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

Good afternoon, ladies and gentlemen. We are very happy to welcome all you again to SCGP Analyst Conference. Today, we will cover the performance of the fourth quarter, along with the full year performance of 2023. My name is Vikorn from the IR team, and I'll be your host this afternoon. And as usual, we will start with the presentation from SCGP management, followed by live Q&A questions. So without further delay, may I introduce and also hand over the floor to the 2 gentlemen, SCGP CEO Khun Wichan Jitpukdee; and SCGP CFO Khun Danaidej Ketsuwan. Thank you.

Good afternoon, [Foreign Language]. Happy New Year 2024. Time flies so fast, we meet again on the analyst conference for the SCGP for the fourth quarter of 2023 and the whole year of 2023. Without further delay, I will start with the revenues on the 2023, we ended the year 2023 with the sale revenue THB 129.4 billion, which down 11% from the previous year. For the EBITDA, we ended last year with the THB 17.8 billion, which down 8% from last year. And the good news is that the EBITDA margin improved from 13% to 14%. This is mainly from the efforts of the cost reduction, both from the energy cost reduction and also the raw material costs, especially for the recycle paper. This helped a lot to improve EBITDA margin. For the net profit of last year, we ended with THB 5.2 billion, we still maintained the profit margin at 4% and up 10% from the prior year. Ended with the core profit about THB 5.1 billion. In the past year, both downstream packaging, both on the polymer and the fiber packaging has been gone off a lot in especially in the third quarter and fourth quarter. In the fourth quarter, the containerboard import in China has been increased also. So this is a significant improve in the volume of the packaging paper that export to China. Next slide. In terms of the business segmentation here, the integrated packaging business revenues THB 97 billion, which reduced 17% from the prior year. The EBITDA was THB 14.4 billion, which reduced 2% from the prior year. This is, again, mainly from the cost reduction from the energy cost and the raw material cost in the integrated packaging business chain. In terms of the fibrous business here, the sales revenue THB 24.9 billion, which improved 40%. However, the EBITDA down to THB 3.8 billion, which down 5% from the prior year. And that with the 15% EBITDA margin same figure as both in the integrated packaging business and the fibrous business at the same figure at 15%. So for the review back to year [ 2023 ] here last year, we have 3 main highlights to share with you. First thing about the cost reduction, as mentioned, the cost reduction, especially from the energy account for THB 850 million. And for the raw material costs, especially for the recycle paper is THB 250 million. This combined end up with the THB 1.1 billion. This is the big efforts of the SCGP team. So on behalf of the management, I thank them for this effort. This helped a lot up to lessen the impact from the weak demand and also the selling price competition, especially in Indonesia. In terms of the growth of the business, last year, we ended with a 3 deal, even it's not a big deal. It's more due for 3 deal here. But it's clear, better future is clear, more future and big future, especially for the medical supply and labware segment that we want to focus more in the future. In terms of the solutions and the services, we ended with packaging solution from 31% to 35%. This is to clear we call the customer stickiness and customers are convenient to buy over the packaging format because we have both in terms of the paper packaging, fiber packaging and also polymer, even we call the high-performance packaging. However, we have highlight, we also have [ low light ]. As we know that the year-on-year have weak demand of the packaging paper, especially from the China. So that result led to, our operating land has been reduced, mostly, we have land more than 90%, but last year, in the range of 80% to 85%. So this is the operating efficiency that we must wish the demand. In terms of the selling price, especially in Indonesia and Fajar due to the Indonesia paper mill most of them are export to China also when the demand from China has been down, so the local and price competition in the country is very high. So the price decreased 28%. However, the bottom was in the October, in November, December and January, the price gradually increased for the packaging paper in Indonesia. For the EBITDA from the pulp operation, last year, EBITDA from the prior year because of the prior year in 2022, the pulp price has been the record high. So last year led to the EBITDA from the pulp operation has been reduced. In terms of the business portfolio, the figure in terms of the segmentation and revenue by the business still mostly most of the same, integrated packaging bust account for 75%, fibrous business account for 19% and the recycling business account for 6%. In terms of revenue by destination, Thailand still maintain at 41%. ASEAN exclude Thailand at 35%, Europe 5% and the rest of the world, mainly export at 19%. This 19% mean loss to [indiscernible]. You see here 19% we export to China 7%, in the past, almost half-half. But this year, due to the demand in China has been dropped, we tried to find the new market and able to compensate lessen the impact from the Chinese market. In terms of the consumer-linked, they still maintained at 72% this year a lot, especially during the demand [ softening crisis ]because of the consumer product, they still consume from the consumer. Industrial packaging still on the figure at 28%. In terms of the market movement in the fourth quarter of last year, we can see that actually, the ASEAN demand was driven by the domestic consumption with the gradual export recovery. You can see here on the right-hand side, the top one, Thailand and Vietnam, the export Q-on-Q in the fourth quarter has been improved. And also in ASEAN and China, PMI also maintained, in China, very flat. But in ASEAN, reduced a bit. In terms of the import containerboard paper to China, we can see here start from the beginning of last year to December of last year. The volume has been gradually improved in terms of the imported containerboard volume to China. Last but not least, for the market movements that we see in the past month we see that this view upward trend in the RCP price. This is mainly due to the demand, a pickup of the volume of supply of the containerboard paper. So this show that the RCP price start to increase, and also, we see that the geopolitical instability, especially in the Red Sea that led to really volatility of the freight cost that passed to the Red Sea. We have a product from Vietnam that have to pass through Red Sea, but that has a more portion recent export for the foodservice packaging. So that lastly, for the total year of 2023, the whole year and the market movement. Next may I ask Khun Danaidej to present in the detail of the fourth quarter.

