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

Good morning, everyone.

Hi, everyone. Good morning. Welcome to the second quarter briefing of D&L Industries. Here with us today is Mr. Alvin Lao, President and CEO of D&L Industries, to discuss the results. Without further ado, I now turn over the floor to Alvin.

Hi, everyone. Good morning. Today, we'll be disclosing our first half results for 2024. So straight to the highlights. We're happy to report that for the first half of the year, we had net income increase by 6% compared to last year. And actually on a quarter-on-quarter basis, we're doing quite well with net income up by 13%. So this is the second quarter of the year versus first quarter of this year as well. And we have other highlights such as our high-margin specialty products volume, or HMSP volume, is up by 33% year-on-year. And this is the fourth consecutive quarter that volume is up for this segment of our business. Export sales are also doing well with contribution to sales at 33%, which matched our record high that was hit a couple of years ago. And we're seeing fairly stable raw material prices, and together with lower CapEx, it's resulted in free cash flow of PHP 2.4 billion for the first half of the year, which is more than double the free cash flow from the whole year last year. And just the last bullet point there. We are still quite confident that we are going to hit our net income target of 10% -- at least 10% earnings growth for the year. So in the next slide, you can see here that -- the historical net income for the last 3 years as well as the comparison of the first half of this year versus first half of last year. In the next slide, you can see that compared to the previous quarters, we're already profitable for our new plant in Batangas. So this plant, the operation started in July of last year, so third quarter of last year. And that's why you see there in the third quarter of last year, we had to start expensing all of the costs that we -- that are incurred for that plan. And over time, as you can see, the situation continued to improve. And as of the second quarter of this year, the plant is already profitable. And the next slide there just shows you a picture of what the plant currently looks like. We are going to be welcoming visitors to do plant tours at our plant soon. So please stay tuned for that. In the next slide is a brief look at our income statement or at least the highlights. So we had 17% growth in revenue versus first half of last year. And as you can see, 6% growth in net income. Comparing year-on-year, just the second quarter, meaning second quarter of this year versus second quarter of last year, net income growth was at 8%. And again, comparing quarter-on-quarter or second quarter versus first quarter of this year, net income growth was 13%. Quick look at the sales mix. So we are still pretty far from the optimal sales mix or at least the peak that we had pre-COVID. So we were at close to 70% coming from high margin in 2019. That fell all the way to almost half or 50-50 between high margin and low margin 2 years ago. Since then, we have been making some inroads, but as a lot of our commodity sales continue to do well, we are still seeing growth across the board. But because the commodity segment does grow quite fast, it does mean that our product mix is still not where we'd like to see it, although it is -- the situation is improving, and we are optimistic that it will continue to improve. The next slide shows you the segment volume growth across all 4 segments as well as split between high margin and commodities. So with the exception of the consumer products ODM segment, we saw very good volume growth across all our segments and overall volume growth of 38%. But with high-margin specialties, overall volume growth of 23%. And in this case, we did see the volume for our commodities business up by 53%. And this was really driven mostly by the high growth in our food commodity segment, which was up by 66%. In the next slide, we see there the volume growth across our high-margin specialty products. So again, for the last 4 quarters, we're seeing positive growth in volume for our high-margin specialty products business. So it's been 4 -- no, sorry, 6 years since we've seen 4 -- at least 4 quarters of consecutive growth for the high-margin segment. So we're hoping to match that 5 straight quarters of consecutive growth for the high-margin segment. And the last time we saw that was 6 years ago. Taking a look specifically at the high-margin segment. So in terms of the margin of our high-margin segment, you can see there that during COVID, the margins dropped from 25.7% to just under 22%. So since then, we have seen recovery, and it's now at 24.4%. So still a little over 1% left until we get back to that point that we had before. For the commodity segment, we are seeing a similar pattern where margins fell during COVID but have started to recover. And I would say at 7.3% for our commodity business, the margins -- the gross margins are pretty much close to the midpoint of where our commodity margins usually swing. The next page is our exports business. So we're at 33% of revenue coming from exports at the moment. So we -- the last time we hit this high level was in 2021, and we are confident of further increasing the contribution of exports to our revenues. So our target eventually is to hit at least 50% of our revenue coming from exports. And with our Batangas plant located in a PEZA zone, that is something that we are quite confident of hitting. In terms of our cash flows, so this year, we've seen much lower CapEx as well as very stable commodity prices. So those 2 factors have made a huge contribution in terms of positive free cash flow, as you can see. And we expect this trend to continue. The outlook for most commodity prices and, of course, for our CapEx as well remains to be quite stable. And on the next slide, you can see there. So we did start to see CapEx increasing as we ramped up the construction of our plant in Batangas. So we finished that construction in July of last year, although we still have a lot of the retention payments being made to suppliers over the next couple of months. So every time we have a large contract with a contractor, we retain 10% of the fees or expenses which are released to the contractor a year after the commissioning of the project with the contractor. So that payment of retention has been -- that release was started a couple of months ago and will still be -- some payments will still be due in the next couple of months. So in terms of our