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

Good morning, ladies and gentlemen. Welcome to SCG campus into analyst conference for the fourth quarter 2022. We have a lot to update in today's presenters comprised of SCG management led by Roongrote Rangsiyopash, the CEO of SCG and SCGC management led by Khun Tanawong Areeratchakul, the CEO of SCGC. Khun Roongrote will walk you through a consolidated results, while Khun Tanawong will highlight SCG's operating performance. He will be followed by the President of the Cement and Building Materials business, Khun Nithi Patarachoke will be supported by Khun Chana Poomee, the financials will be highlighted by SCG's Chief Financial Officer; Khun Chantanida Sarigaphuti; and finally, sustainability will be highlighted by SCG's Executive Vice President, Khun Thammasak Sethaudom. Thank you. And now on to today's program, beginning with Khun Roongrote krap.

Good morning, and again, happy New Year. Let's see. Okay. Well, the past year was a very colorful year in a way I think it reminds me a little bit of 1997. A lot of things have happened. And some of those that happen sometimes that doesn't make any sense. We had high energy prices. Coal price was the all-time high and oil price went up significantly when the Russia and Ukraine conflict started and then dropped towards the end of the year. Inflation, which includes all other costs, also driven by not just only energy prices, but also by the disruption in the supply chain as well as the recovery, sharp recovery of the demand from COVID. And then we had a trough in the chemical cycle with about 10 years that happened last time. And spread of the major products dropped to the level that we have not seen for the past 20-plus years. And then the electricity prices also increased, particularly in Thailand, increased several times. And if you compare the beginning of the year until the end of the year, roughly about 40% increase in terms of the electricity. What we did was to see -- what we did was to try to pass along the increase in prices, increase in cost to the prices, although not to the full amount. At the same time, we embarked upon several cost reduction program. For example, in this chart, we're showing the increase in the percentage of the alternative fuel when compared to coal that went up from 26% to 40% towards the end of the year. At the same time, we continue our business transformation. Our LSP project in the southern part of Vietnam is almost completed. We did a lot of initiatives toward green polymers as well as the recycling business. In terms of the Cement and Building Materials, the business itself is transforming towards the low carbon economy. At the same time, we expanded our retail in ASEAN, particularly in Indonesia. We are forming the ASEAN logistics player, toward a joint venture with JWD. In terms of packaging, we did both in terms of the organic and the merger and partnership. At the same time, we invested in the recycling business for the rest paper and also other raw materials. If you look at the fourth quarter of last year, our revenues came in at THB 122 billion, 14% drop year-on-year and 14% decline from the prior quarter. In terms of EBITDA -- EBITDA came in at THB 10 billion, significantly dropped from the prior year, although increased a little bit from the third quarter as a result of the dividend from associated companies. In terms of profit, we just barely broke even with a profit of THB 157 million. Of course, without counting the nonrecurring the profit would have been around THB 1 billion. In terms of the yearly figures, the total U.S. sales revenue was the THB 569.6 billion, 7% increase from 2021. EBITDA dropped by 33% to THB 62 billion and profit dropped similarly by 55% to THB 21.3 billion. In terms of the sales designation, as you can see here, Thailand accounted for about 55% of the total sales, whereas the ASEAN, excluding Thailand, it's about 28% and other overseas took up the 17%. You can also see that the export portion to China dropped significantly from the prior year, particularly in the fourth quarter. In terms of the high value-added products, came in at THB 195.5 billion. New products increased to 17% of the total sales accounted for about THB 96.5 billion, and the service solution also increased from the prior year to THB 33.7 billion. Now I'd like to forward to Khun Tanawong for SCGC performance. Thank you.

