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

Good morning, everyone. Welcome to the results presentation for the first half for D&L Industries. So these are our highlights. We started commercial operations of our new plant a month ago. And this really marks a very transformational period for our company. Second bullet point, our first half earnings came in at PHP 1.2 billion, which is 28% lower than the previous year. Of course, this does not reflect the potential for our new plant. And if you were to exclude pre-operating expenses associated with the new plant, our first half earnings actually came in at PHP 1.5 billion, which is down by 13% year-on-year. And recovery continued actually with our second quarter earnings being 9% higher compared to the first quarter. So second quarter earnings came in at PHP 646 million. Other good news is that blended gross profit margins also came in higher at 17.7% this year in the first half versus 13% last year. We're also seeing very good improvement in our cash flow, lower debt levels as well as general signs of optimism all around. And so we continue to have the highest confidence of being able to service our bonds, which are maturing next year and in 2026. So just to show a couple of pictures of our new plant. So these were taken a couple of days ago with different perspectives. So as you can see on the outside, pretty much things are done. So still some work being done inside. When we started operations a month ago, it essentially means from the definition of PEZA, the SCO or start of commercial operations, it means that we issued our first invoice. So we have done that. So we do have some lines inside our plants that are up and running. Although there are a lot more still being finalized and set up. So we are expecting the availability of these lines to be ramping up over the next couple of months. So here's a look at the key figures for how we did in the first half of the year. So we see here that sales has -- sales is lower this year, down by 27%. Most of this drop in sales is really a result of lower raw materials. We'll see later the effects of lower volume. So you can see here that on a gross profit basis, we were down by 2%. So the bigger drop are costs that came down really from operating expenses. And later on, we'll show more details about -- on the net income slide. So here, you can see net income down by 28%, but excluding the effects of the pre-operating expenses from our Batangas plant, the net income was down by -- less by 13%. And then here, you can see the comparative figures with our margins, the high-margin contribution also improved by a lot. So we were -- we actually went below 50% in the first half of last year. This year, we're back up to 63%. And then you can see there the big improvement as well in free cash flow as well as net gearing. Next slide please. So looking at the first half net income compared to last year, so you can see there in the chart, lower by 28%. However, you can also see that the 2022 figure, so last year's first half net income had a big jump from the previous year. It was up by 23%. So what we just want to show here is, if you look at the net income, excluding the pre-operating expenses from the new Batangas facility, that net income figure of PHP 1.48 billion still came in -- at least it still came in higher than the net income from 2021. Okay. Next slide, please. So this just shows how our second quarter net income came in 9% higher than the first quarter net income. So here's a look at the condensed income statement. So just a little more details from -- starting from sales all the way down to net income. So one very positive thing here, we can see that in terms of gross profit margin, the numbers came in significantly better compared to last year. So it's actually something that started since COVID. Our gross margins had been creeping lower as the product mix had been deteriorating. But it's nice to see that we have been able to see a recovery in our gross margins. So here's a look at the product mix, how it has changed over the last 13 years, 14 years. So you can see that the product mix has actually been improving until COVID and during COVID, it had been deteriorating steadily. But with the recovery in the economy already starting, COVID still around, but it's definitely not as major a factor compared to before. So as you can see, our product mix has already started to recover, and we do expect this recovery to continue. On this chart, you can see how our volumes have changed since last year. So we use volume -- we believe that volume is a better indicator of how we perform as a company because our revenue numbers are affected by price changes, especially from volatile raw material and commodity price changes. So looking at our volume growth is a better indication of how we're actually growing. So here, you can see a couple of things. In terms of -- so we split this volume growth between our different business units as well as between the high and low-margin parts of each business unit. So you can see that for the high-margin segments, volumes were actually slightly lower for most of our business units, except for our ODM business, which saw very good -- very high-volume growth, up by 59%. On the commodity side, you can see that our food commodity business volume is much, much lower than before. So you can say that the food commodity volume had increased a lot during COVID as a lot of the supply chains were affected, and we were pretty much one of the few suppliers left in the industry that could continue to support the needs of our customers, including providing materials for the commodity side of our food business. So we took up a lot of market share when a lot of our competitors were unable to operate in a very volatile environment. As things are starting to normalize, we are slowly giving up a lot of this low volume -- sorry, low-margin commodity food ingredient business. So you can see there a big drop. But it's really more reverting to where we were pre-COVID because that segment had increased so much during COVID. And then you can see also in terms of -- for -- the overall volume change, we're down by 20%, but this is really highly affected by the big drop in the food commodity volume. On this chart you can see how -- so we get over 90% of our income from just the high-margin segment just because the high-margin segment's margins are so much more -- so much higher than our commodity margins. So