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

Hello, and good morning to everyone. Welcome to the results presentation for the first 9 months of the year for D&L Industries. Okay. Let's get started. So our highlights. So it was this quarter when we started the commercial operations of our new plant in Tanauan in Batangas. So our first invoice was issued in July of this year. For the first 9 months of the year, our earnings or net income came in at PHP 1.8 billion, which is down 29% year-on-year. However, excluding expenses related to the new plant, our earnings were down by 11% to PHP 2.3 billion. We did see in the third quarter that things did show some improvement compared to the second quarter. For example, quarter-on-quarter, there was higher volumes for our high-margin specialty products as well as for our commodity segments. And we also saw the earnings, excluding the expenses from the Batangas plant earnings, were up quarter-on-quarter by 11%. And we'll go into more details in the next couple of slides. So we're confident that we will continue to be able to service our bonds that are coming due in 2024 next year and 2026, as we're seeing lower debt levels as well as better free cash flow. So here in this slide, you can see updated pictures from our plant. And although from the outside, pretty much everything looks like they're done. There is still some work being done inside. So we're still ramping up production, and it is taking a while. And as we're planning to conduct plant tours for this new facility in the next couple of months. So we will be inviting investors to take a look for themselves. So here are the key figures comparing first 9 months of this year to the same period last year. So you can see there with our net income, comparing both with and excluding -- as well as excluding the expenses from our new plant. And so you can see there, excluding expenses from the new plant, net income was down by 11% year-on-year versus third quarter last year, it was down by 6%, so by a lesser number. The decrease was less. And comparing to the second quarter of this year, we were actually up by 11%. So again, that's for net income, excluding the expenses from the new Batangas plant. On the bottom, you can see there in terms of free cash flow positive for all the periods in 2023 compared to negative free cash flows in 2022. So this just shows in graphical form the income, both comparing first 9 months to last year as well as the year before. And if you were to exclude the expenses from the Batangas plant, our income actually came in even higher than that in 2021. So just to show that things are -- we -- well, of course, with the weaker economy and the expenses related to the new plant, we're seeing a weaker year. But at least compared to 2021, we're still doing better. On the right side, you see there the breakdown of net income. So #1 is still the Food Ingredients. Chemrez, which used to be #2, has slipped to #3, slightly behind Specialty Plastics. And then Consumer Products ODM, which used to be a single-digit contributor of net income, now contributing 12% of net income. Next slide, please. So this is just to show how compared to third quarter -- sorry, compared to the second quarter, we actually did better in the third quarter. Again, this is excluding expenses from the new Batangas plant. So 11% higher net income compared to the second quarter of this year. So this is more details from the income statement. At least, the highlights of the income statement. So again, comparing to first 9 months of last year as well as the year-on-year comparison for the third quarter and also comparing to the second quarter. So one very welcome development, which we also saw in the second quarter of this year, the product mix of our revenue has almost reverted back to where it was pre-COVID. So you can see, before COVID, we were actually making very good progress with high-margin specialty products peaking at almost 70% of revenue. But due to COVID and the various supply chain issues during COVID, that ratio deteriorated at one point to almost 50-50. But as you can see, as of the first 9 months of the year, we're at over 60-40. And we do expect this trend to continue, meaning that the revenue from -- we do expect the revenue from high-margin specialty products to continue to increase faster than that for our commodity division or business. And so that ratio should continue to improve over time. So here's a look at the breakdown of our different segments by volume and then split between high-margin and commodities. So a couple of highlights here. First, you'll see that for our high-margin segment, overall, volume was down by 1%, but this was mostly from Chemrez at second row. But all the other -- for all the other segments, the high-margin specialties volume actually saw increases from as low as 2% for food to as high as 65% for Aeropack, our Consumer Products ODM segment. In terms of the commodity segment, biodiesel volumes are flat. So that's why you see there the 0%, no change, substantially no change. But in terms of Food Ingredients, our Food Ingredients volume is down by 34%. This is not as alarming as it looks in the sense that we're basically just giving back the increase that we saw in '22 compared to 2021. So essentially, we're back to around the same levels as 2021 for the food commodity segment. This is really a reflection of -- or a correction from a situation where we saw last year due to various supply chain difficulties our competitors were having. We did -- while we ended up gaining a lot of market share, not intentionally, but it was really more because of the absence of competition. But with the commodity segment being a low-margin segment, this is a part of the business. We're relatively okay with not increasing or even giving up. So that's actually not that a negative development for us. Okay. Next slide, please. So this is a look at just the high-margin specialty products and how volumes have grown over the last 5 years. And as you can see, the good volume growth in 2018 was disrupted towards the end of that year when we started seeing high inflation, the effects of the global trade wars, as well as the late passage of the national budget in 2019. And of course, you have COVID in 2020, which led to a lot of volatility. But as you can see, it took a while for volumes to recover. But this year -- so if you look at