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

Hi, everyone. Good morning. Welcome to the third quarter briefing of D&L Industries. My name is Crissa, and I'm the Investor Relations Manager of D&L Industries, and I will be your moderator this morning. To discuss the results, here with us today is Mr. Alvin Lao, President and CEO of D&L Industries. Without further ado, I now turn over the floor to Alvin.

Hi, everyone. Good morning. So we're going to be discussing the 9 months and the third quarter results of D&L. Okay. So without further ado, let's get started. So we saw in the 9 months -- first 9 months of the year, so we saw full 9 months earnings are higher by 1% year-on-year. So to recap, first quarter, we were up by 4%. Second quarter, we were up by 8% or an aggregate of higher by 6% for the first 6 months of the year. In the third quarter, we were lower. We saw lower net income, down by 11%. Our exports are doing quite well, and we'll give more details about that in the next couple of slides. Volumes are doing quite well. And we do believe that what we're experiencing now, the weakness in earnings is temporary, and it's really a lot to do with the new plant that we opened. And going forward, we are still very optimistic about our prospects, okay? So this slide shows you how income has changed over the last couple of years. And there you see the comparison of first 9 months this year versus last year. And in the next slide, you can see the -- so what's happening with our Batangas plant. So last quarter, during our briefing, I recall mentioning that it was a surprise for us that the plant had already reported profits. So that was much earlier than expected. We do expect that for the next couple of months, there will still be some months where it might still be profitable, but some months, it will not be profitable. So as you can see in the third quarter, the -- from a profit, it swung to a loss, although it's still a relatively small number. As the plant's operation normalizes, we should start to see the business activity improve and increase. And most -- since a lot of the costs are fixed, then we should start seeing profitability start to grow faster as the revenues grow. So first couple of months, there will still be some swings, and we may not see much profits from it yet. But over the next, I would say, at least within the next 2 years, then we should start to see substantial profits coming in from the plant. Okay. Next slide, please. So we started doing plant tours for our plant for analysts and other stakeholders. And some of you may have already been on the plant tour. For those of you who are interested to go and take a look, please let us know. We can schedule one for you. The next slide is a look at the income statement. So quite a few things that you'll notice here. So 9 months comparison, revenue is higher by 19% although we did see cost of goods and cost of services increase at a much faster pace, higher by 21%. You also see interest expense jump by quite a lot. So this is primarily due not just to rates remaining high, but also just the amount of borrowings that we have. But we do expect that rates will start coming down. They have started coming down actually. And the general impression we have, not just from the BSP, but even from the U.S. fed is that rates are expected to continue to go down in the next couple of quarters. So that's something we are looking forward to. In the next slide, we see -- so our exports are doing quite well. Exports currently make up 31% of revenue. As you can see there, exports, by revenue, increased by 38%. So if you recall the previous slide where revenues were higher for the first 9 months of the year by 19%. Just for exports alone, the rate of increase was double that for the comparative company overall. And on the right side of the slide, you can see there -- sorry, the right side of the slide, you can see there in terms of breakdown, food is still our biggest export segment, followed second by oleochemicals, third, specialty plastics. And then we are starting to see some exports as well from our consumer products ODM segment as well. In the next slide, so here -- so this is information that we had not been presenting before, but we felt that since we are doing more exports and our thrust is really to grow exports, especially with our new plant in Batangas being located in PEZA, Philippine Export Zone Authority area, we felt that we should give a little more color in terms of what's happening with our exports. So here, you can see that our export business is doing quite well. In fact, it is fairly outpacing our domestic business. So comparing revenues, exports are higher by 38%; versus domestic, revenues higher by 12%. In terms of gross profits, exports higher by 24% gross profits; versus domestic gross profits, higher by 5%. And also in terms of blended gross profits, exports are at 17.1% versus domestic at 15.7%. So even on the gross profit margins, we are seeing much better performance from exports. So there's a lot of momentum with our exports. We are doing a lot to continue to grow our exports, and this is something we are continuing to be quite excited about. The next slide shows you that in terms of volume change, very good growth across the board, except for the consumer products ODM business, which is the smallest segment of the company, making up roughly 3% of revenue. So 97% of revenue coming from the other 3 segments and all of them growing by quite a lot. Although you can see or you'll notice that in terms of the highest growth, it's really coming from the commodity side of the business. And we'll go into more details about each segment in the next couple of slides. In terms of just our high-margin segment, so we have both high margin and low-margin sales in our business. But if you just look at our high-margin segment and look at the volume change, the third quarter was our fifth consecutive quarter where we experienced