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

Good afternoon, ladies and gentlemen. We are delighted to welcome you again to the analyst conference in the second quarter. Today, we will cover the performance of the first half and also the second quarter of this year. My name is Sornnarin Bangkedphol from IR team, and I will be your host on this afternoon session. As usual, we will start with the presentation from our management, and we will have the Q&A session right after. Without further delay, may I introduce and hand over the floor to our SCGP CEO, Khun Wichan Jitpukdee; and SCGP CFO, Khun Danaidej Ketsuwan. Thank you.

Good afternoon and [Foreign Language]. Time flies so fast, and the -- to the analyst conference for the second quarter of the year and the first half of this year 2024. Today, I'm Wichan Jitpukdee, and I'm sitting here at Bang Sue, Head Office alone because of our CFO, tested COVID this morning just before the BOD meeting this morning. So now I'm staying in the Head Office in Bang Sue. Khun Danaidej, who is CFO, sits in his home. May I start with the consolidated financial performance in the first half of this year. Look at the revenue from sales, the first half of this year, we closed at THB 68 billion, which improved 3% year-on-year and 7% compared to the second half of last year. This solid revenue improvement, both year-on-year and H-on-H, driven by the volume, both in integrated packaging business and also the Fibrous Business. However, this is along with the increased the selling price of the packaging paper, as you know, that the RCP, recovered paper, the price and the cost has been rising in the second quarter of this year. Look at the EBITDA. The EBITDA in the first half of this year is THB 9.7 billion, which improved 7% year-on-year and improved 14% compared to the second half of last year. This led to the EBITDA margin still maintained at 14%. In terms of the net profit, we ended the first half of this year with THB 3.1 billion, with the profit margin improved to 5%. This improvement in the profit and also the EBITDA, mostly come from the, we call the supply chain management, especially in the recovered paper. In addition to that, last year for the energy cost, we said that we used the biomass to reduce the steam and energy cost and also to replace coal, that we achieved last year. And now we come to deploy that we use the biomass at the full capacity. This year, actually start from the second half of last year, we expand the use the deep learning, machine learning, which is the part of AI, to optimize the process and can reduce the same consumption. Also this first half of the year, also the result of that can help to reduce the cost of the production, especially in terms of the packaging paper chain. In terms of the country, we see that in the first half and also second half, especially second half, Vietnam this because outperformed in the 4 countries. Thailand and Philippines, this has maintained as we expected. However, Indonesia performed in the second quarter weaker than the first quarter of this year. In terms of the business segment in the first half, both integrated packaging business and in the Fibrous. May start with the integrated packaging business. You see here the revenue from sale of [ 50.9 billion ] [indiscernible] 3% year-on-year and 7% compared to the second half of last year. The EBITDA also, EBITDA of THB 7.5 billion, which improved 4% year-on-year and 6% compared to the second half of last year. Obviously, IPB chain margin improvement along with the volume, however, the cost of the RCP increase, but with the team effort and supply chain management, so we can manage the RCP price and also [ renew ] the energy cost that's for the IPB chain. For the Fibrous business, revenue from sale THB 13.1 billion, improved also 5% year-on-year and 7% compared to second half of last year. For EBITDA, [ THB 2.3 billion ], which improved 70% year-on-year and 27% compared to the second half of last year. So this half -- this was half of the year fibrous business show a robust improved compared to last year, which led to the EBITDA margin, 18% compared the IPB EBITDA margin of 15%, thanks to the improvement in the Fibrous business. Go to the business portfolio, I'll start from the revenue portfolio, packaging paper chain account for 38%, reduced 1% compared to first half of last year. In the meantime, the integrated packaging chain in that earlier include which the polymer and the fiber packaging improved 1% from 36% to 37%. In this year, you see here the downstream team, I mean, the polymer packaging and the fiber packaging, the figure come closer to the upstream which is the packaging paper. In the past few, we have been improved the downstream portion a lot. This is to redo the list in the future. By the way, the Fibrous Business and the Recycling Business still maintained at 19% and 6% respectively. In terms of the business segmentation by country, we see here Thailand is still the same at 42%. Indonesia has been maintained at 14%. Vietnam, as mentioned in the first slide that Vietnam this year outperformed other country, which also drive from the Euro Soccer, Euro Football and also the Olympic. The footwear apparel export from Vietnam has outstanding in the second quarter. This lead to the sale revenues by country here in Vietnam improved from 14% to 15%, the less almost the same. But the most important here, we see that