PT Avia Avian Tbk (AVIA) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for taking the time to participate in today's PT Avia Avian Tbk, or Avia Quarter 3 2023 Earnings Call. For your information, we uploaded the presentation materials to our website yesterday. Today's earnings call holds a special significance because on this very day, November 1, Avia celebrates its 45th anniversary. It's incredible how far we have come since then, and it's a testament to the hard work and dedication of each and every one of our team. As we reflect on our journey, we can't help but feel a sense of pride and gratitude. Our success wouldn't have been possible without the unwavering support of our employees, partners and of course, all of our investors. Therefore, on behalf of the entire company, I would like to express our heartfelt appreciation for your trust and confidence in Avia. We're fully aware that we still have a long way to go, and there is still a lot of work to be done in order to achieve our goals. We're committed to identifying and addressing any issues that may be hindering the necessary steps to fix them. The plan for today is to start with a 30-minute presentation followed by a question-and-answer session. We aim to keep the entire earnings call within 1.5 hours. [Operator Instructions] For those who cannot join us now, please note that we have the webcast of this event will be uploaded to our website no later than tomorrow. Thank you again for being here today. Allow me to start by introducing myself. My name is Andreas Timothy Hadikrisno, I'm the Head of Investor Relations of Avia, and I will be moderating this earnings call today. We're joined today by 3 other presenters starting with Mr. Ruslan Tanoko, the Vice President Director of our company; followed by Mr. Robert Tanoko, the Operations and Development Director; and finally, Mr. Kurnia Hadi, the Finance Director. In quarter 3, total revenue reached IDR 1.7 trillion or the equivalent of USD 109 million. This quarter, we recorded a gross margin of 42.1% an EBITDA margin of 24.8% and a net profit margin of 20.2%. We're supported by a team of over 8,000 employees. As of the end of quarter 3, we have 156 distribution centers across Indonesia, comprising 116 wholly-owned DCs and 40 third-party DCs providing high-quality services to more than 56,000 retail outlets in 38 provinces and 99 cities in Indonesia. In the third quarter, consolidated sales witnessed a 4.9% growth year-on-year. The architectural solutions segment showed a stronger performance than the trading goods segment, mainly driven by stronger sales from the 3 largest revenue contributors, which include wall, waterproofing and wood and metal. The gross margin of the architectural solutions segment witnessed a 4.9% improvement, reaching a level of 49.1%. In addition, the trading goods segment recorded a gross margin of 17.4%, exhibiting a 3.2% improvement as compared to the same quarter last year. The improvement in gross margin has further led to an improvement in EBITDA margin. Inflation continues to have a significant impact on the market in the third quarter of this year. We believe that the demand for paints has not yet fully recovered, considering the pricing CPI, coupled with the increase in the minimum wage, which remains lagging behind the inflation of building material prices. The escalating prices of rise in Indonesia, which have risen by over 15% in less than a year, have exacerbated the situation. Given that rise is the staple food for most Indonesians, the consequences could be significant. Consumers are likely to prioritize their primary needs over any secondary or tertiary goods, making the situation even more challenging. The ongoing issue of weak purchasing power has been evident across various industries. During quarter 3, several building materials companies struggle with their sales with cement companies experiencing feeble sales growth. In fact, one ceramic tile company reported a negative sales growth of around 5% during the same period. Similarly, the FMCG industry has also been affected by this trend with several large companies reporting even weaker sales performances compared to the building materials industry. Even one of Indonesia's largest FMCG enterprises reported a negative sales growth, which declined by a low single-digit percentage. Despite these challenging market conditions, we have been able to better position ourselves in the market by offering a range of economical price products that cater to the needs of our consumers. By having a complete product portfolio that covers all price categories at our disposal, we're confident that we continue to strengthen our market share. Our research, development and innovation, our RDI division plays a crucial role in creating products that cater to diverse needs of consumers across all income levels. Our recent product innovations have been specifically designed to address the affordability factor of consumers. We aim to deliver the best-in-class products to ensure our consumers across the country receive the best products according to their needs and budget. We launched a total of 5 new products in this quarter, 2 of which are Singapore Green Label certified. In this third quarter, we expanded our distribution network by adding 2 wholly-owned DCs, 1 new mini DC and 3 third-party DCs. By the end of quarter 3, we have a total of 116 wholly-owned DCs, 14 mini DCs and 40 third-party DCs. Within our wholly owned DCs, we have 607 delivery trucks, which enable us to make around 10,300 deliveries per day. We're constantly striving to improve our delivery process by implementing logistics automation. Our goal is to achieve a highly efficient and lean delivery process. Through multiple technology-driven initiatives, we're able to fulfill 96% of 1-day delivery service to retail outlets within 50 kilometers of a wholly-owned DC. As a company, we're always finding ways to improve our performance and take our service quality to the next level. In this quarter, we started to roll out express delivery to provide an even faster and more efficient service to our customers and incentivize them to purchase more products from us. By being able to receive products within 2 hours of ordering, retail outlets can expand their product offerings without increasing their stock, which leads to a profit improvement. We will monitor the effectiveness of this system closely as we granularly implement it to all of our distribution centers nationwide. I will now pass to Pak Hadi to continue the presentation.

Thank you, Andreas, and good afternoon, everyone. During the first 9 months of this year, consolidated sales increased by 4.1% as compared to the corresponding period of the previous year. Throughout the first 9 months of this year, more than 55,000 retail outlets conducted transaction, an increase of more than 500 customers compared to the same period last year. Our top most priority is to establish and maintain positive relationship with all our customers. We're confident that our effort to foster high-quality relationship with our customer will ultimately lead to increased customer loyalty. We still maintain the contribution of our architecture solutions segment of around 81%. The contribution of the trading goods segment accounts for around 19%. According to the chart on the right, traditional retail outlet accounts for approximately 93% of the total sales. The contribution from modern retail outlet is around 7%. The consolidated gross margin for Q3 2023 increased to 42.1%, indicating a significant improvement of 4.5% compared to the same quarter last year. When compared to the previous quarter, the consolidated gross margin in Q3 declined due to increased contribution from the trading goods segment, from 17% in Q2 to 22% in Q3. Additionally, the EBITDA margin for Q3 was 24.8%, showing a 2% improvement over Q3 of last year, good amount. Net income margin for Q3 was 20.2%, representing an improvement of 1% compared to the same quarter last year. For the 9 months of this year, sales for the architecture solutions segment rose by 4.5%, amounting to IDR 4.2 trillion. As we approach the combination of our economical price product line, we have witnessed a significant improvement in volume growth. In Q3, our sales volume grew by 6.2% compared to the same quarter last year. In the first 9 months of this year, sales volume has also shown improvement, which is a positive indication of growth. Despite the low single-digit decline in YTD Q3, we have succeeded in narrowing the decline gap compared to the first half. We remain committed to our differentiated strategy, capabilities and product and service solutions. We feel the difficult environment as an opportunity to become an even more valuable partner to our customer. The architecture solutions segment recorded transaction of more than 50,000 retail outlets in the first 9 months of this year, representing of our 1,000 additional customer compared to the same period last year. Our focus remains on increasing the number of retail outlets that conduct transaction with us, while we continue to work hard on improving the quality of our service. The trading goods segment saw a 2.6% sales increase in the first 9 month of this year. Within this segment, the PVC category has demonstrated a better performance compared to the other categories. During the first 9 months of this year, we have recorded transaction from over 45,000 retail outlets in the trading goods segment. This 3Q represents approximately 83% of our total customer, indicating the high level of synergy that this particular segment has within our business ecosystem. Gross margin for the architecture solution segment improved by 4.9% in Q3 as compared to the same period last year. In the first 9 months of this year, the architecture solutions segment recorded a gross margin of 50.4%. On the other end, gross margin for the trading goods segment remained relatively stable. For the 9-month period, the gross margin for this segment was 17.8%. I will now pass to Pak Robert to continue the presentation.