if you look at the volume of our high-margin segment, you can see for the past 4 years, so we were experiencing good growth up to 2018. And then in 2019, we were affected by several factors, including the late passage of the national budget as well as high inflation, which has started late 2018 and peaked around early 2019. And then the trade wars as well that were happening around the world. And, of course, 2020, COVID, which also resulted in lower volume. But as you can see, 2021, there was a recovery from that low base in 2020. But the recovery has not been consistent. Although if you look at the last 3 quarters, so fourth quarter last year until the second quarter of this year, you can see that the volumes are starting to normalize. So it is something that we are cautiously optimistic about that the volumes look like it's starting to come back. So just looking at the high-margin segment of our business. So on the bottom left, you can see that the margins for the high-margin segment during COVID really suffered, and this was really a result of everything from supply chain problems to [ in-availability ] of a lot of raw materials. But a lot of this -- a lot of these problems are not there anymore. And so you can see the margins starting to recover again. And we do expect this margin recovery to continue. If you look at the box there, at the bottom in the middle, you can see we compare the margins between the second quarter and the first quarter. And there is good news there as well. You can see that margins increased from 21.8% in the first quarter to now 25.7%. Next slide, we look at the commodity business. And you can see, similarly, there is also an improvement in the margins. Margins are now at 8.5%, closer to the midpoint of the low and high of the margins from the last couple of years. And there is also an improvement on a quarter-on-quarter basis. Margins in the first quarter came in at 8.1% and in the second quarter, it came in at 8.8%. In terms of export sales, so we're off to a slow start in the first half of the year with exports coming in at 24% of revenue. So this is something that we believe will get better, and we are slowly starting to see a lot more interest in our export business from our customers overseas. There is also an effect of a high base here because we did have a really great export business last year. So there is that high base effect coming in as well for our exports business. Here's a look at our cash flow. So although EBITDA, if you analyze it, is tracking lower compared to last year, from a working capital perspective, you can see there a very big change compared to -- I believe it was the last 2 years, we had a lot of cash being spent on working capital, mostly because of higher raw material prices. So the high commodity price cycle, that cycle has ended and prices have normalized. And so you see there a lot of cash coming back in our working capital. So we're actually in a negative working capital position in the first half. So that contributed a lot to positive net operating cash flow. And then you also see in terms of CapEx, so we're spending a lot less in the first half. Our CapEx spend peaked last year. And so you can see there, the result is much different free cash flow figure compared to last year. So we are projecting that the improvement in the working capital figure as well as much lower CapEx is going to vastly improve the free cash flow figures for us at least for the next couple of years. So here, you can see how we -- when we started construction of our facility in Batangas, we started that at the end of 2018, how the [ vacancy and ] how the CapEx has been ramping up, and it peaked last year. But we already started, in the fourth quarter of last year, seeing CapEx figures starting to trend lower. And so for the first half of the year, you can see there a much lower spend. So this drop in CapEx spend will continue for the succeeding quarters, at least for the next 2, 3 years. And that is going to be a big contributor to our positive free cash flow. So when we look at how our margins have moved compared to the volatility of raw material prices, which is significant because just the 2 raw material prices, palm oil, coconut oil make up about half of the raw materials we use. And on the bottom there, you can see the dollar-peso exchange rate, which is significant for us because almost half of our raw materials are imported. And so you can see that our margins really follow not so much the volatility in the -- in our costs. They really follow more the earlier slide that we showed with the product mix change. And so as we saw that improvement in product mix this year, we also see a similar improvement in our margins. And as we are expecting the product mix numbers to eventually go back to where they were before, we also expect our margins to revert to where they were before. Here, we can just see that there is a clear correlation between our revenues and the major commodities we use, which are palm oil and coconut oil. So as prices of palm and coconut oil and most other commodities are reverting back to normal, we're similarly passing on the price changes lower. And so therefore, our revenues are coming down as well. So in terms of the overall group results, here you can see -- so compared to, I believe it was last year when the food segment -- so the food segment has always been our biggest revenue contributor coming in at over 60% of our revenues. But for a while, especially during COVID it dropped to #2 or even #3 in terms of net income contribution. So a sign that things are coming back to normal. We can see that the food segment is back to being the #1 contributor of income among our 4 major segments. So a closer look at the food segment. So you can see that gross margins recovered by 6.8%, and there is margin expansion across all segments. So what you don't see here, but what 1 detail that we do discuss or talk about in our press release, gross -- sorry, gross profit or earnings for our food segment, so actually up by 22%. However, higher costs associated with the new facility -- with the opening of the new facility resulted in net income coming in at 3% lower. So on a -- if you were to exclude those pre-operating expenses, the food segment actually did better than last year. Now here's a look at Chemrez. So earlier, we had talked about the high base. So Chemrez earnings in 2022 first half were actually higher by 47% compared to 2021. So this year, we're