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 of 2021 analyst meeting featuring the announcement of the operating performance and key business progress in the second quarter of 2021, followed by the Q&A session at the end. 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, Chief Executive Officer; Khun Surachai Kositsareewong, Senior Executive Vice President, Accounting and Finance. First of all, I would like to extend warm greetings to valued analysts, fund managers and representatives from financial institutes joining in the session today. We will be looking to key occurrences in the past 6 months and the business outlook going forward for the rest of the year. One of the key investment themes, especially foreign investors in ESG. Though everyone here is well aware of Bangchak, I would like to take this opportunity to emphasize on the fact that Bangchak is recognized by many global institutions. For instance, 3G and CFI awards in the United Kingdom, specifically in corporate governance, sustainability and innovation. For national and regional recognition, we have been awarded Excellent CG scoring of 98% by the Securities and Exchange Commission as well as the Asia Responsible Enterprise Awards 2021. Despite the lockdown, we have engaged ourselves in several social activities. For instance, we were one of the first to access a site where the fire incident took place in Kingkaew, in which an abundant amount of fire extinguishing chemical was used. We have provided Fleet Card for our medical personnel and sponsored vehicles to transport COVID-infected patients to and from hospitals. Donations have been made to provide for our crematorium. We have helped SMEs by purchasing their food and provided to medical front liners and also allowed street vendors to use commercial space in our service stations to sell their goods. Discounts are provided at Inthanin stores for our medical personnel. And most recently, complimentary mangosteens are given to customers who fill up their tanks at service stations. In collaboration with over 10 organizations in Thailand, such as EGAT, the Stock Exchange of Thailand and Thailand Greenhouse Gas Management Organization, Shell, CP Group, KASIKORNBANK, Bank of Ayudhya and several others, we have established the Carbon Markets Club to promote carbon credit trading to reduce greenhouse gas. Meanwhile, we have signed a collaboration agreement with NT, a merger of CAT and TOT, to enhance 5G business capability. Both accounting and operating EBITDA have significantly improved quarter-on-quarter. Taking a conservative approach, we have allocated provisions for our potential unforeseeable events. Fortunately, there have not been any, but in turn, we have materialized profits and EBITDA contribution, whereby Khun Surachai is going to share more details on the EBITDA contribution from each business unit. As initiated by Khun Chaiwat, our operating performance in the second quarter has turned up satisfactorily in accordance with the plan owing to changes and adjustments we have made earlier on. For the Refinery Business, the operating EBITDA has improved despite a drop in accounting EBITDA, mainly due to high level of inventory gain in the first quarter of approximately THB 2,200 million, whereas the inventory gain has dropped to THB 1,171 million in the second quarter. All in all, the Refinery's operating performance has doubled quarter-on-quarter after coming out of the turnaround maintenance in the first quarter. The EBITDA of the Marketing Business has reduced slightly by about 5%, mostly due to lower energy consumption following the lockdown and COVID-19 measures. Even so, the marketing margin is still higher than that of the first quarter. In this regard, the inventory gain that is part of the marketing business stood at THB 128 million. Moving on to the Power Plant Business. The peak season has enabled the hydro power plant in Laos PDR to have exceeded capacity from our prior expectations. However, the dividend contribution from certain investment projects in Indonesia and the Philippines might have decreased slightly due to seasonality factors. Despite this, BCPG's overall operating performance is still above the projection. On the other hand, the Bio-Based Products business has been directly affected, mostly by higher raw material costs. For instance, cassava and molasses, consequently causing the operating performance to be lower than expected by about 20%. For the Natural Resources business, OKEA's production field went into a 30-day maintenance shutdown leading to a 1/3 reduction in production capacity, while the rest of the activities have been executed as planned. Moreover, the share of profit is quite substantial due to the surge in gas and crude prices leading to revaluation of assets and subsequently, the reverse transaction in the form THB 333 million share of profits in the consolidated financial statement. Upon completion of the turnaround maintenance, we have resumed with the crude run of 107,000 barrels per day in the second quarter of 2021. With regards to product yield, we have increased yield of our unique products on convertible oil and low sulfur fuel oil in order to alleviate the impact of diesel oversupply in certain periods, allowing us more options and flexibility to maximize from high-yield products. The average oil price in the second quarter of 2020 has increased slightly while crack spreads have also improved, though in the big picture, they still remain rather low. Despite that, the slight increase has been the result of our product yield optimization