the export portion has been reduced from the first half of last year from 19% to 17%. This is mainly the export in the second quarter to China has been reduced due to the demand and also the prior slowdown. This ended with the export to China in the first half of this year at 6%. Last but not least, for the consumer link here, the consumer link, which include on the food beverage FMCG [indiscernible] and other related to consumer linked has been improved to 74% compared to last year, which is the 71%. And in addition to this, in terms of the packaging solution, we have been achieved 35% and 36% in terms of the packaging solution. This held SCGP strong and really resilient in terms of close to our consumer and in terms of the effort to improve the solution, which we cross-selling between the polymer and the fiber packaging. In terms of the market movement in the second quarter of this year, we see that the manufacturing PMI in the major country has been improved, evidenced by the graph that are shown in here. So we expect that this is slightly recovering. In terms of the export, we see that Thailand and Vietnam, the export has been improved, has been increased. We see the evidence on the graph. Look a bit further in detail, Vietnam export by industry in the first 5 months of this year. We can see here E&E improved a lot at 35%, while the machinery and other improved 10% and 14%. So in the average export Vietnam improved 16%. This is quite a good number. In terms of the inflation, this inflation continued to reduce a little, but it's different country by country. But we see this as a little reduction in terms of the inflation. And in addition to that, on the bottom right corner, we make a figure here of the GDP of Thailand here. We say that the GDP of Thailand quite small, 2% to something. But we look inside here, the private consumption, the export and import has been improved, except the comment spending that are reduced. Once again, the SAT packaging product portfolio mainly relinked to the consumer link that related to private consumer. So that's why we see the domestic consumption in Thailand, Vietnam, Philippines and also Indonesia has been improved for the second quarter for the domestic consumption, except for the export. So that the portion, I start with the business highlights. Next for the business segment review, may I pass to Khun Danaidej. Please come.

Yes. Thank you very much. I'll start with the demand movement of the key countries. As you can look at the Q-on-Q, we have positive growth from Q2 over Q1 in most of the countries, except for maybe 2, in Indonesia and in Thailand, where there's holidays in both countries. So that affect demand in the second quarter to be lower in Indonesia from Q1 and relatively flat for Thailand. But if you look at the year-on-year change, we can see that in all the countries, the demand has grown. That's a positive sign that -- this has improved activity, improved demand across all the countries. And we observed the increase to be in the range to 4% to 14% year-on-year depending on the countries. Now if you look at each of the business units start from the one closer to the consumer, for the consumer staples like F&B, FMCC consumer products that continue to have a good positive momentum in Q2 compared to the previous quarter. That's due to the demand of the domestic demand that was still healthy. And also, there's -- as I mentioned, there's a negative impact for Thailand and Indonesia for the seasonality. Moving a little bit into more difficult portion of the consumer product, mainly the consumer discretionary. So that actually has improved also in Q2 because we see the export order for the apparel and footwear, which generally was weak, has resumed. And that's due to the fact that the people are buying more in the U.S. and EU because of the outdoor activities, the summer season as well as sport event that's occurring. But if we talk about E&E automotive part, it has been down a little bit in Q2. And that's because in Q1, people already purchased quite a bit of E&E in anticipation of the summer in the region. Food service packaging is quite healthy, both in terms of the QSR segment, which is the fast food in ASEAN -- in ASEAN market as in Japan and other countries is growing in line with how people are spending and the demand to pick up. And also if you talk about other type of food packagings that we sent over 2 countries like U.S., U.K. and EU, that has already also picked up because of the outdoor activities for the summer that has increased. For the upstream packaging paper, the demand pattern is in line with consumers, in the sense that we have increased demand in Vietnam and the Philippines are driven by food, fresh foods and agriculture and other things, whereas demand in Thailand and Indonesia was [ weekly 2 ] to holidays. And particularly, we have a lower export volume going to China as well, especially from the Indonesian operations. And that's because of the pricing factor, it's not favorable for the export for the few months within the last quarter. So -- but pulp, in general, the price of -- pulp price remain quite healthy on the high side, and that's in relation to the growing demand in the garment and textile industry. So next, we'll move for the quarterly performance. In terms of sales revenue, we recorded THB 34.2 billion for the quarter. And that's -- it was up and [indiscernible] up about 6%, mainly the