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 third quarter. Today, we will cover the performance of 9 months and also for the third quarter of this year. My name is Sornnarin Bangkedphol from the 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 SCGP CEO, Khun Wichan Jitpukdee; and SCGP CFO, Khun Danaidej Ketsuwan. Thank you.

Good afternoon, and [Foreign Language]. Once again, time flies so fast. We meet again in the result of the third quarter and 9 months of this year. Today, Khun Danaidej, CFO, sit with me unlike the previous time that he was get the COVID-19. So this time, we are together. May I start with the revenue from sales in 9 months, we have THB 101 billion, which improved 4% year-on-year. In terms of the percentage cost of goods sold the same as 9 months last year at 82%. The top line growth mainly come from the enlarged of the packaging paper volume, and also the downstream expansion, especially increasing the food packaging and also increased dissolving pulp. Consumer packaging continued to deliver resilient profitability, especially in the ASEAN. In terms of the EBITDA, 9-month EBITDA is THB 13.2 billion, which reduced 1% year-on-year, while the EBITDA margin down from 14% to 13% and core EBITDA is THB 13.3 billion also. In terms of the net profit, this 9 month ended with THB 3.7 billion, which reduced 7% year-on-year, while we still maintain the profit margin at 4%, [ which allow of the -- this mode ]. The core profit is THB 3.8 billion. The EBITDA and profit dropped mainly due to in the third quarter the rising of the RCP costs in the third quarter. In terms of the business segmentation 9-month, left hand side, integrated packaging business. The revenue from sale was THB 75.5 billion, which improved by 3% year-on-year, mainly come from the volume improved compared to last year. While the EBITDA at THB 10.4 billion, which reduced 4% compared to last year, which led to EBITDA margin 14% down from 15%. The main reason that EBITDA reduced come from the packaging paper operation in the third quarter, as mentioned, due to the RCP increase in the third quarter. In terms of the fibrous business, which account for 20% of the total revenue, the revenue from sale is THB 19.8 billion, which improved by 6% year-on-year. So this mainly come from the dissolving pulp and the foodservice packaging expansion, especially in the U.S. In terms of the EBITDA, fibrous business had EBITDA of THB 3.1 billion, which improved 12% year-on-year compared to last year, which led to the EBITDA margin increased from 15% to 16% 9 months of this year. In terms of the business portfolio, starting from the revenue from sale by business unit. This time, polymer packaging and fiber packaging expand from 36% to 37%. As we met last time about the medium-term plan in 2030, we targeted that the polymer packaging and fiber packaging will be 1/2, meaning half, 50% of the total revenues. Fibrous business improved from 19% to 20% this year, while the recycling business still maintained at 6%. In terms of the revenues by destination, Thailand still account for 42%, ASEAN account for 35% this time. So the sales in Europe and in U.K., Spain and Italy has been improved 1%, while the export to rest of the world reduced from 18% to 17%. In addition to this, normally, last year, China export is [ linked ] between 7% and 8% to China. But this year, down to 6% due to the weak demand in China. And on top of that, there is a really strong Thai baht. So in terms of the consumer-linked portfolio this time, 9 months, we achieved 75%, 3/4 of the portfolio was still consumer linked. So we saw the healthy and helped the healthy of the customer portfolio. In terms of the market movement in this third quarter, we see that the consumer price index in the third quarter, especially July, August and September seem to be reduced a little bit compared to previous quarter. And in addition to that, we see that the manufacturing PMI in ASEAN and U.S. has been reduced, while the China mixing feeling because of the injection of the money into the business in China. In terms of the export value of Thai, Vietnam and China, we see here in September, especially Vietnam has been reduced, but in China and Thailand increased a little. So this trade will increase a little in terms of the export. This means indication in terms of the demand. We see that the demand will gradually improvement, especially in the global but very slowly. And also the rising household debt, this will be the burden in the future. In terms of the ASEAN domestic and service sector, we see that the very fast appreciation of the currency, especially Thai baht, will be a burden also. In terms of the China economy saw the slowdown of the economy in China that threatened the export of the packaging paper to China also. So that the main figure for the 9 month and some economic update for the third quarter. Next, may I pass to Khun Danaidej?

