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 third quarter 2020 analyst meeting featuring the announcement of the operating performance in the third quarter of 2020, followed by the Q&A session at the end. Today, the number of participants might not be as full as it used to be since we are also streaming the session live online. Before we begin, please allow me to mention a couple of things for participants who are attending the meeting via Zoom to kindly mute your microphone to prevent possible interruptions. You may submit your questions via chat together with your name and organization. The officer will then read your questions to the executives and participants in the meeting. Without further ado, I would like to introduce the executives who have been playing key roles in managing Bangchak's 2 major businesses and will be giving reports on the operating performance and business updates today. First, Kun Somchai Tejavanija, Chief Marketing Officer and Senior Executive Vice President, Marketing Business Group; second, Kun Surachai Kositsareewong, Senior Executive Vice President, Accounting and Finance; third, Kun Bundit Hansapaiboon, Executive Vice President, Planning and Trading business.

Welcome, analysts and fund managers to the analyst meeting, both on Zoom and here at the venue. From the statement of financial position that has been made public, there has been feedback that it did not turn out as expected, especially the impairment of OKEA's asset of approximately THB 1,000 million, resulting in a negative PAT. The slide captures the consolidated performance in the third quarter of 2020. The majority of Bangchak's businesses, bio-based products, power plants and natural resources have yielded performance as planned. There was an adjustment of the fair value for the Natural Resources business in order to update and reflect the asset value in accordance with the crude price, including the amount of reserves. Details about the impairment will be shared later in the financial report section. The Marketing Business performance has exceeded the target with only about 5% volatility, which is considered normal. And despite the poor gross refinery margin and crack spreads, the Refinery Business has started to recover. However, due to our cost reduction programs, review of investment plans and efficiency enhancement programs, we are in the position that we can control expenses prior to the next turnaround maintenance. All in all, the operating EBITDA still remained positive in the third quarter of 2020 despite being 40% lower than what it should have been, meaning that we have achieved about 60% of our projection. The next slides will be about the operating performance of each business, which will be covered by Kun Somchai and Kun Bundit. As mentioned, the Refinery and Marketing Businesses, which are our core businesses, both have an improved outlook quarter-on-quarter. Going forward, the important question is how we can stay viable in the business, and we intend to share with analysts the execution plan of our core businesses we are prepared to implement in 2021. For our subsidiaries' businesses, we will be providing you with general information, which will be mostly summarized in the financial report section. In the big picture, the refinery and trading business has recovered from a slump in the second quarter due to a rapid drop in crude oil price. As a result, many refineries around the world have been experiencing inventory loss before signs of recovery have started to show, gradually turning into inventory gain in the third quarter. Despite the inventory gain, it is not considered significant due to the prevalence of COVID-19. Meanwhile, Refinery's gross refinery margin has been affected quite a lot. And with the impact of COVID-19 fully felt in the second quarter, demand for certain products such as diesel and jet have greatly subsided. With that, many refineries have suspended jet production and shifted feedstock towards diesel production instead. With that being said, diesel demand has also dropped both regionally and globally, leading to excessive diesel inventory. Ultimately, this has had an effect on diesel price and low gross refinery margin in the third quarter. Fortunately, the Refinery Business has been supported by gasoline, which has also been affected by COVID-19 but somehow had a faster recovery compared to diesel and jet. The driving season is another supporting factor that has helped maintain the gross refinery margin. In this regard, Bangchak's gross refinery margin is about USD 2.30 per barrel. With regard to the production profile, crude run has started to pick up in the third quarter from 89,200 barrels per day in the second quarter 2020, that was the period when we had curfew back in April with lower oil demand, to 95,200 barrels per day in the third quarter 2020, thanks to effective disease control in Thailand, leading to very low transmission rates and then higher oil demand. In fact, once the curfew was lifted, oil consumption has almost resumed to the point it used to be pre-COVID. However, if looking at a year-on-year comparison, the crude run as of the first 9 months of 2020 was still lower than that of the first 9 months of 2019. In terms of product yield, the most significant point is almost 0 jet production due to a much lower number of flights leading