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

Good afternoon, ladies and gentlemen. Welcome back to SCG and to our analyst conference for the second quarter 2022. We have a lot to update. Now before we get started, could we please ask our guests to keep your mask on for the duration of the meeting. And a soft copy of today's presentation can be downloaded via the QR code provided. On today's program, our presenters comprise of SCG management led by Khun Roongrote Rangsiyopash, CEO of SCG; and SCGC management led by Khun Tanawong Areeratchakul, the CEO of SCGC. Khun Roongrote will walk you through the consolidated results, while Khun Tanawong will highlight SCGC's operating performance. He will be followed by the President of the Cement and Building Materials business, Khun Nithi Patarachoke, who will be supported by Khun Chana Poomee. The financials will be highlighted by SCGC's Chief Financial Officer, Khun Chantanida Sarigaphuti. And finally, sustainability will be highlighted by SCGC's Executive Vice President, Khun Thammasak Sethaudom. Thank you. And now on to today's program, beginning with Khun Roongrote.

Good afternoon. Starting with the recap of situation in the second quarter and actually the first half of this year, I think the lockdown of China actually affected a lot in terms of the demand regionally, and it looks like it's going to take quite some more time before the demand in China is coming back. In terms of the price, coal price and oil prices put a lot of pressure on our costs. Inflation and interest rate hike, those 2 affect consumer confidence and, in turn, the outlook for the economy is significantly not weakened. And now a lot of people are talking about recession and so on. I think for most producers, I think the cost situation forced the producers to actually try to increase the prices. And finally, the tightness of the freight situation has caused increased significantly in terms of the freight situation. In terms of our action, I think the increasing price to reflect the increasing costs, I think that was one of the actions that we have taken. New product and services have been introduced quite significantly in the first half of this year. At the same time, the continued management of the HVA portion in order to support the revenue and contribution margin, we have increased alternative fuel mix, particularly in the cement and building materials. As you know, during this period of time, I think a lot of focus have been in terms of managing the crisis. And operational expense in terms of cost and the feedstock procurement, those 2 factors have played into our execution throughout the first half of this year. At the same time, the SCG Packaging, SCGP, had invested in the Peute Recycling business in Netherlands. That's not only helping in terms of costs, but also in terms of the supply of the waste paper. And finally, in terms of the liquidity management, lowering the working capital and revisit CapEx for the group. In terms of the results, as you can see, we reduced THB 305 billion in the first half of this year whereas EBITDA was THB 42.5 billion. That was down by about 24% when compared to the first half of last year. Profit at the same time declined by 41% to THB 18.8 billion in the first half of this year. This sales designation, just one point that I'd like to focus is that you can see the shrinking portion of the China market. That was due to what I just mentioned earlier regarding the slowdown of the economy in China. So consumption of products in China reduced significantly. But at the same time, some of the manufacturing continue to operate, and that's caused a lot of the supply to oversupply within the region. In terms of the new -- HVA and new products, our high value-added portion accounted for about 34% of the total revenues and actually increased in line with the total consolidated revenues. Now HVA portion accounted for THB 104 billion in the first half of this year. New products increased by about 36% when compared to the same period of last year. As a result, the new products being introduced in the first half was about 17% of the total sales. Service Solutions, this is the business that require very little fixed capital, now account for 5% of the total revenues for the group. Now I'd like to pass along the slide to Khun Tanawong for the Chemical business.

