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

Good afternoon, ladies and gentlemen. We are delighted to welcome all of you again to SCGP analyst conference. Today, we will cover the performance of the first quarter of 2024. My name is Vikorn from the IR team, and I'll be your host this afternoon. As usual, we will start with the presentation by our management, and we will have the Q&A session right after. So without further delay, may I introduce and hand over the floor to SCGP CEO, Wichan Jitpukdee; and SCGP CFO, Mr. Danaidej Ketsuwan. Thank you.

Good afternoon, and [Foreign Language]. Once again, time flies so far now. We are reaching the last week -- I mean, next week, last week of APO, meaning we almost finished 4 months of this year, which has the 12 months, meaning 33% has passed. So that's why I was saying that time so fast. However, for the first quarter, performance of SCGP a bit improved from the last quarter. Start with the revenue from sales here, THB 33.9 billion, which improved 1% year-on-year and improved by 6% Q-on-Q. This is mainly improved in the sales volume, especially in the integrated packaging chain and also fibrous business. For the EBITDA, this time on the first quarter, released THB 5.1 billion, which improved 15% year-on-year and also 17% Q-on-Q, which lead to the EBITDA margin up to 15%. This would be a bit higher than the industry average. For the net profit, this time of THB 1.7 billion, which improved 41% year-on-year and 42% Q-on-Q, which lead to the profit margin of 5%. If you look at this week, the sales revenue improve only about 1% to 6% year-on-year and Q-on-Q here, while the profit improved almost 40%. This is mainly the profitability from the -- we call the [indiscernible] paper management. We diversified the port and tried to manage the cost of raw material. In addition to that, with the artificial intelligence, we can reduce energy costs. On top of that, you see here the revenue increase mainly from the volume increase from last year. When we land at the volume, the machine learning more than 90%, that lead to the variable cost was reduced. So with that 3 main factors, lead to the net profit improved much more than the sales revenues. However, if you look at the country in each country, with the 3 country that are main, our business country, Thailand, Vietnam and Indonesia. Finally speaking, that Thailand and Vietnam, the overall improvement is better than expected. However, Indonesia, a bit weaker in the last 2 weeks of March due to the early Ramadan and Hari Raya. So that will be the financial result [ lap year ] on the first quarter. Look back into the business portfolio. In terms of the revenue from the sale by business unit, not much in -- the integrated packaging business still 75%, while fibrous business at 19%. Recycling business still 6%. So the figure has not much changed much. However, the most important in the middle of circle clock here, revenue by sales by end-destination. You see here Thailand improved from 42% to 43%, while Indonesia is still maintained at 15%. The most interesting is that in Vietnam, Vietnam used to be 13% and now improved to 15%. It's time [indiscernible] decision point that in the past quarter, actually start from fourth quarter last year, that in Vietnam, we have one location, we have 2 [indiscernible] in one location, and now we list the time that these 2 machines are utilized at full capacity. So now we are constantly studying a lot. As you know, that in the North Vietnam, we have paper machine #3, which we still are pending. And in December this year, we will make the decision. However, with this full capacity come to the point early, so we are considering other alternatives also to be maintained to keep our leading position in Vietnam, while the export still at 17%, 18% same as last week. However, the export to China reduced from 7% to 6%, which is not that much we export to China. In terms of the portfolio now, the consumer-link improved to 74%. I think this helped to a stable SCGP performance, a little increased by little by little from 70%, 71%, 72%, 73%, and this quarter, we leased 74%. Look at the movement in terms of the market situation into macro economy. You see that the manufacturing activity has been improved in all the major economies earlier. You can see here on the right-hand side, I mean, the manufacturing PMI. You see CN improve, China improve, and U.S. also improved a lot. This helped to improve the demand of the packaging. In terms of the recovery of the global trade, this is quite evident, that's on the [ cap ] right-hand side, you see here. The export value, especially Thai and Vietnam, has been improved end of this year, quite a bit stable. China, India also improved. This has helped to uplift the packaging demand existing now and going forward into the second quarter and third quarter. In terms of the ASEAN demand growth, we believe that is going to be continued, and this help the domestic consumption to be improved, and help too recovery in terms of the business segmentation. So that's lastly and overall on the performance in the first quarter of this year. Next, may I introduce Khun Danaidej to explain the detail in each market. Please come.