volume was up in most of the segments, all the volumes up. Whereas for the price factor year-on-year was not increases very much, it's relatively flat. But if you talk about Q-on-Q factor, the revenue growth, it grow slightly. And we have volume that is lower than the first quarter due to the holiday and other export volume, but the pricing has been increasing across the board, so that helps in terms of the revenue. Moving to EBITDA. Our EBITDA was [ THB 4.6 billion ], slightly lower on the year, but dropped about 10% Q-on-Q. And this is the result of the volume in the second quarter that was lower, plus the cost factor, mainly the RCP cost has risen also in the quarter, so that reduced our EBITDA as well as our EBITDA margin, which dropped to 14% in the last quarter. Similarly, for profit, net profit was THB 1.4 billion, a slight drop from last year and about 16% drop for the quarter, and that's mainly from the EBITDA that was lower in the second quarter. So next will be on the -- by business chain. We look at the integrated packaging chain. Revenue was THB 25.5 billion. So year-on-year, it was increased by about 6%, and that's due to higher sales volume from most of the segments. But if we talk about Q-on-Q, the revenue will remain relatively flat. But if you look at some of the subsegment, polymer packaging Q-on-Q was actually increased in terms of revenue, and that's because of the healthy demand and sales volume for F&B and FMCG in the domestic market, the ASEAN market as well as some of the export market. And also, we have implemented some synergy across for the consumer packaging that we produce in Vietnam with the sales channel that we just acquired in the Law Print in the U.K. So we have increased that synergies to help the volume flow. Also, the medical supply and healthware was -- has improved Q-on-Q. Now talking about fiber packaging, the box in general, the demand in Vietnam and the sales in Vietnam has improved basically because of the consumption, agriculture and other things, but demand in Thailand and Vietnam has reduced. For packaging paper, the volume Q-on-Q dropped by about 5%, and that's mainly from the export from Indonesia or from other countries to other markets, particularly to China. But selling price has improved. If you talk about pricing paper overall, the price factor has increased by about 3% across the board, but [indiscernible] Indonesia has improved 4% Q-on-Q. So EBITDA for the quarter for this business chain is about THB 3.6 billion, relatively flat for the -- compared to the last year. Actually paper volume was up year-on-year, but the price was down. But if we talk about Q-on-Q, it dropped by about 9%, and that's due to the volume that was dropped, but the price actually increased, but the cost also increased. So margin for this business chain reduced from 16% to 14%. For the Fibrous Business, revenue record about THB 6.6 billion year-on-year, it's increased by about 3%, and that's attributed by the increase in volume of our Foodservice Business, which has a higher sales in this quarter as well as the pulp price that was higher compared to last year. But if you look Q-on-Q, the revenue remained relatively flat. Foodservice was doing quite well in terms of Q-on-Q, volume was up. Revenue was up in most of the segments. But the down was coming from the volume of paper, particularly the paper that we sell because of the maintenance activity that we have in the Q2. But if we look at the specialty grades, it actually has increased. For Pulp, Q-on-Q revenue was relatively flat. So EBITDA for the period is THB 1.1 billion. That's a slight decrease on the year and a decline of 12% on the quarter, and the decline was mainly due to the volume was reduced from the paper. So that's the recap of the Q2 performance. Next, we move to the financials of the -- to reconcile net income, core profit and net profit. We don't have many items, special items in the year. So the figures remain relatively close. Our core profit was at THB 1.479 billion, whereas our net profit was THB 1.453 billion. Next will be on our balance sheet. You can see that the net debt remained relatively stable at THB 32 billion. So our net debt to EBITDA at the end of the quarter -- at the end of the half -- first half was at 1.7x. We have cash about THB 24 billion and debt of about THB 56 billion. Our capital expenditure for the past 6 months is not very large. It's about THB 3 billion. And that's -- we have one M&P that was done, but it's not a very big one. So that has not yet contributed to the high CapEx on the growth segment. But we still do budget. Our CapEx for the whole year was about THB 15 billion. We anticipate to have some additional transaction of some deals before the year end and that will come into this growth CapEx section. And as you already know, we already have anticipate the use of CapEx about THB 23 billion for the acquiring acquisition of additional remaining by ordinary shares, and that would be most likely completed within this Q3. And that's funded out of THB 8 billion from cash and THB 15 billion of debt. And that includes already the big debenture that we have already issued. So also today, the Board has approved an interim dividend payment of THB 0.25 per share, and that's consistent with what we have paid for the past 3 years. So this will be paid out in August. That's on the financial review. Next will be business update by Wichan, CEO. Thank you.