our volume growth, we did experience 6% volume growth in our high margins compared to last year. And if you look at third quarter of the previous year, there was growth as well. So our growth this year, it's not just because of a low base effect because we did have growth in the third quarter of last year as well. Okay. For the next slide, just looking at the high-margin specialty products. So the highlight here for me would be the continued recovery in margins. So as you can see, during COVID, we saw margins drop from almost 26% to below 22%. But since then, margins have started to recover. And you can actually see there in that box, even quarter-on-quarter this year, the margins for the high-margin specialty products continued to increase. And in the third quarter, we -- at the -- we're actually at 25.8%. The gross profit margin as of the third quarter is higher than the peak or highest gross margin we had, which was in 2020. So that's definitely good news in terms of the recovery in margins. For the commodity segment, so similar to what we saw in high margin, we saw the margins in our commodity business drop as well during COVID. And so earlier, I had shared that we didn't totally see the growth in volumes last year as all good news, as you can see, with lower margins, even if our volumes are higher, you may not be making that much net profit. So even with the lower volumes, a very big recovery in margins that we saw in this year, that's much more welcome, and it's more our commodity business is operating at a margin that we're more comfortable with. For our exports, so this is one area where we're seeing continued weakness. So revenue from exports down by 40%, and contribution of exports are also lower from 33% last year. We're down to 27%. On the right, you can see there the contribution of our exports, so food still being the biggest, followed by oleochemicals and then by specialty plastics. We're diverting more of our resources into our exports business, not just on the manufacturing side. So our new plant in Batangas is in a PEZA zone. So that is positioning us to take advantage of incentives for exports. So as a Filipino company being located in a PEZA zone, we're required to export at least 50% of the production of the new plant in FIT in Tanauan in Batangas. We're also increasing our presence overseas, attending more conferences, trade shows, exhibits, visiting potential customers. And we do expect to see the impact of these new efforts in the next couple of quarters. In terms of free cash flow, so there's a couple of significant developments. First, with lower raw material prices. As you can see there, that line for a change in working capital. We were seeing very big negative numbers the last couple of years, with raw material prices increasing substantially. However, this year, we're seeing raw material prices being not just less volatile, but actually, in general, lower compared to the last couple of years. So actually -- we're actually in a negative working capital position at the moment. So it means there's more cash coming in to the business from lower cash tied up in receivables and inventory. You can also see there that we're spending a lot less in CapEx. And this is just to be expected as we're winding down the construction of the new plant in Batangas. So even if you were to annualize that 9-month figure of PHP 1.1 billion, we're going to come in at less than half of the CapEx from last year. And the result is a big free cash flow number -- positive free cash flow number at the bottom. And this is something we expect to continue not just for the rest of the year, but even towards next year as well. So in the next slide, you can see that in terms of CapEx, so we started the construction of the plant at the end of 2018. And you can see there the CapEx starting to ramp up and peaking last year. But it has started to come down by a lot. And so it will be significantly lower. CapEx will be significantly lower this year and again -- lower again by next year. So this slide, we track how our 2 most used raw materials, coconut oil and palm oil, which are in the middle of the chart. They do continue to be volatile. So you can see there the massive price increase that happened during COVID. And then we can see how prices recovered towards the end of last year. And you can also see at the bottom there, the volatility in the dollar-peso exchange rate, which is significant for us because a little over half of our raw materials are imported. At the top, you can see there, our margins absolutely do not reflect the volatility. At least, you don't see our margins going up or down by 3x compared to the volatility in the raw material prices. In fact, the change in our margins is more reflective of the change in the product mix that we showed in the earlier slides. Here, so just to show again our ability to pass on price changes. So what we did is we overlaid the change in price for coconut oil and palm oil. And you can see there that our revenues on a quarterly basis actually do reflect that ability for us to change prices. And it is something we're able to continually do. So a look at the segments in more details in terms of the numbers. So in terms of revenue, food still the biggest at 60%. #2 is Chemrez, or oleochemicals and other specialty chemicals. Third, specialty plastics. Fourth, Consumer Products ODM. However, in terms of net income contribution, food is the biggest, but #2, there's -- it's Chemrez that has switched to #3, Plastics is #2. And Consumer Products ODM, which used to contribute mid-single digits or even low-single digits in terms of income, is up now at 12%. Okay. Next slide, please. So for the Food Ingredients volumes, volume overall down by 24%, but the big drop is really due to the drop in the commodity volume. The higher margin volume overall is actually up, slightly up, I think, by 2%. And net income is actually up by 1% for this segment. Overall, margins are actually doing much better compared to before. Okay. In terms of Chemrez, so this segment -- this is a segment that has -- that we're seeing the most weakness this time, with net income down by 53%, volume down by 4% and margin slightly lower by 0.6%. Our drop in exports, actually, a big chunk of that drop is also attributable to the weakness that we're seeing in Chemrez. We're -- as I mentioned earlier, we're putting more efforts into various export