Good morning. For chemical in fourth quarter, I think as Khun Roongrote mentioned, I think if we look at petrochemical price in the fourth quarter, you can see that the price continued to decline from the third quarter. And actually, there's many thing happened. And I mean, for example, people talking about the economic concern from the high inflation -- I mean, for the western part. And in addition, in China, they are still prolonged COVID lockdown. And in addition, I think they have like a property issue, if we follow the situation in China. So that's why what we saw in the fourth quarter, the global inventory destocking throughout the supply chain. And if it's quite -- typically, it's quite normal that people try to reduce the inventory, but this time is quite substantial. So that's why the price dropped. But what we have seen in January priced, I mean, quarter to date, you can see that there's a slight pickup price after China, they start opening the country. So there is a good sentiment. And we believe that, I mean, based on this situation, after Chinese New Year, we will see the demand improve. So -- and look at the PE and BP -- PE-Naphtha and PP-Naphtha gap as Khun Roongrote mentioned, even though the overall naphtha price came down and because of COVID situation and recent economic concern and the ASEAN fee in the Western Europe. But like I mentioned earlier that the product-wise the slowdown compared to the third quarter and mainly due to the destocking of the inventory. So that's why the Q4 -- the gap is quite low. And -- but if you look at the quarter-to-date, the both PE and PP-Naphtha gap improved quite okay. I mean, compared with -- I mean, last quarter, and mainly this is just the beginning of the -- I mean, China opening situation. So we do believe that if they can control all the COVID situation, the demand will become better because China, they consume like , I would say that 40% of the plastic in China. And in terms of volume, what we -- we you can see that Q4 sale volume dropped 22%. And following the ROC turnaround that we mentioned, which we did turnaround in mid of September. And at the same time, we do the optimization because the last quarter, if you look at the gap, you can see that the best way is to optimize the learning to make sure that you can -- you will still make a good contribution. And at the same time, we asked -- when we try to do optimization, what we observed that the domestic market is still quite okay. And our HVA product is still quite okay as well. And then -- and again, we try to optimize the product mix and destination mix as well. For Vinyl chain, Q4 PVC margin also dropped Q-on-Q, but not as much as PE and PP. And actually, the main reason is -- you -- what we observed, there's a slowdown of the construction activity in the fourth quarter. As I mentioned earlier, that in China, the property issue happened and what we have learned that when -- I mean, this year, of course, there will be 2 issues in China, they start opening the country. And the second issue is what we have heard that they try to -- they're trying to support in term of -- I mean, to solve the property issue. So this one will help improve the PVC demand. So what we -- I mean if you look at the quarter-to-date, the gap of the PVC and EDC improved significantly compared to the fourth quarter. In term of PVC of sale volume despite market turned out, I would say, volume still. I mean, more or less 2% actually increase from the third quarter. And this is mainly we have a good diversified portfolio. And if you may I mean, recall that we have application product for the PVC. We produce pipe. We have a profile that we can optimize and we can have a good -- this is like -- our differentiation is like a forward integration to the product application. So this one, that's why we can maintain the volume. And financial Q4 revenue was down. I think this I already explained many external factors that happened, economic concerns in the western. The demand is slow down in the Western and China prolong COVID lockdown and property issue. So that's why this has -- this is something that happened. But if we look at the EBITDA, EBITDA was approximately THB 2,800 million but supported by the dividend from our associated company. And -- what -- if you look at, I mean, compare this year -- I mean, last year I mean in 2021, you can see that, of course, the EBITDA drop, but EBITDA from the associated company is also -- is still quite okay. For profits. Profits, last quarter, we have lost THB 1,000 million and actually, if you look at -- there's 1 -- I mean, we have a stock loss of approximately THB 500 million and compare last year and with -- I mean, full year -- last year with 2021, our profit last year was almost THB 6,000 million. And actually, the situation -- I mean, a lot of macro volatility, as I explained earlier for the associated company, is it to give you an idea that in terms of the revenues also, I mean, quite -- I mean, even though the situation, I mean, the -- we have a lot of external factors, as I mentioned earlier. But for associated, the revenue is still quite okay and profit, okay, of course, has slowed down, but this is still quite okay to support our SCG Chemical. If we look at global, I mean in terms of the outlook, China reopening. This is just a starting point. We do believe that after Chinese New Year, we will see a clear picture. But like I mentioned, if we look at the quarter-to-date, we'll see a pickup side of the gap I mean, all PE, PP and PVC. So this is something that what we see some improvement. And in terms of demand, like I said, we see the market sentiment confident of the -- I mean those product improved. But one thing that we -- like I said, after Chinese New Year, I think we will see a really clear picture. And buy new share and of course, now we see a lot of activity coming up, especially in China and