margins, so we did see -- so this movement in our margins is not so much reflective of volatility in our costs, whether it's raw material prices or the foreign exchange. It's more a reflection of the product mix, that chart or page that we showed earlier. And as you can see here, the product mix, as it fell during COVID, our margins fell as well. But as the product mix has slowly improved, our margins have been improving. And we do expect this improvement in margins to continue as the product mix improves. So a quick look at the different segments. So our food segment is still the biggest at 65% of revenues. It is also the biggest net income contributor at 39%. Chemrez or the oleochemicals and other specialty chemicals business or segment, it's the second biggest revenue contributor. But in terms of net income, the second biggest net income contributor is actually our specialty plastics business. And that segment, as you can see there, in summary, did very well this first half of the year. So a quick look at the food ingredients business. So a huge jump in volume by the commodity part of food ingredients. So we saw earlier that this had the largest contribution in terms of volume growth across all segments. So the commodity business volume was up by 66%. And overall, good growth in volume and sales for our food ingredients business as well as net income, a slight drop in gross profit margin. And this really mostly the contributed by the large growth of the commodity food segment. In the next slide, you can see there Chemrez. So Chemrez, doing relatively better than last year. For those of you who were following us since last year, you might recall that Chemrez net income fell the most last year. So this year, net income is still down but by a much lower number, just by 3%, but more stable in terms of volume growth and there's even revenue growth. And in the next slide, you can see that we are looking forward to the increase in the biodiesel blend from 2% to 3%. So that's taking effect in October of this year. And the blend from 3% this year, the expectation is that it will increase by 1% every year up to 5% by 2026. A quick look at our specialty plastics business. So very good growth in terms of volume, sales and a huge improvement in margins, back up to above 30% in gross margins. And overall net effect was net income growth of 51%. So this is the first business that the group started with 61 years ago, and we're glad to see that this business is still doing quite well. The last segment is consumer products ODM. So we did see this segment -- it's coming from a high base, meaning there was very good growth during COVID and also very good growth last year. So it's given back quite a lot of that growth this year and partly reflective also of the -- and this is something that a lot of other companies have reported. There is that effect felt across consumer segments in general related to higher inflation and basically just higher costs of products in general. So we're seeing that effect on that segment as well. A look at related party expenses. So the left side of this table, these would be expenses paid to related parties. So total effect coming in at around 2% of total costs and expenses. On the right side, so this would be income earned by D&L from affiliates. So net of consolidation, it's coming in at roughly 0.3% of revenue. So we have related party expenses, but we also have a little bit of related party income, which helps offset the related party expense. In terms of our cost structure, so no major changes. Raw materials still making up the biggest chunk of our costs at 80%. Second biggest cost contributor is labor. If you were to add up what would be classified as fixed costs, so that would be pretty much labor, depreciation and rents and maybe half of others. So that would add up to a little under 15% of our total costs classified as fixed. So 85% -- over 85% of our costs would be classified as variable, which gives us a lot of flexibility to be quite nimble and agile and quick to react every time we need to react. On the right side there, you can see the breakdown in terms of raw materials. So coconut oil still being our largest raw material source at 33% with palm oil coming in second at 25%. And if you add together all the other fats and oil, so just vegetable fats and oils and other fats and oils as well, that total comes to about 63%. And on the bottom left, you can see there. So what we define as technology spend includes IT and R&D, and we are continuing to invest in more technology. And the general rule in manufacturing, the more you customize for a client, the higher the price you can charge. So that is -- it is an area that we continue to invest in. Quick look at our balance sheet. So no major surprises. That has been reduced further, down by about PHP 800 million. So debt-to-equity ratio is -- has improved. Return on equity and return on invested capital has also improved as well. Interest cover, still quite comfortable, 5x. And on the next slide, you can see there. In terms of net gearing, we're at 60%. So that is on the high level compared to historical levels. But at 60%, I would say it's still a fairly comfortable level. And over time, as cash flow continues to improve, we do expect to be able to continue to pay down debt. And as you can see, the average cost of debt, which includes the effect of documentary stamp tax, or DST, currently at 5.73%. And the next slide, you can see there. So that interest rate, so that is the light green line. So it's pretty much close to the high that we've seen in the last 8 years, and there is a lot of expectation that interest rates will be coming down. So as interest rates go down and as we pay down debt interest expense, we do expect interest expense to continue to come down. So in terms of cash conversion, so pretty stable, not much change from the level from last year at 144 days, inventory at 106 days, receivables at 62 days, which is pretty much where it would normally be, and payables at 24 days. So in terms of the stock, we're currently ranked #55 among the largest Philippine companies ranked by market capitalization. Market cap's about PHP 42 billion with a 12-month daily trading average at around USD 217,000. Public float is 27% and foreigner owned is about 12% of the stock. And in the next page, you can see there. So how the stock has done since the IPO and compared to the PHISIX or the Composite Index. And we are continuing to hold meetings with various investors not just in the Philippines but in other countries as well. That's it for my part. So we're open to Q&A.