Thank you Pak Hadi. The company has always been mindful of its cost while pursuing multiple growth strategies. The cost of sales and marketing have slightly increased to around 16% as we continue our efforts to raise brand awareness and expand our distribution channels. The decline in raw material prices has directly resulted in decrease in COGS as the percentage of sales. We have observed a relative stable trend in direct labor and factory overhead costs. Below the line marketing expenses accounted for around 9% of sales, of which around 1% were allocated to new products. This page showcases some of our marketing activities that we engage in to enhance our brand visibility. As a company, we always prioritize marketing efforts to ensure our brand remains visible to potential customers. We understand the significance of consistent marketing efforts, particularly in the paint industry where brand stickiness is high. Our marketing team has always been working diligently to develop and implement creative strategies by leveraging social media platforms to increase brand recognition and customer engagement. We have maintained our trading working capital quite well at around 30% in the first 9 months of this year. Our working CapEx is low, accounting for only around 2% of sales. Thanks to our ability to generate higher level of cash and low working CapEx, we have a solid free cash flow. This gives us confidence to commit a dividend payout of at least 50% of our net income. It is important to note that we will continue to pursue mergers and acquisitions. In the meantime, we will maximize our dividend payout ratio. Over the past 2 years, we have paid dividends equal to approximately 90% of our net income. One key aspects that set us apart from the rest of our competitors is our ability to maintain on-time account receivable bill collection. We have seen a decent improvement in our on-time collection despite the ongoing economic recovery. We take pride in the fact that we have earned a top priority for payment from retail outlets, which is a clear indication of the effectiveness of our efforts to streamline our internal processes and foster high-quality relationships with our customers. We're committed to continuing our hard work to preserve these relationships and provide our customers with the best possible services and products. This page provides updates on the progress of our third factory in the Cirebon. The factory expands 11 hectares of land and is nearing the completion of landfilling process. The factory is planned to start operating by 2025 with an expected number of employees of around 300 people. To enhance our vertical integration capabilities, we intend to incorporate raw material production facilities in the new factory, including resin and packaging. In the view of the challenging market conditions characterized by weaker consumer purchasing power, we have decided to adjust our guidance in line with the current market trends. For the full year 2023, we now expect consolidated net sales to register around 4% to 6% growth, while volumes are predicted to be flat, considering the macroeconomic headwinds that are likely to persist in the fourth quarter. We will remain focused on what we can control as we enter the last quarter of the year. We will continue to invest in growth initiatives including adding distribution centers, innovative products and services and tinting machines. That concludes our Q3 presentation. Thank you very much for joining today's earnings call. And I will now pass to Pak Andreas to moderate the Q&A session.

Thank you, Pak Robert. First of all, we would like to apologize if there is anybody that having difficulties to enter our call today. We will continue with a Q&A session. The first question is coming from [ Yuan Long ]. The question is we wanted to ask about what was the main change that led to lower guidance. Recall, in quarter 2, management was quite optimistic about hitting the 8% until 12% year-on-year sales growth and even low base.

Yes. [ Yuan Long ]. Thanks for the question. Yes, so we've been monitoring the situation on the ground very closely, while we're quite happy with the fact that our on-time collections in Q2 has really improved from what we accomplished in Q1. When we speak to our customers everywhere across the nation, there's definitely weaknesses that we cannot ignore. Keep in mind that even though we have launched 5 products in Q3, of which 3 belong in the more economical segment, right? But the pickup from the consumers is not as high as what we had hoped. And in our view, we think that this is a clear sign that the shops are really experiencing lack of confidence with regards to this because we know for a fact that there's still a gap between the prices that we have in Indonesia for paints versus the minimum wage that have been going up for the past 3 years. So in theory, when we see all these more economical products being launched, we were really hoping for responses to be really great. But we didn't actually see that. So even though not all products were actually launched in the beginning of the third quarter, right, we have Avitex Wizz for instance, we only launched this in -- at the end of third quarter, which is like September. We have No Drop Basic. We also launched that in August or maybe actually also September. So short to say that the difference from our belief in the second quarter to what we have witnessed in the third quarter is because, well, these are all products that are at least 15% to 20% cheaper than what we currently have in the respective segments. And yet the pickup is not as strong. One instance that you also see here when you look at the wood care or glue, right? We launched one product there called Avian Lem Epoxy Hemat. Hemat is the Indonesian word for economics or yes. But the pickup for this product, even though the kind of consumers that use these products are predominantly budget conscious, but the pickup was also not very high. So I think the biggest difference within our initial projections to why we decided to make this revision is because of that because we didn't expect the market to behave in this manner, even though 3 products in 3 important categories have been launched in a more economical manner. And that's why we decided to say, I think we need to adjust our target for this year. I hope that answers your questions.

Next question is coming from [ Mike Krista ]. How does the market share look in quarter 3? Have the new products help us to gain material market share?

Thank you for this question. So again, when we look at the Indonesian paint competitive landscape, right, there are a few more products that have been launched into the market. There's a local company who's based in Jakarta who also decided to launch 1 or 2 products. But to be honest, out of the 200-plus paint companies, we've only witnessed maybe less than 5 companies that have been responsive and trying to also launch new products. The rest of the companies have not been launching any new products. So it's very safe to say that we're very confident that we have been gaining market share. And if you look in this waterproofing for instance, right, the No Drop Basic in this kind of price range that we just launched, essentially, there isn't any competitor that exists in this price range. There's very small competitors who are trying to play in this price range because they are trying to enter the market, but they haven't been all that successful. So the fact that we launched this more economical product with the brand using the No Drop, we felt that this would be attracting the retailers as well as the consumers in ways where, well, if I don't have enough money to use a product for my waterproofing to prevent leakages or whatever, this is something that I can use because the price is about 15% to 20% cheaper. So -- and the way that we communicate this to the consumer is by giving them -- okay, if you look on the images on the right, you can see the 4-year protection. So that's basically how we explain to the consumers that, well, this is a product that's cheaper, but at the same time, compared to the normal No Drop that we have, well, the perfection is lesser. Well, I mean, it makes sense because it's cheaper, that's why it's lesser in the number of years. Normal No Drop gives you 7-year protection, whereas this one only gives you 4-year protection. So you pay less, but you also get lesser protection. But at least they have this product now as an option so that they can use it. But other competitors in the market haven't really been all that aggressive in trying to launch any new products. In fact, specific for -- if you look at our approach, right, when we're trying to launch products to cater to the weaker consumer buying power, we haven't witnessed any of our competitors doing it except for maybe 1 company, which is AkzoNobel. So I think 2 or 3 months ago, in Q3, at the beginning of Q3, AkzoNobel decided to launch 1 product in the same price range as this Avitex Wizz on the screen. So -- but besides that, we haven't seen any other company that basically launch any other products. So when we find it difficult in terms of the market now with all the products that we've launched, I cannot imagine how the other smaller competitors would actually feel when the market is really not that strong. So that's why -- that's what led us to conclude that we definitely have been gaining market share in the various categories that we've been launching these products at.

