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

Without further ado, I would like to introduce the executives who will be giving reports on the operating performance and business updates today. Khun Chaiwat Kovavisarach, President and Chief Executive Officer; Khun Surachai Kositsareewong, Senior Executive Vice President, Accounting and Finance.

I believe the current global investment theme is to do with environment, society and governance, ESG, the matter that Bangchak has been emphasizing on all along. We not only get recognized on an annual basis for our sustainability performance, but we also receive regional level recognition as well. For instance, AREA Asia and Country Top 3 PLCs award. Moreover, we have also been shortlisted in global recognitions, which have agencies in London and New York, reflecting our strong ESG initiatives. We have received an official recognition from the DJSI in 2020 after having been in the channel rating for a long time. We ranked third in the DJSI ranking with the bronze class, which is even more advanced than some large refineries in South Korea. This is a representation of Bangchak's capabilities in being accountable for the environment, society and governance. 2020 was indeed a great reset, and we have been very busy internally with a lot of initiatives and activities going on. We have established a BCM task force since February 2020, with the trial work from home starting on February 1, 2020. When the first lockdown took effect, we shut down one of our refineries and reduced production capacity given very low demand for jet oil. When everything reopened in June, we launched a new gasohol product, E20 S EVO, which is clean and good for the engine, with the belief that many people would prefer to use personal vehicles instead of public transportation. The product has been well received so far. And the sales revenue has already exceeded other gasohol products. We have revised the operational expenditure and capital expenditure budgeting together with the issuance of THB 8,000 million bond as an effective liquidity measure. Two months after that, there was a capital increase for BCPG to prepare for business growth, speaking of which we have partnered with a start-up called Manus Bio, Inc., which is a critical step for us and will be elaborated on -- later on. Towards the end of 2020, stock price soared high, especially ones that are associated with technology and EVs, allowing us to take profit in Lithium Americas Corporation stock for about THB 3,000 million. There has been a continuous improvement all along with the operational expenditure reduction target of about THB 900 million from the original budget, which we have succeeded by the end of 2020. Besides, we have adjusted capital expenditure and increased savings by about THB 6,000 million. Meanwhile, there was a capital increase for BCPG of about THB 10,000 million together with portfolio rationalization. The EBITDA in 2020 could hardly beat that of 2019 and with the loss of THB 6,967 million, THB 4,743 million was reported as inventory loss, resulting from a sharp decline in crude oil price from USD 65 per barrel in the middle of 2019 to only about USD 20 per barrel in April 2020. On the other hand, if the oil price rebounds, the stock loss will be reverted back as well. There was an allocation of impairment amounting to about THB 3,300 million, which is potentially a onetime transaction. The tax benefit was reported at THB 1,777 million with a perpetual bond interest of THB 501 million, which was treated as the equity. We have also generated gain from LAC share divestment of THB 3,142 million, which was not recorded in P&L due to the new accounting standard. All in all, the adjusted profit after tax stood at THB 1,905 million. The interest-bearing debt in 2019 amounted to THB 48,041 million, and increased to THB 63,244 million in 2020. Despite that, the amount of cash also increased year-on-year from THB 7,564 million in 2019 to THB 21,651 million in 2020. Hence, the net interest-bearing debt in 2020 was actually THB 41,592 million, which increased only about THB 1,000 million from 2019. All in all, the increase in debt is one way of ensuring our liquidity preparedness, allowing us to end the year with a strong cash position. It can be said that 2020 was a year of making adjustments, improvements and preparations to move forward. The actual operating results are in a much better position than the accounting figures, which Khun Surachai will discuss in more details. Many people may be wondering if Bangchak has actually experienced an operating loss of about THB 7,000 million. The impact of inventory gain/loss is reflected upon the accounting and operating EBITDA. The breakdown on the right-hand side has been detailed to make it easier to use as reference. It has taken into account the new accounting standard, for instance, the impairment on TFRS 9 and the issue concerning Thai Airways and TFRS 16, which is cost depreciation and amortization to increase. To summarize, the key reasons for the decline in Bangchak's operating performance in 2020 was due to crude oil price decrease and lower gross refinery margin. Despite that, other businesses still have a positive outlook going forward, which will be addressed as we go on. The Refinery and Trading and the Natural Resources businesses have been directly affected by the crude oil price decline. However, the Marketing businesses have been performing rather well during the crisis with only a slight drop in performance from 2019 amid the fact that the Marketing business requires a certain level of adjustment