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

Good afternoon, ladies and gentlemen. Welcome back to SCG analyst conference for the third quarter 2020 results. As with the previous 2 conferences, we're doing this virtually. [Operator Instructions] And should our Zoom session experience system or network problem must be suspended, please dial into the telephone number provided in your email. 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, who will also touch on SCGP, which has already reported results and held its own analyst conference yesterday. For the business units, beginning with the President of the Cement and Building Materials business, Khun Nithi Patarachoke. He will be supported by Khun Chana Poomee, who will be followed by the President of Chemicals business, Khun Tanawong Areeratchakul. Thank you and now into today's exciting program beginning with Khun Roongrote.

Good afternoon. This quarter, we are seeing the, I believe, good result mainly driven by the recovery of the margin in the Chemical business, whereas the Cement and Building Materials are showing some improvement in terms of the cost and efficiency of the operations. Packaging, meanwhile, is quite resilient despite all challenges in terms of the impact from the COVID-19. The total revenues of the group is the 109 -- THB 100.9 billion, declined by about 9% from the previous year, mainly due to the lower chemical prices, whereas the improvement is about 5% Q-on-Q. In terms of EBITDA, as you can see here, EBITDA showed an improvement of 30% year-on-year. Nevertheless, it's minus 12% Q-on-Q and that's mainly from the a lower dividend -- or absence of the dividend from the associated company. As I mentioned earlier, the improvement in the EBITDA is coming from the better Chemicals performance. In terms of equity income, the THB 3.04 billion, that's a 50% increase year-on-year and about 78% increase Q-on-Q. And we're showing the strong result from the Chemical associate and also nonchemicals associated companies as well. Profit for the third quarter is 9.7. That's the -- THB 9.7 billion. That's 57% increase year-on-year and slightly increased on a Q-on-Q basis. Nonrecurring this quarter, one part is from the inventory gain. That's mainly the Chemical business. The impairment and restructuring, 70% of it is coming from the Cement-Building Materials. And as you can see here, we have the FX loss from the loan at the Fajar in Indonesia. That's about THB 110 million. In terms of the first 9 months, year-to-date, total revenue is the THB 303 billion, that's about 9% drop from the prior year. And that's mainly coming from the lower chemical prices. Nevertheless, the volumes improved. And as you can see here, we started to see some improvement in the margins of the chemical products. EBITDA follow the same trend, 5% increase from the prior year. And again, that's mainly the contribution of the Chemicals and also the Cement and Building Materials segment. Profit improved also 5% to THB 26.1 billion. Again, that's coming from the Cement-Building Materials and also Packaging, whereas the profit from the Chemicals slightly dropped. In terms of the segmentation of the total revenues, you can see here that this year, Chemicals account for 37%, whereas Cement-Building Material is 40% of the total and the remaining 23% is coming from Packaging. In terms of profit, you can also see here that Chemicals account for 45%. So that's a big chunk of our total profit, whereas Cement and Building Materials is representing 25% and the Packaging 19%. In terms of the segmentations, ASEAN account for 26%. So really not that much change. And Thailand is 57% of the total sales. Export, the major change is the increase of the export revenues to China and that's partly Packaging and also Chemicals. HVA, this is something that I'd like to spend a little bit of time talking about this thing. We actually have revised the criteria for defining what we call HVA. Basically, the criteria, new criteria is reflecting the change in the consumer trends. One change is that the market is moving very quick. So instead of allowing HVA for the products developed 5 years ago, we have decided to shorten it to only 3 years. So the volumes and the values of those to change in line with the duration, the recognition of the products. At the same time, we also tightened actually saying, well, to be qualified of HVA, we also have to have higher margins over the traditional commodity products. So that's already reflected in the new definition. Using the old definition, the first 9 months of this year, HVA came in at 42% or THB 128 billion. Under the new definition, HVA is the THB 93.6 billion, representing 31% of the total sales. We will continue to report both the old and the new definitions of HVA well into the next quarter. So basically, in the next quarter, which is going to be the full year result, you will see the old definition of HVA compared to the new definition of HVA. By doing this, we also established the benchmark so that you can track what's really the trend in terms of the high value-added products and services. Our metrics, we will not include only HVA, but we will start showing the new products development, which is basically the ratio of the new products compared to the overall total revenues starting from next year as well. We were also showing the -- start showing the breakdown of the revenues between manufacturer and the service and solution metrics as well. So basically, in terms of innovation and freshness of our product portfolio, you see HVA, you also see new products, and at the same time, we were also showing the revenues portion that's coming from the service and solution business. So I hope that, that will help in terms of the investors' ability to see how much progress our group is making in terms of innovation. Now I'd like to turn this over to Khun Thammasak, who will discuss about the financial as well as the summary of SCG Packaging. Please.