[Operator Instructions] So we have a couple of questions here. So the first one comes from Jason Mok. Given the exports revenue contribution to total revenue has increased considerably and that we have seen a strong ramp-up of the Batangas plant, why have we only seen HMSP revenue to only grow 1% year-on-year but commodity revenues growing by 45% year-on-year? Would think that exports and the Batangas plant are meant for HMSP, but we haven't seen a big improvement in the product mix.

Okay. Thanks for the question, Jason. So there's a couple of factors here. One is that -- so there is a lot of volatility in commodity prices. And Crissa, if you could please go back to that chart -- no, sorry, do you have a chart in the appendix that shows palm oil and coconut oil?

Yes.

Yes. So what this shows you -- sorry, can you go through the previous slide? I think that you can see it more here. Thank you. So year-on-year, palm oil is pretty much flat, but coconut oils jumped by 50%. So this is a big part of the reason why in terms of revenue growth, we're not seeing much change in the high-margin revenue. But in the commodity revenue, there is a very big jump. And essentially, we are exporting a lot of coconut oil. That is something that -- at the end of the day, business is business. We're going to make -- if we're able to make money from it, we'll grab the opportunity. We do have an opportunity in terms of exporting coconut oil. So we've been doing that. And that is part of the reason why we are able to hit profitability for the Batangas plant. There are -- we are seeing better exports. But admittedly, there is more exports coming from commodities than we had initially anticipated. We think that's fine. It's -- it really does take time for the high-margin exports to grow or to ramp up. So we're hitting quick wins with the commodity exports for the moment. But thanks for that question, that observation.

The next question comes from Joyce Ramos. So why is the food low-margin commodity growing much faster than HMSP? What does that indicate about the situation of your customers? Can you share what trend you're seeing about your F&B customers? Also, as a follow-up to that, previously, there was a commentary that D&L can sort of control the volume of commodities that we sell, especially when margins are not as good. What can we expect for the balance of the year? Are you still expecting the low-margin commodity products to post stronger growth than HMSP this year? When -- and when do we expect the product mix to improve?

