Bangchak Corporation Public Company Limited (BCP) Earnings Call Transcript & Summary

On behalf of Bangchak Corporation Public Company Limited, I would like to welcome you all to the Second Quarter 2020 Analyst Meeting, featuring the announcement of the operating performance in the first quarter of 2020. Without further ado, I would like to introduce the executives who will be giving reports on Bangchak Corporation Public Company Limited's performance and business updates today. First, Khun Chaiwat Kovavisarach, President and Chief Executive Officer; second, Khun Surachai Kositsareewong, Senior Executive Vice President, Accounting and Finance.

Welcome, analysts and fund managers to analyst meeting, the new normal way. Firstly, I will provide an overall update of the business, then Khun Surachai will go through each business unit and all the figures, and I will discuss the business outlook at the end of the session. The crude oil price should have already bottomed out in the second quarter while the private consumption index also declined to its lowest point in April at the peak of the lockdown period. In pursuit of that, the private investment index was at its lowest point in May due to the lagging effect. The graph on the upper right side demonstrates Bangchak's sales volume via our service stations, wholesale and export combined, which have been modified into the barrel format instead of liters for easier reference. The light blue line represents total sales in 2019 with high season ranging from January to April before approaching the low season in May. Blue -- meanwhile, the dark line depicts total sales in 2020 with a major sales decline in April, given the nationwide lockdown and night curfews, though there were signals since the end of March, with sales volume declining gradually from 134,000 barrels per day down to 112,000 barrels per day in March and bottoming out at 98,000 barrels per day in April before picking up slightly in May. Total sales in May and June were almost identical to the same time in 2019, with a gap mainly from the missing portion of jet oil. In relation to that, we decided to decrease our production capacity in March and April and also to close down for the maintenance of plant #2, which lasted about 1.5 months. During that period, plant #3 and plant #4 were still in operation with crude run adjusted to 80,000 barrels per day. In June, when the situation eased out and lockdown measures lifted, crude run was ramped up to 108,600 barrels per day, and that summarizes the sales and production situation of Bangchak in the first half of the year. Many people have inquired about the oil price situation. The crude oil price bottomed out in April with a negative figure for WTI crude, while the Dated Brent and Dubai were down to USD 17 to USD 18 per barrel at their lowest. Now they have rebounded to approximately USD 40 to USD 45 per barrel, also due to the depreciation of U.S. dollars. This has also been the result of OPEC Plus' attempt to control the level of production, consequently impacting shale oil production, which used to peak at around 12 million to 13 million barrels per day. Now it has significantly decreased to about 9 million barrels per day. The production cut will contribute to balance out the demand and supply, and we expect to see demand picking up soon. The current level of demand is about 90 million barrels per day, and we do not anticipate daily demand to reach 100 million barrels until the end of 2021 or until the vaccine for COVID-19 has successfully been developed. At the moment, the significant portion of missing demand is mainly from jet fuel. Diesel and other refined products also have decreased demand, though not as much as that of jet oil, all in all causing global oil demand to decline to 90 million barrels per day. The graph at the bottom is the gross refinery margin comparison between Bangchak and Singapore. Though Bangchak's gross refinery margin seems to be in a better position, the figure is considered very low at about USD 3 to USD 4 per barrel. Refineries' utilization rate decreased to 74% in the second quarter 2020 due to the maintenance shutdown of plant #2 to take advantage of the low demand so that the main turnaround maintenance could be scheduled in 2021. Meanwhile, the 3E project will have to be delayed because technical specialists from overseas still could not travel internationally. However, the project will be completed by the end of this year despite a few months delay. For the marketing business, sales volume via service stations slumped by 20% to 30% in April and May due to the lockdown, with the biggest impact in Bangkok and vicinity. Now sales volume has started to recover again in conjunction with our recent launch of the new gasohol product in June, Gasohol S EVO believing that people will start commuting and using personal cars again after the lockdown and using less of public transportation. Our record showed that gasohol is a performing