Good afternoon, everyone. Thank you for having the time to participate in today's PT Avia Avian Tbk, or Avia Q1 2023 earnings call. For your information, we uploaded the presentation materials to our website yesterday. We will begin the session with a 30-minute presentation, followed by question and answer. Overall, we plan to wrap up this earnings call within one and a half hours. We will begin the presentation by muting all participants. During the Q&A session, please use the Raise Hands button, and we will unmute you to continue with our questions. Alternatively, you can use the chat box to ask your questions. Please note that the webcast of this event will be uploaded to our website no later than tomorrow for investors who cannot join us now. Allow me to begin by introducing myself. My name is Andreas Timothy Hadikrisno.
I'm the head of investor relations of Avia, who will host this earnings call today. We are joined with three other presenting team today, starting with Mr. Ruslan Tanoko, who is the Vice President Director of our company, followed by Mr. Robert Tanoko, who is the Operations and Development Director, and finally, Mr. Kurnia Hadi, who is the Finance Director. In Q1 , we generated revenues of total IDR 1.8 trillion, or the equivalent of $117 million, with a gross margin of 45.3%, an EBITDA margin of 29.1%, and a net profit margin of 23.4%. Our operations are supported by more than 8,000 employees. As of the end of the Q1 of this year, we have 150 distribution centers nationwide, providing high-quality services to more than 56,000 retail outlets.
We cover all 37 provinces and 98 cities in Indonesia. Compared to Q1 2022, consolidated sales grew by 8.7%, driven by growth in the architectural solution segment. Architectural solution segment grew by 11.2%, driven by double-digit growth in the wall, waterproofing, and wood and metal categories. The trading goods segment recorded a decline of 2.5% due to intensifying competition, especially within the PVC pipes category. The improvement in the EBITDA margin was attributable to both sales growth and the improvement in the gross margin. Indonesia's central bank expects inflation to fall to around 4% by 2023. In the Q1 of this year, however, the effects of high inflation are evident. Moreover, total minimum wage increases since 2021 have still lagged behind the building materials price inflation by about 10%.
Based on recently released Q1 result, we notice a double-digit decline in a ceramic tile company and a single-digit declines in a large consumer goods company and a large agri-food company. In the coming weeks, we will continue to monitor the results of many other well-known companies. In Q1 this year, we launched 4 products in the marine and protective, wall, and wood and metal categories. Avian Brands has been able to make a breakthrough in Ace Hardware's modern retail outlets. At the end of 2022, Ace Hardware owned more than 220 outlets spread across the country. Our products are currently offered in 50 outlets. Through the presence of all our wholly-owned distribution centers, we are able to provide Ace Hardware with the best quality service and the fastest delivery service fulfillment across the nation.
In the future, we aim to have more products at all of Ace Hardware outlets. In Q1 , we opened four wholly-owned DCs and six mini DCs. By the end of this quarter, we have established 113 wholly-owned DCs, 37 third-party DCs, and 10 mini DCs. At our wholly-owned DCs, we own and operate 597 delivery trucks. We have the capability to make around 10,000 deliveries per day. We strive to have the best distribution network in the building materials industry through multiple technology-driven initiatives, and we are able to achieve 97% of one-day delivery service fulfillment for retail outlets located within 50-kilometer radius from a wholly-owned DC. I will now pass to Pak Hadi to continue the presentation.
Thank you, Pak Andreas. Consolidated sales increased by 8.7% in Q1 this year. We added more than 400 customers in this quarter. We continue to expand our product penetration by increasing the number of retail outlets across the nation. In this page, we benchmark our sales to Indonesia's GDP across five major islands. We prioritize stronger growth in areas where we lack the most, namely Jakarta region and the northern region of Sumatra. As shown here, in the region of Kalimantan, Sulawesi, and the rest of Indonesia, our sales are higher compared to the GDP contribution. This quarter, the performance of the architectural solutions segment was much stronger than that of the trading goods segment. This was due to double-digit growth in the wall, waterproofing, and wood and metal categories.
The chart on the right shows 93% sales contribution from traditional retail outlets. The contribution of modern retail outlets is quite stable at around 6%. The consolidated gross margin in Q1 was 45.3%. This represents an improvement of 4.5% compared to the same quarter last year, and an improvement of 4.7% compared to the full year of 2022. The EBITDA margin improved by 1.2% compared to the same quarter last year. When compared to the full year of 2022, the EBITDA margin improved by 4.2%. Net income margin comparison to the same quarter last year was flat. When compared to the full year of 2022, the net income margin improved by 2.5%.
Architectural solution sales increased by 11.2% in Q1 compared to the same quarter last year. In this segment, we added around 1,000 customers. Architectural solution volume increased by 1.8%, driven by growth in the wall category. Several new products launched last year, namely Avitex Gold and Avian, Avian Cling, have been well-received by retail outlets and end customers. We also strengthened our project division in order to gain more market share and gain more volume in the architectural solution segment. We remain careful not to participate in projects where we lose money or experience significant margin compression. In the trading goods segment, we continue to face difficult competition in the PVC pipe category. Sales declined by 2.5% compared to the same quarter last year. Nevertheless, we were able to add around 1,500 customers in this quarter.
Gross margin for architectural solution improved significantly in the Q1 this year, mainly due to the stabilization of raw material price. In the trading goods segment, gross margin continued to normalize. I will now pass to Pak Robert to continue the presentation.
Thank you, Hadi. On the cost structure breakdown, G&A expenses as a percentage of sales declined in the Q1 , supported by the top-line growth. Sales and marketing costs fell slightly in the Q1 , although travel and other costs rose back to normal levels. On the other hand, the stabilization of raw materials prices has a direct impact on COGS, which decreased in the Q1 as a percentage of sales. Raw materials began to stabilize from Q4 of 2022, and continued in the Q1 of this year. Direct labor costs declined due to improvement in the top line. Below the line, marketing expenses for existing products declined slightly to around 13% of COGS. The additional 2% was allocated to support our newly launched mid-tier wall category, Avitex Gold. This product continued to gain strong market share nationwide.
It is important to note that we will gradually reduce the budget for this product over time. Trade working capital was well-maintained at 28.6% in the Q1 of this year. Avian Brands is able to generate strong cash flow from operations. We have a low routine CapEx of around 2% of sales, consisting of manufacturing facility upgrades and infrastructure of IT, trucks and vehicles in the distribution centers, and the machines for retail outlets. We have a high level of free cash flow due to our ability to generate high levels of cash and low routine CapEx. This makes the company confident that it can meet its obligation to pay a dividend of at least 50% of net income.
As shown on the chart on the left, for the past 5 years, we have managed to maintain on-time collection of accounts receivable, despite numerous difficult economic situations. Our customers have given us priority in terms of payment, even though they might experience liquidity issues. This is a testament to the quality of our relationship with customers, which we continue to maintain.... The table on the right showcases our ability to minimize uncollectible receivables from retail outlets, as well as internal fraud. The company, through its culture and business model, has successfully implemented an accountability system in internal fraud management. We maintain our guidance for the full year 2023. We are targeting sales growth of 8%-12% and volume growth of 2%-6%.
Given the macroeconomic uncertainties that could impact paints and building materials this year, we are taking a moderate approach of our guidance, and we remain optimistic but cautious. In May, we will implement price increases targeted towards solvent-based products. With regards to adding more tinting machines, the company always wants to be in the best position to take advantage of the opportunities when the Indonesian paint industry evolves into a trading-driven market. Thank you very much for the attention, everyone. I will now pass to Andreas to moderate the Q&A session.
Thank you, Pak Robert. We can now proceed with the Q&A session. Please use the Raise Hand buttons on the chat box. Okay, Divya, you can start now.
Thanks, thanks, Andreas. Good afternoon. Thank you for the opportunity. Just a couple of questions from me. The first one is on the gross profit margin. Could you give us some color on the costs and the inventory situation so that we can better understand whether the 50% margin that we've achieved in this quarter is actually sustainable? Or have you seen some of the costs, especially on TiO₂, as well as on PE, they've started retracing back upwards? So just some color on the sustainability of this 50% gross profit margin would be my first question. And my second question is on competition. How have they really reacted to you know you guys gaining share with Avitex Gold?
How is Avitex Gold priced versus, let's say, a Nippon comparable SKU? And overall, you know, how would you gauge the competitive environment at this point in time? Again, with the idea of understanding whether you need to reinvest some of these cost savings into more ad spend. Thanks.
I think Robert can answer the first one with regards to raw materials-
Yes.
And then I'll, I'll answer the second.
All right.