Yes. So we look at the demand movement. From this chart, you can see that most of the arrows are pointing up and in green. So we would say that this first quarter is a very good quarter in terms of the overall demand across the region, with the exception of Vietnam for the Q-on-Q because of the Luna New Year holiday there that softened the demand. So I'd say the demand figures, if we look at the Q-on-Q for the growing economy, it's ranged between 5% to 10% in terms of growth, and 6% to 9% in terms of the year-on-year growth. And the demand improvement has come from most of the segments. If you can look at here, the plus signs is covering all of the major segments that we have. Looking at consumer staples, the rise, of course, in F&B and consumer products, that's always been the highlight in many quarters and still continue to grow in this first quarter, and partly from the preparation for the Songkran in Thailand and the Hari Raya holiday. So the demand for the manufacturers to produce more goods here in first quarter is quite evident. In terms of the export, we have improved demand for also similarly in terms of the food products such as frozen food, canned food and fruits, for example. For consumer discretionary, the recovery is quite evident also in this quarter compared to the previous quarters. E&E has been up, especially in refrigeration and cooling segment like air conditioning, which coincide with the hot season in Southeast Asia. And also we see the pickup of export in terms of apparel and footwears, especially out of Vietnam. With that, we back into the upstream of packaging paper, which increased in terms of domestic demand in the same trend. So the demand growth in domestic demand in ASEAN has been quite evident as well as the export to particular countries like South Asia. But because of the Chinese New Year, the slowdown in export to China market in the first quarter. For foodservice packaging in Asia like Japan and the U.S., we have seen some growth due to the rebound of economic activity, the traveling. But because of the high freight rate coming from -- in the Middle East issues, we have seen reduced export flow of products of foodservice packaging from Asia to Europe. So that hampers a little bit on the supply and demand situation. For pulp has been very good all across the region, and that's because of the recovery in the textile, especially in dissolving pulp market. So from this page, you can see that the overall, this is a bright quarter in terms of the demand growth in the region. So now back to our performance in the first quarter by segment. We talked first by the integrated packaging business, revenue number is about THB 25.5 billion. This is relatively flat year-on-year. Although the volume was up by about 6% in this chain, the price has been down also year-on-year by similar. So that's why revenue is flat. But if you look at the Q-on-Q growth in each particular business unit, we see that for the polymer packaging, the Q-on-Q was slightly down, and that's because of the impact of the public holiday in Vietnam, because most of the revenue for this polymer packaging is generated out of Vietnam, for example, from Duy Tan and Batico. But if we look at the situation in Thailand, it's still quite a strong growth and resilient in terms of personal care and pet food. Also in Duy Tan, we opened a new Hanoi showroom, and that is to augment on the online platform they have. So this is just to show the continuous growth for the product of Duy Tan in the region. So next will be on the fiber packaging, which is the box business. This show a growth of 5% Q-on-Q, most -- both in terms of volume and also in terms of price. So that is just -- like we mentioned, is a preparation for the new holiday and also in the recovery of the tourism. For the export, consumer segment like frozen food, canned foot, footwear and garment also contributed to the increase in revenue for fiber packaging. For packaging paper, this is a star in terms of the volume growth. We see it's 7% Q-on-Q, both in terms of domestic and also in the key export market. But you can see that our utilization is actually reaching 92% comparing to the previous quarters of last year on the average of -- in the 80s. So that's propelled by the increase in the sales volume. In terms of price, we also see increasing in the product price across the board. This year, we see our price going up by 8% Q-on-Q. So with this, it leads to the EBITDA, which is, for this chain, close to THB 