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

Good morning, everyone. We're going to start the presentation for the results for first quarter of 2023 for D&L Industries. So first slide, we saw our blended GPM improved by 3.2%, resulting in gross profit higher by 4% year-on-year. Gross profit of PHP 1.4 billion. [indiscernible] we saw sales mix revert back pretty much to pre-pandemic levels with our high-margin [indiscernible] sales mix, our high-margin has gone down to 51% for full year last year. As of the first quarter, it's back up to 64%. [indiscernible] lower volume, together with higher operating expenses and interest expenses. So we did see our overall net income at PHP 594 million for the quarter, which is down by 24% year-on-year. We do think, however, that it was really just a story of a weak January and February because for the month of March, we saw a jump back to normal levels for net income. So -- and we'll be going into more details later. But essentially, March was better than January and February by 62% and 26%, respectively. So really weak first 2 months of the year. Our free cash flows turned positive for the quarter. And so we will see more details later, but in essence, we're seeing more cash given back to us from lower raw material prices, so meaning an improved working capital position and as well as a lower CapEx. So this is a look at the monthly breakdown of net income. And so as you can see, we were off to a very slow start for the year with January net income coming in at PHP 152 million, Feb coming in at PHP 196 million, and March coming into a much better PHP 246 million. So this is pretty much summarizes what happened in the first quarter of the year and where the weakness was coming from. If you look at the -- so this is just a look at the past 90 years, and so you can see here the slowdown for us [indiscernible] with high inflation as well as the late passage of the national budget and the trade wars, and of course, COVID in 2020, 2021 and the recovery in '22. Okay. Next. So just a comparison of year-on-year as well as versus fourth quarter. So year-on-year, the very significant improvement in gross profit margins from 13.4% in the first quarter of last year, now we're at 16.6% GPM margins for first quarter this year. So we do expect this to continue, this improvement, albeit we did see even higher gross profit margins in the fourth quarter of last year coming in at 17.2%. We do expect that recovery from the lows in our gross profit margins to continue, especially as how we are seeing the improvement in our product mix that definitely makes a big -- has a big effect on the overall gross profit margins of the company. Okay. So here, we see the product mix, and you can really see the deterioration that started during COVID, going back to almost 50-50 by last year. And then the recovery, the nice recovery that we're seeing in the first quarter of this year. So this is definitely one piece of good news that we're sharing. Now look at the volume breakdown between business units and also splits between high margin and low margin. So you can see that for our food business, volumes are still quite tentative. So we -- this is one segment that really suffered during COVID, and it's taking its time to recover. We do -- we are starting to see some recovery in this segment, and later on, we'll share that with you when we focus on the food segment. For the other segment that displayed negative volume, that's specialty plastics, down by 10%. But for the other segments, so Chemrez, you can see volumes with a nice increase, but the biggest increase in volume percentage-wise coming from the consumer products ODM division, so where we do our one-stop shop packaging fulfillment for our clients, with volume up by 90%. And those margins for that segment also recovering quite nicely, up to 34% for the quarter. So just looking at our high-margin volume, high margin specialty products. So you can see here with -- so 2019, we started to see volume coming down because of inflation fears as well as the lead passage of the national budget and the trade wars. And of course, 2020, the effects of COVID, the lockdowns, particularly. Some recovery, but albeit from a low base in 2021. And 2022, 2023, still -- we're still not seeing as much recovery as we would like. So the good news here is that once these volumes do recover, which we are expecting to happen, then you will start to see very large effects on our business and higher profits overall. So here's a look at just the high-margin part of our business. So you can see here that it's essentially a story of the margins, the margins for our high margin business still staying below 22%. So we are not seeing a recovery yet in our margins. We do expect that to happen, and we are starting to see that happen in some of our segments. So we'll show that later when we go into the different business units and take a look at each one of them. The next slide, for commodity. So here, we are starting to see some recovery. The biggest improvement in margins, which we'll see later on, is really coming from our food segment. For the commodity food -- commodity segment, we saw a very nice balance in margins, and that is the bulk of the contribution which affected overall Commodity margins now being at just over 8%. For our exports. So exports for us in the first quarter are off to a slow start, with exports coming in at 24% of revenue for the quarter. So by volume, it's actually -- so by volume, it's down and by revenue, it's also down. By revenue, it's down by 40%. And on the right side, you can see there the breakdown of exports. So food and oleochemicals, both together making up over 80% of our exports, with the remainder really coming from just specialty plastics. In the next slide, we can see the