in India. So this will be a positive side for the demand side. In terms of supplier side, we see the exiting in fact the early starting -- I mean during the fourth quarter, you may have heard that actually because of the poor [indiscernible] so many crackers, they have to slow down or cut [ lands ] and now they plan for [indiscernible]. And there will be a new capacity in the first half of this year. But at the same time, first quarter, what we -- I would say that first quarter, there will be a curve -- turn around season for many crackers as well. So in terms -- there will be a curve offset with additional supply. And in terms of cost and oil price and naphtha price, I would say that this still remain volatile. So we have to follow the situation closely and EDC cost, Actually, in the fourth quarter, it is quite low. That's why we -- I mean, our PVC gap is not that bad. But now the previously improved quite significant. So PVC supply will come up. And in the big picture, we expect that demand will improve and high margin also improved in the first quarter. So what we plan, you may ask that about our olefin crackers. Actually, we plan to resume our operation in -- I mean in the first week of the February, first mean that we have additional volume in the first quarter compared to, I mean, last quarter, but if it -- outlook. And what we would like to give you an idea that we have search for and that what we did, of course, last year like we mentioned there are many external factors that happened last year. So we -- what we did, we have a lot of -- we did the ASEAN optimization this is to make sure that product mix, destination mix and whatsoever that to make sure that we can minimize the impact. And at the same time, we continue to make sure that when we consider the CapEx that this one will be -- we try to optimize and make sure that we have a good and efficiency CapEx investment. And for the feedstock sale procurement because of the feedstock quite volatile. So we have to do a [ curve ] monitoring and optimized and make sure that we have a good flexibility for feedstock usage. And other than that, the bottom picture, this is -- I mean, like we mentioned about HVA, you see some example that we still have a good portfolio that LDPE for aseptic coating. This is also 1 of a very good product. This one does to -- this is like a coating for aseptic packaging. So there's a high growth and good profit for this one. Then high-performance PP, this is also we have a really good compounding PP that still support our SCG Chemical and for PVC pipe. Like I mentioned, we have really good, I mean, forward integration from PVC to the application product. So this is something that support during the volatile situation. And the update, like Khun Roongrote mentioned, we -- I mean our long-term project in Vietnam, now we have a good book as almost 97%, 98%. And we'll still keep our plan to start up, I mean, in the mid of this year. And after a setup, we will have [ curve ] multiple location optimization actually, like I said, from feedstock product mix, product destination, we will do optimization among Thailand, Vietnam and also Indonesia, if we see a good efficiency for our production. And the second up there, is it -- as we mentioned earlier about our clean polymer. We -- last year, we -- actually, you may have heard that we complete acquisition in the Portugal and that one is the PCR. The capacity is 36,000 tonnes. But this one, this is the latest one, we acquired a 60% share in the KRAS company in Netherlands. Actually, the class, they have plastic waste collection allow 160,000 tons. So this will be a curve when we start with PCR. But actually, you need to do the ASEAN operation, you need to have a plastic waste as a feedstock. So for KRAS operation, they have not only their plastic waste, they're also happy to see capacity of 9,000 tonnes. And now they are in the process to extend to another 9,000 tonnes. So it means that this year, at least for the PCR in Europe, if we have like more than 60,000 tonnes. So this is -- and in addition, like I said, we have the plastic waste allow 160,000 tonnes so it means we can convert the those plaste waste to be the PCR resin as well. Like I think we announced that our target for the clean polymer 1 million tonne in 2030. And last year, if we combine -- if you recall that I mentioned earlier, we have 4 dimensions. The first one we call reduce, reduce, we use our SMX technology to reduce the material use allow 15% to 20%. So last year, we developed many applications with customers. So we already launched a new product with customer for -- and using our SMX technology, so customer can reduce the material use , reduce their energy usage and reduce carbon dioxide emission. So this one, we're talking about 100,000 tonne that we can develop the application. And the second one, like I already mentioned about the recycle. So we still continue our expansion, our footprint in Europe. So now this year, at least because earlier we have to, I mean, M&A project. So our capacity in Europe now 60,000. So there will be some potential, like I mentioned, now we have plastic waste of 160,000 tonnes. So there will be a room to spend more. And renewable, we still-- the Bio-PE that we still will continue to study with our I mean, the potential partner Braskem and recyclables, this is something that I may just give you a shorter explanation. This is where we developed the new packaging. Typically, you have to use mainly we call multimaterial. That's quite difficult for this cycle. This one we call mono material but you have to develop some special properties like a coating material to make sure that you still have a good value property like moisture and oxygen value. So we already launched some product with recyclable packaging. And this is something that we still keep our momentum. So that's all I have. So may I pass that to Nithi.

