SCG Packaging Public Company Limited (SCGP) 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 the IR team, and I will be your host on this afternoon session. As usual, we will start with the presentation by the management, and we will have the Q&A session right 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. [Foreign Language] Time flies so fast this time. So we meet again for the second quarter of 2025 and the first half of the year 2025 operating results. Situations have been changing and instabilities. U.S. tariff for Thailand, we're still waiting for the figure, number from the U.S. and also geopolitical tensions also increasing. Good news that both parties are now satisfied and start pace talk this morning. So we wish that the situation will calm down and both sides can discuss and continue to be a friendship and good country friend altogether. Even the situation that U.S. tariff and the geopolitical tension, SCGP also focused in 3 main objectives, same as the first quarter of this year. First one, we focus on the cash generation. Second, we also focus on the customer-centric and also we expand for the consumer link. We believe that whatever the situation is, the consumer link will be continue to grow in this development world. Third, SCG make the business more flexibility of the supply chain. So we can do supply chain relocation among this, especially Thai, Vietnam and Indonesia. With that, may I start with the consolidated key financial performance of the first half of this year. First half of this year, sales revenue were THB 63.7 billion, which reduced 6% year-on-year and 1% compared to second half of last year, with the cost also reduced from 85% to 82%. Revenue declined year-on-year, primarily from the weaker selling price of the indicated packaging business and also fibrous in line with the regional market trend. However, first half of this year compared to second half of last year, revenue slightly decreased. This is because of the sales volume has been increased. The selling price also dropped, but the sales volume increased to a hell to lessen that impact to the revenue from sales. In terms of EBITDA, EBITDA THB 8.49 billion, which improved 34% compared to second half of last year. This is the significant improve, especially for the EBITDA margin, up from 10% to 13%. Net profit also the same. This first half, we reached the profit THB 1.9 billion, which very much improved from the second half of last year, which lead to the profit margin at 3% come close to the figure that we used to achieve in the past. EBITDA and profit dropped year-on-year reflecting the revenue decline. However, the first half compared to half of last year, profitability increased from the raw material and also energy cost saving. On top of that, as we see on the figure, most of this one also contributed from the Fajar, which improved the Indonesia operation. In terms of the business segment, we see that the Integrated Packaging Business margin stayed very resilient due to volume growth in the consumer packaging along with the effective cost management. We see here the integrated packaging business, the EBITDA 7.3 billion with EBITDA margin 15%, which improved 28% compared to second half of last year. For the fibrous business, profitability declined from the downward trend of the selling price across all the product category, which lead to the EBITDA THB 1.17 billion, reduced 10% compared to the second half of last year and lead to the EBITDA margin at 9%. With that, the business portfolio we see from left-hand side, revenue from sales by business unit. We see here consumer packaging expand to 46%, up from 44% last time. This due to the volume growth in health care supply, polymer and foodservice packaging, while the packaging paper -- actually, packaging paper deck, the domestic in ASEAN improved a lot, but the export to China has been reduced. All in all, total, we just reduced a little compared to total market. In terms of the revenue from sale by end destination, we see Thailand improved from 42% to 44%, once again, the lithium because of reduced the export to China, and we can grow the domestic market in Thailand. On top of that, the export outside this region, outside our area of doing the business, down from 17% to 16%. This contribution by the export to China also has been reduced to only 5% compared to the past 76% and now down to 5%. Export to U.S. still maintained at roughly 3% to 4% of our portfolio. In terms of the market movement, we can see that the PMI here, the global economy continued to grow because in the moderate rate because of the U.S. PMI improved in the past 3 months, while the China and Thailand, the figure above 50%. This is show the size of recovery. However, the instability due to the U.S. tariff is still there. So we hopefully, by end of this week, all the figure from our country will be released from the U.S. and the new -- latest we see that the less than -- there might be a range of between 15% to 20%. In terms of the export, all the country has been improved from Q-on-Q, Thailand, 5%; Indonesia, 2% because of in the second quarter, have a long holiday. Vietnam also improved 13%, China, 12%. So this improved a lot, meaning the growth in the domestic. Of course, this small portion comes from the front-load to U.S., but our observation is it's not much for the front-load. In terms of the consumer price index, Thailand has been reduced and negative. So we are quite confident that the inflation is not so high. And hopefully, the Bank of Thailand will be reduced the interest rate. For Vietnam and Indonesia, in the past 6 months, the CPI is quite stable. So with that, Indonesia, Central Bank also reduced the interest rate. So that will be the key figure. However, for Thailand, the instability of the political source will be the key challenge, will be the key challenge for us. So this will be key to aspect of the FDI to Thailand. For the business review and segmentation for the second quarter, may I ask Khun Danaidej to present and explain in further detail. Please come.