cash flow statement. So here, so as we saw raw material prices really stabilizing, and in some cases, even going lower, there is really -- the effect on us has been that line for a change in working capital. So we're in a negative working capital situation as of the first quarter, so PHP 224 million of cash being returned back to us, less cash being tied up in receivables and inventory. We also see here the -- so -- for the last 2 years, so for 2021, 2022, hitting roughly PHP 3.5 billion or approximately almost PHP 900 million per quarter in CapEx. We're at a much lower number for the first quarter, with CapEx at slightly over PHP 400 million. So much lower CapEx and a negative working capital position contributing to free cash flow being positive for the first quarter of the year. So we do -- it looks like we will have a positive free cash flow situation for the full year. That's something that unless we see massive changes in raw material prices for the rest of the year, we are expecting a very significant increase in free cash flow for the year. Here's just to see the historical CapEx. So we started construction of our expansion plant in Batangas at the end of 2018. So you can see here CapEx ramping up starting 2019, and it peaked last year. And so you can see for this year, CapEx coming in at a much lower number, and we are going to continue to see lower numbers for CapEx as we are scheduled to start operations in our plant by the start of the second half of the year or by the middle of the year. And so for this year as well as next year, CapEx numbers continuing to come down and being quite low starting in 2025. So on this chart, you can see here how our margins have behaved with respect to our major costs. So for raw materials, over half of our raw materials come from palm and coconut oil. And also over half [Audio Gap] this are already higher than where we were not just compared to 2022, but also compared to 2021. So we do expect a continued improvement in our gross margins. [Audio Gap] Margin perspective, the food division also had a nice recovery, and we'll go into more details in the next slide. But as you can see here, with weaker results from Chemrez as well as our specialty plastics business units, but a very good performance in our consumer products ODM business, with net income up by 96 -- sorry, up by 76% compared to first quarter last year. And consumer products ODM. So when we did our IPO in 2012, that segment was contributing, I believe, around 2% to 3% of net income. In the first quarter of this year, that contribution to the company, it's at 16% of net income. So a very nice jump in that business, and we'll go into more details next couple of slides for each business unit. So for our food ingredients segment, you can see here, volumes are down for 3 of the 4 segments. The one segment that did well is our specialty ingredients segment, which has the highest or one of the highest gross margins at 32%. So across all food divisions, you see a jump or an increase in margins. But the biggest jump would be coming from the commodity business, which is the second box on the bottom. But we also saw a nice increase in margins for our specialty ingredients business. So some improvements coming there. So the overall story for food, essentially, we sold a lot less of the commodity food segments, and that had the biggest impact on the overall volume for our food business. Consequentially, revenue was also lower overall by 23%. However, the food commodity segment does not contribute as much income as the high margin food Segment. So the higher volume of the specialty ingredients segment as well as the jump in margins in the commodity business as well as specialty ingredients business more than offset the lower volume from the commodity business. So overall, net income still came in higher by 14% for our food business. So in essence, selling less of the low margin -- the lowest margin commodity food. Effectively, what happened was overall margins for our commodity food business increased to as you can see, over 10% now. So overall, a positive for our food segment. Okay. For Chemrez, Chemrez is off to a slow start in the first quarter of the year, with net income down by 41%. So this had the biggest effect in terms of the drop in net income of the company. So overall, volume was actually up, and this is mostly from the oleochemicals segment. So you saw from the earlier slide we showed with the commodity part of Chemrez, which is biodiesel, volume was higher significantly compared to the year before. So we had much higher biodiesel sales for the first quarter of the year. Volume was higher by 54%. But biodiesel margins are pretty much almost at 0, meaning not -- it did not contribute much to net income for the year. So biodiesel continuing to be not just a commodity business for us, but in the first quarter, it turned out to be negligible in terms of income contribution. We did -- so there, you see there, overall margins for oleochemicals falling to below 17%. And the story there is really coming from the weak biodiesel business. On the right side, you can see there for other specialty chemicals, an improvement in margins, but volume was also down. So these -- sorry, these other specialty chemicals are the chemicals that Chemrez mix which go into the more traditional segments that chemicals would go to. So you've got everything from manufacturing, packaging as well as construction. Okay. For specialty plastics, we see overall drop in volume as well as revenue. Margins are also lower across the board for specialty plastics, with net income coming in at negative 36% to PHP 139 million. We didn't also see a slow start for specialty plastics for the year. Part of it is still for some of the raw materials trying to offset the higher -- some raw