Yes. So let's start from the demand movement for the various countries that we operate. If you look at the year-on-year number, we can see that in all the countries, the demand has improved. So that's a good news that consumers are spending more this year than last year. In terms of Q-on-Q, in most of the countries, also similar stories. Indonesia also have a long holiday in the second quarter, so there's an improvement in the third quarter. For Thailand, however, the third quarter demand seem to be dropping a little bit compared to the second quarter. And one of the reasons is because of the Buddhist Lent period, in which the lower sales of alcoholic beverage also coupled with the floods in some area. Also, export segment from Thailand is also suffering a little bit from the appreciation of the Thai baht. One thing to remind is also in the second quarter in Thailand was actually quite well compared to the second quarter of the previous year. So we have a very strong second quarter in April, May, which then means that in the third quarter, it didn't improve so much from the very good second quarter. So if you look at the consumer and in terms of the segment by segment, fiber and polymer packaging, we see on the consumer side, the segment that is still growing, food and beverage, FMCG, consumer products. As in any other quarters, these are the segments that's still going well, including for food exports. For garment and textile, it's quite a steady demand, still continue to be okay. The drop was mainly in terms of the E&E, household appliance, electronics and automotive sectors. And this is also linked to the packaging paper in which the domestic demand in ASEAN continue to grow along with the consumption in the region. But the downside, the lower part has come from the export volume, particularly to China, which has been slowing since toward the end of the second quarter and into the third quarter. If you look at the foodservice packaging, there's a mix. In the domestic part in ASEAN, the demand in terms of B2B and also in the retail segment are going quite okay, but demand in Europe start to decline because of all the stocking is now less. Europe is entering winter, so the stocking of the foodservice packaging is reduced because it's not a high season for them over there. In terms of pulp, demand for pulp, especially dissolving pulp is still quite okay, remain quite strong. And that's in line with the situation in the garment sector. And the drop in price is mainly in terms of the short fiber mainly from the increased supply globally. So now let's move to the financial performance for the company in the third quarter. Revenue from sales was THB 33.4 billion, and that's an increase of 6% year-on-year. The increase in this comes from both volume and price, volume particularly from the polymer and fiber as well as dissolving pulp. For Q-on-Q, revenue dropped about 3%, and that's from the drop in terms of volume, mainly from the packaging paper operation. Price remained quite stable between Q2 and Q3. So you can observe from the chart the cost of goods sold portion has increased from 82% to 84%. So that means the margin has been squeezed from the previous quarter, and that's reflected into the EBITDA figure, which is THB 3.49 billion for the quarter, and that's a drop of about THB 1.1 billion from the quarter earlier. The main factors are, one is the appreciation of Thai baht, which affects the revenue in terms of the Thai baht terms. Also, the volume there was decreased, earlier mentioned, particularly on the packaging paper. And also, a majority of this has come from the higher RCP costs in the third quarter, which is a result of the higher price from the second quarter and going to our consumption and production in the third quarter. So overall, the EBITDA margin is reduced to about 10% for the company. In terms of net profit, it's at THB 578 million, and the drop is actually in line with the EBITDA and for the same reason. So now going to each segment of the business, starting from the integrated packaging business. Revenue is THB 24.6 billion in the third quarter, an increase of 4% year-on-year, mainly from higher volume of polymer and fiber, especially in Thailand and Vietnam. If you look at Q-on-Q, revenue declined about 3%. For polymer packaging, slightly -- revenue slightly dropped mainly from the medical supply labware in Europe, in which in the summer, the business operation is less, so the volume of order is reduced. That's a seasonality factor also in that one. But if you look at the consumer packaging, it's actually improving, especially in the segment that is related to food, pet food and seafood for