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 first quarter 2022. Over the next hour, our management will provide you with results clarification and business updates. Kindly note you'll be melted while a program is on, who'll open the floor up for questions after our management presents. Now on to this morning's program, today's presenters comprised of SCG Management led by Khun Roongrote Rangsiyopash, the CEO of SCG; and SCGC management led by Khun Tanawong Areeratchakul, the CEO of SCGC. Khun Roongrote will walk you through our consolidated results, while Khun Tanawong will highlight SCGC's operating performance. He will be followed by the President of the Cement-Building Materials business, Khun Nithi Patarachoke who will be supported by Khun Chana Poomee. Finally, the financials and sustainability will be highlighted by SCG's Executive Vice President, in charge of Finance and Investment and Chief Financial Officer, Khun Thammasak Sethaudom. Thank you. And now on to today's program, beginning with Khun Roongrote [ krap ].

Good morning. I'd like to start with the page that recapped the kind of challenges that we have faced in the first quarter of this year, and it's still going on. One is conflict in the Ukraine. And this has resulted in the surge in the oil and naphtha prices. On the other hand, the prices of other energy-related products have also followed oil prices, in particular, coal prices. At the same time, the environment, I call it the inflationary environment, has continued to persist and actually made the situation worse together with searching in the energy prices. At the same time, I guess, the COVID-19 still going on. I think the focus now is on China. And tightness of the supply chain and also the freight situation has also compounded the market situation. As for SCG, I think we have concentrated in optimizing our energy prices, energy costs in terms of the alternative fuel. We have reached 30% for the domestic cement production compared to 26% in the same period of last year. We also have tried to be as lean as possible in terms of inventory and the tie-up of the working capital. As you can see, the sales volume of polyolefins continue to increase. Q-on-Q and year-on-year in the first quarter of this year. We continue to deliver high-value products and new product development to the market. And lastly, I think the focus is on the liquidity management and making sure that we are as prudent as we can in terms of spending and capital expenditure. Before going into financials, I wanted to highlight the key milestones of our strategic execution. One is that yesterday, we did the filing for SCGC, SCG Chemicals, IPO. The submission was to SEC. And I guess this has been the process that over a year, if you recall, April last year, we announced study of the chemicals business restructuring. And then beginning of this year, the Board of Directors of SEC approved the IPO plan. February this year, we announced the issuance of the debentures for SCG Chemicals. And now we did the filing and then after that, now we are waiting for the approvals by SEC. In terms of the HVA, we have been able to maintain the percentage of HVA in terms of the total sales at 34%. So about 1/3 of the products are HVA. In terms of new product development, this has been the ongoing process of making sure of continuation to deliver the value to the customers. Now the total of the new products is about 17% of the total sales. Service Solutions accounted for about 5% of the total revenues for the whole group. This is, on one hand, meeting the service requirement of the customers. At the same time, the doing it in a manner that is not heavily tying up with the working capital and the assets of the company. In terms of the regional focus, both sales to ASEAN and the rest of the world increased more than the total sales, which means that our regional strategy is coming around. Right now, Thai sales account for about 56% of the total sales. And actually now is 28% and the rest of the world is 16%. This is the summary of the financials for the first quarter of this year. Sales revenue up by about 25% year-on-year and 7% Q-on-Q. We stood at THB 153 billion. In terms of EBITDA, I think the effect of the high oil prices and after prices cut into the EBITDA of the whole group. EBITDA stood at THB 17.6 billion, a 26% decline from the first quarter of last year, an 18% decline Q-on-Q. I also want to remind that first quarter of last year 2021, we had better-than-expected EBITDA from the Chemicals business as a result of, as you recall, the situation in Texas, where the below-freeze temperature affected the supply of the chemicals in the U.S. Profit for the year, the first quarter of this year, we had THB 8.8 billion of profit, up by 6% from the last quarter and nevertheless, dropped by about 41% year-on-year. Now I'd like to pass along to Khun Tanawong for chemical business.