efforts, and this is also being done for Chemrez as well. So we're expecting the benefits of that increased focus on exports to be coming online in the next couple of quarters. For one development that we have been starting to hear about recently, so the Biofuels Law, which was passed in 2006, came into effect with a 1% biodiesel blend in 2007. And that 1% was increased to 2% in 2009. There are -- there have been talks that due to several factors such as higher crude oil prices as well as a desire to reduce reliance on imported fuel, there's been talk to increase the blend possibly to 3%. So various media have reported this, reports from the DOE, and even the President has mentioned this. So the overall impact, of course, aside from higher volume, we're expecting for margins to be better as well, hopefully, overall industry profitability. For Specialty Plastics, overall volumes up 6%, although net income is slightly down by 5%. And we're still continuing to develop a lot of new products for our Specialty Plastics group. This is actually the first business that we started with -- 6 years ago. So this is D&L's first business when it started, but still a lot of potential, especially on the Engineered Polymer segment. And then finally, for the Consumer Products ODM. So Aeropack is continuing to see very good numbers. Volume, revenue as well as net income up substantially. So this is one segment that really suffered during the pandemic as people were not going out anymore. So everything from lower consumption of shampoo, deodorants and so forth. But as people really are going out right now, as we can see from the worsening traffic situation in our major cities. So these numbers are reflective of not just the increased or improving consumer economy, but also the efforts that we're continuing to make in developing new products in this segment. In terms of our related party expenses with rentals or fixed assets. So if you look at the balance sheet of D&L, you will see that we do not own any property. All of the PP&E there, it's really just plant and equipment. So almost all of the properties, the company uses are leased from affiliate companies, and that's on the left side of this chart. So those are related party expenses, which come up to roughly 2% of overall costs and expenses. So that's pretty much in line with where it has been in the past. On the right side of the chart, you can see there. So D&L performed shared services across all of our businesses and including businesses that are not under List Co. So services would include things like HR, IT, finance, accounting, legal, admin and so forth. And so the fees for the services would be classified as related party income, and they do offset the related party expenses. In terms of cost structure and R&D spend. So you can see here on the left -- upper left, you can see the overall -- in terms of contribution to cost, raw materials by far is #1 at 80%, with a far #2 being labor at 6%. And overall, if you were to just look at what's considered fixed costs, so that would primarily be labor, depreciation and rental and maybe half of others. So more or less below 15% of our costs and expenses classified as fixed. So with over 85% of our costs classified as variable, that gives us a lot of flexibility and ability to adapt and move very quickly. On the top right, you can see there in terms of the breakdown of raw materials we use. Edible fats and oils make up over half, with the biggest chunk coming from palm oil and coconut oil. More or less around 55% of our raw materials are imported. And then on the bottom left, in terms of R&D and IT spend, we lump it together as tech spend. You can see there the numbers continuing to gradually increase over the years. And in terms of tech spend, the increase compared to last year is 14%. Okay. A quick look at our balance sheet. So a few things that you'll see in terms of borrowings. Overall, it is lower compared to last year. And in terms of debt to equity, there's also an improvement from 0.75 to 0.7x. Interest cover on the bottom right, we're coming in lower now at 7x. However, at 7x interest cover, I would say that's still classified as moderately geared. Okay. And more look at our gearing. So net gearing is coming in at 55%, better than the 59% at the end of last year. Net debt of PHP 11.2 billion. And with interest rates having gone up substantially from a year ago, our average cost of debt has gone up as well with 5.65% average cost of debt. So out of the -- out of our debt, approximately PHP 5 billion is from the bonds. However, PHP 3 billion out of the PHP 5 billion is maturing in September of next year. So -- but -- so we're -- by the end of this year, we will be classifying that portion of our fixed income as short-term debt because there's less than 1 year left to maturity. So the remaining PHP 2 billion, which is maturing in September of 2026, that is continuing to be classified as long-term debt. The short-term debt -- sorry, the PHP 3 billion interest rate is at 2.8% with the -- that's a 2024 maturity, the 2026 maturity coming in at 3.6% interest. So here's a look at how our debt or overall net debt compares to our interest rates and interest cover. So net debt started going up as we were constructing our plant and spending more in CapEx. Interest rates are back to where they were from the 2018 figures. Interest cover are lower, currently at 7x. In terms of cash conversion, so receivables at 55 days, inventory at 107 days, payables at 24 days. Overall cash conversion at 138 days, still relatively within the metrics that we normally look at for cash conversion and for working capital. In terms of the stock, so ranked among the -- we're #52 when you rank Philippine largest companies by market cap. In terms of trading volume, currently at a little over $300,000 a day. There's not much change in the foreign ownership of the company. And you can see there on the bottom right, currently at 14% foreign ownership, roughly half of our float held by foreigners. And that's been pretty steady the last 2 years. In terms of Investor Relations, there's a lot -- there's still a lot less conferences currently compared to pre-COVID. Although as you can see, we're still continuing to join conferences and even individually meet with investors as well in NDRs. Okay. So that's the end of the presentation for the first 9 months of the year. We're open to Q&A.

