement in margin and also an increase in net income of 12%. For Consumer Products ODM. So this is an effect that we see with economy opening up compared to last year. So people spending less on home care and disinfectant. So that's what you see here with volume for home care down by 28% and maintenance chemicals down by 3%. But people are going out more, and that's where we see volume for personal care up by 22%. The next slide, here, we show the related party transactions. So for related party expenses, we have a lot of fixed costs like land, warehouses, barges and so forth. These are rented from affiliate companies. This rent came up to approximately PHP 322 million in the first 9 months of the year, which is equivalent to about 1% of total costs and expenses. On the right side, though, you see what we classify as related party income. So income from affiliates and subsidiaries from management and shared service fees, and these do help offset the related party expenses. On the next slide. So a quick look at our cost structure. On the top left, no major changes from previous periods. Raw materials still making up the largest portion of our costs at 87%. If you add up all the fixed costs here, so that would be labor depreciation and rental and maybe half of others. So that would add up to maybe 8% of our total costs and expenses classified as fixed. So with over 90% of our costs classified as variable. This is really what allows our company to react very quickly and adapt every time there is volatility or a crisis. At the bottom left, you can see there, technology spend, higher by 13% versus the previous year. On the next slide, a quick look at our balance sheet. So no major surprises. And you can see there on the right, the nice improvement in return on equity and return on invested capital. So from 2020, return on equity was below 10%. Currently, it's at 17%. For return on invested capital, it was at 11.8% in 2020. Currently, it's at 13.8%. On the next slide, you can see there our capital structure. So net gearing is currently at 61%, still relatively moderately geared. Interest cover is at 15x, quite comfortable. Our net debt currently at PHP 12 billion. Average cost of debt has gone up as expected with interest rates going up. We were lucky last year. We were able to fix a big part of our debt with the bond that we issued. And thankfully, we were recently confirmed at AAA by Philratings. In terms of our working capital cycle, cash conversion currently at roughly 100 days or 101 days with receivables at 44 days, inventory 74 days, payables at 17 days. So nothing out of control, quite -- we have quite a good handle on our collections from our customers and on our inventory as well. Okay. In terms of the stock, we're currently ranked #48 among the Philippines' largest companies by market cap with market cap at PHP 48 billion. Average trading in the last 12 months at roughly USD 0.5 million. And on the right side, you can see there the ownership breakdown for the company, foreigners still make up around half of the float at 14% ownership of the company. And the next slide shows you chart of -- so it's actually our 10th year anniversary for being a listed company this year. And you can see there how the stock has done compared to the physics. And then below, you can see there that for the first time since COVID, we are actually starting to meet investors in person in a big way, and we're actually going to be at the conference in person next week. Okay. The next couple of slides we're going to just take a quick look at our expansion in Batangas. So yes, the picture looks almost the same as the picture we showed last quarter, it's because most of the changes are really being done inside the plant. So on the exterior, not much changes anymore. Maybe just a few more new parts being added from the last 3 months. But a lot of the changes happening really just indoors. And -- Okay. I think that's -- that's my last slide. So we are open to Q&A.

[Operator Instructions] Okay. We have one question from Koh Sang Lim. In a recession in the U.S. next year, how much will the high-margin business be affected in terms of volume in your opinion?

We're not so sure that there will be a large effect on our business. We don't sell that much to U.S. customers in terms of nonessential products. And usually, what you'll find that just like what we found in not just during COVID, but previous periods of difficulty. Usually, it's the nonessential products that are really affected more. Essential products are not affected as much. So if there is a recession or when there is a recession, we don't -- in the past, we never really saw much impact at least in terms of our segments because most of what we sell really caters to basic industries.

Okay. [ Tina ] I see your hand raised. Please go ahead.

Yes. Actually, it's Paul. Yes. So nice pretty pictures on Batangas. Remind us again when that comes on in the kind of stages that you're expecting as well? And can you give us some guidance if ever -- if at all, on client RFPs coming through? What kind of volumes that you might expect from this plant? And again, when?