between the product and crude oil spreads. As a result, we resumed from the major turnaround maintenance with an effective crude run and product yield, enabling us to plan our production scheme to resonate with the yield and market conditions in a more flexible manner. The Marketing Business has been quite stable in the past quarter. The market share growth rate is slightly above that of the market at 16%. In the meantime, retail sales volume in the second quarter has decreased. But fortunately, we have been able to maintain our industrial sales volume at a satisfactory level. The net marketing margin has also improved by 17% quarter-on-quarter. Khun Chaiwat will have some interesting updates on the Marketing Business later on in the session. All in all, the number of service stations has increased in the past 6 months with about 4 to 5 new stations launched in the second quarter and about 30 new stations launched in the first half of the year. As of June 2021, the total number of service stations is about 1,247. For the non-oil business, currently, there are 711 Inthanin stores with a plan to gradually open up new stores as we progress. Meanwhile, the number of convenience stores is now 190, whereby the plan to launch new stores might be slightly delayed due to the current situation. The operating performance of the hydro power plant in Laos PDR has significantly improved in the second quarter. The solar power plant business in Japan has been stable due to favorable weather condition. Meanwhile, the seasonality factor has affected the performance of wind farms in the Philippines as addressed earlier. For the share of profits, the geothermal power plant in Indonesia has contributed THB 153 million due to lesser number of days for the plant maintenance shutdown. The Bio-Based Products business has been doing well with B100 average price being maintained quite close to that of the first quarter, and the business is generally in a better position than the previous year. Meanwhile, ethanol sales volume increased in the second quarter despite the drop in production due to lower demand for Mogas in order to maintain inventory balance. However, due to the drop in CPO price, B100 cost has decreased at a slower pace than that of the selling price, consequently causing the gross profit to decline by about 20%. With higher raw material costs, both for cassava and molasses, ethanol price has increased as a result. Given the slowdown in demand, the average selling price may have been discounted in order to maintain optimization of production and inventory causing gross profit to reduce quite significantly quarter-on-quarter. There was a planned maintenance shutdown at OKEA for 31 days in the second quarter, decreasing production from 9,000 barrels of oil equivalent per day to 5,800 barrels of oil equivalent per day resulting in the decline in net production to 13,200 barrels of oil equivalent per day. However, the overall revenue increased from higher crude and natural gas prices. Meanwhile, there was an impairment reversal of assets under development at Yme amounting to NOK 730 million, leading to the share of profit contribution to Bangchak of THB 333 million. There was a dividend payment for 2020 performance in April 2021. Bangchak also divested all shares of BCPE to Sacgasco Limited, which is a company listed in Australian Securities Exchange. As a result, removing Bangchak's interest in Nido Petroleum. Upon capital injection, BCP exercised a warrant for BCPG, valuing THB 553 million. While BBGI has successfully issued debentures of THB 1,300 million, which has been quite well received by the public as seen from the oversubscription of 5x the availability. The gross profit in the second quarter was not much different from that of the first quarter once the inventory gain taken out of consideration, However, the bottom line might have decreased slightly due to certain factors that are not directly relevant to performance drivers. Even so, the overall performance in the second quarter is significantly in a better position compared to the first quarter. With the inventory gain loss taken out of the picture, other key indicators have generally improved both quarter-on-quarter and year-on-year. In the first half of 2021, there were a certain number of onetime accounting transactions. For instance, reserve allocation for Thai Airways and recognition of profit sharing from subsidiaries. With regard to the balance sheet, the major amount of cash has been disposed of to increase the working capital. The asset investment amounted to THB 2,348 million, mainly for the turnaround project, BCPG's solar power business and BBGI's expansion plan, despite the depreciation of THB 2,149 million. Besides the investment in joint ventures accounted for approximately THB 2,000 million. On the other hand, liabilities have decreased after short-term and long-term loan repayment leading to a decrease in loans and debenture payback options by about 5%. At the bottom line, the company reported the net profit of THB 4,716 million, an additional gain of THB 1,340 million from exchange differences on translating financial statements from subsidiaries overseas. As of June 2021, cash has been disposed of mostly for loan settlement with debenture repayment of about THB 2,500 million and subsidiaries' short-term loan repayment of roughly THB 2,000 million. Insurance payment and long-term loan repayment, each amounted to about THB 1,000 million. The amount of debt might seem to increase quite a lot mainly due to project financing arrangement in order to facilitate