Next, from Sukrit again. Does Avian expect market volume outlook to pick up in 2024, even with the elections pending hope overall sentiment does not seem to show a pickup spending?

Yes. So I mean, as a company, right, whether it's good times or bad times, right, we're always trying to find opportunities. And to be honest, I'm quite excited as a company with regards to all the things that we will do and implement next year. I cannot share everything with you guys at this point in time because a lot of it will definitely -- we try to disrupt the market. And what we're trying to do with regards to our approach next year is to, okay, what else can we do to basically introduce all the products that we have to the market, trying to push, right? Which is why 1 important slide that I decided to share here is the use of the express delivery. So in my mind that now that we have a lot of products that we've been introducing in the past few years, right? This is an expansion to that strategy. Because when you go to the shops, right, you will see a lot of paint products that they carry from various suppliers, right? So if our approach also doesn't change, if we just keep asking the shops to carry more and more and more inventory, I think they would find it to be extremely challenging, and you can see it now, which is why when we decided to launch this, right? We only have this now in less than 20 DCs, right? Because we mentioned that we're doing this gradual launch. But by the end of the year, all of our DCs will have all these 3 wheelers. And short to say that the whole 3-wheeler idea is really to give shop options, right? And the key message from us to the shop to our customers is that, look, you can improve your profit margin without involving any capital, right? Because we have DCs everywhere, meaning that when we want to deliver something to you, well, we can do it in less than 2 hours. So you should really take advantage of what we offer and because of the nature of the vehicle, right, it can only -- in terms of radius, I think we can only cover around 40 or so kilometers from where our wholly-owned DCs are located. So we're expecting around 30,000 also shops that would benefit from this service because on the outer when the distance is quite far, we cannot do this yet. But I mean as we open more and more DCs, more and more customers will be included, who can basically enjoy the benefit of this. So I think going back to your question, even though election is happening next year, right? I believe that -- I'm hoping that it will be a peaceful one so that essentially consumer will still spend and do their home renovation. But what we're trying to do next year aggressively is trying to think outside the box to what we've done so far and trying to find ways that we can still grow our business even though the market condition may or may not be good. So I think that's how we look at it.

Next, from Sukrit again. Could you share how much of the increase in marketing costs is attributed to new product launch and how much is for existing products to fan off competition?

Yes. So if you look at the BTL here at the bottom, right, we indicated that the BTL for new products account for around 1%. The allotment of this, obviously, is when we needed to be very aggressive in trying to get the shops to buy more from us. But beyond that, right, beyond the BTL, you can see that the top, the sales and marketing went up by 1% compared to last year. A lot of it is basically has to do with the branding activities that we've been doing. So we have a few competitors where -- when they're trying to persuade our top customers, that's basically what they do, right? They paint all the shops within their branding and everything else. When this type of threat is actually happening to our top customers, well, we have to defend our positions. And therefore, we've been also increasing our branding activities in all regions, not only in Java but also in many parts of Indonesia. And we also have to do branding and repainting and all these things. So in order to defend our positions. But beyond that, the existing products that we have, we did not increase the BTL budget because we only increase them for the new products. For the existing one, they barely go up. In fact, they're probably flat at this point in time because we just focus on all the new products. And -- but one thing that I want to add is that if we're launching a more economical product, you can be sure that the company is aware and we wanted to avoid any issue of cannibalization because when the products are lower or more economical, we don't want cannibalization to happen, and we're keeping a very close eye on this to prevent that from happening.

Next, we go to the question from [ Giovanni ]. Would you mind to share the current purchasing power condition, especially on wall painting segment, and how the Avitex Gold that has been launched fit well in the market? Is it able to gain market share from the market leader Nippon Paint?

Avitex Gold continue to be tracking very well within our expectations. I mean, to be honest, above our expectations. But beyond Avitex Gold, when we look deeper into various markets in Indonesia, especially on the outer islands, there are actually many regions where the price for Avitex Gold is actually considered to be too expensive. So in those regions, right, what we have to do is to actually push with other products. So at the beginning, we believe that Avitex Gold has market everywhere. But then as we go deeper into the various cities in Indonesia, the 99 cities that we cover, there are plenty of cities where Avitex Gold is actually considered to be premium. And therefore, in those regions, we need to push with Avitex Wizz, sometimes with ARIES Gold or sometimes with ARIES Bling. But our overall strategy with Avitex Gold in trying to enter that more premium in the mid-tier wall paint has definitely been getting market share from, I would say, not only Nippon, in particular, but a few other competitors because Nippon is not the only player in the mid-tier wall paint. But we continue to do very well with Avitex Gold. In fact, we just completed our new television advertising for Avitex Gold, where the new idea because the name is gold. So we're actually using our 3-wheeler for the express delivery, and we paint the whole body in gold, so to catch people's attention. I think the new advertising has been launched in the past few days, if I'm not mistaken. And that's basically what we will be doing. So we will use that new television advertising on the Avitex products from now on to really get the momentum going even faster. This is the first time that Avitex Gold will be aired on television because before this, we weren't advertising it with Avitex Gold. It was a different Avitex that we were using.

Okay. Next question from Ali. Why did architectural margin come down in third quarter Q-on-Q? And what was the architectural margin in year-to-date 9 months in 2022, please?

Yes, thank you for the question. The margin for the architectural solutions in Q3 '23 is going down slightly because -- after increasing in the BTL figures. If you recall at our COGS, there is a BTL inside it there. So in our effort to push the sales and everything during the Q3 and 2023, we slightly increased the budget for the BTL. That's why the margin for the architectural solutions in Q3 '23 is slightly down. But compared to the last year, the same, 9-month '22, the gross margin for the architectural solutions is still increased here because last year for 9 months, gross margin was around 45.2%.

We go to the next question from Divya. Can you provide some outlook for promotions trends? It has been stepped up to 10% versus usually 8% and [ APL ] also higher. So total is almost 12% of sales versus 10%. Is this higher level just for quarter 3 or expected to continue?