Okay. So we are expecting this plant to be up and running in the first half of next year. It should be up and running by January. We are getting updates from the contractor as well as our own engineers, various suppliers. But it's kind of like building a house. There's so many small details that even though you -- even if you planned for a long time and got all the right contractors and got all the parts, but until the day you move in, you won't really know when it's finally okay. So do expect us to be giving constant updates, especially as we get towards the end of the year. Sorry, what was the second part of your question?

Yes, how do you plan to fill it with client orders. Can you give us any detail on that?

So we -- when we decided to build this plant, we already had -- and we currently have quite good export business, a good export business that has already started. So we have a lot of customers who are buying from us. But our limitation in terms of selling more to them was really capacity. We didn't have that capacity to serve more. So in that sense, we already had a good feeling about how much more we could export. And true enough, in the last couple of months, we have been having quite a few foreign both existing as well as potential customers doing plant visits, showing a lot of interest. So I can't give any concrete numbers. In general, we do not talk about expectations in terms of volumes. But I can say that there is a lot of interest -- not a lot of companies built new capacity in the last 2 years. Number one, there was COVID. Number two, there was a lot of uncertainty, especially this year because of the war in Ukraine, the disruption in so many supply chains. So we're actually, I would say, doing quite well in a sense because we are entering a period where not a lot of companies have this new capacity coming online, but we will be. So there's a lot of optimism in that sense.

I see, I see. Is it fair to say that because of the cost, depreciation, et cetera, which will surge, I guess, next year. Will it be an impact on margins? Or are you confident enough to suggest that business will be so good that even in the first year, there won't be that impact on margins because of the expected business coming in?

So we, as a company, what we have seen is that our margins are affected more by the product mix, not so much by the volatility, whether it's from cost of raw materials or the ForEx. Inflation, I assume would really hit more the cost of raw materials. And that is something we normally are able to pass through. That's something we're confident we will be able to do. So at least from a margin perspective, we don't expect much impact if and when something happens next year.

Right. Okay. And maybe last for me, just on the margins. Yes, there's a steady improvement from the last couple of quarters, but you're still a long way from off where you were back in 2018, '19, is there a time line on when we can start revisiting those heavy days?

It will really depend on things stabilizing as far as the -- it's more the macro environment. So currently, you've got interest rates rising quite fast. You've got inflation still, although there are some signs, it may have stopped going up, but the rate of inflation is still relatively high compared to before. So -- and then you've got a lot of headwinds as well, like there's still the war in Ukraine and you've got elections in the U.S. today or -- yes, today or tomorrow U.S. time. So the short answer is no, but we do expect that as long as these causes of volatility start to improve or at least stabilize and not get worse. And as long as we see raw material prices stabilizing, for example, then we should start seeing our margins revert to back where they were.

Okay. We have a couple of questions from the Q&A box. So first one from Joyce, can you give more color on what are the lower-margin plastics that you sold less of and the higher margin plastics that you sold more of?

So in general -- so maybe let me clarify one thing. In general, we are not -- in general, we are more active in the specialty segment for plastics. So pretty much everything we do in plastics is high margin. But within that space, you will have some which are in the low -- some with margins in the low teens, some with margins in the high 20s. The low teen margins would be the specialty materials used in the more commodity type of products. So even the commodity type of products would have specialty plastics. So these would be colorants, additives used in some of the packaging type of applications. On the more specialty higher-margin plastics, these would be more parts for appliances, parts for vehicles, packaging for semiconductor, so we do that as well. So those uses where there's really more engineering and R&D required, those would usually result in higher margins. Those where applications are not as R&D intensive, the margins would be low.

We have another question on margins from Aaron. can you talk about the outlook for specialty fats and oils margins for the segment? Why have volumes remained soft even with your other segments pre-COVID?

Okay. Aaron, that's a great question. It really reflects how -- in a lot of ways, in general, it's really the hospitality sector that has not fully recovered. You've got hotels at below 50% occupancy compared to pre-COVID, they were at 60% to 70% thereabouts. You've got foreign tourist arrivals currently, they're up, of course, from last year, but still very low compared to where they were pre-COVID and even though traffic has been getting worse recently in Manila, from what I understand, for a lot of people, they are still not going out and celebrating as much as they used to pre-COVID. It will be interesting to see how the country celebrates Christmas coming soon, if people really are going to be going out or if we will -- if it will be quieter compared to previous periods. But that's really what's happening on the food segment that's affecting us. The nonfood side of our businesses. So fortunately, in that sense, we are diversified even though the food side hasn't recovered that well yet the nonfood side really did quite well. And it wasn't just a recent improvement. On the nonfood side, we actually saw most of it start to recover as early as the third quarter of 2020. So the impact was not as long for the nonfood side for us.