Thank you. Happy to have. I would like to start with business dynamic. Yesterday, you can see that we reported softer operating results, mainly due to increase in energy costs, in particular, our core costs have raised close to the very high level due to our procurement activity, which are done 6 months in advance. So we can see that the visibility of the coal cost in the next 6 months to come back surge in coal cost, we have implemented several major including increasing alternative fuel use, raising cement selling price and building additional 60 megawatts in renewable power generation in 2022. This measure did and will continue to help, but we're not enough to compensate our fuel cost search in the fourth quarter. However, we still have the mitigation plan, which will mentioned in the last part of the presentation. For the domestic market, demand landscape show that grey cement demand has grown 3% year-on-year in the fourth quarter. However, investors should know that actual demand tonnage in the fourth quarter was lower than the last quarter. The full cost cement tonnage remained significantly below pre-COVID level.Weak demand contributed to the difficulty in resting cement price to fully offset the rise in the energy cost. Demand for housing products and ceramic registered growth year-on-year, driven by the construction recovery in the residential segment. Full year volume has recovered to the pre-COVID level. Cement demand in ASEAN market remained weak due to the impact from the high energy costs, which drove Cement and Building Material price resulting in delay in construction activities. Ceramic tile sales volume decreased 3% year-on-year, mainly from the regional market demand weakness. However, demand in domestic market improved from renovation projects and new retail outlet opening selling price in all markets increased year-on-year due to price increase effort. Total revenue from sales this quarter increased 7% year-on-year, mainly from upward price adjustments in domestic market. For regional markets, export sales to non-ASEAN markets show a positive growth due to efforts to find new markets. EBITDA and profit this quarter were lower as a consequence of the cost push situation. Quarterly EBITDA was THB 1.9 billion which net profit registered at minus THB 717 million. If excluding nonrecurring items, core loss would narrow to minus THB 157 million for quarter and core profit for the year would have been THB 4.6 billion. Outlook. China's reopening should benefit Thai economy, particularly in the second half of this year. We expect domestic cement demand from private investment, both residential and commercial sector to improve. Cement demand in this year is expected to be higher than last year. Improved demand outlook and high energy costs should drive producers to continue to raise in price in this year. Finally, higher FT rate imply increased electricity costs. However, as mentioned at the beginning, we expect coal cost gradually drop. Mitigation plan, to drive operational recovery in this year, our plans are as follows. First, we will continue to raise product price to compensate for cost increase. This will be done in parallel with offering new products and solutions as well as proactively tapping all market segments and countries which improved demand. Second, we aim to raise alternative fuel in domestic cement operation from 34% last year to 40% to 50% this year as well as diversity field type and souce to cut our energy bill. Third, we will realize cost savings from 60-megawatt in solar capacity, which completes building last year as well as continue to adding more megawatts this year. Finally, we will continue to actively adopt ID4 lean automation as well as accelerate other cost-saving projects to strengthen our cost position. This, together with expected drop in coal cost should offset electricity tariff and drive -- and we continue to drive operational recovery at Cement building Materials business this year. For the long-term strategy, we still to transform ourselves going forward. We continue to promote hybrid cement, which is low carbon cement to replace portland cement in order to lift up construction industry standard. By the end of this year, we plan to turn our back portland cement into hybrid cement as a pathway to SCG net zero. We also promote green construction solution by offering effective design, apply innovation construction process, implement the construction technology with concept of turn waste to value for sustainable construction. Last one, we enhanced smart living products and solution to lift up living standard for the end customer. That's all for the cement building material. May I pass to Sarigaphuti.