faced with a couple of things like high inflation. And then we also had an early start to the rainy season, which affected the construction industry. And we also see a very -- a super competitive biodiesel business that -- so these factors had affected the performance of Chemrez in the first half. However, we are starting to see signs of exports for this segment, for Chemrez, the prospect is very good, and we are quite optimistic [ that ] things at least from the export perspective, will bring the division back up. For our plastics group, so first quarter net income was actually quite weak. It was down by 36%. So we are seeing in a way, an improvement because, as you see for the first half, net income, although down by 20%, it's much better than the 36% drop in the first quarter. So quarter-on-quarter, income is actually higher by 28%, and margins quarter-on-quarter are also higher by 2.6%. We are planning to launch some new alternative solutions to plastics, which are more environmentally acceptable. So they are renewable, sustainable and sourced from indigenous materials. We'll have more updates later as and when we are ready to announce that update. And then for our ODM business. So this segment just did very well. So this segment did extremely well at the start of COVID. Thanks to the sales of cleaning and sanitation chemicals although the -- understandably, the personal care group or products did not do well because people weren't going out at the start of COVID. And then last year, when things were normalizing and people started going out again, we saw personal care have a big improvement, but home care dropped because less people were staying full time at home and more people are going out. This year, it's just positive across the board. So as you can see, improvement across volume, revenue and margins for all the different ODM segments. So income is higher by 41%. And this segment last year contributed 7% of net income for the company. This year, that income contribution is higher. It's up to 13%. And it's just a sign that we're still continuing to see strong demand for -- particularly for home care and personal care products. So we do have related party expenses. On the left side, you see there costs associated with 6 assets that the company leases from affiliate companies outside of the [ listco ]. So this comes up to roughly 2% of overall costs and expenses. On the right side, you can see shared service fees charged by D&L, including to companies that are outside of the listco. And these, you could classify as related party income, which helps offset the related party expenses. Here, we can see our cost structure as a company. So raw material continued to be our major cost driver at 81%, followed by cost of labor, which came in at 6%. And no major changes from previous periods. If you were to add what would be classified as fixed costs would be, things like labor, depreciation, rental, maybe half of the other part or the others, so coming in at maybe 12%, 13% of our overall costs classified as fixed. So that means over 85% of our costs are variable, and that is really what allows our company to be agile and flexible and quick to respond and react every time something happens that we need to react quickly to. Here's a look at the balance sheet. So there is an improvement when you look at borrowings, it's much lower. Our debt-to-equity ratio is better as well. Although our interest cover is coming in lower compared to previous period, it's now at 9x interest cover. That's still a pretty, I would say, moderate and conservative figure with interest cover at 9x. On the next slide, you can see our capital structure. So our net debt, I believe, last year came in at around PHP 12 billion. So we're now below PHP 10 billion for net debt. So quite a big drop in our net debt. And most of it is because of that big increase in free cash flow that we saw earlier. And we do see average cost of debt higher currently at 5.5%. So if you look at the next slide, you can see a chart which shows how our net debt. So that's the bars. So the net debt peaked last year at PHP 12 billion. So currently at PHP 9.5 billion. Although effective interest rates have gone up, they had been below 3% for a while, 2 years ago, currently 5.5%. Although if you look -- if you compare our interest rate to last quarter, we're actually coming in at a little lower, and that's really just a function of -- since we have lower debt, it just means that -- and our fixed -- our long-term debt since we fixed it with the bonds, and that number fixed at PHP 5 billion with the overall net debt lower, the drop in that is really coming from the short-term debt. So I would say that's what -- that's probably what's explaining the lower interest rate. And in terms of interest cover, 9x lower than we have been historically, but at 9x interest cover, still fairly moderate and conservative. In terms of cash conversion, so previous years cash conversion numbers are year-end numbers. That means that the plants have shut down. And since we're not operating as much and all the divisions are busy with their collections and there's not much inventory coming in because we don't -- we tend -- we try not to import during the import surge in December, cash conversion numbers year-end tend to look better. So the 2023 cash conversion numbers are mid-year numbers. So we can see receivables higher at 56 days, inventory at 101 days. These figures are higher from year-end last year. But they're not that out of where they would be normally. And we also see a big jump in our payables as well to 27 days. So overall cash conversion coming in at 129 days, still lower to where they were pre-COVID. So one thing we did see during with our receivables didn't balloon, our inventory levels were still manageable and we've been able to track closer to those cash conversion numbers, those improved cash conversion numbers during COVID compared to the higher numbers pre-COVID. So in terms of the stock, the stock is ranked #50 across the different Philippine-listed companies. In terms of the float, the float is 28% and around half of the float or 14% is owned by foreigners. So that figure has been pretty steady for the last couple of years. In terms of what activities we're doing to continue to communicate with investors. So you can see that -- so we had been participating in various conferences and DRs, and we will continue to do so. Okay. So that's it for the deck. We're open to Q&A.