Okay. Aaron has another question. What drove the quarter-on-quarter changes to interest expense and other income?

So I believe part of that is rising interest rates. It's also related to some of the timing in terms of booking of the loans. At least that's on the interest expense side. For other income, I think I need to call a friend. Crissa?

Yes. For other income, it's coming from ForEx gains because we have some dollar denominated receivables. And quarter-on-quarter, we have to mark that to e market and recognize some unrealized foreign exchange gains.

Thanks, Crissa. Thanks, Aaron.

We have a question from Randy [indiscernible]. Do we have credit exposures to PCR and PMS? How are they doing in paint business?

Okay. I have to be careful here because normally, we don't talk about specific customers. But to answer the question straight, yes, they are customers because they are part of the industry that we sell biodiesel to. We are okay in terms of business with them. There may be some collection challenges, but the amounts are relatively small compared to our -- compared to the size of our business because we did try to limit our exposure to them. But I think pretty much you can read in the news, right, where some of the difficulties are. And I think it's fair to say we're in the same boat as pretty much all the other suppliers.

Another question from Randy for biodiesel, how is its margin performing relative to the prices of crude oil? Does it expand when crude prices are up?

Not necessarily. So I wish it did. But if it did, we'd be similar to the large oil companies reporting massive jumps in net income. We didn't see that massive jump unfortunately. Biodiesel price tends to follow more the movement in coconut oil because that's the base ingredient we use to make our biodiesel. So it doesn't necessarily follow crude oil. So the way it works is the coconut oil prices, which are set in Rotterdam follow more palm oil prices. And palm oil prices, which are set in Malaysia follow more soybean oil prices, which are set in the U.S. So that's really more where the correlation is not so much on crude oil prices.

We have some questions relative to the new plant. First one from Arvind. Can you quantify the depreciation expected to be taken to the P&L from the new facility in full year 2023?

So the cost of the construction will -- let's make it easy to do a quick back of the envelope calculation, roughly PHP 10 billion. And if you amortize a plant over 20 years that PHP 10 billion over 20 years is PHP 500 million a year more or less. So more or less straight line depreciation, you're looking at roughly PHP 500 million a year, which sounds like a big number, but we're tracking to be above PHP 3 billion net income a year and that PHP 500 million. So that's roughly 15% of the PHP 3 billion. I believe we can make up for it with the new business coming from the new plant. So maybe a little historical context. The last large CapEx we built was the biodiesel plant, which was built in 2006. The cost, I think, was around -- well, it was much smaller. I think we spent around PHP 800 million spend then, but the payback was 2 years. So that was relatively fast, but we were lucky back then because the biofuels law was just passed which mandated 1% blend of biodiesel starting in 2007, going up to 2% in 2009. But -- so we were in the right place at the right time as far as biodiesel is concerned. In a sense, we are also in the right place at the right time with this new capacity coming online and pretty much none of our other competitors having new capacity coming online. And it doesn't look like any of them are going to have any new capacity coming online anytime soon. So we'll see. But we are quite optimistic. I mentioned earlier with Paul's question that we have quite a lot of very interested export customers who are doing plant visits, audits and so on. So the interest definitely is there. So we're quite optimistic.

Second part of Arvind's question, would you move staff from the existing facilities to start off production? Or will you be hiring more staff?

So it will be a mix of both. We do have a few staff moving from the older facilities to the new site, but we still need to keep the older sites running. The new site is meant to supplement what we have, not to replace. So in fact, we have since -- 2 years ago, we've already started hiring some new people to join us to be involved in the construction to get familiar with the plants, to also do training in our existing facilities. And we are also bringing in more -- hiring more new people for the plant. So that is ongoing as well.