smooth execution of key projects. All in all, the beginning cash in January 2021 amounted to THB 21,651 million with the short-term cash and cash equivalents of about THB 3,000 million. The ending cash as of June 2021 then stood at approximately THB 16,000 million. There are no worrying issues regarding our balance sheet and liquidity. Given the persistent COVID-19 situation, we have made preparations to accommodate unexpected events through to the end of 2022, which we believe the situation should have improved by then. The average Dubai crude oil price in the first half of 2021 was about USD 63 to USD 64 per barrel with an average crude run of 86,000 barrels per day. We are of the view that the crude run in the second half of the year should reach 110,000 to 115,000 barrels per day, depending on how fast demand picks up based on the crude price projection of approximately USD 75 per barrel. In this regard, our crude price [assumption] for the entire year is around USD 70 per barrel. In terms of product yield, jet oil yield has remained almost 0 for about a year now. And in order to achieve the rated capacity of 110,000 barrels per day, the product that serves to fill this gap is unconvertible oil. Jet oil used to account for about 10% to 15% of the total yield, which is now being replaced by unconvertible oil. As the name implies, unconvertible oil stands for unconverted oil, meaning that cracking is not necessary, consequently requiring less energy consumption in the production process, including heat and pressure. Besides, since it does not require cracking, the catalyst utilization is more effective and can last longer. If we manage to keep this production momentum, the operational period can last up to 3 to 4 years before the turnaround, which can offer substantial economic advantages. Previously, the turnaround maintenance must take place once every 1.5 year. Now it has been extended to once every 2 years. Each turnaround maintenance lasts 45 days on average causing depletion of revenue during the period. Being able to extend the gap between each turnaround maintenance to 3 to 4 years can certainly make a big difference in terms of revenue generation as well as better crack spreads and refining efficiencies. Speaking of crack spreads, the orange and pink bar charts represent product spreads in the first and the second half of the year, respectively. It is noticeable that 95 Dubai spread is likely to drop slightly from the driving season to a high-single-digit towards the end of the year. Meanwhile, crack spreads for gas oil, diesel and kerosene tend to increase during the winter months. We can potentially see double-digit figure of gas oil Dubai spread in the fourth quarter. Speaking of which, there is a switch of scenarios here. 95 Dubai spread was in the double digit in the beginning of the year while gas oil Dubai spread was in single digit and vice versa at the end of the year. Hence, refineries have maximized gas oil production like Bangchak, should be able to reap benefits in the second half of the year. Moreover, low sulfur products like ones produced at Bangchak will also enjoy premium over Dubai whereas high-sulfur products will be discounted to Dubai crude. For the Trading Business, BCP Trading PTE Limited has been making good progress with stable growth, and we expect to see even more growth this year. Furthermore, BCP Trading PTE's [out out] sales volume sold to other buyers outside of Bangchak accounts for more than half of the total sales. We have further built on the success from Project Rocket into what we regard as fast plus, which is a refinery process optimization program to save cost and increase efficiency. Some of the initiatives are, for instance, the increase in diesel yield from catalyst optimization, maximization of unconvertible oil, sales volume from a few shipments to over 10 shipments per month, which has contributed to prolonged life of catalysts as shared earlier and the enhancement of transportation efficiency. Previously, when the oil price was low, we usually lowered the amount of transportation via pipelines and changed to trucks instead. Now we are able to optimize transportation mode based on the price and market conditions through a centralized single command management. All in all, the expected benefits from these initiatives have been set at approximately THB 1,300 million by the end of 2021. We are now halfway towards the end goal, not to mention that there was a 45-day maintenance shutdown in January. At this point, we are confident that the goal should be achievable. The number of standard type service stations has now exceeded that of cooperative type ones, increasing from about 200 stations to about 600 over the course of 6 years. The throughput for standard type service stations has increased to about 450,000 liters leading to a significant improvement in sales volume. Besides, there are 39 service stations with unique designs featuring different architectural themes. We have launched a pilot program of food trucks at Srinakarin service station amid the lockdown, which has been very well received by customers. This does not only serve as advantages for the non-oil business, but also increases traffic in service stations. There will be further execution and development in 5 to 10 more service stations by the end of this year. Last but not least, the community support campaign with complimentary mangosteens serve as the sharing and carrying initiatives during the lockdown. As of June 2021, there are 711 Inthanin stores nationwide with 2/3 located in service