example. Fiber packaging revenue increased slightly, mainly from Vietnam and Indonesia, but Thailand has an effect of the demand that was reduced, so the Thailand operation slightly declined. For packaging paper, sales volume dropped about 6% Q-on-Q, and the majority of that would be from the export to China. The selling price, however, remained quite flat, okay, slightly improved in terms of domestic overall and a slight decline in Indonesia. But Indonesia, if we look at the domestic price is still maintained, the part of Indonesia that reduces the export price. So coming to EBITDA for this packaging chain is THB 2.888 billion for the quarter, and that's reduced about 20% both year-on-year and Q-on-Q, mainly from the higher RCP costs, so the margin for the chain is reduced from 14% to 12%. So next up is the fibrous business. For fibrous business, revenue is about THB 6.7 billion, and that's increased both year-on-year and Q-on-Q. For year-on-year, the increase is mainly from the dissolving pulp, both in terms of volume and price. But if you look at Q-on-Q, the increase about 1% overall. But for foodservice, it slightly declined mainly from the reduced sales in Europe, like I mentioned. But actually, we try to diversify or shift our portfolio towards more in terms of the U.S. and Thailand and ASEAN. Also for paper, especially specialty paper, the volume slightly increased. So that's how we adjust the portfolio to shift more towards special grade. For pulp, Q-on-Q is improved mainly from dissolving pulp. So EBITDA of the fibrous business is THB 799 million, dropped slightly year-on-year from lower sales of foodservice packaging. But in terms of the Q-on-Q, the drop was mainly from the appreciation of Thai baht. So if you look at the graph here, you can see that for fibrous business, the export portion is more than half. So that has a bigger effect in terms of the Thai baht movement. Next will be to align our core profit and net profit. The core profit is at THB 677 million and the adjustment for this quarter is THB 99 million. So net profit is THB 578 million. The majority of that adjustment is from the cost of the M&P transaction, particularly in terms of the purchase of Fajar, so the brokerage fees and other legal fees, for example. So this is the part that account for the difference between core profit and net profit. So if we look at our financial position in terms of balance sheet, our net debt to EBITDA -- our net debt has increased to THB 55 billion from THB 32 billion. So the increase of THB 23 billion, mainly from the Fajar acquisition that we did in August. So net debt to EBITDA stands at 3.1x while D/E stayed at 0.97. So with this THB 55 billion net debt, about THB 65 billion is the interest-bearing debt, and we have cash on hand, about THB 10 billion. The cost of debt remained unchanged at about 4.1%. In terms of CapEx for 9 months is THB 27.5 billion, and that includes THB 23 billion for Fajar. So for this year, we expect the CapEx to be roughly about THB 30 billion. But going forward for next year, the budget is set about THB 13 billion, which will include about THB 8 billion to THB 10 billion for growth CapEx and the remaining THB 3 billion to THB 5 billion will be the regular maintenance, ESG CapEx. So this amount of CapEx is so that we maintain our net debt to EBITDA at around 3x. So that's the financials. Next will be business update. So let me start off with this new partnership with Once Medical, which is a specialty design and solutions for some certain type of device -- medical device. Particularly right now, the existing product portfolio that we have consists of the labware disposables, things like syringe, pipette tip as well as some of the reagent and test kit, which is done by Deltalab, [indiscernible] and VEM that we just acquired. So we have opportunity to expand this health care business to be more complete solution in packaging as well as in the medical device and supply. So for Once, they are doing specialty syringe and also needles. For example, the safety syringe in which the needle can be tucked in the syringe and protecting the health care worker from getting poked by the used needles or special type of syringe that can preserve the -- or increase the amount of medicine or use of the vaccine, for example. So we believe this is an extension to -- Once has a lot of IP and a lot of innovation that we can actually leverage and use with our production capability within Deltalab and VEM to enhance and move forward to more of a specialized and more high-end type of medical labware going forward. So that's part of the business update. The next will be on Indonesian update, which Wichan will explain.