So on the cost side, we expect costs to be down by low- to mid-single-digit percentage in 2023 compared to 2022, right? I would say the raw materials have normalized as we expected. Regarding the TiO₂ price, we saw that there is a little bit of bounce back of TiO₂ price from the end of last year to beginning of this year. However, the increase of the percentage is relatively very small, it's about 2%-4%. And again, the contribution of TiO₂ pigments on our pigment is relatively very small, and we will say that the impact are not much on that case.
Yeah. Maybe just to add to that, I think the answer that you're looking for, Divya, is that whether the question is on the gross margin, is it sustainable or not? Unless anything change drastically, we believe that this is something that we can maintain, right? But obviously, you know, we always mention that, you know, there's always uncertainty with regards to, you know, China tension or the escalation of war, whatever. But if things are maintained as they are, because they've been high for more than two years, right? As we mentioned previously, right, things cannot be high forever in terms of raw materials.
So I think it is time now that we're starting to enter an area of where the raw materials are starting to go down, you know, because after all, the supply chain costs, you know, container costs and everything else, as you know, are already back to normal. So we do expect that we should be able to sustain this margin for the full year of this year. Let me go to your second question, Divya. So we're on the right page with regards to answering your second question with Avitex Gold. First of all, let me put the context that this product is priced exactly the same as Nippon's SKU. By the way, if you look at the mid-tier wall paint, okay, the largest revenue would come from this product price point.
So Nippon is currently the market leader, and the second player is a product by AkzoNobel, so they're in the second position. So in terms of pricing, we're exactly the same. Maybe our price is, like, 1% or 0.9% lower, that's about it. Now, to be honest, we were caught slightly off guard with regards to the success of this product because just before we ended the Lebaran this April, we're out of stock. Everywhere throughout the nation, everywhere out of stock. Even at the company level, we're out of stock. We didn't expect demand to be incredibly strong for this product, which is... I mean, obviously, it's a good sign. But as you can tell, we are spending quite a bit of money on this.
We are spending about 2% of COGS in terms of our below-the-line budget for this product. But because of this, I think, retailers are really seeking this as a, you know, moment to, to take advantage. Because as they all know, that when we give something that, you know, at a, at very attractive level, they never last forever, right? And as we mentioned also at this presentation, it's important to note that we will gradually bring down the budget for this product. So at this point in time, I think retailers are really taking advantage of, you know, the high profit that they can make from this product. And moreover, I think they're very happy about the quality of this product, because, this is a product for the mid-tier, which you can basically use for interior as well as exterior.
So by just selling this one product, it really solves both the interior demand as well as the exterior demand. We're feeling very optimistic about this, and which is why the growth of our sales has been you know strongest in the wall paint category among other categories. Hopefully that answer your question, Divya.
Yes. Yes, that's very clear. Thank you very much for that, Kurnia.
Thank you.
Okay. We go to the next question coming from Yuan Loh.
Yeah, I-
Thanks, Yuan Loh.
Thanks, Pak Andreas. Pak Ruslan, hello. Hope you guys are okay.
Hi. Hi, Yuan Loh.
Yeah, yeah, quick, quick questions for me. I think first is on, on April itself. I think-
Mm
... anything you can comment, I mean, just so far you've seen, last month? Yeah.
Yeah. So first of all, let me put in the context that the number of working days April this year is actually five days shorter compared to April last year. Because as you know, with Lebaran, you know, there's always a shift of two weeks.
Mm.
We have five lesser working days. So obviously, we expected sales to be lower in this month, April, but on the flip side, then May, we have five extra days compared to last year's May. So we're basically expecting to catch up what we are a bit short of. But I think the answer that you're looking for is whether demand pre-Lebaran has really gone back to pre-COVID level. If that's what you're asking, Yuan Loh, I don't think that... I don't think so. So I don't think demand has basically returned back to normal level. I think people are still, you know, a bit cautious in this, which is why, like we mentioned also, right?
We remain optimistic, but we're cautious about what this year is happening. Because when we look at many other companies... I mean, first of all, Catur Santosa already published their report. So when we look at their growth in Q1, specifically for paint, their growth was only 0.4% in value. So obviously, then, this is not good, because that 0.4% in Catur Santosa is the growth for paint, both on the Mitra10 as well as the growth on the paint on their distribution side. So if Catur Santosa only records 0.4%, well, maybe something is not that strong yet. So we haven't seen that pre-Lebaran this year to recover to the pre-COVID level.
Got it. Got it. Second question is, I guess, what explains the difference between you and the general, like you said, general building material space, that you all have, like, a pretty big gain in terms of volume growth? Yeah.
I don't think our volume growth is big, first of all, but look, I think the biggest difference is that we continue to try harder, right? We know that we didn't do a good job last year, and I don't wanna be caught in the same position again. We don't even know whether our growth that we have shown you this year, this quarter, is good enough, to be honest. But, we're always trying to do better, and trying to reflect on our mistakes and try to see what it is that we can do to adjust our strategies. I think that's basically what separates us from many of our competitors.
Because if you look to Indonesia market, right, it's very fragmented, and many of the Tier 2, Tier 3 players, they really don't do anything, right? When we look into the aggressiveness of our competition in here, it's the same players, right? You're looking at a few multinationals and maybe one company, local, and the rest really don't do anything. So I suppose in terms of what separates us, is that we're always trying to do better. When we do benchmarking, right, you noticed earlier that when Andreas mentioned, we benchmark with ceramic tile, but we also look at FMCG companies. We look at agri-food companies, right? We look at many other companies which may explain what is really happening to demand in Indonesia.
So because that could also impact our business, and we wanna know if, you know, Mitra Adiperkasa, MAP, is doing well, I say, "Okay, maybe that, the explanation is the people with, you know, thicker wallet can still continue to spend." But what happens on sales on, you know, Unilever, for instance, right? How are they doing? You know, and things like that. So I think the biggest difference between us and many of our peers is that we're, we're always hungry, we're always trying to correct any mistakes that we've made in the past and try to always do better.
Pak Ruslan, so relative to, I mean, last year, where we lost share a little bit, I guess, to Nippon, how would you think we are doing so far this year?
Well, this is a question that I sort of expected, Yuan Loh. Okay, first of all, in March this year, they have a last bite, right? So, my gut feeling is telling me that maybe they'll do fine, right? Whether they'll do better or not, I don't know. Maybe they could-
Mm
... because their last bite actually is taking place in the month of March, right?
Okay.
But for us, we are having a last bite in the month of April and the first week of May. Why the first week of May? Because we know that in April we have two weeks off, so I have to actually offset that by giving an extra week in May so that we, we can basically do that. So there's a slight timing difference. But in terms of the products that are being given the last bite, it's quite similar, right? It's predominantly the solvent-based products. Because we've mentioned this last, last time we met, that the solvent-based products have been under pressure. Because even though oil prices have been going down, but for some reason, raw materials for solvent-based products continue to go up. So obviously, we're not the only company that has been impacted.
Nippon has also been impacted in this context, so they decided to raise price. Then, we're doing the same thing, but our price hike is happening in April, theirs is happening in March.
Mm-hmm.
... Okay. But I think one thing to add, I know for a fact that we will definitely gain market share in the wall paint category, Yuan Loh.
Mm.
Because, you know, in terms of value, the growth for our wall paint has exceeded 20%.
Mm, got it. Would you say wall paint side, Avitex Gold is one of the main things?
Oh, for sure.
Oh, okay.
Sure. I mean, because if you know, we tried as best as we could to do a good forecast, right, when it comes to demand. But we were completely unprepared. We had to issue a letter today to a few large customers who wanted to close their promotion, but because of, you know, no stock, that we have to apologize to them. I said, "Look, we'll do something on the promotion side so that you don't miss out on this. And it's not your fault, it's our fault, because we cannot keep up with demand." But you know, something like this had to be done. And I mean, it's a problem, but it's a good problem to have, I'd say.
Mm, got it. Okay. Thanks, Pak Ruslan. Go back to you. Thank you.
Thank you, Yuan Loh. We go next to Harry. Can ask question, Harry.
Hi, thanks very much. Can you hear me okay?
Yes. Hi, Harry.
Hi. Hi, thanks very much for the call. Just a couple of follow-ups on those questions. First on the market share, the point that you raised. Could you just help us understand a bit more about, like, that process of gaining market share? Like, what do you, you know, think happened to the underlying consumer? Is it a question of, like, availability on the shelves, or, you know, incentivizing the trade channels, and creating favorable incentives? Yeah, and so if you could just talk a bit about that and how you've been able to gain that market share, and whether you think that's something that you'll be able to sustain-
Yeah
... going forward.