Yes. So now we focus on the fourth quarter, starting from the movement in terms of demand of the key countries. So if you look at here for our key economies, key markets that we operate, you see as a mix. In Thailand, it's a Q-on-Q basis, it was slightly weaker in the fourth quarter compared to the third quarter. In fact, the momentum of the demand was quite strong in October and November, but start to taper off in December, a bit more than we anticipated, meaning that the customers stopped to taking new deliveries sooner and also on the retail side, consumers defer spending to the year after that. So in December, it was weaker, resulting in a weaker demand Q-on-Q. In Vietnam, we have an improvement in terms of Q-on-Q, and that's because of the upcoming Lunar New Year or Tet holiday in Vietnam, which is a very big festival. So manufacturing activity was increasing for the period of the fourth quarter to fill up the demand for that event. In Indonesia, the third quarter was particularly softer than usual. So in the fourth quarter, the momentum that was picked up from the end of the third quarter continued. So it contributed a positive in the fourth quarter. In the Philippines, it was rather stable because of the long holiday, the Christmas season, we start late in December in last week there. But if you look at the year-on-year pictures in most of the economies are doing better, the demand is improved in Thailand, in Vietnam and Indonesia compared to 2022, which was at the low base due to the strict Chinese lockdown at the time. Now when you look at each of our segments on each of our operations for the downstream, fiber and polymer packaging, which are closer to the consumers, we can see similar pictures from the previous quarters in that consumer staples, things such as food and beverage, our FMCG products, consumer products are still going quite strong on the domestic consumption, and that's in line with the increase in the tourism and business in the spending of the festivity toward the year-end. Also, the export of some sectors are doing well, such as frozen food and pet food. But consumer discretionary items like garment and footwear or home electronics, those are still not very growing very fast. It has picked up somewhat in the earlier part of the quarter, but then slowed down in the later part of the quarter. For packaging paper, the seasonality, meaning that towards the end of December, people stopped taking deliveries. And so it was particularly weaker in December, especially in Thailand and the Philippines. But the good story is in China, the import volume of packaging paper that we can sell on the export side to China still continued to be strong in the fourth quarter on a month-on-month basis as well. And the price in that market increased a little bit in that period. For foodservice packaging, in general, it was an improvement because that's in line with the year-end travel and the demand as people do tourist increase, consumption at the QSR or the fast food chains generally increased. So that contributed positively to the food packaging business, with the exception of Malaysia, in which some of the fast food brand had some decline in the consumption due to the geopolitical conflict in the Middle East that some brands are not selling very well and consumers shy away from those. For packaging material recycling, we have an operation in Europe. The demand in Europe is still weak, consistent with the consumer spending over there, but it was compensated by the higher demand for the ASEAN and Indian paper mill who are restocking. So next we'll move on to the potential performance for the quarter, starting from the revenue, which we locked in at close to THB 32 [ billion ]. That's a drop of 5% year-on-year, but an increase of 1% Q-on-Q. For both Q-on-Q and year-on-year, volume actually increased, but the factor that contributed to the drop year-on-year and a slight increase Q-on-Q was more on price factor, which declined. In terms of EBITDA, both Q-on-Q and year-on-year show an increase for Q-on-Q and this increase of 4% was mainly from the fibrous business because for the IPB integrated packaging business, EBITDA was declining. But for the year-on-year, EBITDA showed a positive increase on both IPB and fibrous. So that leads to our overall EBITDA margin improvement from 13% to 14%. In terms of net profit year-on-year also increased following the same trend as the EBITDA, which was increased. But in terms of Q-on-Q profit it was a decline by 8%, and that's due to increase in all of the components after EBITDA, such as depreciation, also increased. Tax components also increased, also interest costs also increased. So that leads to our net profit of THB 1.2 billion. So now we go