[Operator Instructions] So first question, we have from [ Jason Mack ]. Could you share more color on the pre-operating expenses that was incurred in first half '23? How much is expected to be incurred in second half? Do we expect pre-operating expenses to only drive profits in 2023? Or would it be in 2024 as well despite the plant being already online for 6 months or the entire second half? Also, it was mentioned that Food Ingredients profits were [ driven ] by pre-operating expenses. How does the company allocate pre-operating expenses across the different business groups? Would this be by revenue or profits or utilization of product lines.

So there's a couple of -- couple of things there. So first, maybe let's talk about the pre-operating expenses. So earlier, I talked about how the food segment earnings, excluding the pre-operating expenses, were higher by, I think, 22%. We ended up with earnings for the food division coming in lower by 3%. So there definitely is an impact. And overall, for the overall company, so our earnings came in at PHP 1.2 billion, but excluding pre-operating expenses came at PHP 1.5 billion. So that's more or less PHP 300 million in the first half. So if you analyze that, you're talking about PHP 600 million for the year. Of course, as production in the new facility starts to ramp up, and we only started in July -- so there are pre-operating expenses that you can capitalize and those did not have any effect in the first half. Those only started having effect when the plant started operations. But there are certain pre-operating expenses that you can't capitalize, rent, for example, and some other expenses. So those have already been charged even before the start of commercial operations. Let me discuss with our finance how much more detail we can show in terms of the pre-operating expenses. But I think from the figures that we have discussed comparing the income, both including and excluding the pre-operating expenses, you can get a pretty good figure of where the expenses are. So the bigger factor here, I think, will be how fast can we ramp up production to offset these higher expenses. Now it is, I would say, fairly normal. When you have a new plant, you can't expect it to be making money from the start. It's going to take a while. The orders are going to take a while to come in. There's a lot of the debugging that you have to do, permits you have to apply for certifications and so forth. So that's really going to take a couple of months. We have -- we already have some permits. There are some that are on the way and might take a while. In terms of how long it would take for us to see 100% or what we would call full production, I'm not so sure. So if we go back to the last time we built or opened new plants, that was actually when we did our IPO in 2012. So when we did our IPO in 2012, we just finished 2 food plants. I think we actually finished 1 and we were about to finish the second one. And I remember at that time, we were explaining to investors that our capacity utilization, when we did our IPO, our capacity utilization was coming in at around 25%, which is really low. And I remember it did cause some concern with some investors. But we just really had to explain we're not -- we're not a typical manufacturing company where it's just 1 -- it's not like a semiconductor or a car manufacturing plant, where you need the whole thing to work to be able to make a product. In our case, we have a lot of lines in our plants. And you just need 1 or 2 lines to start. You don't need all the lines to be up and running to start. So that's one difference. Also, if you look at our depreciation, our depreciation -- total depreciation and rental -- sorry, Crissa, if you could please go back to that slide, depreciation and rental comes in at around 4% of our overall costs and expenses. So depreciation on its own is probably half of that. So maybe 2% of overall costs and expenses. So that's just shows you how we are not a CapEx-intensive business. Okay, so what am I saying? Yes, there's a lot of expenses related to CapEx and pre-operating expenses, which are costing us a lot of money now. But on a long-term basis, we're still following the same business model, on a long-term basis, a lot of these costs are actually going to be a small part of our overall cost as a company. So if you fast forward a couple of years, you will see, yes, these operating expenses are high, but the resulting revenue coming in will be significantly higher and which will be much bigger than these pre-operating expenses. So what we're trying to say is, yes, there are higher expenses now, but we should really be looking forward to when the new facility is more or fully up and running, then that's where we will see a lot of the benefits. Okay. Just going through the question, trying to see if I missed anything there. Okay. Do we expect pre-operating expenses to only drag profits in 2023? Or would it be also in 2024? Actually, I'm not sure, but [ what I ] recall from that 2010, 2011 when we did the 2 food plants, it did take a while. So I would expect the same for this new facility as well. It won't be just this year because it's really just -- if you think about it, it's only the middle of the year of 2023, when we started the operation. So it will still affect 2024. How does the company allocate operating expenses across different business groups? So I mentioned earlier -- so we have pre-operating expenses that are -- we can't capitalize. So those have been expensed and they have already been expensed. I think starting -- the big one is really rents, and that started last year. The ones that we can capitalize, they are just literally capitalized. Sorry, Crissa, is there something I should add here in terms of that allocation?