Thank you. Khap and good afternoon. For the financial update, I would begin with the EBITDA margin. If you look at the bottom line, you could see that the EBITDA margin in the first quarter has increased to -- from 14% to 19%. So this reflect the stronger in terms of the margin and business strength. And so if you look at EBITDA on asset, the red line, you could see that EBITDA on assets stood at 10.7%. And if you exclude the project under construction like Long Son Petrochemical or the Map Ta Phut Olefins debottlenecks, those -- if you exclude those figures, it will be 12.4%. You could see the trend is improving. And for the net debt, stood at THB 190 billion and net debt on -- to EBITDA, it's 2.5. Again, if you exclude the project under construction, it's 1.5. So net debt-to-equity is 0.5. So this net debt-to-EBITDA is -- not include the proceeds from the IPO of the SCG Packaging yet. So you could see the improvement when you include that capital in. For the CapEx and investment, we spent THB 37.3 billion for 9 months. And we are getting up the spending. At the moment, we have a very strong and solid balance sheet. So we plan to spend up to around THB 60 billion this year. Majority is still spent on the greenfield expansion, that's about 67%. And Chemicals is still the major use of the CapEx. And as you may know, it's -- the big project like LSP and MOCD. For the interest and finance cost, you could see it's THB 5.7 billion for 9 months and the interest cost stood at 2.9%. For financial highlight, you could see that SCG profit is quite resilient and it stood at THB 9.7 billion in the third quarter. And so basically, the business performed well, as Khun Roongrote explained in detail. Cash and cash under management is about THB 87 billion, and this is by the end of the third quarter. We have a very strong balance sheet, a net debt-to-EBITDA at 2.5x and net debt-to-equity is 0.5. So interest coverage ratio is 10.9. So you could see that we are in a very good position to further growth as in our strategy plan. Outlook for the CapEx and investment, we will plan to speed up and try to complete the spending around $60 billion, as I mentioned. And debenture rollover about THB 25 billion. It's due to roll over in November this year. So I have one page to summarize the SCG Packaging result. As Khun Roongrote mentioned, that we already -- SCG Packaging already announced and have the conference yesterday. So this is just the key point. You could see that 9-month result, revenue increased 5%. So amid this kind of the pandemic in the regions, so revenue still have a growth. EBITDA margin expand from 17% to 19% and EBITDA amount also increased 16% to THB 13 billion in this year. And also, you can see the same trend for the net profit, that increased 22%. So for me, I'm looking at the EBITDA margin and net profit margin that's already improved year-on-year. So this is -- represent a very strong and robust business performance. So for the key highlights, you could see that the IPO already complete and have first trade on the 22nd October with the proceeds around THB 45 billion. So this is assuming the fully exercise. ASEAN situation continued to be quite challenged. As you may know, that outside Thailand, pandemic still inflict many country and people in those countries. So that will be the key challenge, but SCG Packaging still outperform with this trend. EBITDA rose 16%, while the net profits grew at 22%, as mentioned, amidst the contraction in the economic activities. So SCG Packaging still pursue the growth strategy as they announced. And so we -- this is the acquisition of the packaging plants in Vietnam expect to complete by end of this year. So that's another evidence of the strain of the SCG Packaging to go further to be the leader in the regions. So that's from the SCG Packaging cup. I hand over to Khun Nithi.