to very low trading volumes of jet oil. However, Bangchak has been able to adapt quite fast and only produces on demand. Besides, Bangchak is the only refinery in Thailand that does not export jet oil during this time. Meanwhile, BCP Trading still remains operational in Singapore, with the aim of continuously generating income and growth. Compared to the previous years, BCP Trading's business still reports growth in both trade volume and gross profit every year. With the recovery of oil demand, the graph on the right suggested higher sales volume. Sales via service stations increased by 14% quarter-on-quarter, while the industrial sales volume also increased by 5% quarter-on-quarter. Diesel sales volume in the third quarter of 2020 was reported at 731 million liters, while gas oil sales volume stood at 461 million liters. Jet oil sales volume has increased quarter-on-quarter from 7 million liters in the second quarter 2020 to 14 million liters in the third quarter of 2020 due to gradual resumption of domestic air travels. There have been tangible signs of recovery in September, as seen from 7% growth in sales volume via service stations compared to September 2019. The net marketing margin in the third quarter of 2020 was THB 0.89 per liter, similar to that of the second quarter 2020 at THB 0.90 per liter. There was an inventory gain of THB 3 million in the third quarter of 2020 despite the fact that the inventory loss of over THB 400 million was recorded as of the first 9 months of 2020. Last, but not least, the market share as of the first 9 months of 2020 was 15.6% compared to 16% at the first 9 months of 2019. One of the reasons for the lower market share is because Bangchak's major distribution channels are service stations in Bangkok and vicinity areas accounting for about 36%. Therefore, the lockdown period in the second quarter consequently caused significant impact on sales volume. However, our market share has increased to 15.9% in August and September, which is close to where we were last year. Since Bangchak has been able to execute the Marketing Business quite effectively and exceeded the target, let us now hear more about the Marketing Business outlook as we move forward. Our focus in terms of the distribution channels will be to boost sales via service stations as it is the channel that yields maximum margins. At the end of September 2020, the total number of service stations is 1,223 altogether, with 31 new service stations being launched during the past 9 months. In this regard, the target for the whole year is to open 54 service stations. Moreover, this year marks the first year where the number of standard type service stations will have exceeded the number of coop type service stations, whereby the number of standard type service stations by the end of the year should be around 620, while the number of coop type service stations will be around 615. We have been trying to attract customers to visit our service stations as much as possible by using the unique design, especially for the non-oil business, which comes in different themes. Currently, we have already launched 30 unique design service stations in 22 provinces, and 14 service stations are now under the design and construction phases, which will gradually be opened in the first half of 2021. By that time, the total number of unique design service stations will amount to 44, with the target of 75 stations altogether, though we are not going to open service stations in every province. Out of the 30 unique design service stations that have been launched, they have been quite successful, being able to draw more traffic compared to normal service stations, generating higher throughput per station per month. Meanwhile Inthanin outlets in unique design service stations also generate higher sales compared to those in normal service stations as well. Another aspect of our endeavor is to deliver innovative experience to our customers. Apart from more spacious, more appealing design of service stations, our products have consistently been developed. Last year, we were highly successful with the launch of the B20 diesel, enabling us to generate sales and secure market share. In June 2020, we launched E20 S EVO as the flagship gasohol product with the additive that enhances quality and acts as an engine booster. The product has been very well recognized by customers as seen from the increase in the E20 market share from 16% to 16.9%. Going forward, we will be developing and improving our products on a continual basis, both for fuel oil product and engine oil. For instance, we expect to develop at least one fuel oil product in 2021. The lube-based oil business has been performing quite well over the past 9 months with a market share of almost 10% compared to 8.1% in September 2019. Despite the COVID-19 pandemic, Bangchak has been able to generate significant growth for the lube-based oil products. There are 3 major brands of Bangchak's non-oil business: Inthanin; FURiO Care, which is an engine oil service provider; Wash Pro, an engine oil service car wash and coating services; and Green Wash, car wash service. We have taken a new partner on board for the convenience store business, Central Group, to open Tops Daily and Family Mart in our service stations, now available in 33 service stations. We have continuously been expanding