Joyce, so what I mentioned earlier, we're going for some quick wins, and there is a lot of demand in terms of coconut oil exports. So let me maybe give a little context here. The Philippines is the world's -- or has been the world's largest exporter of coconut oil for a long time, decades, at least since the '80s. Now the problem, though, is that the bulk of these exports are in crude form. What we're exporting is not crude coconut oil. It's coconut oil value add. It could be low value add, meaning just to fine coconut, or it could be much higher value add, meaning it's actually a specialty product. The thing with specialty products is it does take time, everything from certification, qualification by the client. So it is expected to ramp up over time, but it won't grow immediately. So what we really wanted to do was, okay, we have this huge plant, huge depreciation cost. We were under a lot of pressure to try to offset these huge costs with something that can give us an immediate income. What you can see, though, from this slide in terms of the commodity segment of food, so that's the second box, with the margins coming in at 7 -- gross margins at 7.2%, that on a net income basis, it is profitable. So while this segment is profitable, we will take advantage and we will sell because we need the income. And we have the source of coconut oil to be able to service these customers. It's also a way for us to make inroads for these new customers. And that's been typically how we have made steps or gained traction within most of our large customers. When you have a new customer, there's not much trust built. We have to learn their systems. They have to learn what it's like also waiting for shipments coming from the Philippines and all that. So the way to do that is start with something can ship immediately. So these would be the commodity products. And as we're working on the formulations and certification to sell the higher-margin products to them, we will do that over time. But in the meantime, in the short term, we will sell the commodity products to them. So in a way, yes, you could say we are selling more commodity than we were expecting, but it is net income accretive. So that's -- that can only be good for us. Plus, in a way -- it is, in a way, expected because this is really how we make inroads with most of our new customers. It's really starting with the simpler commodity low-margin products And over time, as the relationship is built, then we move to the high-margin products. But your comment about us having control over the low-margin business, yes, that is definitely true if that margin dropped. So you saw that chart earlier where we showed historically the low-margin segment margins can go anywhere from 4% to 10%. So currently, we're at 7%. If that margin drops anywhere below, I would say, 5%, then you would probably see us -- you would likely see us stopping sales because if it wouldn't make sense.

Okay. There's a follow-up question relating to the sales mix in case you wanted to add something else. So can you provide more color on what times your optimism in further improvements in product mix over the coming quarters?

Well, so earlier, I had mentioned in one of the slides that our spending in technology, so that's mostly related to R&D as well as IT. And so spending on both has been going up. So it's up by 33% this year. And it's doubled from the level pre-COVID. So the general rule, as you spend on more customization for clients, something that you can specialize, something that gives -- give something unique to the customer, the customers really appreciate that, and you can really charge more. And that's really the story behind our high-margin segment. So it's not -- this is not new for us. This is really how we have grown most of our businesses, how we have shifted into more high-margin specialty products over time. So unfortunately, what happened during COVID is a lot of our customers just were not interested in any new developments. They were really focused on survival, on focusing on just their basic products. And because of that, our spending on development actually dropped. And you can see that in the tech spend chart. From the spending in 2019, it fell by roughly 10% in 2020. But since then, we've started to ramp up spending on technology. Even when customers were not as interested and they were not as receptive in terms of new developments, we knew that it was only a matter of time before they would be interested again. So we needed to be ready. We needed to, in a way, we spend ahead so that when the time came and when the orders started coming in again, we would have a lot of things that we can offer to them. And that's really what's been happening. I would say in the last year, that interest from a lot of our customers has been very strong. So recovered from the big drop during COVID and I would say getting even better. And that's really what -- when we talk about how there's confidence that the product mix will improve, that's really where the bulk of the confidence is coming from. It's a knowledge that this is something we've done before. We've seen it happen in the past. We know customers are going to come back to us. We know that interest for unique products, for customization, it's very strong. And it's -- so it is aligned with that expectation that effectively the product mix will eventually improve over time.