So essentially, there are a few different channels that... I wouldn't say the word channel. Okay, so if we look at the ultimate decision maker when it comes to paint, there are a few people, right? Number one is the homeowners themselves. Number two, they can be impacted by the role of contractors, painters, interior designers, architects, and as well as the retailers. All right? So maybe we're looking at six of them. But majority would come from either the retailers and the homeowners. I'd say that these are the two biggest, and then followed by painters, right? So what we've been trying to do is then, okay, now, if we look at these three, then-
Mm
... then you need to make sure that your products are available on the shelves. That would be the first thing, right? Because if not, then how are you gonna get the products across? So number two, then you need the help of retailers who are willing to push or offer your products. If the retailers are not happy, they're not gonna do it. If they're not gonna do it, then obviously you miss out on this retailer's influence, who can also help to push your products. And lastly, when it comes to the painters, right, keep in mind that these painters are people with, you know, years and maybe even decades of experience, who've been, you know, painting all their lives. So how do you impact them? It's really not so easy.
I mean, we've started to train them since maybe a year and a half ago, and that continues, by the way, up till today. And yet, you know, it's not an easy process. Because after training, they would go back and start using the old paint. So what makes this strategy, this time around with Avitex Gold different is that, number one, we're giving the retailers, like, a lot of profit. When I mean a lot, it's a lot of profit. We're giving them, you know, a huge margin, because to the point of that, they cannot refuse. They're gonna say, "Wow, nobody is giving this kind of margin. And, I can sell this product with... You know, it should be okay because Avitex is a third wall paint in the country, right?
Number one is from Nippon, number two is from AkzoNobel, and then we're number three in this category. So I can sell this product. The packaging is nice, and, and, and I make a lot of profit." So that's one. Number two, when it comes to the painters, once they try to use it, this is where the first impression matters the most, right? They need to be impressed by the quality of the products, and I think that's what we have delivered. So when they try the product, they were impressed. And now, keep in mind, we actually launched Avitex Gold, it wasn't this month, Harry. We launched this, like, six months ago. So why is there a pickup all of a sudden, like, in March, for instance, or in April?
It's because, you know, they've tried it, and they like it, and then they say, "Okay, now I'm willing to try it again." Because, the true test for us of a success of a strategy is that if there's repeat, right? So the first one or two months is really not an indicator of success. It's like when you open a restaurant, right? The first two months, any restaurant's being busy, that's normal. Can that restaurant last for the third month, fourth month, and, and so on? That's what we're doing with our product, right? We also need to see whether this particular product can continue to gain success in the third month, fourth month, fifth month, and so on. That's what we're seeing in Avitex Gold. So the quality was definitely there.
So we tick a lot of the boxes in terms of this strategy within this particular product. And so that we know that this is how we gain market share. And lastly, Harry, keep in mind that I mentioned earlier, right, in terms of wall paint, this by far is where the biggest market is for wall paint. The mid-tier on the upper level, this is it. So we're really targeting and checking all the right boxes.
...
Half a kilo, we're over half a kilo.
Mm-hmm.
Yeah.
I mean, they have to see. Sorry,
No worries. Great. Thank you for that answer. That's helpful. And you mentioned that, you know, the BTL marketing expenses, you expect that to normalize over time. So I'm just-
Yes
... I'm curious whether, like, you expect there to be a sort of correlation between, like, the volumes in this product and the, you know, the intensity of the BTL marketing?
I think the plan is for us to actually still maintain this same level of intensity for the remainder of this year, Harry, and then we'll see whether we can tone them down. We know that we can. The problem is that it will be done gradually. I cannot slash the aggressiveness or the intensity of this BTL for this product immediately. So it will be a gradual decline over time. But that's we know that that's something that we can do, because we're also supporting this with a bunch of different marketing, right? Above the line for television and everything else. So we just essentially converted an old Avitex product, and then we're putting an Avitex Gold instead. And it's, you know, the advertisement has aired in March and April. So, yeah.
But we will definitely bring this down gradually, but the intention is to keep this for the remainder for the year of 2023. We won't bring it down this year.
Okay. So you said BTL for new wall paints accounts for 2% of the total, BTL marketing expenses?
No. So if you look at the 15.2, about 2% of that is allocated for the new one, and the rest-
Right
... is for the allocation, for the existing ones.
Right, for the new one. So if I were to just think about the new products, would that be right to think that there may be, you know, it's more like 20% for them? Because-
Correct. Correct.
So, okay.
Correct.
Okay.
Yes, yes.
'Cause they're not, they're not, you know, they account for quite a small amount of volume.
Correct. Correct.
Okay. Okay, great. And the second question is on, on the gross margin. Just expand on what you were saying before, like, you know, I, I think the, the Q1 gross margin was really impressive, and, and you've said it's going to continue. Can you just help us understand if, if that continuation includes the price increases you're going to do in May of this year?
Yes.
And then of that gross margin expansion, like, how much would you expect to trickle down to the operating level?
Yeah. Okay. First of all, with this 50.6% gross margin on the architectural solutions that you see, if we dig down into, you know, the, all the different products in detail, what we are seeing is that there is- we are experiencing margin compression specifically for the solvent-based, okay? And that's basically what we're trying to address. So, but... And solvent-based, if you look in the pie chart there, go to the pie chart. The solvent-based that I'm talking about is... No, wrong pie chart. No, no, no. Keep going to, to the front, the pie chart of the sales breakdown. So the solvent-based that we're referring to, there you go, is the in the wood and metal and wood care. So in terms of sales contribution, they're about 25%. All right?
So, you know, but and these are in terms of sales, so 25% of our sales are impacted, and the margins are lower. So that's what we're trying to improve this time around. So, yeah, and prices for this solvent-based would go up between 3%-5% in this May that we were looking at. So, you know, if you multiply three to five percent by 25%, so another 1%, more or less, will improve if things remain as they are.
Okay. Okay, so you, you think there'll be about 1% blended price increases?
Correct.
Oh, okay.
Yes. But we need to take into account that it will only start in May, right? It's not a full year.
Yeah, yeah, yeah.
Yeah, yeah.
Okay.
Multiply by 7 months out of 12 for it, right?
Got it. Okay, and then the last point on the flow down to operating profit. Did you see that? I mean, is that a 1-for-1, or do you expect some of that to be consumed by SG&A?
No, I think it... I mean, if you look at the, go back to the EBITDA, Harry. Yes. So if you look at this, right, I mean, I think I mentioned this point before, right? When raw materials start to normalize, and then margins all of a sudden shoot up, right, we can expect that there's going to be some intensifying competition in terms of SG&A. But for now, we're not seeing that yet, and we're still able to manage it. But obviously, we won't know how the competitors will react, right? I think our competitor will announce their result in the next two weeks, so we'll find out how well they're doing.
But first of all, if you recall, when they published their full year result, their OP margin was already much more superior than ours. And as we explained, because we have longer inventory, because of our business model, because we have our wholly owned DCs, and they don't as much. So that's what we're seeing. But I think for now, if things remain as they are, then the impact on the EBITDA margin, we should still be able to maintain this also.
Very clear. Thank you very much.
Thank you.
Thanks, Harry. We go next to Sangam. You can start to ask questions, Sangam.
Yeah, hi. You know, first of all, just a small clarification in terms of the volume growth. Based on the architectural solutions, which particular segment is actually seeing the volume growth, A? And I know when we talk about the demand, we, you know, the narrative appeared as if, you know, the demand is a little bit subdued, even now. So how do we expect the price increases to impact, given that 25% of the products will witness a price increase, be it 3% or 5%?
So could you give us, you know, some idea in terms of, you know, how we are looking at, at the demand based on what it's been in Q1 for the various segments, and how that's going to flow through into the guidance in terms of 2% or at the lower end, or the 6% at the higher end in terms of volume growth?
Yeah, yeah.
That's first, yeah.
Right. So the volume increase, you know, 1.8%, as we said, right, we'll always try to do better and, but at least we're a step in the right direction. But if you ask me, like, what's the strongest? Well, I mentioned that our wall paint growth was the strongest, so obviously the volume increase was driven the most by the wall paint category. So that's basically what we're seeing. With regards to your question on the second one, with the solvent-based price hike that we will do in May, right? Well, look, if the impact is coming from raw materials, which it is in this case, right? Raw materials for solvent-based have been, you know, continuing to apply pressure to the extent whereby we have to raise prices.