Okay. Great. Next question from Jason. What would be the target revenue mix between HMSP and commodities when the new plant starts to ramp up?

So we hit 70-30 at 1 point in the past. And I think it's fair to say that from a CapEx perspective, from a resource allocation perspective, like how much management time we spend, the bulk of our time is really spent on the higher margin, not so much on the low-margin part of our business. So we do want to get more business in high margin. However, we do recognize that low margin, the commodity side of our business does provide some value to us as well. Everything from taking a share of the fixed expenses, increasing our visibility with our customers, giving us good access to high-quality raw materials and so forth. So in other words, we don't see the commodity side going all the way down to 0. But at the end of the day, because the high margin part of the business is really where the bulk of our profits are coming from. That's really where we are putting the bulk of our resources into.

We have raised hands from [ Karthik] . You can go ahead and ask your question.

I have 3 questions. The first one is, if we were to refer to Slide 9, which has the gross margin product wise, if you notice the Food Ingredients gross margin has been the lowest it's been in the last like 10 years. And at 8%, it also implies that the commodities gross margin is probably very, very low single digit. So my question in this regard is at what point do you think this gross margin bottoms? And secondly, on a like-to-like basis, have you seen gross margin compression both in your high-margin specialty as well as commodities business? That's my first question.

So we think we're already at the bottom in terms of margins for the food business. I mean, 8%, you're right. This is the lowest we've ever seen. And Crissa, could you please go to the food business slide. So you can see in the food business slide that our commodity food business margins are actually down to 2.5%. There, yes, 2.5%. So we -- it's rare for us to see margins to slow for commodities. There have been times it has been lower in the past, but this is -- at this point you can just imagine, on a net basis, we're not making. We're -- if anything, we're just making peanuts now like literally peanuts. So -- but if you look on that first column or first box there, specialty fats and oils, there is a slight drop in margins as well from -- sorry, it was above 17% last year, it's now at 15%, so a drop of 2%. We believe this is the lowest. I don't think it can go any lower than this because at this low point, this is the point where we believe for a lot of our competitors, they are likely already exiting the market or just giving up altogether because it doesn't make sense. If at our size, at our scale, this is our margin, imagine what it's like for our smaller competitors who are not as well integrated in terms of supply chain, in terms of linkages with R&D and other services that we have in the food business relationships with customers and so forth. So we believe this is likely the lowest already for the margins for food. So we are confident that going forward, margins for food should be on the way back up. Sorry, the second part of your question with regards to compression of margins for high margin and low margin. We did see margins start to go down, Crissa, could you show that slide showing the volatility in raw materials, ForEx as well as our margins? So you can see from that slide -- there you go -- that we actually only start to see margins coming down during COVID. Before COVID for -- volatile raw materials or ForEx were really not something affecting us. So COVID caused that type of disruption where there was just a lot of weakness in demand, but supply wasn't really going down. But what we are expecting is that as economies, not just in the Philippines, but around the world, really start to open up, especially in Asia, then for our domestic business as well as our export food business, you should start to see prices start to stabilize and start to grow. This is assuming that raw material prices will not be volatile anymore, of course, because one big factor that has been contributing to our margins going down has been rapidly changing raw material prices. That's causing a lot of disruption for our customers, a lot of disruption in our pricing as well.

Got it. So in another -- in other words, even if the mix were to remain unchanged, the gross margin on the food ingredients has more or less bottomed and will probably improve year-on-year next year, right? Is that a fair conclusion?

We don't expect it to get any worse. So yes, it should get better.

Okay. Great. The second question is Slide 26. If we were to look at the average cost of debt of about 4.2%, this figure was 3.09% just last quarter, and the incremental debt during the quarter has only been about [ PHP 1 billion ] to PHP 1 billion, which is less than 10% of the overall debt. Why is the swing in the cost of debt so high, almost on a Q-on-Q basis?