Okay. Maybe we can add that on Batangas plant, we have 2 operating companies. One is D&L Premium Foods and the other one is Natura Aeropack Corporation. So D&L Premium Foods or DLPF is 100% owned by Oleo-Fats. So 100% of the pre-operating expenses associated with DLPF, you can see that this expense in the Food Ingredients figures. For Natura Aeropack or NAC, that one is 70% owned by Chemrez and 30% owned by our ODM business. So in our presentation, 100% of the pre-operating expenses is consolidated with the figures [ we see ] for our Chemrez business. So in terms of presentation, that's it. But on a consolidated basis, the 30% allocated for the ODM business is already incorporated under Chemrez. So in a nutshell, that's how we allocate the expenses if you're talking about on a per segment basis. Okay. We have a follow-up question also from Jason of [ Ministry of Singapore ]. Could you share what would be the target utilization of the new plant? And in an ideal scenario, how would the utilization be changed over the next 2 to 3 years as the plant ramps up?

So we started the commercial operations just about a month ago. And it's very low currently. It will start to go up over time. We're hoping to have it running to at least probably 25% in the next couple of quarters. And then by next year, to hopefully have it up to around maybe 50%. Target to have it running at 100%, hopefully, within 2 to 3 years. But that would be quite optimistic, but it is a target that we're hoping to achieve. So within the next 3 years, we hope to be at close to 100% running.

Okay. Another follow-up from Jason. What is the company policy to pay down long-term debt since FCF is improving?

So the long-term debt that's pretty straightforward because it's a bond. So we're paying the interest when it's due, I think every 6 months. And then the 3-year portion that's due September next year. The 5-year is due September 2026. We will just pay if -- pay the bonds on maturity dates pretty straightforward. We don't have -- aside from those bonds, we don't -- there's no other long-term debt. So everything else is short term. 100% of our debt is in peso. We only took on the long-term debt because we wanted to fix in the costs for this expansion. We don't have any large CapEx plan for the foreseeable next couple of years. So there is no plans to issue any long-term debt for the next couple of years.

Okay. The next question is from Daryl Wong of [ DCG Invest ]. It's also about the utilization rate but with a specific figure. Do you think we can reach around 25% utilization in the next 2 to 3 years? Is that a reasonable expectation?

So I think I mentioned within the next couple of quarters, we're hoping to be at 25%. 2 to 3 years, it's too long to be at 25%. We need to be at pretty much up in full running by 3 years' time. So that's -- it's a scary target for our sales guys, but they have their marching orders.

So far, we don't have any more outstanding question. [Operator Instructions] Okay, [ Kimberly ] now raised her hand. Kim, you are now allowed to talk. You may now ask your question.

I just have a quick question regarding volume sales. I recall in the first quarter, you mentioned that volume sales were weaker because, well, it could be because due to overstocking of customers in the previous quarters. And I think you mentioned that it was during this time where there was really heightened uncertainty on lingering supply chain issues, which caused the overstocking. Now in the second quarter, it seems that volumes are still pretty weak. So I was wondering if that is still the reason or if there's other -- or if there is anything else that could explain the weaker volume sales?

It's not as big a factor compared to the first quarter. Second quarter, I would say inflation is risk. So for a lot of our customers, the food customers, the manufacturing companies, construction, makers of construction -- makers of appliances, there does seem to be hesitation. They're not as aggressive when it comes to planning, placing large orders even there -- even when it comes to launching new products, opening new stores, it seems that they're not as aggressive. So there seems to be a sense that -- well, it's not for all categories. And I think you can even see that when a lot of the other public companies, publicly listed companies, reported their second quarter figures. Some did very well, but some there is really weakness compared to last year. So the overstocking is not as big an issue this quarter. There's still some of it, but it's not as major compared to the first quarter. This quarter, there's really more concern about higher prices, and the cost of everything is really so expensive today compared to last year. I would say that's a bigger factor.

And in terms of like competitors, do you think that your customers are looking at other competitors? I guess based on pricing, how are you adjusting in terms of that?

That's always something [Audio Gap]. Our sales guys really have to balance between trying to retain a customer if it's worth retaining customer. So if you saw that slide earlier, [ Crissa, I really could ] show the volume slide where you see food commodity volume dropped by 40% in the first half of the year. This really is a -- it's a factor, it's 2 things. One, that segment grew so much during COVID because a lot of our -- a lot of the trading companies, a lot of our competitors in that space, they were not able to compete anymore with all the supply chain issues. It was so hard to access a lot of raw materials. So we kind of gained market share because it was there for the taking for us. But a lot of these companies have started coming back in, and we're happy to let go. So we can be very flexible in that sense. But we would not want to -- it's not something that we allocate a lot of resources to, just because it doesn't really make that much sense for us in terms of the economic benefits. But we do have that flexibility, and we can do that again in the future if that opportunity presents itself, but it's not something we would fight over. What we would be more interested in is really growing the high-margin segment, because over 90% of our profits are really coming from the high-margin segment.