Yes. So I think what we have been looking into our response to the market, Divya is that at any shops where I mentioned earlier, right, when we're under threat from any competitors that wants to get more market share from us, then we need to definitely retaliate. The other thing is that we have been making a decision to improve our -- to increase our above the line or television or digital spending in our attempt to boost our brand awareness as well as product awareness because we believe that this is something that we need to do. One topic that we also discussed is that the introduction of tinting machines, right? So as we have more and more products, many of them are tintable including the No Drop Basic, the more economical version. So what makes sense for us to do is that, okay, well, we're increasing all the branding, we're increasing all the television. So we should also increase our deployment of tinting machines because this is something that we believe is important to do for the Indonesian market. We're also witnessing that more and more second or third generations are now becoming involved in continuing the shops or building material shops everywhere. So these are the kind of generations that can be influenced easier with regards to acceptance of tinting machines, right? And historically, the previous generation was always skeptical about the tinting machine deployment because they feel like it's too complicated and what happens if the tinting machine breaks down and everything else. But keep in mind that this is where we're different, right? We have so many distribution centers everywhere across the nation. And at this point in time, we have maybe about 200 technicians. And the technician's purpose is basically to maintain any of tinting machines before they break down or give you issues, right? So I think in that way, we're positioned better than any of our competitors. And -- but yes, I think with regards to the sales and marketing increase that we have witnessed, I think it's most likely that those numbers are going to be maintained. And the way we see it is if we continue to benefit from the stabilization of raw materials, I think it would be better for the company to prioritize doing more branding and marketing activities for the longer term. Now when there are going to be pressures from raw materials, then we may look at the whole approach and maybe we will make a decision to reduce some of them. But for the time being, because we're still enjoying the benefits from stable raw materials, I think we'll continue to maintain the aggressiveness with regards to our sales and marketing budget that we have allocated in Q3. So we will keep them in Q4 as well, maybe even Q1 next year, providing that we still enjoy the benefits from the stable raw materials.

Next question is from [ Yuan Long ], has 2 questions. One, margins have expanded year-on-year, but on a quarter-on-quarter base, this has declined. Why more BTL expense? Number two, given that customer pick up for new products has been weak, will you dial back advertising, what is the top process here?

Yes. I'll answer your first question. Thank you, [ Yuan Long ], for your question. When talking about margin -- consolidated margin, I think there's 3 factors that affected the margin. Number one is raw material of course. Number two is BTL. And number three is the contribution from the architectural solutions compared to the contribution of the trading goods. Talking about raw material, I think, yes, because after increasing in the oil price, the effect on us is on the oil derived fatty material like soybean and monomers raw material for the resin. So an average price for October, for instance, for this material increased around 6% to 7% compared to September. And this type of material contributes around 20% of the total materials. For other commonly used raw material like TiO2 and FeO, effect on price will be more on the supply and demand. But when we're talking effect on COGS because of the buffer in the finished good inventory as well in raw material up to September, our cost per unit still decreased compared to September last year. The second factor, the BTL yes, because of the latest market condition as Pak Ruslan also explained earlier, we need to be more aggressive in the marketing effort. So this translated to a higher BTL contribution to COGS. And lastly, for the sales contribution from the trading goods in Q3, it's increased quite a lot from 17% in the first 6 months to 22% in Q3. So it's also effect on the consolidated margin. Hopefully, it can answer your question,[ Yuan ].

Yes. So the second question, [ Yuan Long ], with regards to if the pickup from the shops are relatively weak, will we dial down on the BTL spend and marketing and everything else? So this is why we believe that the express delivery was important for us because if we didn't have this, I think we'll continue to face challenges with all the products that we have as well as all the new products that we've launched, right? And the fact is we have been planning to launch more products next year to different categories to complete our product portfolio. Because again, I think if we reflect on many paint companies around the world, okay, one, for example, which is the nearest to us is Asian Paints in India, for instance, right? They continue to launch more and more products. If we look at our waterproofing products, for instance, we still have less than 10 products, but Asian Paints have more than 30 different products. So that gives you a bit of a glimpse with regards to, okay, why are we continuing to launch products. But I think the trick is now that we've been launching all these products, how can we get the shops to buy from us, right? So this is where we believe the role for the express delivery is important because the ultimate key message to them is that, hey, make more profit, but you don't have to commit any capital, right? No stock, make more profit. You just offer our products, whatever they may be, and then we'll deliver it to you in less than 2 hours. And if we can do this everywhere across the nation, I mean, imagine yourself if you're a shop owner, [ Yuan Long ], would you say no to less than 2 hour delivery, right, where you can offer this whatever products that you want from us, and then you'll get the products in less than 2 hours. So this is why we believe that, okay, this is an important step for us to take so that even though customers are very happy with 1-day delivery, but if you want to offer something new to consumer, they're not going to wait 1 day. But will they wait less than 2 hours, most likely, yes. So this is how we're going to couple the strategy that we have within the product innovation side with the push with the express delivery. But if you go back to the marketing spend or the BTL that we do, okay, first of all, I explained the BTL is predominantly for new products, right? For the existing ones, they are more or less the same in terms of budget and everything else. And secondly, the marketing is -- has a lot more to do with the branding or with the repainting of the shops and things like that. But no, I think -- I don't think that we'll dial down what we've spent so far in Q3. In fact, we'll continue to maintain that aggressiveness in Q4, but we're really trying to maximize more that the shops can buy by various strategies, one of which is the express delivery. I hope that answers your questions.

Next question from Divya. With brand prices rising, is there going to be a need to take more price hikes in 2024? What is the raw material situation for Avian?

Maybe Robert want to answer the raw material and then I'll answer the price side.

All right. So at this point in time -- we're quite comfortable with raw material prices at this point in time because from last year, if we look at year-on-year raw material prices, we have quite comfortable on a reduction, especially, again, on the Brent oil price, right, as Pak Hadi mentioned, not all of our paint raw materials are related to the Brent oil price. So we're mindful that even the price -- oil price has increased from [ 80 to 90 ] is only mostly on the resin part and the packaging side. Where it's only contribute about 30% to 40% of our raw materials. But then there is also, we need to be cautious about the exchange rate, which is with the weakening rupiah and we see that the weakening rupiah now has reached about 6%. And of course, we would like to always be cautious about this. But at this point in time, we are quite comfortable with the raw material price.

