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 of the first quarter of this year. Today, we will cover the performance of the first quarter. 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 by management, and we will have the Q&A session live after. Please allow me to 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, so far, we meet again on the first quarter results of year 2025. At the end of first quarter and the really beginning of the second quarter, there is a U.S. tariff issues beginning at the second quarter of this year. So before discussion on that, may I report on the first quarter performance before we go to the U.S. tariff issues. In overall in the first quarter, the packaging demand has been growing. And thanks for the government stimulus package that build the demand of the -- from the bottom of the people. And also with the strategy of SCGP, we focus on the flexibilities speed. And of course, we do focus on the cash management and cash generation management that and still really strong. That lead to the consolidated key financial perform in the first quarter. Revenue from sales THB 32 billion, which reduced 5% year-on-year and improved 3% Q-on-Q. The revenue decline due to the selling price, both in terms of the indicated packaging business and business. And also the volume of export of the packaging paper also reduced compared to last year. For EBITDA, EBITDA THB 4.2 billion, which is down 18% year-on-year and improved 49% Q-on-Q with the EBITDA margin at 13%. Net profit, THB 900 million, which down 48% year-on-year and also profit margin up to 3%. So this is mainly due to the margin improved, thanks to those production utilization and the effective cost management, especially RCP and also the energy cost savings which we are using the machine learning and the AI. From this information, we are really confident that we can reach the bottom and now we are off the bottom as we commit at the end of last year. As we prioritize the expanding consumer packaging business and strengthen the top line growth through the consumer-focused strategy, which lead to we have the consumer packaging business increased to 44% of the total revenue, up 1% compared to first quarter last year. This we put a lot of effort to improve the volume of the consumer packaging business, and this is the result help us to very proud of the team to improve this one. In fact, the consumer packaging business comprised of copy paper, A3, A4, A5 like that, which we also export some portion to U.S. Foods packaging, of course, and then health care supply, polymer packaging and fiber packaging. So in this category, we consider to be a consumer packaging business. In terms of the revenue from sales by destination, Thailand improved for 43% to 45% because mainly Thailand focus on the domestic and export and expand catching the market in ASEAN also. In the Indonesia and Vietnam, the revenue reduced 1% because of a reduced number of exports. We would say that in the past year that we see the trend of export to China has been reduced until today. We decided to loose coupling from China for export. In the past, we are already tie cutting to China. Now we can say that we are loose coupling from China with the new market and also with the domestic market. We still have the link to China, but we still don't say that we are decoupling from China. We just say that we are loose coupling from China at this stage. In terms of the other country ASEAN, Philippines, Malaysia and in Europe, U.K. and Netherlands that's still maintained as usual as last year. For export, 17% here, 6% to China and U.S. 4%. Last year, the total year -- whole year last year, we do export -- we did export to U.S., 3%. But this first quarter, we did export to U.S. 4%, which demand that jumped up in the March, especially in Thailand. So this help a lot that the export to U.S. improved. So that will be the revenue from sale by destination. For the economic and market movement, we see that the global economy faced the significant volatility. We can see these 3 figures, the first in terms of the PMI, purchasing managers index. We see that the ASEAN which in the gray color also improved compared to last year. China seems to be stable. But if you look at in the retail January, February and March, the color from China improved a lot. However, in the U.S., this PMI seems to be the abnormal quite high. As you know that it might be impact from the -- before the tariff issues. In terms of the export value from the major economy in Southeast Asia, Thai, Vietnam, Indonesia, 15%, 11% and 7% growth year-on-year, especially Thai in March has jumped a lot compared to the past few years. In addition to that, also China also export value increased 6%. We can see that all the major country, the export improved. That seems to be an understand that, meaning the market is still growing. For the consumer price index, we see that Thailand, Vietnam, Indonesia also increased year-on-year. However, the Vietnam on the top is tend to be reduced from 4.5% to roughly about 3% from CPI. Indonesia is another glass that in gray color. So Indonesia, the CPI start to decline, but still not negative. For Thailand, I would say Thailand is stable at roughly 1%. So this is quite a good number to maintain those inflation. So this is the 3 main areas that I want to report. So next for the detailed business for each business unit, may I pass on to Khun Danaidej.