[Operator Instructions] So to kick us off, we have a question from Jojo Abad. What is your earnings guidance for 2023 and 2024, given your 9 months results?

Hey, Jojo. So normally, we would discuss our guidance every year when we announce our full year results. However, for 2023 -- actually, during -- ever since COVID, we had not been giving any guidance just because there was just too much volatility, too many -- too much -- too many factors that we had to look into that were so unpredictable. And even for this year, we have not given any guidance. The fourth quarter, I think what we can see -- so we can see that in terms of traffic, in terms of people being out, it's almost at the same level compared to pre-COVID. But if you were to look at the numbers coming from a lot of consumer companies, there seems to be a lot of weakness, especially from the B2C companies. So a lot of what we do is very much related or supplied to the same companies or at least the same industries. So I don't think we're going to be any different in that sense. For next year, it's still very difficult to say, but we may be able to give more color when we release our full year results at the -- in the first quarter of next year.

Another question from Jojo. Moving forward, do you have any plans of reissuing fixed corporate bonds to refinance maturing debt?

Great question. So we've got PHP 3 billion maturing next year September, and then another PHP 2 billion maturing in 2026. At this point in time, as we're seeing very good improvement in our cash flows, it's -- we're in a pretty good position in the sense that we're able to -- as you saw, our debt level is actually lower compared to last year. And as long as we continue to see improvements in the cash flow, we will have -- it's just the ability of having a lot more cash means ability to pay down debt more. So there's less and less chance that we would need to issue bonds. So probably not anymore. Well, the other factor is the interest rates for bonds have just gone up so much. I mean, we did the 3-year at 2.8%, the 5-year at 3.6%. If we were to do the same now, we'd be paying anywhere from probably 6.5%, 7% or even higher, which is not really that appetizing for us. So there's less incentive for us to fix the debt. And combine that with the fact that we have so much in lines available with all of our banks. So I'd say there's very little chance that we'd be issuing bonds, again, at least in terms of just to refinance the maturing debt. It doesn't look like we will need to.

Okay. Thank you. Yes. That's actually all the questions, but if -- maybe we can give a couple of more minutes. Anyone who would like to type a question in the Q&A box or raise your hand and we can unmute you.

Aaron -- Aaron is -- yes, let me unmute you. Okay, I have allowed you to talk, so yes.

Maybe 2 questions from me. One, can you give more color on what factors drove the softness in Chemrez? Was it more exports or domestic-driven? Any particular industries that slowed down, that caused the impact to your own orders? And then secondly, on the Batangas plant, you mentioned that the first invoice had already been issued. I think sometime in July or August. Can you talk about the -- any update since then or outlook for the balance of the year in terms of potential new orders or revenue contribution?