Okay. Thank you. There's a follow-up question from Joyce. I'm not sure, but can you confirm? It seems that domestic sales is around low single digit. Can you comment on the sentiment of your customers? Are you expecting a bit of a recovery in the second half? What indications are you seeing?

I can't comment specifically, but I mean you can kind of see from our numbers. Take a look at overall revenue growth. Then you can see what our export growth numbers were. You can kind of see some patterns there. But there is -- so for us, what I can say is, for us, the opening of the Batangas plant opened a new door for us in terms of exports, which was really kind of a low-hanging fruit and a very big opportunity because we were just a drop in the bucket. Even though we were exporting before, we really had -- we had this limitation. We didn't have the capacity to really ramp up our exports. And now we do. So thankfully, because of that, we can take advantage. So even if growth domestically is not as strong, we do have that capability to grow because we can tap into the export markets. In terms of sentiment from our customers, everyone was hit by higher raw material prices not just in the Philippines but globally. And that kind of took the wind out of a lot of businesses because we -- everyone is just starting to recover from COVID, and suddenly, here we are hit with high commodity prices. But that seems to have passed. Even with all the geopolitical issues happening around the world, commodity prices seem to have stabilized. And so that doesn't seem to be a factor anymore. So there is a lot more optimism for growth in the second half.

Okay. Thank you. The next question comes from Jason Mok. What is stopping your export customers, both old and new, from placing more HMSP orders? D&L has quite long relationship with them. The CS team has been working hard to get more orders, and the Batangas capacity is already there. So what is stopping them from placing more orders quickly? Would it be more of macro weakness in general? Or is it something that is D&L company specific?

So I wish that having that long relationship and that long history was enough. Unfortunately, the reality in manufacturing is every time you build a new plant, you pretty much start not from 0, but you kind of have to start from a beginning. What I mean by that is when you have a new plant, you have to undergo a whole new set of certification standards. And the standards that you met before may not necessarily be the same standards you have to meet now because usually, companies will be tweaking or changing their standards. In other words, it's becoming more and more difficult to qualify and to certify. So we're undergoing that process. It is taking time. But it was kind of expected. So in the meantime, while we're undergoing these necessities, we're tackling the low-hanging fruit, which is really selling more of the commodity product, making sure that it's still profitable but adding to the relationship building that we're doing with our customers. So selling low-margin products to our customers, maintaining the communication, learning about the systems and they're learning about what it's like buying from us at a much larger scale and over time, ramping up the sales of the high-margin products. So it's just going to take time.

Okay. The next question is also related to that. In your experience, how long does it usually take for new customers to shift their demand towards HMSP?

It could be as quick as a couple of months. So 6 to 9 months is possible, though in our experience, we've had some customers that we had to court for years like a couple of years before they finally ordered from us. So I would say on average, maybe 6 to 9 months is a good indication on average.

Next question from Prashant Premkumar. Congrats on the strong quarter. First -- actually, there are 2 questions. So first question, HMSP gross profit margin for 2Q '24 appears to be lower than first quarter '24. Is this because of mix as well? Second question, what are the factors driving strong export growth? Are we seeing more demand from China, ASEAN? Or is this demand from Western, more developed markets?

So the first question with the lower -- we are seeing slightly lower margins, you're right, in HMSP. I think we were at 26% -- roughly 26% in the first quarter. So we're currently at blended 24.4%. So that means we're probably at 23% for -- just for the second quarter. Part of it is just how -- so most commodity prices have been stable, but what we showed you earlier, coconut prices are actually up by 50% year-on-year. And we use a lot of coconut oil in our high-margin products as well. So what we usually see is that there's a lag in our ability to pass on prices. And when prices have grown so much, that means that there is that lag effect. So it's taking a while for the margins to catch up. So margins are lower in the second quarter for HMSP, but we do expect the margins to recover once the commodity prices, specifically coconut oil prices, stabilize. The second question about export growth. It's demand across not just ASEAN. We are seeing good growth in ASEAN. We are seeing good growth in North Asia, so China, Japan, Korea. And when we talk about Asia Pacific, it goes all the way down to Australia, New Zealand as well. We're also seeing growth from customers ordering out of Europe and the Americas as well. So in a lot of ways, the growth for us is really because we're kind of the new kid on the block with a suddenly large capacity. Not a lot of companies built up capacity in the last 5 years. So in a way, we're kind of in a good spot, and we're benefiting from that.

