The Siam Cement Public Company Limited (SCC) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome back to SCG Analyst Conference of the Second Quarter 2020 Results. As you can see from the format of today's conference, we're doing our part to help minimize the chance of a COVID-19 recurrence. Kindly note that while our program is on, you'll be muted. We do this to try to keep background noise to a minimum, and we're open to flow up to questions after our management speaks. Last but not the least, should our Zoom session experience system or network problem and must be suspended, please dial into the telephone number provided in your email, the meeting will, in that case, continue on conference call. Onwards to this afternoon's program, today's presenters are as follows: beginning with the consolidated results, the CEO of SCG, Khun Roongrote Rangsiyopash. The financials will be highlighted by the CFO of SCG, Khun Thammasak Sethaudom. For the business units, beginning with the President of the Cement-Building Materials Business, Khun Nithi Patarachoke and he will be supported by Khun Chana Poomee. Next is the President of Chemical Business, Khun Tanawong Areeratchakul; and he will be followed by the President of Packaging Business, Khun Wichan Jitpukdee. Thank you. And now on to today's exciting program beginning with Khun Roongrote.

Good afternoon. I think the past 3 months has been the -- to me, it seems quite long. But anyway, here we are today and we're now recapping the situation in the second quarter. As you can see from our financial result, the second quarter was above extension. I think the chemical sectors are also performing well, partly by the improved in the cast sectors. On the other hand, packaging was -- has been quite resilient and Cement-Building Materials, I think the efficiency and cost improvement has shown the improvement in terms of the result. So I'd like to start with the consolidated sales revenue. As you know, the oil price is -- actually was dropped by half. So that was contributing to the lower chemical prices and hence, the overall revenues of SCG, down 12% year-on-year and 9% Q-on-Q. In terms of EBITDA, we have seen some improvement. The second quarter EBITDA registered at THB 22 billion, improved by 11% year-on-year and 42% Q-on-Q. Equity income, as you can see here, declined year-on-year by 46%, and the decline came both from the chemicals associate and also nonchemicals associated companies. Profit for the period. The total profit on the consolidated profit was THB 9.4 billion, and that's including the write-down of the goodwill of the overseas, mainly Indonesian operations of the Cement-Building Materials. In terms of the first 6 months, the sales revenue was THB 201.7 billion, in terms of the revenue, so down from the previous year. EBITDA dropped slightly to THB 37.4 billion. You will notice that EBITDA from operations actually improved. Profit for the period, again, we see the drop of the profit to THB 16.4 billion, in the first half of this year. But at the same time, you could also note that profit from the subsidiaries actually improved. In terms of segmentation, the chemicals account for 36% of the total revenues, where Cement-Building Materials now accounted at 41% and the packaging at 23%. In terms of profit, chemicals account for 39% in the first 6 months of this year. Packaging is 22% and Cement-Building Materials is 29% and the remaining is at associated companies. In terms of the export and the destination and the sales segmentation, you could see that the portion that increased is the sales to the other countries, mainly China, in both export and the sales segmentation. Now I'd like to pass it along to Khun Thammasak for the financial updates, please.

[Foreign Language]. Good afternoon. For the financial update. I'll start with the first half EBITDA on asset. You could see that it stood at 10.3%, while the EBITDA margin was 16%, slightly improved. And for the net debt at the end of June amounts to THB 186.1 billion, and net-debt-to-EBITDA stood at THB 2.5 billion. Net-debt-to-equity was THB 0.5 billion. For first half CapEx and investments, we spent THB 22 billion for our CapEx in the first half. And mainly on the Greenfield expansion, such as the LSP project in Vietnam, this is about 65% of the total CapEx spend. Interest and finance costs amount to THB 3.76 billion, and interest cost stood at 2.9%. SEC Board has approved payout of the dividend of THB 5.5 per share, payable on August 28 and XD date on August 13. Cash and cash under management was THB 88 billion at the end of June. This is still quite high. CapEx in the second half will increase and full year CapEx is still in the range of THB 55 billion to THB 65 billion. We still put a very strong emphasis on the financial stability. And second lot of the debenture amount, THB 25 billion, we will plan to roll over in November. And just to inform you that SEC already proved the SCG packaging IPO filing on May 29. So that's all for finance update. [Foreign Language]