material prices are still higher, trying to offset it. Although we are starting to see some raw material prices coming down, so we do expect the margins there to start going up in the next couple of quarters. And then finally, we have consumer products ODM, so everything doing well here. So all segments reporting higher volume revenue as well as increased margins. So this segment, we saw -- at the start of COVID, personal care dropped because people weren't going out anymore, but home care went up by a lot. And then as people start going out last year, we saw home care drop and personal care increase. But as you can see in the first quarter of the year, home care has started to be positive again in terms of increases. So the story you usually hear is that not only are people spending more, but there really is a lot of spending going on for not just personal care products, as people are going out more, but on products that people use at home. So the home care division as well as maintenance chemicals supporting much better volume overall. Okay. So a quick look at the related party expenses in relation to the rentals that the group pays. So we rent fixed assets of affiliate companies including land, facilities, warehouses, barges. PHP 161 million, roughly 2% of overall costs and expenses, on the left side of this table. And on the right side of the table, you can see there fees that D&L charges all companies, including affiliates, for performing central services or shared services, and this is considered related party income, which helps offset the related party expenses on the left side. Here's a look at the cost structure of our company. So no major changes. The bulk of our costs are still coming from raw materials at over 80%. Next biggest cost, which is labor, at 5%. Overall, if you look at what would be classified as fixed costs, so that will be labor, depreciation and rental, maybe half of others, that would mean that roughly 12%, 13% of our overall costs are classified as fixed. So almost 90% of our costs classified as variable costs. On the right side, you can see there in terms of raw material breakdown, palm oil, coconut oil making up about half of the raw materials we use at the company. And on the right side there, the words that talk about how around half of the raw material fees are imported and almost all of it denominated in U.S. dollars. Okay. Next slide. A quick look at our balance sheet. So no major surprises. What -- one thing that has changed, if you look at the borrowing slide, you can see that our borrowings have started to come down. So from PHP 15.5 billion at the end of last year, we're down to PHP 15 billion as of the first quarter of the year, and you can see more details in the next slide, a historical breakdown of equity and debt. So you can see our debt levels peaked in 2022, slowly coming down as of the first quarter. So when you see our cash flow improving like it did in the first quarter, so it just means we have more cash available to us. And so one thing we did in the first quarter was paid down some debt with that increased cash level. So net gearing from 59% last year, it's currently at 56%, so I would classify that as moderately geared. Interest cover at 9x. So interest cover lower than where it was before, but still, 9x interest cover would -- I would say that would still come in as moderate. Net debt also lower for us at PHP 11.9 billion. Average cost of debt is higher, so it's really the effect of higher interest rates. So approximately 1/3 or PHP 5 billion out of the PHP 15 billion in debt is fixed for us, and it's PHP 10 billion out of the PHP 15 billion or 2/3 that would be short-term debt or repriced pretty much within 90 days or less. And here's a chart that shows how for us -- so the light green line is effective interest rate. So it is higher in 2019 when we had a higher inflation then it went down at the start of COVID, as you can see, and started to go up towards the second half of last year, with effective interest rate coming in at 5.6%. Interest cover, so lower than where it was in the previous 2 years, but at 9x, still relatively moderate. And then net debt, which peaked last year at -- and right now at PHP 11.9 billion, so slightly lower than last year. So our working capital cycle. So in terms of our receivables, pretty much around where we normally are, around 50 -- it's normally around 50 to 60 days. So we're at 53 days in the first quarter of the year. For our inventory levels, our normal inventory level lies between 80 to 90 days, so we're not far from normal at 92 days. Payables are slightly higher. From 16 days last year, we're up to 19 days. So overall, cash conversion at 127 days for the first quarter, which is pretty much in line with where it normally has been in the past. So in terms of our stock, D&L is currently ranked #46 among the Philippine listed companies by market cap, with a market cap of just a little under PHP 60 billion. And on the right side there, you can see the public float is at 28% and roughly half of the float or 14% owned by foreigners. And we are continuing to meet with investors. So I was in London to meet with investors last Friday, and in the next month, we'll be participating in a conference as well as doing MDRs in Singapore. Okay. And here's a picture of our plan. So no change. This is actually the same picture we used from our last presentation because, no surprises, the plant really is the same. From the outside, nothing has changed, so it didn't make sense to show you a different picture because it would be the same anyway. But it -- a lot of the changes really are ongoing inside. We are trying to start up operations by the middle of the year, so around July, and looking forward to it. I believe that's the end of the deck, so we are open to Q&A.