Hey, Aaron. So in terms of the weakness in Chemrez, it's really a combination of many factors, kind of a perfect storm. So first, in terms of exports, there's definitely -- it's definitely a much weaker export environment. So I'm not sure if you guys monitor things like container shipping rates. So container shipping rates, which really went up by a huge amount during COVID, they have essentially collapsed. It's down something like 80%, 85%, the rates to ship a container across the world. So global shipping has -- there's really been a huge drop. And we also continue to hear a lot of weakness across very many sectors, everything from chemicals, even EV sales in the U.S., there's a lot of weakness being reported. So domestically, we're also, again, just relying on the results from the various listed companies, especially the consumer companies. Pretty much anyone that is in manufacturing, retail, consumer-branded goods, whether here in the Philippines, there's really a lot of weakness being reported. So what we're seeing happening in Chemrez is really reflective of what's happening in that part of the economy overall. In terms of the Batangas plant, so yes, we issued our first commercial invoice in July. And it's just been slow to get started, slower than we expected, admittedly. However, we're encouraged in the sense that there is a lot of customers doing audits, visiting us, meeting with us because compared to the period before we had this plant, we didn't have the capacity. We didn't have the ability to serve exports in large numbers. Now we do. But it's just getting through -- there's a lot of things you have to get right. You have to get certification, you have to -- so even if you're already approved to sell to a customer -- so we have a lot of experts that are currently being served with our old facilities or I wouldn't say old, but previous facilities. But this new plant, we had to get new certification even for those old customers. You can't use the same certification because it's a new plant. So that process is taking a little longer than we expected. And then what you see in a normal new plant, it's just a lot of debugging that's taking place. We're using a lot of newer machines, newer technology, newer processes and getting it all up and running as smoothly as possible, getting the kinks out, reducing issues, various issues in the production lines. That's just taking a little more time. But that's pretty much it. We're expecting -- we're actually quite optimistic in the next couple of months to be able to really ramp up production. That's something we're quite optimistic about.

We have a couple of questions here in the Q&A section. So the first one is from Stephen. Can you share what led to higher HMSP volumes for third quarter 2023? And do you expect to sustain this over the coming quarters?

Well, if you see the breakdown of the volumes we showed earlier, the higher HMSP came primarily from Food, Plastics and Consumer Products ODM. So Food was still -- Food was a segment that suffered the most during COVID. Everything was closed down, even the malls. I think it was 2 months when the malls were closed. So if you were a restaurant, if you were in the mall, you couldn't open. You could only open if you were on your own outside. So it really suffered. That segment really suffered. And it is recovering, but it's -- I won't say it's near -- anywhere near full recovery yet. But -- so I would say that segment can only get better. So the big surprise or the biggest jump in terms of volume change, you can see that 65% is really from the Consumer Products ODM business. Sorry, Crissa, can you go to that slide for Aeropack, please. So everything from personal care, home care, even the maintenance chemicals like lubricants and other chemicals, that segment is doing very, very well. And so that's really where the gains are coming from. In terms of -- so part of your question was are we able to -- do we expect to sustain this? I think so. I think Food definitely should be getting better. We're -- so one thing we saw that changed during COVID was we saw a lot of our Food customers shift to -- basically are trying to survive. So that behavior is slowly reverting back to more investments and growth rather than just keeping things conservative. That's a change in behavior that we're starting to see with some of our customers. So at least from the Food side, that's something we're quite optimistic that will be improving. And Food was 60% of our revenue. Small changes there can translate to -- that's going to have the biggest impact on the overall business. Sorry, I'm not sure if the second question was read, but I can read it out.

Not yet. Okay. Okay. Go ahead.

Yes. So the question of Stephen is, how do you plan to navigate 2024, given expectations of higher for longer inflation and interest rates? So this is something I constantly remind the younger staff. It's -- inflation and higher interest rates, it looks scary now because we were at 2% and below 2 years ago, we're now at 6%, 7%, 8%. It looks really scary. But for old timers like myself, we remember -- I remember when I joined the company in 1997, we were paying I think, 12% or 14% for short-term money. I remember in the year 2000, you could buy a 2-year bond of San Miguel paying 14%. So for old timers like us, sure, the increase is rapid and scary, and it's definitely big in magnitude, but we're used to this. So I would say any business that's been around for a long time, like us, we're used to dealing with higher interest rates. So we're -- I think we'll be okay.

So the next question is from Rainier. What caused the quarter-on-quarter decline of 190 bps in GPM from second quarter this year to third quarter this year?

Okay. I'm drawing a blank. Crissa, I need your help.

Okay. Actually, it's because of the drop in the margins for the commodity segment. So if we can go back to the slide on commodities. Let me just move this to Slide #12. You would see here that in the third quarter, there's been a drop in commodity margins. But by nature, that's normal because commodities is heavily influenced by various market factors, and that's just really it. But if you turn to the high-margin specialty products, there is a positive development here, which you can see that the margins continue to inch up quarter-on-quarter.

Okay. Thanks for the save, Crissa.

Okay. The next question is from Paul. He says, could you provide how your customers are viewing the Batangas plant in terms of quality control progress, et cetera?