Good morning. And for chemical business in the first quarter, before we move to the market and performance. Let me begin with our strategic update. As Khun Roongrote mentioned that we have already -- we just did the IPO filing yesterday. So let me give a short recap that as you -- we already communicated that SCG Chemical, we have a unique position. We are the only integrated -- polyolefins with a strong presence in the largest -- the 3 largest economy, in Thailand -- we have been operation in Thailand, Vietnam and -- I mean we have stake in Indonesia as well. And our IPO proceeds, what we planned, we plan to strengthen our ASEAN leadership position in not only polyolefin, but also the PVC business. And what we plan to do, we will expand the capacity in the region. And actually, what we plan like, for example, in Vietnam, we're looking for the debottlenecking the complex. And at the same time, we're also looking for the opportunity to expand further by using the advanced technology and make it become like a low-carbon complex. And in addition, for vinyl, we plan to strengthen our vinyl business by -- we put investment in the downstream application and also we also plan to backward integration to strengthen our vinyl business. For Green polymer platform, we used to communicate that we have planned to achieve 1 million tonnes in 2030. And in short, we have 4 pillars. The first one, we have a special technology we call SMX, that we can reduce the material use. So it means that the customer can reduce the material deals [indiscernible] consumption and at the same time, reduce the carbon dioxide emission. And now we have some new product launch already. So we try to expedite to expand use cases more and more. The second one we have, what we call mono-material. This one, we will produce the material -- I mean, this is like a mono-material to replace the multi-material and multilayer packaging. So this one, we can make our product to be recycled easily. And now we also have a use case for this one that we will expand further. And the next one, we -- of course, this will be a big one. That I will explain later, but we plan to have both mechanical recycling and advanced chemical recycling. So this one, we -- for chemical recycling, actually now we just complete our demonstration unit. And we now -- we are in the process to start with the Japanese company to scale up the unit. And the last one, we have what we call the [ evaluating and studying in the biopolymer ] with [indiscernible] that this one we can use the biomaterial. So this will be a key pillar for our clean polymer platform. And last but not least, is the HVA that we have to expedite. Our HVA product that we have the application development center, that we can shorten their time to market. So this is kind of recap that what you can see. We have a lot a good prospect, I mean, and growth potential for chemical. And next one, let me update, our Long Son Petrochemicals complex forecast. The overall forecast is 93%. And what we plan? We plan to start-up downstream plant in the second half of this year, in the Q3 and Q4, actually. Actually, now we have already start-up utility system, I mean, like steam and water system, electrical system, for example. And in -- I mean, first half next year, we plan to start up the cracker Q1, Q2. So it mean that we -- next year, we will have additional capacity from Long Son Petrochemical. And just to give -- I mean, to give you in more detail that in Vietnam, what we have seen, the economy is still growing quite well. I mean the economy growing well. So that's made our -- we believe that the demand for polyolefin and PVC also growing -- will be growing as well. So this will be a very good prospect for our Long Son Petrochemical complex. And the next one, we -- if you recall, last year, we mentioned that we signed a share purchase agreement to acquire the recycling company, the biggest -- biggest one in Portugal, and we just closed the -- I mean we have a closing of the deal to acquire 70% stake in Sirplaste company in Portugal. So this is a company that -- I would say that is the biggest one in Portugal. The capacity is 36,000 tonnes. And of that, we have 9,000 of the recycled high-density polyethylene and what we plan now -- not for replan. Actually, we already got the approval to expand production capacity another 25%. We plan to expand high quality of the high-density polyethylene. The definition of the high-quality polyethylene mean that we will put additional unit like [ deodorized solution ] to reduce the smell of the PCR. So this one, we will be [indiscernible] because they need to have a very high-quality PCR. So we see the opportunity to expand more, more and more in Europe. As you may know, that regulation in Europe is quite -- I mean, they quite support recycling the smell. And at the same time, their brand owner, they also required the recycled plastic for their product. So this is -- that's why we have a very good footprint. We have a good network. So we have opportunity to expand either organic and inorganic more and more. And now we come to the operation execution. Before we jump to the market. And for -- I mean, as Khun Roongrote mentioned about Russia and Ukraine conflict. What we have seen that, of course, the feedstock costs that are sharply increased. And what we have to -- we also have to manage. Actually, our immediate action, we also have to do a kind of optimization in terms of the product mix and destination mix that we have to serve our product to make sure that we can optimize our profit. And at the same time, we have to monitor the feedstock market closely to make sure that we can manage our feedstock pricing to be in line with the market. And at the same time, we have to keep our inventory lean. And again, I mean, for HVA, we have to expedite and make sure that we can respond to our customers quickly. So when we come back to the market and performance. If we look at the polyolefin, you can see that, like I mentioned, in terms of cost, the feedstock costs sharply increased from the last year Ukraine conflict. But at the same time, you can see the product price also increased. We will see the uptrend actually for the product price. But in terms of the margin, PE-N, Naphtha and PP-N, Naphtha spread reduced mainly due to the sharp increase on the feedstock costs. For Vinyl. What we -- I think what -- PVC price declined from the -- actually, there's the supply recovery from the