growth in high-margin specialty products. And this is -- the third quarter was also the first quarter where we had growth on top of the previous third-- the previous year's third quarter, which also experienced growth. So this is a pretty good trend, I would say. So it wasn't just 2023 third quarter where there was volume growth. We actually also saw volume growth even in the third quarter of 2022. So 10% volume growth, definitely a very good number. And this is something that we anticipate and we're working hard on continuing to improve. So just looking at the high-margin segment, you can see that we saw 4% revenue growth year-on-year. And on the bottom left, you can also see that margins, during COVID, had contracted. So from pre-COVID, around 25.5% GPM, margins had fallen to below 22%. But over time, they have been increasing, and we believe that the -- that we do have the capability to continue to increase margins to the same level of where they were pre-COVID and in the future, to go even higher than where they were pre-COVID. Looking at the commodity segment, similar behavior where margins had fallen during COVID, but they have started to recover already. And this is, I would say, one segment -- we don't have as much control over pricing, but a margin of around 7% to 8%. That's very typical of where we would see margins for our commodity segment. In the next slide, you can see our product mix. So not much change from where we were in the previous quarter. Currently, we're at 54% high margin, 46% low margin. So this is still a way -- quite a difference from where we were compared to pre-COVID. We were almost at 70% high margin pre-COVID. And we are -- we do expect that, as time goes by, as the economy continues to recover, also as our exports ramp up, that we should see an improvement in product mix as well, so that should be accretive to overall margins. So in terms of the cash flow, overall, still seeing positive free cash flow, although one change compared to the previous quarter or the first half of the year, we now see positive working capital. In other words, with the increase in raw material prices, we are starting to see cash being used in our working capital. So that's that negative PHP 398 million number that you see on the chart. CapEx also continuing to be a much lower number compared to where we were last year. So we do expect CapEx to continue to decrease from previous levels. So as you can see here, we peaked in our CapEx in 2022. And last year's CapEx was less than half of the peak. And this year's CapEx will likely still be lower compared to last year. So the bulk of the CapEx we are experiencing currently are -- so we're still seeing a lot of CapEx that are in the form of retention payments. So for the bulk of our contracts with our suppliers, there's a 10% retention that we hold on to, and we only release 1 year after the project is commissioned and everything is working okay. If there are issues, then we do not release that retention. So the releasing of the retention has been ongoing for around a year for various projects. And there will -- we will still continue to see some of this retention being paid out over the next couple of quarters. So CapEx, essentially, still continuing to be slightly lower over the next couple of years. So the next slide, looking at how our margins have moved over the last 14 years. So in the middle part of the slide, you can see there our 2 most used raw materials, coconut oil and palm oil, together making up almost half or roughly half of the raw materials we use. And as you can see, prices of coconut oil, the brown line, have increased a lot compared to last year. They're almost double. Palm oil prices are up also. The dollar-peso exchange rate, so currently, we're at roughly -- today, we're at roughly PHP 58.4. So that is significantly higher compared to last year. So a lot of increases in our costs. Nevertheless, in terms of our gross profit margins, slightly lower. This, I would say, is more a reflection of the previous slide that we showed earlier that showed the product mix. If you overlay the margin chart over our product mix chart, you can see that there is a very clear correlation. As our product mix changed, our margins reflected a similar change. So what we communicate to investors is that our change in margins reflects more a change in the product mix and not so much the change in our costs, because you clearly do not see the same magnitude of volatility in our costs that you would see in our margins. And so if you look closely, also, at our net income margins, they've been -- you could get a sense that they're not -- since 2021, they have not been following the same pattern as our gross margins, and they have come down by quite a bit. And I would say that this -- a lot of this is due to the expenses that we have been facing with the new plant. So as the plant is still in early stages of operations, a lot of expenses have started to come in. So we're seeing the effect of a lot of these expenses. But as the operations get better and revenues increase, you should start to see improvements in -- especially on the net income margin side, and if you do -- so net income margins at currently 6% is roughly half of the peak that we saw in 2018. So the end of 2018 was when we started construction of the new plant. I -- if you do a quick back-of-the-envelope calculation and just assume net income margins were back at the 12% level, we should see our profitability vastly improve. And so that's something we're definitely looking forward to. It's only a matter of time when the new plant operations are much more significant and the contribution is at a much larger scale so that it is already very noticeable and quite profitable. So next slide shows you the different segments and how they did in the first 9 months of the year. So in terms of revenues, Food Ingredients is still #1. #2 in revenue is oleochemicals. However, when it comes to