Well, so the increase in the debt is in net debt. So we have some cash and then there's an increase in the gross debt as well. But in terms of the cash we hold, the increase in rates has not been as fast as in the debt. So I'm sure it's the same thing happening with everyone else. Our banks are not exactly eagerly passing on higher interest rates for our savings, right, although they do that for debt. So that's one reason. The other reason is that although we have PHP 5 billion of that that's been locked in since last year, the Philippines Central Bank has been matching the increases that the Fed has announced. I think that actually the BSP has stated that they will stay at 100 basis points higher than the Fed. And so that's for the BSP rate, but what the banks pass on or charged to us are usually higher than that. And so the increase we have seen in our debt and our variable or short-term debt has been quite rapid. And that explains the big jump in the average cost of debt.

And would it be fair to say that our marginal cost of borrowing now would probably be more than 5%, it would have crossed 5%?

Yes. We're seeing loans being renewed now at above 5% for short-term loans. That would be correct.

Okay. Great. Last question now, Alvin, if we were to look at the inflation trajectory. It seems as if it's been coming off a bit. And if I were to look at our inventory position, which is at 74 days, compared to 76 days in the first half, that hasn't changed much. So I'm just curious because I thought if inflation is actually moderating, you would probably be a little more tactical with your inventory so that as price corrections happen, you're able to accumulate more and more but it looks like the inventory position hasn't changed. So any color on your thought process in this regard?

We don't really speculate much in terms of -- okay. So if there are situations where we feel it would make sense to buy a lot because of -- it will give us a certain advantage. Yes, we can do that. But in general, positioning for us is really more from a strategic perspective of maybe -- at the end of the day, our priority is making sure we don't run out of product. We -- yes, we can make money from buying ahead. But we have seen in many cases how this type of speculation can actually hurt a company. And we see a lot of examples where other companies get it wrong and pay a big penalty for it. So we don't want to speculate. At the end of the day, what really matters to us more is that we have enough material to service the needs of our customers and that we are able to pass on the price that -- we are able to pass on costs to our customers. That's really what matters to us.

Got it. Very clear. Thank you very much for the detailed responses, Alvin, and wish you and the team all the very best. That's it from me.

So we have a question from Joy in the Q&A box. Can you share your observations on your customers' procurement strategies recently? Commodity prices have been easing. So are they buying more? Or are they holding back because of fears on consumer demand being impacted by elevated inflation?

Interesting question. So yes, since COVID started customers' buying patterns have been quite volatile. So at the beginning of COVID, they just stopped buying. And then as the economy opened up, they got more courageous and ordered more. But I would say because of what's happening now, interest rates are going up and then there's still quite a lot of -- inflation is also a big factor that is concerning everyone. So -- it is a -- it's very challenging for everyone. It's very hard to plan. But I'd say there's more reason to be courageous now because case counts are lower, the Philippines, for example, recently lifted even the indoor mask mandate. So by law, we are not required anymore in the country anyway to impose a mask mandate except for certain situations. So I think that's where the correlation lies. It's really driven in many parts by COVID. And as restrictions are relaxed, as people's behaviors go back to where they were before, then we should start seeing things like buying patterns go back to normal. In terms of inflation and rising interest rates, that does also play an impact and that might have a -- that may be one reason why customers would hesitate, but it's really COVID, I would say, that's #1 and a lesser impact from inflation and rising interest rates.

Next question from Jason. You mentioned that if commodity margins sit below 4%, this would be below breakeven point for most players. If that were to happen, what would the D&L approach be, reject volumes and orders, for example, sacrificing volume for profitability?

So we're a company that hates to sell at a loss. So that would likely be the case if the margin doesn't make sense, we likely would not entertain the order because we have the storage capacity, we can hold on to it and just wait for prices to go back up. We have the luxury in that sense, unlike a lot of our other competitors who don't necessarily own their own logistics, they may not be in that position where they can hold on to the product. They may be pressured to have that turnover. So we have the logistic capability hold. We also have the financial capability to stay steady.

Okay. Just one question from [ Lin ]. What is your outlook on commodity prices?

It's so hard to predict because everything in the world is related to each other. The price of oil, the price of gold affects so many things, and you've got interest rates from the Fed movements, inflation, even the war in Ukraine, so many things can impact supply and demand. So, sorry, ask me an easier question.

Okay. How are your customers reacting to higher inflation?