And then just a quick follow-up. So on the export, the commodity side of the Food Ingredients, on an absolute value, is that higher versus last year because I know, right, the contribution is not the same anymore.

Yes. Our exports came in lower this year compared to last year, although there was -- you could say -- okay, let's look at -- okay, this chart shows you first half exports came in at PHP 4 billion. Last year was PHP 7.7 billion. However, there was a huge jump in our exports. Actually, since COVID started, our exports had been growing tremendously. So from PHP 4.7 billion full year 2019 for exports, it came in at PHP 13.6 billion full year 2022 actually. So if you deduct the PHP 7.7 billion from the first half 2022 from the full year, PHP 13.6 billion, so exports in the second half was already starting to show lower numbers. It came in at -- what's that, PHP 6.9 billion for the second half of the year, and then PHP 4 billion in the first half of this year. So it is lower, but we're still tracking, I would say, close to 2021 numbers. It just so happens that last year was a fantastic year for our exports. Not just the higher commodity prices, but we couldn't do anything wrong with exports. Exports did very well last year, but this year we're trending lower. But on the positive side, I would say what limited our ability to export before has always been our lack of capacity. We just didn't have that capacity. So every time an export customer comes to us, it's a little difficult to service them and to convince them that they could -- that we could be a long-term supplier. Now that we have this new facility open, we can say that we do have the capability to supply that extra capacity for export. So there is a lot of interest. It is something that we believe we will have a lot of growth going forward just because we have this new capacity online.

Our next question comes from [ Rainier Yu ]. Just a question on exports at 24%. Will this likely be the bottom in terms of percentage of sales, given the ramping up of the new plant?

I hope so. So we're putting in a lot of resources into our exports. Our sales guys are going up a lot more. However, of course, it depends a lot on what's happening outside the Philippines and what's happening in the Philippines. So what do I mean by that? If outside the Philippines, there's a lot of volatility and there's uncertainty about how certain economic and political factors are ongoing, then it might affect our export business, our export business may not grow as fast as we hope. We also have -- our export percentage is really a percentage of total revenue. And the other side of our total revenue, aside from exports, is our local economy. So if the Philippine economy -- so far we're tracking, I believe, 6% GDP growth. If the economy continues to do well, then then local -- our local or domestic business might [ grow ] faster than exports. So that might mean it might go below even 24%. So if local grows faster than the global economy, you're just going to see lower exports naturally. But again, it also depends how -- that ability to convince our export customers to place those orders. If we can get those orders and displace other suppliers for our export customers, then that would help our export side. So, short answer, I do hope it is the bottom, but can't guarantee. [Audio Gap] still change. But there's really more reasons to expect exports to continue to go up rather than go down.

[ Daryl Wong ] raised his hand. Daryl, you may now ask your question.

Just a quick question for me. I understand from -- I'm just trying to get a sense of -- okay, in terms of capacity, right, I understand maybe in the 2 to 3 years the blue sky scenario is that you'll get about 100% utilization, and that's the hope for it. I just want to understand, in terms of capacity for the new facility, relative to your existing capacity, will it be on the same level? I'm just trying to understand on a relative basis,, will it be -- because I understand right now you would probably have 1 or 2 lines, which presumably to get it to 100% utilization should be quite quick. And along the number of years, you'll be probably ramping up some new lines. So I just want to see, like, will it be a case that the capacity in your new plant will be maybe like, 60% of your existing capacity or something like that? I'm just trying to get a sense of how I should understand it.

So, Daryl, we have not disclosed details about the capacity of the new plant. So we're very sensitive to giving out too much info that -- we don't want to let our competitors know what we're doing essentially. But just to give you an idea, definitely, this higher capacity from this new plant compared to our existing facilities, the land area of this new facility, so you can see the pictures here, that site is double the size of all our existing facilities combined. Of course, we haven't occupied 100% of the new site, but it's -- we've occupied probably 60%. So there's a little more of the new site that we could add on, but not a lot. But in essence, this is -- we're talking about a lot more capacity compared to what we have now. As to what -- and so the other factor here is we're actually planning to add more capacity over the next couple of years within the existing buildings, so -- even without large CapEx. So 1 reason why we spent so much on CapEx here in this initial stage is we wanted to set the stage to be able to add more capacity in the future without having to spend large CapEx. So it means there's a lot of space where we just plug in new lines over time, but the incremental cost of adding those new lines is a lot lower compared to building a whole new plant. So a lot of extra space in this new facility to add new lines. But it does mean that our capacity numbers will go up later as we add these new lines. So it makes that capacity question a little harder to answer. But what I can tell you is eventually once this existing facility -- once all the lines are filled and once they're up and running, this will be a much larger operation than what we currently have.

