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 financial year 2021 results analyst meeting. We have the honor of Khun Chaiwat Kovavisarach, President and Group Chief Executive Officer; and Khun Surachai Kositsareewong, Senior Executive Vice President, Accounting and Finance, to summarize the operating performance of the company in the previous year. Please join me in welcoming Khun Chaiwat to begin the presentation.

Bangchak has been recognized in more than 40 awards last year, whereby one of the most prominent recognitions is the AA ESG ratings. Meanwhile, the Most Innovative Knowledge Enterprise Award, Thailand MIKE Award 2021, is also a representation of our outstanding performance in corporate innovation. Bangchak & Inthanin were also granted the Superbrands 2021 Award as well as Asia's Influential Top Brand and UN Women 2021 Thailand WEPs Awards. All these awards and international recognitions are the reflection of the company's dedication to creating social impact, not just the financial performance. Our refineries went into a major turnaround in March and April 2021 with crude run standing at 99,000 barrels per day during that period of time. Despite the fact that jet oil production has not yet resumed, the crude run has been maintained at over 120,000 barrels per day throughout the fourth quarter. The portion of jet oil has been converted to unconverted oil, which made a record high yield of 9%, increasing from 5%, allowing us to maximize Refinery's operating result. The more we are able to maximize crude run to the fullest, the lower the fixed operating cost will be. Besides, refineries have recorded an incremental benefit of about THB 1,300 million from cost reduction and process improvement measures. Speaking of which, the cost saving benefits for the whole organization is about THB 1,600 million, meaning that the majority of the contribution is from refineries. Bangchak's market share in November 2021 was reported at 17%, which is the highest since the company's establishment, with the whole year average of 16.2%. There are over 800 Inthanin outlets, making us the third largest cafe chain in Thailand with outstanding performance in many aspects. Moreover, the company has generated the highest retail sales volume via service station, exceeding the production volume, while lube market share stood high at 11.7%, resonating with it being a high-margin product with a promising growth potential. We conducted a review of BCPG's portfolio in 2021 to determine our focus over the next 5 years. We aim to gear our efforts towards areas we are good at and be able to add value, especially in solar and hydro energy businesses. On the other hand, geothermal energy business is less likely to be our key focus as we are only a minor shareholder and cash flow is rather inconsistent. Additional areas of focus are new technologies in smart city, discrete building and battery technology that is compatible with grid storage, which will enable us to achieve a utility-scale energy storage business. BBGI is actually in the silent period prior to the IPO, so we will not be going to great details for today. With the incorporation of the new CEO, a highly competent executive from the largest conglomerate in Norway, OKEA's statement of financial position was consolidated in the third quarter of 2021 and a number of adjustments have been made. Besides, Yme has managed to dispatch its first oil in November. And we can observe a very high gas price tendency in Europe over the past few months, about 2 to 3x higher than the oil price. Given OKEA's gas portfolio of 40%, the company has hit the record high revenue in the fourth quarter of NOK 1.7 billion. Better yet, the revenue in the fourth quarter alone was higher than that of the entire 2020. Major business units have all achieved the target in 2021, though the Power Plant business might have performed at about 90% of the budget due to portfolio review. The earning per share was recorded at THB 5.25 per share, and it marked the first year ever that the EBITDA reached THB 20,000 million. Going forward, we should be able to maintain this momentum over the next 4 to 5 years. The Refinery crude run in the fourth improved significantly quarter-on-quarter, resulting in a major increase in Refinery EBITDA by about 50% with the extra revenue from onetime items of THB 433 million. Meanwhile, OKEA's performance has improved considerably quarter-on-quarter from THB 3,112 million to THB 4,832 million, mainly supported by increased oil price and sales volume. The marketing margin may have subsided due to the diesel price control measure in the fourth quarter, though sales volume exceeded the target by about 30% due to the easing of COVID-19 control measures. The Power Plant business' performance may seem to drop in the fourth quarter due to the seasonality factor. For instance, lower water volume in Laos PDR compared to the year before causing a decline performance in the Hydro Power Plant business. As for BBGI, since the IPO procedure is in progress, the information shared today may not be available in great detail. Refinery's key performance indicators have all improved across the board: crude run, gross refinery margin and product yield. We have generated better product yield, especially for unconverted oil and low sulfur fuel oil, despite the persistent missing portion of jet oil. For the Natural Resources business, OKEA's operating results have improved due to increased production volume, coupled with higher product prices, resulting in the exponential sales growth of about 300% in 2021 from about THB 5,000 million to about THB 14,000 million. This achievement