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Edited Transcript of SCC.BK earnings conference call or presentation 28-Oct-19 8:00am GMT

Q3 2019 Siam Cement PCL Analyst Meeting

Bangkok Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Siam Cement PCL earnings conference call or presentation Monday, October 28, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nithi Patarachoke

The Siam Cement Public Company Limited - President of Cement-Building Materials Business

* Roongrote Rangsiyopash

The Siam Cement Public Company Limited - President, CEO & Director

* Tanawong Areeratchakul

The Siam Cement Public Company Limited - President of Packaging Business

* Thammasak Sethaudom

The Siam Cement Public Company Limited - VP of Finance & Investment and CFO

* Wichan Jitpukdee

The Siam Cement Public Company Limited - President of Packaging Business

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Bang Sue for the analyst conference for the third quarter and first 9 months of 2019. For safety purpose, in the event of emergency, please note the 4 exits in each of the corners of this room.

And now onwards to today's program, beginning with presenters in order of sequence. The CEO of SCG, Khun Roongrote Rangsiyopash. The financials will be highlighted by the CFO of SCG, Khun Thammasak Sethaudom; and for the business units, beginning with the President of the Cement Business Units, Khun Nithi Patarachoke, and he'll be supported by Khun Chana Poomee; next is the President of the Chemicals business, newly appointed Khun Tanawong Areeratchakul; and they'll be closing by the President of the SCG Packaging, that will be Khun Wichan Jitpukdee. Thank you.

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Roongrote Rangsiyopash, The Siam Cement Public Company Limited - President, CEO & Director [2]

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Good afternoon. Before we start, I must also say that today, Khun Tanawong is very well equipped to answer all questions that you probably have.

Anyway, starting from the consolidated statement in the third quarter. The total sales was THB 110 billion, which is down 10% from the same period of last year and about equal to the last quarter. I think the main difference is the Chemicals, which -- okay, sorry. The main difference is the Chemicals which I think, as everyone is aware, the price of the chemical products dropped sharply in the third quarter of this year.

EBITDA is THB 14.8 billion, dropped 17% year-on-year and 25% Q-on-Q. As you can see, the drop was mainly on the lower Chemicals margin. Equity income following the same trend was down almost 50% year-on-year and reduced THB 2 billion in the third quarter.

Profit. The total profit for the group in the third quarter was THB 6.2 billion, and this include 2 nonrecurring -- 2 additional factors. One is the deferred tax asset reversal, and this is mainly from the annual review of the deferred tax amount of the Chemicals business. Secondly, is the asset impairment, roughly another THB 700 billion -- THB 700 million from the Cement-Building Materials, mostly in the ceramic business.

In terms of the 9-month performance, revenue dropped by about 8%. So in the first 9 months of this year, the total revenue of the group is THB 331.8 billion, whereas the EBITDA is THB 54 billion. So another 19% lower than the same period of last year, and this is mainly on the lower Chemical performance, whereas the profit, as reported, is the THB 24.9 billion. Again, we had 2 nonrecurring. One is the change of the labor law, which we reduced in the second quarter of this year. That's about THB 2 billion, and another THB 1 billion is from the reversal of the deferred tax asset on the Chemical business.

In terms of the segmentation of the revenues. Chemicals account for 41% of the total revenue whereas Cement-Building Materials account for 39% and Packaging, 20%. In terms of profit, Chemicals is slightly more than half of the total profit for the group whereas Packaging account for 17%, and Cement-Building Materials is 19%. And the remaining 11% is on the others.

So segmentation. ASEAN, ex Thailand, account for 26% of the total sales. And the other, outside of ASEAN, account for 15%. And this is mainly export from Thai operations, and Thai operations account for 59% of the total sales of the group.

In terms of export, you can see that export actually declined from THB 97.9 billion to THB 78 billion, so roughly around a 20% decline. This, as I'd mentioned earlier, is mainly in terms of the chemical prices. As you are all aware, the prices of the chemicals product actually dropped between 10 to 20 -- 10% to 30% across the board when compared to the same period of last year.

This is what has been helping us to stabilize our margin. High value-added products account for 41% of the total sales, although it declined by 2% year-on-year. But if you recall, the total revenues declined by 8%, so basically is really showing that high-value products and services actually help us to be more resilient in terms of the -- when the business is on the low cycle.

So I'd like now to pass along to Khun Thammasak for financial.

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Thammasak Sethaudom, The Siam Cement Public Company Limited - VP of Finance & Investment and CFO [3]

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Okay. For the finance, let's start with the EBITDA on assets for 9 months, dropped to 11.2 -- or 11.4%. And EBITDA on assets, excluding project under construction, stood at 12.2%. EBITDA margin is flat 14% mainly due to the lower chemical cap.

Net debt registered at THB 184.9 billion by the end of the third quarter. And net debt on EBITDA rose to 2.7. And again, if -- without the projects under construction, net debt on EBITDA will be just 2.1.

For the CapEx and investments for 9 months, it stood at almost THB 60 billion. 51% went to the Packaging business. As you know, that is an acquisition in -- for Fajar and Visy in the past. And Chemical business spend was around 34%. For the interest expense and financing cost, it was THB 4.9 billion. And the interest costs stood at 3.1%.

For the financial highlights. There's -- as Khun Roongrote mentioned, there's a reversal of the deferred tax asset for the Map Ta Phut Olefins, and this impact P&L around THB 1 billion.

And I will, like, lead you on the asset impairment in third quarter, the impairment for this quarter is around THB 762 million. Cash and cash under management come down to 30 -- almost THB 31 billion by the end of the third quarter. And you can see that the Chemical business is in the low cycle, and anyway it shows some signs of resilience at the moment.