Well, I guess for -- so D&L, as a company, we're going to celebrate our 60th anniversary next year. And so we've been through it all, the difficulties in the '70s with the oil price hikes caused by OpEx. And then the political instability in the '80s, '90s and Asian Financial Crisis, the Global Financial Crisis and so on. And now with what's going on currently. For companies like us, who have been around for so long, what we're going through now, we've been through a lot worse. So we -- because of this longer-term memory or experience, we tend to be more conservative, and we tend to put in measures just in case something happens. So in our case, it's everything from having conservative debt levels, not over hiring and positioning our inventory so that the there's just a right amount, not too little, not too much, things like that, having 24-hour gensets at all our facilities, including our new plants. So -- sorry, a long answer to your question. But generally, I would say customers who have been around as long as we have in the Philippines who win through all the difficulties -- we've been through it before. And because of the lessons we've learned in the past, likely we've put in place a lot of measures to make sure that whether interest rates go up or inflation now, let's call it, what, 7% or 8%. We've been through but in the '80s, Jobo bills, the treasury bills selling at 50%. So what we're going through now is not as volatile. It's not as -- you could say exciting compared to the past. So I would say it's more the newer companies who are likely having more difficulty. And so -- so we do see that we do anticipate that. And what we try to do is we try to assist them by guiding them and advising them on, okay, this is how we handle high inflation, high prices before. So maybe we suggest you do step 1, 2, 3 to help to assuage them that, yes, prices are going up, but there are ways that this can be handled.

A question from Randy. Who are our most efficient competitors?

I would say our most efficient competitors are, a, the companies who have been in the Philippines operating for a long time, we've also gone through what I mentioned earlier, a lot of these past crises. And for what's happening now, it's nothing new anymore because it's something likely that they've gone through before. And the others would be the multinationals, the multinational competition, so companies from -- within Asia as well as Europe, North America, they have deeper balance sheets. They've got better logistical support, and they've got operations overseas that they can interject a lot of orders and a lot of -- they can divert demand very easily. So they would be the more competitive parties for us.

Okay. A question from Paul. Is there a peer or nonrelated party -- company globally that D&L look to any?

I remember 10 years ago when we were doing the IPO, our underwriter was trying to help us do a peer comparison so that we could value the stock. I think, suffice to say, we weren't able to come up with someone because we -- that time, we priced the stock at 11x PE, which admittedly reflecting now what did we know that, right? What it was too low. It's not easy to find someone like us. But in terms of companies we emulate, it would be the companies that do well in R&D. So you've got companies like 3M and some other companies in specialty plastics, specialty foods, specialty chemicals, they will be the companies that we look at this admiration.

One question from Rainier. Can you remind us of how the new capacity is noted for the HMSP and commodity assessments?

So we haven't disclosed any capacity figures. So I assume you're talking about the new plant in Batangas. What I can tell you is that in terms of our resources. So everything from management time, CapEx and so forth, we really spend much more time and resources on the high-margin parts of our business rather than the commodities part of the business.

One last question here from Joyce. What is your outlook for 2023 in terms of volumes and margins?

We were expecting to announce our 2023 outlook when we announce our full year results for 2022. So that will be -- is that in March? Crissa, can you remind me. March. Okay. But just looking at what happened in 2022. So we had Omicron in January. And I remember when the lockdown was announced in January, I was like, "Oh, my gosh, okay, it looks like we're going to write off the whole of 2022 again. But 2022 turned out to be okay, although we had that weak month in January. So knock on wood, that we don't get another new variant that will result in a lockdown. And I understand that the government, our Philippine government, has made an announcement that they are not planning to do any more lockdowns because I think they've really seen how damaging it has been to businesses and to the economy. So assuming no more lockdowns, 2023 should be better than 2022, just from that fact that we had Omicron in January. But for other factors, the rest of the war in Ukraine, can it get worse? We're not sure. Will there be other disruptions? We don't know. So there's still a lot about 2023 that's could happen and could result in volatility. So hard to say at this point in time.

Okay. That's the last question actually.

So thank you, Alvin and Ainslee. So if no further questions, so that concludes our third quarter briefing. Again, if you have further questions later on, you can always speak of our IR team, that's Alvin, Ainslee and myself. Again, thank you for joining our briefing and stay safe, everyone. Bye.

Thanks, everyone. Bye.