I just want to check, so you mentioned about 60% of that land is twice the size of your current land size. 60% of it is occupied by this current facility that you already have built correct?

Yes.

And you say that maybe how you envision it when you're already running it at your concept of 100% utilization, how I should imagine it is that when you go into the factory, is it really like quite full and everything is really set up after that it is really like business as usual and should be quite stabilized by then, right? That's how we should understand it?

Yes. Yes. That's right.

Okay. Got it.

Our next question comes from Cristina Ulang. What is your overall assessment of the operating environment for your P&L onwards, difficult, improving or if improving will it be volume led, margin led or pricing led, lower or combination of all these?

Cristi, you always ask the interesting questions. Thanks for that. It is definitely a more -- a difficult environment. So the last couple of years, the difficulty was really COVID, supply chain. COVID is not an issue or it's still a factor, but it's a much smaller factor now. Supply chain is not really a problem anymore. Well, except for the commodities that you ordered from Eastern Europe, that's still an issue because of what's happening in Ukraine. But a lot of other commodities, they're pretty much back to normal. There is -- but you have a lot more political things going on the political side of the world. That seems to right now not have a big impact on business, but it could when you have elections in the U.S. next year, and we don't know who's going to be the President. It might even be the previous president, right? And how -- what will that mean for business in general. We're not sure -- so yes, definitely, it's difficult. I would say, though, that it is an opportunity. So every time there is difficulty there's always a bright side to things. For us, the way we look at this, there were many other companies that built large CapEx during COVID just because it was so scary, things were so unpredictable. No one was willing to make that long-term commitment. We did. We built this plant. It means we're very well positioned. We just have to get the plant started, which we already did. Now that the plant is up and running. It's now -- we don't have any excuse anymore not to grow, not to perform because we have the capacity. It's just a matter of going out, finding those customers and starting to sell to them. So that's the next leg of what we need to do. So from that perspective, definitely it's improving for us. So it's really a customer-led, sales-led initiative. On the other hand, we're still continuing to invest in R&D. In the slide deck showed earlier, you can see that our spending on technology is continuing to increase. So that includes R&D, IT and so forth. And the rule in business, normally, the more you customize, the more R&D you do typically the better you do as a business and the higher the margins you can charge. And that's definitely something we have seen happening in the past, and we believe will continue to happen going forward. So thanks for that question, Cristi.

[ Sir Jun Lao ] who is the President and -- who is the President of Chemrez as well as Natura Aeropack Corporation, he sent a message saying a good proportion of the new plant will be serving -- just going back to the earlier question, just to add an insight, he mentioned that the good proportion of the new plant will be serving new products and customers, so it will be additive business. So at least 50% of which will be exported. Sir Jun, I placed you on the panelist side. Would you like to add more insight to that?

Yes. Thanks for the spotlight. When the new plant was built, you can see in one location, we have manufacturing of ingredients and raw materials. And with the location of Natura Aeropack there, we can also assemble all of these ingredients into finished consumer formats. So that can shed quite an interesting light because that would be more value-add. Sometimes of value-add of our finished product allows even healthier margins. What we would bring to prospective customers is a fully integrated plant that not only collapses the supply chain into something that's a lot more streamlined, we're also able to bring in a lot of CSR into our supply chain. This attracts a new type of clientele. If you are familiar with a lot of retailers of consumer goods, we're talking about the retail chains in America, Australia, Europe, a lot of them are trying to source more sustainably. A lot of them are looking to find a way to influence more, let's say, the lives of farmers, the lives of the marginalized stakeholders. What the Natura Aeropack and D&L Premium Foods brings to the table is a supply chain that not only is vertically integrated in a manufacturing sense, but now we also have a more direct relationship with our coconut farmers. So that kind of sustainability story and CSR appeals to this type of customers I mentioned earlier.

Thank you, Sir Jun, for the additional insights. Please stay on the panelist side just in case you encounter more questions on Natura Aeropack or Batangas plant in general. So the next question comes from [ Michael Chan ]. Can you talk about your dividend policy with CapEx peaking out and operating cash flow and FCF improving?

Michael, so that's an interesting question. We were able to maintain our [Audio Gap] dividend payout even during COVID, although we did for 1 year suspend the special dividend. So that was in 2020. But 2021 onwards, things were back to normal. So we did have confidence that we were able to maintain not just the 50% payout, which is our standard dividend but the special as well. If the cash flows as it continues to improve and we pay down the debt and the debt levels are low, then we'll have excess cash. If we don't have any use for that excess cash, standard finance policy is to pay out to shareholders. So that's something we'll have to discuss at the Board level. But I don't -- I'd expect we would act as a normal company will act in terms of finance. Thanks for that question.

