SCG Packaging Public Company Limited (5Y7A.F) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. We are very happy to welcome all of you again to SCGP Analyst Conference. Today, we will cover the performance of the first half of this year and also the second quarter of 2023. My name is Vikorn from the IR team. I'll be your host this afternoon. Now so for our event, may I remind all of you to keep your microphone on mute for the time being. We will have a Q&A session right after the presentations. So without further delay, may I hand over the floor to our two presenters, SCGP CEO, Khun Wichan Jitpukdee; and SCGP, CFO, Khun Danaidej Ketsuwan. Thank you.

Good afternoon, and [Foreign Language]. Once again, welcome to the second half -- second quarter of the 2023 financial performance of SCGP. May I start with the consolidated financials for the first half of this year. The revenues in the first half of the year is THB 65.9 billion, which reduced from last year 12% and negative 8% from the second half of last year. However, the percentage of cost of goods sold on sale is reduced to 82%. In terms of the core EBITDA for the first half of this year equal to THB 9 billion, which improved 3% from the second half of last year and reduced 14% from the same period of last year. For the core profit ended with the first half of this year, it's at THB 2.6 billion, which improved 22% from the second half of last year and reduced 28% from the same period of last year. And this brings to the profit margin of 4%. And the net profit is THB 2.7 billion for the first half of this year, with the performance is really strong in the second quarter. Next slide. In terms of the business segment for the first half of this year, in terms of the integrated packaging business, which account for 75% of the total sales, the revenue from sales at THB 49 billion, which reduced 9% from the second half of last year. The revenue reduced mainly from the price decrease. In terms of the EBITDA, EBITDA THB 7.2 billion, which improved 11% from the second half of last year and ended with the EBITDA margin, 15%, which improved a lot from the second half of last year. In terms of the fibrous business, which accounts for 19%, the revenue from sales equal to THB 12.5 billion, which improved 2% from the second half of last year and also improved 6% compared to the same period of last year, which lead to the EBITDA THB 1.9 million, which reduced 9% from the second half of last year and improved 7% from the same period of last year, which ending the EBITDA margin 16%. So fibrous business also gave a really result and really strong performance from the second half and the whole first half of this year. Next slide. In terms of the sale of revenue by the business unit, the integrated packaging business account for 75%. This has been reduced compared to last year. The reduction mainly come from the packaging paper because of the demand, especially in Indonesia has been reduced and also the price also reduced also. The next 2 portion is the recycling business account for 6% and also fibrous business account for 19%. Once again, in the past year, included first half of this year, fibrous business also contributed a lot to SCGP. In terms of the revenues from sale by end destination, Thailand account for 42% and in ASEAN has been reduced to 34%, mainly from Indonesia, as mentioned. However, in Europe and U.K., the percentage improved to 5%. This is due to the [indiscernible] and also the export to rest of the world account for 19%. Thanks for the sales team and also the collaboration between the country here. So that's why we can find new market, especially in the South Asian market that we can export more to compensate the loss of market from China. In terms of the consumer link, the figure is still 71%, almost the same as the past time here. We still keep this at a strategy to try to expand more of the customer into the consumer link segment. One thing that I want to point out here, in terms of the detailed segmentation in terms of E&E, electronic and electrical appliance, the percentage of this portion has been due to the electronic and electrical appliance in the low season, especially in the second quarter. Next slide, please. In terms of the macro update, China GDP by sector, actually, the service sector has dominated the GDP of China, which last year accounted for 52%. This year, the figure is not a launched yet. However, we see the service PMI in the second quarter of this year was 55.8%. So this also contributed to the service sector of the China GDP. So this proves that the demand of the packaging paper in China start to improve a little. So in ASEAN manufacturing PMI, this continues to grow. We can see here on the green color. However, we have to monitor in terms of the export, especially for the global demand in the Euro and in the U.S. In terms of the energy, especially the core market price, which we call -- this is the manufacturing essential. The energy cost, the future, we think is going to be reduced because of in the past year also reduced and we are confident that it's going to be reduced further. So that, lastly, update for the movement of the first half of the year and the macro update. Next, I would like Khun Danaidej to present in detail about the second quarter, please.