net income, it's actually specialty plastics, the third largest segment by revenue, but it's the first largest segment by net income, with net income much -- the biggest among all 4 segments. So we'll dig into more details in the next couple of slides. So food ingredients did relatively well, increases in volume across the board for all segments, albeit the largest increase by value is still coming from the commodity side. So as you can -- as you saw in the earlier chart where we showed volume change, the commodity food segment volume increased by quite a lot. And that has a very big impact on the whole business because it's such a big part of the overall business. And we did see net income higher by 4%, although margins have fallen for the first 3 segments of our food ingredients division. And so overall margin is lower by 1.4%. The next slide is Chemrez. So Chemrez has been experiencing a lot of difficulty in the last couple of quarters. But as you can see in the first 9 months of the year, things have recovered. All segments of Chemrez is doing quite well in terms of volume and revenue, net income higher by 11%. And in terms of the biodiesel mix, so no effect yet -- or less effect in the first 9 months of the year. But for the biodiesel blend, the increase from 2% to 3%, that took effect October 1 of this year. So we did start to see some of our customers for biodiesel already starting to procure biodiesel as early as August. And so that 1% increase will be followed -- to 3% will be followed by another 1% increase next year and another 1% in 2026. So by October 1, 2026, the blend will be 5%. And this is something -- although -- so biodiesel has -- the biodiesel industry has been in an oversupply situation since it started in -- sorry, in 2007, but we are starting to see more activity in biodiesel, and we are optimistic that once the 5% blend kicks in, we will not be in such drastic oversupply situation. And so margins should be much better for biodiesel. Here's specialty plastics, so this segment did extremely well, volume and revenue growing double digits, net income higher by 32%, margins also higher. So we do not do any of the commodity plastics -- commodity type businesses in our plastics business. These are all high-margin products, and we're happy to see that it's still continuing to do quite well. Consumer products ODM, so this segment really reflects the weakness in the domestic economy. So revenue and volume, down by 20%, net income down by over half. Margins are also lower. It is quite -- it's facing a lot of challenges. This segment is 94% domestic in terms of revenue. So one positive -- one thing positive happening with this business is that we are starting to see exports. Exports are currently 6% of revenue for this segment, and so exports have grown by quite a lot. It was virtually 0 about a year ago. So now we are starting to see some export revenue. But we do expect that as the consumer economy does start to pick up, then we should start to see a better performance from this segment. So the next slide, we show some of our related party transactions. So that's on the left side. And also on the right side, what we would consider related party income. So D&L, as a management company, it charges affiliates for services such as finance, accounting, IT, legal and so forth. So that related party income helps offset the related party expenses. In the next slide, we can see there our cost structure. So no major changes in terms of our largest cost driver. It's still very much raw materials. And if you look at the breakdown, so fixed costs would really be mostly -- it's just labor plus depreciation and rental, maybe half others. So a little over 10% of our costs classified as fixed. So over 80%, 85% of our expense is classified as variable. And that's what makes us quite quick to be able to react when -- to react and adapt when things change in the market. So on the right side, you can see there 39% of our raw materials are imported, pretty much all in U.S. dollars. So 60% of our raw material is used denominated in pesos. And so you can see there, by far, coconut oil is our largest raw material, followed by palm oil, together making up 58%. On the bottom left, you can also see in terms of R&D, R&D spend continuing to increase and this year, higher by 18%. So next slide shows our balance sheet. No major surprises. Borrowings are slightly lower. Total assets, significantly higher. Debt-to-equity ratio has improved from 0.82 to 0.80 and returns have also improved. ROE, currently at 11.4%; ROIC currently at 11.1%. The next slide shows you our capital structure. So borrowings at PHP 17 billion, equity at PHP 21 billion. Interest cover is 5x; net gearing, 68%; and average cost of debt, 6.4%. We do expect this to continue to come down. So the BSP has been reducing rates and reducing the reserve ratio requirement as well. So -- and the indication or the expectation is that rates are likely going to continue to come down. So we should start -- we should continue to see our cost of debt coming down as well. In the next slide, you can see there how our net debt effective interest rate as well as interest cover has changed over the last 8 years. And we should start to see improvements in all of the numbers going forward. In terms of working capital cycle, pretty steady from the end of last year. Cash conversion, flat at 143 days. Inventory and receivables, slightly lower, but payables also went down. So in terms of the stock, D&L is currently ranked 55 among the Philippines' largest companies by market cap on the PSE. Market cap is roughly PHP 43 billion. Average daily trading over -- sorry, daily trading turnover in the last 12 months at a little over $200,000. The public float is 27% and foreigners own 12% of the company. In terms of what we've been doing, we have been participating in various conferences, and we will continue to do so. I think that's the last slide. So we are open to Q&A.