Good afternoon. For SCG Chemicals, before we move to the operational execution, let me begin with strategic update. Actually, what we have here, you see quick recap of our strategic approach that we have in our filings. We have -- like one of the approach, we will be to have ASEAN Chemicals leadership. And the second one, we will strengthen our Vinyl ASEAN and to become a leadership in ASEAN as well. And the third one will be the -- what we call accelerate Green Polymer platform. And the last one, we will expedite our high-value added to offer the product to the customer. And today, we will give you some highlights of the items #1 and #3 ASEAN Chemicals leadership and Green Polymer platform. Starting with Green Polymer platform, we have 4 elements. The first one we call it reduce. This is something like we have technology -- patented technology that we call SMX. This one, what we can do, we can offer a customer product that they can reduce their material used. So it means that at the same time, they can reduce the energy consumption and reduce the carbon dioxide reduction. So this is like carbon -- low carbon product. The second one we call is recyclable materials. This one means, typically, if you would like to recycle plastic waste, sometime it's quite difficult. So this element, we will try to invent a new material that we can recycle much more easier than what we did before. And the third one, bioplastics. This is one that we have a joint study with Braskem. This is polyethylene that we will produce from the ethanol. So the outcome will be -- the polymer will be negative carbon in terms of the carbon dioxide in the Scope 3 product. And the last one, recycling polymer. We have bought mechanical recycling that I will give you more update. We just finished the acquisition. The company is in the protocol, and the next one advanced recycling. This one, like I have -- I gave you updated situation last time that we -- last year, we completed a demonstration unit. And this year, we will have a [indiscernible] with Japanese company to do the scale-up study. So this is one example of the reduce that I mentioned. This is a patented technology that we call is SMX and property is quite good. So it means that we can reduce up to the application. But actually, we can reduce really from 15% to 20%. And at the same time, we can lower the carbon dioxide emission. And because of these good properties, so we can blend the cycle material with this polymer. So on the right-hand side, you can see some kind of product application that we co-developed with other customers. So this is something that we are still in a good momentum. And the next one, I would like to give you a short video. This is the company that we acquired in the protocol. This is the #1 in the recycled PCR in protocol, please. [Presentation]

So what you have seen, did you see branding in protocol but what I would like to give you an idea that when we -- in the past, when we think about the conventional recycled material, normally, we -- after we get the recycled [indiscernible], most of the product we will produce the low-quality product. For example, like combination that or sometimes like a box something quite in terms, it's quite low-quality property. So for Sirplaste, we have a cleaning technology. We have sorting technology that we can separate with. So it means that quality of [indiscernible] and we focus on the medium and high-quality waste. And actually sometimes there's a question why we start in Europe. I would like to share that if you look at bottom left, now you can -- you may have heard that many brand owners, they have, I mean they press that, for example, in 2025 to 2030, they would like to have a recycled material in the packaging product. Some company mention like 25%, 30% or even 50%. So this is what I try to say that in terms of market, our customer demand is quite substantial. And at the same time, like I said, the technology is -- now many company develop technology to answer those type of demand and requirement. So -- and in addition, the EU government, they have a quite solid and clear regulation. Some countries, they even announced that if you need to produce packaging, you need to have at least 25% or 30% in the packaging, Otherwise, you have to pay additional tax holding. This is something that what I try to say, Europe is quite good in terms of the component and factors that make the recycle demand growing quite substantial. And what we're doing now after acquisition C+, actually in Portuguese, when you call company, they call C+. After acquisition, we expand capacity immediately to additional 25% capacity. So this one, we try to speed up and offer the product to the customer. And one more thing that I would like to add. We also have synergy with C+. As I mentioned earlier about our polymer technology, that we can develop our formulation to improve the property of the recycle material. So this is we can engage. And one more thing I try to give you a picture that when the customer need polymer, I mean the recycled polymer is not 100%. Actually, they need a combination of the recycled polymer with [ whiting ]. So it means that when we move to this direction, we can have -- I mean, product to offer them as a bundled package. So this is something that what we try to do in Europe first. And actually, in the future, we would like to do something in ASEAN, we can leverage technology that what we have learned over there. Next, is it again -- I mean, we keep update, our long-term petrochemical company in Vietnam. Now the growth is approximately 96%. And in addition to the consumption and