U.S. Markets open in 3 hrs 4 mins

Edited Transcript of BCP.BK earnings conference call or presentation 14-Aug-19 10:59am GMT

Q2 2019 Bangchak Corporation PCL Earnings Call

Bangkok Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Bangchak Corporation PCL earnings conference call or presentation Wednesday, August 14, 2019 at 10:59:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Chaiwat Kovavisarach

Bangchak Corporation Public Company Limited - CEO, President & Director

* Surachai Kositsareewong

Bangchak Corporation Public Company Limited - Senior EVP of Accounting & Finance

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

On behalf of Bangchak Corporation Public Company Limited, I would like to welcome you all to the second quarter 2019 analyst meeting, featuring the announcement of the operating performance of the second quarter of 2019. The presentation will cover Bangchak's operating performance for about 1 hour, followed by the 15-minute Q&A session at the end. Without further ado, I would like to introduce the executives who will be giving reports on Bangchak's performance and business updates today.

Kun-Chaiwat Kovavisarach, Chief Executive Officer and President; Kun-Surachai Kositsareewong, Senior Executive Vice President, Accounting and Finance.

--------------------------------------------------------------------------------

Chaiwat Kovavisarach, Bangchak Corporation Public Company Limited - CEO, President & Director [2]

--------------------------------------------------------------------------------

I would like to extend appreciation and greetings to all valued analysts for attending our session today. The operating performance report has already been published last week before the long holiday, which I believe you should have already adjusted the information. As usual, the presentation will cover performance update, financial review, business updates and Q&A.

The performance in the second quarter of 2019 did not turn out as expected, mainly due to the market conditions, despite the 112,000 barrels per day crude run as planned, with a total gross refining margin of USD 4.53 per barrel. Despite the improvement Q-o-Q, it is still considerably lower than the target, which I will be elaborating further.

The marketing business, on the other hand, has been doing quite well, with the key driver being B20. It has generated consistent growth, successfully capturing the market share of 40% to 50%. The increased volume only contains a small portion that has been cannibalized from B7 to B20, but more of the newly acquired volume, all in all, due to the high-margin products and the oil price that is on the downward trend in the second quarter. The marketing margin has turned out quite reasonably well with a market share of about 15.8%.

The power plant business has been performing better than the target and should be the star of this year. Meanwhile, sales volume of the bio-based products has increased following higher demand, especially for B100 amidst the considerably volatile palm oil price.

For the natural resources business, OKEA, has generated satisfactory production that is higher than the target, though factors concerning price and market volatility are still prevalent. In general, we have mostly managed to deliver the products that are higher in performance than the initial target. Nevertheless, the major impediments of prices and market conditions in terms of gross refinery margin, oil prices and feedstock prices, such as palm oil. The dotted line represents the budget, where you can see that the power plant is the only business that exceeds the budget in the second quarter of 2019.

Meanwhile, the marketing business' performance, it's quite close to the budget, while the rest are considerably below the budget, largely driven by the global market factors. The refinery business can essentially be summarized in this slide. Production-wise, it has been higher than the budget and has increased Q-o-Q, with a utilization rate of about 93%. The graph on the lower right, report that fuel oil price has increased in the second quarter, continuing to July, strengthening the gross refinery margin in the months of June and July.

Another key observation is that UNL95 crack spread, which used to be rather low last year and lower than USD 5 per barrel, has regained its position at USD 7 to USD 8 per barrel. However, this is still lower than its normal double-digit threshold of over USD 10 per barrel. All in all, these figures have led to the gross refinery margin of around USD 4.5 per barrel, which is not so much different from peers. Also, the spread between Dated Brent and Dubai oil prices has been narrower, which is favorable upon us at the end.

The market gross refinery margin after hedging and inventory loss is around USD 4.02 per barrel, which is rather low, caused by the oversupply condition in the market and weaker-than-expected demand, supported by the fact that demand growth has been lowered from 1.5 million barrels per day to 0.8 million barrels per day according to the IEA.

Moreover, many producers have executed at their full capacity following the high-growth refinery margin in the recent period, leading to excessive inventory in the market.

The marketing sales volume has been growing consistently with exponential growth of the retail business through high-margin products compared to industrial products and export sectors, whose growth are rather flat and are on the downward trend. This is a reflection of a healthy business outlook from higher retail sales portion and lower risks involved. The overall market growth is about 3% to 4%, whereas Bangchak's retail business has generated growth of about 7% to 8%. So we are considered more advanced than the market. Furthermore, we do have a greater combination of sales volume, having managed to secure higher margins from B20, with monthly sales volume of about 40 million liters with the overall sales volume of 350 million to 400 million liters per month. B20 sales account for about 10%, which is considered quite high.