So let's start talking about the market condition in the various countries in the second quarter. So if you look at the year-on-year change, you can see that for almost all the countries in ASEAN, there's a year-on-year drop in terms of demand. And that's mainly coming from the same factor in which subdued global economy, where the global economy is particularly soft in this second quarter compared to the same period of last year, mainly because of the high inflation, high interest and reducing purchasing power of consumers across the globe. Anyhow, if we look in terms of the Q-on-Q change, we can see that in Thailand and in Vietnam, this has a positive demand growth Q-on-Q. In Thailand, domestic consumption has been increasing, and that's due to increased activities in the economies, also in terms of the tourist arrivals and related to the traveling and other things. So even with some grand holiday, we still observed the increase in the demand in Thailand. In Vietnam, the second quarter is better due to the first quarter, that's a long holiday, the Lunar New Year. So the demand bounced back in the second quarter. However, in Indonesia and in the Philippines, the demand Q-on-Q was still lower in the second quarter. In Indonesia, mainly it's because of the long holiday Hari Raya in the countries in which manufacturing activities and consumptions are lower, in the Philippines also mainly because of reduced consumption during the period. Now if we look into various parts or segment of our business in the downstream part, where we have fiber and polymer packaging. If you look at the F&B, food and beverage, that still continue to grow, which is in line with the domestic consumption recovery. Also, the export in some sectors already improved. That's related to the food and the basic needs such as frozen food or canned food. Fresh fruit export also increased, especially export to China. For packaging paper, the demand is recoverable in Vietnam in the second quarter, and that's related to the holiday in the first quarter. But in Indonesia, the market is still soft, both from the holiday and from the lower commodity prices, which also impact the overall economy there. But in terms of export of packaging paper products out of ASEAN, it's also improved and increasing in terms of the amount. The volume export also go to China has also increased. The big increase come from the food service packaging in which we see rising demand domestically as well as in the key markets like Europe and U.S. where we export to. And that's driven by more activities in relation to gathering and traveling in the summer months in preparation for that. So the spring and the summer are the seasons that people consume a lot of food service packaging for outdoor. So that's related to the preparation for that period. Also for the U.S., quick service restaurants also increased in demand due to the promotion and people going to the fast food more. So overall, the pictures of the demand is in this way. From that, we move to our performance in the second quarter. So if you look at all the quarter only, second quarter, we have a revenue of THB 32.2 billion, and that's a reduction in terms of year-on-year and Q-on-Q, but mainly due to the reduction in the overall volumes of the integrated packaging business. But we will look into the profitability, both in terms of EBITDA and profit, we can see that the Q-on-Q EBITDA and Q-on-Q profit has improved, and that's mainly from lower cost elements, such as raw materials or energy costs and also the fibrous business is doing very recently and doing quite well. So overall, in the second quarter, we have a core EBITDA margin of 14% and EBITDA margin of 15%, which are then improved over the margin from the first quarter. So EBITDA margin at this level is quite healthy already. So the profit for the period is THB 1.485 billion. So next, I want to get into the details in each chain of business. For the integrated packaging business, which is 75% of our revenue, the revenue is THB 24 billion in the second quarter. That's a drop of 24% year-on-year, mainly from the packaging paper price and volume. But for Q-on-Q, the drop is lower because in some part of the business, we have an increase in revenue, such as for polymer packaging Q-on-Q was increased in total revenue due to higher demand for frozen food and personal and home care, which is linked to the consumption in the region. For fiber packaging, it's also quite resilient. We have a recovery in Vietnamese sales and also export of some segment doing quite okay. For packaging paper, this is when the revenue declined Q-on-Q due to mostly on domestic operations or domestic volume, but export outside of ASEAN to China to South Asia actually increased. Overall, Q-on-Q, the packaging paper volume dropped by about 5%, whereas price dropped by about 2%. So that's the reason why the revenue has declined. But if you look at the EBITDA, the EBITDA year-on-year dropped mainly because of the price in the region. But if we look in terms of the margin Q-on-Q, it's already improving from 14% to 15%, and that's due to the reduction in the cost element, whether it's the raw materials, [ recovery ] paper, freight and energy cost. So those are the factors that contribute to the lower cost and increase in margins. On the fibrous business, which is about 19% of our revenue, the revenue for this chain is THB 6.4 billion in the quarter and an increase both in terms of year-on-year and Q-on-Q. For year-on-year, the main increase driver would be from paper price as well as the expansion of the food service packaging. For Q-on-Q, foodservice packaging also played a key role in the increase as well because of the rising demand in terms of this product in the U.S. and Europe, as well as the pickup in the QSR, as I mentioned earlier. Paper volumes also increased Q-on-Q, and that's supported by the school term getting started. For pulp, however, revenue declined mainly because of the price of the short fiber pulp. But anyhow, we are shifting more of our operation and our product mix to dissolving pulp, which is having a stronger demand. But if you look at the EBITDA, also we have a Q-on-Q decline mainly from the pulp price. But if you look at Q-on-Q