operation that what I have updated earlier, actually, in terms of the people, population and marketing, we've done premarketing I think more than a year that we send our product to Vietnam. We test the supply system and the logistic system. And we also complete ERP system for LSP. So it means that our client support and marketing activity has already been prepared. And for people, we already complete -- I mean, we recruit and train the people for start-up. And again, I mean, this is to give you more color that for LSP, in terms -- to recap again, feedstock, we have flexibility that we can be flexible [indiscernible] 30% to 70%. And the start-up again, as I mentioned, now we already started up the utility. And we plan to start up [indiscernible] plant in the fourth quarter this year and upstream sometime -- actually, what we mentioned in the first half, but this is typically when we're talking about start-up, normally, we're talking about in the range of 3 to 6 months. I mean, when you work with the contractors that when they complete, and we have to do the commissioning and preparation and then we -- after that, we can do the startup. And the #3 is the tax benefit that we have received from the government, the Vietnamese government. And the last one is in terms of the -- we can give you more information about we use 50%, 50% debt equity and depreciation is 30 years. Okay. So let me continue with the operation and financial. I -- like Roongrote mentioned that I would say that this year the situation is, I mean, in terms of the market, is quite volatile. This one, we try to compare between first half last year and this year. Actually, last year, you will look at -- on the left-hand side, last year, we have like unexpected situation happened in the U.S., what they call like the Winter Freeze. So at the time the supply capacity in U.S., I mean, it's a bit disruption. So the product price come up substantially. And -- but come back to this year, when we compare in terms of oil price in the second picture, you can see that oil price -- this year and last year, the oil price come up quite high after Russia Ukraine conflict. And this situation will still continue. And the third one is the ForEx, in terms of Thai baht. Now Thai baht is weak. And actually, SCGC is the net exporter. So we have benefit from the weak Thai baht. In term of market highlights, like I mentioned, for feedstock, I mean, crude oil price in the second quarter, the crude oil price coming up to approximately 15%. But at the same time, if you look at the naphtha, naphtha price still quite -- I mean, compared to first quarter, is quite stable, not a big decline. And actually the reason mainly due to the -- mainly operator still under pressure from the crackers, I mean the spread of the crackers. So some of them have to cut run. So the demand for the naphtha is not that much. And if you look at the PE, naphtha kept -- they kept for PE slightly improved. Actually, the PE price slightly went up and mainly from the cost -- higher cost actually. And -- but for PP, naphtha also discerned -- PP and naphtha decreased, and mainly due to the additional supply. And also as Khun Roongrote mentioned about the China lockdown situation, the COVID lockdown in China, I mean, brought full lockdown and semi lockdown. The demand in China is quite weak. And in terms of volume, what we have seen here that compare year-on-year and Q-on-Q, volume declined, about 13% and 14%. And as I mentioned last time, actually, we also have some plant maintenance. But at the same time, we also have to lowering -- actually, we have had lowering our utilization as well to optimize our portfolio and our profit. So this is -- that's why the volume came down, but compared with the market that you may have heard that some other company, they may have to reduce down to 20%. So compare year-on-year and Q-on-Q, we saw about 13% and 14%. And Vinyl Chain, in terms of [indiscernible] you can see that [indiscernible] PVC and EDC improved, especially in the early, I mean, at the beginning of the second quarter. And after that, the [indiscernible] slightly softened from the lower demand from the construction activities stopped, especially in China. And what we have seen, not only in China, in Asia as well. Now we are in the rainy season, some construction activity will be slowed down. And you see, I think the second quarter, I would say that the [indiscernible] is quite okay. In terms of volume, volume here reduced 3% year-on-year and 12% Q-on-Q. And you see it mainly due to [indiscernible] for our VCM plant. But if you compare the total volume, first half this year, last year, more or less, the volume is the same. In terms of financial, revenue come up -- came up mainly from the higher cost push. And that's why we can have a higher selling price. And if we look at EBITDA, you can see that from the one part, we see dividend from the associated company. And this is -- actually, we got a good performance from the associated company. And EBITDA from operation, more or less, we have the same as the first quarter. And if we look at profit, you can see that profit, more or less, I mean, in terms of the net number is close to the first quarter. But if you look at it, we have the inventory loss to 1 billion. And at the same time, we also have asset divestment of 1 billion as well. So net-net between inventory loss and investment divestment of the asset will be [ net off ]. And compared to first half and second half, the profit is lower than first half because of, like I mentioned last year, we got a big -- I mean, [ K ] have informed the interface in U.S. And in