has enabled us to determine a clearer outlook for OKEA going forward upon consolidation of OKEA's performance in the second half of 2021. Sales volume has dropped by about 5% in 2021 due to COVID-19 prevention measures and the work-from-home policy, while the marketing margin also declined to THB 0.72 per liter in 2021 from THB 0.84 per liter in 2020. However, sales have now started to significantly regain its momentum, leading to the increase in market share from 15.6% to 16.2%, which is considered an advantage towards all products in Bangchak's portfolio. In short, the margin has declined quite considerably due to the impact from pressured diesel price in the fourth quarter. Due to the seasonality factor, especially in Laos PDR, the Power Plant business in the fourth quarter has been affected. However, the performance is still in a better position compared to the same period of time in 2020. Moreover, BCPG also recorded shares of profit of THB 600 million from the investment in Indonesia as opposed to THB 270 million in 2020. The business outlook is quite positive, taking into account the investments that are going to yield returns. And some of them have already achieved their commercial operating date, enabling BCPG to realize the share of profits more fully. As mentioned, since BBGI is going through the IPO process, more updates on the business performance will be shared later on.

With regard to the accounting and financial highlights, there have been issuances of debentures totaling approximately THB 20,000 million, though the majority of which is the restructuring of the existing loan of about THB 17,000 million. Hence, the additional acquisition of loan is to accommodate investment activities in the future. In terms of the change in investment status, OKEA's share of profits were taken on in the first half of 2021 and OKEA's statement of financial position was consolidated in the second half, resulting in the realization of goodwill and the change of status from an associate to a subsidiary. In the meantime, some of UBE shares were disposed of in September 2021. And the shareholding proportion has decreased from 21% to 13%, resulting in the change of status from an associate to other investment. For the time being, the investment status is regarded as fair value through other comprehensive income, FVOCI, together with the recognition of gain on share sales of THB 616 million. Bangchak's sales revenue should have now exceeded THB 200,000 million, supported by the increase in crude oil price and robust volume growth, coupled with a substantial increase in OKEA's contribution as a subsidiary, paving way for a clearer picture of the company's business landscape. The crude oil price still remains a determining factor for many indicators, for instance, inventory gain and loss. We have been performing well with regards to the selling and administrative expenses despite the consolidation of OKEA as seen from only a minor increase in the figures compared to the increase in sales revenue. On the other hand, there was a loss on derivatives, whereby the excess is recorded in the cost of goods sold. There was a gain on fair value of investment of THB 616 million from UBE's share disposal, together with a gain on disposal of investment of THB 120 million from the divestment of NIDO. The loss from impairment of asset is mainly from OKEA's impairment at Yme on the accounting effect from the transfer rig ownership, which in turn favors the company with the tax benefits. This is essentially the accounting and tax planning procedures rather than the impairment from actual operations. So none of the financial impact has been realized. The tax expense may have increased, mainly due to the consolidation of OKEA, where the tax rate of 30% applies because OKEA's tax rate is quite high. All in all, the earning per share has improved from minus THB 5.5 to THB 5.25 per share in 2021. The company's assets increased from THB 148,323 million to THB 201,785 million in 2021. The amount of cash and equivalents increased to THB 32,022 million, with the majority coming from Bangchak's trade receivables, and THB 4,744 million from OKEA's consolidation, capital injection and debt financing. The account receivable also increased from higher marketing sales volume and higher oil price, coupled with the contribution from OKEA. For property, plant and equipment, OKEA's portion is equivalent to THB 11,410 million, while PCP Group's investment represents about THB 7,366 million, including Bangchak, BCPG and BBGI, which are potentially going to yield positive returns on the investment in the future. Liability has also increased year-on-year, mainly from the consolidation of OKEA's statement of financial position, without which, the increased amount of long-term loan is considered quite marginal. Besides, despite the issuance of debentures of approximately THB 20,000 million, the majority of which is part of the loan restructuring scheme to attain lower financial cost. The investment formats undertaken by the company come in many forms other than cash. We have arranged loan repayment and restructuring, leading to lower financial costs, while at the same time, we focus on acquiring loans with favorable terms. We ensure that the investment plan is being executed as targeted in order to achieve their aspired growth milestones. All in all, given the beginning cash of THB 21,651 million, the amount of cash from OKEA's consolidation of THB 5,011 million, coupled with Bangchak's cash movement of THB 5,111 million, minus the exchange rate effect, the amount of ending cash was equivalent to THB 32,022 million at the end of 2021.

