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

Happy Chinese New Year to everyone, and good afternoon, ladies and gentlemen. With great pleasure, we welcome you at this first year SCGP Analyst Conference. Today, we will cover the performance of the last quarter and the full year of 2024. My name is Sornnarin Bangkedphol from the IR team. I will be your host for this afternoon session. As usual, we will start with the presentation by our management, and we will have the question session right after. So 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] Happy Lunar New Year. So time flies so fast, we meet again in the fourth quarter of 2024 and the whole year of '24 -- 2024 performance. First of all, on behalf of SCGP management, we would like to thank our analysts who are reporting -- continue reporting the SCGP performance and continue to follow our movement in the market. Thank you very much. So even in the 2024 a year is quite challenged for the regional. And the good thing is that I have to thank for the sale and marketing staff that push the effort on the domestic marketing, and we'll have more detail later. For consolidated performance in 2024, the revenue from sales ended at THB 132 billion, which improved by 3% year-on-year. This revenue growth driven from the higher integrated business chain and also buy back business chain sales volume, especially for the domestic. However, the cost of goods sold on sale increased from previous year 1% from 82% to 83%, mainly due to the recycle paper. With this increase in the recycled paper cost that led to EBITDA reduced, 9% year-on-year down to THB 16.1 billion, which have the EBITDA margin at 12%. Based on this, the profit also decreased, aligned with the EBITDA. Also, in addition, with the higher financial costs and also the appreciation of the ASEAN money currency, that lead to the profit for the whole year of last year 2024, THB 3.699 billion or THB 3.7 billion, which are down 30% from previous year. And also ended with the profit margin at 3%. So with that, we see a little bit more in terms of the business segmentation for last year for the 2 main business chain. Start with the integrated business chain. Revenue from sale THB 99.7 billion, last year, almost THB 100 billion, also increased 3% year-on-year. This is driven by the domestic volume in our product category. However, for the EBITDA, THB 13.2 billion, which down 8% compared to previous year. And the EBITDA margin at 13%. EBITDA mainly decline from the lower packaging paper price and also the higher RCP cost. For the fibrous business, which accounts for 19%, fibrous business top line growing to THB 25 billion, which improved by 2% compared to the prior year. This is mainly from the full service packaging volume and also higher dissolving pulp price together. In terms of EBITDA of the fibrous business ended at THB 3.6 billion, which down 4% year-on-year. And also margin of the fibrous business, 14%. The EBITDA margin dropped mainly from the lower printing lighting paper price. In terms of the business portfolio -- in terms of the revenue from sale by business unit, this has not changed much. The figure also the same. The downstream packaging account for 37%, integrated packaging business at 75% and the less in the same figure. The most important, this information this page in the circle in the center in the middle, that revenue from sale by end destination. This time, may I start with the export to rest of the world. In 2023, we have export portion of 19%. This year, we have export portion, 17%, mainly the export dropped drop from the export of the packaging paper to China. Mostly we have to China, 7%, 8%, but this year, down to 6% due to the soft demand of the packaging paper in China. In addition to that, we put the export to U.S. we call the direct export. We do export to U.S. 3%, mainly copy paper, also food service packaging and also the polymer packaging. These 3 account for 3% that we call direct export from us to U.S., which you might consider maybe the impact in the future, but we will discuss later the impact from the new President of the U.S. On top of that, in the domestic in ASEAN Thai, in though Vietnam and the Philippines, the percentage of revenue by sale has been increased at the domestic growing. Thailand increased 1% to 42%. We see 14%, but due to the digit, I think the volume improved. Vietnam improved from 15% to 16% Philippine from 2% to 3%. And in relation to that, the Europe also 5% to 6%. So we put effort a lot for the domestic. From this circle on the right-hand side, also the consumer linked has improved from 72% to 75%. That thanks for the sales team and the strategy that we want to transform to downstream business bigger and more. Recap in year '24 start from the global now to China and down to our Southeast ASEAN and deep down into the packaging paper business. Start from the global demand, we see the moderate growth in the global, even the downturn of the inflation, however, the consumer is still really aware on the spending that made this one really moderate. In China, we see that softened production and the consumption despite the Chinese government also put the support on the economic stimulation. So this may -- still made the China in the slower growth effect by our export packaging paper to China. For ASEAN, we see that the ASEAN is still growing ASEAN still growing in the domestic consumption tourist service sector are the key to the domestic in ASEAN. And on top of that, each country they put the money to stimulate the economy in that country. Deeper down to the paper -- packaging paper industry in this region, the still overcapacity, meaning the demand and capacity imbalance. So that led to the regional price reduced. And also, on top of that, the RCP