Inthanin with 648 outlets in October 2020 and aiming for 700 outlets by the end of the year. About 60% of the outlets are in the service stations, while 40% will be located outside of service stations. Many of service station owners are keen on having attractive design of the station as well as the coffee shops. In 2021, the number of Inthanin outlets is likely to grow in pursuit of the increasing service stations, speaking of which we have launched 54 service stations in 2020 as planned and has set the target to launch 100 more in 2021. In these 100 service stations, every station will have an Inthanin outlet. And we also plan to open about 50 outlets outside of the service stations, meaning that the total number of Inthanin outlets will be 855 in 2021. We have also collaborated with the Provincial Electricity Authority and other potential partners in installing EV chargers in Bangchak service stations, starting from 56 service stations in Phase I, mainly in regional flagship stations, such as the North, Southeast, West and Northeastern regions, which will be available in every 100 kilometers. The installation should be completed in April 2021. Going forward, the EV chargers provided by the Provincial Electricity Authority and the Metropolitan Electricity Authority will be available in 152 service stations across the nation. From the 9-month performance, I understand that analysts might be most concerned about the Refinery Business. This slide captures the consolidated performance throughout the first 9 months of this year. The EBITDA performance for the Marketing Business has actually been higher than expected at THB 1,572 million despite the COVID-19 pandemic, with operating EBITDA of THB 2,089 million due to the fact that the inventory loss has been allocated to both the Refinery and Marketing Businesses. This has somehow exceeded our expectation, especially given that we are now operating in the unprecedented times. The power plant business has also been more advanced than planned, securing the EBITDA of THB 2,771 million, though some plants might have lower performance due to the low season. More details will be available in the BCPG session. The bio-based product business has been similar to what has been projected with no significant changes. For the Natural Resources business, there was an impairment of Yme, which will be discussed more in details later on, the reason being is mainly because of delayed production. So we try to adjust the value to reflect what has initially been forecasted. The operating EBITDA of the Refinery Business still remains positive, but the accounting EBITDA might appear to be negative because the inventory loss of about THB 4,400 million has been booked. More details will be discussed by Kun Bundit as well as the way forward for the Refinery Business. The EBITDA on Bangchak's financial statement may appear to be at the negative with a PAT of THB 9,292 million and the inventory loss of THB 4,834 million. The impairment of TG amounted to THB 894 million, which is in the process of negotiation given that TG is in the business recovery phase. Apart from this, the impairments on assets as of the first 9 months of 2020 is equivalent to approximately THB 5,000 million. The impact caused by deferred tax was reported at THB 967 million, ultimately leading to the core profit of THB 608 million. There have been no particular changes to Bangchak's balance sheet this year, except ones induced by the changes of the Thai Financial Reporting Standards 9 and Thai Financial Reporting Standards 16 Accounting Standard. For instance, the right-of-use assets and leasehold rights and regulations, as mentioned previously, causing liabilities to increase. Meanwhile, we have acquired a certain amount of loan as part of the liquidity improvement plan to prepare for the persistent COVID-19 situation that is likely to continue to the next year. Apart from the funding required, we are anticipating the cash inflow of about THB 3,000 million to THB 4,000 million in 2021 together with short-term credit line of approximately THB 7,000 million to THB 8,000 million and additional credit facility from financial institution of roughly THB 5,000 million to THB 6,000 million. With that being said, the situation in 2021 somewhat similar to this year, we can go ahead with refinery improvement plan, including turnaround annual maintenance and the execution of the marketing business expansion to accommodate growing domestic demand. With regard to the source of cash, the total amount of funding is equivalent to THB 19,859 million, whereby our objective is to balance between cash inflow and cash outflow. Towards the end of the year, the ending cash for Bangchak is expected to be about THB 3,000 million to THB 4,000 million, while the remaining amount belongs to subsidiaries, mostly BCPG. Other subsidiaries should also have sufficient amount of cash to proceed with their business operations in the next year. Let us now move on to the Refinery Business outlook, which is the business that has been affected quite significantly, coupled with the lack of clarity in terms of the market condition and a certain degree of volatility. Meanwhile, other businesses, for instance, Marketing, will be executed as planned and is actually slightly more advanced than planned despite COVID-19. The power plant business