Good afternoon, khap. I would like to start with ASEAN market. Cement demand in ASEAN this quarter generally declined year-on-year due to the second wave of COVID-19 in Myanmar and Vietnam. Cambodia cement demand declined significantly because of the slowdown in Chinese investment and the Songkran holiday that was postponed to this quarter. Thailand market. Grey cement demand slightly grew 1% year-on-year. Cement demand from residential segment grew slightly, 1%, year-on-year, driven by own built housing demand in provincial areas as the increase in agriculture price. However, condominium and housing projects in metro area remain weak. Cement demand from commercial segment was flat year-on-year because of lower new investment projects from private segment. Cement demand from infrastructure segment continuously increased 1% year-on-year, mainly from mega project infrastructure. Ready-mixed concrete demand contract 7% year-on-year due to lower new investment projects. Housing products demand decreased 8% year-on-year because of the slowdown in condominium and housing project as well as nonresidential segment in metro and Eastern areas. Ceramic tiles demand dropped 1% year-on-year, recovered from the last quarter thanks to relaxing lockdown measure. ASEAN ceramic tiles sales volume still decreased 7% year-on-year due to weak demand. However, the sales volume this quarter improved 12% quarter-to-quarter, thanks to the easing lockdown measures in the Philippines and Thailand. ASEAN and others sales segmentation declined 7% year-on-year due to the slowdown in new investment projects and construction activities from COVID pandemic. For Thailand sales segmentation, domestic sales in this quarter declined 5% year-on-year, mainly from weak demand of housing product and ready-mixed concrete because of the contraction in new housing projects and new investment projects. Despite the market demand have been under pressure, the service and solution on sales continue to grow year-on-year to 6%. Example of flagship service and solution that have got a good response from customer, our Solar Roof Solution and construction solution that realized 3x year-on-year growth. Revenue from sales. Revenue from sales this quarter decreased 6% due to the overall demand decline significantly,from the slowdown in new investment projects and construction industry across ASEAN. In order to defend against the demand decline, we switched the cement export destination to outside ASEAN market such as Australia, New Zealand and China to repress ASEAN market during weak demand situation. EBITDA and profit for the period. EBITDA still increased 20% -- 21% year-on-year and profit increased 176% year-on-year. However, without asset impairment, the normalized EBITDA for this quarter increased 18% year-on-year and normalized profit increased 71% year-on-year. There are 2 factors that drove EBITDA growth and margin. First, our effort to boost up service solution and new business and new products that generate additional EBITDA without increasing [ fit ] costs. Second, the continuous efficiency improvement in operation process with digital technology and [ ID 4 ] as well as the lower energy price pushed operation costs down year-on-year. Outlook. The demand for Cement and Building Materials in ASEAN and Thailand are expected to be challenging for the rest of the year. People are still cautious in big spending and private sector still postpone new investment projects because of the economic uncertainty. We believe that the recovery of cement demand in Thailand will be led by the government spending on infrastructure projects. And we will continue to take an effort to cost optimization in order to sustain the momentum of cost reduction over the next year. Service and solutions will remain a key strategy for the next year, which will be driven by the customer needs that have already changed in the past few months. For company update, CPAC has entered into a joint venture agreement with SHO-BOND and Mitsui Infrastructure Maintenance Corporation in order to engage a lifetime solution business in ASEAN. SCG CBM has reached an agreement to acquire Oitolabs Technologies in India in order to support SCG CBM's digital technology and software development. SCG Retail Holding has entered into a joint venture agreement with Boonthavorn Group in order to expand home-related design solution retail outlet in ASEAN. This quarter, we also opened new retail franchise format store in Prachuap Khiri Khan and Nakhon Sawan provinces. We currently operate 17 franchise retail format store now. And the last one MCL has temporarily suspend its production due to lack of limestone. The dispute between SCG Cement and PLCI has resulted in MCL's inability to assess the limestone mine. And SCG Cement has filed a request for arbitration pursuant to the JVA. The result from the suspension is insignificant to overall SCG performance. Next, we will update you about the new initiative and the improvement during the third quarter. Firstly, I would like Chana to help to explain.