liquid paper also price increased in the past year. For SCGP on right hand side, we still create the competitiveness, the effective of the challenge and managing of the market. We continue to grow in ASEAN market. In overall, the sale volume grow 2%, both domestic and export. We add more information in next slide, we talk into detail about the growing into the domestic market. And the packaging margin of downstream is still healthy. In terms of the RCP, the cost increase, while the energy costs and the freight costs are quite stable in the past year. So from this, we have 3 figure that we want to inform and want to announce that. In last year, we have the alternative fuel from 35.9% up to 38% that aligned with the greenhouse gas reduction plan. We use the RCP portion for the domestic improved from 57% to 61%. And last but not least, for the energy saving cost due to the artificial intelligence and AI that we are using and machine learning, we can reduce the energy cost last year, THB 140 million. In terms of our liquidity management, we also managed working capital. In last year, we did really well. And so thanks for those manufacturing and marketing who coordinate together. And we reduced the working capital from 84 days down to 78 days. And in the future this year, I mean, we will go less down further. Next slide is the information that we want to explore more and want to explain that how the domestic performed. This we have to thank for the team efforts who are striving to stabilize the performance and to maintain the market share. This lead to SCGP is still a leader and top of the leader in terms of the packaging market in the Southeast Asia to the volume of the domestic. As you know that we have the integrated packaging business and fiber business. For the integrated packaging business on the top left graph, top right graph and the bottom left graph that tick up from the packaging paper, fiber packaging and polymer packaging. We see that start from the packaging paper. The packaging paper, the domestic volume has been growing 10% last year compared to the prior year. So this is the big effort. Despite the export, we reduced a lot from China. So the domestic portion improved from 79% to 84%. This is the lot of effort that we keep our market share. For the fiber packaging, the domestic has been growing 4%. This due to the expanding the capacity in Thailand and also enhance the cross-selling with staffing. We have the customer a broad base, so we can share the customer and enter to sell more packaging. For polymer packaging on the bottom left corner, you see here that the domestic and export has been growing at 9% same figure. So this is a huge number for the volume -- for the polymer packaging, that strengthened the polymer packaging in Thailand and Vietnam 2 country and enhance cost-selling in both that we can get the opportunity. In the integrated packaging business, packaging paper, fiber packaging and polymer packaging, we would say that we grow in the domestic more than the GDP. This is a huge effort that we grow the company in terms of the domestic ASEAN, which we see that this will compensate the volume of packaging that we used to export to China. For the fibrous business, we see the domestic drop by 2%. This is normal because of the printing lighting has been dropping. And with the effort also, we do export -- improve the export more that export improved by 7%. That the export increase from the foodservice packaging and all those products that we call the sustainable product and [indiscernible] and compostable product. So once again, for the integrated packaging business, we grow more than GDP in the last year. In addition to that, in Indonesia operation, especially fourth quarter and the outlook in the future also, we see that the Q4 EBITDA has been improved from the third quarter of last year. GDP, Indonesia roughly 5%, that also solid growth. But the majority of growth of India mainly for the food and beverage and the fast-moving consumer goods, while the RCP and energy and freight cost that align with the ASEAN country. Due to the excess packaging paper supply, so that the slow demand and that lead to price pressure among the industry. On top of that, I went to Indonesia quite often in the past year and just went to Indonesia last week, we see that Indonesia infrastructure has been improved a lot in the past 2 years. So we see that with this infrastructure is being improved and accelerate the growth of the GDP in Indonesia, the new present they account for this year is 8% of GDP. So that's a huge number. For FAJAR key performance with this one, we see that in the fourth quarter, the volume has been improved a lot from the third quarter, almost equal to the first quarter of last year in terms of volume, 18% improved Q-on-Q. However, we still maintain the share at the Indonesia of FAJAR at 29%, 30% in this range. On top of that, the information that APP, their market share improved from 32% to 40% in the fourth quarter of last year. However, the paper -- packaging paper packaging #3 and #4, their market share lost nearly 10% loss to APP. That movement because of they have the difficulty to continue their business due to the loan and debt. So that's the volume. In terms of the EBITDA, we see that the EBITDA negative has been reduced and show the positive tie of the FAJAR and we expect EBITDA breakeven will be in the second quarter of this year as informed last quarter. In terms of review the Internet expenses, we do the financial cost reduction by the capital increase and capital restructure. Khun Dan will have more information. That's the summary of the -- in each business and also in the FAJAR Indonesia. Now we move to the business segment level in the fourth quarter. May I pass to Khun Danaidej.