So I'll start it off with SCG Packaging. As they already have the analyst conference on Tuesday, so I will just give you a quick snapshot on the financial results and strategies. For the last quarter of last year, revenue was about THB 33.5 billion. Core EBITDA is THB 3.6 billion and core profit is down about THB 600 million all dropped year-on-year and Q-on-Q, basically because of the weak demand in ASEAN and particularly in China because of the COVID lockdown. On the full year results, revenue was about THB 146 billion, up 18% from last year, basically because of the expansion, both on organic and inorganic. Core EBITDA, however, dropped 5% to THB 19.2 billion, and the core profit also dropped to THB 5.7 billion. The earnings was pretty much impacted by the high energy costs and also the high raw material costs, particularly on the waste paper and also because of the weak demand, as I mentioned earlier. In terms of the key strategic focus this year, SCG Packaging will continue their expansion through the merger and partnership and also the organic expansion. I would say they are pretty much on track to achieve their IPO target that they already announced to double their revenue by 2025. Okay. Innovation will continue to be one of their main focus. So they will be able to offer the new innovative solutions to the customers. In terms of the financial management, they adopt the same approach as SCG in terms of they're not being prudent and being proactive. The financial position remains very strong with net debt to EBITDA below 2x. Next is on the financial results of the SCG as a whole group. In terms of net debt. Net debt increased to about THB 268 billion at the end of 2022. We have issued additional debentures last year, about THB 45 billion. Our net debt to EBITDA increased to 4.3x basically because of the weak EBITDA as mentioned earlier. However, if you look at the net debt to EBITDA -- net debt to equity is only 0.6x, which remained very strong. In terms of the capital expenditure spending and investment last year was about THB 52 billion. And the majority of that was from chemical business on the LSP project, which is approaching the final stage of completion. This slide, I would like to show you that despite a very challenging situation, as mentioned by Khun Roongrote, our sheet remained very strong, okay? And liquidity is sufficient that we are very certain that will help us go through this kind of volatility and uncertainties during this period. On the top left, our cash remained very strong at THB 95 billion at the end of the year. Net debt to equity, as I mentioned 0.6x. In terms of capital expenditure, if you could recall, we inform you that we kind of reprioritize in terms of the spending as part of our prudent management approach. We started off telling you that we would spend about THB 80 billion last year, but we ended up ended up spending THB 52 billion. And this year, we expect to spend about THB 40 billion to THB 50 billion in terms of capital expenditure. Liquidity remained very strong. As I mentioned, we issued a new debenture THB 45 billion last year. And as usual, all the issuance are very well responded by our bondholders. This one is the -- I would like to show you that our loan portfolio is very well positioned. Debenture account for about 2/3 of our portfolio and our bondholder base continue to get larger, and our re-subscription rate remained very strong at about 90% on average. In terms of the interest rate exposure under this kind of rising interest rate environment. Almost 90% of our interest exposure is already fixed and remaining about 10% is on a floating basis. Last but not least, on the dividend, our Board approved dividend payment for full year of THB 8 per share. We have already paid THB 6 for the interim dividend. So the final dividend will be THB 2 per share, and that will be payable on April 25. Our dividend policy is 40% to 50% of the net profit. And for 2022, our payout ratio will be 45%. And that's at the end of my part. Let's pass out to Thammasak.