regarding product demand, coupled with the change in domestic regulations concerning the change in B7 to B10. We have started to fully realize returns from investment in the Power Plant business in 2020 with some additional acquisitions that will be finalized within 2021, all of which has been prepared for since the previous year. In the meantime, the bio-based business also had a positive performance in 2020 with improved spreads of ethanol and B100 while sales volume has also been maintained in the same level as that of 2019. Regarding the product yield, the amount of jet yield in 2020 has decreased by about 10% due to almost no air transportation. This portion has been converted to diesel instead to optimize production. The average crude run was decreased to 97,200 barrels per day in 2020 to align with the actual demand. Regardless of the jet oil situation, we maintained our sales volume at a satisfactory level, which was only about 1% to 2% lower than that of 2019 despite lower domestic demand. Meanwhile, BCPT's transactions have increased by about 20% year-on-year, though the revenue might have slightly resulted from the crude oil price situation. The information on the right-hand side should have already been made available to analysts. For instance, gross refinery margin and Dubai crude price, which has declined greatly in the second quarter of 2020. In response to that, Bangchak has been active in making adjustments to cope with the changing situation at a faster pace compared to others. Being aware of the missing demand and price crisis, Bangchak usually plans our crude run in advance. And the graph here is a representation of such advanced planning, allowing us to be agile in the unprecedented times. On the other hand, we can resume our normal operations in no time when the market started to show signs of recovery. Our retail sales volume has not at all decreased, only with the exception of jet oil, which did not cause a significant impact on other products. In the meantime, the net marketing margin improved from 2019, though please note that we only consider the marketing margin net to Bangchak. And with the lower sales volume of jet oil taken into account, the net marketing margin improved slightly. Hence, it may not be applicable to make a direct comparison with other companies. COVID-19 has caused the non-oil business development to delay slightly. However, we have launched 111 new Inthanin outlets in 2020. We have also restructured the convenience store business model with selections of Mini Big C, FamilyMart and Tops Daily to cater to different needs of customers. Currently, there are almost 200 outlets, and we believe that the expansion can be executed at a faster pace in the future once we can get our hands on the information regarding customers and their behaviors. BCPG has fully realized revenue from the investment in Nam San 3B hydro power plant, in Laos PDR in 2020, coupled with the acquisition of solar power plants in Thailand of 20 megawatts. The share of profits was reported at THB 270 million from the investment in the geothermal power plant in Indonesia and the wind power plant in the Philippines. The bio-based business performance has exceeded our expectations in 2020, mainly due to the much improved speeds, both for B100 and ethanol. Meanwhile, demand was still going strong and the regulatory change from B7 to B10 has been contributing to revenue generation, which can essentially compensated low profits in the past. The overall outlook for the bio-based business should remain positive in this year. OKEA has inevitably been impacted by the crude oil price decline, but production actually did not drop too much compared to 2019 given the overall market condition and higher competition. Hence, OKEA's oil lifting has been adjusted to better accommodate the change in the demand and the shipment schedule. However, there has been a considerable decrease for gas sales volume, which is normally transported via pipeline in order to match with the actual demand. The direct impact can be felt on both gas and liquid prices. In 2020, EBITDA for Natural Resources business group decreased by about THB 1,000 million, mainly from the price of crude oil and natural gas adjusted downwards sharply throughout the year. With regards to the balance sheet, liabilities increased in 2020 from the preparation for the issuance of bonds. The net debt is actually the cash we have on hand that will be disposed of as an investment capital in 2021. The total equity decreased by only 1% in 2020, taking into account BCPG's capital increase and Lithium Americas Corporation realization of profit causing the equity not to decrease too much. The TFRS 16 has had some impact on the liabilities regarding rights of use assets and leasehold rights contributing to an increase in liabilities of THB 7,962 million. Given several occurrences in 2020, we are not certain as to how the situation will turn out. So there are a number of funding options. For instance, the issuance of debentures, BCPG's capital injection and the divestment of Lithium Americas Corporation shares. Everything is in accordance with the plan, which is within the investment scope and the cash flow limit that we can optimize. From the beginning of 2021 onwards, we have been more optimistic of the situation and ready to capture new investment opportunities once the COVID-19 situation gets better. And that is the overall summary of the financial performance. What we have been doing quite well is the preparation of sufficient liquidity for the next 18 months, providing an explanation for the cash