So we start by looking at the demand from the various countries. As you can see in terms of the Q-on-Q, we have in many countries, the demand is up, and this is consistent with the increase in our sales volume in the domestic market of these countries. For year-on-year, also, we see that for the majority of the countries, there's also an improvement. And mainly, this is driven by the usual positive contribution from the F&B and FMCG segment, consistent with the end of the year festivals and spending in most of the countries in the region. However, some on the export segment, particularly in the food, canned food, seafood has passed the peak season, so this one dropped a little bit in the fourth quarter. Consumer discretionary is about the mix. Some slight increase in electronics because people are buying this for presents towards the end of the year, Christmas, New Year and so on. But there are also other people who are waiting for the spending interaction in Thailand to wait for the government e-tax campaign this quarter. So this part is quite moderate growth. Translate that into the upstream packaging paper, we see the improvement in the overall demand and Indonesia included. But the export to China has reduced because of the volume there has become weaker. However, the tax rate remained at 0 for this segment for the year. Into the fibrous business, which is food services and mix, the increased part is from Asia operation where the focus is on QSR, fast food, which is consistent with the spending of the end-of-year season. Whereas in Europe, the demand for single-use food service packaging dropped because of the winter season. For pulp, dissolving pulp remains quite a high price, and that's a good thing. And for the short fiber pulp, price dropped due to the increase in the capacity globally. So that's the situation in terms of market. So if we move next to the performance for the quarter. You can see that in terms of sales revenue, we stand at THB 31 billion, and that's a drop on both year-on-year and Q-on-Q. The Q-on-Q drop is actually mostly from the price factor because if you look at the volume factor, it's actually an increase in terms of Q-on-Q volume. But the price actually dropped. So as you can see, the percent of cost of goods sold has increased to this effect. EBITDA is then at THB 2.8 billion, okay? It's a drop from both year-on-year and also Q-on-Q. For year-on-year, that's mainly from the increase in costs, particularly in terms of a key raw material, which is recovered paper, which has increased year-on-year. But Q-on-Q, the recovered paper cost has reduced. So if we talk about 2 change, the price dropped and cost also dropped, but the price has dropped by more in terms of absolute terms. So that's why the margin has contracted in the fourth quarter. Looking at net profit, it's also a decline because we record a net loss of THB 57 million. And that's also in line with EBITDA, but there are additional factors in this. And one is in the onetime adjustment that we have for the recycling business in Europe. And this amount is about THB 260 million, which we booked in quarter -- the fourth quarter. This is a nonrecurring item. It's due to the change in the method that we used to calculate the provision for the purchasing cost and expense. And this is to reflect accurately the cost that's going to the system. So that contributed about THB 260 million of loss. Another part that was a change in -- from the third quarter was the additional take-up of the portion from Fajar additional shares. Although Fajar performance has improved, both in terms of EBITDA and net profit Q-on-Q. But in Q3, we take account for the 30% additional shares for 1 month, whereas in this fourth quarter, we take for the full quarter. So that Fajar loss contribution into our consolidation will be THB 260 million more. So if we look closely into the -- in terms of the change between the profit from the third quarter to the fourth quarter, that will factor the onetime nonrecurring of the recycling business of THB 260 million and additional Fajar of THB 260 million. That's -- these two alone, it's already THB 520 million in terms of change in a negative change. Plus, we have dissolving pulp operation that we have annual maintenance, which has lost contribution by about THB 100 million until EBITDA. So in total, these 3 factors almost explained entirely the change from the third quarter. So what that means is when we're moving to the next quarter, which is this quarter, the first quarter of 2025. So we start from the core profit, let's say, if everything else equal, core profit was THB 34 million. We will be able to add the nonrecurring onetime THB 260 million. Dissolving pulp is starting to run as usual. So that's another THB 100 million. And we expect also the improvement in Fajar. So that's -- altogether, the basis for the first quarter profit would likely be -- the starting base point would be around THB 500 million, and that we can see additional improvement in other areas like volume in Q1, the price which has started to increase in some markets. So we believe that the fourth quarter was probably unusually low. So this