[Operator Instructions] So we have a couple of questions in the Q&A chat box. The first one is from Jason. Have we seen orders for the new plant yet? And can you remind us how often you negotiate their contracts for volumes and pricing? And how much visibility you have for both?

We don't have any confirmed orders for the new plant yet. So what we do have our existing export orders from our existing facilities. It is possible that when the new plant is -- and likely what will happen is when a new plant is up and running, we can have some new orders coming in through the new plant depending on the product that will be made and depending on the specs or the quality that the customer requests for or specify. So it would really depend. So for all intents and purposes, our existing facilities for the moment can cater to the existing orders. In terms of visibility for our exports, we have some visibility because we do have some clients where the orders are more recurring in nature now. But the visibility is much better for our local business just because we have a much longer relationship with our local clients in the Philippines. In terms of how we negotiate contracts for volume and pricing, these are already done on a per order basis or maybe a quarterly basis. In general, we don't lock in prices for a long period. The most we've locked in for would be maybe 1 or 2 months because we are quite careful about the risks coming from volatile raw material prices or effectively higher raw material prices, and we wouldn't want to be caught in a situation where we're not able to pass on higher raw material prices. Thanks for the question.

Okay. Next couple of questions from Jason also. Why were the volumes down by so much? And why was January and February so weak but strong in March? Is this due to the seasonality of inventory destocking?

So that's a big part of it. In the last 2 years, not just [indiscernible] but even part of last year. So we had factors from supply chain problems, logistics companies and shipping companies having large bottlenecks, and of course, the war in Ukraine last year causing a big spike in raw material prices. But all of these difficulties in supply chains and all of these bottlenecks created a lot of uncertainty in terms of access to supply. So we saw a lot of our clients bump up their inventory just to make sure they would not run out of inventory. So what we saw happening, actually, we started seeing it towards the end of last year. So if you look at our fourth quarter figures, you'll see that our fourth quarter volumes were actually not that strong also. But -- so we started to see that behavior even in the first 2 months of this year, in January and February. So a bit of -- to what we call in this [indiscernible], inventory overhang, customers essentially overstock using up that inventory for the last couple of months. But as of March, it looked like things are reverting back to normal and they're ordering again.

Why did exports decline so much for quarter 1? And does this suggest difficulty in getting new orders for the new plant?

Well, so for the first quarter of this year, well, part of it is we just -- our exports just did super well in -- during the last 2, 3 years when there was COVID. And so this year for at least the first quarter, there was a drop. But if you compare it to how we were doing compared to pre-COVID, so if you look at 2019, for example, [indiscernible] as a percent of revenue was at 21%. So at 24% for the first quarter of this year, we're actually still ahead of where we were pre-COVID. And even if you look at the value of exports at PHP 2.1 billion for the first quarter of the year compared to even full year '20 -- not just 2019, which is pre-COVID, even 2020 when our exports did well, full year exports for 2020 came in at PHP 6.3 billion which, if you annualize the PHP 2 billion first quarter exports, we're going to hit -- we're projecting to hit over PHP 8 billion. So that's also higher than not just 2019, but 2020 for exports. So it is a weak start. Part of this is also from the inventory overhang I had referred to earlier. But if you look at the numbers, we're still actually doing better, at least compared to pre-COVID and even the first year of COVID.

Okay. One more question from Jason. So the cost mix improved in the first quarter. How sustainable is this as the jump looks quite huge? And how hard would it be to maintain this mix for the next few quarters? Or should we see the mix worsen on a relative basis going forward?

