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

Good morning, ladies and gentlemen. Welcome back to SCG Virtual Analyst Conference for the Second Quarter 2021. Over the next hour, our management will provide you with results clarification, business updates. During the presentation, we will not be wearing mask as everyone is alone and at different location. Kindly note that you'll be muted while our program is on. We will open the floor up to questions after our management presents. Now on to this morning'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 business units, beginning with the President of the Cement and Building Materials business, Khun Nithi Patarachoke. He will be supported by Khun Chana Poomee. And he'll be formed by the President of the Chemicals business, Khun Tanawong Areeratchakul. Thank you. And now on to today's exciting program, beginning with Khun Roongrote, kab.

Good morning for our second quarter result and also the first half of the year. Next, please. Yes. The second quarter, the revenues came in at THB 133.5 billion, actually is the 35 -- 39% increase year-on-year and 9% increase Q-o-Q. Chemicals actually was the main growth driver mostly in terms of the chemical prices. Next one. [indiscernible] THB 33 billion. Those are coming from the 3 business units, whereas the Chemicals and Packaging contributed the most. Next one. Equity income, as you can see, more or less the same as in the previous quarter at THB 5.7 billion equity income. And Chemicals equity income increased, whereas the non-Chemicals equity income increased on a year-on-year basis. Profit for the period came in at THB 17 billion. That's the 83% increase from the prior year. Looking at the first half of the year, the revenues in the first half came in at THB 255.6 billion. And Chemicals account for about 44% of the total revenues, whereas Cement and Building Materials accounted for 34% and Packaging is the remaining 22%. In terms of profit, the total profit for the first 6 months is THB 32 billion, and Chemicals account for roughly about 60% of the total profit in the first 6 months of the year. Cement-Building Materials is 16%, and the Packaging is 10%. And as you can see that the profit from the minority JVs are [indiscernible] significantly from THB 1.6 billion in the prior year to THB 4.4 billion. And that is from the agricultural machinery and also the retail in the building materials business. In terms of the sales segmentation, domestic sales for Thailand accounted for about 56%, whereas the export and ASEAN production accounted for about 44%. Export in the first 6 months of this year was THB 63.6 billion, and that is a 34% increase from the prior year. And as you can see, ASEAN showing some growth in terms of the percentage growth. At the same time, there is more sales to countries in the others category, which is basically South America, Europe and also Africa countries. In terms of the high value-added products, HVA accounted for 34% in the first half of this year, whereas the new product sales, which is the product that introduced between the period of 3 to 5 years, that's account for about 15% of the total sales. And the service solution, which is basically a non-product, sales accounted for 5% of our total revenues. Now I'd like to turn over to Khun Thammasak for the financial update, please.

Can you hear? Okay. Yes. So we'll start with EBITDA on asset stood at 12.3%. If you exclude the project under construction, it's going to be 14.4%. And EBITDA margin increased from 19% to 20%. Next, kab. And net debt stood at THB 178.2 billion, and net debt to EBITDA was 1.9. So net debt to equity is 0.4. We have a very strong balance sheet. Next, kab. First half of this year, we spent THB 34.5 billion, and the 70% is for the Chemical. As you know that we have the MOCD2 completion in the first quarter, and also the LSP project is still going on. This year, we expect that our CapEx and investment will increase to, in total, THB 80 billion to THB 90 billion for the whole year. Next, kab. Interest and finance costs amount to THB 3.38 billion, and the interest rates averaged at 2.8%. For financial highlight, Board of Director recommend interim dividend of THB 8.5 per share, and that's THB 10.2 billion in total payable on August 27, XD on August 13. We have a very strong performance in the second quarter. EBITDA generation is THB 32 billion, and this is up 35% Q-o-Q and 39% year-on-year. This is from the very strong performance from our 3 business unit, and thanks to the expansion of the HVA which enabled us to enjoy the higher chemical gap than the market. So -- and strong revenue growth and very good cost control at the CBM and solid M&P and growth execution by Packaging business. In terms of the balance sheet is very strong. Cash and cash under management is the THB 94.5 billion by the end of June. And we also have a -- and net debt to EBITDA at 1.9, as already mentioned. We still execute a growth strategies. You also know that we subscribe for the rights issues for Chandra Asri, and that amount is USD 434 million. I'm sure that Pi Tanawong will explain in more detail on the logics. Apart from the maintain the stake in the Chandra Asri, SCG Packaging also secured the M&P for 70% of Duy Tan, and that is the THB 9 billion. And we acquired the 51% stake in the A.I. Technology. This is the leading automation system integrator in Thailand. This will represent and move into the higher level of the manufacturing technology using the robotics. As I already mentioned, the planned spending for this year is THB 80 billion to THB 90 billion in the CapEx and investment. And the major chunks still go to the LSP project, which is around THB 40 billion. Next, kab. So I will be covering quickly on the SCG Packaging consolidated result. Sales revenue stood at THB 29.8 billion and up 38% year-on-year and 10% Q-on-Q. Core EBITDA also stood at THB 5.5 billion and up 37% year-on-year and 2% Q-on-Q. Core profit also at almost THB 2.3 billion and 56% year-on-year up and up 1% Q-on-Q. So net profit is THB 2.2 billion. As Khun [ Wichan ] already announced on last Tuesday, so the growth strategy is still on track. May I pass to Pi Nithi, kab.