Our next question comes from [ Miguel Rees ]. Just would like to ask if you have any bottom-line guidance for 2023. Also, would you have an idea how much the Batangas plant can contribute to top line for the second half of 2023 and for 2024?

So I'll start with the easier question. We don't have any -- in terms of the contribution of the plant, we have a lot of targets, but we'd rather not talk about them publicly. But I did mention earlier, we want to be fully 100% up and running within the next 3 years. So that's kind of a -- it is a bit -- I would say it is a bit aggressive because the export market, even though we've been exporting for many years, there's just so many challenges associated with dealing with markets outside your own country. But it's something that we want to get to. In terms of bottom line guidance for 2023, it's not something I would be brave enough to, at this point, give unfortunately. Too many things going on, too many reasons why numbers could be better or not. So at this point in time, it's not easy. I'm unable to give any guidance in terms of net income for the year.

The next question comes from [ Stephen Oliveros ]. Can you give a sense of the month-on-month volume performance in the second quarter and in early third quarter?

So we did mention this in the first quarter. January and February were pretty slow. March was good. In the second quarter, I think April and May were decent. June was not so hot, might be the weather, might be inflation finally kicking in and people running out of money. But yes, June wasn't fantastic for us. Yes. So I think that's what you're [ looking for ]. Yes.

The next one comes from Cristina Ulang again. Many thanks for Alvin and Sir Jun. [Audio Gap]. I don't see any more questions from my end. Okay. Daryl raised his hand.

I just want to have an understanding. I think you mentioned earlier that with the new facility, you would be able to sell the whole CSR angle and then mentioned that you tend to work closer with the coconut farmers or the planters. So I'm just trying to have a better understanding on that point because like previously, I guess you guys have always had supply to coconut planters all the while. So I just want to know how does this -- how is this different from before? And how does it help solve the whole -- your capabilities at the end of the day?

Thanks for the question, Daryl. About around the fourth quarter of 2021, we started operating several coconut millers, coconut milling plants. So we started dealing directly with farmers to source the dried copra meat. That is the starting material that we have done. And it was only then we have reached this far back into our supply chain. That not only gives us better control, but also gives us a more direct relationship with the coconut farmers. We now see that as a very positive step because it's become a more sought-after feature of any supply chain. Brand owners have particularly been clamoring for that kind of setup. They want to see that their brands are very sensitive to the marginalized farmers who are typically getting the short end of the stick. D&L through its family foundation, the Lao Foundation has always allocated a portion of its budget into supporting these marginalized families, mostly the coconut farming areas where we source from. So that has become more into not only the supply chain, but our CSR. It's become part of the [Audio Gap] story.

If I understand correctly, back in the day of many years ago, was it a case that you guys used to buy a lot more from the wholesalers or the middle guys, but then now it's become more integrated. So you're working much closer with the farmers [ and it happened ] in more recent years?

[ Correct. ] Before we were buying crude coconut oil, but we crush our own crude coconut oil and refine it from [Audio Gap].

No more outstanding questions from my end. [Operator Instructions] If no further questions. There's another question again. [ Miguel Rees ], just clarify what we said earlier. The new plant is the base of the existing 6 plants combined?

Miguel, so the new plant is on a site that is 26 hectors in size. All of our previous facilities combined by roughly 13 hectors land or the sites. So the new site -- the new plant occupies a site -- the new plant occupies a site that is double the size of all our facilities. Although the new plant occupies 60% or is utilizing 60% of the land, but as you can imagine -- so we have 6, 7 facilities. If they're not contiguous or in 1 place, there's a lot of inefficiencies [ to move ] if everything is in 1 site. So it's a more modern, newer everything, better technology, more efficient. So there's just a lot of capability to produce [Audio Gap] in 1 large site.

Fully integrated for a smaller footprint.

Okay, thank you. I don't see any more questions from my end at this point. So if no additional questions, that concludes our second quarter briefing. Again, if you have any more questions at a later date, you may always reach out to our IR team. So that's Alvin and myself. We would like to thank [ Sir Lao ] for joining us this morning. So thank you, Sir Jun. [Audio Gap] Thank you once again for joining...

Sorry, before we go, can I just add? So we are almost done with the preparations to be able to do a tour of the site. Hopefully by middle or end of September, we can start doing that. So we will be reaching out to you guys to organize this. Yes, please watch that.

Okay, thank you. So I'll reach out to you, guys. Again thank you for joining our briefing this morning. Stay safe and see you next quarter.