So yes, the jump is big. But if you look at where we were historically, particularly pre-COVID, we're still actually slightly below where our product mix was pre-COVID. We were at 69% high margin in 2019. 64%, that is a big jump from 51%, but still some room to catch up on the 69%. So yes, we do think this is sustainable because -- primarily because we are still below the product mix of where it was compared to pre-COVID. So it is something we believe we can maintain and improve as well going forward. We don't expect this mix to really worsen going forward, and this is something we've actually been talking about in the past couple of years where -- so every year, we actually talk about how the product mix has gone worse during COVID and how we didn't expect it to get worse. But it actually did start -- it still would get worse because COVID hadn't gone away. And of course, there were all the supply chain problems and the war in Ukraine as well, which also had a contribution. This year, things are much more stable, a lot of raw material prices have started to stabilize and there's also more confidence coming back. We're seeing more signs that -- so in many Western economies, things are pretty much back to normal. It's -- in Asia, not just in the Philippines, but in a big part of Asia, recovery is just starting. So that recovery will be accretive or positive in terms of our product mix. So things will continue to get better.

Okay. We have one question on OpEx from Joyce Ramos. The OpEx to sales ratio has been elevated in recent quarters. Is it safe to assume that this is related to the upcoming Batangas plant? And what ratio do you expect it to settle?

Okay. I'll have to call a friend here. Crissa, do you have details on the OpEx?

So for the OpEx, so actually, it's a combination of, one, higher fuel prices for last year, so if you were referring to the previous years. And second, for this year, we started paying rental for the Batangas plant. So -- but once the plant is up and running, once we're able to generate revenue from the plant, then you should expect the incremental income from the plant to offset the incremental operating expenses related to it. So in the first quarter, that's pretty much it. Rental, also some increases in taxes and licenses. But really, it's the rental for our new plant.

Thanks, Crissa. Okay. So a question from Gina. Any sort of guidance for 2023 that you can provide?

Not really. What -- so we were -- we started off the year being optimistic, specifically since we had a great year last year. But the first 2 months, the weakness, it did surprise us in a way. Although we knew a lot of our customers had overstocked, we didn't expect the drop in volume as much as what happened in January and February. So March looks like it's starting to stabilize, and we hope to continue to see that stabilization for later months and later quarters. But we are quite cautious, I guess, because there's still so many uncertainties. Everything from higher interest rates to COVID cases in a lot of parts of Asia starting to go up again, even here in the Philippines. Although a lot of it looks like it's mild and hospitalization utilization rates aren't really going up yet, but it's still causing a lot of nervousness. So still a lot of uncertainty making it quite difficult for us to be -- to have that confidence to really say, okay, this is what it looks like it's going to happen for the year. What we are sure of is that as we open our new plant and as we are able to demonstrate to more export customers that now, we have the capability, that was really the big bottleneck we had for exports before, then we should be able to start seeing those orders come in. So not just for -- not just optimism for this year but optimism going forward for the next couple of years for our exports. So there's a lot of excitement coming in from there.

Okay. We have a question from Han. What were your market shares in verticals which you saw market or volume declines? And could you help us differentiate what was market-driven weakness versus share loss or was it deliberate pulling back from margin segments? Or was it higher competition?

Sorry, is that market shares? Sorry, I lost -- there's the audio cut off there. Was that from Han?

From Han, yes.

Okay.

So it was the market share question first, in which you saw volume declines.

Okay. So we don't think that our market share has really deteriorated in terms of at least our largest customers. From what we can see -- and this is something that we monitor very closely, this is very important for us. And we do this on a per customer basis for all of our segments. We've seen our market share. Every time there's a crisis, there is a -- for all of -- for most of our competitors, especially the multinationals, they closed down or they shrinked their businesses. So it's actually an opportunity for us to demonstrate to our customers that we're here, we are ready, we are not going away, we are continuing to serve your requirements. And usually, we see market share getting higher. So we don't -- we haven't seen any major changes. So if anything, during COVID, we started to see our market share actually improving. And in the first quarter, that has not changed. It's still pretty much the same way.

Okay. For the decline in market share or volume declines, could you help us differentiate what was market-driven weakness versus share loss? Or did you deliver any platform low-margin segments? Or was this because of higher competition?