is the report on the financing for the whole company. Next would be on the integrated packaging business. Revenue is THB 24 billion. So that's a slight increase year-on-year and a slight drop Q-on-Q. In polymer, the revenue is pretty much stable. Basically, there's a pickup in domestic demand, but in the export segment was weaker. And also the medical and labware continue to improve. For fiber packaging on the box, the revenue slightly declined due to some of the durable goods demand, in contrast with the other consumption, which has improved. Packaging paper revenue Q-on-Q decrease, and that's because the prices. Volume has increased by about 4%, but price declined by 6%. So that's the reason. So if you look at EBITDA, which is about THB 2.8 billion, it's quite similar to the last quarter, and in terms of margin, it's also similar. As I mentioned, if you talk about year-on-year, the lower EBITDA would be mostly due to on the cost of packaging paper, which is the RCP cost. But if we look into the Q-on-Q change, the volume is better. The price is lower and the costs are also lower, but the absolute amount of the change is not in the same proportion. So we have that slight reduction in the margin there. But anyway, Fajar has improved. Next is on the fibrous business. The revenue is THB 5.4 billion, it's just a drop both year-on-year and Q-on-Q. If you look at all 3 segments of fibrous, which is food service, paper and pulp, we see revenue actually decreased in all 3 of them and mainly from the volume factor. Also, paper price also declined during this period. And for the pulp, the key one is on the maintenance of the dissolving pulp. Looking at the EBITDA, it was down to about THB 500 million, which is about THB 300 million lower than last quarter. And this can be separated into 3 equal -- about equal amount, the drop of THB 300 million about THB 100 million is dissolving pulp, which we have a period downtime for the annual maintenance. The short fiber, which has a lower selling price, that's also about THB 100 million. And the paper, which is down in both volume and price, about THB 100 million. So the 3 segments contribute about THB 300 million. But as I mentioned for the dissolved pulp, this should be recovered fully in the first quarter of this year, which is this quarter. So we should see the margin improve going forward. So next on financial review, we have core profit of THB 34 million in the fourth quarter with an FX loss. This is due to the loan, derivatives and investment. This is a nonoperational part. So that takes our net profit down to THB 57 million. For the balance sheet, our net debt at the end of the year is THB 52 billion, and that's an increase from the year-end last year, mainly because of the additional acquisition of Fajar, which we used up cash as well as take on additional loan. The total amount now of the loan will be about THB 65 billion and cash of THB 12 billion. And the cost of debt average is 4.3%, but mainly, it's because of the overseas debt, which has a higher interest rate than Thai debt. Anyhow, our rating remains maintained at A, stable. Looking into CapEx, we have spent last year nearly THB 30 billion. But as you can see, most of it, THB 25 billion is on the growth, which is majority of the Fajar acquisition plus the M&P of VEM and also other organic expansion. In terms of maintenance CapEx and efficiency, ESG, that's about THB 4.3 billion. So coming to this year, 2025, we expect CapEx up about THB 13 billion, THB 3 billion to THB 5 billion of maintenance and efficiency CapEx and THB 8 billion to THB 10 billion in terms of growth CapEx. Additionally, today, the Board has approved the dividend payment of THB 0.55 per share, which is the same as last year. And this represents a yield of approximately 3.3% on current price. And the reason we are paying the same amount of dividend despite the lower net profit is because we have a very good cash flow position. We have very good cash flow, we expect higher EBITDA in this year 2025. So with the CapEx of our THB 13 billion, so paying the dividend of this amount is actually quite suitable for the current situation. and reflecting also, I believe that the outlook for 2025 is actually better. Last item for me would be on the update on ESG and innovation front. On the sustainability rating, we maintain our AAA set rating, which is the third consecutive year. And the same thing with Sustainable1, which is the S&P Global, which we are rated at top 1% globally on container and packaging sector for the third consecutive year as well. On the EcoVadis rating, we are upgraded to Platinum. So all these still shows that we are very committed to our sustainability initiatives. In terms of innovation and R&D, we spent roughly 1% of revenue for the past few years, and that has bear fruit in terms of our achievement. This prize and award of honor to reflect the quite cutting-edge innovation that we have from our company for 3 years in a row. And the last year for the latest one is Eucalyptus clones, which is emphasized on sustainability as well. So these are the updates in terms of financial and business. Next will be outlook from Khun Wichan.