Thank you, khop khun, Danaidej. This still on the business update agenda, this will be update for the Fajar Indonesia. May I start with the packaging paper and the fiber packaging player landscape in Indonesia. This data with our intelligence data and information that we are gathering from the market. Let me start with the top left corner, that is the player of the packaging paper in Indonesia. You can notice that the top 4 players account for the market share, more or less 80%, which a huge number in terms of the market share of the top 4, especially for top 1 and top 2 is more than 60%. For the graph -- circle graph on the right side, the fiber packaging, the same. The top 4 here also have the own box plant. This box plant has the market share half, roughly 50% while the SCGP has a market share of 7%. This demand, both packaging paper and the fiber packaging at the same level, roughly 3.1 million ton per year of the demand of the paper and the fiber packaging. Moving to the right-hand side here. This is the amount of the export volume from Indonesia, mainly to China. The orange color is Fajar Paper, the other blue and gray from other competitors. You can see that this year, 9 month, the export volume to China has been reduced a lot as we reported earlier that the demand in China now is quite soft. So the export volume to China has been reduced compared to last year, last year, 50% reduced. In the good year in some year, the paper export from Indonesia to China, at least 1 million ton in the past. So -- but this year, almost 50% reduced from the peak. This reduced the export number to China led to the bottom left corner for the light graph, you see that. We see here at the left color of Fajar market share. Fajar has still maintained market share roughly 29% or 30% here. But we can see other competitor increasing market share or reducing market share. As you see here, we call the X1, they gained market share while the X2, X3, X4 and other reduced market share. In addition to this, we can see that we have one --well, X2 bought X3, these 2 players has merged since 2022. So this is the movement of the paper packaging and also the packaging paper in Indonesia in the past 9 months. This is moving in the market share. We see here some player, they lost market share. Some player, they gained market share because they have the reason to gain the market share. Next is the current situation here. You can see here the regional price gap has been squeezed in the third quarter, especially in third quarter here, we see that the RCP price has been increased, while the selling price still stable. However, there's still good news that the ICI3 core in Indonesia are steady reduced from the past year. For right side for Fajar key performance. You see here in the third quarter, the selling price, just a little dropped a bit. We could say that is maintained Q3 and Q2, while the sales volume also dropped from 296,000 to 290,000 tons. However, the EBITDA are negative, quite a bit higher compared to the second quarter this year. This is mainly because of the RCP surge in the price in the third quarter. However, we see that in terms of the monthly -- in the third quarter, in terms of monthly performance, Fajar has been improved by monthly. In terms of the plan to turnaround Fajar, this is our top priority in SCGP. Because of this, we prove that we have ability to compete in this Southeast Asia and also in East Asia and also in this global. We have 3 main strategy and action to turnaround Fajar. First one, we start with those we have -- we are -- can handle in our hand, we call the operation improvement. The operation improvement starts from the variable cost reduction. This time, we optimize raw material by utilizing AOCC, which the network that we are sourcing the local old corrugated container. And also, we try to improve the energy mix. In Fajar, we also try to improve the energy mix to [ lead the cost ]. In terms of the quality rationalization, we initiated the new paper specification, which can reduce the quality giveaway because of the marginal cost reduction and marginal quality improvement that we help strengthen the cost of operation in Indonesia. The second strategy that we handle is to improve the factory ahead. In other words, it's fixed cost. We try to optimize the fixed cost, reduce and use automation and some of that we use to help to improve this thing. And this will improve the competitiveness. Third, strategically increase the sales volume, actually increased sale volume, we strategically -- we call the strategic alliance with some box plant that turned to use our paper. Especially, you see that the X2, X3, X4 and other, their market share has been reduced because of ability to compete in the market. By this way, we can offer the paper to other to replace in the others. That will help a lot to improve the performance. In addition to this, we also adjust the customer portfolio, our customer segmentation and some also we apply adjustment. And by this action, we're confident that by