I'd say it's very positive, because we're -- so this is not a new business for us in the sense that we've been making a lot of these products for -- some as long as 50, 60 years. And so all of the learnings from the decades of manufacturing have gone into this new plant. So everyone looks at it positively. Everyone is very excited. And everyone wants to start buying from us. So it's just going to take a little more time. But yes, we just have to wait. This is just a matter of time.

Okay. Next question is from Denise. Could you help us understand the higher effective tax rate recognized in third quarter?

Okay. I'll take this question, if that's okay. So if we can go to the slide on the condensed income statement, so you're right, the effective tax rate in the third quarter is around 30% versus around 20% recognized in the previous quarters. And that's because in the third quarter, we recognized losses from the Batangas plant. So if you'd compute for the effective tax rate, which is the income tax payable over the profit before interest and taxes, the EBIT, or profit before interest and taxes, it's actually kind of distorted. So your base is distorted, which in turn made the effective tax rate looks like it's higher in this quarter. But moving forward, it should normalize back. And there's actually room for effective tax rates to go down once the Batangas plant is -- has ramped up fully because once you recognize earnings from that plant, it's nontaxable for the first 4 years and can be extended up to 6 years.

Can I -- I'm not sure if this was mentioned, Crissa, when you talked about the lower margins this quarter versus last quarter. I think another impact might have been the higher depreciation from the new plant. Am I correct there? Or is that...

Well, I think that would have an effect in the EBIT margin, but I think the.....

Okay, but not on the gross margin?

On the gross, maybe slightly, slightly.

Okay. All right. Okay. Thanks.

Okay. Thanks, Crissa. So a question from Daryl. How long does it typically take for a customer certification for a facility like the Batangas one?

How long does it take? Sometimes, it depends on the mood of the auditor. So during COVID, everything was so nice because suddenly, these auditors were fine to do everything online. Now that there's really -- well, COVID is still around, but it's not as bad as before. So everything is back in person. So that's one issue. A lot of these firms that are doing the audits are shifting back to in-person audits, and it's taking them a while to get the processes start again. So in some cases, it means bringing in new auditors, retraining them or there's just not enough of them. So scheduling the audits are -- it's taking longer. So typically, it can take anywhere from a couple of weeks to 3 months, 4 months, sometimes it can take as long as that. So what we're trying to do is to -- and so the other problem here is that it's a much bigger plant compared to what we had before. And when you have something that's a bigger size, bigger scale, more complex, there's just more things to look at, more things to check, more things to clarify and wait for results. And then sometimes, if the results are not convincing, they want another test and more results to be seen. So it's something we're used to that really takes time. It's just we've never had something so big come online so quickly at one go. That's why it's just taking a little longer. Unlike with our previous plants, we've had them for years. And every time we get a new customer, that's the only time we'd have to do the audit. We didn't have to do the audits all in the beginning. We were doing the audits over time as we were guiding the new customers. Not just -- so with this new plant, we have to do the audits all in the beginning. And you can just imagine all that scheduling, it's a lot more complex.

Next question from Melissa. How much in contribution do you expect from the Batangas plant?

Okay. We haven't really talked much about details in terms of capacity or revenue or income contribution of the new plant. We'd like to hold off for now. But -- so what we can normally discuss would be more towards scale. So this new facility occupies a land area that's double the size of all our existing plants occupied. However, if you think about it, being located in 1 massive location, in theory, you're supposed to get -- and you have better and newer technology, newer processes, newer machines. So in theory, you are supposed to be able to get better yield, lower waste, more efficiency. Margins should be better. So those are the pros that should give you better margins and better profits. On the other hand, your costs, everything from the construction cost to all the implementation costs, they're definitely much more expensive now compared to like 20, 30 years ago. So that's something that will weigh on the costs more. But -- so in terms of where the profitability of the new plant will come in, that's really more in line of what we're willing to discuss at the moment. But we're -- maybe in the next couple of months, we can give more insights. But as of now, that's pretty much it.

The next question is from Daphne. What caused the high effective tax rate also for the third quarter, you've already answered that. But how should we look at full year 2023 effective tax rate going forward?

Okay. Can I take this again?

Yes. Go ahead.

So for the income tax rate, just to put it in context. The income tax payable, we compute on a per-company basis. What you see that we present is D&L on a consolidated basis. So that's why if you take a look at it on a consolidated basis, there's some sort of distortion as far as the effective income tax rate is concerned. But for easier computation for the purposes of your financial modeling, I think it would be better or more stable if we compute it as a percentage of the gross profit because also in some business segments, we can use the OSD or optional standard deduction. So effectively, that's gross profit x15%, more or less that's where the effective tax rate will fall.