So if we look at the chart on the left, we can see that for most of the economies, you'll see the green arrows pointing up. It's mean demand has been growing in terms of year-on-year and Q-on-Q on most of them. So that's part of the good news. For Thailand, it's not -- maybe not growing, but it's not actually not a very bad second quarter at all because if you look into -- normally, the second quarter would be less than the first quarter. But for this year, the second quarter and first quarter was quite similar, given that we have some grant holidays during that period, too. But if we talk about year-on-year, last year in the second quarter in Thailand was particularly good. So this year was not bad, but it's not as good as last time. So the demand dropped only slightly in the second quarter. Now if we look into each segment, starting from the consumer-linked fiber and polymer packaging. In terms of consumer staple. We see -- continue to see resilient domestic consumption, and that's a part that drive all the demand in most of the ASEAN countries. In terms of the exports, some segment benefit from the tariff pause, let's say, the suspension of the waiting period, particularly in the packaged and produce food that has an extra volume of export in that category. For the consumer discretionary, the momentum for export continue for things like footwear and computer and electronic parts to take advantage of the similar window for tariff. But in terms of domestic consumption in the consumer discretionary is still not very strong, and that's constrained by the consumer purchasing power because of the higher debt -- household debt that we have. So with this, it also has the implication on the packaging paper in that there's a strong domestic demand, as you can see from the rise in domestic volume as well, particularly in Indonesia and in Vietnam. And for the export market, if you talk about the China in terms of containerboard, there was a slowdown in terms of the export to China or in other words, the import of China in this product category actually reduced because they rely more on domestic production. For foodservice packaging, it was overall very good in terms of volume. For the QSR, our fast food segment in Asia, they have promotional items. So there's a growth in foodservice packaging as well as the retail items selling in Europe because of the summer months is the peak season for this type of packaging as well. For pulp, the demand was rather weak because of the dissolving pulp linked to the slowdown in the garment and textile segment. And also, there was an overall decline in the pulp price in the global market. So that contributed to the decline in terms of the pulp segment. So next, we will talk about the quarterly financials. First, look at the revenue, we locked in at THB 31.5 billion for the second quarter. That's a drop year-on-year, mainly because of the price factor. In terms of volume, year-on-year volume rose, but because of the price drop, so that contributed to the revenue drop. In terms of Q-on-Q, the revenue dropped slightly also. We have a drop in volume, mainly in relation to the Fibrous business, whereas the price is relatively flat across all of the segments. So that's contribute to a small decline in terms of quarterly revenue. We move to EBITDA was THB 4.2 billion, and that's a drop also year-on-year in line with the revenue. But in terms of Q-on-Q, we have a slight improvement of 1%. Despite the fact that the volume decline Q-on-Q, cost elements also declined. So that gives us a better margin to give us better EBITDA in the second quarter. So with that, our net profit for the second quarter was THB 1.01 billion, to be exact. And that is in line with EBITDA. Now it's increasing from the last quarter, which was THB 900 million. So that's the overall quarterly performance of SCGP. Now I would like to go into the detail of each business chain, starting with the Integrated Packaging. Revenue was roughly THB 24 billion, and that's a drop year-on-year, mainly because of the price factor. Q-on-Q also a slight decline, relatively flat. But if we break down into each segment, we'll see that the polymer packaging actually see the growth in terms of revenue because of the growth in volume, whereas the price remained quite flat. And this is -- the volume growth is supported by the domestic consumption and also part of the export market, as I explained earlier. In terms of medical supply and labware also show improvement in this quarter. For Fiber Packaging or box business, revenue was resilient, relatively flat because we have both price and volume similar to Q1. We have the demand -- partially driven by the demand growth in the consumer-linked segment in Vietnam and Indonesia. Whereas in