Thank you, kab, and good morning, everybody. I would like to start with Thai market first. For this quarter, grey cement demand decreased by 2% year-on-year due to lower working day from Songkran long holiday and effect from the third COVID outbreak in construction site. As you can see, resident and commercial segments have faced downward, with negative growth at 4% and 5%, respectively. Infrastructure segment still contribute positively to the demand landscape, growing at 2% year-on-year, thanks to public investments. Ready-mixed concrete demand contracted 1% year-on-year due to lower private investment projects and the effect of [ thruster ] in construction site that helped the operation, especially in metro areas. Despite weakness in cement demand, the demand for housing products and ceramic tile grew 1% year-on-year and 10% year-on-year from increased renovation activities. For ASEAN market, cement demand improved in Indonesia and Vietnam, thanks to economic recovery and government stimulus package, while big contraction was seen in Cambodia as the new wave of COVID outbreak that lead to lockdown in many areas. Myanmar also experienced new outbreak, which, together with unstable political situation, drove a drop in cement demand. Next, kab. Ceramic tile. Despite the weak cement demand, ceramic tiles sales volume grew 10% year-on-year, thanks to strong demand, particularly in Thailand from renovation projects and better economic situation in the Philippines and Indonesia. Next, kab. Thailand sales segmentation. Domestic sales in this quarter increased 9% year-on-year due to higher demand of housing products from renovation project as well as increased sales in distribution business. Meanwhile, increased construction solution sales helped offset lower cement sales volume, enabling total cement sales steady year-on-year. For ASEAN, ex-Thailand, and other sales segmentation, total sales of outside Thailand rose 10% year-on-year due to increased export to ASEAN and non-ASEAN market. Our ability to tap into foreign market and our global network helped mitigate domestic demand weakness in Thailand. Meanwhile, sales in our regional operations remained stable even as regional demand was sluggish. Revenue from sales in this quarter increased 9% year-on-year due to robust sales in building materials product within Thailand as well as higher exports. EBITDA and profit for the period. EBITDA increased 9% year-on-year, thanks to overall increase in revenue from sales and export market. As a result, profit for the quarter rose in line with EBITDA. Outlook, kab. Demand outlook in third quarter will be affected by the fourth wave of COVID outbreak, which led to government order closure of the construction site for 1 month. As lockdown is not being implemented countrywide, government spending on infrastructure projects is expected to continue to be the major driver of domestic cement demand. For the mitigation plan, as you can see in this quarter, we successfully grew our sales in both domestic and overseas market. We will continue to do the same in the next quarter. In Thailand, we will maximize the sales of housing products and service solutions, both via physical store that we expand and online platform. Outside of Thailand, we will continue to expand export sales to new markets in South Asia, EU, U.S.A. and Oceania. Apart from sales, we will continue to keep cost reduction by increase the portion of both self-generated power and alternative fuel use. For company update, we steadily grew our retail platform, adding 3 new franchise stores to total 24. We also added 7 more ceramic outlets, bringing the total 54 stores nationwide. Progress was also made in active omnichannel with continued expansion of gross merchandising value and product offering. Finally, amid this resurgence of COVID-19 outbreak, we continue our effort in developing innovative products and solution that are geared towards the health and wellbeing of our customer as well as the community. I will add more detail shortly. First, I would like to ask Pi Chana to update about the service solution and cost control, kab. Please, kab.