4 billion, up 9% year-on-year. mainly from the improvement of volume and also from the reduction in cost, most notably the ability to manage the RCP cost. So that's why the margin has improved to 16%, okay? So I would say the major contributor for the packaging chain together packaging business is higher volume as well as the ability to manage the cost to preserve the higher margin. So next will be on fibrous business. For fibrous business, revenue was THB 6.5 billion, and this is up both year-on-year and Q-on-Q. For year-on-year, the volume is up for both paper and foodservice packaging, so this is the reason for giving the rise in revenue. And also for the Q-on-Q, we see that the food service packaging actually dropped slightly, and this is because of the -- in QSR, on the quick service restaurant segment, in Malaysia. They have lower sales there, but we were able to enhance that portfolio by selling more to Japan products, to the Japanese. So that helped. For the paper, also higher volume for both fine papers and also in terms of specialty paper. We have higher volume sales due to the school term and the book fair, and also higher export to Indian market in terms of specialty paper. For pulp, has significant increase in terms of revenue Q-on-Q, and the majority is from the improvement in the dissolving pulp in terms of sales volume and also in terms of price. So that actually leads to the high -- very high EBITDA numbers for the fibrous business. We can see the double-digit increase in terms of EBITDA, both year-on-year and Q-on-Q. The margin has reached 19%, and that's mainly the contributor from both dissolving pulp and the paper business. And because of the higher volume demand and a higher price, we also shift our maintenance activity that was planned in the first quarter to the second quarter. So that's also one of the contributors to the higher revenue and EBITDA. So next, we move to the financial part. Core profit was at THB 1.686 billion. So the number of adjustment is quite small. We have FX gain of THB 48 million, so our profit -- net profit come to THB 1.725 billion. For capital structure and capital expenditure, our net debt remained quite stable compared to the last quarter at about THB 31.5 billion, and that we have cash on hand by the end of the quarter of about THB 18.6 billion with the interest-bearing debt, both in terms of loan debentures and lease obligation of THB 50 billion. So this gives the numbers of net debt to EBITDA of 1.7x, and also D/E of less than 1. Talking about capital expenditure for the first quarter is THB 1.49 billion, and that's just a mix of maintenance, efficiency and growth CapEx. We do have a budget for this quarter of about THB 15 billion, okay? So that -- we think about THB 10 billion would be coming from growth CapEx such as organic expansion, and also M&P in the pipeline. In addition to that, we will also have, like Wichan mentioned, the potential CapEx in terms of the additional acquisition of Fajar shares, which will come later in the year, of approximately about THB 23 billion. In terms of Fajar, the performance of Fajar has slightly improved in the first quarter. Basically, the volume of domestic volume increased somewhat, but the volume export volume dropped mainly because of the Chinese New Year in China. So the export to China portion reduced. The price has been going up, especially domestic price, together with export price together, up about 8%. So that's the performance of Fajar. We continue to take actions to try to improve the performance. One is to try to increase the integration level by trying to find M&P box business still that will enhance our integration, and we will lead to a better margin for the whole chain. We try to expand our M&C clients to a higher value products like lightweight paper. Also in terms of securing competitive cost of raw material or RCP, we target to have a domestic portion to remain at 50% or higher, including additional synchronization and production of sales in order to maintain the competitiveness of the business. In terms of time line of the share acquisitions, the start day for the exercisable of the put and call would be the late June or 28th of June, and with that, there was a 60-day period in which to implement the share purchase. So that puts us 27th of August to be the earliest date of this transaction. So we would say it would happen sometime after the end of August for this transaction. Anyway, I think Wichan may want to add some more on this.