If we go back to the Product portfolio, you can see that if we are going to have to take price hikes next year, if the oil continued to go up as well as the rupiah exchange rate continue to weaken, then we have no choice but to implement another price hike. But this is where things are different, right? If we go back 2 years ago, where we have been taking a lot of price hikes in -- during COVID years, we did not have a lot of the more economical product range within our Product portfolio but now we do Divya. So let's say, we are going to take a price hike in Q1 next year. That's fine, because consumers who do not have enough money, for instance, they can go down 1 grade or maybe 2 grades, right? But one thing that I hope you guys can notice in this page, right, if you look in the wall paint category and then look from #1 to #3, in terms of price range, you will see only 2 brands, right? One is Avitex, one is ARIES, right? So we've also made a decision as a company to streamline our product portfolio. And then if you go into the premium in the wall paint, you also see 2 brands, right? One is called Sunguard, the other one is called Supersilk, right? So this is what we will be doing in the future. We only want to have 2 product portfolio in the different segments so that we -- what we'll do then, when we want to create more economical product is to just do brand extension. So essentially, if you're a consumer and you experience a price hike that you feel that the price for this product, I used to buy Avitex, but now Avitex is too expensive, but I want to buy something else. Well, I can buy Avitex Wizz, because Avitex Wizz is positioned to be 15% cheaper than normal Avitex. Similarly with No Drop. No Drop is too expensive. Maybe I want to go to No Drop Basic and NoDrop Basic is positioned 15% cheaper than the normal No Drop. So likewise, with the glue, likewise with many other products. And likewise, with the wood and metal, for instance, we had Avian and now we have Avian Cling. So, this is what makes us different again, right? Because of the innovation capability that we've had, we've been able to launch all these products to complete our product portfolio. So that when a price hike needs to be implemented, whether that's in the Q4 or maybe -- probably not Q4, most likely maybe Q1 or Q2 next year, then we are in a better position than we were 2 years ago because we now have all these more economical products, completing our product portfolio and consumers can still buy the same brand that they were buying before, except now they just go down 1 category. I think that's how we look at it.

Next question from Ali. Please can you elaborate on how valuable Express delivery is for the retailers, does this make that much of a difference, if they can get products in 2 hours versus 1 day.

The big difference, Ali, is that when you want to offer new products to your consumers, right? So imagine, your painter, your homeowner walking into a paint shop, right? And then the paint shop say, "Hey, Ali, would you like to try this product. We have this new product. The product is good. It's cheaper. So if you have less budget, you can use this, right? At the moment you say, yes, all right, I'll try it, okay? Before Express delivery exists, what it means is that, okay, can you come back tomorrow and try this, but do you want to wait until tomorrow? That's one question, right? So what we're telling our customers now is, hey, you guys need to maximize this, right? We're pushing this concept everywhere across the nation. As soon as they are launched into any particular DC, we make sure that all the shops there know, that the Express delivery is now present in your DC and take advantage of it, right? Because the ultimate goal is to get the shops to offer more and more products that we have, okay? All the products that you saw just now in that product portfolio is quite vast. And I tell you, we have way more than that, which is not listed on that page. So how do we get them to buy more of this? Well, we are hoping that this will be a game changer because if any of our competitors wants to copy this, well, it would require them to have as many warehouses as we do. Because if they don't, that the number of retail outlets from our competitors' point of view, that can enjoy it, will not be more than 30,000, but maybe only 10,000, right? So we definitely have an edge over our competitors. When this service is really being enjoyed by our customers. But the ultimate goal here, Ali, is to get them to try and sell more of our products, that they've never sold previously. So the short results -- short-term results that we've had from the '20 or so DCs, that we have launched this Express delivery is very promising. And what I mean by very promising is that retailers are now willing to try to offer products, that they never sold before, which obviously is the final goal for this, right? It's like, I mean the way I think about it is like when you think about Amazon Prime, being launched a decade ago or something, right, it was a 2-day delivery in the U.S. People didn't need it, right? But then when Amazon offered 2-day delivery, they felt that it's great. But a few years ago, Amazon stepped up their game and they changed Prime into 1 day, right? I mean, nobody compliant with 2 days. But now that you have 1 day, will you complain with 1 day, right? So that's what I'm trying to -- that's what we're trying to do as a company, right? Customers are happy with 1-day delivery. But if I can do this in less than 2 hours, right? Will they now buy more products from us? So that's basically what we're trying to think. And logically speaking, why wouldn't they, right? If I have -- I don't have to deploy any more capital and I can offer products and I can make more profit, why wouldn't I use it, right? Its zero cost for me and consumers should be willing to wait. And keep in mind that we continue to add more and more DCs, right? When more and more DCs are being added, then obviously, more and more retail outlets can enjoy this type of benefit. So this is what we'll be doing between now to the end of this year. And we'll definitely keep a very close eye on how this will be beneficial for the company. But one thing that we haven't discussed here, you guys noticed that the 50% lower delivery costs, this is real. So by using this, the cost per shipment per shop is actually 50% cheaper. So we're trying to incentivize shops to buy more. But at the same time, as a company, we also enjoy this benefit. So you'll notice that sometime next year, the number of delivery trucks that we have will go down less than -- to be less than 600, because when we are going to deploy more of this 3-wheelers, we may make a decision to reduce some trucks in some DCs to balance them out. Because if the metropolitan areas are being serviced by these 3-wheelers in such a more efficient manner, we don't need as many trucks. So we are expecting to have reduction in our delivery trucks next year. I don't know, by 20 to 40 or maybe 50 at most, and then we'll have more of this vehicle instead.

From Ali again. Please, can you elaborate on, where you expect gross and EBITDA margins to be in 2023 and 2024, given current raw material prices and your pricing strategy.

Okay. Thank you for your question, Ali. I think if we want to look at the full year 2023, I think we should look at the Q4 here. I think for raw material, as explained by Robert earlier but how all of our raw material is affected by the oil price. So we still feel quite comfortable with the -- we can maintain the raw material cost. But for the contribution of the trading goods, I think will be similar with us in Q3. And for the PTL, I think we still maintain our effort in marketing. So we can assume that the gross margin for the Q4 will be at the same level with Q3. So, the full year gross margin, I think -- I mean, for the 9 months, the gross margin is 44-point something percent, right? So I think if we see that the Q4 margin will be the same level with Q3. I think the full year margin -- gross margin would be slightly lower because it's affected by the lower gross margin in Q4. For the operating margin, I think historically, our operating expenses is of around 19%. But for Q3, it went up to around 20% because of [indiscernible] expansion-related costs and also because of more effective marketing approach. So if we assume that operating aspects in Q4 also at around 20%. So I think the EBITDA is also affected. It also slightly decreased compared to the YTD Q3. Hopefully, does answer your question Ali.

So next question from [indiscernible]. While peers may not be launching products in economical segment, what are they doing on pricing/ASP. Our day cutting prices to pass on cost benefits to customers.