To elaborate on what Khun Surachai just mentioned, though the amount of debt may be about THB 60,000 million, given the cash on hand of approximately THB 32,000 million, the amount of net debt is actually about THB 30,000 million with EBITDA of approximately THB 25,000 million, which is considered healthy. With an abundant amount of cash, we are ready to make investments and capture new opportunities, taking advantage of the potential economic recovery. Speaking of which, we have not yet taken into account the additional cash of approximately THB 14,000 million from the divestment of asset. Hence, the total amount of cash on hand will be roughly THB 45,000 million. Without having to worry about the resumption of jet oil production, we can maximize our crude run at the fullest capacity. With the debottlenecking in progress, we aim to increase unconverted oil yield from 9% to 13%. Since jet oil is available from every refinery, it is more practical for us to purchase and sell and instead gear our capacity towards a converted oil production. With that, we can now extend the major turnaround period to 2024 from the most recent one in 2021. And from 2024, we can expect another turnaround maintenance in 2028. The longer turnaround cycle allows for maximization of revenue since a 40-day shutdown means a loss in revenue of hundreds of millions of baht. And especially, unconverted oil does not only yield better margin than jet, the longer turnaround cycle also enables us to capitalize on refineries' utilization even further. In the meantime, product crack spreads all improved as seen from the bar chart. The darker color on the left represents crack spreads in 2021. The gross Refinery margin in the first quarter of 2022 has remained stable compared to the fourth quarter of 2021. In 2021, our cost savings achievement was recorded at approximately THB 1,300 million. And this year, we aim to reduce cost further by about THB 1,200 million. One of the highlights that has not been addressed much on is that our oil sales volume via BCPG has doubled to about THB 40,000 million, not including the portion purchased by Bangchak. There are not many independent traders left in Singapore. The majority of them are major conglomerates from Japan, Korea or even a big player in Thailand. It can be said that BCPG is considered the largest independent trader among peers, about 30% to 40% larger than the second largest player from the perspective of sales revenue. Their profitability is also on par with other traders while taking only 4 years to step up to be the #1 independent trader in Singapore and the second largest independent trader in Thailand. We aim to launch carbon credit trading and potentially lithium carbonate trading at the end of the year. From the bar chart, it is noticeable that BCPG's EBITDA doubles every year with the projection going from USD 8 million to USD 50 million in 2022, signifying that growth has consistently been delivered over time. We closed the BFPL deal, the Bangkok Fuel Pipeline and Logistics Company Limited, in 2021 with the managerial rights over the pipeline network capacity and terminal systems for 20 years from FPT under the investment value of THB 1,600 million. In this regard, about 50% of the pipeline currently accommodates oil transportation from Bangchak's refinery in Bang Pa-in. This deal is potentially going to stabilize oil distribution system, lessen the use of trucks as well as enhance asset utilization and maximize the use of existing pipeline from the Eastern Seaboard area from about 40% to 70% to 80% over the next few years. Moreover, not only we can generate revenue from increased opportunities, we can also fulfill Scope 2 of the go green intention by reducing carbon emission. Therefore, we are given the opportunity to generate more revenue and keep our commitment in terms of social and environmental contributions all at the same time. In terms of network expansion, we aim to open 80 to 100 new service stations in 2022. Sales revenue generated from unique design service stations is twice as high as standard type service stations. Currently, we could say that we have 3 types of service stations. Some service stations have been closed down during COVID-19, causing a drop in sales revenue when normally sales via standard type service stations is about 450,000 liters. Unique design service stations can double the volume. Meanwhile, co-op type service station's throughput per station is approximately 150,000 liters per month. Besides, we also emphasize on retail sales, especially for such products as engine oil and E20 via service stations. During the time when the oil price is under pressure, we have discovered that margins generated from industrial users have improved. The industrial sector is usually the factor that causes the marketing margins to lag behind. But now we start to see that this has helped balance out the mission portion of the RM business amid the price crisis. We will