[Foreign Language] For CBM, I would like to start with ASEAN market. In this quarter, we got a full effect from the COVID-19 cement demand in ASEAN, generally declined year-on-year due to the lockdown measures. However, we expected that the demand will recover slightly in the next quarter, as many countries have started to relax lockdown measure. For Thailand market. The cancellation on Songkran Holiday in April caused a positive growth in cement and housing product demand in this quarter because there is an additional 3 working days. However, the overall market situation remain under pressure from the COVID lockdown measures. Gray cement demand in second quarter grew 4% year-on-year. However, cement demand would be flat year-on-year if we were to exclude additional working days coming from the cancellation of Songkran Holiday. Cement demand from residential segment grew 3% year-on-year. However, people are likely to be cautious about making a big spending. Cement demand from commercial segment slightly increased 1% because of ongoing construction projects that have started since before the lockdown. And cement demand from infrastructure segment increased 7% year-on-year because the government has resumed spending on capital expenditure. Ready-mix concrete demand contracted 5% year-on-year due to lower new private sector. Housing products demand slightly grew 1% as demand in Renovation segment grew. Ceramic tiles demand dropped 12% year-on-year due to a temporary shutdown of modern trade channel. Sales volume of volume of ceramic tiles decreased 20% year-on-year, largely because of COVID lockdown situation and seizing some production plans in Indonesia. ASEAN and other sales growth declined 14% year-on-year due to weak demand across ASEAN market as a result of COVID lockdown measure. For Thailand sale segmentation, domestic sales in this quarter declined only 4% year-on-year due to weak domestic demand from lockdown and uncertainty, economic situation. Despite the market demand has been under pressure, we can boost up the service solution on sales to increase from 4% last year to 6% this year. This service solution can help to balance the revenue stream and increase margin in soft demand conditions. The multi-location of production plan across the country and the most comprehensive distribution channel network are our key strengths that help to prevent a supply chain disruption during the lockdown. Revenue from sales. Revenue from sales this quarter decreased 7% year-on-year due to the overall demand decline, significantly from the COVID lockdown measure in many countries across ASEAN. EBITDA and profit for the period. EBITDA still increased 13% year-on-year and profit increased 211% year-on-year. However, with our asset impairment, the normalized EBITDA for this quarter would increase 26% year-on-year and normalized profit would increase 66% year-on-year. This was because of lower energy price and a result of our efforts to boost up service solution, speed up new business, explore new market opportunity and continuously improve operation efficiency. For example, we have utilized digital channel and ID for to improve operation and management process. And also we consolidate the duplicate support functions and production plans in order to increase efficiency, which is resulting in lower operation costs and admin expense significantly. Outlook, the demand for Cement-Building Materials in ASEAN and Thailand are expected to remain weak for the rest of 2020. Even we have seen a recovery sign after many countries have relaxed lockdown measure, but we expected that people are still cautious on a big spending and the private sector still delay new investment project because of overall demand remained weak. The recovery of cement demand in Thailand will be led by the government spending on infrastructure projects. For company update. Better be a marketplace, a subsidiary of SCG distribution has entered into a joint venture agreement to establish PT Renos Marketplace Indonesia, a digital marketplace platform for home and living products in Indonesia. This investment is following our strategic plan to catch up -- to catch the growing trend on online and home living products shopping amid end user increasing accessibility to Internet. This quarter, we also opened 2 new retail franchise format store in Ubon Ratchathani province. Now we have operate 15 retail franchise format store in total, and we aim to have 20 stores by the end of this year. SCG Home online is the e-commerce platform that has been launched since fourth quarter last year, and has reached 1.5x Q-on-Q sales growth in this quarter. Last slide about business observation from COVID-19 situation. During the COVID lockdown measure, overall demand has declined, but there are demands in some segment, that we have increased -- that have increased significantly as customer behavior have changed in order to capture this opportunity. We have speed up the implementation of active omni-channel, service solution and new products to fit the customer need. Here are some of our service -- here, some of our new service and products that increased significantly during the situation, SCG Home online, SCG EXPRESS, SCG Solar Roof Solution and Active Airflow, COTTO Touchless and Hygiene products, CPAC BIM. We have prepared and developed all this product and service before COVID situation. This is because we see the future trend of this product. Now all of the trend have been accelerated faster because of COVID situation and it will become the next normal in post-COVID. That's all from CBM.