The answer is no. We haven't seen any of our competitors slashing prices in the market at various categories. But we have seen aggressiveness also in their sales and marketing effort. So we're not the only company that has been increasing our BTL activities. I mean some peers have also done similarly. But many of the smaller companies, I think they tend to take a position of wait and see. The fact is that's what they were doing also throughout COVID, right? When sales were impacted in COVID, when profit margin went down in COVID, they also didn't do anything. So the fact that now we're operating in normal conditions no longer COVID, they also didn't do anything. So really, the market is really dominated by just a handful of us. And when it comes to the battle in the market, it's just, again, a handful of us. The rest really don't do much. They just wait and see. But again, because of the nature of the ready-mix dominance in Indonesia versus tinting, price drop -- cutting prices in Indonesia is really not going to happen. I was listening to a few results from Asian Paints this past few months. And if I'm not mistaken, they have actually been reducing selling prices in India because they were aggressively also raising prices there. Obviously, the market dynamic and the conditions is different there because it's more than 90% of sales are coming from tinting machines. So the stock that retailers carry there is not as high as stock as retailers carry in Indonesia. So in India, price being reduced is normal activity, but definitely not the case in Indonesia. So competitors, other than those handful, really don't do anything much. I think they're just waiting and seeing, and they're just accepting the fact that the market is weak. Well, we're trying to do different, right? We're trying to explore more products. And like I said last time in the earnings call, right, my team and I we -- every year, we go out to look at the different markets in the region to see, whether we can learn about all the different products that we may need to have within our product portfolio. So we already plan out what we need to launch next year. And we need to know, we already know what it is that we have to be doing next year. So that even when election is happening and everything else, we'll still be able to do better because to be honest, I know that we're better than just delivering just single-digit results. So we are pushing extremely hard next year to try to go back to how things were before COVID, so that we can continue and deliver double-digit results. That's what the image.

Next question from Joan Long. For the 20 DCs that you have rolled out 3-wheeler service, how has the uptick been amongst your customer base? Within that 40 or 50-kilometer radius? Are you patient the logic, reduced working capital burden for dealers, but do the dealers understand these 2, is competition copying what you are doing.

So, so far, no competition has been copying, but now that we've shared it here. So you can guess who will most likely copy this idea. But nevertheless, right, it all comes down to -- this is not the only thing that we'll be launching, right? There's a lot more initiatives, that we'll be doing to complement this, which I cannot share here. But to give you an answer, a short answer, in around the 20 DCs that we have been launching this, right, the 3-wheelers exist. The uptick is certainly very promising, right? And ultimately, what I want to get at is, for the shops to offer more of our products because that translates to new sales, right? That translates to them not buying anything ever. And now, let me try at this, right? Because, what will happen logically is that if you are a shop owner, right, and you start to sell the same product 2 or 3 times right, maybe by the fourth time, you'll make a decision, okay, maybe I need to carry a little bit in inventory, right? Because, I mean, I can sell this product now, and I don't want to wait 2 hours every time. But without this as an offering, the reluctance from the shop's point of view, in trying to sell new items is always the one thing, which is, if I buy this product and I cannot sell, what are we going to do with it, right? And we're trying to solve that dilemma, right? We're trying to tell them like, look, don't try anything, right, and do this. So in some areas alone, in area -- in shop locations where the traffic is very high, right? We're now able to go there and offer them. Look, if you feel that by us placing a sales promotion boy or sales promotion girl in your shop can help you to sell more of our products, we're willing to try it out. And again, it costs you nothing. You don't have to carry extra inventory. We just get our people to offer more products, where you can make more profit using this 3-wheeler concept. So I think this is how we see the benefit that will be everywhere in the country. And that's why we make a decision. 20 locations showing good results. I don't want to wait anymore. We ordered around 150 units or something of this 3-wheeler and then we're just going to deploy everywhere. So yes, and you can see here, this is an actual photo. It's not a 3D image. So we're doing branding and we're sending this everywhere in the region depicting now, to the end of the year.

Next question from John Long. How do you measure the effectiveness of your advertising/BTL/sales and marketing spend since Avia is spending much more on advertising and promotion now.

Yes. So first of all, let me remind you that for the existing products, they barely go up, right? They're flat. So the increase is really because of the new products, right? And more of the new products are in the wall paint category, right? Maybe one in the more economical waterproofing and one more in the glue, for instance. But the way we see it is that in times now, where shops are really reluctant. Well, they are not taking advantage of the Express delivery, right? If the Express delivery is not yet available in their region, right? Then the only way for us to get them to buy more from us is to by giving them a very -- an incentive to the extent where they're going to say, "Wow, this is crazy. It's so appealing to me, so I'm going to try to buy that product, right? And that's what we needed to do in a tough market, where things are at this point in time, right? And -- but we believe that we will maintain this, especially for the wall paints, right? Water Proofing no problem. We'll, as soon as the product is launched, No Drop Basic, we will definitely scale down the promotions because it's more economical products, it makes sense that they make lesser in terms of their promotions. But for the wall paint, I think the same strategy that we adopted for Avitex Gold, will be implemented for other Avitex as well, as well as other ARIES, for instance, because we wanted them to be excited in selling our products, rather than selling whatever products that they have right now. Because they barely make any profit. And I think that's one way for us is to drive more sales on the wall paint and therefore, which will lead to also a healthier growth in terms of volume. And we're really identifying areas, where the different product needs to be pushed. So like I said earlier, in cities where the buying power is relatively weak and Avitex Gold can only be sold at a few locations, then obviously, we will try to push for more products, which is more economical. So that, that particular market can accept the positioning of the new product that they were trying to push there, whether that's Avitex Ways or ARIES Gold or ARIES Bling, for instance. But this is a strategy that we feel will allow us to continue to gain market share because if none of our competitors are launching any other products in this, right? And from the shops point of view, well, either I buy one product that I already have now, I make no profit. But here you are, you're coming in with a new product, same quality, very similar price, selling price to the consumer, but I make a lot more in terms of profit. So that's how we see it as a strategy that we will need to continue to adopt for the wall paint in particular. And the way we measure it John Long is by, I think, 2 parameters. One, we look at the number of shops that buy the products, which is important. And number 2 is how much sales are they -- are we generating for that new product.

A question from Felicia, Trading Goods revenue were up by 10% Q-on-Q, 4% year-on-year. Can I check if this is more driven by pricing improvement or volume.

It's by volume Felicia. So I think it's safe to say that the Trading Goods segment is experiencing a rebound from where they were because Trading Goods haven't been performing well. And that's why I was quite shocked also that in Q3, the Trading Goods contribution was up to 22%. So I was like, wow, there's a rebound, and you can see it in the market that demand for BPC 5, in particular, has been very robust. But if we did not implement a price hike whatsoever in the Trading Goods segment. So it's definitely because of volume. And I think things are recovering. People have been holding -- postponing any of the products that form with the Trading Goods, but now they've decided to, hey, maybe I need to do this. So that's why we witnessed healthy growth in the PBC pack segment.

Next question from Robin IBM team, happy 45th anniversary, a few for me. If minimum wage increase is a key concern, should we be more upbeat, heading toward elections given political hands out? Can we have some insight into 2024 guidance, please? And then next question, Water Proofing a stronghold, but No Drop Basic launch, coincided with minus 10% Q-on-Q decline in Water Proofing revenue. Any thoughts on this?