Well, you can expect that most of our competitors who are a player in the wood and metal or in the solvent-based categories will react the same way. Now, not all multinational players in Indonesia actually are players in the wood and metal category, okay? If you look at AkzoNobel, they hardly have any presence in the wood and metal category. You look at Jotun, again, hardly have any presence in the wood and metal category. So you know, the biggest multinationals in Indonesia with wood and metal, obviously, is Nippon and then Kansai, to a certain extent, because Kansai has very strong wood and metal only in Jakarta area. So all these players, I can tell you that they...
It's only a matter of time before they decide to also implement a price hike because now that we've done it, Nippon has done it, you know, they, they will follow. How will that impact demand? Now, this is where it works for us, right? There, go back to the appendix on the product portfolio. If you recall, we launched an Avian Cling product, right? So if you look in this-
Mm-hmm
... chart, on the second bar, on the second line, wood and metal, you can see that Avian Cling under price range three has already existed, right? So because we now have two products in category... One product in category three and one more product in category four, right? For us, you know, if prices go up and let's say there's going to be a change in demand, okay, maybe people say, "I cannot afford the normal Avian under category four. I need to buy the Avian Cling under category three," that's fine, right? Because at least they're moving to our product. But when we didn't have this product before, obviously it possesses a more danger to us as a company because then when consumers cannot afford, they will go away and buy our competitor's product.
But in this case, prices go up for all solvent-based products for us, and if they cannot afford category price number 4, they can still go to category price number 3. And I think, you know, we're in a good place to capture that demand, even though they may not have the money to buy the category 4 product. So I think we're fine with it. Well, maybe that's not the case with more of our competitors because they may not have a product in category 3. So we'll find out.
Got it. So under what circumstances are you looking at the 2% volume growth for the year and the 6% volume growth? I mean, what are the scenarios that you're laying out internally in terms of assumption for that guidance?
We really, we really have to see what happens on the consumer buying power, right? A critical point that we mentioned is that when you look at the total minimum wage since 2021, right? Between that, compared to the price inflation for paints or building materials, you know, there's still a 10% gap. So this is what we're trying to be cautious with regards to our projections for this year, because that... It's, it's, it's not a small gap, right? It's still 10%. I think this gap will definitely narrower next year, with minimum wage going up again and then price remaining as they are, you know, more or less.
Mm-hmm.
But this year, I think for us, in order to be able to deliver the 6% volume, right, we need to continue-
Mm-hmm
... to gain more from our competitors. I think that's it. Because if we just rely on the organic growth from the market demand, it's not gonna happen, because the market is not easy, the market is tough, and but we just have to continue to grab it from our competitors. Like what we-
So, you know, going back to the question one of the parties been asked at the beginning, you know, the incremental price improvement that we are planning to incorporate, but all the margin. Any benefits on the margin front would actually be used up on higher marketing spends, right? In order to gain market share over competition. I mean, so effectively, what we are talking about is that Q1 profitability numbers are kind of the peak in terms of profitability numbers for this calendar year, given the fact that, you know, we will be a little bit aggressive on the marketing spend, ad spends, et cetera, in order to gain more market share.
Am I, am I right here, or, is there a different way to look at it?
No, not, not really. So what, what, what I'm saying is that when, when we're entering Q2, right now, right, we're, we're actually not increasing any promotions whatsoever. What we're giving to our consumers now is no different than what we've been giving them in Q1. But obviously, as I mentioned, right, we are, we're always reacting to what our competitors do. So we're looking to see after today's meetings, right? They're gonna see this, they're gonna hear all about what we're, we're discussing now, and then we'll find out how they will react in the market, right? And when they react, we don't always have to retaliate. If what they're doing, in our view, is, "Oh, this is normal behavior," then we don't need to do it because we also have many other things, right?
I mean, you know, the promotions that we do now is quite comprehensive, right? Not only BTL, we also do gathering, we do virtual event, we invite them to come, and, and all these things. So there's a lot of things that are happening simultaneously. But the bottom line is, what we're giving them in Q2 now is no different than what we've given them in Q1. So to say that our margin has peaked in Q1 is actually incorrect. I think that in Q2 you will see a similar margin, in fact, from us. Unless raw materials change drastically, because that is something that we cannot control. But in terms of our marketing spend, that is something that we have full control about. So that is something that we know that we, we can still, you know, manage, right?
But, if raw materials decide to behave erratically, then obviously then what I've just told you will not hold true because, you know, we have no control on them. But we're really not spending anything beyond what we've spent in Q1.
Got it. Got it. Got it. And finally, if I may, in terms of your working capital, which is closer to 28% currently, you know, do you see any, you know, aggressiveness there in terms of providing a little bit more credit to the retailer or in order to gain more market share there? Or-
Well-
Do you expect discipline there to be maintained?
What was the number that you were referring to? I'm sorry, you got cut off at the beginning. 28%?
I think it's 28%, right? Your working capital.
Working capital.
Oh, yeah. So look, we're not... It's not in our way of... Essentially, we hardly give any extension on payments, right? Which is why if you go to the next page in terms of accounts receivable collections, right, you know, you see on the left chart here, right, we maintain them really well, right?
Yeah.
It's pretty much the same thing, kind of payments. Because in terms of payment terms, what in fact is happening is that more and more of our competitors start to follow our payment terms. Because they also realize that, "Hey, I'm giving an extra ten days really doesn't make any difference. So why should I give them an extra ten days? I'll just follow what Avian gives, and then that should be good enough." So we're not in the habit of extending our payment terms, and I don't believe that it would lead to a market share gain, to be honest. So we'd rather try something else rather than giving extensions of payments for our customers.
Got it. Got it.
Yeah. So I think-
Okay
... working capital will also be more or less maintained, unless Hadi can add something to that.
Yeah, I think for the longest time, we always maintain our working capital around 10. So yeah, we will not change that.
Mm-hmm.
Got it. Got it. Thank you.
Thank you.
Okay, we can go next to the question from Tian. You can start ask the question, Tian.
Good afternoon.
Hello.
Hi. Good afternoon. Can you hear me?
Yes, clearly.
Oh, hi. Hi, nice result. Congratulations.
Thank you.
Just some questions. I think there's some change. I think last year, because we have such a bad declining market, the BTL is not working. And then certainly the price elasticity for the demand was working in the negative direction, right?
Mm-hmm.
But now, even you're talking about the first of the main price increase is a tiny amount. But to me was, there's a something is working, in the positive way, otherwise you won't do the price increase if the demand, the price elasticity, on the demand is so bad, right?
Right.
Is you sense something changed, that's why you decide the customer take your price, with chin up?
Yes. So I think I mentioned earlier that we, as a company, we're always analyzing what we've been doing, right? Whether they're good or bad. Especially on the bad ones, we try to find out what it is that we made. I mean, what sort of wrong decisions that we do that we need to correct. So what's different this year is that we have been extremely aggressive in selectively targeting retailers, which are more, you know, of our competitor shops. I'm not saying any particular, because we have a lot of shops in the country, right? And 56,000 customers, and not all of them are dominant with our products. Some retailers can be dominant with our competitors' products.
So essentially, in terms of our strategy, what we have tweaked this year that seems to be working is that we selectively target these shops in all the different locations, and we go to them, and then basically we ask them, "Look, you're selling a lot of our competitor's product. What will it take for you to buy more from us? We can negotiate something that will work." Obviously, it needs to be a win-win. We need to agree on something upfront, and that’s what we’ve been doing. So we are careful to do this so that the limit is that they are not allowed to resell.
Because if they resell, obviously, they will then fight against our own sales team, and that's not good. But if they're not a reseller or wholesaler, then it's fine, because if they're a retailer, and we just try to get them to buy more of our products and try to sell more of our products, and that's what we did. And I think we... The fact that we've also invited a lot of these customers to come to Surabaya to visit our factory, to look at our R&D center, to meet me and my team, and you know, we have dialogue, we have interactions. You know, I'm like having dinner with them, you know, as often as I can. Every time I'm in Surabaya, I tell my team, "Okay, well, let's do two days this week.
We'll do another one or two days next week," you know? So I definitely need to exercise more so that—because I'm eating more now with customers. But it seems to be working. I mean, I think that bond that we create, that we have with them, has led them to feel that, "Okay, hey, you know, maybe Avian is the right long-term partner for us." And I tell you, I cannot share anything here, but we have more happening in the future, and we—I feel really good about this strategy. And then you'll hear about it after we launch it, but for now, I can't share anything yet. But ultimately, what we're trying to do now is, rather than just spending BTL everywhere, that's not the intention anymore.
We're selectively targeting retailers, which are more of our competitors' retailers, and we basically ask the question: "What will it take for you to buy more from us? What do you need from us? What can we help you so that you can be a, you know, good customer or a large customer of Avian Brands?" So that basically is the tweak in terms of our strategy.