Also, we have begun to see positive changes in the non-oil business, with one SPAR outlet waiting to be launched. The revenue has increased by about 7% Q-o-Q and 28% year-on-year, enabled through effective cost saving measures, resulting in improved EBITDA margin and other signs of improvement.

The information on this slide presents the most recent market share and throughput per station. The information regarding market share has been cited from the Department of Energy business. You might as well interpret the market players from the colors indicated. From this, we're quite firmly positioned in the second rank.

In the second quarter, 21 new service station were launched, and we anticipate that the number of standard type service stations will be about the same as that of cooperative type service station, which is about 600 service stations in due course.

If you still recall, about 4 years ago, sales volume from standard type service stations accounts for about 64% to 65% of the total sales volume, while cooperative type service stations contribute about 35% to the total volume. Nowadays, sales volume contributed from standard type service stations has increased to almost 80%, despite a smaller number of service stations. In the meantime, we launched 18 Inthanin outlets and one SPAR outlet in the first half of 2019. We can say that we are the leader of B20, both in terms of sales volume and the product itself. We're the first player to put additives into the product. Super Booster and Super Purifier. Vehicle users can feel that it gives more power to the engine and helps reduce pollution. Currently, B20 is available for sales in over 400 service stations all over Thailand. As seen from exponential growth over the course of the first half of 2019, with a sales volume of 35 million liters at the end of June, exceeding 1 million liters per day.

The revenue of the power plant business has increased due to the dry weather and scarcity of rainfall, both in [Thailand and]Japan, leading to results that are higher than the target, further supported by the effective cost control measures.

B20 has contributed in generating higher sales for B100, though prices has remained pretty stable. The graph on the lower right illustrates the pickup of biodiesel price in May, though it has dropped again in June continuing to July, the CPO price has peaked at THB 23 to THB 24 before declining to THB 19 per liter. So you can still see some extent of volatility there. On the other hand, the ethanol sales volume has been able to maintain its momentum, especially molasses-based ethanol, having generated profit for the company consistently.

OKEA has successfully been listed in Oslo Stock Exchange on June 9, 2019, amidst the volatile market condition. After IPO, Bangchak's shareholding proportion in OKEA has decreased from 49.33% to 46.62%, whereas Seacrest shareholding proportion has dropped to 20.22% and the rest belongs to minor shareholders.

There were 2 shipments in the second quarter despite the target of only one shipment, while production is higher than the budget by about 4% to 5% and the production uptime is around 90%, which is deemed satisfactory. The major impact upon OKEA is a natural gas price. There are 2 major fields, Draugen oil field and Gjoa natural gas field. The natural gas business has been affected by shale gas from the U.S.A, as the area hub gas price was reported only about USD 2 per million BTU, with some portions being exported to Europe, essentially causing the selling price to drop from about USD 6 per million BTU to about USD 4 per million BTU, consequently causing the gas business margin to be lower than the target. However, the oil business performance is still aligned with the target.

Though there were not a lot of activities happening in the second quarter, there were some transactions that have effected the financial statements. The bond repayment of THB 4,000 million in April 2019, loan drawdown of USD 80 million, the dividend payment for the performance in the first half of the year 2019 of THB 688 million and dividend received from BCPG of THB 224 million.

With regard to the IPO of OKEA. The recorded gain from changes in the investment interest amounts to THB 94 million, which was recorded in the second quarter. The gross profit has improved slightly Q-o-Q, mainly due to the refinery's gross refinery margin performance and partially due to the inventory gain/loss, which did not have a significant impact on the statement since the oil price movement is not that extreme in the second quarter. Meanwhile, revenue generated from share of profits from subsidiaries is about the same as that of the first quarter of about THB 156 million THB 157 million. With an addition of OKEA’s, share of profits amounting to THB 102 million in the second quarter.

This slide provides a comparison between the first half of 2018 and 2019. The refinery's performance is considered a major indicator of the business. Given a rather low gross refinery margin compared with the first half of 2018, coupled with a slight inventory loss whereas there was an inventory gain of USD 1.55 per barrel in the first half of 2018. However, the crude run has increased from 87,960 barrel per day in the first half of the year 2018 to 111,400 barrels per day in the first half of the year 2019. Total assets have decreased by about 1% or approximately THB 1,200 million, while liabilities have decreased by 2% and equity has increased slightly by 0.4%.