has a positive outlook with the capital injection and upcoming acquisitions of new projects. Existing assets have been generating good returns in spite of the climatic fluctuation in Japan and the Philippines and the water situation in Laos PDR. Key milestones have been executed in relation to the plan so far. The geothermal project in Indonesia has just gone through financial restructuring, and we expect it to generate healthy returns in no time. Details will be shared further with comments by the BCPG team. The ethanol business, BBGI, has not been very volatile this year in terms of raw materials. Key activities have been executed as planned, while some might have even been accelerated. Hence, the operating performance is quite consistent, and BBGI has started to invest in relevant businesses to generate higher margins. Speaking of getting the company registered in the stock market, BBGI's Board of Directors are now considering different matters related to it. Most importantly, the climatic conditions are something that BBGI needs to pay attention to this year as there have been a series of typhoons taking place, which can have adverse impacts on the products. Therefore, BBGI needs to reconsider its investment plan and business execution plan that will take place over the next 3 years. Kun Bundit will share more later on, together with the outlook and plan for the Refinery Business going forward. The bar chart at the top illustrates refinery's crack spread, which ultimately reflects our gross refinery margin. It can be seen that the crack spread in 2019 was quite high compared to this year across 3 main products: benzene 95 Dubai, kerosene Dubai and gas oil Dubai. The next one is crack spread as of the first 9 months of 2020, which has been directly affected by COVID-19 so the actual data generated shows a dramatic decline compared to 2019. The other 2 bars are the projection made by foreign analysts suggesting that benzene crack spread will gradually recover, though kerosene, gas oil and diesel may drop further from third quarter 2020. However, they have a potential tendency for a recovery in 2021. In conclusion, the 2 major sources of impact are COVID-19 and producers in the OPEC Plus. These 2 are key factors determining the overall outlook of the Refinery Business going forward. In fact, if you have been keeping up-to-date with the COVID-19 situation, there are both positive and negative aspects, depending on which aspect is more significant. The positive side is the potential success in vaccine development, though we still need to see the success rate of the vaccine. And if it actually becomes successful, the next challenge lies in how effective the vaccine gets distributed to the global citizens and those in need. Nevertheless, the negative aspect is that COVID-19 transmission rate is still on the rise, especially in the U.S.A. and Europe, where the second lockdown has been enforced since early October. We are hopeful that the lockdown will help slow down the rate of transmission in Europe due to the fact that Europe is a high-growth region for diesel demand, approximately 15% of global demand or equivalent to 15 million barrels per day. Thus, if the rate of transmission does not reduce and the lockdown period persists, diesel demand will certainly be affected. With that being said, the positive and negative aspects concerning COVID-19 are still being looked upon to determine which one has more significant implications. The majority of analysts and relevant institutions usually place more emphasis on the positive aspect, and that is why the projected crack spread turned out quite positive. However, Bangchak will be taking a cautious approach to planning for the Refinery Business, where the current gross refinery margin situation and high level of volatility will put a halt on exports, but will rather capitalize on our strength: R&M business and our strong domestic service station network. Therefore, with the positive gross refinery margin for domestic distribution, we'll focus on distributing products in the country at this point in time. In this regard, the crude run will be determined based on the actual demand from service stations. For instance, the crude run we have planned for in the fourth quarter 2020 will be approximately 100,000 barrels per day with the expectation that the situation will improve in 2021. Upon completion of the turnaround annual maintenance at the end of the first quarter of 2021, our crude run should be in the range of 100,000 to 105,000 barrels per day depending on the market demand, which may be less than previous years, mainly because jet oil demand has not yet fully recovered. Hence, the crude run has not been maximized. Meanwhile, we try to ensure feedstock management in order to obtain the most optimized gross refinery margin while only producing jet in accordance with the demand. We are also aiming towards the development of nontransportation fuels focusing on unconvertible oil, which is yielded from our hydrocrackers. And convertible oil is then distributed and sold as feedstock to our customers to produce new base oil and wax. The price of these products are higher than that of transportation fuels. With regards to BCP Trading in Singapore, we have devised the execution plan that strives to achieve continuous growth. Apart from trading gasoline, jet, diesel