product with improved sales volume compared to 2019, and total sales of gasohol higher than 6 years ago. Meanwhile, E20 is also doing great, now surpassing gasohol-91 already, somehow in accordance with the government's policy and direction. With the redesign of the non-oil business model, we are now working with SPAR on the termination process whilst SPAR signs have already been taken down. Central Food Retail will be the convenience store operator in place of SPAR, FamilyMart for areas less than 200 square meters and Tops Daily for areas more than 200 square meters. To date, about 20 outlets been launched. And by the beginning of September, we should have launched about 50 outlets in total. For the power plant business, the transfer of Nam San 3B hydropower plant was successfully completed in the first quarter, together with the solar power plant of 20 megawatts, while the bio-based business also looks promising and has proven itself in terms of business agility with an even better outlook than the previous year and with EBITDA reaching historical records of THB 1,000 million. We have sold over 8.5 million liters of ethanol, representing 27% of national sales to produce alcohol gel and other disinfectant products. Speaking of which, we are essentially the largest producer of ethanol in Thailand. Moving on to the Natural Resource business, the crude oil price crisis has urged OKEA to reschedule the turnaround maintenance from September to May or June instead as it was the time when the oil price was at its lowest, thus, it was best to execute the maintenance work. The turnaround maintenance was completed slightly ahead of the schedule, costing approximately THB 100 million. Production has now resumed with the first shipment expected by the end of August. Another positive news for OKEA is that it served as a key promoter for the change in Norway's petroleum tax regime. The operating loss will be compensated for by the government straight away, meaning that OKEA's liquidity will be eased out by approximately USD 60 million to USD 70 million. With that, it might be a good opportunity for us to consider the investment possibility through M&A deals. As you might have already seen, the operating result of minus THB 1,911 million was reported in the second quarter of 2020, mainly from extraordinary items, for instance, stock loss of THB 1,725 million, asset impairment of about THB 900 million from Thai Airways and Bangchak Retail Company Limited. All in all, if these extraordinary items were excluded, the core profit would be equivalent to THB 447 million. The bar chart on the right side is the comparison between the operating performance in the second quarter alone and the first 6 months of 2020. Again, with extraordinary items excluded, the actual operations were not as bad as it may seem. The most important things are to reevaluate spending and maintain strong liquidity. After the issuance of perpetual bond in October 2019, we have also issued bonds valuing THB 8,000 million to support liquidity. Meanwhile, we have been strictly exercising cost control, saving up to about THB 1,100 million from rescheduling the turnaround maintenance and about THB 5,500 million from postponing certain projects. We established OpEx cut target by 20%, approximately THB 2,200 million from the original budget set in October 2019. At the end of the first half of 2020, we have already succeeded in reducing OpEx by 14% to 15%, equivalent to about THB 1,400 million. If we could maintain this consistency, we should have been able to save up to THB 3,000 million at the end of the year, considerably higher than the target. These figures were also reflected in the statement of financial position. And to date, this is equivalent to the cash savings of THB 560 million year-on-year.

Continuing from what Khun Chaiwat just talked about, we need to be agile enough to adopt to changes that come with the crisis: COVID-19, crude oil price war, et cetera. Amid the global commotion, we have managed to maintain our businesses, though some of them might be more heavily impacted than others. The operating EBITDA has been maintained in the positive territory, reflecting our capabilities to operate the business in this highly volatile period. The negative figure of the refinery and trading business was mainly due to nonfinancial items, that is inventory loss as well as the industry impact as a whole when, in fact, refineries' operating performance tuned out positive in the second quarter of 2020. Other businesses were also inevitably affected, and we have made adjustments as necessary to suit the situation. For instance, rescheduling of the turnaround maintenance as well as reconsideration of the investment plan to secure the consistent stream of EBITDA. The operating EBITDA of the refinery and trading business in the second quarter 2020 was actually reported at THB 889 million despite the impact of inventory loss totaling about THB 3,278 million, an NRV