Okay. I have a question here from Joyce. Okay, too early for now, I know, but what are the scenarios that you are preparing for given the U.S. elections? I remember last time the trade war under Trump impacted volumes and therefore, growth.

So Trump's been quite vocal about tariffs. I believe it's one of his favorite words. So that is something that we might have to be prepared for if Trump wins. Other than that, maybe not so much effect on -- nothing off the top of my head. But if Harris wins, things pretty much will likely be just as they have been for the last 4 years.

Okay. [Operator Instructions] We have a question here from Brad. Is the higher level of operating expenses in quarter from Batangas ramp-up onetime? Or ongoing?

Brad, great question. So we started construction of the plant end of 2018, and the planning was taking place a year or 2 before that. It's fair to say that what -- the scenarios we are expecting, what we thought our customers wanted compared to what we actually know today, there are some differences. So a lot of the machines, a lot of the lines that we had planned for, we've had to change a couple of the plants, and we have had to buy some new machines, which we weren't planning to earlier. And some of these purchases have -- are fairly recent, and that's one of the reasons why there are still expenses and that's why CapEx hasn't been coming down as fast as we thought. Actually, so I think this is a good thing. It means that we are facing more demand than we initially anticipated. It also means, essentially, that revenue should be much better. And if you -- so for those of you who had joined us in the previous briefing or last quarter's briefing, a lot of you may have heard the surprise in my voice when I talked about how we weren't expecting last quarter for the new plant to be profitable already. So -- okay. So to answer your question, it's not a onetime thing. It's actually more a reflection of how we're getting more indications of other new things we should be doing with the plant and we're, therefore, putting in the lines to meet this demand, which we weren't expecting earlier on.