maintenance activity last year. And at the same time, in terms of the demand slowdown from the construction activity during the winter and also the lockdown situation in China as well. So that's why the margin [indiscernible]. But what we have seen in the outlook, the margin will be improved. In terms of sales volume, we -- even though we have a big challenge in terms of the feedstock costs, but we can maintain our same volume compared quarter-by-quarter and also year-on-year. And in addition, we also prepare our inventory for our planned polyolefin maintenance in the second quarter. So we -- I think, we say thank you that we have a very good optimization for the product portfolio and also the designation mix that we can say of our product. For PVC volume, you can see that our sale volume increase, even though, like I mentioned, that the market in China may be in slowdown. But we see the market in South Asia, like India, the demand is still firm. So our volume is compared to -- increased 6% -- 12% quarter Q-on-Q and 6% year-on-year. Financials. Financials, of course, in terms of revenue, increased; and from product price, increased. And EBITDA and profit declined and mainly from the sharply increase of the feedstock cost. And as Khun Roongrote mentioned, if we compare with the first quarter last year because of winter freeze situation. So that's why last -- I mean, first quarter last year, the performance is -- it's quite good when compared with the usual situation. So in terms of EBITDA -- and profit in terms of profit, also declined, similar to the EBITDA and mainly from the sharply feedstock cost increase. Industry outlook in terms of demand, we see that the end market product, if we're talking about non-China, we see the demand still stable. And hopefully, that we see the potential upside from the China if they lift the lockdown. And PVC, in terms of demand, we see the demand improved from the consumption activity improved, especially in South Asia. And in terms of supply, we see the limited supply because there are some players, they cut run their potential from the feedstock volatility and we see some new capacity may be postponed from the feedstock -- high volatility of the feedstock. And PVC supply, we see the tight situation in the second quarter because of the turnaround season. And if we look at crude oil price, [indiscernible] naphtha. Based on the Russia-Ukraine conflict, we see the high volatility. But what -- like I said, what we have to do, we also have to manage our feedstock, and we try to utilize our -- I mean we can use more gas compared to the naphtha as well. And EDC, we also see that the price will be sorting from the -- I mean, mainly due to the regional -- more regional supply availability in the region. So this will help support the PVC gap. That's all I have so may I pass to P'Nithi [ krap ].

Thank you [indiscernible]. Good morning to everyone. I would like to start with -- we have company highlights and update. First, we continue to conduct fuel cost management and did commercial strategy to compensate for cost-push inflation. Second, we still expand domestic and regional retail platform in ASEAN. First quarter, our JV just acquire additional 9.25% stake in Depo Bangunan, the leading retailer for one-stop shop retail, bringing our shareholder -- total shareholder of our JV to 22%. And we continue to expand our retail franchise business to total of 28 branches -- 28 stores across the country. Third, we continue to offer HVA product and service solution. For example, new SCG Solar Roof Hybrid Solutions, we -- this is the partnership program integration. Now we have like battery in this solar roof and this allow day and night, 24 hours electricity use from the panel, saving up to 60% of the electricity fee. Next, I would like to P'Chana to explain in detail for the first one, fuel cost management.

I will elaborate more on the part that we still continue to proactively manage, our coal inventory, advance contracting activity and also maximize our use of the domestic alternative fuels in cement production. What we have secured our volume of coal of this year is nearly 90% to 100%. And amid the persistent high seaborne coal price, we have planned to place the remit of the import coal not over 50% of the portion of the fuel that we have. We also have to share that we achieved our continued effort and investment over the past 15 years using the low heat fuel. And what we have right now, technology that we invest to maximize our alternative fuels. For example, we invest on the chloride bypass, external combustor and also setting up the AF burner. This is what we also collect our knowledge for 15 years. That's why we still ongoing to improve using the alternative fuel for our cement production. The waterfall chart on this slide illustrate our framework of fuel cost management that I'm Chair on the October last year. This time, we have the updated number. As you can see that we're taking into consideration the recent coal price increase and our mitigation activity, we expect our production cost in this year will be increased by only 13%. From last year, cement production cost projection, we expect an increase in production costs around USD 4 to USD 5 per tonne. Our commercial strategy could cover approximately 2/3 the cost increased from enhancing high-value products. Service Solutions as well as efficiently manage our end-to-end value chain to defend our profitability. However, due to Russia and Ukraine conflict, there is an additional impact on fuel costs on the cement industry. We, therefore, need to tactically cover the cost-push situation through the fuel cost management and also commercial strategy to increase supply to compensate what we have the impact from the cost. And for this slide, will share on the -- what we have the product innovation, low-carbon cement. The name is the hybrid cement. This we launched into the market and so as the high-value-added product is quite achieved and also can compensate some of the price that we can increase. And also Green solution that we combine our technology, 3D printing and also together with our customer or partnership to let them get the new experience on the new [indiscernible] Green Construction technology using the 3D printing combined with construction technology that is quite really impressive press of the new coffee press, maybe the -- you can see at the [indiscernible] road #2. That's all for my addition.