Good afternoon, Khun. Chemical Business second quarter market highlight. I think in the second quarter, you can see that, I think, the situation is quite dynamic and quite challenging for oil price. If you -- I think if you have heard in APU, we can see that the oil price that came down substantially and down to $20 per barrel. And because of the soft demand from the lockdown situation. And after that, in May and June, oil price gradually came up. So I think in -- so in the second quarter, oil price got substantially. And similar to the naphtha price also dropped sharply, Europe relatively to the crude oil price. And if we look at the gap for PE and naphtha gap, and PP and naphtha gap, the gap is wider, even though the polyolefin price came down, but costs came up more than the product price. But PVC-EDC gap decline, and this is mainly from the lockdown situation in India. So what we did in terms of -- what I mentioned here like performance highlight that in the second quarter, the many things happened like, for example, in Thailand, in the other country, the lockdown situation changed from one country to the other. So what we have to do, we have to adjust and adapt our sales to adjust the product mix, to divert our product to other destination. And I think one example that we can see in terms of the product demand weakness that the automotive segment and durable product. So what we have to do, we have to -- I mean, we have to divert our product to other segment that still -- the demand is still okay, for example, like packaging and consumable product. So this is what we try to adjust our sales regarding to the situation in the second quarter. And in addition, I think in the second quarter, you may know that during the lockdown, the situation is quite sensitive. So we -- like Roongrote mentioned, we have a kind of business continuity management. I mean, for example, we have to ask ourselves, how can we maintain our operation at early. So this means, we have to make sure, we have to classify our operationally like critical stop. So we managed operation carefully. And in addition to the -- those COVID lockdown, if you remember, we mentioned last quarter about the drought situation and what we monitored is the situation, we can see that in the second quarter, the drought situation improves. There's a lot of plan actually. So I do believe that the drought situation for this year. So I mean, we have no problem. But we still keep collaborate and monitor the situation to make sure that in the upcoming year, we are still in a good shape. And in term of EBITDA improved, of course, we -- like I mentioned, we've moved turnaround from May to fourth quarter because of the COVID situation. Normally, the -- during turnaround, we use a lot of people like 4,000, 5,000 staff. So it means that we have no choice, but to move. And that's why we have more volume to sale. And also we have a good, in terms of the chemical gap. So look at PE and naphtha gap. You can see that, like I mentioned, even though the product price, it came down, but the naphtha price came down substantially, like I mentioned, when there's a lockdown situation. But we can move the product. For example, you can see that China and other countries like Vietnam, they have easing of country lockdown. So we can deal with our product. So it can help in terms of the situation and the product gap, I mean, the market gap still quite okay. PP and naphtha gap are doing the same -- similar to PE and naphtha gap because of the feedstock price down. And PVC-EDC gap, I think, like I mentioned, actually, in the -- many thing happened, like I mentioned, but you can see the gap in May, sharply from IPO, actually, mainly from the lockdown situation in India. So what we have to do, again, I mean, we have to divert product to other countries, especially to China and Vietnam. Benzene and toluene gap. Actually, this one, the demand is quite soft, and the gap is -- you can see that soften compared to the first quarter and quarter-to-date now also soften to -- I mean, quite low, and you see mainly from weak demand. And in addition, the inventory in China, it's also quite high. Toluene, I think also in the same situation. MMA gap, I think quite stable compared to last quarter, but BD and naphtha gap reduced substantially and mainly again from the automotive segment demand weakness. In terms of sales volume, like I mentioned earlier that we moved turnaround to the fourth quarter, and we can plan at a really high operating lane. So I think our sale volume is increased to 4,000 -- 491,000 ton and went up 17% Q-on-Q and 4% year-on-year. And if it -- like I said, even though we have to sell at higher volume. But at the same time, we have to do -- adjust our product mix and divert to the market that still has room for the demand. PVC volumes slightly declined. Actually, like I mentioned, lockdown in India, but if you look at the volume, I mean, slightly lower than last quarter, only 2%. Because, again, we can move the product to other country that easing of the lockdown situation. Financial revenue from sale, even though the volume increased substantially, but the revenue came down because of the product price. As I mentioned earlier, and compared to -- I mean, first half this year, last year also came down 21%, mainly from the product price. EBITDA increased compared -- I mean, year-on-year and Q-on-Q, and again, mainly from the higher-sale volume and improve of the product gap. Profit, I think, similar to the EBITDA that we -- profit also increased year-on-year and Q-on-Q. But compared to -- for example, last year, the profit came down 34%. And outlook. If we look at the crude oil price, I think what we have seen that rebalancing in terms of supply and demand. Now some country they have easing of the country lockdown and at the same time, OPEC and OPEC+, I mean, they have kind of -- they cut production to control the supply. So what we have seen now, the oil price will be in the range of $42 to $44 per barrel. In terms of naphtha, I mean, firm demand. And now there are some crackers [indiscernible] from shutdown and now they come to operate. And polyolefin, I think our demand, what I can say that the demand expected to recover. But at the same time, we also see the additional capacity in the third quarter, they are new capacity to add up in the third quarter. For PVC, the demand is still strong demand in -- I mean, actually, after easing of lockdown, many countries, the government, they put some investment for conception activities over the PVC demand seem to be strong. The ground situation, I think I already mentioned that now situation seem to be improved and we try to monitor and make sure that and we hope that the upcoming years, that situation is still okay. The company update, like I mentioned, I think in the second half, we will have MOC turnaround of 45 days. And estimated polyolefin volume loss may allow 120,000 to 130,000 ton. And VCM2 also turnaround of 29 days in the third quarter. And LSP, in terms of the progress now, overall progress is 45%. And MOCD expansion now overall progress is 93%. That's all I have. So may I pass back to Khun Wichan?