So may I start with the picture of the market and the demand for the first quarter for all the countries that we operate. As you can see on the left side that the arrows are pointing up and it's green for most of the markets. So that's a good thing. That's a good news. Q-on-Q-wise, it's up in every market, except in Vietnam, where there's a holiday, Lunar New Year. And so that's why the demand was dropping Q-on-Q due to seasonality. But if you look at the year-on-year, it has been a big improvement in all the markets, even in Europe, which has been also the demand in Europe is picking up year-over-year. For the segment, the fiber and polymer packaging, we see on the consumer staples that there's also the rise in consumer products as well as certain segment of the exports such as frozen and canned food. So that contributed to the increase in the demand. There's also a stock preparation before the holidays in Thailand and Indonesia, which partially offset the slow demand in Vietnam due to the holidays. But on the consumer discretionary, we have some segments which are growing due to seasonality such as air conditioner or cooling appliances. Also some of the footwear markets are gradually increasing. So that's the part that is growing. But overall, in this consumer discretionary, we see that there's still the restraining spending on the household or consumer due to the tight debt level. For this, it leads to the packaging paper also have experienced an increase in demand on the domestic market. For the import into China or the export from our part to China, it also shows an increasing number in the first quarter compared to fourth quarter of last year despite having the Lunar New Year in the first quarter here. So that's indicating that in the China and the Chinese market also requiring more paper into their production process. For food packaging, the QSR segment is favorable, and that partially contributed by the increasing in the tourist number and also the activities in the ASEAN market. Pulp, short fiber pulp demand increased, but the dissolving pulp demand somewhat weakened towards the end of the quarter due to the slower garment and textile market. So that's the picture of the demand for the first quarter. So now we move into the performance in the -- each business chain, starting from the integrated packaging business. In the first quarter, we locked in the revenue of THB 24 billion. That's a decline of 5% year-on-year, and that's due to mainly on the price factor of all of the segments, plus the declining volume in the packaging paper, mainly in the export part. If you look at Q-on-Q, the numbers are flat. And if you look at each segment in the polymer packaging revenue declined because our portfolio for the polymer is mainly in Vietnam. So that's a holiday. But in Thailand, we see the consumer part quite stable. Medical and labware sales volume also improved in this polymer packaging. For fiber packaging, revenue slightly decreased. Price was stable and not adjusting higher, but there's also some slight decline in the durable goods segment, which is offset by the stable demand in the essential goods part. Packaging paper revenue was up, the sales volume increased by 4% Q-on-Q. And that's mainly from the export market that is down. But if you take about the domestic market for the packaging paper, it's actually increased by about 7%. So that reflects a healthy demand in the first quarter in the various domestic markets. Selling price are relatively flat for packaging paper. So with this, the overall EBITDA margin -- EBITDA for IPB was THB 3.5 billion. That is down 12% year-on-year, mainly on the price of packaging paper as well as the rising raw material cost, which is RCP, which has risen year-on-year. But in terms of margin, the margin grew to 15% compared to 12% in the last quarter, mainly from the volume increase. In packaging paper and in all other segment, but the cost -- overall cost was reduced. So overall ICT cost is favorable. The energy cost is favorable and freight cost is favorable. And this is the main reason that the margin has expanded to the level of 15% compared to last quarter. So let me discuss a little bit on the Indonesia operation. So the overall Indonesia market, we see the broad domestic consumption remained quite resilient, and that is seen from the demand pre and post holiday there. You can see from the chart that the domestic volume grew internally about 3% on the quarter. Overall, the volume dropped, but that's mainly because of the export to China, which was reduced. If you look at the price, it's also increased by about 3% Q-on-Q. So with this, we can see that EBITDA has improved, become less negative in the first quarter. This is the unit is in IDR 1 billion. So it's improved from minus IDR 100 million to about minus IDR 55 million. So it's in the right direction that we aim to breakeven in the second quarter of this year. In terms of the progress, how we do this, how we improve the volume, we use -- we strengthened our integration between packaging paper and the box business. The box we were able to acquire some new segments for their customers, and that means utilizing more of the paper from Fajar. So the integration and the consumption of paper has been increased because of the new segment that we are able to get. So that's increasing in terms of the collaboration between the chain. The second part is on cost. We were able to achieve -- we prioritize the use of the domestic RCP supply at 55% and also increased doing on our -- delivering on our quality rationalization