Thailand, we have a holiday season, so a bit lower. Packaging paper revenue slightly declined, and that's because of the volume in the export market that was lower than the first quarter, whereas our domestic volume actually increased. Price overall dropped slightly. But in Indonesia, we have an increase in price of about 2% Q-on-Q. So with this for the whole chain, the EBITDA was THB 3.8 billion, and that's an increase both in terms of year-on-year and Q-on-Q. The reason is because we shift to more domestic markets, domestic volume, so that gives us a better margin and also our cost, whether RCP or energy cost was in a better position. So that contributed to expand margin in the second quarter. And Q-on-Q as well, we have an EBITDA, which is positive for Fajar operation in the second quarter of this year. I'll expand on that later. Next would be the fibrous business. So for fibrous, revenue was THB 5.9 billion. It's a drop both year-on-year and Q-on-Q and mainly involved the pulp and paper operation, which we see lower volume and also lower selling price. Similar in terms of Q-on-Q. For food packaging, however, Q-on-Q revenue increased, and that's because of the higher volume, both in terms of our QSR or fast food segment in Asia as well as our retail sales in Europe. So those increase in volume contribute to the higher revenue in the Foodservice Packaging segment. But on the paper segment, the revenue declined because of the drop in volume because the customers are managing their inventory level as well as in terms of the difficulty or limited vessel availability. Please note that part of these paper products are sold in the export market. So the export volume overall is challenged. The price in paper is stable Q-on-Q. So moving to pulp. We see the reduction in the pulp revenue because of both volume and price. There was a decrease in volume in dissolving pulp as well as in the short-fiber pulp. And the selling price remained relatively weak because of lower demand in the textile and garment segment. So with those reasons, we see that the EBITDA for the fibrous business stayed at about THB 446 million, and that's a significant drop from a year earlier as well as from the last quarter. And this is the effect in terms of both price volume as well as in terms of the Thai baht appreciation, which reduced our income and margin. So our margin for the fibrous business stays at about 8% in the last quarter. So that's the review of our financial performance in the second quarter. To -- next to reconcile the core profit and net profit, you can see that the special items, one is the FX gain on loans, which we have about THB 45 million, partially offset by the additional expense in relation to the acquisition of additional shares in Duy Tan, but that's not much when the -- when we net together. So our net profit stays at THB 1.01 billion. Next will be on our balance sheet items. Our net debt in the June would be THB 55 billion, and that's a slight increase from the end of the year, mainly because of the investment -- capital expenditure on additional shares in Ran. In terms of net debt to EBITDA in the second quarter, we are at 3.7x, which I would say would be at the peak already because, of course, it's increased from the last period because of the CapEx we have, but also because when we calculate our EBITDA, we used the last 12 months and the last half of last year was particularly challenged in terms of our EBITDA. It was lower than normal. And right now, so the last 12 months will include Q2 of this year in replacement of Q2 of last year, which our EBITDA was lower this year than last year. So that's contributed to the rise in this net debt to EBITDA. But we project that with the better EBITDA year-on-year of the second half of this year, we should have this net debt to EBITDA coming down to the level of 3.3x by the end of the year. The CapEx that we had in the first half was THB 6 billion and about THB 4 billion of that is growth CapEx, mainly for the Duy Tan acquisition. So the budget for the year is about THB 10 billion, and that was revised down from the THB 13 billion. We see we have an opportunity for additional M&P this year, at least one, but another deal that we're working on probably shift to early next year. So we have maybe one -- most likely one in the remaining of this year and maybe early next year. So that's why we shift some of the CapEx from the earlier THB 13 billion to be THB 10 billion this year, and it will be topped up for next year instead. And today, we also -- the Board has approved the interim dividend at THB 0.25 per share to be payable in August. Next will be business update. Let me start with the situation in Indonesia in Fajar. As you can see, we actually exceeded breakeven