Okay. Thanks, Crissa. Okay. Let's go to the next question from Adrian. Do you expect high-margin volume growth in fourth quarter 2023 to mirror what happened in fourth quarter in 2022, where customers seemed to stock up on inventory in the third quarter last year, which resulted in lower volumes in the quarters that followed? Given the current economic weakness, could we see a repeat of this? Or will it be better given a low base in fourth quarter last year?

Yes. We didn't really see any stocking up this year. So I don't see that behavior repeating. So that was really more, I would say, a reaction last year to supply chain problems, and COVID and all that. But I don't think that's going to repeat this year anymore. So fourth quarter this year should be pretty much, well, normal in that sense. Or at least more normal. Anne? Sorry, you're on mute.

Sorry. The next question is from Joyce. How long do you think it will take to iron out the kinks and get the Batangas plant to operate more smoothly? And when do you think its operating margin will start to be more at par with your existing facilities, i.e., no more ramp-up margin drag from the Batangas plant?

In our experience, new plants really take a while to iron out. So it might take a couple of months. And well, what we know is that some parts of the plant in the next 1 to 2 months will be okay already because they came online earlier. However, we have some lines where the construction and the completion are actually still coming online. So they will take longer. So that process will be ongoing for at least, I would say, until the middle of next year at least. So it's still going to be a while before we can see that the plant is truly done with construction. Okay. So here's the other complication. We -- whenever we build new plants, our experience has been just to build it much bigger and have spare space to add more lines in the future. And we've done that with this new plant. So what that means is that if there are opportunities we can see sooner rather than later, we may start adding more of these new lines as well. And from that perspective, it means as we're adding more capacity, then we can't say that we're done with construction because we've just added new construction. So -- but at least in terms of what we have already now, I expect by the middle of next year, hopefully, we should be done. That's what we're expecting. Second question was about operating margin. When will it be at par with our existing facilities. If we can get utilization to around, I would say, 60%, 70%, that, I think, would give us a good shot at having the margins be comparable already with what we -- with our existing facilities. So it's going to take a while. That's going to take a while.

Okay. Thank you. That's actually all the questions we have in the Q&A section. [Operator Instructions] Okay. Follow-up question from Joyce. When do you expect to hit 60% utilization?

So we're -- okay, I can tell you that the sales guys are working really hard, especially on the export side to promote exports and works. So we're -- so the minimum for us, being a Filipino company in a PEZA zone, is we need to hit at least 50% of the production or revenue from this new plant coming from exports. But we're actually targeting higher than that if we can. So understandably, before, our exports were around 25%, 30% of our revenue. So now it's required us to have a change in mindset that we really need to dedicate more in exports. So that's one perspective. The other perspective is that we're actually -- so in the Philippines, we would be considered a big fish in a small pond. But overseas, we're a tadpole in a huge pond. So there's a lot of customers, a lot of potential, a lot of business that we can get. In terms of how long to hit that 60% -- even at 60%, that's a huge increase from where we're now. That's -- I would say that's more than double of our peak from last year. So for us to double from our peak last year, it's going to take a little while longer. I don't want to preempt or -- but it's a massive effort on our part, and it is something that we want to line up, and we're trying really hard, but it's going to take a while. Sorry, Joyce, it's not an easy question to answer, but it is -- it's a huge jump from where we're.

Okay. Thanks for answering that. That's the last question we have in the Q&A box.

There's someone raising hand?

Yes. Yes. So okay, Joyce, you raised your hand. Do you have any follow-up questions? Okay. I've allowed you to talk now.

Just a follow-up. So if 60% is more than double your peak previously, and as you mentioned, it will take a lot of effort. Would it be safe to say that it will probably take a couple of years for the Batangas plant to stop being a margin drag to your overall business?

Ramos, when you put it that way, it sounds depressing, but -- I -- yes, it's a big plant. You can't expect to build something so huge, something so expensive and not expect it to be a temporary drag on -- in terms of expenses and costs. So yes, it will take a while.

But I guess if you say...

But we're very comfortable with that because we're really looking at the long term. I think we started talking about this in the last briefing. There's really short-term pain when it comes to a massive undertaking like this. But we're really looking at the long term, 5, 10 years out. Anything to do with constructing a new plant, buying all the machines, putting it together, getting the certification. Looking back 5, 10 years ago, we were so happy that we did it because things were much cheaper then and it's -- as time goes by, it's also harder. It's getting much and much harder to get certified and to satisfy the different standards because standards are getting -- for compliance, for different reasons, they're getting harder. And the manuals are getting thicker, the rules are getting longer. So yes, it's short-term pain, but long-term gain. That's really what we're looking at.