by reducing our product SKU, and that helps improve the production run in the plant and improving the plant efficiency as well. In terms of capital increase, it's on track. We are now in the midst of the rights issue, and it should be completed by June or July of this year, which is about 1 quarter ahead of our plan. And this would help reduce the interest cost of Fajar by about THB 500 million per year at Fajar level. So that's an improvement and development on Fajar. Next will be on the Fibrous business. Revenue is THB 6.4 billion. That's a reduction of 2% year-on-year and mainly from the price of the paper and pulp. Volume actually increased except for paper in terms of the year basis. In terms of Q-on-Q, revenue increased by 18%, and this is the increase in all of the segments here, foodservice, paper and pulp. For foodservice, the revenue rise mainly from volume factor, driven by tourism and promotional materials as well as the demand, which started to pick up in Europe and U.K. in preparation for the higher usage season in the spring and the summer. In terms of the fine paper, revenue also grew, and that's mainly on the volumes. Price dropped somewhat. For pulp, both volume and price are better in the first quarter. Volume, of course, we have the shutdown of the dissolving pulp operation in the fourth quarter. So we resume that. So we are running full capacity in the first quarter and having then the output increase. The price of pulp also increased, whereas towards the end of the quarter, the dissolving pulp price start to weaken. So with this, we achieved EBITDA in the fibers business of THB 727 million. That's dropped year-on-year due to price factor, but improved Q-on-Q, mainly from the volume, as I mentioned. Next will be on the financial part. In terms of core profit and net profit, our core profit for the first quarter was THB 916 million. There was some adjustment mostly on the FX and some impairment of the obsolete spare parts that we booked in Q1. So the total net profit is THB 900 million. In terms of our balance sheet, the net debt level is now stable at about THB 52 billion, okay? So our net debt-to-EBITDA stay about 3.4x, D/E about 1x. Our cost of debt over the first quarter was 4.4%. This 4% is actually a blended cost of debt in Thailand and in overseas market. In Thailand, our cost of debt is below 3%. But in certain overseas markets, the cost of debt is higher. So the average is 4%. In terms of CapEx, the first quarter number is THB 1.1 billion. That's still not much because mostly of the maintenance, efficiency, innovation type of CapEx. The growth CapEx we plan at THB 8 billion to THB 10 billion this year is more for the expansion and M&P, which would be coming in the second to the fourth quarter rather than in the first quarter. So that's still -- the budget is still maintained at THB 13 billion for this year. So now I want to move into the -- some progress in terms of the business that we have. The first one will be on the investment to put up a line to produce syringe and needles in Thailand. We enter into health care market because of the high growth and the health care supply market are still growing everywhere in the world. Globally, it's about 4%, but in Asia Pacific region, the growth is higher. So syringe and needles are the part -- essential part of this that we are looking to enter because it bring us closer to the real users and they have a growing market in Thailand and elsewhere. But Thailand now still rely mostly on the imported syringes and needles from outside of the countries. So it will be a good chance to actually produce this product in the country. This is a more sophisticated and higher value than the portfolio we have. So the way we do it is we use our VEM. If you remember, we acquired this company at a 90% share last year. We also have already the portfolio in the health care. They also have a know-how in terms of production and also the facilities with clean room. So we just want to add this production line to produce. First of all, if you look at it, is the syringe. The syringe, the one that we have seen in and use here, this in Thailand, as I mentioned, are mostly imported. So we will be able to substitute import with our local production. In terms of the needles, we will source and then assemble the needles at the facilities so because we can combine and sell it as a package of the needle for use here. And one of the key features is the new, which is gaining momentum in terms of the safety needles where after use in the health care professional, there's some -- from time to time, there's accident where the nurses or doctors get pinched by the used needles, and that's very dangerous. So Once Medical, who is our partner in doing this brand once for the needles and syringe, they have also their patent design on this safety, which can cap all the needles and the professional are safe from being pinched by the needle. So that's the kind of product that we are looking to move into. Initially, the investment will be THB 142 million for this line, producing 180 million pieces of syringes a year and 100 pieces of needles and should start commercialization in 2026. The next product will be on the flexible packaging, which is our current portfolio, but we want to expand into new and higher value, which is a growing pet food segment. And for this particular investment, Howa, which is our current partner in our flexible packaging, will set up a company to produce this flexible packaging to serve their customer from Japan. But facility is here in