second quarter next year, we can make the breakeven EBITDA of Fajar, and by the fourth quarter of next year, we can breakeven the profit. That's the summary of Fajar Indonesia improvement. However, looking into the future, we can see that Indonesia is a promising economy. We see that in terms of the packaging consumption per capita in Indonesia compared to Thai and Vietnam, Thailand now 60% -- 60 kilo per capita that the paper in terms of polymer is 15.5. Vietnam used to be a very low number, but this time, Vietnam catching up Thailand. However, Indonesia is still far from Thailand. So we still see the opportunity to grow and to compete in Indonesia in the future. In terms of the economy in Indonesia and so on, we see that the GDP of Indonesia range from 4.7% to 8%, if projection in the future is 4.8%. Just one point from this one. A lot of research and news that in the next 4 years, Vietnam and Philippine GDP will overtake Thailand. In terms of the foreign direct investment here, we see that every year, '21 through '23, the foreign direct investment in Indonesia has been improved big amount compared to Thailand. So this is the opportunity in the future. However, we have to overcome short-term obstacle that to improve the performance of the Fajar in Indonesia. Next will be the outlook heading towards end of this year and also into next year also. We see that China demand will extend the soft demand until the fourth quarter. Even this fourth quarter, we feel that this is the high season, especially October and November. In December, end of December, it's just slow down a bit. So this will be a high season because of we prepare for New Year time again, also prepare for the Chinese New Year. In case of the China soft demand, we will focus on the portfolio optimization to serve the target, domestic and also the export, which we are on in the Middle East and some of the products that we have carbon footprint we send to the U.S. Of course, the second is we have to turnaround for Fajar improvement, and we see that it's a clear sign of the improvement. By monthly, July, August and September, we see that it's improved by monthly. However, in terms of the third quarter is dropped compared to the second quarter. In terms of the expansion, enlarge the downstream business. This downstream business includes the M&P box plant still in a growth path. However, the price now are still missing, still not match between the buyer and seller. In terms of the external factor, we see that ASEAN still continue to grow especially in terms of the domestic in this ASEAN. In addition to this, Vietnam and Indonesia will be outperformed in this region because of the population and the management from the government. In terms of the global economy, we see that soft landing, I mean this good soft landing will be finished in the first half of the next year, despite the inflation that also reduced and also the [ exchange list ] that also Thai baht are really strong. In terms of the geopolitical instability and political transition here. We see this still has a risk, but it will be going to improve, we see that. And ASEAN, quite neutral so the movement and relocation of European and U.S. debt, they're invested in China. We see that they also move to ASEAN, especially Thai, Vietnam and Indonesia. In summary, first thing, we must improve the packaging paper format in Indonesia through our effort and continuous improvement. In terms of the investment, as Khun Danaidej mentioned, next year, we plan a THB 13 billion with the M&P and expansion about THB 8 billion to THB 10 billion. So this will be prioritized on the strengthen of the chain integration and also support the strategic growth segment. And also, we will shift more towards downstream business and also a sustainable innovative solution. Last but not least, in the third quarter, we did the upgrade of the rating, especially from MSCI, from rating BBB to rating A. Can you change the slide, please? Yes. Okay. From MSCI, we upgraded rating from BBB to a rating A. This will help improve in terms of the social and the governance part in the category here. In addition to that, we are also rating excellence level from the Carbon Neutral Network, which by the Climate Action Leading Organization, or CALO in this year. So this is the good movement in terms of the sustainability. For carbon footprint product, now we improved a lot in terms of the carbon footprint product. We have the cradle-to-gate assessment of 19 product; cradle-to-get assessment 126 products, total 145 product. In addition to this, we also had to process that pass the certification. This has helped SCGP to a more easier to certify the carbon footprint product because of this [ 16 process ], they are the same and quite fit in terms of the emission from each process. So that's all the update from the third quarter of this year.

And we would like to thank all participants for joining our virtual conference today, and we look forward to seeing you again in January. Thank you, and [Foreign Language] for today.