The major reasons behind the lower assets are due to bond repayment of THB 4,000 million in April and dividend payment totaling THB 5,887 million in the second quarter, leading to lower cash. In the meantime, inventory has increased by THB 2,086 million together with the acquisition of assets both from Bangchak and subsidiaries amounting to THB 2,300 million to THB 2,500 million, less depreciation expense of THB 2,200 million. All in all, leading to higher PP&E of THB 827 million. Apart from that, there are factors concerning the working capital, changes in investment and loans granted to subsidiaries ultimately leading to an increase in noncurrent assets of THB 1,282 million.

--------------------------------------------------------------------------------

Surachai Kositsareewong, Bangchak Corporation Public Company Limited - Senior EVP of Accounting & Finance [3]

--------------------------------------------------------------------------------

In terms of liabilities, account payable has increased by THB 2,231 million from the end of 2018. However, other current liabilities, such as excise tax and other payables, have decreased by THB 1,772 million due to early settlement, also since loan has been acquired for subsidiaries and due to bond repayment. Long-term debt has decreased by THB 1,635 million. In terms of equity, other components of equity have increased by THB 79 million, whereby the net fair value change in available for sale investment for Lithium Americas Corp., has increased by THB 384 million. Meanwhile, noncontrolling interest has also increased by THB 123 million.

Nevertheless, the loss incurred from foreign currency conversion of financial statement amounts to THB 295 million, ultimately leading to an increase in equity of THB 223 million from the end of 2018.

Cash flow from operations amounts to THB 3,600 million, of which debt service repayment is equivalent to THB 2,309 million. In the meantime, the investment in PPE in the first half of 2019 is THB 3,022 million. With a dividend payment and investment in subsidiaries and associated companies, the amount of funding acquired is THB 3,811 million, combined with the available beginning cash, the ending cash at the end of the quarter is THB 5,703 million. Bangchak's debt burden amounts THB 29,434 million, while the consolidated debt is THB 48,464 million. The proportion of fixed and floating debt is shown in the pie chart, while the liquidity and the leverage ratios are also displayed, with a comparison against the previous quarter and the previous year.

The Hydrocracker maintenance to change the catalyst went as planned, whereby the facility will be charged to resume on the upcoming Friday, August 16, 2019, and it should take about 3 to 4 days for the operations to be up and running again.

Over the next 4 months, we plan to execute the crude run of 120,000 barrels per day in order to pick up the pace and to compensate the missing volume during the shutdown. So far, the gross refinery margin has been much more reasonable in the third quarter and should continue this way through the fourth quarter, which is significantly more improved compared to the first and the second quarter. However, as a precaution, since the oil price has continuously being decreasing about USD 67 per barrel in March, USD 62 to USD 63 per barrel in June, dropping to USD 58 to USD 59 per barrel and bouncing back to USD 60 per barrel just the other day. Hence the issue concerning inventory loss missed to be in prospect. In short, though the gross refinery margin has become much better, the inventory gain/loss can still be an indicator that affects the bottom line.

The refinery upgrading has been in accordance with the plan and even ahead of the schedule by about 3% to 4%.

--------------------------------------------------------------------------------

Chaiwat Kovavisarach, Bangchak Corporation Public Company Limited - CEO, President & Director [4]

--------------------------------------------------------------------------------

For instance, major chunks of work with long lead time in the continuous catalyst regeneration unit project have already been completed, while the detailing works for the debottlenecking project are in progress. And we expect the whole operations should be up and running by the end of the next turnaround in the third quarter of 2020.

One of the questions we get asked a lot in the gross refinery margin outlook throughout the remaining of this year all the way to the next year and the potential impact the IMO may have on the business. The information on this slide has been cited from FGE, one of the largest oil traders in the world.

According to FGE, the global bunker fuel consumption is 5 million barrels per day, of which 1.5 million liters of marine grid gasoil or diesel. While the remaining 3.5 million barrels, a fuel oil that we are familiar with. Upon enforcement of the regulations, we can expect high demand for marine gasoil, which is likely to double to 3 million barrels per day, while 0.97 million barrels will be marine fuel oil with lower than 0.5% sulfur content. In this regard, 1.21 million barrels of high sulfur fuel oil will still be in demand by industrial factories. Power plants on remote islands, they need fuel oil supply energy for the operations. This new consumption structure can be reflected in the graph on the right, whereby the marine fuel oil displayed in orange, used to have a pretty close selling price to that of high sulfur fuel oil, which is considerably discounted from gas oil.