reserve of about THB 20,000 million in order to keep the business running smoothly despite potential recurrence of COVID-19. Also, the actual operating performance is not at all as bad as the figures may have suggested with only a slight increase in net debt. Moreover, if the onetime items in inventory loss are taken out of consideration, our performance is actually well above the border line. Going forward, our direction is still based upon the 3R strategy: Refocus, identify the business sectors we choose to be in; restructure, phase out from businesses that are not in our focus by way of restructuring or divesting; and reimagine, think outside the box, incorporate innovation and capitalize on the potential opportunities amid the volatile capital market. The 3R strategy will be the focal point for Bangchak in 2021 that will serve as guidance on how Bangchak can make proper adaptations. This slide captures the outlook regarding fossil fuel, clean energy and the energy transition. Many people are of the view that fossil fuel is likely to reach its peak in 2035 to 2040. And that is going to cross over with clean energy somewhere between 2060 and 2070, when we can expect the green energy to take advantage of the upward trend. Being aware of this, Bangchak has been expediting green energy business long before. And with COVID-19, it is possible that the energy transition will be accelerated and happened much faster. If that is the case, our pace will also be accelerated. And by 2030, our proportion of fossil fuel and green energy businesses will be above 50% each. Once the energy transition has fully taken effect, the proportion of green energy should have exceeded the fossil fuel. Bangchak's core businesses are comprised of 5 major areas: Marketing, Biofuel, Green Power, Refinery and new S-curve or upstream businesses. The Refinery business has developed a number of new initiatives. For instance, different types of solvents. The Marketing business has experienced a very good market reception for lube-based oil, which we plan to further develop as well as the non-oil business. Meanwhile, the focus of the Green Power and Biofuel businesses lie in the high value-added product business, which I will discuss more in details on what we can do and what we have done. For the new S-curve business, the key theme is lithium processing. In this regard, the initiatives in the dark green zone are the ones that are currently being executed or ones in the lighter green areas will be executed over the next 3 to 5 years, 5 to 10 years and beyond, all of which will be based upon the 3 main themes: lithium value chain, whereby we have the lithium offtake of approximately 6,000 tonnes per year; green power value chain; and bio-based value chain. These are the 3 areas of which we'll be accelerating development in order to materialize the energy transition. For the Refinery and Trading business, we aim to become a niche product refinery. We are the first and only unconvertible oil producer in Thailand to date. With the missing jet oil demand, we can instead produce unconvertible oil and distribute it at the gas oil plus price. Meanwhile, there have been a few shipments of solvent as well as wax and oil blending. With successful execution of the 3E and project Rocket, which is now complete, our crude run can be maximized to exceed 120,000 barrels per day when the turnaround is completed. With regards to the Euro 5 standard, the investment capital required to develop the facility is only about -- approximately THB 1000 million to THB 1,200 million, which is not that high. For the Trading business, after continuously securing exponential growth for some time, the goal is to maximize growth by 3x over the next 5 years, which will contribute to strengthen the Refinery and Trading business. The key theme of the Marketing business is greenovative destination, which will be launched next week, featuring a series of social responsibility campaigns. In the meantime, the goal has been set to increase the non-oil and lube business EBITDA to 30% from the current performance of 17% to 18%, which has previously been lagged behind by the convenience store operations, whereby we have already returned the convenience store license to the licensure. Hence, the chance of increasing the non-oil EBITDA to 30% promises a high possibility. Moreover, we are among the first operators that launched the digital payment at service stations after the prevalence of COVID-19, which will be developed further, as well as the organic growth service station expansion for the Green Power business. BCPG CEO will discuss more in details later on. Regarding the bio-based products, we should have secured the largest sales volume of alcohol gel among all of the ethanol producers in 2020 and the construction of the refined glycerin plant was completed at the end of the previous year. Hence, we are officially tapping into the high-value product business. We also formed partnership with Manus Bio, the pioneer of synthetic biology, whose founder is the student of the person who discovered synthetic biology. Therefore, they possess an abundance of knowledge to pursue this business, and they have also acquired the sweetener factory in Georgia that used to supply to Coca-Cola. The acquisition was made at a very low cost, only about 2% of the face value. The factory was commercialized in 2020, and it should be ready to scale up from now on. Having said that, Manus Bio is likely to be Bangchak's next Lithium Americas Corporation. There are going to be several other interesting opportunities coming along, coupled with some