Next is Thai market. Demand in almost all segments were lower year-on-year, except only ceramic tiles, 2% increase. In the ASEAN market, Indonesia and Vietnam experienced rising cement demand. Only Cambodia felt negative impact from COVID. For ceramic tiles in all markets, overall sales and volume increased, thanks to recovered demand both in domestic and regional. For Thailand sales segmentation, sales increased because the implementation of the commercial and pricing strategy and also volume increased despite the contraction in some segments, like in concrete segment. For ASEAN sales, higher regional sales year-on-year from better COVID situation in almost all countries. Revenue from sales. Revenue increased year-on-year on higher sales from both domestic and regional markets. For EBITDA and profit. First quarter EBITDA and profit increased Q-on-Q on the higher sales volume and price, but dropped slightly year-on-year on the cost-push. Outlook. Demand in second quarter is expected to be improved from recover -- I may say, slowly recovering economic sentiment, both domestic and regional. We see -- we saw the improvement from Jan to Feb, Feb to March. So we expect the same in the second quarter. But however, the rising inflation and cost-push may slightly like delay the purchasing from the customer. Government sector still continue to be main driver in domestic cement in both the cement demand in Thailand and in regional. But the residential and commercial sector should be gradually recover. Retail business, it's expected to be resilient. This is due to the home renovation and repair segment. That's all from CBM Business, [ krap ]. May I pass to [Sethaudom, krap].

Good morning. Kap. And I will recap for the packaging section. Start with the sales revenue in the first quarter was THB 36.6 billion. This is up 34% year-on-year and up 4% Q-on-Q from increase in the product price as a result of the cost-push. For core EBITDA, which is at THB 5 billion, decreased 9% year-on-year but up 9% Q-on-Q. If you look at the core profit, which is at THB 1.7 billion, this decreased 24% year-on-year but up 20% Q-on-Q. The high cost of the waste water -- waste paper and coal price pushed the margin down year-on-year. But if you look at the Q-on-Q for the core profit, you have to adjust the nonrecurring item in the Q4 last year, that the core profit Q-on-Q are pretty much the same. SCG Packaging still continue the journey to grow, especially in the regions and has completed the merger [indiscernible] as well as complete the greenfield start-up of [ new PVC ] new line. This is the 220,000 tonnes per year in Philippines. So -- and also adding more HVA products in the first quarter supply chain adjustment to make it lean and resilience were the key focus to cope with the global situation and turbulence. For the financial result. Net debt has increased slightly from THB 235 billion to THB 239 billion. Net debt on EBITDA increased from 2.6 to 2.8. Overall, SCG still have a very strong balance sheet. In the first quarter, we spent THB 11.2 billion, mainly for maturities for LSP project in Vietnam. And other than LSP, we also spent on the energy saving cost saving project. So that's increased our acceleration toward more efficient and cleaner energy. This year, we estimate a CapEx and investment could be in between THB 65 billion to THB 85 billion depending on the overall situation. For financial highlight, SCG profit in the first quarter was still very robust, up 6% Q-on-Q. EBITDA weakened due to the absence of the dividend. This is when we look at Q-on-Q. However, the product demand still quite okay in general. Cash and cash under management was close to THB 82 billion by the end of the first quarter. THB 30 billion debenture issuance by SCG Chemicals was complete and successful. The net debt on EBITDA reduced to up to 2.8x as I explained, and also the CapEx plan that's already discussed. I would like to cover for the ESG part. This is our effort to make a progress on the ESG front. So we stick to the ESG [ 4 plus ]. And that's -- I will give you more detail on this. Last year, we achieved 2.7% reduction in greenhouse gas emission. This is better than 2.5% reduction target set for the well-below 2-degree scenario, and this is according to the science-based target initiative. And in the first quarter this year, we emit 8 million tonne CO2. And if you extrapolate, it's still on target for the well-below 2-degree scenario. For the percentage of the alternative fuels increased -- use has increased to 16.4% for overall SCG Group. And if you look at the cement -- domestic cement percentage, alternative fuel uses, we could achieve 30.4% by the end of the first quarter. Look at the Green Choice. Revenue for Green Choice product represents 51% of our