Nonetheless, from June to July 2019 onwards, we can see the exponential rise of marine fuel oil price away from high sulfur fuel oil towards marine gasoil. This means that those who can produce marine fuel oil, will be able to enjoy better gross refinery margin. Speaking of which, Bangchak's fuel oil has an even lower sulfur content compared with marine fuel oil, which regulates the sulfur content of 0.5%. Whereas our fuel oil sulfur content is only 0.3%, so it can be one of the components that can be processed and blended to yield marine fuel oil, significantly allowing us to capitalize from this change. In parallel with that, we're now studying the optimize mode of refinery to be implemented from 2020 onwards, whereby the refinery module currently in use is likely to be the best option that yields a rather high gross refinery margin. At the same time, we have begun to secure more sweet crude, the type of crude oil with low sulfur content in preparation to produce low sulfur fuel oil.

Bangchak got awarded Superbrand after 35 years of operating the business. This award has been granted on a genuinely bottom-up approach, whereby the survey was conducted all over Thailand and that at least 15,000 votes of brand recognition and willingness to refer are required to be granted this award. This is equivalent to the promoter score of 9 or 10, and we were invited to join Superbrand Group, which will be promoted globally.

We have developed a more solid business plan for SPAR and Inthanin. Our non-oil business, especially for SPAR in terms of sales boost, our same-store sales growth is about 6% to 7%, which is quite high compared to the industry average of only 1% to 2%. There will be new business models for Inthanin to serve different marketplaces, one of which is Inthanin Grocery. You can discover for yourself at Sukhumvit 62 Alley outlet. With a new concept we have been able to draw quite a lot of traffic to the store. Also, there are a number of promotions, e.g. gold price giveaways and collaborations with credit cards. All the details are available in Bangchak mobile application.

The debottlenecking of Bangchak biofuel has already been completed, lifting the capacity from 930,000 liters to 1 million liters per day, which I believe is the country's top 3 producers with such a high capacity. In the meantime, we have added the refined glycerin plant, whereby construction is now in progress. This is due to the fact that crude glycerin price is very low with a big gap between crude and glycerin price of about USD 10. The construction is due to completing around the third quarter of 2020.

For KGI Nam Pong first ethanol plant, we plant to double the capacity from 150,000 liters per day to 350,000 liters per day by building an additional plant, which is due to complete in the third quarter of 2020 as well. For Bo Phloi plant in Kanchanaburi, we have already increased the capacity from 200,000 liters to 300,000 liters per day. All in all, the combined capacity will be about 800,000 to 900,000, not yet including the capacity from Ubon Ratchathani plant of 400,000 liters per day.

Due to the dry weather this year, some agricultural products have suffered. For instance, smaller harvests of sugarcane have led to lower sugar production, consequently leading to higher molasses price and thus higher costs for molasses-based ethanol, allowing opportunity for cassava-based ethanol to thrive. At this point, we believe that once agricultural product prices have recovered, ethanol price is likely to increase from around THB 22 per liter to THB 24 to THB 25 per liter in the next year, improving the prospect of the business.

With reference to the original plan put forth by Minister Siri, B10 will be exercised on a mandatory basis with no B7 involved, whereby the B10 mandate policy will be formally effective from December 2019 onwards. Our own consumption alone is already about 1 million liters per day. So there is no need to sell Bangchak biofuel, biodiesel elsewhere. In this regard, Bangchak's own consumption has increased from 560,000 liters in 2018 to 720,000 liters in 2019 with the B20 option incorporated. Once the B10 mandate takes effect in 2020, Bangchak's own consumption will be 100%, and we believe this will use up excessive palm of several hundred thousand tons as the proportional increase of feedstock requires almost 50% as a result of changing from B7 to B10, subsequently increasing the price. In that case, the business shall have a more positive outlook in the following year.

The graph at the bottom illustrates the difference between refined glycerin and crude glycerin prices. Even though crude selling price has dropped, the gap between the 2 is still about USD 10 per kilogram. So it makes sense to maximize sales of refined glycerin rather than crude glycerin. For the upstream business, Draugen production is slightly higher than the target. The budget has been earmarked and the ship has been booked. In this regard, the drilling of 2 more wells will commence in the end of this year, one development well and one exploration well. We can now identify the trace of hydrocarbon, so the drilling will be to assist the developing capacity to prepare for production, while the drilling of the exploration well will be to evaluate whether the amount of hydrocarbon is sufficient for production. All in all, this coincides with our direction to securing more oil reserves and to maintain the single-column platform to last for at least another 20 years, whereby wells in nearby area can then be tied into this production platform.

Yme is another oil field where development activities are now in progress and key components of the platform have been distributed to the North Sea area already. We can expect the first batch of oil in the third or fourth quarter of 2020, potentially adding up to the overall production.