Thank you, Khun Danaidej, for the very clear explanation. For the outlook and the key takeaway, we presented last year, the progressive forecast for the next 5 years start from this year. But this now, we see deeper for the progress forecast in this year 2025. This means this is the strategic implementation. We summarized in full our strategy and concluded with the target that can be measurable. For the profitability enhancement and the transition growth here, of course, we want to transform the business model transformation to be more consumer linked. With this, we target that the EBITDA of this year will be THB 18 billion with the growth CapEx more than THB 8 billion, as Khun Danaidej explained. Second one in terms of the improved production cost, energy efficient with AI as already mentioned here. We use technology and automation. With this, we are confident that we can file the business opportunity and include with the cost saving around THB 600 million this year. For innovation solution, customer experience, I want to add customer excellence with the marketing excellence now we formulate and share all the customer information and we set the pricing of the each business. So this will include the solution and service more than 37% compared to the total sales. In terms of the ESG and circular economy, which we give the important here because in the future, they might impose the carbon tax here. This year, we target that we use alternative fuel to be 93%. And we continue to modify our boiler to use more alternative fuel in our boiler. For the outlook heading towards this year, we see that internal, we see here the expansion, we provide a growth CapEx more than the THB 8 billion here. So this one, we see that we go in the end product demand that give the opportunity, especially the new growth, health care supply and also the packaging that close to the consumer. Next one, we see that Indonesia operation is the key because any time when we made the analyst conference, more than half that asked about the Indonesia operation. We also give importance for this Indonesia operation, especially Fajar. Of course, we want to create the competitive advantage in India. And now the portfolio optimization go along with, we reduced number of SKUs that reduce the chain and make cost more efficient and make product more optimum. And also, we want to find the strategic partnership. This is in 2 ways. The first way, I mean, the customer that use our paper, so we want to engage with them, ensure them that we support them in longer term. And also the end customer who buy the packaging. Frankly speaking, that our customer, mainly in Thailand, many of them are multinational company and multinational company, they have many companies in Southeast Asia. So we use our network to expand the packaging in Indonesia. For packaging solutions, we also improved on that and also for the sustainable development goal, the project that both have been approved in terms of modify the boiler to use biomass more, that's to repair in case of the government we impose the carbon tax in the future. So we will not hurt much for that one. In terms of the outlook of the market, we see that the positive momentum from ASEAN domestic Thailand, Vietnam, Indonesia, Philippines and also in Malaysia. We see that a little bit pressure on the export, especially to the U.S. President. Dan already in the position here, but the executive order that has been signed still in line with the mentioned. However, the tax still not yet finalized. So we see on that how the impact of the China and Southeast Asia. In terms of the macro economy, we see that foreign exchange and interest rate, but interest rate will be the downtrend, while the RCP may be expected to sideway up due to the demand will be picking up. In all in all, I just want to summarize that. So I think the fourth quarter of 2024 is the lowest one, and we see the demand picking up in this first quarter. And hopefully, this we can maintain this momentum. And with the efforts of the sales and marketing team, so we are confident that we can grow in terms of volume and improve the financial improvement start from the first quarter of this year. That's all the fourth quarter results and the whole year of 2024.

If you have any additional questions, please feel free to contact our IR team. We will address on that. And we would like to thanks our participants today for joining our today virtual conference. We look forward to seeing you again in the next quarter. And today, thank you and [Foreign Language].

Happy Lunar New Year and [Foreign Language].