The next question comes from Parvin Mamedov. How is the recruiting of new clients for food ingredients going? Are there any big new customers that we have signed up since the beginning of the year? And could you give more details around the margin decline for specialty ingredients in the food segment?

Okay. So short answer is yes. We have gotten several large customers for exports. So these are customers who had already indicated to us before that they are interested in our products. But because a new plant wasn't up and running yet, they couldn't really place large orders with us. And since then, since the new plant has already been up and running for about a year, we have been shipping to them, and we expect more to sign up. Just looking at the meetings that our people are having, the interest in the exhibit and the trade shows that we've been attending, so short answer is yes. In terms of the margin decline in specialty ingredients, so we were at 31.6% last year, currently at 28.5%. I mean a 3% swing sounds like a big swing. But at the end of the day, it's a high-margin product with almost 30% gross margin. So a 3% swing is kind of the norm in a way. It's not really that big. But it's -- part of it is really the price -- sorry, the lag in the price pass-through. Again, we use a lot of coconut oil, especially in the specialty ingredients segment. And when you have prices ramping up very quickly, it takes us a while to fully pass on the price change. But that should revert -- or the margin should go back up once commodity prices are more stable.

Next question comes from Rainer Yu. Are coconut exports expected to be maintained for the rest of the year, similar to the first half?

So while margins -- at 7% for the commodity segment, 7.2%, that -- we can continue to do that because it's effectively income accretive for us. But if that margin gets lower, so if our competition dumps prices or just if demand weakens and supply doesn't go down or doesn't decrease as much, then that will lead to prices going down and margins going down, then we would not be as interested to do exports. So only if the margins make sense, then we would participate.

Okay. Thank you. I don't see any more outstanding questions from my end. [Operator Instructions] So Jason, you are raising your hand.

This is Koh Sang, sorry. I used Jason's [ slate ]. Yes, I wanted to ask about the utilization rate of the new plant. And mostly, the production is coming up in our new plant. Are they mostly the OEM or the exports that are the basic nature or the more value-add kind of products that we produce out of the plant?

Koh Sang, so utilization is still fairly low. It's still less than half, way, way below half. But what we did with the new plant, we purposely built it extra large because we knew that over time, instead of adding or rebuilding all the infrastructure, the utilities, warehouse and so on, we want to leave extra room so that it would be easy to add capacity effectively or cost -- additional cost of producing on a per tonne basis is lower. So what I mean by that is even as utilization goes up, we can easily add more machines over time. And that would have an effect on the capacity and the utilization again. So with the existing machines, utilization is still less than half. But as we grow, we can easily add more machines later. And so utilization, by any way you look at it, it's really low at the moment, very low. But if I can point something out, if we look at our cost structure as a company -- let me just go to that slide. So our cost structure, you can see that we are not CapEx intensive as a business. Depreciation -- together with rental, depreciation is about 4% of our total costs. So just depreciation alone is roughly half of that. So roughly 2% of our costs coming from depreciation. So that means we are not a high CapEx. We are not CapEx intensive as a business. So what that means is -- I guess what I'm trying to tell you guys is for us, we are a manufacturing company. But if you look at our margins, you look at our -- but in terms of product mix and if you look at the margins, specifically of our high-margin business, we're clearly not a typical manufacturing company. In a lot of ways, we're kind of like a service company where the high-margin specialty product is more like a recurring business because our customers continue to buy these high-margin products from us. So low utilization is not exactly a penalty for us because we're not CapEx intensive. And we saw this -- I remember when we did our IPO 12 years ago, our utilization back then was just 25%. And we were already profitable back then. So maybe -- and thanks for the question because it reminded me to mention the other thing, which is -- so as a company in terms of the new plant in Batangas, we built it based on our expectations. We started construction 6 years ago, in 2018, the end of 2018. Things have changed a lot. So what we ordered then we thought would last at least 2 years. What we're finding now is actually some of the lines that we ordered, we've already hit full capacity. So adding a little complexity to the answer to your question. So overall, utilization is still low. But for some of the lines that we ordered, we didn't order enough. We didn't think the demand would be as strong. So we've actually hit capacity. We're actually ordering additional lines now. So we can continue to do that. It may not make a big impact in terms of the overall utilization or the overall CapEx spend or the overall efficiency. But I guess for me, what I'd like you guys to take away from this is that currently, we're at a very low utilization. We have the capability to add a lot more capacity at a quite cheap price or cost and ramp up production and extract good margins going forward.