change, it's a healthy increase. So EBITDA is THB 1.1 billion and margin is 17%, and this is due to the expansion of margin for foodservice when the freight cost has already reduced, so the margin per unit also increased. So we have quite an improvement in terms of the margin of foodservice as well as the production cost for the paper -- writing paper was also reduced, so that's expanded margin for that operation. So that's the picture for the second quarter. Next, we look at our half -- the first half comparison if we exclude M&P. So we can see the same trend in the sense that the revenue declined year-on-year and half-on-half. And that's mainly because of the same reason in which the packaging paper price and volume were down. If you look at the EBITDA, it's also a decline year-on-year. But in terms of half-on-half, it's quite square. So if you look at the existing operation, the margin in the second quarter would be about 14%. Now M&P margin, which you can calculate from this, if you take out recycling business, which is a significant part of the M&P revenue here, but the recycling business generally generate about 2% to 3% EBITDA margin. If you exclude that part, the margin in the second quarter would be about 16% for the M&P operations, which is an increase from 13% in the second half of last year. And this is a half-on-half comparison. Next will be on profit. Core profit and net profit figures for Q2 similar because there's only a small adjustment of THB 46 million, mainly come from foreign exchange. Other things are quite minimal. So our net profit is THB 1,485 million. In terms of our balance sheet, our net debt at the end of the quarter is about THB 35 billion, which is slightly lower than in the end of 2022. Net debt-to-EBITDA was 1.9x, and debt-to-equity ratio is 0.9. This is an increase from the end of last year, and I will explain a little bit on that in the next slide. For the cash under management, we have about THB 13 billion and the cost of debt is about 4.1% year-to-date. That's an increase from the last year, mainly because of the increase in interest rate in the period for the overseas short-term loan. Also today, the Board of Directors has approved the interim dividend of THB 0.25 per share, amounting to THB 1 billion in terms of payment. For CapEx, the first half is about THB 3.2 billion that we have spent mainly on the maintenance and ESG and others. Our plan for CapEx for this year is still a target at THB 18 billion. About half of it, about THB 9 billion will be from M&P, Starprint would be one of them. And also we have some potential M&P that may materialize in this fourth quarter. So that's together -- that's why we still keep the budget of THB 9 billion. The other part will be coming from the regular maintenance, ESG and others, approximately THB 5 billion a year. Next will be on the potential CapEx in investment in Fajar. So there's a potential CapEx for next year amounting to about THB 20 billion, and this is associated with the acquisition of additional shares of 44.48% from the current partner. And if this materializes, it will be in the middle of last year, as you can see, we -- sorry, in the middle of next year. So if you can see, we entered into Fajar with a 55% shares in 2019. And in the next year, if this investment occurs, we will get another 44.5%, and that will bring our shares to about 99%. This is part of the put/call option that is part of the original transaction package. So with this in the second quarter of this year, we record this transaction in the balance sheet. And because of this -- and also, we still have other growth CapEx in our pipeline and we still have quite a gearing ratio of [ quite low with this 4.9 ]. And so we have room to take on planned investment in other M&NPs or other organic expansion still on intact. So that's the update for the financials and the performance of the second quarter. Next will be for a business update from Khun Wichan.

Thank you for the explanation Khun Danaidej. For the business update, I want to add from Khun Danaidej that the strategic direction of Fajar [indiscernible]. Fajar continues to be one of the key assets for SCGP for the future growth. This is really important. And we're also seeing the potential new strategy who could add value to Fajar, while the main team of the top management is still working with us. For the operational expense during the short term in this year and 2024 beginning of next year, we see that the optimization of sales allocation and the production optimization, along with the cost savings, will be the key for the success of the landing Fajar. And also, we want to ramp up utilization of Surabaya plant and also seeking for the new growth market, especially for the South Asia. And in addition to that, the continuous improvement and continuous optimization of the energy consumption to secure the cost reduction for Fajar, that will be the short term. And for the longer term into next year 2024 onward, we plan that we will increase the chain integration and improve the captive demand with the box M&P. And we also will continually develop a new product to improve the profit margin and also expand food and beverage and FMCG link of more consumer link in the Indonesia market. Next information. Next slide, please. Look at Indonesia for a big picture, we see the government sector projection in the year 2050 is quite long from now, more than 20 years, but we see that the GDP of the world will be moved to Asia. And the top 4 the world will be start from the China followed by U.S., followed by India and followed by Indonesia, that's why Thailand, Vietnam and Indonesia will be the key strategy and key playing field of SCGP. In addition to that, for the last growing population of Indonesia help a lot in terms of the consumption in the future. Look at a bit in terms of the demand and the growth by the industry. We see here in Indonesia, the food and beverage account for 59% and consumer account for 19%. These two consumer and food and beverage combined is roughly almost 80% of the consumption in Indonesia. So this is the good side and the good thing that we're quite confident for Indonesia in the future. In terms of the market lead position here, we see that we increased the