Adding on the operating cost of the third quarter 2020 decreased significantly year-on-year. This is the result from 3 main successes. The first is to maximize self power generation from waste heat power generation and also new solar farm, 4%-plus year-on-year. The second is derived from redesigning plant operation and reliability management by changing in incentivized scheme, depending on productivity and output. This improved 14% year-on-year. The third is to improve overall plant equipment effectiveness or OEE by 3% year-on-year by implementing Industry 4.0 technology, such as the smart maintenance system, advanced process control system and processed data analytics system on platform. Next move is rolling out the 3 key strategy to housing product and also regional operation.

We would like to update about the scalable service and solution. SCG has introduced construction solution and living solutions since 2018, according to customer need. These are the examples of our service and solutions that are scalable. The first one, CPAC construction solution realized sales growth of 300% this year. The flagship solution has met foundation that can be leveraged and customized to other solutions, especially smart farm for agriculture and food segment that's expected to see strong growth. We respond to customer need proactively through 23 CPAC solution centers nationwide. Furthermore, the living solution that can be scaled up, for example, Solar Roof Solution, Active AIRflow solution and bathroom solution. This living solution realized sales growth up 200% this year. The last update about retail and business -- retail business implementation progress. First, we speed up. Now we can open 17 franchise retail format store and aim to double the number of the store by the end of next year. Secondly, the coronavirus pandemic has changed customer behavior by accelerating the arrival of online channel. The evidence is our online sales channel increased significantly during the lockdown measure. We expect that in this change -- we expect that this change could turn into permanent after the COVID-19. We have already prepared for this change by acquiring Oitolabs Technology, a leading software development in India that will complement our strategy to expand active omnichannel retail platform in Thailand and ASEAN region. Thirdly, we have rolled out the active omnichannel strategy to ASEAN market. We have just established SCG Boonthavorn holding in order to expand [indiscernible] solution retail outlets in ASEAN. The first is under construction in Cambodia. That's all the update from CBM, khap. Would you like to move to EBITDA?

Good afternoon. For chemical business in the third quarter, I think if you remember, second quarter is quite volatile in terms of the -- I mean, [indiscernible] -- I mean, in many countries, they have lockdown situation. So at that time, I mean, second quarter oil price and naphtha and also product price is quite volatile. So compared to this quarter, after lockdown easing and if you remember that the OPEC, they also continue there to cut production to try to stabilize and try to have a supply-demand balance. So that's why the third quarter, the oil price increased quite substantial. And I mean, third quarter, we're talking about $40 per barrel. And for naphtha, actually from crude oil price increase, and in addition, actually, the demand of the gasoline also -- actually, the refinery margin is not that good. So the refinery, they [indiscernible]. So the naphtha is a bit high. So in terms of naphtha price, if we compare the third quarter to the last quarter, the cost increased quite substantially as well. But in terms of product, because of the cost push, and we -- what we can say that in terms of polyethylene and polypropylene cap, you can see that we can also push up the price, and more or less, we can maintain PE and PP gap. But for PVC and EDC gap, this one demand recovery quite strong, especially in China and India. So in terms of supply, also quite high, there's a limited spot cargo from U.S. and from other countries. So that's why the gap improved. And if we -- in terms of performance highlights, I would say that we have a very good operation in terms of, I mean, both cracker and and downstream and -- both cracker and downstream plant and also our associate company. So we can take advantage and opportunity to capture the market during the recovery market, especially in the automotive and electronic appliance sector. And actually, like I mentioned last quarter, I think this quarter, we do the same in terms of the portfolio management and product destination. We have a good management in terms of product destination and portfolio so we can capture the market at the right value. And in terms of PVC sales volume and VCM, actually, we have a very good in term of, like I mentioned earlier, in