Okay. For this, as we discussed last time now, we have a few investor interest in Fajar. However, the price, they will still not reach our target yet. So the process still continued discussion. Let's see the partner who give our synergy and can give us the value. Hopefully, in the next quarter, we can update you once again. For next -- this figure we set update here, you can see that the improvement improved, very much improved, especially every segment has been improved in terms of the demand. So that's a good news for the first quarter, and we wish that this will be continuing to the second quarter. However, I'll come back to the strategy of the company about the quality of growth here. We have both organic and inorganic growth here. So in last month, in the end of March, we finished the expansion of the fiber packaging project, which are located in Samutprakarn in the Bangpoo Industrial Estate, and another location in Samutsakorn, which are near the food processing company. So we prepared a short video clip less than a minute. [indiscernible] show to the analyst. [Presentation]

So that's short clip for the fiber packaging, which already finished and start commercial landing in the end of March. This location, as mentioned earlier, one's put in the Samutprakarn [indiscernible] the industrial estate with all the electrical appliance I discussed earlier. And then which is a bigger capacity in Samutsakorn that's located near the canned food, frozen food export, even the chicken, things like that. So this will be set up and putting in the strategic area. Talking about the capacity here, we have the 75,000 tons per year, equal to 9% of capacity in Thailand increase. So this is a good move. Looking into the strategic location here, you can see that this is the central region of Thailand, you will see, and this near the customer and also near the seaport. So this will improve their logistic costs and help to manage all the supply chain. In addition to that and on top of that is that this is the most modern factory that we have ever built because this is the newest. So you can see that in the video clip, we used a robot. Actually, the people or operators that work in the video, just we ask them to work. Otherwise, you just see the machine. In fact, we can reduce our number of the people, number of the employee who operate this factory. And hopefully, we can expand the new technology with the robot and other control system to other factory. That will be the organic expansion. In terms of the merger and partnership [ OMP, ] we still continue to discuss. Hopefully, in next quarter, we have a process update, and we will come to update to those of you again. Next one about the innovation update. As you know that we have the contract with the Origin technology. Look back to last year, last year, we finished a proof of concept and technology verification and also pilot testing and also setting the condition that already done in the past year, 2023. With the amount of the investment of USD 3 million that we used for this project already coming in this year 2024, this year, we do the market study and techno-economic study. This is really important for this year. And we also want to [ verify a ] partner now. A few of the Japanese come to see us and want to talk in this, but it's too soon to conclude and selection the partner, but the discussion still continue. Come back to the technology of Origin. As we know that last year, the price of the PET or PET has been reduced and made this technology difficult to make it competitive. In this year -- actually, it starts from last year that we aim instead of the go to Bio-PET, we go to PEF, which PEF has a higher value compared to Bio-PET, has much higher. For example, for oxygen barrier, so PEF has a 10x higher than PET. And carbon dioxide barrier also, PEF has more than 20x than PET, meaning PEF can use more high value of the product. In other words, that can be life extension of the product. So this is the thing that we do this year. Looking into the future, we plan to bring the raw material for the demonstration plant testing in next year, 2025. So that will be the update of the innovation, which we set up, enjoy with Origin. Next is the -- further into end of this year. We see that the programmatic M&P is still focused on the new growth segment or new business or even the [ HSNC ] business. Hopefully, in the next quarter, we come back to update you again. In terms of the fiber packaging, as mentioned. So this we plan to ramp up the capacity in the next 2 quarter, second quarter and third quarter, or so. With this one, we can fulfill the requirement of the customer for -- especially for the foods and beverage. And once again, one of the factor that we can gain the benefit in the first quarter, one of the 3 is that about energy cost. So we can expand the successful energy cost saving in Thailand to Vietnam and to Indonesia. In terms of the macro economy, we can see that the global inflation has been stable. In many countries that start to reduce the interest rates, this will improve the consumer spending. However, the demand of the packaging, as mentioned earlier, also this quarter, first quarter, has been improved and also second quarter, it can be continued. [indiscernible] of these packaging, so it will cause the [indiscernible] also roll up. So this will pressure us to increase the price in the second quarter and third quarter. In terms of the new market and new area, especially emerging market, in ASEAN [indiscernible], we see those in the first quarter. And one thing we see here in India, it has been improved a lot in terms of the global trade and the export. Last but not least, all the key takeaway we see here. The target for this year, we aim to grow double digit as we plan for this year. Second is that we extend the leadership position in ASEAN in terms of [ leadership ], development and innovation. As mentioned, we spent for Origin USD 3 million, which lead to the expense set or investment of R&D and innovation for the first quarter, THB 256 million, which equaled to roughly 0.75% of the sales revenue. So with a higher number in terms of the R&D and innovation investment. Of course, by this one, we are cashing the tenant about the ESG and also the practice and also improve the ESG and greenhouse gas emission. Last but not least, again, to improve the profitability and create the competitive -- long-term competitive advantage, and also want to get long-term competitive differentiation with the [indiscernible] model. With this one, we put up the fiber packaging is [indiscernible] cost, and this one helped SCGP to manage a value chain and the supply chain along with the customer and also with the supplier. On top of that, in automation as shown in the video clip, and also we want to expand artificial intelligence and machine learning into Vietnam and Indonesia. So that concludes the presentation of the first quarter result of 2024.

We would like to thank all the participants for joining our show event, and we look forward to seeing you again in the next quarter. Thank you, and [Foreign Language].