in terms of EBITDA. And the reason you can see from the first chart on the left that the blue bar represents our domestic sales volume, and it has been increasing for the past year, quarter-on-quarter. So we have increased our domestic sales portion. And particularly in the last quarter, the second quarter, the domestic sales actually increased about 11% year-on-year, which match with the -- if you see the chart on the right, you see that our market share also has been increasing since 2024, increasing in Q1 of this year and also in Q2. So now our market share stands at about 32% for Fajar. So our domestic focus actually pays off. The export volume dropped, and you can see the orange portion on that chart is actually getting smaller, and that's intentional as we decouple from the China market because the price and the volume in China is particularly weak. So we are serving in a different alternative market instead. So overall, the volume was down Q-on-Q, but the domestic volume was significantly up -- in terms of price, it was up 2% Q-on-Q. So with this, the revenue Q-on-Q relatively flat. But in terms of EBITDA, we achieved -- Fajar achieved EBITDA of IDR 31 billion in the last quarter. So that's a mix of higher domestic portion, which give us a better domestic margin, also the price increase that was factored in and also a better cost position, both in terms of RCP as well as in energy cost that was reduced from the earlier quarter. Another point to note is that our capital increase exercise through rights issue was completed. So all the funds are in Fajar and also used to repay the expensive bank loan. So we actually reduced our net debt to equity of Fajar to about 1 as we communicated earlier. The interest cost savings at Fajar level will be roughly about THB 450 million a year. If you factor in the cost of SCGP, the total SCGP interest saving for the entire year would be about THB 320 million. So half of that will be occurring already in this second half of this year. So that's a big savings. Next, I would update on the Duy Tan acquisition. which we increased our stake from 70% to 100% by acquiring additional 30% shares. Duy Tan is a leading rigid packaging producer in Vietnam. And the main reason we want to increase our exposure or increasing our investment in this company is because, first of all, it is a very much consumer-linked business. If you look at the Duy Tan portfolio, they have B2B portfolio, which the packaging is sold to our brand customers or brand owners, which are consumer products. So they are very close to the consumer. They also have their own consumer products such as container, plastic containers, as you can see in the picture. Sorry about that. And the second reason is that polymer packaging give us a superior margin at roughly about 18%, 20% EBITDA margin. And so we want to increase this portion. And another point is Vietnam is a country of growth. We see growth about 5% annually every year. So we want to increase our exposure in this market. So that's the reason we increased our stake in Duy Tan. And as you can see in the table, the net profit is at about THB 800 million last year, and that represents about 8% to 12% net profit margin, very healthy. So that's the reason. The next one would be the long-term reason why we want to increase our share in Duy Tan. We want to rebuild our polymer packaging business. Right now, it consists of about 13% when we consider polymer together with health care. But with our additional investment, our plan to expand both organically and also M&P, we expect it to increase to about 15% next year. But in the long term, we want to build our, what we call, the consumer-linked portfolio part to grow from the current 46% to about 50% in 2030 and polymer and health care is part of that portfolio. Also, we want to expand our portfolio of ASEAN -- outside of Thailand. So our Thailand -- outside Thailand revenue, mainly in ASEAN would increase from 56% at present to about 2/3 of our business by 2030. And our consumer-linked portfolio in total would be above 75%. So that's our aim and our rationale for investing further in return. Another point I want to mention is in terms of the ESG. We also commit and continue to progress on this front. So in terms of carbon footprint product, we currently covers about 50% of our products already. And so that gives our customer the confidence of knowing what kind of carbon footprint of product when they purchase from us. We plan to reach full coverage of all of our products by the end of this year. Another one is on the EcoVadis, which we achieved platinum level for the second consecutive year, staying at a 99 percentile for our category. So that's 2 achievements emphasize our commitment to ESG. Next, Khun Wichan.