Thailand, meaning the customers -- the customer in Japan set up the pet food manufacturing facility in Thailand and Howa will be serving this customer. So we joined with them at a 25% share to be able to catch on this fast-growing pet food market as well as to gain some higher technology, higher production know-how in this particular product, which is the retort pouch with 4-layer dry lamination. So this is just to strengthen our relationship with our current partner, Howa and also to tap into the new and value-added market. So the plan will start running starting from June this year. Next will be on our ESG and recognition and other parts. First of all, we installed -- we established 2 new biomass boilers for our box plant fiber packing operations in Thailand. So these 2 boilers will replace the old ones with use fossil fuel. So that has 2 benefits. One, the cost will be reduced as well, but also in terms of the greenhouse gas is also reduced. So the percentage of our increased use of alternative fuel will now increase to 42%. With that, we also win the World Corrugated Award 2025, recognizing the fact that we developed the carbon footprint calculations. We updated this last quarter that we have achieved some carbon footprint certification. So we do this by the formula and this formula give us the award as well as to use the renewable energy system for our box business, such as biomass boiler or solar panel. The third one is the Thailand Top Corporate Award, which is a recognition that we are the top brand with a brand valuation of over THB 100 billion in the packaging category. This is the award and the award is done by Stock Exchange of Thailand in conjunction with Chulalongkorn University and the Manager online. So these are the 3 key achievements in terms of ESG and the recognition of our innovations on that front. Finally, I want to recap the progress in the first quarter along the 4 strategies. The first one is on profitability enhancement and transition growth. You can see that our EBITDA is THB 4.2 billion, and that's moved along with our -- still with our target of this year EBITDA of THB 18 billion, which we believe that we can achieve. The second one is on CapEx. It's still low in the first quarter, but we would be looking into some further investment, valuable and accretive investment in M&P coming in the second half of this year. On the second strategy in the people and operational excellence, supply chain excellence, we aim to achieve a cost saving of THB 600 million this year. In the first quarter, we were able to achieve THB 185 million through the use of higher efficiency improvement, better fiber yield optimization as well as the use of biomass boiler to save costs. In terms of solution and innovation, we achieved 39% of our products compared to the target of 37%. So we already achieved that in Q1. We have to maintain or increase this in the remaining of the year. The same is for alternative fuel percentage, which we achieved 42% in the first quarter. So we try to maintain this or achieve higher number for the year. So these are the recaps in terms of financial and business update for the first quarter. For the next part, Khun Wichan, please.

Thank you, Khun Danaidej. Next will be the key takeaway and outlook. May I start from the U.S. tariff indication. For this, we do the value chain impact analysis, which we categorize in the supply chain into 3 groups. The first group, the blue color, we call the SCGP level. The gray color is the customer. And the third one is color we call related stakeholder in the value chain, meaning it's a competitor and the competitor of our customer. With the 3 category, actually, there is another one about supply, but we cut the supplier out because of the impact is not that will be our opportunity for the supplier. With this value chain analysis, we divided into 3 groups. Each group, we also divide into the 3 level. May I start with the level 1 level of FCG direct exports to U.S. In the first quarter, SCGP did export to U.S. THB 1.2 billion, which a little improved from last year due to the sales demand in the March, okay. The product that we export to U.S. category polymer packaging. We have also copy paper A3, A4, A5 sizes and the food service packaging also these 3 have the production base in Thailand and in Vietnam, only 2 countries. Our customer in the U.S. and the customer is the end user or retailer. In this category, we also see the major competitor. The major competitor, meaning the country that which have the U.S. tariff less than Thailand. So we can say that this is our competitor in the future. So Level 2 is about the customer -- our customer has exposure, meaning our customer who buy, for example, our box like can and vegetable fruits, rubber, they produce this, and they have exposure in terms of export and some of those exports going to the U.S. For example, if our customer may export in the portfolio about 30% to 35% and part of that goes to U.S. overall, 5% to 10% of the customer revenue that goes to the U.S. So for us, our revenue that's linked to that part in the Level 2 is about THB 966 million in the first quarter. So the main customer segmentation here, you can see that we have the food. We have labor, we have food, electrical and also processed food. This is the key majority, which we have the base production in Thailand, Vietnam, Indonesia and also some in the Philippines. We can see that the competitor of our customers are in the country that we mentioned here. So this is the thing that we see and we see the competitor that the country