... Understand. Let me just change the angle to ask. I think we, when company you were talking about earlier this year, I think you were a bit cautious about because the capacity for your customer to take the more price high-
Yes
Seems to be quite limited.
Yes.
Now you seem to be comfortable, even only 20% portfolio going to increase the price by, you know, 2%-5%, just maybe.
Right. Correct.
That's because there's you feel the customer, the sales now is quite good, inventory is coming down on the customer end, or is the very end demand is coming back, that's why you feel comfortable to do the price? I just look at more kind of this simple symbolic change of your attitude.
Yeah. Okay. I think it's because more on the fact that raw materials on the solvent base continue to apply pressure again.
Okay.
So it's not because demand is coming back. I said that the market is still not the strongest. It hasn't gone back to pre-COVID level because we saw it in Lebaran. It's not that strong yet. But when we look at the solvent-based, it continues to be applied on us, right? Even though our gross margin, you know, has improved significantly, but not for the solvent-based. Solvent-based is still under pressure, right? So when we saw this, I said, "Look, it's only a matter of time before the rest of the players in the country will also raise their price. So why not do it now?" So that's basically what led us to do this. So Nippon has done it again before us. So we were like: Okay, well, hey, you know, we're going to do it also.
And then we know that, you know, Kansai and a few other players who are players in the solvent-based products will also participate. The only question is, which month is it? Are they going to do it in June? Are they going to do it in July or August? We don't know, but we know that they will definitely follow suit on this because pressure coming in from raw materials for the solvent base.
Can I ask on the solvent? You do have the pie charts for the overall paint. Yeah, this chart. 6%, that's on the overall paint portfolio, but what is on those solvent-heavy, like the wood and the metal you just talked about, the 20% portfolio? And then, what will be the solvent as a % of the cost?
Maybe Robert can answer. I think they will all be there because we don't use solvent in the water base, right?
Yes.
All of this will be basically for that 25% product portfolio then.
Basically, the solvent-based are used for the wood and metals and-
Mm
-wood care category.
Yeah. So all this that you see on this page, the 6% of solvent in terms of COGS, are only used for the wood and metal, as well as the wood care category.
Ah, okay, okay, okay.
Yes.
So you-
We don't use any solvents in the water-based.
Then for the... Oh, okay. Okay, I got you. Okay.
Mm.
Then my next question is, this Avitex Gold is a big surprise because I know on the Q1 result, we actually were talking about, I think it was the other two products, right? Talking about, I think called VIP.
Yes
-Wall Paint Remover-
Yes
and also, Avian Clean.
Yes.
Both this was launched end of last year.
Yes.
How do they fare in the market so far?
The VIP is too small, but it's, it is something that's newest in the market. And, we wanted to demonstrate to consumer that-
Mm
You know, look, we, as a local company, we also have the capability and technology and support of the strong R&D team to create something new in the market that they've never seen before. So that's the whole purpose of the VIP Paint Remover. So, but Avian Clean is, another second product that was really well received. There was a period, a much shorter period, where we also ran out of stock because we didn't expect demand to be that strong. But ultimately, the biggest success from us came from this Avitex Gold product.
Okay. Can you quantify the size of the Avitex Gold now within your wall paint category now?
I don't have the numbers in front of me. But it is sizable because if you look at the BTL marketing expense, right, it's about 2% of COGS. Well, it has been spent more or less on this product.
Got you. Okay. My last question is, basically regarding your tinting machine, right? I think in the guidance slide, you talk about tinting machine.
Yes.
Because I think there seems to be a, also a change of the attitude, right?
Yes.
I think it was after IPO, yes, during IPO, we talked about tinting machine.
Yes.
But, over the last two years, you actually slowed down. Yes, the pace of what changed, and also this time, why? And also the strategy. You used to give away for free, right? So will it still be the same process or same approach?
Yes, it will still be given for free. So what changed in terms of tinting machine? And you're absolutely right, Tian. I mean, we have been sort of slowing down with our tinting machines. Sorry, Terry, go back to that page. But with regards to this, what has been the switch in the tinting machine strategy is because of this, the Avitex Gold that you see. Because this product, when we first launched it, it's already- it was available in both ready-mix and tinting. And the tinting has been incredibly successful to the extent where it basically helped to push our revenue per tinting machine.
So obviously, with that in mind, I say, "Hey, our revenue per tinting machine have gone up quite a lot." So now I tell my team, "Look, let's install more machines because we now have an even more product that can help us maintain and, you know, reach break-even point much easier, because Avitex Gold has been really well received. So let's push for more tinting. Let's see if we can, you know, install more machines." And, but for us, installing tinting machines is very important to also look at the revenue per tinting machine, right? Because as you rightly pointed out, we give it away for free. So if the revenue from that tinting machine is not met, then obviously we'll make a loss. So, but Avitex Gold has certainly been a game changer for us.
It's also been adding more revenue to the tinting machine, so we feel really quite good about that strategy. And now, okay, let's add more. I won't say that we're gonna go ballistic and start adding, like, thousands, but we just wanted to see whether we can intensify our rollout of tinting machines compared to what we've seen in the past year.
Do you have any figures you're thinking about how many Tinting Machine you're going to roll out this year?
No, not yet.
Okay.
Yeah, a bit too early to say, but we'll definitely-
Uh
... be adding more.
You used to talking about. I just looked in my notes, right? You used to talk about 150-
Yes
- units per year.
Yes. Yes.
How-
Yes
... Can you talk about, with the reference to this 150, which, yeah?
Maybe the 250-300. We'll try to double it, essentially.
This year?
Between this year and next year, because this year it's, I already gave the instruction. So maybe we won't meet 300, but maybe 200 something this year. But then next year, we'll aim to do 300. But we'll see, because rolling this out is easy, right? Because we have the distribution centers, we have the technicians, you know, we have 56,000 customers. But at the end of the day, we still pay a lot of attention on the revenue per tinting machine. That, for us, is the most important metric.
So if we can continue to maintain they are, as they are, and the revenue per tinting machine can continue to improve, then we really have no issue in rolling out, you know, way more than 300 machines every year. But until that is met, then we'll still roll it out carefully.
Okay. Just on the related notes, 'cause you talk about why is the Avitex Gold is so popular because your customer did earn very good margin on this one.
Mm.
Is this has to do with the tinting machine because they're going to buy in, buy drums rather by cans?
No, no, no.
That's why they get a better, margins? Sorry.
No, we don't sell in drums. We sell-
Okay
... in the packaging of 5 kg and 20 kg. But I think the BTL, because the intensity of the allocations of BTL for this product is very high, and it just really caught them by surprise. They saw this, and they're like, "Wow!" So every time I meet with customers, when we invite them, you know, they always say good things about Avitex Gold, and they always tell me that, "Okay, let's maintain this margin for as long as possible." And to which I always say, "Yes, we'll try to maintain it as long as possible.
Okay. Okay. Okay, that's all the question from me. Thank you very much.
Thank you.
Thanks, Tian. We go next to Swati. You can start asking the question, Swati.
Hi, thank you for the opportunity. Any color on market share trends for other segments like, waterproofing and wood and metal?
Yes. So, if you go back to the pie chart, you'll notice that our wood and metal contribution have actually gone up. So obviously, this was attributable to the launch of Avian Cling , right? Because we were impacted by the fact that weaker consumer demand, you know, they don't have enough money to continue to buy the normal Avian for wood and metal, and that therefore, they may move away to other products. But now, as soon as we introduce Avian Cling into the market, they say, "Hey, this is the same brand that I was using before, but maybe it's slightly different, but so I want to try this." So Avian Cling , sorry.
Avian Cling , for instance, I know the last I checked, more than maybe 12-13 thousand shops have sold it. And we achieved this number in, what? 4 or 5 months. So it's very fast to have that kind of demand pick up from retailers for that product. So that led to a rebound in the wood and metal, and therefore growth in this segment was also in double-digit. One thing that you'll notice, however, in this pie chart is that in the wood care, we are impacted. Our wood care shrank slightly, so we're addressing that. And we will launch something in this segment in Q3 to address this so that we can grab more shares in this particular category.
Thanks. That's very clear.
... Any other questions from you? Oh, sorry, waterproofing. Well, waterproofing, the growth has also been in the double digit. So we continue to do well in the waterproofing. The No Drop Anti Panas being a more premium product, continue to gain traction because, it's... The thing about this product is that I think consumers need to understand how it works, right? And the fact is, in Indonesia, I mean, you know, we have the issue of both, right? We are a very tropical country, but at the same time, building qualities have really low standards so that they leak very often. So how do you address this? Well, this is the perfect product.