What about the part on the type of products that have been exported out of the new plant?

So we're -- as much as possible, of course, we try to sell high margin because margins are over 20%, 25%. But it takes time to certify. It's time to get these approvals. In the meantime, we have this opportunity to sell commodity. The margins are good. Gross margin, 7%. So in terms of net income, it is accretive. So we're taking advantage. I do believe, though -- so in the beginning, at least for the new plan, we're selling more commodity than we expected, although I do believe that our high margin in terms of volume, we're still selling more high margin and commodity. It's just that the commodity is higher than we thought. So instead of like, let's say, 70 high-margin, 30 commodity, we may be at 60-40, something like that. But the commodity business is very -- it can be fleeting. What I mean by that is if the margins drop down to, let's say, 5% or even 4%, we could easily stop that. And you would see the volume there just drop, but the impact on net income would not be as noticeable, again, because the gross margins of commodity is just 7%. For the high margin, it's around 24%, 25%, 26%. So I am not too worried. Eventually, we do expect we may not sell as much commodity, or it may not grow as much. It may even go down, but I'm not too worried about that. My focus -- our company's focus is really more on a margin business.

Thank you, Koh Sang. The next question, maybe we can entertain Parvin from Equinox.

Congrats on the results. I had a question on free cash flow generation. It has been strong so far this year and mostly supported by working capital change, clearly different from the last year's pattern. I was curious, what exactly is driving that? And what is the expectation for the full year?

So a lot of commodity prices really ramped up when -- during COVID, there was a lot of supply chain disruption. And then when Russia attacked Ukraine, we saw that huge disruption again, and a lot of commodity prices went up. But since then, the markets adjusted, and the situation stabilized. So except for a few things like cocoa, coconut oil, I think orange juice and a few other things, where prices are still pretty high, most commodity prices are pretty stable. And even the conflict in the Middle East doesn't seem to have that much effect on commodity prices. Like I saw -- even this morning, I saw OPEC announced that they were adjusting their targets for 2024 lower in terms of crude oil production or demand. So as long as commodity prices are stable, then you may not see as big a change in terms of negative working capital, like what you saw in the first half. But it would be you won't see as big a change compared to when raw material prices are going up. So from -- so we really are very much affected by large swings in commodity prices, maybe not so much in terms of margin, but more in terms of working capital. What I'm glad to see, though, is that we have a lot of resources at hand in terms of lines with our bank. We have the -- and then 3 years ago, we even sold bonds in the market. So we have the capability to raise funding -- debt funding, if needed, whether it's short term through the banks or longer term to finance if something does happen and we need to pay for -- in terms of higher working capital, then that's something that we can tap on. The other aspect that affected free cash flow is really CapEx, and that number is just going to continue to drop, continue to normalize as we're not really -- we don't have a huge plant to construct anymore. Even if we're ordering new lines, in terms of amount, it's a much lower amount. And it's just going to be something that's phased in over time. So stable commodity prices as well as lower CapEx, it would both contribute to positive free cash flow.