reversal of THB 1,412 million, leading to the net inventory loss of about THB 1,800 million. With the disturbance in the demand and supply balance, refinery crude run decreased from 104,300 barrels per day in the first quarter 2020 to 89,300 barrels per day in the second quarter of 2020. In terms of product yield, demand for jet oil was essentially 0 into the second quarter of 2020, urging us to adjust product yield accordingly, increasing diesel yield from about 50% to 64% in replacement of the missing jet yield. Moreover, the operating gross refinery margin improved to USD 3.93 per barrel despite the inventory loss of USD 7.15 per barrel leading to the gross refinery margin of minus USD 3.22 per barrel, improving by almost 100% quarter-on-quarter. In the meantime, product spreads were affected across the board, putting challenges upon refineries to adapt and survive. However, we believe that Bangchak will be doing fine. Given our advanced production planning and optimization, we had higher diesel production in the second quarter of 2020 in place of jet oil, that declined from 216 million liters in the first quarter 2020 to 7 million liters in the second quarter of 2020. The missing volume was partially from the decrease in total production of about 14% quarter-on-quarter from about 104,000 barrels per day to about 80,000 to 94,000 barrels per day, coupled with our conversion of jet yield to diesel. Nonetheless, we've managed to ramp up diesel sales volume from about 615 million to 620 million liters to about 700 million liters, meaning that diesel sales volume increased by about 90 million liters in the second quarter 2020 amid the COVID-19 pandemic. It was one of the measures we exercised to compensate the missing sales volume of jet oil with approximately 90 million liters of diesel export volume. All in all, we were still left with some margins from domestic and export sales. The graph on the left demonstrates our performance in different channels. It is noticeable that industrial sales volume had a sharp decline, mainly from jet oil, though other products have generally improved. Meanwhile, the wholesale business was essentially proportional to the actual sales volume generated. In relation to that, the marketing margin seems to have improved slightly due to the drop in industrial sales, specifically jet oil, which usually has thinner margins, while the percentage of retail sales increased. As a result, the net marketing margin to Bangchak increased slightly to THB 0.9 per liter. However, some peers might have reported the marketing margin of about THB 1 per liter, but we are referring to the net margin realized by Bangchak. However, it is evitable that the overall volume declined by about 20% quarter-on-quarter. There were 1,212 service stations in total as of June 2020, and there will be more of them coming up in the second half of the year as planned. The market share is getting reviewed and finalized, especially when the government sector is involved, taking into consideration the products will be promoted and the government policy in the long run. On the one hand, we need to cater to the market trend and products that will be promoted, while on the other hand, we need to optimize our product yield to properly suit the changes as well as the changes in costing structure. Meanwhile, we need to pay attention to the crude premium, a significant factor that can potentially affect the gross refinery margin. For the non-oil business, Inthanin has been doing well though outlet expansion in the first half of 2020 might not be as fast paced. We will need to wait for the right timing before launching new outlets for maximum efficiency and minimum chance of running into financial losses. In the meantime, we took this opportunity to conduct the convenience store business restructuring with the emphasis placed on stream of income by way of maximizing our available space in the service stations. Our main goal is to create a magnet to generate customers and a consistent stream of income that can be implemented in our service stations nationwide by extending lines of products and services. We should be able to see a new business model in more clarity by the end of 2020. The power plant business has been performing in accordance with the plan and might even be slightly better, partly due to the seasonality factor. For instance, the EBITDA from Nam San 3B project in Laos PDR has been realized in full in the second quarter of 2020. However, the wind power plant in the Philippines had a slump in EBITDA due to the weakening air stream during the off-season. And upon improvements in the previous year, the geothermal power plant has resumed operations and generated the EBITDA of THB 118 million. There are no worrying issues for the bio-based product business in the second quarter 2020. And it was actually better than what we initially expected, though not as good as it was in 2019. The overall outlook for the entire year should