that has lower tariff from the U.S. So we can employ and we can initiate how the mitigation plan for this. We come down to the Level 3, Level 3, we call the threat from the China and global demand slowdown. As of now, we do export to China lastly, in the first quarter, 2 billion, which we have the packaging paper and also the sowing the key product that too. So the implication of the impact that the decreased demand from the imported paper into China may be reduced because of the slow export China to U.S. things like that. So this is the thing that we are analyzing. And also, as mentioned earlier at the very beginning for the sale by destination, we do loose coupling from China since last year. And however, we still sell to China, but noting as before. With this value chain impact analysis, we go to the next strategy for the strategic execution. We execute the cross-functional solution in a changing competitive landscape. From this map, you see that the blue color is our production base in Vietnam, Malaysia, Indonesia, Philippines and so in Europe and the trading office in the U.S. The orange color mentioned about those countries that get the U.S. tariff lower than Thailand. So when this see the country, we divided the group that the ASEAN operation with the tariff from 24% to 46%. This area in ASEAN, we will diversify our focus to ASEAN domestic. And also, we have potential market in South Asia, Middle East and Oceania that we started in the first quarter. In addition to that collaboration with the international account, we can do OEM or streamline our relocation and production transition in Indonesia or Malaysia, with the tariff effect lower than Thailand and Vietnam. This is a good one. The second one, those company in the Europe operation, the tariff in the between 10 and 20. By this, we can do the outsource of the food packaging, for example, to Turk and Eastern Europe because we have a very good portfolio of the customer. We can do outsource to Turkey, which has the lower tariff effect. Last but not least, the most important, the other business opportunity, we can see the opportunity here, especially for the sales and marketing. we improved the chain indication that if then show in Indonesia, that's already mentioned that the indication that help to improve the volume. In addition to that, we have the onshoring, offshoring and nearshoring to lower the tariff area. And now they have another word that, friendshoring. So that will be the opportunity for us. For raw material, of course, China and some area that the high tariff number. So they might have a problem in terms of the supply. However, we can source from them with a cheaper price that we are sourcing now so that the raw material. For the investment in U.S.A., we consider setting up the business operation in U.S. Next week, Khun Danaidej and myself will go to the U.S. to join the SLC USA convention. And also we go to see a few factory and also to understand the situation in the market there. In fact, during the COVID customer in the U.S., especially for the rigid packaging already request us to put up the factory in U.S., but we see still no benefit at that time. We decided to put warehouse in state. But now with the tariff and so on, so we go to U.S. to see the situation there and discuss with the customer and also see the location, how the thing happened there. So that will be result from the impact from the U.S. tariff. Looking further into the 2025 of this year. So we still focus on the speed of execution, which evidence already in the first quarter. We also add up the flexibility and also cash management is the key criteria to success for this time. And also, we will capturing ASEAN domestic growth, especially for the consumer packaging business. And in addition to that, Khun Dan already mentioned that we invest in health care supply, we use our competency in the injection molding. Next one is the cost saving. I think to survive in the industry from now on, the cost saving, which in our hand will be the most important. And also, we see the industry consolidation will be coming more in the near future, especially those who have no customer diversify of the portfolio of the customer diversification things like that. Last but not least for the internal, we're expanding the solution and so and chip to customer focus. SCGP start the business from the manufacturing. At that time, some of them a commodity. And in the past few years, we moved from manufacturing to be a product focus, which help a lot to understand and more close to consumer. But now we see that to survive in this changing world also now we are transformation to product focus to customer focus, we understand customer more and keep the customer and keep relation with the customer so we can focus and expand in the future. In terms of the external in terms of the transformation of the business that ASEAN still remain relatively outperform in other region and still remain the most competitive manufacturing sector. We have good people. We have really working hard people. And also, we have the lower cost of the people, this thing. We think that Southeast Asia and ASEAN will be still the competitive and we can compete with the other area in this world. In terms of the financial market, we see that it seems to be quite a fluctuation in the near term here, especially in exchange rate and also interest rates. So that's all the update from the first quarter of this year. And we look forward to seeing you again in the next quarter. And today, we would like to thank and [Foreign Language].