terms of the outlook, if you look at global, I think you will see the same picture that I think Russia and Ukraine get you the energy price too high. And I think in terms of inflation, that's what we have seen in many countries, not only in Asia, but also in western countries. And hopefully, that actually in Asia, if China, they lift their lockdown, we do hope that the demand will pick up. And if we look at the demand side, typically in the third quarter of Olefins, the third quarter will be a [indiscernible] seasonal demand in the third quarter. But again, we have to monitor the COVID lockdown situation in China. Now they have either fully locked down or semi-locked down, and this one will impact the demand somehow. So we -- on one hand, we will see the potential. But on the other hand, we have to follow the lockdown situation. And for Vinyl, Vinyl in the third quarter -- actually, the third quarter, there will be, for example, in Asia, India and ASEAN, now we are in -- to have a monsoon season. So construction activity will slow down. And -- so this one will impact in terms of the demand. And in terms of supply, olefin capacity, as you already -- you may have heard that there's new capacity in the -- in this year, I mean, in terms of ethylene capacity about 10 million tonnes. And this one will be -- put pressure on the operating rate for many operators. And for Vinyl, PVC Vinyl supply, some of the players they returned from the turnaround activity. And in terms of the cost, I mean, naphtha and crude, naphtha price I would say that it's still quite volatile, followed through the -- I mean, with the crude movement. And Vinyl with EDC cost seemed to be soft. Because of the downstream, the demand quite soft as well. So this is a big picture of the outlook? So that's all I have for the Chemicals. May I pass to Nithi.

[Foreign Language]. Good afternoon to everybody. I would like to start with company highlights. In this quarter, we would like to highlight our progress in low-carbon cement. We have been actively collaborating with Thai cement manufacturer association and government agencies to promote the usage of Hybrid cement in order to lower carbon emission. Hybrid cement is an eco-friendly cement that uses less coal and less electricity in manufacturing process. We are proud to announce that, as of now, we have converted 100% of our bag cement into Hybrid cement. And work is going on to introduce Hybrid cement in the bulk market this year. We have also exported the first shipment of Hybrid cement to United States. Hybrid cement demonstrated our strong commitment to net-zero pathway as well as our determination to lift up the construction standard, both domestically and globally. Key execution in this quarter. Firstly, the commercial strategy enabled price increase to partially offset the cost push inflation resulting in the revenue growth q-on-q and year-on-year in the second quarter. Secondly, we adjust our product portfolio and increase sales of high-value products and service solutions to provide additional revenue stream. Thirdly, we made decision to strengthen our retail platform by establishing a new distribution center in Pathumthani. This will help improve supply chain efficiency for our retail business. Thai market. In Thailand, grey cement demand was lower to minus 7% year-on-year, mostly due to the effect of Russian-Ukraine war, that led to cost push situation and slow economic recovery. For the residential and commercial segment, saw a negative growth at minus 7% and minus 6%. Infrastructure segment also have a contraction of minus 6% year-on-year, and ready-mix concrete demand contracted 7% year-on-year. In addition, demand for housing products faced contraction at 2%, while ceramic tiles grew 1%. ASEAN market. Cement demand in this year saw significant improvement in Indonesia, thanks to better COVID situation and economic recovery. However, weak demand was still seen in Cambodia and Vietnam due to impact of the high energy costs. And the cement and building materials have like delayed construction because of the material price higher. For ceramic tiles, sale volume increased 12% year-on-year, thanks to demand from the domestic renovation as well as improved regional demand. Domestic sales in this quarter was 11% year-on-year from increased sales in our business segment, thanks to our commercial and pricing strategy. Total ASEAN sales rose 20% year-on-year. This is because of the increased sales from ASEAN operation and export sales to non-ASEAN market. Total revenue from sales in this quarter increased 14% year-on-year as a result of higher sales in both domestic and regional market. For EBITDA and profit, this quarter dropped mainly due to cost push effect and weak demand. This latter kept sale volume at Bay, and we were able to push selling price and deliver revenue growth both quarter-to-quarter and year-on-year. Outlook. Looking ahead, improvement in the tourism sector, together with low-base effect from last year should allow domestic cement demand to grow in the next quarter. However, there will be some impact from the rising inflation, which was to lower customer purchasing power and high energy price is expected to persist into the second half of this year. Execution-wise, we believe that we are in the right path. We will continue to implement pricing and commercial strategy to increase the revenue to compensate the cost push. This will depend somewhat on the overall economic condition in the next quarter. We also proactively manage few and other raw material costs as best as we can. That's all from CBM. I would like to pass to SCGP Recap.