So, the first question, Robin, we're definitely going to be in a better position next year, when the discrepancy between the minimum wage as well as the price inflation of paint, in particular, are going to get even lesser, right? We're now at around 10%. But next year with minimum wage going up more and prices for paints barely go up this year or not even going up yet for now. Then the gap will be even smaller. So I think we'll be better positioned because of that. And plus, keep in mind that next year, we'll also enjoy the full benefit of all the product launches, that we've had this year, right, including some of the more economical products in Q3, Q4 or whatever that is in this year. So I think we'll be -- that's why I'm thinking quite positively about what will happen to our numbers next year. And again, the many strategies that we'll be deploying, will be supportive of that. But in terms of guidance, look, guys, I'm ashamed to be missing guidance every time. So maybe I'm not that good in giving guidance. So, I think I will take a more -- less optimistic guidance giving, so that I can basically deliver more. I think that's how I look at it because it seems like every time I give you guys a number, I'm not delivering on them. So maybe Hadi needs to give better guidance than I can or maybe I'll ask Hadi to do it because I don't think I'm doing a good job. But the way I see it is that, look, we will do a lot of things next year to the extent, where if our competitors don't really complain that Avian is becoming crazy, then we're not doing our job. That's what we want to do. We want our competitors saying, what is Avian doing? Why are they doing so many things all at once. Why are they doing this and that. And that's exactly how we're thinking about our approach into next year. We're really looking at everything that we have, what else can we do and then how can we streamline the operations, what else can we get the shop to buy, how can we improve the buying from the consumers and everything that you can possibly think of, we're thinking alongside of those. But in terms of guidance, again, I don't want to be just putting numbers out there. I'd rather give conservative numbers, and hopefully, I can really outpace them. But in my mind, I mean, when I'm giving targets to my team, it is certainly going to be in the double digits. We never give them a single-digit target, always in double digits. But the fact is we haven't been delivering. So that's what I'm trying to change now because we have to make some changes. Otherwise, it's not going to be good for the company. And secondly, you mentioned that the No Drop revenue in Q3 dropped by 10%. I don't think that assessment is true, Robin. Hadi, I think if you look Q3 versus Q3, did our waterproofing this year dropped by 10%?

Just minus 10% Q-on-Q.

Okay, is that true? Because I think in Q3, we also launched a No Drop Plus 3 in 1. We'll get back to you separately on that, Robin. Okay. Can we go to the next question, Andre?

Next question from Jung Huong. How are inventory levels at the dealers or retailers?

Yes. So when we enter Q2 or the first half of this year [indiscernible], the inventory levels, I mentioned that they are back to normal, right? But when we look at Q3, I think retailers are starting to feel a bit more buildup because they're not seeing consumers walking in and buying it, right? And I think the fact that many other FMCG companies, reporting poor Q3 performances, also is an indicator that the market is pretty weak, right? And one thing that we noticed that we read on news is that the fact that rice prices in Indonesia went up by 15% and everybody eats rice in Indonesia. So that's not a good thing to be seeing in the market. But now because of the multiple approaches that we're trying to do, we believe that retailers are sitting on higher inventory levels, than they were in the first half. So that's why we felt that, look, we don't have any choice but to take a more conservative approach in Q4 and have to reduce our guidance for this year, because retailers are really not buying as much as they want to because in their minds, consumers are not walking in and buying more products from them. So yes, we believe that retailers are definitely sitting on higher inventory levels compared to what they had in the first half this year [indiscernible]. But not as high as the -- during the COVID time. That's for sure.

Next question from in [indiscernible] 2 questions: number one, implied ASP breaking out from sales and volume growth seems to indicate ASP compression year-on-year. Can management share if this tale is with internal loss? And why this is so -- is there downgrading? Question number two, on gross margin, has management done some sensitivity on impact with higher oil prices?

Yes. I think for the ASC because of -- because we launched some of the more economical products. So on ASPs also affected there. So yes, we see that slightly decline on ASP. Number two, for the impact on the oil price, again, not all the inventory, not only raw material is affected by the oil price but if we assume that 30% or -- 20% or 30% of the raw material is impacted by the oil price, I think because raw material is around 50% of the COGS and COGS is around 50% of the sales from the architectural solution. So we can do some kind of like sensitive analysis, yes.

And question from Divya, follow-up, what is the level of EBITDA margin that you want to maintain in near term? It was 25% in quarter 3, but first half was 29%. It's 25% comfort level now given the need to invest in branding?

Yes. I think because of the -- it's been talking about PTL, yes we -- I think we want to sacrifice depend on the margin. But, when we're talking about EBITDA, we're also talking about the gross margin, right? This is also affected from that side, right? But on the raw material, I think we're quite comfortable that we can maintain the margin quite okay. So I think, the effect on the EBITDA, if we can improve the sales in the coming years, I think we will maintain at the level back around 26% in December.

Yes. I mean to add to that, Diviya, I think 25% is definitely too low for us. We'd like to do it. But look, which is why I think if we go back to the whole idea of Express Delivery, right? Not everything that we do need to cost us money, right? When we offer our customers the convenience of using the Express Delivery and essentially for them to sell more products, right, we don't need to offer them anything except that it will take them less than 2 hours to get the goods, right? So Express Delivery, it really does not cost us anything. And to improve on this, right, when we are going to reduce the number of delivery trucks that we have, we're also trying to balance the small CapEx that we'll deploy to add the 3-wheelers. And then we sell some of our trucks. If we sell our trucks every 8 years, right? So when we sell them, then we're not going to replenish them. We'll just use the 3-wheelers instead. In terms of manpower, once those trucks are sold, then the 2 people that operate the trucks can now operate 2 of these 2-wheelers, right? Because the 2-wheelers only require one person where structure required 2 people. So if we can also push a lot of sales to come in from the 3-wheelers or the Express Delivery approach, then we can improve a lot of that performance and then bring back our EBITDA. Because if we're trying to do all kinds of things without also taking advantage of our ecosystem and trying to push for more sales, then I think that won't be a wise course of action, but we are. So we're fully realizing that we've been spending money on doing branding and doing advertising, on doing marketing blah, blah, blah. But at the same time, I said, okay, is there things that don't cost us extra -- is there things that don't require any money to come out from the company's pocket? Well, this is it, right? If shops all of a sudden start to buy all the different products that we have, it doesn't really cost the company anything. So I think we can improve the EBITDA that we did in Q3 so that we can go back maybe not as high as 29%, but at least we're aiming to be in the 27%-ish level. That's how I see it.

Next question coming from Sukrit. Thank you for the previous answer. I have a couple more. What is the mix or split between premium, mass and economical product and have the mix change materially this new year. And then the second question coming from Sukrit again. If Express Delivery become widely accepted, could that lead to higher costs for Avian? Does the dealer have to pay extra for Express Delivery? How much volume-wise, can dealer order under this Express Delivery?