be in accordance with our plan, despite the fact that product spreads have started to narrow down, though not significantly. All in all, we are of the view that the EBITDA performance at the end of the year will be in accordance with the projection and have a positive outlook. In the meantime, we are looking to new product development opportunities and innovation that can add more value to the bio-based product business and related areas in the near future. Given the crude oil price scenario and lower production in the past quarter, OKEA opted for the maintenance shutdown in the second quarter 2020 to make essential improvements before getting ramped up again. There was also an impairment of asset in the second quarter of 2020 because there was a significant decrease in the benchmarking of oil price. This is the matter that, in which Bangchak took a rather conservative approach to ensure strong cash flow and identify interesting investment opportunities for OKEA. Going forward, OKEA is presented with quite a promising future given the preparations we have made so far. As outlined in details in the MD&A, the transaction items in the statement of financial position in the second quarter 2020 are not significant in that of the first quarter 2020, where such key items such as impairment was booked. There will be inquiries asking about the non-oil business restructuring, specifically convenience stores, whereby there was an impairment of Bangchak Retail Company Limited's assets of approximately THB 135 million in this regard. Since we are a major supplier of jet oil to Thai Airways, and given Thai Airways being in the business rehabilitation phase, we have recorded an impairment loss for the trade account receivable by 100%, equivalent to THB 895 million based on our conservative approach. After that, if the business recovers and regains financial liquidity, we will then make adjustments accordingly. Speaking of share of profits from our investment, almost every business has been performing well amid a highly volatile situation with the minor exception of Ubon Bio Ethanol, where the business operations might not have resumed to its full function, and also due to the overall market outlook and some pending issues with regard to pricing and feedstock policies. The earnings per share, and at the end of the first half of 2020 was reported at minus THB 4.99 per share. And even though our subsidiaries have been performing rather well even in these times, the accounting standard has called for a measure that the burden has to be absorbed by the mother company. The impact on the balance sheet in the second quarter 2020 was considered minimal only with the decrease in inventory from lower crude oil price and our attempt to optimize inventory for improved agility. The TFRS 16 accounting standard seems to have impacted both the assets and liabilities, inducing an increase in the right-of-use assets and leasehold rights of THB 7,592 million, and from goodwill and intangible assets for acquiring Nam San 3B hydropower plant of THB 2,161 million. In the meantime, we have reviewed our investment plan to identify projects that could be postponed without directly affecting revenue generation to suit the situation concerning COVID-19. Trade and other current payables also decreased quite a lot, resulting from lower crude price and sales volume coupled with our enhanced prudency in operating the business. Also, current and noncurrent liabilities have also increased by about THB 7,000 million as a result of the TFRS 16 accounting standard, which will be recorded as expenses accordingly. As part of the liquidity preparation protocol, bonds valuing THB 8,000 million were issued together with the loan drawdown to execute Nam San 3B project, causing liabilities to increase to about THB 1,600 million. The company also acquired credit facilities in the form of short-term loans amounting to THB 2,773 million, thanks to the favorable interest rates during these volatile times. The equity of THB 51,570 million is already inclusive of the perpetual bond valuing THB 10,000 million, while other items are especially the reflection of the profit and loss they've been at the balance sheet. The issuance of debenture is to serve the purpose of equipping the company with liquidity preparedness and to ensure that the plans get executed as expected to ensure the desired stream of income, not because we run short of cash or have issue with cash management, while other sources of funding were used to support investment endeavors mostly for short-term and long-term ones. Ultimately, the ending cash of the whole group amounted to THB 18,094 million at the end of the first half of 2020. From June 2020 towards the end of the year, not only our liquidity is not an issue, our cash flow is also positive across all business units. However, we still need to pay attention to depreciation expenses in some business, which can constitute financial loss in the statement.