terms of the gap and sale volume also okay, I mean, compared to the plan. If we look at PE gap, like I mentioned, if we compare third quarter to second quarter, the PE gap improved, and again, I mean, mainly from the Thai supply and the demand also recovered, especially in China. PP gap, market gap slightly declined. I mean, actually, mainly from the -- actually, in terms of PP, the Chinese demand also improved. But at the same time, there is a new capacity start-up. So that's why the market gap dropped. And also, like I mentioned, the feedstock cost increased quite substantial. But again, like I said, we can push up. So that's why we -- I mean, more or less the gap is slightly lower than compared to the second quarter. And PVC and EDC gap. And this one, like I mentioned, demand recovery quite good, especially in China and India. And like I mentioned, we managed the portfolio quite okay in terms of the product destination. We can capture the market. And at the same time, there is a limited cargo from U.S. because of the cargo disruption in the U.S. from the hurricane problem. And benzene, toluene, actually, the benzene gap spend decline and mainly from the new supply in China. And the arbitrage window to U.S. closed because of the -- actually, the [ starting ] performance is not good. And toluene spread also not good, and this is the weak solvent demand. For MMA gap, actually, this one, if you look at the third quarter compared to the second quarter, slightly declined mainly from the feedstock cost increase. And BD gap, this one improved mainly from the -- there's a limited deep sea supply from U.S. and EU -- deep sea cargo supply from U.S. and EU, and also, at the same time, the demand improved for BD product. So looking at polyolefin sale volume, actually, the second quarter, like I mentioned last time, we postponed the turnaround. We -- actually, we're supposed to have turnaround in May, I mean, the second quarter. So that's why at that time, we keep some volume. So when we postponed to the fourth quarter. So that's why the second quarter volume is quite high. And at the same time, when we move to the fourth quarter, so we have to prepare ourselves in the third quarter that -- so we built some inventory. So the volume will compare to third -- second quarter volume will be lower -- was lower than the second quarter, and year-on-year, slightly decline. And I think, again, is it mainly from the we have to prepare for the turnaround -- I mean, inventory for the turnaround in the fourth quarter. PVC sales volume slightly improved year-on-year and Q-on-Q and mainly from both, I mean, domestic, strong domestic demand and also strong demand in -- especially in India. Financial revenue from sale, third quarter, the revenue improved 9% Q-on-Q from the price -- product price increase, and year-on-year declined again. I mean, if you compare to last year, the product price this year less than last year. And EBITDA decreased 11% Q-on-Q. But actually, the [ fit ] from the lower dividend and compared to the second quarter. But if you look at operating EBITDA, it's quite okay and improved 58% year-on-year from lower feedstock cost. And if we compare the 9-month this year and last year, the interim EBITDA more or less -- I mean, we have the same EBITDA. But different is the EBITDA comes from -- I mean, this year come from the operating activity. Profit, actually, profit earnings improved 20% Q-on-Q. If you can see that equity income also come up and if we compare year-on-year also improved 80%, mainly from the lower feedstock costs. And compare 9-month this year and last year, the profit slightly declined, mainly from the lower -- the equity income. Outlook for crude oil price, we -- what we foresee that fourth quarter the crude oil prices seem to be that stable to improve. We believe that OPEC still will continue to control the production cut and at the same time, there will be the concern over the second wave of the COVID. So I think in term of crude, there will be the positive and negative factor. And naphtha, the demand is quite firm, like I mentioned earlier, that now the after turnaround season in the third quarter, some cracker, they start operation. So they have to procure naphtha. So that's why the naphtha, quite firm demand. But in terms of polyolefin market, we believe that we -- because of the market that I mentioned earlier, especially in China and India, we believe that demand still remained stable. And however, we -- what we have to follow, we have to see that the new capacity that will start up in the fourth quarter. But more or less, we -- like I said, the -- on one hand, the demand still remained stable. And PVC demand, I think we foresee that we expect the demand still remained healthy and mainly in India, especially there's a lot of the government projects that support the demand. And at the same