So it's not really shared loss, I would say. So if you look at the volume chart here, so food segment being down for us, well, the market that we did lose, you can probably tell, it's more from the food commodity, but that's the lower margin part of food commodity. So when you look at our food segment slide, which I showed earlier, our commodity food margins more than doubled from below 4% last year, it's now up to 10.1%. So the bidding drop. So we did lose a big chunk of that low-margin food commodity segment. But the consequence from an income perspective was not as significant just because it was such low margin business for us, and that's why overall margins for our food commodity business is now at 10%. Other than that, I mean, you see even for biodiesel, volume up by over 50%. And the other volumes, at least for consumer products ODM, volume up by 90%. Specialty plastics is down by a little bit, but that's really overall market, we think it still looks quite neat. So it's not really in terms of share loss. It's -- a lot of it is what we talked about earlier how there's an inventory overhang where a lot of our customers had ordered a lot the last year just to make sure they don't run out. They're just going through a lot of this inventory which they have accumulated. And so going forward -- and as of March, we see that behavior starting to revert back to normal. So it should be back to normal.

Okay. There's a related question here from Daryl Wong. Can you help elaborate further on why volumes in food is down, particularly in specialty fats and refined oils? Are people starting to cut back on consumption in general?

I wouldn't say so because specialty ingredients volume are up by 21%, so I don't think there is really much in terms of people cutting down. So the commodity part, I had mentioned earlier, it was really us just not participating in the lowest margin part of the food commodity business anymore. This is really not that worth it for us. And so consequentially, even though volumes dropped by 33%, you see margins more than doubling to now over 10%. So from a barely profit contributing segment, the food commodity margin is now actually significant in terms of profit contribution because it's at 10%. So the drop in the specialty fats and oils volume, part of it is also the inventory overhang, I mentioned earlier. But this is -- but overall, it's -- I wouldn't say it's overall drop in the market or any drop in our market share. Because again, for specialty ingredients, our volume is up by 21%. And this is where we have a higher margin as well. And I would say this is the more -- from a margin perspective, it's the more profitable. At least the margins are higher. So with volume being up significantly in this segment, I wouldn't say there's really any shrinkage in the market in that sense.

Okay. So we have a question from Adrian. Are you seeing any evidence that your customers' inventories are beginning to [ beat ]? And can you give any color on April and May?

Yes, because we -- so first is when our sales guys visit our clients, and they can -- they also have a track or a history of how much inventory the clients bought. And the history, they know. So from maybe 14 days or 30 days of inventory, they know more or less the clients now carrying probably 60 days of inventory. So from that perspective, we know. And second, when -- so I think, Crissa, you had a slide that showed the monthly sales from January to March. So you can see here that the -- with the net income -- sorry, for net income. For net income for January, February being really weak and March being much stronger, it essentially means that the weakness is something that -- so I mentioned that we started seeing it actually in the fourth quarter. When you look at our fourth quarter figures, you'll actually see that our fourth quarter last year came in weaker than compared to the first 3 quarters of the year. But -- so this inventory overhang issue stayed on for the first couple of months of the year. But as of March, it looks like it has normalized. So your question about April and May, we don't expect it to be much different compared to March, so it should be much better. So the second quarter looks like it's going to be a much better quarter compared to the first quarter.

Okay. We have a question from Aaron on the better GPMs. Was there a deliberate move to raise prices at the expense of volume, hence the improved gross profit margins?

So we do always try to try to get better pricing for our sales. It was very challenging in the last 2, 3 years. When raw material prices were moving so much, especially when they're going up, it's very hard to increase prices. And when your costs are going up by so much, it makes a job so much harder. But yes, it is a very deliberate effort on our part. So we're not so much about trying to hold on to volume and sales, the margins also make a big difference for us. And so yes, you could say it was deliberate on our part. The lowest margin or the lowest -- yes, the lowest margin, especially for the food commodity segment, we just didn't participate as much because it really is not worth anymore for us. If you're getting gross margins of 3%, 4%, your net margin is pretty much 0 at that point and you can even slide to negative. So it wasn't really that worth it for us anymore, so we just wanted to focus on the higher-margin parts of the business.

Okay. We have one question about oleochemicals volume. So could you explain the major drivers for the increase in volume of sales of oleochemicals and other specialties?