Good afternoon, and [Foreign Language]. When I was working in the Philippines, even in the afternoon, I always say good morning to my staff when I was working in the Philippine because we feel fresh and throw off energy, when we say good morning. Okay. May I start for the SC packaging with the Q2 country update, okay? Thailand, Vietnam and Malaysia has shown the ability to control the COVID-19 really well, while the Philippines and Indonesia defy the way on their way to serve on those with COVID-19. Look back for the country updates for Thailand. Due to the growth of the canned food for export and hygiene care product, together with the government stimulus package, so they had to improve the spending and consumption. However, the alcohol beverages due to lockdown and electronics and consumption and automotive demand also slowed down together with the printing, writing paper declined due to schools closed, universities closed and all the workers work from home. For Vietnam, food and nonalcohol beverage started to resume and the seafood export still is very good in Vietnam. But the decline in garment and footwear export due to the weak global demand on the textile and the footwear. For the Philippines, the essential business allowed to operate while still weak demand in the Philippine. The fresh fruit export also really slowed down in Philippines. Indonesia, I'll say, food beverage also dropped due to the Hari Raya period, and also EE, garment and footwear also slowdown. Malaysia, medical glove export has been jumped up and balloon up because of the requirement of the medical glove while the EE and automotive demand slowed own. It seems that E&E and automotive demand slowdown has happened even in the ASEAN and across the globe because of this considered as the durable goods. Next one for the Thailand domestic. You can see here the food, frozen food, canned food, FMCG, e-commerce has been grown up even we compare year-on-year. So even the COVID is still growing. But in the beverage, especially on the alcohol segment, alcohol beverage still dropped. E&E also dropped. Automotive as part of the industrial packaging also dropped, as I mentioned earlier, because of E&E and automotive, this happened a lot because they are considered as the durable goods. With all the efforts that we could list the revenue from sale on the second quarter, THB 21 billion. This increased 6% year-on-year and dropped 11% Q-on-Q. This is because of the consolidated Fajar and Visy from last year and also the lower consumption of the durable goods and products. If we are stipulate to our business segment, I'll start from Integrated Packaging Chain segment. Revenue from sales, THB 18 billion, this increased 14% year-on-year. And EBITDA, THB 3.8 billion, this increased the 28% year-on-year, while the EBITDA margin, 21% in the second quarter and average for the first half, 21.7% for the EBITDA margin. For Fibrous Chain segment, revenue from sale was THB 3.7 billion, dropped 23% year-on-year. And the EBITDA of THB 155 million, dropped 51% year-on-year. This is due to the school and the universities closed and the workers work from home. EBITDA margin 4% and the average for the first half of the year is 7.5%. If we separate by the country, back down by the country, Thailand is still the largest, 52%, but reduced from last year from 60% to 52%. Indonesia become #2, 14%, Vietnam, Philippine, Malaysia. One thing I just want to point out here, the export to the rest of the world has come -- increased from 13% to 16%. This is because we want to optimize the whole value chain. Next would be the sale revenues of the integrated packaging chain by customer segmentation. You see here almost 69% of the customer portfolio of the indicated packaging chain consumer goods. First quarter is 68% and the second quarter 70%, the average is 69%. This is mainly because of the industrial packaging has shrinked that caused the consumer goods have expanded. Look at in terms of the customers of SCG packaging, food beverage has been grow up, so this grow up. FMCG may be stay flat. E&E and other industry are reduced. E-commerce is booming, is growing a lot in the e-commerce segment. For integrated packaging chain here, if we do subsegment, we see on a subsegment here. Performance and polymer packaging account for 9%. Fiber-based packaging 30% and packaging paper is still maintained at 61%. The key point is that for the integrated packaging chain, it has been growing 20% year-on-year growth compared to last year. If we look into insights into the back down to the subsegment, start from the performance and polymer packaging here. You see here, second quarter, performance and polymer packaging revenues THB 1.9 billion. This increased 56% year-on-year and 21% Q-on-Q. Mainly is 2 factors. You may know already, we consolidate. We see same fourth quarter last year. But in addition to that, the second factory of the Vietnam expansion already start commissioning second quarter this year. Together with the food export has been grown up. So this helped to boost up the