[Foreign Language] As the -- I will add more detail onto 2 points. As the ESG is the -- our philosophy as well as the business strategy, amid the ongoing market weakness, we will maximize the value and minimize the losses by offering a solution to customers from beside to the construction phase. These are some of the solutions we offer at the 23 CPAC solution center nationwide. First, CPAC drone solution. This is the solution as the assessing the overall construction area using drone to collect the information and produce construction map of the project. The technology helped reduce delays of the construction area, enhanced land-use efficiency, increased safety and decreased construction time. Second, CPAC Building Information Modeling used the digital technology to manage construction projects, allowing the stakeholder to understand construction ecosystem in every step of work. CPAC BIM improved design precision and can detect design error prior to construction. The system also lower the delayed [indiscernible] rework and waste. The third, CPAC 3D printing solution uses a computer program to design and control the construction process using 3D printers. The solution enable structure and building to be constructed in desired shape and form while decreased the transaction time and lowering the use of labor as well as the amount of waste generated on the construction site. Next, please. To ride out this storm, will keep the lid on cost and work relentlessly to improve the efficiency of our operations. First, we add 2 megawatt of solar power this quarter and have planned to add another 50 megawatt to cement business, bringing the total is about 190 megawatts. And also, we introduced 13 megawatt of solar power to other business within CBM this year. The second, rising coal prices. We have already secured alternative and locked in the price of coal more than 90% of our planned coal-consumption this year and also increased the usage of the alternative fuel from 23% in the first quarter to 27% in this quarter. The fourth (sic) [ third ], we actively adopt lean and ID4 by implementing the internal consolidation of the support function among CBM operation to increase the efficiency and enhance the collaboration between working unit. This also include automated warehouse with reduced manpower to dispatch products and increase the level to customer. And also, the smart inventory and [ sub-prime ] management, which, as the name suggests, increased efficiency for procurement and inventory management. May I pass back to Pi Nithi, kab.

Kab, next is our retail store expansion. As part of our mitigation plan, we will speed up the physical stores expansion as well as promote online channels. Apart from 3 retail store and 7 ceramic outlets opened in this quarter -- in second quarter, we plan to open more branches the rest of the year. As for e-commerce, good progress was made this quarter with plans in place to continue growing the platform. First, our active omnichannel for retail via SCGHOME.com grew 320% year-on-year, and nearly 20,000 SKU of products have been added. Second, Q-Chang service has been integrated into 24 retail franchise store, with GMV growing nearly 400% year-on-year. Third, NocNoc marketplace platform grew nearly 200% year-on-year, with total products SKUs reaching 170,000 SKU this quarter. Next, kab. For social contribution to society, as we work through the challenge from COVID-19, we do not forget the stakeholder. We continue to develop medical solution to ensure safety of the medical staff directly support COVID-19 patient. Our latest solution is the modular ICU for critical patients. Our team worked 7 days a week to finish this ICU as soon as possible to save people's lives. This modular ICU separate patients from those with other units and provide isolation ventilation to medical team to minimize infection risk to save their lives. That's all from CBM, kab. Thank you very much, kab. May I pass to [indiscernible], kab.