On the ESG sustainability part, I would like to report our progress. But before I get into the detailed data, I just want to highlight one thing that today, we've already seen the energy price, energy become the big issue. And it's likely that there's going to be a big issue further on. And our effort on the greenhouse gas reduction really help to reduce the overall energy cost and replace the high carbon energy with the low-carbon energy. So we start with greenhouse gas emission. So the greenhouse gas emission, last year, we could achieve 3 million tonnes reduction, which is well under the target. And thanks to the effort of the increased alternative fuel consumption. You could see that the more we can use the biomass or alternative fuels, the better we can control our coal costs. And also we installed almost 60 to 70 megawatts of the solar. This is internal consumption, and it will pay off starting from this year. And we do a lot of energy optimization. And that also contribute to our efficiency and better greenhouse gas reduction. Of course, the big reduction also come from the turnaround of the ROC in the fourth quarter last year. Without the ROC turnaround in the fourth quarter, overall greenhouse gas reduction still met the target below the target on -- I mean, the better than the target because we could achieve almost 2 million tonne greenhouse gas eduction if we adjust the ROC turnaround. So in detail, you could see that this is the alternative fuel consumption that we put a lot of effort over the last few years to increase. We could achieve 35% last year. And in fact, by the end of December in Thailand operation, we could actually 40% alternative fuel consumption target, meaning that our coal consumption will reduce according to our long-term plan. For the Green Choice or go green products, revenue from the SCG Green Choice, this is the products that are good for the environment so carbon emission has increased from 41% in 2021 to 51%. So we could reduce the THB 290 billion last year for the SCG Green Choice. These are the products that we will sustain in the future because it's eco-friendly products. One of the showcase of the SCG Green Choice is hybrid cement. In terms of the hybrid cement, we could achieve 41% by last year that -- another effort that we are transforming our portfolio towards the low carbon. And you could see that inequality become more and more pronounced not only in Thailand but across the regions. And SCG effort to help on this. We -- last year, we could achieve almost 9,000 job and upskill training, so basically create opportunities for 9,000 people. Open collaboration, SCG contribute to COP27 and we promote and become the showcase on carbon dioxide emission reduction to the cement process because cement is hard to abate. We become the showcase and present in the COP27. Hence the -- in the -- in terms of the green megawatt, especially from solar, we could achieve 234 megawatt. And you could see that we will invest and promote this green megawatt further. And last year, we showed the 2 important technologies. One is a smart grid. Another one is the high-efficiency heat battery to the energy storage, the high efficiency energy storage at the reasonable cost will become more and more important into the future. So that's for the ESG past. I think the summary, last year was a very challenging year. I think one part is because of the chemical down cycle. The other part is because of the energy and related cost increase in our operations. I think this year, we started to see some light. I think the China's opening has been a good starting for the year. Of course, the Thai economy is expected to recover fully this year due to the full year of the incoming tourists. In terms of the energy cost, we do expect some uncertainty. On one part, we started to see the decline in the coal price, particularly the core index and the forward curve. But at the same time, with the increased economic activities in China, we also do expect that could cause the spike in the energy prices worldwide. In terms of electricity, I think you're already aware that this year, the Thai government has already announced the increase by roughly about 12%, 13% from the end of last year, which is equal to about 30% increase in electricity compared to the average of 2022. Nevertheless, we will continue to increase the price, push for the increase in order to offset the increase in cost. At the same time, our programs to continue to reduce the energy cost and the switch of the energy portfolio, toward green and more alternative energies will continue. In terms of financial, as you can see, the focus is on the financial stability. At the same time, the CapEx will be prioritized and will be limited to only as necessarily. In terms of the new areas, the focus will be in green not only the green products and the green solution of the existing business, but also the green and renewable energies as a business. So that's about all to ramp up in the fourth quarter. It was a very, very difficult quarter. Not only the industry specific, but also at the same time, the broad increase in the cost, particularly the energy cost. I want to say that as of now, what we're seeing is a little bit more encouraging. The demand started to pick up. At the same time, particularly in the chemicals, it seems like the destocking has stopped and people likely will start to restock of the products. And again, this is only 3 weeks for the beginning of the year. So I do expect that the recovery, if any, will be uneven and will be a little bit rough. We have increasing demand. At the same time, the cost will also increase. Nevertheless, we do believe that the fourth quarter was the lowest from what we have seen, considering the current situation. Thank you.

Well, thank you. And ladies and gentlemen, this concludes our fourth quarter 2022 Analyst Conference. So we wish you a safe journey home. Look forward to seeing you again in 3 months' time. Thank you.