total revenues. We are closer and closer to our long-term target of 67% target by 2030. Reduction of water withdrawal could reach 24.7%. This is the -- well beyond our long-term target of 23%. So that -- this is something we can beat the target early. On the social path, which our theme is to reduce inequalities. In last year, we could train and create a job for more than 3,000 jobs. Just to give some examples, it's like skill for the truck driver, handyman, nurse assistant, this as part of the skill development program. And in the first quarter this year, we could create around 1,500 jobs through the platform of Q-Chang and in collaboration with [indiscernible]. So last year, SCG Skills Development School has trained close to 9,000 persons for the truck driver. And our effort to build a check dam construction has reached 110,000 check dams. And our program on No Drought No Poverty Project reached 47.5 billion households -- 47,500 households, sorry. And the social contribution, we spent around THB 700 million in total. In terms of the collaboration platform. On 29 March, we draw our hand with the TCMA to promote the low-carbon cement and the aim is to achieve the 12 million tonnes local on cement by next year. For the collaboration with Worldview Climate Foundation and Worldview International Foundation, we planted close to [ 82,000 ] trees and 44,000 mangroves and that's a good content into the carbon assumption about 14,500 tonnes carbon. And one of the big events we hold every year as SD Symposium. This year, we changed the name to ESG Symposium to emphasize the importance of the ESG and in line with our ESG [ 4 plus ]. Collaboration activity will start from next month and run through July 19. And this year, we will make it on-site and also online. So you can have more option to participate and hope that it will create a richer experience and better collaboration. That's all from my part, may I pass to Khun Roongrote kap.

Thank you. In summary, I think we reported THB 8.8 billion of profit, up by about 6% Q-on-Q. Nevertheless, it was the significant drop from the first quarter of 2021. Two factors. One is that 2021, particularly in the first part of the year, there was a situation, as we mentioned, of the lower-than-normal temperature in the southern part of the U.S., which affected supply of the chemicals from the U.S. So that was the favorable factors for the first and second quarter of last year. Secondly, I think as you all know, this wave of inflation, market uncertainties and also the high oil and energy prices as a result of the geopolitical conflict between Russia and Ukraine. We do expect that in the next 3 to 6 months, these uncertainties will continue to remain. That's something that we all know. In terms of the company, I think we try to be as adaptive and as proactive as we can in order to meet these challenges. In terms of raw materials, we have secured enough supply in what we believe competitive prices. In terms of managing the working capital and inventory, as we have mentioned several times, the idea is to be as lean as possible. When you have a lean inventory, it's easier for you to move in either direction. We try to pass our escalated costs in all products as possible. However, the market on one hand, seems to be accepting. But on the other hand, this uncertainties made the market sometimes quite reluctant to take these increases. Our balance sheet continues to be quite strong with a very good liquidity and also, we will continue to manage the business in a way that we are quite prudent as we can in terms of how we spend the money. In terms of the major projects, we do believe that long term, the prospect of the business remained good. The project in Vietnam made good progress in the first quarter compared to when we reported at the beginning of the year. We will not be able to detail as much because of the filing of the IPO. The filing, as I mentioned was done yesterday and we do hope that this will be a good preparation when the market situation is good. We continue to do the green and recycle capacity of the Sirplaste subsidiary in Portugal will increase. As Khun Nithi mentioned, the acquisitions of the stake of the Indonesian listed operator of Building Materials retail, Depo Bangunan, I believe that will strengthen our retail platform within ASEAN. And also, we had a good successful start-up of the new packaging paper line in Philippines and continuation of the merger and partnership of SCG Packaging. This will allow the long-term prospect for growth. Our management continue to be quite vigilant and the focus in the operational excellence, cost. Nevertheless, the commitment how ESG remained as strong as ever. So this is the summary of our first quarter results and key matters to be reported.