So we actually -- so high margin oleochemical volume was up by 3%. The biggest increase in oleochemicals volume was actually from biodiesel, which up -- was up by 54%. So that's in the volume chart that we showed earlier. So we just sold more biodiesel essentially. That was the reason why oleochemicals volumes were up so much for our Chemrez.

Okay. We have another question from Jason. Given our contracts are negotiated every 1 to 2 months and it's a month away before the new plant is commercialized, but we haven't seen much orders yet, how confident are we that we're able to achieve decent utilization and ensure a minimum negative operating leverage?

So I remember when we did our IPO 10 years ago, the utilization -- our overall utilization was around 25%, which I remember surprised a lot of investors. I mean, utilization of 25% is classified as like super low, and in most cases, would not be a profitable position for most companies. But in our case, because we're not a CapEx-intensive business, we're not so dependent on operating leverage to make money. We're not so worried about low utilization from this new plant. It is -- yes, it costs a lot of money. Yes, we are expecting depreciation expenses to go up. But our focus is not so much to have high utilization. Our focus is more using this new capacity, this new capability to be able to come up with more products, to make more products to sell to our clients, and now focus more on our exports compared to before. So that's really where our focus is. We're not focusing so much on increasing utilization. Now having said that, we do have a lot of confidence, especially for exports. Just -- well, for one thing, if you look at what this new -- what we're planning to do with this new plant and what we've done in the past, there's really nothing -- there's nothing you would classify as totally new in terms of what we will be making or what we'll be doing. Yes, we'll be using new equipment, new processes, new formulas. And we'll be more efficient with better yields, low waste because it's a new plant and we'll be focusing on more experts as well. But in terms of the things that we're making, the industries that we will be talking to the customers that were in the businesses that we'll be looking at, it's pretty much things that we have done in the past, we have experience in. We have experience in chemical manufacturing and food ingredient manufacturing and the R&D. We've also been doing exports, our exports, our over 20%, 25% of revenue. So in that sense, it's not new anymore for us. So we are able to start with a lot of confidence as far as this new plant is concerned just because we've already done a lot of it in the past. So just to set the tone there, we're not so concerned about utilization because it's really not a metric that would spell success for us. It's really more being able to grow our volumes and to come up with products which have good margins. That's really more where we're focused on.

Okay. We have one question about volumes and margins. Will reducing low-margin volumes impact high margin specialties? Is it important to your customers that use supply broadly across products?

That's a great question. We do use a lot of our low-margin products as feeds or raw materials for our high-margin products. We just decided not to sell, [ one sell ], some of this low-margin volumes to our customers. We're just going to use it ourselves. So in that sense, there's really not much impact on -- so in other words, just because we're selling less of the margin, low-margin segment, it doesn't really have much impact on how we're able to do or how we perform on the high-margin part of our business. What our customers really care about is more the quality of the products that we sell and the reliability that we have that we are able to produce and deliver the quantity that we committed to deliver. That's what's more important for them.

Okay. One last question here. How much do you expect Batangas orders to contribute to sales in 2023, if you gave your best guess? And how much will overall company might improve because of Batangas?

I can't say for sure yet what the contribution of the new plan will be. I mean I think I've mentioned in the past. In terms of size, this new plant, effectively, the land it occupies is double the size of our -- all of our existing facilities combined. So in effect, you could say we tripled the sites, the land area of the sites we occupy with this new facility. But in terms of what it will contribute this year or next year, I wouldn't be able to give you any numbers at this point in time. I mean we do have a lot of export customers who have visited us, done and started their audits, and with that we've been in communication with. But nothing I would be able -- no numbers I can share with you. In terms of overall margins, I would say that the margins should be close -- pretty much close to what we have been doing in the past. Because if you look at our cost structure -- so to understand our margins and where they're coming from, I believe a big factor would be really looking at where our costs are. So number one is how we price, and number 2 is where our costs are. If you look at our costs, with over 80% of our costs coming from raw materials, that cost structure will not change significantly with this new plant. So maybe in the first couple of years as volume will still be low and as it starts to ramp up, you may have fixed costs higher than where we normally are just because it's a new plant and volume is still low. But as volume starts to ramp up, we will revert to what our normal cost structure is, and fixed costs will start to come down as a percent of overall costs. But overall, I'm not expecting much in terms of how margins will change with the new plant.