Okay. Thank you. The next question is from [ Stephen Oliveros ]. So Stephen is asking for the revenue contribution of the Batangas plant for the past quarters. So I can take this question. So I don't have the figures with me in the presentation prepared here. I might have to get back to you as to the exact number, but my rough estimate is maybe around 20% to 30%. So I'll get back to you on this. Okay. Next question from [ Jojo Abad ]. Of your total debt, how much is fixed rate and floating rate? What's the average tenor of your loan? Okay. I can also take this question. So we have about PHP 17 billion in borrowings on our balance sheet. It's predominantly short term. The only long term that we have currently is the PHP 3 billion outstanding bonds that we have. Initially, it was PHP 5 billion, but PHP 2 billion out of that PHP 5 billion matured last September. So we only have that PHP 3 billion as long term, predominantly short term because we don't want to lock in the rates yet because we know that interest rates are falling. So we are looking for better rates. And much of our borrowings are used for working capital requirements and just to match short-term debt with short-term assets. Okay. And then we have a question from the audience. [ Brian Uy ] is raising his hand. I will allow him to talk.

Crissa, can you hear me?

Yes I can year you.

Great. A couple of quick questions, starting with Batangas plant. We've seen that increase in exports being really quick in the recent quarter. Has it really -- has it mainly been driven by Batangas? How much comes from there, first of all?

Yes, Crissa can take that.

Okay. So the Batangas plant is located in the export zone or what we call Philippine Export Zone Authority area or PEZA. So we need to export at least 50% of our revenues coming from that plant. So I'd say majority of the growth in export is really coming from our Batangas plant. To us, it is very strategic because it gives us the capacity to go after export customers more aggressively. With the Batangas plant now we can cater to bigger export customers.

And sorry, if I may add, short answer, Brian, is yes, we are really -- the bulk of our exports are really coming from the new plant, because it's really where we can be more efficient and operate at -- so we want to also show to our customers that we're finally able to produce at the quality and scale that they needed compared to what we were making before with our smaller plants. And so it's not just for the tax incentives, it's also for the ability to demonstrate to our customers, we can do it and please order more.

Okay. And just to follow up because I believe you tried to answer Brad's question on the revenue contribution from Batangas. And I know you don't have the exact numbers, but if it's anywhere around the 20%, 30% handle you mentioned, it sounds like the margin for Batangas is going to be very significant. It's going to be close to almost all specialty margin or product. Is that a correct characterization?

Crissa?

Okay. So the Batangas plant is really catered towards the manufacturing of the high-margin specialty products or HMSP. So long term, you are correct that much of the -- the exports would largely be HMSP. However, initially for the Batangas plant because we needed to ramp up operations, we are currently producing some commodity products from the Batangas plant, and that's really just to help cover some of the fixed cost ramp-up operations. But over the long term, we expect margins from Batangas to be significantly higher just because, number one, it will produce more HMSP; second, it will cater to the export market, which is by nature, higher margins; and third is because once we reach a certain level of volume, it's more efficient. So ideally, the margins will be better.

Can I also add if you look at even before the Batangas plant opened, our high-margin specialty products, the average GPM was around 25%, 26%. And the commodity side, average margin is around 7%. So just do some quick calculations, you can deduce that on a net income basis, high margin's probably making up 90% of our income or more. So it's really what we want to sell more of because that's really where we can -- not only do we make more money, but it's really where we can differentiate ourselves and price better. And also, there's a lot less competition. So the high-margin segment definitely is growing, definitely is where the bulk of our profits are coming from and definitely is where the bulk of our resources are being spent on.

Got it. And if you look at the pickup in OpEx as a percentage of revenue in Q3, how much of that would you say is coming from the Batangas plant ramp-up versus, say, any other potential sources?