into the picture of each chain, starting from the integrated packaging business, the revenue for IPB is close to THB 24 billion for the quarter, and that's minus 5% year-on-year. The drop is mainly due to the price factor of packaging paper mostly. For Q-on-Q, it was a slight increase of 2%. And this is coming from the increase in revenue of our segment. Polymer packaging also increased, fiber packaging increased, packaging paper revenue also increased. For polymer packaging, the increase was roughly about 3% Q-on-Q, and that's come from the stronger sales in the premium segment such as processed food, personal care, pet foods as well as medical supply and labware. For fiber packaging, the increase in EBITDA in revenue was about 1% Q-on-Q, mainly from the strong sales in Vietnam and also the Indonesian which has the election-related spending. For packaging paper, an increase of about 2% Q-on-Q, but the volume increased 5%. That's both from domestic and export, but the price dropped about 4%, and that's mainly a product mix. So if you talk about the Indonesian price, it actually improved within the quarter. If you look at a quarter-on-quarter basis, the price seems to be flat. But in fact, if we talk about the end of the fourth quarter in December compared to the beginning of the quarter, which is at the low point, price has improved by about 6% and continued to improve into Q1. Volume in Indonesia also improved quite significantly in Q4. So our operation in Indonesia has a 20% volume increase Q-on-Q. Moving to EBITDA. EBITDA is close to THB 3.5 billion, and that's an increase year-on-year of 32%, mainly from the volume of packaging paper and also because of the cost was down for this year compared to the same period of last year. For Q-on-Q, EBITDA is slightly down. But if we talk about in the box and the polymer, EBITDA was actually improving quite well on those 2 business. For example, in the box business, EBITDA improved about 20%, for the polymers about 10%. But for packaging paper, although the revenue increased, EBITDA for the quarter dropped and that's contributed to the higher RCP costs in the fourth quarter compared to the third quarter. Next will be fibrous business. Revenue is about THB 6.1 billion, and that's a drop of the 2% year-on-year. We have an increase in the volume for the business chain, but the price is down, especially for pulp. For Q-on-Q, foodservice and paper revenue was down, while the pulp increased. For foodservice packaging, the reason for that is from volume, especially on the foodservice part in which it's seasonality. In the winter, people consume less because of the fewer outdoor activities, fewer parties and all the foodservice packaging are normally used on those occasions in the area where [indiscernible] have the customers, so that contributed to the drop in volume and leads to the drop in the revenue of foodservice. For paper, revenue was down by about 3%, and that's due to the decrease in price factor. For pulp is up, okay? Pulp revenue was up. The volume was also up and also the global price in this period also went up. Moving on to EBITDA. We achieved EBITDA of about THB 1 billion. That's a 13% increase year-on-year, both due to higher sales volume as well as lower operating costs and same pictures as Q-on-Q, we have improvement in EBITDA mainly due to improved cost position, especially in the pulp operation. So that's for the financials of the quarter. Going now to see the financials back to the picture of the full year. We have our sales revenue of THB 129 billion. But without M&P, the drop will be higher. So M&P contributed close to THB 20 billion in terms of revenue for 2023. So that's improved from the year earlier. If you look at EBITDA, also our M&P contributed roughly about $2 billion, similar to the year before. And if we talk about the contribution or EBITDA margin from M&P, if we exclude the recycling business, which generally have a lower EBITDA margin due to the nature of the trading and sorting, we will have the M&P EBITDA margin of roughly about 17% compared to the overall existing business of 14%. For this quarter, we have very minimal adjustment in terms of core profit and net profit. So the figures on the 2 practically almost the same, a minimum adjustment. Next will be in terms of our financial position. So our net debt now stands at close to THB 32 billion. That's a decline from a year earlier. We have now cash on hand, about THB 17 billion at SCGP and also at our subsidiaries. In total, we have interest-bearing debt close to THB 50 billion, and the average cost of debt is about 4.1% for the year, the higher interest rate, mainly from overseas subsidiaries. And that leads to our net debt-to-EBITDA of 1.8x, debt-to-equity ratio