Thank you, Khun Danaidej, and thank you for your [indiscernible]. Even the COVID, you still helped to explain. Thank you very much. I'll come to the next session, session for about the business update here. As you know, that we disclosed the merger and partnership with VEM Thailand, where the company situated in Rayong. But before I go through that, may I come back to the T-profile business model and the competency that we believe and we go into new business beyond the call and adjacency. Look back and talk about the T-profile business model here. So we used this already 4 years in the IPO of the company. We said that we are the company that did vertical integration and also really why horizontal expansion in the customer portfolio. In terms of the indicated packaging business to start from the [indiscernible] paper, we have [ at lease a ] cleaning station across in ASEAN. And also we do collect plastic. In the past, we collect only the paper, but in the past 5 to 10 years, we start to collect the plastic. That is the key raw material. And now for the paper, we usually recycle more than 99% plastic we are 30%, 40% like that. So from the RCP recyclable paper, we do manufacture the packaging paper in our [indiscernible]. However, on the top of that, in terms of the [ Huawei ] horizontal, we focus all type of the packaging start from the primary, secondary and the tertiary packaging. The primary packaging, mostly, this is direct contact with food and goods. So mostly the material for this primary is a polymer packaging. And we see that in the past few years, we start to enter into the healthcare business, that's something to expand in the next pace of information. In terms of the display packaging, we have they are printing for the [indiscernible] of the packaging and the tertiary packaging which used for the logistic and transportation. This is covered the [indiscernible] of the packaging material. We focus on the paper and the plastic, which glass and metal will not enter into in that higher material yet. For the life side, about the Fibrous Business, start from a plantation, which we call linear [indiscernible]. Each year, we plant eucalyptus and sell the seedling and young tree about 40 million, eucalyptus trees a year. And these are we harvest in both our own plantation and from the farmer to manufacture pulp, both the chemical power and semichemical power. And this also use as a material to produce the printing lighting of fine paper. In the past 4, 5 years, we enter into the food packaging. This is going improve a lot and help to transform the Fibrous Business. That makes the Fibrous Business really healthy as this year as dividend by the result of the first half of this year. Next information. So from this information, you see on the left-hand side in the column in the light blue color, we prepare 2 column. The first column is the product of SCG, our packaging that are produced today. The second column, we call this is the manufacturing competency. Another word is that the competency of making those products. For example, for the [indiscernible] plastic packaging, the technology and the company say that we are having, we call the injection molding, blow moding, even [indiscernible]. For the flexible, we have film extortion, molded -- pulp molded and coating. Paper and carton, this is we call the fiber modification. We usually cycle fiber, we put nano, we put the starch to make the strain of that paper in the quality of the grid. Display packaging. R&D and services so that the product and the competency. I pause here with the product and the competency. We see on the top, on the light yellow, that we call the health care supply subsegment. We summarize here for the subsegment start from the health care packaging, healthcare equipment and supply. For the first tool -- which the first tool that we are focusing. For pharmaceutical, healthcare serving biotechnology and healthcare technology on the right hand side, which we see the opportunity in the future. By mapping between our competency and the subsegment of the health care industry, we see that the healthcare packaging and healthcare equipment and supply will use our competency. #1 here, we have injection molding medical device and equipment. Because we know how to inject polymer. We know how to produce the labware by blow molding. That's why we entered into this because we have competency. The difference of the normal polymer and plastic packaging compared to the [indiscernible] is about the [indiscernible] and the certification to produce medical labware. #2, we call the flexible medical bag. Now we already produced this but in terms of the packaging. But in terms of the primary packaging which produce the [ solid index ] things like that, we are entering into that in coming soon. So by this 3 [indiscernible] to draw the T-profile business model that we enter into the healthcare by using our manufacturing competency. Next information is about the VEM Thailand. So this, I'll explain 2 information before here is because of we think that VEM Thailand has benefit to expand the medical and healthcare supply in Thailand and in ASEAN. I mean in the future, Thailand is now. As we enter into M&P, the data lab in the Spain, now we want to produce that product in Thailand. If we construct a new factory, it might take 1 to 1.5 years. And the most important test is that if we produce medical and healthcare supply, we have to certify the ISO 13485, which is ISO for the medical devices. But in VEM, they already certified ISO 13485. In addition to that, VEM Thailand also have been the ISO -- cleanroom ISO Class 8 and Class 7, which held through [indiscernible] to [ SMB ] or those the component for the other medical and testing machine. This PMV take share, [ 90% ] then the owner will keep it 10%. Look back into the [ life side ] for the [ circle car ] sell by destination. VEM Thailand sale of those products in Thailand, only 43%. The less are 57%, they do export to U.S. or China and some are [indiscernible] to other countries. But look