Okay. Good afternoon. I will do a quick recap on SCGP because they already had the analyst conference yesterday. Okay. SCGP continue to deliver growth as promised in the second quarter. They have completed the expansion of the fiber packaging capacity in Thailand. And Khun Roongrote just mentioned about the acquisition of the packaging material recycling business in the Netherlands. That was just concluded this month. So they grew both organically and inorganically. So with the series of the M&P that they have done in the past, so SCGP now continuously pursue on that post-M&P integration, try to maximize the value through the business synergies. And at the same time, they continue to focus on ESG. On the financials, first half of this year, they have revenue of about THB 75 billion, 31% growth year-on-year. This comes from the business expansion, both organic and inorganic, as I mentioned earlier. On the core EBITDA, it's about THB 10.5 billion, dropped slightly from last year. And core profit, THB 3.6 billion, dropped by 20%. The drop in both EBITDA and core profit was due mainly to the increasing raw material and the energy cost. On the financial side, started off with the net debt. Net debt increased to about THB 258 billion at the end of June and increased about THB 24 billion from the end of last year. Net debt-to-EBITDA was 3.3x. But if we were to exclude the project under construction, which is mainly LSP, net debt-to-EBITDA will be 1.5x. Capital expenditure for the first 6 months, we spent about THB 22 billion. The majority of the capital expenditure was from chemical business, which I think you are all well aware that we have the large project in Vietnam, the LSP, which is now approaching the final stage of completion. Okay. On the financial highlights. This morning, our Board has already approved interim dividend of THB 6 per share, and that will be paid on August 26 and XD on August 10, okay. Despite the very challenging situation, our balance sheet remains strong. Cash and cash management was about THB 69 billion at the end of the quarter, and the net debt to equity was 0.6x, with the interest rate -- interest coverage ratio of 14.5x. But I think the highlight here that I would like to emphasize is that our loan agreement, our debenture, we don't have any debt or financial covenants at all. Okay. Since the beginning of this year, when the war between Russia and Ukraine started, we have taken a very prudent approach for our capital expenditure and investment. We have, as Tanawong mentioned, we have revisited all projects. And up to now, from the beginning of this year, we have delayed some projects worth about THB 10 billion, okay? So that doesn't mean that we won't make any further investment. What we are doing is that we prioritize all the projects, okay? We will continue to invest in strategic projects like LSP. We'll continue to invest in the projects that provide us with the immediate cash. Example, like M&A that in line with our strategic direction, okay? We'll delay the project that can be delayed, okay? So this year, we expect the total capital expenditure to be about THB 70 billion. So we revised the number down from what we have told you at the beginning of the year at about THB 80 billion. So we revised to about THB 10 billion. Last point I want to touch upon is about the interest rate. I think this is something that everyone is kind of concerned that interest rate will be increasing. What we are happy to tell you is that we proactively managed this matter by entering into the interest rate swap. We did that since the second quarter of last year, okay, well before interest rate started to increase. So as of now, about 75% of our long-term loan has fixed rate and the remaining 25% is floating. So I think that really helped alleviate the impact of the rising interest rate that will come in the near future. I will pass on to people on ESG.