of 0.9x. Also, we have announced the dividend for last year at THB 0.55 per share, and that's equivalent to a 45% payout to be paid in April. On the CapEx side, our CapEx for the year come in short of THB 1 billion. As you can see, the part that is lower than the year before, would be on the growth CapEx, which is about THB 3.5 billion in the last year. Our M&P came in a bit late. It came in the fourth quarter. We have 3 transactions concluded in the fourth quarter, but 2 of them, the size was not that big. So in total, together, we spent roughly about THB 1.6 billion on the 3 M&Ps and the rest of the THB 3.5 billion will be from organic expansion. We also have about THB 3.2 billion in terms of CapEx for the maintenance, ESG and innovation. These are projects like solar power automated plant as well as recycled plastic pellet, for example. So this leads to the update in terms of our project progress. On the M&P front, we have concluded 3 transaction. One is in polymer packaging in the U.K. And this is more or less to gain channels and customers for our flexible packaging business. The investment size is THB 475 million for 100% share. This will contribute revenue per year of about THB 500 million. Another one is Bicappa Lab, which is focused on the pipette tips. This is medical supply labware in Italy, which will complement Deltalab in Spain in terms of the portfolio of offerings. The investment size is quite small, THB 125 million. We acquired 85% stake and the revenue contribution would be about THB 100 million a year. The bigger one will be Starprint in Vietnam, in which the deal was completed in December with investment size of close to THB 1 billion for a 70% stake. The company will introduce new solutions to Vietnam, for example, folding carton as well as rigid box. Revenue for the company is approximately THB 1.5 billion per year. So the 3 M&Ps altogether will contribute about THB 2 billion per year of revenue to SCGP in this year. For organic expansion, we have completed our expansion of the Peute in The Netherlands that we moved the location of the sorting facility to be close to the Rotterdam port. They will help a lot in terms of logistic costs and also double the sorting capability from 1 million tons a year to 2 million tons a year of paper and from 100,000 tonnes a year of plastic to 200,000 tons, and that's already completed and run at the new plant since November. We also have one ongoing expansion in Thailand for the fiber packaging. And when it's completed in this quarter, it will add about 10% of capacity to the Thai operation. The next one will be an update on our North Vietnam packaging paper plant that we announced earlier with the budget of close to THB 12 billion for the capacity of 370,000 tons. And we talked earlier about the delay of this project. So right now, the EIA was already completed and granted by the Vietnam government. Land preparation, as you can see from the pictures, are almost complete, meaning that the land is almost ready for use. However, we have not engaged any further procurement in terms of engineering design and suppliers for the equipment because we want to wait and see the situation in the region in terms of supply and demand, and we'll make a decision in terms of this project again in later part of this year toward the end of the year. Next will be in terms of our future growth. You can see on, in terms of our CapEx, we anticipate the spending on the CapEx investment in 2024, this year of about THB 15 billion, and that excluded the part for the potential acquisition of Fajar share. And this will be for growth CapEx, both M&P and also organic expansion as well as the maintenance and ESG and innovation of those things. So this is our forecast for next year. If we take together with Fajar acquisition, it will be still below THB 40 billion. And this is to achieve our growth target for 2024 with a revenue target of THB 150 billion, which is a growth of about 15% compared to the 2023. And the criteria for our investment would be to expand our customer coverage. This is the most important one, like you see in our Law Print acquisition. Also, we would like to enhance our products and service offerings, and entering into the new attractive markets, this is, for example, when we enter into Starprint in Vietnam, we also look to acquire new technologies and skill, for example, for the Bicappa in Italy, this is for this reason and also to increase our revenue and cost saving. This is, for example, our expansion of Peute in The Netherlands fits with this criteria. So we look into this criteria when we do our investment and our expansion going forward. So these are the updates on the business. Wichan will be talking about our new innovative products.