Kab. Good morning, kab. For Chemical business in the second quarter, may I start from the market highlights? What you can see is that crude oil price increased mainly from the strong demand, actually the demand recovery in the Western countries, and the situation of the COVID also improved in the Western countries. So that's why the crude oil price increased. And naphtha price, you can say that naphtha price also increased following crude. And also, there is sort demand of the naphtha from the new cracker startup in this region as well. But look at our key products spread. For HDPE gap, you can see that the gap is quite stable and mainly due to the limited supply from the U.S. and Middle East. And even though we have the COVID case increase in Southeast Asia, but because of those tight supply and we can have a [ tighter ] spread of the PE gap. But look at the PP gap. The PP gap that squeezed from the -- you can see the price. Actually, this is from the new -- the resume of the operation from there. There are some producers that they come back. And the COVID case in Asia also impacting in terms of the PP gap. But look at the PVC price. The gap improves quite substantial, mainly from the supply tightness in the U.S. from the winter freeze that what we mentioned. There's still some impact fairly to this quarter as well. And actually, one more issue about the freight limitation in the second quarter also affect export volume from Southeast Asia. So look at the performance highlight. We -- what we would like to mention that we can have total sales volume at 492,000 tons during the challenging situation, I mean, the COVID situation in the Asia and freight shortage situation. But what we can do, we can manage our product and market destination, including improved the product portfolio adjustment. And in addition, we also continue to do the new product development that what we did. For example, and you may see from the video, we have a new product from SMX that for new customers, and we also have a PP compound that the new [ play ] that produced from our new catalyst. Next, kab. Next highlight, and look at the, like I mentioned, the -- you can say that the second quarter, the gap is -- [ will stay ] with more or less second half -- the first quarter. And mainly, again, this is from the limited supply from the U.S. and Middle East. Next, kab. PP gap, again, I think this is the gas decline compared to the first quarter, and this is, again, from the resume of the operation from the Middle East and Chinese producer as per the maintenance season. Next, kab. PVC price gap, this is quite, I mean, substantially improved. And again, this is -- like I mentioned, this is supply tightness in the U.S. and I mean, from the winter freeze situation that carried from the previous quarter. Next, kab. Benzene gap -- benzene naphtha gap also improved, and this is again due to the tight supply in the Western countries due to the delayed of restart of some maintenance unit. And toluene, more or less, the CapEx also slightly improved. Next, kab. For MMA gap, I -- gap also improved from the global supply tightness due to the plant turnaround in Europe and Asia. And look at an BD and naphtha are also improved, and this is mainly from the tight supply in the U.S. and some many maintenance activity in the U.S. facility. Next, kab. Look at the polyolefin sales volume. Like I mentioned, we can achieve for 492,000 tons even though we are in the situation of the COVID case increase in Asia, especially in India, and at the same time, the freight shortage situation still -- previously we have this type of problem. But like I said, we have to manage not only the product portfolio but also try to manage channel -- the domestic channel and export channel as well. Next, kab. PVC sales volume slightly declined. Actually, this is -- you can say that this is the volume -- in terms of the volume slightly declined from slow demand. But in terms of price, like I mentioned earlier that because of the tight supply, so that's why we can maintain the high price and maintain the high gap for PVC. Next, kab. As I mentioned, revenue improved 18% Q-on-Q and 75% year-on-year and mainly from the higher product price. Next, kab. EBITDA also improved 42% Q-on-Q from higher gap and from sales volume as well. And we also have some dividend improved. Next, kab.

Please, unmute.