Okay. Thank you, Parvin. I see questions in the chat box. So the next question comes from Denise Joaquin. What caused your lower effective tax in the second half -- second quarter? And should we expect this level to be sustained moving forward? I can take this actually.

Yes, please.

So in the second quarter, as you recall earlier, we were able to record net income or Batangas plant being profitable. So because of that, we were able to take advantage of the tax holiday associated with the new plant. So that's really what caused the drop in the effective tax rate. Will it be sustainable? The answer is yes because the higher the earnings coming from the Batangas plant, then the more tax benefit that we can get. Okay.

Sorry, let me add. I think we also have the benefit of the net operating loss carryover, I guess, because -- well, no, we didn't have the loss actually. So maybe not. Okay. Scratch that. All right.

Okay. Okay. Maybe we can move on to the next question, which comes from Brad Virbitsky. How is domestic demand for HMSP this year? Would you provide some more details about growth potential for HMSP domestically?

Demand, still pretty good. If you look at the volume change chart, we've got overall 23% volume growth across the high-margin segment. And then food volume growth for just for high margin, 17% up; Chemrez, oleochemicals, 37% up; and plastics, 12% up. So -- and a lot of this is domestic. So in general, it's still good.

Okay. Thank you. Okay. I don't see any more questions from my end, but maybe we can give our investors maybe 1 more minute just in case they have further questions. Okay. There's a question from [ Pon ]. On the export side, is it possible to give a color on how much of this growth are from new customers or existing customers?

I would say it's roughly probably half-half. So we have -- so I mean we are already exporting before the new plant opened. So -- but now that we can export a lot more, we've gotten a lot of -- so the orders from existing customers, that definitely went up, but we also got a lot of orders from new customers as well. So I would say yes, it's probably -- the growth is probably half-half, half from new, half from old customers or existing customers.

Okay. Next question from Brad. What's your outlook for coconut prices? Are there any other costs that are higher than expected?

Well, coconut oil is 33% of our overall cost. So that's 1/3. I mean that's -- in terms of the impact, that has the most significant impact. The outlook likely, it may still -- it's -- let me preface that with a disclaimer. If I could -- if I could be accurate in my forecast, I could make a lot of money, but -- so take this with a grain of salt. It's really just my perspective. Coconut oil prices, it is, I would say, short term tied to the increase in the biodiesel blend because in the Philippines, only coconut oil -- indigenous coconut oil is allowed to service the biodiesel blend. So with the Philippines being the world's largest exporter of coconut oil, with the blend taking up more of that -- taking out more of the supply, then with the reduced supply, it is possible that the price may still stay high and may even still go up. So if you look back at when -- in 2007, when coconut -- sorry, when the biodiesel blend was first introduced at 1% in 2007 and then went up to 2% in 2009, coconut oil prices jumped up in the short term, but in the long term, they went back down. So while we're -- so this would be my own guesstimate. While the biodiesel blend is going up this year and next year and the year after, you may see the price stay high. It may even go up a little. But the more that gap you see -- and you can see it clearly in the chart. The bigger the gap between coconut oil and palm oil, you'll see more switching. And there are a lot of uses where the application may not be as sensitive where they could easily switch away from coconut oil. So that's going to be one factor. But my sense is that while the biodiesel blend is going up from 3% to 4% to 5% in 2026, prices may continue to be high. But once that blend stops going up, then it may drop down. So the good news is that there is an alternative for a lot of applications, and that's something we can also take advantage of as a company. We can steer customers towards oils, which are not as expensive, and we can use our R&D to do that. And that's something that we have done as well.

Okay. Thank you. Okay. I don't see any more outstanding questions from my end. Maybe we give our participants maybe 10 more seconds just to type in their questions if they have follow-up questions. Okay. Looks like there's no more questions at this point. So that ends our second quarter briefing. But again, anytime you have additional questions, you may always send an e-mail or message us any time. So again, thank you for joining our second quarter briefing, and we'll see you next quarter. Thank you.

Thanks, everyone, and good morning. Bye.