stations and the rest located outside of service stations. The sales performance in cups per store per day has increased quite significantly quarter-on-quarter despite the recent wave of the pandemic starting in April. One of the key enablers is a increase in online sales volume via delivery platforms, the LINE Man, Food Panda, Grab Food and Robinhood from 10% to 30%. Also, we have just incorporated our new business partner, DAKASI, a bubble tea business that has been generating even higher margin than coffee with sales volume of about 150 to 200 cups per day. The plan is to increase the number of stores to 12 by the end of this year with the long-term goal of 100 stores. We have added new drink selections to Inthanin featuring finger roots and lemon juice, which are now very popular, as well as plant-based milk options such as almond milk for lactose-intolerant customers. The number of charging stations should exceed 100 nationwide by the end of 2021. We collaborate with MG for charging stations in Bangkok and vicinity and the Provincial Electricity Authority for charging stations in other provinces. I just visited one of our service stations in Cha-Am, where charging stations were always in full use. I believe the EV chargers will be the key traffic drawer to our service stations. Furthermore, we have added vending machines in joint partnership with Lotus' in service stations that do not have convenience stores with a target to set up 50 vending machines by the end of the year. Setting up vending machines will require lower operating costs than convenience stores, and it pretty much satisfied consumers' needs since most of the time people just buy energy drinks or cigarettes. The lubricant market has picked up, moving up our market share from the sixth in rank 4 years ago to the third rank. This is also the first time we can secure the double-digit market share with the possibility of getting to the teen stage within the next few years. BBGI's filing should be finalized by the end of August 2021, with the IPO scheduled in January 2022. Our strategy is to designate biofuel as a captive market, whereby the EBITDA generated will be used to reinvest in other high-value products such as astaxanthin with a plan to market under BBGI's own brand, B Nature Plus. BBGI in collaboration with the Department of Biochemistry, Chulalongkorn University, to conduct research on the development of bio enzyme for nonchemical pesticide decontamination liquid for fruits and vegetables, which present a lot of potential opportunities for further development. Manus Bio, our joint venture, is going to get listed in New York Stock Exchange via SPAC, Special Purpose Acquisition Company, in this year. We have developed a sweetener product branded as Neotame, which has been certified by the Food and Drug Administration to distribute in Thailand. And authorized dealers were appointed in Vietnam, Myanmar, Indonesia and the Philippines. With regard to the LNG business, we have notified the Stock Exchange of Thailand of the collaboration with TSG, Thai Special Gas, to operate businesses related to natural gas and other types of gas, such as oxygen or hydrogen. We will start from the industrial segment and might expand to other markets in the future with the initial registered capital of THB 200 million. The key rationale of this partnership is to move towards the clean energy segment as well as to resonate with the energy transition concept. BCPG has invested in the technology for the energy storage system. There was a fire incident in South Australia in the energy storage system where lithium ion is used. The fire could not be extinguished easily as lithium ion releases oxygen, making it difficult to put out the fire. Stationary factories, smart grid, large power plants or transmission pipeline systems can benefit greatly from this vanadium flow battery technology. With large amount of precipitation, the hydropower plants business has improved both quarter-on-quarter and year-on-year. Regarding the investment in Japan, we have cleared issues with SunEdison in terms of filing and gearing, and we hope to see operations up and running from October 2021 onwards. We can expect new production from OKEA in the second half of 2021, with the first oil for Yme in September or October. The average volume net to OKEA will be 5,600 barrels of oil equivalent per day, taking advantage of the upward cycle of crude oil price, which was around USD 50 to USD 60 per barrel during the development phase before improving to about USD 70 per barrel, and is likely to remain at this level for a certain period of time. This should have been reflected in our bottom line and OKEA should be able to reap benefits from this directly. Normally, when oil price increases, the refining margin is usually not very healthy, but the upstream business can realize profits right away. In this regard, OKEA's oil and gas comprised of 50% each in the business portfolio, whereby natural gas has improved quite notably generating good returns for OKEA from selling into grids in the United Kingdom. We believe this should serve as a positive momentum in the second half of the year for OKEA. This slide captures the fact that the past 6 months have been somewhat a historical record of Bangchak's business performance in terms of profits and EBITDA with impressive contribution from every business unit. We will do our best to keep this momentum going, though the second half might not be as good as the first half. At this point, we can sum up by saying that this should be another good year for Bangchak.