polymer packaging demand. For fiber-based packaging, revenue from sales is THB 5.8 billion, dropped 11% year-on-year because of the lockdown for 3 months and the drop in the durable cost demand. For packaging paper, revenue from sales of THB 14.5 billion, this increased 70% year-on-year and dropped 13% Q-on-Q, the reason may be the same as the fiber-based packaging because of the lockdown and the slow demand of the delivered goods products. For fibrous chain, revenue from sale in the second quarter at THB 3.7 billion, this dropped 23% from last year due to the closure of the school, university and the work from home. However, the food-service delivery and the food-service packaging also grow up in this segment. In summary, we can achieve the EBITDA of THB 3.9 billion, which a 19% increase year-on-year and drop 21% Q-on-Q. For the profit, we could achieve THB 1.9 billion, this increased 94% year-on-year and 10% Q-on-Q, with the average EBITDA margin on second quarter, 18%. And average for the first half will be 19.6%. In summary, SCG packaging can deliver growth revenue from sales, THB 45 billion with a growth from last year, 11%. EBITDA, THB 8.9 billion, growth from last year, 26%. Net profit, THB 3.6 billion, growth from last year of 40%, which integrated packaging chain segment still the main contributor for the growth of the IC packaging. Just update for the organic growth and inorganic growth, I start with the inorganic growth for inorganic merger and partnership as announced last quarter, so we -- acquisition now the process -- under the negotiating process, so if this materializes and double capacity of the fiber-based packaging in Vietnam. For organic growth expansion in brownfield, we have flow project here. Start with the expansion for Thailand, this is prepack polymer packaging, THB 600 million. This -- the Board approved for this project last month. For Vietnam, expansion Batico factory to, as mentioned, already commissioning on the second quarter and hopefully, it's across the project check by third quarter. For Indonesia Fajar, second factory in Surabaya. This will be start-up on the first quarter next year. This has been delayed due to the COVID-19. And also in the Philippines, will be start-up on the second quarter next year. All in all, we have the organic growth and expansion on the budget here, THB 8 billion. For the company update, following the SEC filing approval on the May 19, now we are in the process of and catching with the potential cornerstone investor. We are really excited for the equity lessing in this period, and we do put the effort -- our effort and we do the best to achieve the goal of the companies. For the outlook, COVID-19 in Thailand, Vietnam and Malaysia has been improved and controlled, while the situation in the Philippines and Indonesia is still on their way. The challenge that the macro-economy is challenging across the ASEAN because of situation is really unpredictable. Durable goods, I think, is still a long way to recovery and the graphic and copy paper still with demand and the freight costs is still the issue. However, the health care, hygiene, food and beverage and e-commerce still growing and booming. So this is an opportunity for IC packaging. As we mentioned, whenever there is a challenge, there is also an opportunity also. So that's all for SCG Packaging.

Just a quick summary of the situation in the second quarter. I think the result was, as I mentioned, better than expectation, both in terms of EBITDA and also in terms of profit. I think there have been a few factors. One is the lower naphtha cost. Secondly, is the operational stability of the chemicals business that allow us to achieve the very good sales volume and overall the margins. In terms of the Cement-Building Materials, I think the cost management as well as the ability to adapt to the changing demand in terms of the construction solution and e-commerce. And lastly, in terms of packaging, I think the ability of the business to maintain the level of the customer service in a very, very difficult and challenging situation. And I think the -- our strategy to offer the integrated solution packaging is also being something that has helped us to be able to navigate throughout this crisis. I think looking ahead for the next 3 to 6 months, I think the challenge is that, first of all, the crisis in terms of the COVID-19 is far from over. Second wave and the economics impact still a lot of uncertainties. I think in terms of the cost of raw material for chemicals, I think there will be some uncertainty. At the same time, there could be some slowdown in terms of the construction segment, particularly residential and the commercial sector. And in terms of packaging, I think as Khun Wichan mentioned, the 2 large market, Philippines and also Indonesia, I think the COVID situation is still unclear on what's going to happen and how much impact it will be to the packaging market there. So I think that's my summary in terms of the performance and also the outlook for the remaining of the year. Thank you.