time, there is a tightness of the U.S. and EU producer because of the hurricane problem so they declared force majeure. Okay, some of them may resume the production, but maybe we would say that maybe second half of the quarter. And company update, I would like to update that as we communicated earlier, that actually now Chemical, we forecast a lot in terms of the circular economy that we would like to make it become circular economy business model. So now in terms of mono material for packaging, we have a really good forecast. So we expect that we can launch the first grade of the product next year. And post-consumer resin, this is the PCR that we can produce from the waste plastic. Now we develop our formulation and with brand owner. So this one, we -- I think we have a good forecast, and we do believe that next year we also can launch a new formulation for PCR resin. And investment update. Actually, we -- today, we just announced that SCG Chemical will acquire a 9.2% stake in the Thai-listed company, AJ Plastic -- A.J. Plast, a leading flexible packaging producer. And at the same time, we also established our JV to produce the what we call the BO, biaxially oriented film, BO film, in Vietnam that we believe that the demand in Vietnam is quite substantial -- I mean growing quite good and BO film is one of our part mono material. And actually, if -- I think I can give more detail that actually SCG Chemical, we produce the film. This is it not the first one. We have a joint venture with our Japanese partner. We also produce our DPE film and this is also for packaging. And if it's typical for this [indiscernible], I mean both our DPE and also BO PP film that we plan to produce in Vietnam, this will be a very big volume. So that's why I think the chemical invest in this type of application because we can capture the value from the downstream product. And this transaction can -- we think that, like I said, Vietnam, has a very good potential in terms of the market growth. So we believe that [indiscernible] starting for in Vietnam. And we can consider that after we enter into this business, we can move further in terms of investment. And for the project update, MOC, this is the cracker that we expand the capacity, what we call MOC debottlenecking. The forecast now is 97%. You can see that the plant is quite complete. And this coming turnaround in the fourth quarter, we will complete our [ tie-in point ] and we plan to start up in the -- I mean, the commercial operation in early Q2, I mean, next year. So after start-up, we have additional capacity of 350,000 ton of polyolefin. And MOC turnaround, like I mentioned, we postponed to the fourth quarter, and we will have 45 days. And we estimate that polyolefin volume loss will be in the range of 120,000 and 130,000 ton. And LSP project in Vietnam, now the overall forecast is approximately 55%. And if you can see from the picture that we complete construction jetty, and we have a good progress for the hydrocarbon jetty. And what you can see in the -- on the left side is it like a modular plant that we built and removed, and we can expedite the project from this type of concept. So that's all I have for Chemical. May I pass back to Khun Roongrote?

In summary, I think this third quarter, we're showing the resilient profit despite of the pandemic and the challenging business environment. Chemicals continue to take advantage of the strong market recovery, particularly in China, whereas Cement and Building Materials' focus remain at the cost and also transformation, which hopefully allow us to be more profitable. Packaging, as you all know, we debuted our shares in the IPO last week. And the investment thesis is clear, is the growth and that allows SCG as a whole to remain financially strong with, I believe, that the sustainable cash generation and a strong balance sheet. I think in terms of the challenges, we also, at the same time, keep in mind that the COVID-19 situation is still around and looks like the second wave, particularly those in Europe, and to some certain extent, in the U.S. remain a primary concern. In Asia, the recovery of the Chinese economy is very good news. So that's, I think, is a plus. Just to share with you, I believe that a majority of you are already aware, our transformation strategy. Chemicals, I think the focus is to improve the cost position, while at the same time to grow the HVA product portfolio, and at the same time, looking to continue to invest in the circular economy business model. Packaging, I think the strategy is clear, we call it M&P merger and partnership, that we'll deliver the growth that we have promised to the market. CBM, I think the story is also efficiency, service solution and also active omnichannel. So these 3 strategies for CBM is our call. So with that in mind, I just want to end our presentation right now and...