So actually, we have a slide that showed earlier how exports compared to domestic. And you can really see there, exports grew twice -- no, more, 3x faster than the domestic in terms of percentage change. So exports are just growing much faster than the domestic side in terms of revenues.

I'm sorry, I meant operating expense, OpEx.

That I don't -- Crissa, do you have any...

So the increase in OpEx for the quarter is really related to the Batangas plant because we had expenses relating to new lines that have been recently commissioned and those expenses were recorded in the third quarter. So as Alvin mentioned earlier, to a certain extent, it is an indication of new lines coming online and indication of volumes that we foresee coming.

Got it. And my last question before I go back to the queue is just on the consumer product business, it seems like for this quarter, things seems to be bottoming out. It's sequentially improving and year-on-year, it seems to be hitting at least a sort of positive growth rate. So are we seeing a bottoming out in that business?

For consumer products ODM, I'd say the drop has really been a reflection of how inflation has really hurt the consumer pocket or wallet the last 3 years or so. And inflation -- so Philippine inflation for October came out, I think, yesterday at 2.3%, definitely much lower than where it was. So I would say I would agree with you that likely it has already bottomed. The only caveat there is if inflation were suddenly to shoot up again, then we might see some more hurt in this segment. But overall, I think -- it looks like the worst is over.

Okay. Next question from [ Jojo Abad ]. Given the positive growth performance of your exports, how do you manage foreign exchange risk?

So we actually have facilities set up to do a lot of hedging. I remember, like, 15 years ago or so, I remember signing this ISDA document. So ISDA, it's like the document that you have to agree to everything in terms of trading futures and options. And so the facilities are set up. But generally, we don't hedge. In general, things are -- our ForEx is managed on a spot basis. We can -- but we have the hedging facility set up. If we do sense that there are some instances where there's like an imbalance, then that's something we could use. But in general, it's at spot. The other factor here is that we export 31% of our revenue and currently 39% of our costs are -- of our raw materials, sorry, are imported. So our dollar use and dollar proceeds, the amount of dollars is almost at the same level. So in a way, we also have a natural hedge. So that's actually one reason why we want to increase our exports, because it does give us that additional breathing room so that we're not so hostage to the dollar-peso exchange rate.

Okay. Next question from [ Wei Yi ]. Can you share your export market strategy? How do you do your market expansion? Would you be able to share the geographical breakdown of exports?

We've already been exporting even before the new plant started operating. And so here in the Philippines, we meet the requirements of a lot of customers, including a lot of multinationals. So you can say that in terms of standards, we can meet the specifications of our clients. So when it comes to our quality for exports, it's not foreign to us. It's something that we can readily do. What was really holding us back was capacity. We didn't have sufficient capacity for our exports. So this is one of the prime reasons why we built our new plant and why it was built in a PEZA zone, PEZA is Philippine Export Zone Authority, so that we can really meet the capacity requirements of our export clients. In terms of marketing, it's -- so a lot of relationship building, some of which was done before, but there are new activities being done, everything from client visits, attending exhibitions, conferences. I think for the month of October, company-wide, we attended easily maybe 4 or 5 different exhibitions/conferences outside the Philippines, Japan, U.S. even Europe and so forth, China, pretty much trying to get the word out and meeting these potential export clients and forming the relationships. In terms of geographical breakdown of exports, so we -- it's natural for us or it's fairly easier for us to reach the markets that are close by. So within Asia, it's north as far as China and South all the way down to Australia and New Zealand and everything in between. But we also export -- currently, we also export to the Americas and to Europe as well.

Okay. Thank you. Next question, from Jason Mok. Why are debt levels at the end of the 9 months higher than the end of the 6 months even though the company has paid down a decent chunk of its long-term debt in the third quarter? Could you remind us how much of the debt repayment was done using cash, short-term bridge loans? And when could we expect to pay down these short-term loans used for the refinancing?