back into the segmentation of the industry of the customer, of course, the automotive and loan space is #1 and #2, medical and medical [ DIY ] is #3, which share is [ 21% ]. So this is -- we see the upward opportunity to move and bring some product from Delta lab to produce in Thailand and start to market that product in Thailand. And in terms of the bottom line, on corner here is the sample of the product that we plan to produce here in Thailand, at VEM Thailand in the Rayong province. So that the latest M&P that we announced in this month. Next, if the Fajar improvement and going forward, the strategy, as you see that in the second quarter of this year, the sub-demand stayed low from the seasonal effect and also the weak export to China due to the demand and also weaker prices in China. However, the domestic volume has been improved and also the price has been about 4% Q-o-Q as the committed. However, the raw material prices also increased in the second half of the year due to the demand of the RCP very strong in the second quarter due to the domestic demand. So the strategy for the company into second half of this year. The first thing we will optimize the product portfolio by consulting on the high-value segment, and streamline operation, I mean cost reduction that those and also increase their supply chain efficiency. The second, we will do a strategic enhance of the RCP sourcing. We will balance between the local RCP and also the imported RCP. And we prioritize on the partner to get more RCP from the domestic. Number 3 is that we drive into the operational excellence and also the supply chain excellence by improving productivity of cost, cost deduction, especially the fee cost that we are planning to reduce. And also the synergy and the levels of the SCGP capability, especially from the deep learning, machine learning and AI together that to help in terms of the energy cost. And last but not least, we expand market list and capability by fortunately statics and especially for the Chinese importers. So this is the key that we will maintain the volume to China. Next is a good news for the first half of this year, especially in the second quarter. SCGP certified the CFP so-called the Carbon Footprint Product. In the past, we also disclosed and we talked about the CFO, meaning, Carbon Footprint Organization. We have targeted that by year 2030, we will reduce Carbon Footprint Organization by 75%, which base year 2020. And now our 4 year past, we at least more than 10% of the reduction here. The second quarter, we received the certification from the Thailand green-house gas management organization in terms of the product in pulp, integrating paper, food service packaging, packaging paper, fiber packaging, printing and paper packaging process also. We summarize here, we have 109 products in pulp and 19 products in the copy paper and also 16 processes involved printing and also our paper packaging. This led to our SCGP to be pioneer, I would say a pioneer, but in fact, we are the first one who gets certified from the TGO in Thailand. As you know, that the license requirement of the carbon footing product and help to reduce low, medium, high figure, it doesn't matter. But if we commit, it means that we can reduce this CO2 emission in the future. Come back to the next session outlook and the key takeaway here. Look at -- in the internal commitment here, of course, the static execution of the Fajar turnaround has a key to improve the financial performance is something like if we takeoff, [indiscernible], we are fortunate, we are brainstormed to improve the assessment of the financial improvement of Fajar turnaround. In terms of the supply chain excellence through the RCP sourcing management, so we will increase the utilization of the -- all the packaging paper facility, why we emphasize on the synergy across operation. In terms of the expansion, we also expand in terms of the organic and also M&P. This year, we already finished at one M&P. Mostly, we have 1, 2 or maximum 3 M&P each year. We improve in the innovation and packaging solution and costs, we get the Carbon Footprint Product certification from the TGO in Thailand. In terms of the external, we say that ASEAN and Global slightly recovering slowly in terms of the PMI. However, in terms of the ASEAN, we see the export and the domestic growing is really strong. RCP price still continuing to be high side due to the demand in Europe and in this [indiscernible]. So we increased the price of the paper and the box will be continue until end of this year. Last but not least, the imaging geopolitical list, also one of the key. This weekend, we see that there was a change in the election in the U.S. and in other Europe. So we see that the way that we diversify the product portfolio and also the location, that tell a lot of the SCGP to be a resilient company in the future. I summarize today in 3 key takeaways, that Indonesia is still important, and this we will improve and enhancement the financial performance, especially in Indonesia and also synergy in terms of the ability across region, across company. In terms of MAP, we're still growing in terms of core adjacency and also in terms of the business as evidenced by M&P with VEM Thailand in this month. In terms of supply chain, excellence and operational excellence, we use the data analytics even to improve these efforts. And also now, we have revised ESG and CAP. This will help to improve the competitive advantage over the competitor. We talked to the multi-national customer, multi-national company, they're really happy to do this. And this seems to be -- will be strengthened between the supplier between the customer who are in those multi-nation, who use the benefit and we use the Carbon Footprint Product in there product. So that's the result of the second quarter and also the result of the first half of this year. And we would like to thank our participant for the joining of our virtual conference today. We look forward to see you again in the next quarter. And today, thank you.