Not only that it will protect your walls from, you know, leakages, but at the same time, it will also lower the temperature of inside your home. So why not use this product? Well, it's more expensive, yes, but I mean, you know, how much do you really pay, right, to enjoy a better environment when you stay in your home, right? How can you value that by an extra 30% on this particular wall paint, right? And you only use it if you wanna be... You know, if you wanna save money, you only use it on areas where the sun really hits your wall. On other area where the sun doesn't hit your wall, you don't need to apply this product. So, you know, we're constantly trying to educate the market.
We just came up with a really funny storyboard to make something like this to really explain this whole idea. So we'll launch it, I think, sometime next month. So, yeah. But the whole idea with this premiumization of waterproofing is to really get the consumers to understand that, look, with No Drop Anti Panas, you get the best, the best of both worlds, right? The waterproofing as well as the heat, you know, reduction in temperature. So that's what we're trying to do. And the growth in waterproofing continue to be very strong for us.
Thanks, that's very helpful.
Thank you. Oh, we just recently launched the tinting version for the No Drop Anti Panas. So it was only available in select colors. Now it's available close to almost 200 colors. So obviously, then that should also add more market for us.
Okay, that's great.
Thank you.
Thanks a lot.
That's all from me, yeah.
We can go next to Ajay.
Yeah, hi. Actually, I just wanted to get a sense, broadly on the high EBITDA margin, right? If I compare with paint companies across the region, right, particularly India, Thailand-
Sure
... the margin levels are very, very high actually in Indonesia. So I'm just wondering, what drives that?
Yes
- if you could talk about that.
Sure. So, number one, prices for paints in Indonesia has actually been proven to be higher than many neighboring countries. So, that is the ultimate reason why the EBITDA margin or gross margin for us is very high in Indonesia, because the prices are high here. And if you ask me, why are prices high? Well, to begin with, we were not the market leader, right? So when our company will turn 45 years old this November. So before we were market leaders, we had to follow many other companies in terms of our pricing points. So ultimately, the people, the companies that set the prices where they are now were all the multinationals.
Now, I mean, I have some theory as to why they decided to make prices so high, and one of them has a lot to do with the supply chain challenges that you see in Indonesia. Unlike India and Thailand, and many other neighboring countries, right, we are an island of nations, right? So, and a nation of islands, sorry. So we have a lot of issues when it comes to transporting products, because paint, you can only transport by sea. And it takes a long time to get one point to another point, because the poor logistical, you know, infrastructure that Indonesia has. And, maybe that could be one of the leading reasons to why these multinationals, you know, back, even way back then, decided to make paint prices in Indonesia high.
Right. Okay. And then, is that the reason why the volume growth is kind of quite low compared to a market like India, for example? Historically, India paint companies are reporting double digit consistently, whereas Indonesia is really struggling in terms of volume growth. So is that the reason, basically?
That could be one of the reasons, I think, which is why the biggest mistake that we have made as a company was that, you know, with regards to raw material prices that have been going up very strong in the past 2+ years, we didn't act on it fast enough. We should have launched more economical products, which we haven't done until late last year. But yeah, it definitely has. It plays a role in that in terms of prices, and that's why volume hasn't been as strong as they are in India, compared to India, I mean.
Right. And then, how would you categorize your entire product mix in terms of the income levels? Does it target the mid to high end, or is it like... How is it positioned overall?
We are strongest in the mid-tier, which is, you know, which obviously is the biggest market in Indonesia. In the premium, we have a long way to go. So we are still investing in the branding and everything else, so we still need to do a lot of work on, products on the category, you know, let's say 4.5 to, and, and above. There's still a lot of work that we still need to do.
... and would that space be occupied by the Nippon and the Akzo?
Nippon is quite similar to us. They're also very strong in the mid-tier. In the premium tier, the strongest multinationals are Akzo and Jotun, and then there's a local company who is quite dominant because they've been around for more than 50 years and consistently been a player in the premium market.
Right. Okay, and just the last bit on, do you have any plans to branch out into non-decorative category, like maybe auto or coatings or any other industrial coatings or anything else, or you would continue to focus on the decorators?
Yes. So if you go back into the... I mean, even on this page, right, you will see that we have a small presence in the auto refinish.
Mm.
But essentially as a company, we the focus is to remain focused on paints, right? Which is why there is no desire for us to start venturing into you know what Asian Paints does, for instance, in the wallpaper or even the sanitary, you know, and things like that. We have no intention to go into those type of products. But going into other paint segment is definitely within our aim, so we would like to venture into other coatings beyond decorative. One of which was done through a small acquisition that we made before we went for IPO. We bought a 67% stake in a company who is a player in the protective and marine. So we, in fact, just launched this product. So go back to the new product launch today.
So if you see on this product, there you go. On the left, the marine and protective. This is the brand Admiral. This is a brand that is owned by the subsidiary of ours, where we own 67%. But we launched a new product, specifically catered for the fisherman industry. So which is why this is a product. We weren't only launching the antifouling and thinner, but we'll follow up with a few other products in Q3. But we definitely want to be a player, an overall player in the paint segment in Indonesia over time, and that can be done through JV. We don't have to do everything ourselves, but we also need to find the right partner when it comes to JV.
Right. And, and what's the margin gap between solvent and the water-based currently? How much gross margin difference?
Single digit only.
Like, low single-digit difference, or?
I'd say maybe mid single digit.
Oh, okay. Okay, thank you so much. Thank you.
Thanks, Ajay. We can go next to Robin. You can start. Ask question, Robin.
Hi, everyone. Can you hear me?
Yes. Hey, Robin.
Hi. Hi, Pak Ruslan. So a few quick ones from me, if we could start with Avitex Gold still.
Mm-hmm.
So, your earlier comments that it's, you know, it can be used interiorly and, on the exterior parts of the house. You know, like any concerns that it will lead to a long-term cannibalization of the more premium products? Yeah, I get that it doesn't have antiviral and, you know, anti-heat properties, but,
Right
... any concerns there? Yeah, I, I get that the GPM for the architectural solutions has come back to 50%+, so that's a positive.
Yes.
And yet, how do you counterbalance that, you know, the basically potential cannibalization versus the GPMs already, you know, reaching near all-time highs?
Yeah.
I'll start with that part.
Okay. So to be honest, there is no cannibalization, right, Robin? Because we you know, for us in the wall paint, for mid-tier wall paint, this product is positioned pretty up, pretty high up, right? We have maybe one or two other products, which is even higher than this. That would be Avitex Anti Viruz, for instance, that the price would be higher than this. But when it comes into cannibalization, this product is really not cannibalizing anything. Now, when we look into our existing Avitex, we also saw that sales for that product, it's still growing. So which is obviously very good because what it means is that whatever sales we get from Avitex Gold, it's a pure market share gain for us.
So, you know, this is important to note because like you said, right, any kind of cannibalization is not good for the company, because then it's a left pocket, right pocket, right pocket kind of issue, and we don't want that. But I can assure you that Avitex Gold has proven to be a really good story for us, and we're monitoring any impact on cannibalization on our existing products, and we haven't really seen any. Maybe one product that has been slightly impacted is a product of ours, it's called Avitex Exterior. Tere, go back to the appendix. I think you can see it there. There you go. Under category four, you see it in the green can? It says Avitex Exterior. But that product sales is tiny.
So you know, even if it's impacted, it's fine. You know, the Avitex Gold is, you know, sales is way higher than that. So, you know, we're really not looking of any kind of impact of cannibalization whatsoever. The other follow-up question that you had with regards to gross margin, what did you want to know, Robin? Is it sustainable?
Yeah, basically, how do you count... I mean, you've sort of answered it in your answer, so that's fine. But,
Okay
... I think you also touched on the GPM, in that you're giving your retailer customers higher margins than usual.
Yes.
With Avitex Gold.
Yes.
You know, like, as a factor of the materials, overall GPM is also near all-time highs for architectural solutions. Yes. Any further details on that, basically whether or not you will continue giving the high margins to-
Yeah
The retail customer results?
Sure. So as I mentioned earlier, right, what we're giving now in terms of Q2, and you know, it's really no different than what we've been giving our customers in Q1. So we're not spending any extra money whatsoever on that. But with regards specifically to the Avitex Gold, we do need to maintain the momentum, right? I do not want to disappoint consumers or retail customers now by starting to, you know, give them less profit. So, that's not the intention, which is why I mentioned earlier to Harry's question, right? I don't want to reduce the BTL budget for Avitex Gold all the way till this end of this year.