and fuel oil, we will also be pursuing logistics management and freight management businesses while, at the same time, expanding partner network. All in all, this is an area that we can still generate continuous growth momentum. The 2 projects that will be completed and put to use in 2021 are Continuous Catalyst Regeneration Unit, which mainly supplies gasoline to Bangchak's refineries. The project is actually 100% complete, and we are now awaiting the commissioning test run, which will be carried out in December 2020. The desired outcome of this project is that it should have enhanced benzene production capabilities for Bangchak's plants. Currently, the amount of domestic production is not enough for Bangchak so we have to rely on import as a supplement. So this project will help enhance benzene production and serve Bangchak's market as well. The other project, debottlenecking of the hydrocracking unit, will be completed by the first quarter 2021 with the aim of increasing yield value and effectiveness in cracking distillate fuels. These 2 projects are for improvement purposes to increase yield value for Bangchak's refineries rather than for production capacity expansion. The pie chart suggests that the production will be geared more towards gasoline, mainly for domestic distribution. In the meantime, it will help improve yield value and gross refinery margin as well. As part of Project Rocket, we are identifying rooms for improvement in various areas of our refinery operations. For instance, energy saving, hydrogen saving and improvement of yield value in different aspects. We have begun to realize benefits from these initiatives, which has been estimated at THB 320 million in 2020. The benefits might seem minimal because certain activities have just been completed. However, going forward in 2021 and 2022, benefits should have been realized more fully, ultimately enhancing Bangchak's gross refinery margin. And that is the presentation we have prepared for you today. If you have any questions, please feel free to let us know. This time, it is our intention not to discuss the figures in details since analysts usually have already reviewed them in advance, coupled with the fact that there are no particular changes that we need to be aware of. Therefore, we'd rather focus on the overall picture of the business over the past 9 months. For the CapEx plan, specifically, sources of funding and how they are going to be disposed of in 2021 and 2022, which we are quite confident that we can proceed with our plan. At this point, we may not have a concrete plan of how we are going to use our CapEx as we are still considering potential projects and activities that require budgets. But what we are certain about is that the turnaround annual maintenance will be carried out in the first quarter of 2021, whereby the refinery and marketing teams will have to work closely together to identify the potential volume for distribution during that period of time and how we can allocate reserve for products to sell during their turnaround annual maintenance period. In addition, another key endeavor that requires a significant funding is the 3E project. Combined with the turnaround annual maintenance, the approximate CapEx required will be about THB 3,000 million. Meanwhile, as part of the Marketing Business execution, we are constantly expanding our network. The collaboration approach will be in a joint venture format, with many people showing interest in operating Bangchak's service station business. They have come up with different unique design ideas and themes that are diverse and represent various attractions in Thailand, speaking of which not only Bangchak is pursuing in this direction, but many other brands are also doing the same, which, at the end of the day, will benefit consumers. In this regard, the annual CapEx for the Marketing Business is approximately THB 2,000 million each year. For other investment possibilities, we will need to see and consider opportunities that may arise. For now, the emphasis will be to look at existing projects we have invested in and identify relevant businesses to develop further. For instance, the trading business in Singapore is not going to rely on cash as a means of investment but rather on financial instruments to support the project funding. On the other hand, there are 2 issues concerning OKEA: First, Okea had a tax return, leading to a significant amount of cash on hand as a result of the tax privilege for the oil and gas business regulated by the government as a reinvestment measure; second, 2 impairment transactions, whereby the first impairment was in accordance with the available reserve. With the lower oil price, the fair value then was reassessed to reflect the market value the most. The second impairment was from the assets that are expected to yield production in the third quarter 2020 to the fourth quarter 2020. However, due to the oil price scenario that is not so facilitative and the general market volatility, the production has been delayed so the impairment was booked upon the inventory and the operating performance of the projects. Hence, everything we have done is for the purpose of reflecting the true value of our investment capital. Above all, these are the financial figures that do not have any impact on the CapEx plan in the next few years.