So if we look at the product mix that we have, no, we haven't noticed any significant changes to the contributions for this, it will be a bit difficult for us to give you a comparison, in terms of the sales breakdown now. Because we already share enough within our pie chart. And I don't want our competitors to gain any more -- even more insights on the detail or even on the breakdowns of our product portfolio. But on your second question with regards to Express Delivery, right? The Express Delivery can shift up to 500 kilograms. So the box that you see at the back of that will have the capability of delivering up to 500 kilograms at once. Whereas a normal truck, a 4-wheeler truck will have the capability of delivering about 3,500 kilogram to 4,000 kilograms. So this is definitely only [indiscernible] of that. But in terms of costs, like I said here, it's actually cheaper to be delivering by this because the fact is, even though we have all these trucks, right, what you guys may not know is that the trucks are not always full, okay? Because we don't -- now with the new software that we've been installing within the supply chain, right. So when we go out from our warehouse, the truck needs to complete a full delivery in 1 day. Okay? When you go for 1 route in 1 day, I think we have the capability of making deliveries between 15 to 17 locations or 17 shops per day. So that's what the truck needs to do. But the question is, are the trucks always full? The answer is no. They're not always full. So trucks are not always full because shops can order however a month they want, right? So in fact, we believe that within the 30,000 shops, which can be covered around the 40-kilometer radius, we believe that they can actually benefit more from the 3-wheelers. But we don't think that it will cost the company extra because the number of 3-wheelers is only about 1/5 of a truck and then the -- you only require one operator, right, for this, right? And the other benefit is that, you don't have to pay such an expensive maintenance for cars, the maintenance fee every year is expensive. This is essentially a motorcycle, right? So maintenance for motorcycle is very cheap. Another issue is that for trucks, you have to buy petrol, which is a lot more expensive. And then this is a motorcycle. So you can buy subsidized petrol because this is a motorcycle. So when you combine all those benefits, right, we believe that having the Express Delivery will not be adding to the delivery cost that we have. And so we're quite confident we can do this well. And obviously, the goal is for this to be adopted at all shops at all shops. But we are still limited to about 40 kilometers because you can't drive a motorcycle a bit beyond that. I think we just think that it's too far.

Next question from Theodores Melvin. It is Melvin from [indiscernible] firstly, congratulations on impressive results. I truly appreciate the year-on-year improvement, particularly given the challenging circumstances. There are 3 questions from me. Number one, could you give any color on the middle up segment? Is their purchasing power still robust, contributing positively to the company performance, despite the challenges faced by the lower middle segment? Number two, I'm curious, are you considering supply and paint for the IKN project. It seems there are several building materials companies like those in cement industries are keen to securing contracts for our IKN. Only 2 questions.

Great. So let's talk about the IKN first, right? With regards to this new -- first of all, we don't supply directly to any government entities. I think it's all over the news, right, that many of the government entities, who prioritizes in constructions are all under big trouble now, right? They have heavy loan, billions of dollars everywhere, and then they're really essentially are under a lot of pressure now which is why we don't supply to them. But the good thing about IKN is that it's located between the 2 cities. One is Balikpapan, the other one is Samarinda. And in their very province, the market leader for pain is us. So we're the market leader there. And it's impossible for IKN to be built with workforce, all imported from Java or from Jakarta, right? They're bound to use local people either from Samarinda or from Balikpapan. So there's a high chance that our products are going to be used. But on top of that, while we are not supplying to government entities directly, we're always making proactive approach in trying to get our products to be understood by the various government entities. So we now have set up a project division team that has been quite aggressive in training various contractors, architects and builders everywhere across the country so that they became familiar with a lot more products that we have within our product portfolio. So we're doing the same thing with the government entity. So obviously, even though we don't supply to them directly, but I think if the knowledge of our products are there, they can still get the product, right? But going back to your first question, what was the first question, Andrea, sorry.

Would you give any color on the middle up segment?

Right. Sorry. So I think if you look into the middle up segment, right, I think the easiest way to look at this is by looking at the performances of [indiscernible] , Ace Hardware or maybe Depo Bangunnan to that extent, right? I think if you look -- I haven't seen the results for Ace hardware yet as of today, but I have seen the results for [indiscernible] yesterday. And the growth within Micro 10 is around 5% for their paint segment, which is more or less in line with our performance but their number is way smaller, right? I think every month, they sell less than 100 -- or around IDR 100 billion of paint. Whereas we more than IDR 400 billion, right? So their number is smaller than us. And yet their growth is also in the 5%-ish margin. So I think even though -- and if you look Micro 10 -- if you look in the category of Micro 10, you only see from category 3 upwards. Micro 10 does not sell paint in category 2 or 1. They only sell it in the category 3, 4 and 5. And even then, the growth is only around 5%. So I think even the middle up this time around is also experiencing similar kind of pressure. And the honest truth is I don't know why. Because these are the kind of people who always have money, right? So if they're not spending, it must be for something else. And we're not really sure what that reason is. But that's what I -- that's how I see it in that. I'm looking forward to see how ACE will fare this year. But is, again, doesn't sell a lot of paint, right? ACE sales is very low in terms of contribution from paint. They sell many more other products but not paint. So -- but just to gauge in terms of the buying power, we can use ACE also as a benchmark.

I think due to time constraint, we will allow one more question for the last question, but -- the last question coming from Leonard Lim. While I appreciate your strategy of offering a full range of products, could the downgrading lead to lower margins. What is the margin differential between your premium, midrange and economical products?

Yes. So the easiest way to discuss this is by looking at No Drop Basic for now, right? So if you look at our best seller, which is the normal No Drop in the blue can under Category 4, right? What we're giving in terms of below the line to our retailers are about 15%. So for No Drop Basic, in the first 3 months that it's launched, I'm also giving them 15%. But what happens after 3 months is that No Drop Basic BTL budget will be dropped to 10%. And guess what? The gross margin between No Drop and No Drop Basic is 5% difference. So we're doing that kind of strategy, right? Well, if we make 5% less on the gross margin, I should also give shops 5% less in terms of BTL promotions. So that's what we're doing. So we're adopting a similar kind of approach with many other products that we have, so that while they are downgrading the gross margin can still be maintained, right? But look, what we are also realizing is that consumers don't really like to downgrade unless they have no choice, right? Because as Indonesia, consumers become more wealthy in the future, right, or even now, the tendency is for them to go up, right, not go down. So I think we're in a good position for now to keep an eye on the gross margin compression. But we're managing that quite well, I believe. And for the wall paint, like I said, we're always keeping an eye on the gross margin also and keeping an eye on the kind of BTL activities. But, that's something that we've decided to do because we needed to be super aggressive in the wall paint category to track to get more market shares from the others.

Thank you. If you have any questions that have not been answered, please feel free to e-mail me, and I will make sure to coordinate with the management and get back to you as soon as possible. Once again, we appreciate your participation in our Quarter 3 2023 earnings call today and hope to see you again in our next earnings call. Take care, and bye-bye.

Take care.

Thank you so much.

Thank you. Bye.