I'll start to look whether next year would be the right time to start making it go down or not, to reduce the budget. But ultimately, if as long as we can continue to gain market share, as long as we can continue to grab market share from our competitors, then I think it's justifiable, right? Whatever spend that we have for Avitex Gold. Keep in mind that whenever we look at any particular budget, we do isolate this, right? Just because I'm giving really high attention on Avitex Gold in terms of intensity for BTL, does not mean that all the other products will go up, which is why I mentioned in here, right? In fact, the other promotions for other products have actually gone down, you know, to more or less about 13% from 13.6%.
So the other 2% or so is coming in from Avitex Gold contribution, which is why it's important for me to add a footnote there. Because if I didn't, then you would think that, "Hey, what are you doing? Well, why are we spending way more?" But I needed to draw your attention to, so that you understand that this is actually allocated for this product. Which is why Harry also mentioned, "Does that mean that you're giving, like, more than 20%?" Yes, that's the correct way to look at it. I'm giving BTL, huge BTL for this product, but because of that, you know, it became very successful. And obviously, the product needs to support it, right? Which is why it didn't begin to be this successful in the first two months.
You know, it took, like, 5-6 months to finally, "Hey, we're out of stock now." Which is why we're like, "What? How are we out of stock?" We kept so high inventory thinking that it's enough to last us, and we have no inventory now. So Robert and the team now has been working overtime for this one product, and but it's a good problem to have. But all the other products, in terms of all the other budgets, Robin, we're still maintaining them. So unless we start seeing really aggression from, you know, many of our competitors, then we'll start retaliating. But for now, we're still managing them quite well. So we don't, we're, we are really not seeing any issue.
Got that, Pak. Very clear. If I could move on to the AR days, Pak. Receivable days has gone up by 4 days in 1Q23 versus 1Q22. So, I know we touched a bit on the collection of issues.
Yes
... earlier, but, does this sort of 4 additional AR days tie up with the 2% volume growth, think?
Not so much. So essentially, the AR days have been for... You recall that we launched a new program called Priority Customers? So this program that we launched with regards to the priority customers, we have decided to really make it special. So for these few customers who fall into the category of priority customers, I have decided to extend a bit of payment terms for them. But the impact is very small because we're only talking about more than 1,000 customers. So it is not an overall extension, which is why I said, "Look, we're not in the habit." But we decided to do this for these 1,000+ customers because we needed to make differentiation points so that they say, "Hey, why, what is so special about your priority customers?
Why am I a priority customer, and what do I get from becoming a priority customer?" "Well, you get a slightly longer payment terms," is one of them. So I say, "Ah, okay." So that was it.
Is this likely to sustain, Pak?
For, for-
Are they-
... for the same customers? Yes. For the same customers, yes. We'll, we'll keep that as part of the priority customer package, Robin.
Got it. Thank you, Pak. Lastly, just very quickly, any updates on the M&A?
Unfortunately, nothing yet, Robin. When, from what we see from a few of our, you know, potential target, you know, they continue to launch new product into the market and things like that. So I was like, "Yeah, you know, I don't think anything is happening yet." Which is why when we did our AGM, a few days ago, right, just before Lebaran, we basically decided, "Look, let's pay out as much dividend as possible," because if M&A is not likely to happen, then, you know, I think the right thing to do for our investors is to really pay out as much as possible. So our payout last year, from our net income was, what? 93.9%. So yeah. But we're still trying, Robin.
You know, a few discussions are happening right now, but not with the same company. I think we need to move on and try to find other targets. So we're looking at different targets now.
Got it. Thanks a lot, Pak. All the best for the rest of the year.
Thank you.
In the interest of the time, we only have 10 minutes remaining, so we will conclude the earnings call with two final questions. The next coming from Theodorus Melvin. You can start ask question.
... Okay, luckily, I only have one question. First of all, thank you, management, for the opportunity to ask. Melvin here from Stockbit. I just want to ask the question, I see that the GPM improved domestically. Could you give me any color on which item in the COGS breakdown that contribute to this improvement? Is it coming from the binder, solvent, or additive? And also, could you give us any color on the new factory in Cirebon that plans on 2025? How does it gonna affect the whole paint industry, since based on my calculation, it's gonna double your capacity? Thank you.
Robert, you wanna take the question?
Yeah, first of all, about the new plant in Cirebon, right? At this point in time, we just started to do the landfills because we got the permits back in early February. And we hope that the construction will start in the mid of 2024, after all the landfill and the structural piling are completed up until the beginning of 2024. And the expected of the completed are still to be scheduled in finished by 2025. And in terms of capacity, it's not double. So, the capacity that we were planning is about 200,000. But for the first initial first two years, we'll allocate it for 100,000 metric ton capacity.
However, for the additional capacity, it's dedicated to cover the west area of Indonesia. So we are assured that the growth of the company will be strengthened more to the west side.
And he was asking about raw materials, Robert, which one gone down more in terms of-
Oh
... COGS?
In terms of COGS, right, the raw materials that gone down more is specifically on the raw material side due to the monomers and the resins that's has been normalized quite a lot, as well as on the direct labor side.
Mm.
Maybe, maybe I can add something, Pak Robert.
Yeah.
If you... Yeah. If you look at the raw material cost per unit, I think, for resin in Q1 2023 compared to full year 2022, it's declined more than 18%. And also, for the pigment, also declined about 19%. So I think that's the two raw material that the price is going down-
Most
... Most, yeah.
Yeah.
That's why you can see that the percentage of the raw material compared to the previous years is going down a bit. Yeah.
Mm.
Okay. I guess you are benefited from the drop of the oil price, since the resin and the pigment also declined.
Yeah.
Yes, but solvents still went up.
Okay.
... So, Melvin.
Yep. Thank you so much, Pak Ruslan, Pak Hadi, and Pak Robert-
Yeah
... for the answer.
Okay, we can go back to Yuan Loh, or the last question coming from Yuan Loh .
Yeah. Thanks, Pak. I'll... One question from me, then I'll let Yuan Loh take the last one.
Sure.
Pak, on Avitex Gold, right, can you just talk a little bit more? I mean, obviously, you mentioned the high profit that the retailers have, but I guess-
Mm
... it's just quite, just curious to find out how it trended. Did you always give it so high in the beginning when you launched it, or when you saw sales momentum come up, and you stepped up? I guess I'm trying to understand what were the success factors? And, you know, 'cause stocking out, you said you were stocked out already. Was it something you did not foresee beforehand? Like, what was going on? Yeah.
So when we launched it, I think sometime in October, if I'm not mistaken. Is that correct, Robert, sometime in October? Yeah.
Correct.
So, when we first launched it, typical, Yuan, you know, the first two months, sales were high. Okay, that's fine, right? But then obviously, in January, things weren't so good. So I'm like, "Look, so we need to do something." So we continue with our education process. But first of all, to get back to your question, we never reduced the budget. So whatever budget, nor did we increase. So the same-
Mm
... budget had been allocated from the start up till now has never changed. Now, but what we're trying to do this year is that I basically go to the shops and ask that question, right? "What will it take for you to buy this product?" Some shops will say, "Okay, I don't want the promotions that you have. I want the same budget, but I want something else." "Okay, what do you need?" "I want a Harley-Davidson." "Done. Is it done?" "Yes." Whatever you need, as long as you give us a huge contract, we'll agree to whatever demand you need. So if somebody wants a Harley-Davidson, I'll buy them a Harley-Davidson, you know? And that's basically the trick that we did.
But keep in mind, Yuan Long, that, you know, giving retailers high margin is only half of the equation, okay? The other half needs to be supported by the product quality. So this is where Robert's team, where the R&D team have really delivered, right? Angelica, as the new director of R&D, has really done a great job in making sure that it addresses the needs of the painters when they use this product. So it really has good coverage, and it can really be used for exterior and interior. So when they used it, they're happy, and then that's how when they say, "Hey, let's repeat." So what happened in April or March? Well, the high sales that we witnessed in December or even November, the first two months after we launched, we far outpaced that. In fact, we more than doubled that, Yuan Loh.
Mm.
... which is why we're like, "Huh? We're out of stock. How is it possible?" I give you a quick story, okay? I asked one of my friend who painted this hotel, right? I say, "Hey, you gotta use my paint, right? Because you know, I support you, you support me." He say, "Okay. Hey, how come I cannot find your paint?" "Ah, I'll help you find the paint." So I told my team, "Hey, this guy is going to use our product, Avitex Gold, to paint his hotel. I don't care what happens, we need to supply to him." I have to actually look around at more than 10 DCs to find the paint, Yuan Loh .