Another thing we have been discussing internally is how we can formulate synergies among the 5 businesses. Apart from diversifying risks, we're looking at how we can co-create and develop new opportunities and minimize costs in certain activities. This is the matter that has been at the focal point of top-level executives of every business unit. The operating gross refinery margin has a stable outlook at approximately USD 4 per barrel, which will contribute to positive cash flow. The crude run in the second half of 2020 has been expected to be between 95,000 to 100,000 barrels per day, largely depending on the demand and supply mechanism since we converted jet oil yield to diesel, leading to quite an abundant supply of diesel while the diesel market has been rather stable, hence, we could not ramp up production to 120,000 barrels per day because the additional 20,000 barrels per day is supposed to be jet oil. However, we are at an advantage compared to other refineries in a way that we can convert jet oil to gas oil in full, but that also means we would not be able to run at maximum nameplate capacity. The turnaround maintenance will be postponed from October 2020 to March 2021 in order to compete before Songkran holidays. With lower crude price and decreased production capacity, the estimated benefits from the project Rocket should be around THB 500 million as opposed to the original target of around THB 800 million. We have also implemented the smart logistics and inventory management programs, leading to cost saving benefits of several hundred million baht. Furthermore, we have been looking for ways to make use of excessive products and identifying new markets along the borders. Last but not least, we will commence construction of the Euro 5 facilities at the beginning of 2021 to prepare for the next milestone of Euro 5 to ensure that it matches with the government's plan and time line. With the exclusion of jet oil, current retail sales volume in 2020 is very close to that in 2019. Gasohol-based products have made impressive growth so far with the launch of a new product recently. Going forward, refineries and marketing teams will be working together very closely to identify new product development opportunities that will be in demand by the market. In the meantime, with our product range comprising of 8 to 9 products, not every product is available in every service station. Our challenge is how to optimize product allocation to maximize profit, especially for service stations that only have 4 tanks that can contain only 4 types of products. Hence, we will need to determine the types of products to allocate to these service stations to satisfy consumers and generate good returns at the same time. This is another matter we will pay very close attention to in the second half of the year. Our core products, B10 and E20 are now available in almost every service station, about 1,210 altogether. B10 is currently available in 1,115 service stations while the remaining are mostly co-op service stations, which are now awaiting a formal announcement from the Ministry of Energy. E20, on the other hand, is now available in 888 service stations and should be available in every service station in 2021. Talking about the branded engine oil, Bangchak's engine oil currently ranks the third in the market share at about 10%, which is considered an interesting growth dynamics. Speaking of the non-oil business, currently, there are about 20 service stations with unique design. They are mostly large-sized service stations with specific themes. The picture shown on the slide is the one in Khon Kaen designed under the Gold Rush theme, featuring the atmosphere in California about 100 years ago. There's a check-in point inside where Instagram enthusiasts can help draw more traffic. We offer retail space for rent that has something more than just a convenience store, but rather a small community model. Another example is an Italian-themed service station in Bang Pa-in. Moreover, the theme also applies to the design and ambiance of Inthanin. For instance, Inthanin Coffee Shop in Buriram features the silk fabric style, which is reflected on the facade and decoration. All in all, this is something that will help differentiate ourselves and draw more traffic into the service stations, benefiting both the non-oil and oil business. Besides during the lockdown period, Inthanin online sales volume actually doubled from delivery orders, while sales in physical stores were also doing very well. For other businesses, Bangchak Corporation Public Company Limited acquired 4 solar plants totaling 20 megawatts, with revenue realization commencing in the third quarter of 2020. Meanwhile, the rainy season will be beneficial for the hydropower plant business, hence, the acquisition of hydropower plant in Laos can offset the solar power plants really well and can potentially stabilize revenue to a certain extent. Lastly, project Swan, the largest wind power plant project in Asia, has already been signed off by the Vietnamese Prime Minister. BBGI has a better overall outlook compared to 2019 despite molasses being under pressure due to tight sugarcane supply of about 75 million tons compared to 120 million tons in 2019, coupled with excessive ethanol supply. Meanwhile, the construction of KGI Nam Pong has been postponed due to tight molasses supply and is expected to complete in 2021. A new company has been established to operate a thin bio product business. Discussion is still in progress, so details cannot be disclosed just yet. We expect to share more update on this matter at the end of the year. For the listing of BBGI, we are now finalizing the selection of consultants to help us execute the filing. If everything goes to plan, we expect to submit the IPO filing at the end of 2020 with the listing process completed in the middle of 2021. The negative tax regime has been in favor for OKEA's business, other than it has helped support liquidity. This will help accelerate drilling activities that have previously been delayed to generate returns more quickly. Speaking of which, OKEA has acquired 2 more assets recently. For assets currently in operation, the drilling of Gjøa gas field is now in progress with the first batch of production in the fourth quarter of 2020, while Yme has been quite heavily affected, causing its first oil to delay by 1 year until the end of 2021. Lastly, Lithium Americas Corp.'s stock price increased exponentially and somehow in line with Tesla's stock price. Lithium Americas Corp.'s current stock price in August was about CAD 13 while our cost is about CAD 3, leaving us with a capital gain of approximately CAD 120 million or about USD 90 million. This is an upside that is not shown on their financial statement. We see a big potential in Lithium Americas Corp. If Tesla continues to perform, Lithium Americas Corp. is likely to follow suit. [Statements in English on this transcript were spoken by an interpreter present on the live call.]