Thank you, Khun Danaidej for presentation and reporting. So for key takeaway and the outlook, may I start with the U.S. tariff progress update. For the detail, I'm not going in detail because of last quarter, we already discussed in the detail of the mitigation plan. For this quarter, we will report the progress that we already explained in the first quarter. Before to present that, we see that the tariff from the U.K., 10%, Europe just conclude the day before yesterday, 15%; Vietnam, 20%; Philippines and Indonesia, 19%. So we see this figure is quite a good number. We're just waiting for Thailand to release. And we hope for the best that Thailand will land between 15% to 20%. We see the opportunity now that Vietnam and Philippines still remain very competitive among the ASEAN country. As Khun Danaidej mentioned, Fajar, we laid out the foundation. We have been put a lot of effort to our chain of product category. We have to stop and cancel some product and laid out product that be competitive and suit for Indonesia market. For the challenging Thailand operation, we still export competitiveness. And the FDI will be the pressure because of the tariff is not concluded yet. Going to right-hand side about the progress. For the second quarter, the ASEAN revenue improved 5% Q-on-Q compared to the first quarter. The first quarter, the domestic 80%, export 20%. However, for the second quarter, export fall to 17% and the domestic 83% that conclude the ASEAN revenue improved 5% Q-on-Q. This is due to the intentional and we want to lose copy from China. Of course, China will be our market, but we don't try copying to China as in the past. In terms of in Europe, so we do order allocation between Thai and Vietnam right now to support food services packaging. And VEM already commissioned over last year and the new [indiscernible] will be commissioning in December this year. And hopefully, it will started up in January next year. The most important on this progress update of the tariff is about the cost reduction and improve the operational efficiency. In the first half of this year, we do the cost reduction THB 390 million. With the detail of this THB 390 million, THB 120 million is come from using the AI. We put the AI and machine learning in terms of the -- across all the value chain here, in the production process, in the power plant also. With this, we are very confident that we can enhance our organizational competitiveness. And also, we start to roll out to Vietnam, Indonesia and the Philippines. When we start to use AI, it's not to use immediate, we have to lay out the foundation sensors and also we call the plant information system when we get all those information when we kept -- those information, we can do optimization. The use case of the AI start from the safety. We are in the manufacturing, the safety of employees is so important that we're also using AI in terms of the safety. Next is about the cost reduction, fiber yield optimization because we do import 40% of the RCP from outside the ASEAN. So using every single piece of the fiber is turned the benefit to us in terms of the yield improvement, and at the end is come back to the cost reduction. We also do the spare part inventory optimization with the AI optimization and machine learning help a lot for the cost reduction. In terms of quality improvement and the data management, we have the quality monitoring dashboard. This virtual to the quality monitoring dashboard instead of the putting into the paper. So when we monitor so we can control easily. On top of that, SCGP chatbot for the employee. This is about the, we call, knowledge management. In terms of the maintenance people or the operators who control the operation. When they want to know something, we put all the knowledge management, we call the SCGP AI chatbot. On top of that, the plant reliability with the advanced predictive. At the beginning of this year, I mentioned that we do the quality prediction of the paper quality. And now we improved into another area we call abnormality detection platform. This platform here to detect the abnormality of the machine. So the operator who control the machine can know early warning of the abnormality of that machine. Last but not least, the energy efficient with the real-time monitoring control and steam reduction here that can reduce the energy consumption and help to reduce the cost. Once again, the value release from the first half of this year, we reached the $120 million, and we like to expand to Vietnam, Indonesia and in the Philippines. Heading towards in the second half of this year, we see that the transformative transformation that we mentioned for the 2 years ago. We want to diversify and tap into ASEAN market because of they were really uncertain and really unstability, especially for the geopolitical. So focusing on ASEAN and less rely on those export aspiration will help a lot. And also, we'll be scaling our consumer packaging business, as Khun Danaidej had mentioned. Hopefully, by end of this year, we can include one deal for the consumer packaging business. In terms of the market, we want to expand solution and services cross-selling start from end of this year, the cross-selling among the paper packaging and the plastic packaging contribute a lot and became the existing customer. As we mentioned earlier, we focus on the customer centricity and also the consumer link. By this, we are on -- once again, we are on the restructure of the segmentation end market. Hopefully, in the next quarter, I will report for the progress of the market that we are restructuring to suit for the new future of doing of the consumer packaging. In terms of the organization, in this year, beginning of this year, we do so-called decentralized. We do empower and delegation. So each country, they're more free to decide to manage their own. However, for the technical expert, we do use Thailand as a center. So by this way, we make our organization more efficient. In terms of the trade uncertainty and economic challenge, ASEAN still very resilient performance as proved by this second quarter. We hope that the China stimulation package will help to boost up China and that will increase the regional price of the packaging. Last but not least, inflation still remain as the CPI has mentioned, Thailand will reduce a bit while the Indonesia and Vietnam are quite stable. So this align with the Central Bank on this [ K-30 ] and hope that they will reduce the interest rate for the third and fourth quarter, respectively. So that's all for the second quarter and the summary of the first half of year 2025.

From all of the participants today, so should be the case, I believe that would be the conclusion of our virtual conference today. If you have any questions or further -- please kindly contact to the IR team. We would like to thank all participants for joining the conference today, and we look forward to seeing you again on the next quarter. And today, thank you and [Foreign Language].