Good afternoon. On the ESG path, this is the pathway toward the Net Zero. And for SCG, the way to issue this Net Zero over the next several years, it's the ESG 4-plus, which stands for environmental, social, governance, Plus Trust Through the Transparency. So basically, we need to build trust and transparency towards our journey to Net Zero. And every quarter, I will come to update you the progress and start with the greenhouse gas. This year, our target is 32.2 million tonnes, and that's -- if we can do that, we will achieve 2.7% reduction. And that's well below 2 degrees Celsius. So first half of this year, we can achieve the 16 million tonnes, which is better than our target. So that this is the highlight. And another part is on the alternative fuel use. We could achieve the 31.3% for our Thailand cement operation. And so we are increasing these alternative fuel usage, because the more that we can use alternative fuels, the less coal that we will use. And next one is on the Green Choice. Green Choice is the product that very friendly to environment, and we are promoting this Green Choice because it gives the consumer an alternative to help deliver a better world for the next generation. So our revenue from Green Choice for the first half is 50% of our total revenues. And the reduction of water withdrawal, this one, we can do better than the targets that we set. We can achieve 24.9% water withdrawal. So that's our water conservation target. Just for an example of the SCG Green Choice. So you could see that we have the SCG Concrete Prestige X-shield slim rooftile. This is 3x longer lasting on the vivid color. So it's a little bit of marketing. So it's not only the product that's good for the environment, but it also looks very nice. COTTO AIR ION. So basically, the ceramic tile in your house that can -- emits the ion and clean the air for you. Low Carbon Concrete. This is a very, very important product to help reduce the greenhouse gas in the construction industry. And the innovative product, like HVAC Air Scrubber that will help reduce the energy for green buildings. So all the air condition, if you use this air scrubber, we can reduce the energy use in the air system by 20% to 30%. So -- and there will be more of the SCG Green Choice product that's offered to the market, to the consumer. Apart from those greenhouse gas and the Green Choice, we are creating a very inclusive pathway. So basically, we are, at the same time, reduced inequalities. And we would be proud to achieve that 4,000 job creations and upskill in the first half of this year, is consisting of the 415 persons that we can train and serve in the Q-CHANG. Q-CHANG is the - it's like marketplace where contractor -- the small contractor can acquire the skill and contact with the homeowner through this character website, Q-CHANG. It's like an Uber for the CHANG. And also CPAC Upskill for eco-partner, that's 2,251 person that we can achieve and so on and so forth. So this is something we are doing to create -- to reduce the inequality and make inclusive pathway. And the ESG Symposium that already finished last week. And this is the collaborative platform that we are promoting the agenda for Net Zero, and bringing the women's power and new generation, not only from Thailand, but also the kids from Indonesia, Vietnam and country in ASEAN, bring the new generation idea to promote this ESG transition. So there are going to be a continued effort that we will promote this ESG agenda for the whole region. In Vietnam, together with the 5-member company, we collaborate with Ministry of Environmental and Resource in Vietnam to help the circular economy forum to promote the awareness of the ESG in Vietnam and create a discussion forum for private and government to do the collaboration, launching the circular economy hub in Vietnam. And last but not least, we promote global collaboration. So SCG, together with Thai cement and construction, Industry has set the target for Net Zero, and this -- the whole industry commit to move forward towards the Net Zero and this is -- if you remember, Chana is on the global stage. I pass it back to [indiscernible].

Thank you, [indiscernible]. I think in summary, the second quarter result came in at a net profit of THB 9.9 billion, up by about 12% on the first quarter. However, looking ahead, I think we do expect that the macroeconomic factors are very, very challenging with a lot of downside risk. At the same time, the continued conflict in the Eastern Europe is still ongoing. And in terms of the rising interest rate, particularly in the U.S. and the rest of the major economies could potentially push the economy into recession. In terms of the industry, I think China, hopefully, will not continue to be a big factor. Otherwise, the demand in Asia that will be suffered. In terms of what we have done and what we are planning to do, I think the priority is to manage the business in the emergency situation. We will continue to proactively manage the working capital. Watch out in terms of the financial and cash deposition, including liquidity. In terms of the CapEx, I think we will complete the LSP as planned. Other than that, I think it will be strictly, look at any greenfield investment, unless there are some strategic benefits that we can get the financial of saving immediately. The acquisitions will continue only if we can get immediate cash flow and it does coincide with the importance of our strategic growth as we outlined to you earlier. The dividend, THB 6 per share signal our intentions to make sure that there's the right balance between financial, the discipline and at the same time, making sure that shareholders get what they're supposed to get even in this difficult environment. Nevertheless, I think our financial remained very strong, and we are committed in terms of the ESG pathway that Khun Thammasak just mentioned. So that's about all in our presentations in the second quarter of this year. Thank you.