Okay. Thank you. That's actually our last question. So Crissa, I'll hand it back to you. Thanks, everyone.

Okay. Thank you, Alvin and Ainslee. [Operator Instructions] So Joyce is actually raising her hand. Joyce, do you have a question?

Sorry. Sorry for the question, I just want to understand your thought process when deciding when to stop or at least limit your sales of the lower-margin commodity products? Because looking at the margin, it's actually quite higher recently. So I remember before, you mentioned your deciding factor. At least one of your deciding factors if the margins are too low. So I just want to understand your thought process on this one.

So yes, it's -- we don't want to set the loss essentially. The other thing we are always considering is we do want to remain visible as far as our customer presence is concerned. But when you start selling a product at a 3% gross margin, at least your net margin's practically 0. Might even be negative. It doesn't make sense anymore. If there is -- if our customer can find an alternate supplier that's willing to sell at a price or even lower, we're not going to match. I mean, it doesn't make sense for us anymore. We'll just let go. And it's -- from a profit perspective, there's not much impact, but it does have a significant impact as far as our margin is concerned. So we've reached the point this year where we're not -- so our customers aren't having the difficult time compared to the last 2 years in terms of access to raw materials. So the last 2 years, everyone had difficulty accessing raw materials just because of the volatility in supply chain and all the different problems in logistics and so forth. This year, we don't -- we're not seeing that problem anymore. Everyone has access to as much product as they need. So in that sense, our customers are not as -- they're not as scared in terms of buying raw materials. So from our perspective, we felt that it's a good time to, okay, we can slowly let go. Because if we had let go, let's say, 2 years ago during the supply chain constraints, it would have meant some of our customers running out of raw materials. And they may even blame us or be mad at us that they didn't have access to raw materials anymore. We don't see this issue at the moment. It's much easier for everyone to buy from alternate sources, and so we're happy to let that business go. If margins improve in the future, then it's something we could consider taking back. But at this point in time, it just doesn't make sense, so we've let go of some parts of that business.

Yes. I'm just trying to reconcile because looking at the margins now for the commodities business, it's at 8.1%. It's closer to the upper range of your typical margins rate on the lower margin. So I'm just trying to reconcile if it's a factor -- if it's more of a factor of maybe less demand rather than you trying to pull back because of low margin? Because it's actually quite high this time around.

Yes. So I wouldn't say demand has really gone down. So again, if you look at our -- the food business slide. Crissa, if you could please pull that up. So our specialty ingredients segment, the third box there, volume is actually up 21%. Sure, you can say food ingredients, specialty ingredients for us, it's a small part of our business, but I would say this -- so this part, together with food safety, has the highest margins for our food business. It also, I would say, has a high potential for growth because we have a very -- we still have a very small market share for specialty ingredients, especially for food in the food segment. So if demand had really gone down, we would -- I don't think we would have seen volume increase by so much for this year. So I can understand your question in terms of -- is there less money, is there less disposable income because of higher raw material prices and higher inflation? Are people spending less? From our numbers, it's hard to conclude that because for some of our segments, we are doing better than before. So yes.

I guess maybe you, like, can look at it from a perspective of maybe it's still -- the [ base ] is much harder last year. Maybe that could be the reason for the drop in volumes, at least for the whole...

Well, it's also the inventory overhang I mentioned earlier for some of our clients. They had really stock up more than they normally do. Crissa, if you could show maybe the consumer products ODM slide, please. So here's another -- hard to say that there's less consumer spending because if there was less consumer spending, you wouldn't see such big growth in our consumer products ODM business. Volume's up by 90% and net income jumped by so much, and even margins are higher for this segment. I mean, among our different businesses, they're B2B2C. But I would say consumer products ODM business here. You can really -- we're really serving consumer brands. And at least for our customers, they seem to be doing relatively okay, so it's hard to conclude just looking at our figures that demand is really down.

Okay. I don't see any more outstanding questions from my end. So if no further questions, then that concludes our first quarter meeting. As usual, you may always reach out to our IR team, so that's Alvin, Ainslee and myself, in case you have additional questions in the future. So once again, thank you for joining our briefing, and see you next quarter. Thank you. Bye.

Thanks everyone. Have a good morning. Thank you.