Thank you, Khun Danaidej. Very well explanation and the presentation. Thank you very much. I'll now move on to the innovation from the renewable eucalyptus wood to make the Bio-PET. Last year 2023, the proof of concept has been done. Technology verification has been done, and the pilot testing had been done also, and we are reviewing the report. So we spent roughly USD 2 million for this test. So this year, we do a market study and also our partnership verification because of this is quite a big project. So we have to find a good partner. So this year, we focus on the partner verification. One more thing here. [indiscernible] cycle of the chemical that lead to the PET pet, the price has been reduced. So now Origin and the team also explored to the new journey to compare with the Bio-PET that from the eucalyptus wood, we make the CMF, from CMF, we make the FDCA and combine with the Bio-MEG, become the PEF, which the molecular and molecule of the PF are quite comparable to the PET. However, the PEF has more really high value at property, meaning PEF much better than the PET. So this will help to make the PET or PEF from eucalyptus wood more competitive, let's say, for the future. Anyway, this year, we will focus on the partner verification and the market study. In terms of the climate change, so we go to next slide. In terms of the climate change, we target that by the year of 2030, we will reduce greenhouse gas by 25% from the base year, which is 2020. Now passed a year, meaning 2.5% of greenhouse gas reduction per year. With 3 year passed, so we set target at 7.5%. Congratulation to the team that for this year, we can reduce to 19.5%. But however, this I think 0.5% come from the 2 main factors. The first main factor is the effort of the team, especially in Thailand here. The usage of the alternative fuel, especially for the biomass has been increased from 31% to 36%. This helped to reduce amount of the coal usage in the process. So another portion is that, as I mentioned at the very beginning that the land led and utilization led is about 80% to 85%. But normally, we land at more than 90%. So this helped to generally greenhouse gas lesser. So these 2 factors that lead to estimate for this year about 19% or 1 million ton reduction of the CO2 of greenhouse gas. So this is just as mentioned because we have to verify for the third-party verification, hopefully, in the end of the first quarter, we finish all the verification. But when we see the figure, it should not division from this much. In addition to the greenhouse gas emission reduction here, in the past year, we also achieved EAC recognition start from the S&P Global. As we know that we did IPO in the 2020, on the first year 2021, we did volunteer to apply to the S&P Global. When the first year passed, I mean, 2021 passed, the second year, it's been 2022, the S&P Global invite SCGP to be a member in terms of the emerging market, and the first year in 2022, we got 86 score and top 1% in the packaging business. Last year, 2023, we also kept the 85, which reduced score 1 point from 86 to 85, but we still maintain at our top 1%, meaning we are the leading in the global ESG score in terms of the container and the packaging sector in year 2023. For the SET ESG rating Thailand, of course, last year, we got the 2 award, best sustainability, which a 2-year 2 consecutive years. And also we received Innovation Award and also 2 consecutive year in terms of innovation. Obviously, SET [indiscernible] plays importance of the research, development and innovation. This is result of our research and development. So last but not least, we also kept the letting AAA from the SET last year. Next is the outlook in 2024. We're still growing, and we still do the programmatic M&P, which we focus in ASEAN and new growth frontier. Of course, we have to do M&P mainly in ASEAN except for the technology of India that we are of the ASEAN. And also, we start to have the new frontier, especially for the medical and related labware for services and also by all solution. We also improved the service level which can build and create a customer stickiness. In terms of the cost reduction, energy costs and the RCP cost sourcing, inventory management still the key to achieve the cost reduction for this year. In terms of the external factor, we see the demand from ASEAN start to pick up, especially from Indonesia that we saw it. And along with the export also like recovery as mentioned at the very beginning that the Thai and Vietnam export seem to be starting to improve. In terms of inflation, the inflation in the U.S. and Europe start to reduce in the U.S. down to a bit below 2%, in Europe, inflation roughly about 2%. So this help to slow down, start to increase the interest rate and this will increase the purchasing power. And also in the end of November and starting for the January this year, we see the RCP price seem to be upward trend due to the demand pickup. So the demand for the RCP also pick up. However, the energy cost, we see that the side way is still stable or plus or minus. And last but not least, also for the important Red Sea country and sort geopolitical conflict that make the freight cost volatility, let's say, in a few weeks. So look at the 2024, we still focus in the 5 pillar start from the performance enhancement. The big issue for us is the Indonesia operation, especially for Fajar. We have to do turnaround and the turnaround has been implemented since the fourth quarter last year. The price bottomed in October last year and start to increase. And even in Indonesia, the operating cost, variable cost, is among the lowest in our 4-country operation. However, the price, the challenge that we have to improve, and we see a good trend here in Indonesia. In the free print also, we have to improve the performance enhancement also. In terms of the operation of excellence the cost reduction and the RCP cost management and new improvement has to be continued. [indiscernible], as mentioned in ASEAN and also got to new higher-margin. Packaging solution innovation and customer experience will be the key to keep and maintain the customer. ESG and people also one of the keys that make SCGP stand still today. Last but not least, for the key takeaway, this year, as Khun Danaidej mentioned, heading toward THB 150 billion for this year. And also, last year, [ 2022 ], we had achieved a cost reduction of THB 1.1 billion. And this year, we also a target that we can reduce the cost reduction again THB 1 billion. This helped to lessen and upside of the performance of the SCGP for this year. In terms of ESG, we still continue to achieve the greenhouse gas as our commitment and as our target. We wish that we can achieve this target earlier than the plan. That's all for the update of the SCGP on the fourth quarter of year 2023 and the whole year of 2023. So we would like to thank all participants for joining today virtual event,And we wish you all prosperous year ahead and look forward to seeing you again in the next quarter. Thank you, and [Foreign Language].