indication level. As of now, we have the market share of the box roughly 8%. And in the future, we plan to improve to 20% of the downstream and box plan. In terms of the packaging solution, we also want to increase the packaging solution from our R&D, especially the clean carton in Indonesia. And also, we also want to M&P for the display packaging that increase the portfolio of the downstream, and we can improve the cross-selling among those products. And last but not least, and really important that the operational excellence and automation, we have to improve the performance of the Indonesia operation here. And also, this will lead to our future expansion and more expansion in Indonesia in the future. Next slide, please. For the innovation update, last week on the July 20, I was in Canada, I visited the Origin, and this is the update. So right now, we success for the first phase woodchip lab trial. And also, we finished the second phase with the condition optimization, meaning we know the condition how to land the bio PET plan by that condition. For the next phase, we will go to, we call, the pilot scale or pilot plan or pilot test. After this T phase and the third phase, we hopefully will finish by end of this year. After we get our information here, by the first quarter of next year, we will conclude the investment and also with the seeking and discussion with the partner that is broadcast from SCGP site. But for Origin side, they call Origin 1 with the first demonstration plan of the bio-PTA pan in the world has been commissioning. I visit that last week and see -- saw that by myself and very proud of this disruption technology. After this demonstration plan finished now under commissioning, if after finished, they will invest another investment, 1 million tonne of the wood material in the U.S.A., so that they call Origin 2. This is a thing that we have been discussed with the Origin. Not only for that in the first half of this year, we start to develop because the biodegradable wooden foodservice packaging. Mostly, we see the wooden packaging, especially the ice cream pack [indiscernible] that made for the wood from Europe, the name is [indiscernible]. So now we develop those foodservice packaging, fork, spoon, knife, even bowl and from tray from the eucalyptus wood. So these are under the research and development, and we see a good forecast of this one. And in addition to that, we also invest in research on the new species of the wood that to produce the food -- wooden foodservice packaging. So this is a new innovation and the first time we use the eucalyptus as the wooden foodservice packaging. Next slide. So in terms of the developing the well-being solution product in the brand of Holis. As you know, that we start from the IM-MU Cap, which produced from [Foreign Language]. We also wish the B-Cap, [indiscernible] from the mushroom -- bamboo mushroom and also CHO-LESS Cap, which produced from the Jiaogulan. So this is a series of the product that involve the well-being. In the second quarter of this year, we launched the new product we call Probiotic, actually, we call Probio Active Plus, this to help the digestion system in the stomach and really well accepted. And we're very proud of this because of Watson -- we discussed with Watson and Watson asked us to be the sole exclusive distributor for this product. In terms of ALMIND, which we use from the nano cellulose from eucalyptus, it's really soft and gentle, especially for the baby and the ladies due to the demand of the alcohol and gel has been decreased due to the COVID-19 subside. We launched a new product we call the Ultramild Foaming. This is the foam that -- to clean your hand and we put the capsule -- small capsule inside with the blue color. When you wash your hand, passed by 30 second, the blue color [ shape ] of the foam will convert to the white color, meaning this is very clean, especially this one for the children and those young who don't know to wash your hand 20 seconds or 30 seconds, things like that. So this is the innovation, this is about the well-being product. In terms of the outlook, we see that the outlook in terms of the internal effort. We see that the cost savings still continue, even the selling price has been reduced in the second half -- in the second quarter and also the volume reduced a bit. But due to the cost reduction effort, a lot -- so that's why we make the profit better than expectation. In terms of innovation, we continue to improve the innovation, especially for the sustainable packaging and the wellbeing solution. In terms of the growth, now we have the M&P Starprint in the third or fourth quarter of this year. And this [indiscernible] due to the interest rate is high. So the working capital management is still the key important. So these 3 key points will be the internal that we can manage by ourselves. For the external factor, at least, we see the positive momentum of the packaging demand in this region and also in China, just a little bit, yes. In terms of the domestic consumption, we see the food and beverage, as Khun Danaidej mentioned, frozen food, all those has been improved. However, for the export outside the ASEAN to especially EU, we have to watch that, we have to monitor that. And last but not least, there are cost improvement, we see that the energy cost, the freight cost still continue to reduce. But for the recycle paper price, we see somewhat maybe a sideway may be stable in the third quarter. That all -- in summary, we can see that upcoming M&P, the Starprint project in Vietnam. Hopefully, it can be finished end of this third quarter or beginning of the fourth quarter of this year. And also with the research and development capability, we still focus on renewable material innovation. And also last but not least, we commit on the ESG. Right now, our greenhouse gas reduction, we target that in the 2030, the greenhouse gas reduction should be 20% from the base year 2020. When the time passed for 3 years as of 2023 now, we have been done quite very well, and we wish that we can achieve the target before 2030. As of now, our renewable energy usage [ has reached ] 35%. So that's all the first half of the year and the second quarter of this year performance.