mergers and acquisitions deals. For the new S-curve business, upon rationalizing our Lithium Americas Corporation portfolio, we have available cash of approximately THB 4,500 million, which will be disposed of as an investment capital going forward. Given that, we have explored the new S-curve business, taking into account the lithium offtake of 6,000 tonnes per year, which can produce up to 200 million iPhones per year. The working team is now exploring potential opportunities we can pursue with this abundant amount of lithium, and we should be able to see tangible outcomes within this year or the next. Our EBITDA gets doubled every 7 years, and it is expected that in 4 years' time, we can double our EBITDA performance in 2025. However, this chart was made somewhere around July 2020 when the situation was rather gloomy and uncertain. So we projected 1.7x growth by 2025. But now we are quite confident that doubling the figure should be possible. At this point, the investment budget that has already been earmarked is mainly for the Power Plant business. The budget for the new lithium project has not yet been substantiated. But once that happens, additional investment budget will have been allocated for accordingly. Starting off with the bio-based business, the focus was initially based on business-to-business customers, selling ethanol to different service stations, operators, including Bangchak. Now with the products such as alcohol gel being well received at good margins, we will penetrate the business to consumer market to a large market exposure for other relevant bio-based products. Meanwhile, we plan to further develop products from Manus Bio, of which we are the exclusive distributor in Thailand, including ASEAN countries, Japan and Korea. Being able to distribute these products will contribute to our increase our margins. Moreover, we also have the zero-calorie sweetener product, Stevia, that we can develop and distribute within the region, which is going to be another exciting endeavor for the company. Our Refinery is now going through a turnaround, while domestic demand in February has improved significantly. Upon completion of the turnaround, crude run is likely to exceed 120,000 barrels per day based on the assumption that the Dubai crude price is around USD 48 per barrel, whereas last night, it closed at USD 66 per barrel already. With a sharp drop of USD 65 per barrel to USD 20 per barrel in 2020, the inventory loss of roughly THB 5,000 million was incurred. So with crude oil price recovery, we can expect inventory gain in the first quarter of 2021. We have realized the cost-saving benefits after being able to execute the crude run of 120,000 barrels per day. We have set the cost-saving target of approximately THB 1,000 million, which I am quite confident is achievable. As a result of the 3E project, our capacity has been improved by 10% for the debottlenecking project, allowing us to process a wider variety of crude. With the CCR project, the benzene yielded will have more octane content, enabling higher volume of gasohol 95 without having to rely as much on imports given our enhanced flexibility to blend different combinations, while the products themselves will also have higher capabilities. The target has been set for the Marketing business to launch 100 new service stations in 2021 as the number of outlets still remain an important matter for this business. Meanwhile, we aim to increase sales growth by 6% to be supported by the upcoming launch of greenovative destination in the beginning of March, presenting audience with some other options we can do when we cannot travel abroad. Also, we plan to launch 150 Inthanin stores in 2021, together with a new Hero product, Iced Cocoa, which sold up to 40,000 cups on Valentine's Day alone. Everyone is welcome to try it out and learn more about health benefits of cocoa. Lube is another product that made positive sales in 2020, and we also gained higher market share while others might have lost theirs. 5 years ago, we were in the sixth rank. And today, we have made our way up to the third for the branded lube base oil. I will leave the Power Plant business for BCPG team to discuss. For the Natural Resources business, both oil and gas prices experienced a significant drop previously, though they both now have recovered a great deal. The average crude oil price in 2020 was about USD 30 to USD 40 per barrel before increasing to USD 55 per barrel at the beginning of the year. Meanwhile, gas price has improved by 5x or about USD 2 per million Btu to USD 10 per million Btu at the beginning of this year. Besides, 2 new production wells in Gjøa are going to commence production today and tomorrow, potentially increasing production volume and improving the price situation for Gjøa. On the other hand, Yme's first oil is expected in August to September 2021, which is still on track. All in all, 2021 is likely to be a productive year for OKEA, after having suffered in 2020 from the crude oil price decline, coupled with the fact that they are going to have a new young CEO, who should be full of energy to drive the business. This slide summarizes the capital expenditure projection for 2021. Similar to the 5-year plan, the majority of capital expenditure in 2021 will be allocated for the investment in the Power Plant business and refinery maintenance given the turnaround. The capital expenditure allocation for the marketing business is mainly for the network expansion, while the new business investment is not yet part of this year's plan. If there are any updates, we will share further with you all again.