continuously be focusing on the non-oil business. As already mentioned, Inthanin has been highly successful in terms of brand recognition and sales growth of 150,000 cups per day. It is also well received among teenagers and young generation, especially our signature iced cocoa. We have introduced food trucks in unique design service stations, which have become highly popular since the lockdown as people are less willing to dine in restaurants. Our food options are quite unique. For instance, our service station in Wang Noi has [indiscernible] which is very delicious. We also collaborated with [indiscernible], a well-recognized noodle chain store, which is also very tasty. So the choices are pretty diverse. Many chargers that claim to have a quick charge feature do not have built-in transformers. Since the transformer serves as the power storage, chargers that do not have one cannot really deliver a quick charge function as the power is insufficient. We can claim that our EV chargers are truly quick charge type. We collaborate with PEA for upcountry area and with MG and Sharge for service stations in Bangkok and vicinity areas. The chargers are now available in about 100 service stations countrywide, and we aim to increase to 250 service stations by the end of the year. Our lubricant is considered a high-margin product. We anticipate a double-digit market share in 2022, which has doubled from 4% to 5% from 5 to 6 years ago. The information in the slide is captured from the road show materials. You can stay tuned with the session on BBGI IPO road show to learn more details. We can expect to see tangible growth momentum for the Power Plant business with the first full year contribution of 20 megawatts from a power plant in Chiba, which commenced operations in November 2021. The other 2, Komagane and Yabuki, are due for a commercial operation date in the first quarter of 2022. BCPG's cash on hand in the first quarter is about THB 20,000 million, enabling the company to invest in potential projects with an expected EBITDA growth of 25% in 2022. Furthermore, the solar power project of 496 megawatts (sic) [ 469 megawatts ] in Taiwan has already been signed off by the Board of Directors. It should take a few years for the structure to complete. For the wind farm project in Laos PDR of 600 megawatts, the capacity net to BCPG is 230 megawatts, which should take about 2 years to build, whereby the EPC contract and the execution plan have already been developed. This is going to be the largest project in the region. And many financial institutions are keen on providing financing for this project. OKEA is set to be a net cash positive company, the amount of cash is higher than debt. We can expect to see some more investment projects from OKEA together with a plan to double the production capacity. On a positive note, the oil and gas markets in Europe have continued to remain strong with the dated Brent price almost reaching USD 100 per barrel. OKEA's performance in their first quarter should be about the same as the fourth quarter of 2021 or even better. Going forward, we should be able to see more M&A deals for OKEA in the future. After 4 to 5 years of studies, the sustainable energy solution after oil is hydrogen. Even though battery can serve a number of functions, its attributes can hardly compete with that of oil. So it is rather something that comes in between the transition. In support of this notion, the U.K. government has issued the policy that power plants that use natural gas to generate electricity must have hydrogen proportion of at least 30% in around the next 3 to 4 years. In the U.K., they need gas to heat up their accommodation in winter. And then it is likely that about 20% to 30% of the gas portion will be replaced by hydrogen in the future. Therefore, we are of the view that this is a good timing to start investing in Transitus Energy, a company with expertise in this area. What they do is separate hydrogen and carbon dioxide from methane. Carbon dioxide will be buried in the well that had been dug out, while hydrogen will be supplied through the pipeline together with natural gas. In this regard, we should be the first Thai company to invest in hydrogen-related business. This slide is a recap of what has already been discussed throughout the presentation. In summary, the outlook is quite promising and the overall situation looks positive. With the exception of BCPG, the CapEx focus for Bangchak is geared towards maintenance activities to ensure reliable operations. In the meantime, the CapEx allocation of THB 30,000 million from BCPG has been reserved for new investment, both in greenfield and brownfield projects, all in all, amounting to THB 39,000 million. In conclusion, this year should be a positive year for Bangchak. And it is our intention to resume our active investment activities in this year. [Statements in English on this transcript were spoken by an interpreter present on the live call.]