Okay. So Crissa, could you please go to the balance sheet or simplified balance sheet. So you'll see here that cash is slightly lower, borrowings are slightly lower. So in terms of net borrowings, not much has changed. So you can deduce that from the -- so the 3-year bond started in 2021; matured September, 2024. So essentially, we've converted from -- when the bond matured, we used short-term borrowings to finance it. But you can also see that total assets and current assets went up by quite a lot. So the bulk of that -- so if cash didn't go up, the bulk of the current assets is pretty much inventory and receivables in terms of value. So -- and earlier, I had also shown in the previous slide that the price of coconut oil and palm oil is higher. So that's really where the bulk of our loan proceeds have been going to. It's really more cash tied up in working capital because prices of coconut oil and palm oil have gone up. Plus there's also payments for our suppliers. I had mentioned that we are also putting in some new lines in the new plant, lines which we were not -- which we had not anticipated earlier, but we now know our customers have a demand for. So I would say -- so yes, we're still using up a lot of cash. Our borrowing level is still -- it still hasn't gone down. But if you look at our interest cover, it's at 5x. At 5x interest cover, I would -- personally, I'd gauge us as moderately geared. And with interest rates coming down, it's fair to say that we still have room to even borrow more if we wanted to. And so that other part of the question is when can we expect to pay down? So as cash flow continues to be positive, not only can you expect us to pay down the loans, but you can expect that we'll be continuing to pay dividends as we've been doing in the past.

Okay. Next question from [ Stephen Oliveros ]. What's the usual lead time between production line installation and commissioning?

So it depends on the line. So some lines order -- the time to order could be -- the shortest is probably 3 months. It could take up to a year, depending on how complicated the line is. Installation itself could be anywhere from 4 to 12 weeks on average. Commissioning is maybe another 4 to 12 weeks. So a new line from the date we want to order it, minimum, easily 6 months before it's up and running up to over a year.

Okay. Next question from Brad. Do you anticipate a further increase in operating expenses from new Batangas lines in the coming quarters? Or are you mostly finished adding new lines for now?

We're not done because we're still getting -- so as we talk to our customers more, as we also meet more new customers, we get more information about what they need. And so far, I'd say it's good that we're getting that information. And because of that information, we're able to improve in terms of what capacity we have to meet the needs of the client, so it's still ongoing, I would say.

Okay. Next question from [ Anika ]. You mentioned adding new lines in the third quarter. Could you share the number of new lines added since your initial launch and the current total number of active lines in your Batangas plant?

I can't give you specific numbers, but it's fairly significant in the sense that we're not talking about just 1 or 2 lines. It's more than that. And it's big enough so that it's making a difference in terms of the money that we're spending. And the way we look at it, it's very typical that when we buy the lines, install it and it's up and running, the payback -- of course, there will be time for the payback. But just in terms of the cost, usually -- I can't remember a time where we installed something and it was cheaper to install later on. The price of these lines just go up over time. I don't know what that rule is, but it's -- so in other words, it's better for us to do it earlier rather than later. And so in a way, I'm actually glad we're doing it now when we have the space, when we have the financial capability and when we actually have real concrete demand coming from our customers or indications coming from our customers. So it's a little bit of -- there will be a little bit of delay. There's, of course, costs associated with it. But if you look at big picture, if you look at long term, we're all the better for it.

Okay. Just a follow-up question about the new lines from [ Heather Lim ]. So previously, we talked about having secured the low construction cost of the Batangas plant. Now with the new lines and machines, how would the margin profile change? Will it still be similar trajectory as the previous plants with breakeven at 20% to 55% utilization?

Actually, so the short answer there is yes. Crissa, could you go to that slide that shows the profitability of the plant per quarter. Last -- the previous quarter, in the second quarter, we were already profitable. So as we install these new lines, their incremental impact is not so big compared to how much we've already spent for the entire plant. And so you can imagine, in terms of how accretive they will be for profits, they will be highly accretive. So that's the advantage of building a plant that's so huge with a lot of spare space inside. As you add these new plants, the -- if you think about the cost of production per metric ton going forward is not so much -- so yes, the answer to your question is a big Y-E-S. We are seeing much better profits and the margin profile will definitely -- it's even better actually. But the first part of your question -- was that the question? Yes, okay. So that was the question. Okay. Thank you.