Mm.
No, no, no. No availability. I'm like, "How is this possible?" So, you know, and then finally today, we have to send a letter to the shops to basically, "Look, we're sorry for the out-of-stockness of this product. So if you don't have enough product, we'll still give you the budget that we'll allocate. And, if you want any particular product, any particular, you know, motorcycle or whatever, and you cannot get it because we're out of stock, you can top it up with cash," something that we've never done, because we don't want you to top up. But because we cannot deliver, then I have no choice. But so I think what caught us off guard was that, you know, just by tweaking something slightly, you know, and, and, and the fact that product is good, okay, that's the basic thing.
And now consumers are immediately willing to try it, and then we just got caught off guard. But look, this is... We're still not there yet, okay? I, as good as this sounds, we know that we can still do way better. I'm looking at the number of shops that buy this product, and I keep telling my team, "Look, there's still way more customers that we can address, all right? Let's continue with our push. Let's continue to ask the right questions. What do you want from us? And let's give them that opportunity to get what they want, so that if they want to a tour to Turkey, you want to go to a tour to Egypt, whatever you need, we'll basically give it to you.
As long as the budget remains the same, that's fine, because to us, we need to spend the budget anyway. So whatever you need, it's fine, I don't care. So that's what basically, you know, part of the secret sauce, I suppose.
Got it. Got it. Thanks, Pak Ruslan. I hope they all don't want a tour to Turkey. That would be quite-
Yeah, exactly. Yeah, because my team will not accompany them probably, right?
Yeah.
It's earthquake, so and so, you know.
Okay. Yeah, thanks, Pak.
Thank you.
We have the remaining question coming from Yuan Loh.
Yeah, uh-
The last 2 minutes, okay?
Yeah. Thanks, Andreas. Hey, guys, yeah-
Thank you, Yuan Loh.
... thanks for, yeah, thanks for doing this call.
Thank you.
Yeah, I know there's not much time. I just have two questions. My first one is, you know, you're talking about Avitex Gold, it's the big hit and all these things. So let's say we talk about your volume growth, 1.8% year-on-year.
Mm-hmm.
Is that all Avitex Gold?
No, no, definitely not. Even for the other wall paints are also growing, because Avitex Gold itself is not enough to drive... I mean, the overall growth for our wall paint is more than 20%, Yuan Loh . So you cannot get that solely from Avitex Gold. So the other products also-
Wait, wall paint is 20% volume growth?
No, no, not volume, value.
Value, okay.
Yes. You cannot get that alone from Avitex Gold, so other products also need to do well.
Okay, so you are seeing the volume growth across your portfolio, you are seeing it, I mean, generally across all your products?
Yes, but with the exception of Avitex Gold, which is the strongest, yes.
Okay.
That's correct.
Okay, also because it's a low base? I mean, it's a small base, right?
Oh, yeah, yeah, because it started from nothing, right? Essentially.
Okay. No, okay, I was just trying to figure out the, you know, how the performance across the portfolio, if one is growing fast and everything else is... okay.
Yeah, but I can tell you that Avitex Gold, in the month of March, was our second-best seller.
Okay.
So that put it into context. With many, all the wall paints that we have, right, it's number two in March.
Okay.
You know, it's really meaningful.
No, but is it like more than 5% of sales or like-
No, no, no, no, no. No, no, no.
Okay.
No, no.
Okay, you are saying at SKU level, right?
Mm, yes.
Okay. Okay, and then my second question is, I hear you talk about BTL marketing expenses and all this. I believe sometime last year or maybe end of 2021, you also tried to increase BTL and try to push it through retailers, but it seemed like-
Yes
... they didn't respond that well.
Yes.
Whereas this time it seems like the response is very good. I mean, you're talking about trips to Turkey and all this, but-
Yes
... I think previously you were giving cars and, you know, all these things, right? So what kind of change in the retailer space, like why are they suddenly more sensitive to BTL?
It's what I said earlier. Rather than giving, you know, an increase of BTL to everybody, we don't do that anymore. So we just select a few, okay? We just select some, and then we give them more, right? To give you an illustration, if I were to give you 1%, Yuan Loh , you're gonna say, "1%? I mean, I won't do anything for 1%." But 1%, if I give to everybody, you know, it's 1%. You know, my margin will decline by 1%. But if I only give it to 1,000 shops, I can afford to give them 5%, right? Because the other 40, 55,000 shops are not getting anything. I'm only giving extra to the 1,000 shops. So the BTL that we're tweaking now is not addressed for everybody.
It's only addressed to a few shops, in particular, shops that buy more from our competitors. So that has been the tweak. So I'm not giving to all the shops. I'm only giving to a select few. But I'm not giving you 5 per- 1%. I'm giving you 5%, some I'm giving you 6%, 7%.
Okay.
Whatever it is. But if you put it into-
Yeah
... broader context, it becomes, like, zero point something, you know?
Is it strange that, I mean, your competitors are not really reacting? It's, it's-
I mean-
... unusual, right, because these are your competitors, like-
Yeah
... these shops, and I'm sure they know it, right? These are their-
Yes
... key accounts.
Of course. Not everybody is reacting, Yuan Loh .
... Oh, yeah, I mean, so do you think it's a bit strange? Like, if someone were to give more BT to your key account, I'm pretty sure you would-
You will react, for sure. Yes. But that's how it is. Not all of our competitors have the same data analysis. Not all... This is the other thing, Yuan Loh . Not all of our competitors have their own DCs, right? When you rely on third-party DCs, there is the biggest weakness that you have, right? You don't have access to data, right? So if your third-party distributor is buying less from you, in your mind, it's like, "Well, hey, maybe they're just buying less from me." Little did they know that this, these third-party distributors are now selling way lesser to the key account. And third-party DCs, you know, they have limit to what they can do, right?
Mm.
So their retaliation is definitely nowhere in the same scale of a factory would or a company would, like us, right?
Okay.
So-
They don't have that top-level look through.
They don't have... They definitely do not have that level of transparency.
Mm.
Which is why if you're gonna ask me, are they going to retaliate? Yes. When? Maybe next year.
Okay.
Yeah, it's too late already.
Okay.
So because, again, you rely on third-party, you don't have the data, and they don't install software like us. We know what our third-party DCs are doing because they are using our software. But our competitors, they don't have that, you know, so they really have no transparency, and by the time they know, it's too late.
Okay. But in that case, how do you run into a stockout? You should be able to see your inventory levels, right?
At our distributor, yes, but not at the retailer.
Okay, but you're saying you are stockout at your own distribution now, right?
Yes.
Your own DCs, okay.
Yes, but even-
Okay
... our third-party DCs, even at our third-party DCs, I mean, we have full visibility at all third-party DCs. We know who they sell the products to. We know all their clients. You know, we have full visibility of their-
Okay
inventories. But what I'm saying is that our competitors do not have the same kind of visibility like we do.
Yeah.
Okay? No other paint companies, as far as we know, install software and hardware to their third-party distributors.
Okay.
Nobody does this, except for us. I think that's where the difference is between our company and theirs.
Okay. I guess there's some lead time from production to the data you see as well, so you can run into stockouts.
Yes.
Sorry, the last question is, so the stockout, is this already resolved, or is it, I mean, kind of work in progress, or you're still stocked up?
No, I think inventories at the retailer levels are all back to normal now because there hasn't been any price hike since, you know, November, kind of, you know, January, February, one or two small companies. So retailers are now sitting on normal inventory.
I mean, that you're saying Avitex Gold is fully stocked up now. I mean, you don't have-
Oh, no, no, no, not yet. I mean, I was chatting to Robert just before we start, you know, he, he's still trying to keep up with the production demand.
Mm.
So he's doing what? Two shifts now, Robert?
Yes, two shifts for the new one.
There you go.
Okay. But, you're saying that general retailer inventory levels have normalized?
Yes.
Um, and-
For sure
... it's just Avitex Gold, this very specific SKU you are-
Yeah, yeah, yeah
... trying to fix it. Okay.
Yes.
Okay.
Yes, everything else is normalized.
Okay, okay. That's it from me. Thank you very much.
Okay.
Thank you, Yuan Loh . So investor who have not answered the questions, you can email me, and I will respond after coordinating with the management. Once again, we would like to thank you for your participation in our Q1 2023 earnings call today. We look forward to seeing you again at our next earnings call. Please take care. Goodbye.
Goodbye. Thank you, everyone.
Thank you.
Thank you, everyone.
Thank you, everyone.
Thank you.