Should I -- okay. I think for the closing, Like I said, the earnings improved 18 Q-on-Q from higher gap and from the higher equity income. Next, kab. Outlook. I would say that we expect the crude [ will climb ], will come up. And of course, we -- what we can say that now the demand recovery in the Western countries is quite clear. And COVID situation in those area -- I mean, in those countries, including the [indiscernible] helped improve the demand. And in addition, the OPEC+ production, the production curb to balance the support, I mean, the market. And naphtha will -- what we say that naphtha were moving in line with the crude, and also, there is a firm demand from the new cracker and lower LPG replacement. And for polyolefin, we see the demand pressured by the COVID situation in this region and also the freight tightness situation. However, we -- what we can see that actually, the third quarter, this is however seasonal restocking for the quarter. So this what may help offset. For PVC, the construction demand in Southeast Asia impact by rainy season, and there is a kind of implementation for -- of the social restrictions. So the construction activity, a bit slowed down. So we -- but what we have seen that Indian market now, I mean, improved. So Indian demand will gradually recover from the COVID-19. And for the company update, what we would like to update with you, the first one, the subscription of the rights issue from the Chandra Asri Petrochemical. The second one will be the circular economy activity, and the last one the LSP project update. Next, kab. The -- if the -- what we would like to mention here that you may know that we invest in the CAP since 2011, and we continue investing in CAP with a proven track record of successful project execution and together with our partners. So the rights issue for the CAP2 project, we think that this is a good project. Indonesia market is sizable and we still need to import a lot of the product -- I mean , ditto, chemical product. So this -- with it, we will have a good investment. Next, kab. For the circular economy, actually, we have 4 pillar. What we call reduce, this is the SMX -- the concept for SMX that what we're doing now. This is a really special polyethylene that we can use the less amount of the material. For example, we can thinner packaging that still have the same property or even better. So this is what we call reduce. The recyclable, this is the one that we call mono material. We produced the material that can recycle easily. And we plan, I think, hopefully, that we can launch the product within this year. For recycle, we have both mechanical and chemical recycle. And we will update something about the mechanical recycle. That's what we collaborate with the brand owner. And the last one is the bioplastic that what we try -- we export the opportunity to have kind of a very special bioplastic. Next, kab. This is the partnership that what we have with Unilever. What we're doing now, we have a kind of HDPE resin formulation that is quite special to improve the property of the post-consumer resin. And this one, we will in line with the brand owner that they would like to use this kind of product. So we will start the new product packaging very soon. Next, kab. For the -- as the project now, overall progress is 83% as planned. And you can see from the picture, for example, the hydrocarbon jetty is already almost complete actually, and utility and some of the downstream [ panel ] also okay -- is quite okay on our plan. So what we still maintain our commercialization plan in the first half of 2023. Next, kab. This is something -- I think we all know that COVID situation is quite serious in Southeast Asia. And also, the situation in Vietnam, I think they also have a really strict measure to control. And for our LSP project, we also put a really strong measure to make sure that we can prevent the COVID case in our LSP construction site. So what we did and what we're doing now, we separate a group of people, and we do a kind of 100% check. And this kind of activity will carry on to make sure that we can maintain our construction activity, kab. I think that's all for the Chemical business, kab. So may I continue with the sustainability, kab? Next slide, kab. Actually, what we announced for net zero emission by 2050, so at the moment, SCG, we have initiated and we also committed to the Science-Based Targets initiative. In addition, we also adopt what they call TCFD. This is a kind of framework that mainly investor, they are looking for. We have to identify list and opportunity from our activity and take the necessary mitigation to handle those stuff and scenario. And in terms of key initiative, what we have here, that's for the renewable energy and alternative fuel. Like Khun Chana has already mentioned, just to keep a really quick number. At the moment, I think we already have put almost [ allowed ] 100 megawatt of the renewable energy. And we also have a policy for the internal carbon pricing. Now we use like $18 per ton. And we also developed the new product and service solutions and looking for opportunity to invest in the Deep Tech. This is something like you may have about the carbon capture and carbon conversion. Now we try to -- we will set up a demonstration unit and prototype to do the carbon dioxide conversion, okay? Next slide, kab. For social contribution, I think as Pi Nithi mentioned already, actually since the COVID pandemic last year, I think we have a lot of, yes, innovation product that we can help our cost. I mean, the people that have to -- that they need to use, for example, what unit the [indiscernible] -- I mean, the [indiscernible] field hospital-based and modular ICU unit. And also, we also have [indiscernible] application to also help to support. And we also provide -- not only for COVID, we also provide the financial support and service to mitigate the impact of the COVID lockdown on SME business and trade partner. Next, kab. For governance, I think the ESG is quite important. So what we did -- I mean, not -- I mean, as I mentioned about framework that we adopt and we try to move on that. But in terms of the high level of awareness, we also launched what we call like the ESG in the eye of investor view. This is like an investor perspective on ESG that we share with our Board of Directors. And we also have a climate resilience and decarbonization mitigation mechanism. This is a kind of Thailand road map that we can understand and we can plan for our activity. I think that's all I have. May I pass back to Pi Roongrote, kab.

I think in summary, we have a very strong second quarter and the first half of the year result in [ regard ] to all 3 business units. I think the Chemicals business delivered better than the market spreads, and also, the sales volume came in very, very good. Cement-Building Materials, I think we were able to report revenue growth -- revenue -- good revenue growth under the current circumstances with a good cost control. Packaging business continued to show a strong execution in terms of the growth. But on the other hand, looking ahead for the second half of this year, I think the situation is quite challenging, considering that spread of the COVID-19 Delta variant is very, very fast, particularly in Thailand, Vietnam, Indonesia and Malaysia. So at the same time, there is a possibility that COVID-19 Delta could reemerge in the Western countries, and this could impact the demand, which have already shown some increase after the certain percentage of the population in those countries reached a high vaccination rate. Nevertheless, I think our group remained financially strong with a very high liquidity, and cash flow is good, and balance sheet is good. So I think as a group, our company, I think we are better in terms of preparation to meet all these challenges. At the same time, we are in the process of transforming our business toward more ESG oriented, for example, chemical recycling, recycled plastic and reduce -- reduction of the coal consumption. The investment in the Chandra Asri second cracker, I think this will add the growth capacity [indiscernible] beyond the LSP startup. Nevertheless, I think the management priority remains to focus on the strong execution during this very challenging period. I think we have about 5 minutes of the video clip that we like to show all of you, so that you can get a feel in terms of our business continuity management programs that we have run and now upgraded across the regions, including Thailand. So please take a look. [Presentation]