Okay. Next question is from [ Darren Tin ]. Is the growth from your exports coming from new customers? Or more from existing customers simply buying at larger quantities?

To be honest, a typical new customer, it takes time for them to understand our capability. It also takes time for us to understand the requirements. So the bulk of this new business is from other previous customers where they couldn't order as much from us because we didn't have the capacity. Having said that, we do have a lot of new customers who we're very excited about because they are keen to order, and there's a lot of communication, a lot of audits being done. And we do expect them to be coming online as well in a big way going forward.

Okay. Thank you. So far, I don't see any more outstanding questions from my end. [Operator Instructions] So we have a follow-up question from Brian. Sorry, Brian, are you raising your hand?

Sorry. I'm so sorry I was on mute. Just wanted to check. So for specialty food ingredients, you've seen the margins fall off a bit for the past couple of quarters. Is there anything happening in that business?

So it's really a reflection of 2 things. One is the weakness in the domestic economy that we saw in ODM. There's a little bit we're seeing there in specialty ingredients as well and in general, in the high-margin food side. So that's one. The other is just the ramp-up in our costs, especially in terms of raw materials, coconut oil, palm oil. There's a delay or a lag. For us to pass on price changes is typically 30 to 45 days, but with how quickly prices have moved up, so there's a slight delay. So going forward, we do expect that the margin for specialty ingredients should revert back to where it was over 30% as things in the economy improve and also as that -- as we catch up to the lag.

Okay. We have a question here from [ Rainier ]. What made the difference in the raw materials in terms of percentage imported? In 9M '23, 55% of raw materials are imported versus in 9M '24, 39% of raw materials are imported. I can take this question. So it's really because of the faster increase in the price of coconut oil. So let me just move to that slide, one second. Okay, sorry, this one. So year-on-year, the increase in coconut oil is higher versus the increase in palm oil. And coconut oil is something that is an ingredient that we procure 100% locally. So because the price increase in coconut oil is faster than the price increase in palm oil, so naturally, in terms of contribution to total, we have higher raw materials in terms of value coming from the domestic market.

If I can also add, so the price of crude oil has actually been steady. And I think it's actually been coming down or even with what's happening in Gaza and so forth, crude oil prices and therefore, petrochemical raw material prices have also been quite steady and actually going down. So that's another factor. That is something that's affecting the cost side for us on the nonfood side, and those prices are mostly imported. And as they've been coming down, that also means the contribution or the raw material prices imported also -- that component has also been coming down.

Yes. And sorry, one more thing that I forgot to mention. So our exports business grew significantly this year. And bulk of what we export, it uses coconut oil because that's really our advantage. That's really the product that we intend to export and we source that domestically. Okay. Next question from [ Denise Joaquin ]. Could you provide an estimate of the incremental OpEx from the new lines installed in the third quarter? To clarify, would the additional costs be reflected as depreciation costs? I can take this question. So we can go to the slide. So as you can see in the third quarter, there was a 45% increase in operating expenses. Majority of this is related to the new plant in terms of how it is reflected on our income statement. It will be reflected as, yes, partly depreciation, partly increase in labor, partly increase in professional services. But it's really related to the new plant in Batangas. Okay. I don't see any more questions from my end. Maybe we give our attendees one more minute just in case they have follow-up questions. Okay, looks like no more questions. So if there are no more questions, that concludes our third quarter briefing. Again, thank you for joining. And whenever you have questions, you can always reach out to us. And if you want to schedule a plant visit, then you can also reach out to us. So again, thank you very much, and see you next quarter. Bye.