Yes. And just the expected drag will probably diminish over time. So...

Yes. Yes. It will be. And you can see it. There's a big difference between the income with and without the expenses for the new plant. The difference is big, and we can see it. We can feel it. It is a heavy burden on us. I think another person raised her hand?

Yes, [indiscernible]?

Yes. [ Steve Barry ], I have allowed you to talk. So you may ask your question now.

Yes. Sorry, I don't hear any audio.

Yes, we can't hear anything. So if you have any question, you may speak now or you may either type your question in the chat box.

Sorry, can you hear me?

Yes.

This is [indiscernible] here. So I just have a quick question for you because clearly, there's above excess capacity now due to this massive undertaking with the Batangas plant. So understandably, it takes a clear ramp-up. But will you be able to share with us in terms of the product lines or whether the -- or maybe the split between specialty and commodity and so on, what do you think is your focus on when you want to really ramp this up quickly? At the same time, given the -- it is also a financial burden for the time being, how do you think about pricing, especially when you try to ramp up capacity?

Okay. That's a great question. So we want to hit the low-hanging fruit first and get revenue started. And by having more throughput as well and increasing it over time, it gives us more opportunity to get the bugs out of the manufacturing line. So definitely, we'll start seeing more commodity coming out of the new plant in the beginning. But of course, the focus for us will always continue to be to prioritize the specialty. But the commodity side, it's there for the taking. It gives us that ability to absorb a lot of the fixed costs, ramping it up very quickly. So it's slightly -- that's where we will go initially. But over time, the focus is really more -- it's really higher on the specialty, and that's where we will be focused a lot on. So you can expect that -- so it's similar to how we grew all of our other businesses, starting with the lower margin first, driving market share, grabbing awareness and visibility with the customers and over time, shifting to the higher-margin. In terms of specialty -- so yes, so that's what we will -- what we're expecting to do in terms of the ratio or the product mix. Sorry, what was the second part of your question?

It's really on pricing there. Would you engage in a bit more, say, competitive pricing to try and bring up the capacity utilization more quickly? And if I may just jump in a quick follow-up there. In terms of the commodity market, how will you characterize it in the sense that, is there a lot of volume for the taking, if you try to produce -- or present your new capacity to the clients? Or do you think it's going to be a gradual ramp that takes time?

Okay. So in terms of pricing, it will depend on various factors such as the state of the commoditization of what we're selling as well as the requirements for quality. That's usually where there's some variability in pricing. But I think it's safe to assume that if we're selling more commodity, we're really going to more or less follow the pricing that the market is dictating. So we don't expect to be giving too much of a discount. So in other words, we don't necessarily need to sell at a lower price just to sell more because by nature, we're not a very big -- we're not adding such a big chunk of volume to the overall market that's going to cause a distortion that -- where everyone has lowered their price. In terms of the behavior of the commodity market, I would say the food commodity market in general went -- just went through so much disruption in the last couple of years because of COVID. And then there was the war in Ukraine as well, which caused prices to, at one point, go up massively. And suddenly, they're collapsing. So I would say that would -- the external factors would play a bigger factor rather than just the fact that we're coming online with a big new plant. So in essence, not much impact from our new plant, just as a new plant, but it's really what's happening globally. That, I think, would be the bigger factor.

I guess where I was coming from is if you present this capacity to your clients, are they willing to quickly switch to your plant versus taking it from other competitors? Or would they be quite sticky in terms of where they produce from?

Okay. So we're very focused on clients that really want us because of our proven track record, our ability to extract and convert products that we're naturally -- we have that natural advantage. So everything like coconut oil, for example, and other such similar products, we do have that advantage, being located in the Philippines. So we're trying to be selective. We're trying to focus on those businesses where we do have that natural advantage and where the demand is very high. We're not so focused on chasing after other markets where we don't have that advantage.

Joyce, did you raise your hand again? Do you have any follow-up questions?

Oh, sorry.

Okay. Yes. So we don't see any more outstanding questions from our end. So if no more questions, then that concludes our third quarter briefing. As always, you can always reach out to our IR team. So that's Alvin, Ainslee, and myself if you have further questions in the future. So again, thank you for joining our briefing, and see you next quarter.

Thanks, everyone. Good morning.

Thank you. Thanks, everyone.

Buh-bye.

Bye.

Thank you.