From the outlook, you can see that the growth still will be at SCG Packaging. And today, the SCC Board approved for the equity raising to the IPO. For full year of 2019, CapEx and investment should be around plus THB 70 billion. And this already include the acquisition of the Fajar and Visy and ongoing construction of the Long Son Petrochemical project in Vietnam. Debenture issuance of THB 10 billion on November, and this is 4 years and 3%, which replaced the THB 10 billion matured debentures.

That's for the finance. May I pass to Khun Nithi.

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Nithi Patarachoke, The Siam Cement Public Company Limited - President of Cement-Building Materials Business [4]

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Good afternoon, everyone. I would like to start with market situation. Demand -- cement demand were generally positive for us in-country and continued high competition across the region but less in Cambodia. For Thai market, gray cement demand dropped 1% year-on-year caused by the floods in Northeast Thailand. The average cement price increased 3% to 4% to the range of THB 1,750 to THB 1,800 per ton. Ready-mixed concrete demand contract 7% year-on-year. The average price for ready-mixed increased 3% to 4% year-on-year to the range of THB 1,700 to THB 1,750 per cubic meter. Demand for housing products were flat, but estimated demand for ceramic tile dropped 1% year-on-year.

This is for ASEAN market. The Cambodian cement demand grew 20% year-on-year as a result of strong growth from the Chinese investment. Indonesia cement demand increased 1% year-on-year, but the residential demand remained soft. Myanmar cement demand slightly declined by 1% due to lower new private construction projects. And Vietnam cement demand increased 4% year-on-year, but demand for housing product and ceramic tiles slowed down from the previous year because of the weak demand in residential segment.

Revenue in third quarter decreased by 2% year-on-year and 1% Q-on-Q due to lower sales volume from the operation Indonesia and Vietnam due to weak residential demand.

For EBITDA and profit. EBITDA and profit for this quarter include the asset impairment loss, still increased 10% year-on-year and 239% (sic) [235%] year-on-year, respectively.

ASEAN and other sales segmentation. ASEAN sales growth decreased 10% year-on-year due to weak demand in housing products and ceramic tile in Indonesia and Vietnam. Ceramic tile, the average selling price of ceramic tile remains soft due to high competition and weak residential demand.

For Thailand's sales segmentation, Thailand domestic sale grew 3% year-on-year, which was contributed by the growth of retail and logistics business.

Thailand gray cement segment. Cement demand for this quarter contract 1% year-on-year because of 2 reasons. First, the flood in the Northeast Thailand. This caused the residential segment drop 1%. Actually, in Northeast, it dropped 6%. And another reason, the demand growth from the government segment slowed down because of the high base effect from stimulus package to local infrastructure project last year. But -- however, we expect the recover in the next quarter or fourth quarter for the housing, repair and maintenance and renovation in Northeast region.

Outlook. ASEAN demand for Cement-Building Materials product in 2019 is expected to see growth in selected markets. Cement demand in Thailand is expected to see slightly growth, which will be mainly driven by demand for mega-infrastructure project, whilst demand for housing product and ceramic tile in Thailand are projected to be flat this year.

Company updates. Ceramic business in Indonesia is in the process of restructuring. For the first 9 months of this year, retail franchise format achieved the opening of 9 stores. We expect that the retail franchise format, we will open up to 12 stores within this year. And lastly, regarding to the court order to revoke permits for unloading coal freight at Pasak river, we are unaffected by the order because of our world-class environment management standard in closed-loop coal management that minimize impact to the community.

Here is the closed-loop operation system that we invest more than THB 1.5 billion since 2012. It is handling capacity of 3.8 million tons per year. It's also the first closed-loop coal operation in Thailand. We are confident that this world-class management standard of our coal system will help minimize impact on the community and environment. This is in Ayutthaya.

That's all from CBM.

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Tanawong Areeratchakul, The Siam Cement Public Company Limited - President of Packaging Business [5]

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Good afternoon. Chemical business in the third quarter, let me start with the market situation. As you can see, the crude oil price dropped 9% Q-on-Q. And actually, it -- this is due to the soft demand from the trade tension between U.S. and China. Even though there was an attack from -- of the Saudi Arabia facility, but what we can see, the crude still maintained at this level. And naphtha also declined relative to the crude. HDPE and naphtha reduced 15%. And again, this is mainly due to the soft demand from the trade tension between U.S. and China. And at the same time, there's availability of sea cargo supply.

PP-naphtha slightly dropped 1%. And again, this is mainly from the soft demand. But in terms of supply, to PP supply, a bit tight because of some capacity outage. And PVC and EDC gap improved significantly and mainly from PVC demand improved. And at the same time, the feedstock price also declined. And BD-naphtha -- sorry, MMA and naphtha declined 17% Q-on-Q. And again, it is the global economy slowdown. BD and naphtha improved 49%. And in terms of demand, quite okay but, in terms of supply, it's a bit tight because of outage in the region.

If we look at HDPE gap for the third quarter, the gap went down to 457. And what we foresee for the Q4 will be lower to somewhat between 350 to 375. And for HDPE, again, as we mentioned that there's a kind of soft demand but, at the same time, there's additional supply in the region as well. But in our case, as Khun Roongrote mentioned, we have HVA portion as well. So that's why our HVA, like for PE pipe, the LDPE coating and one cable, this is for example, those portion can support for the polyethylene portion.

For PP-naphtha gap. Actually, like I said, the gap slightly declined compared in the third quarter. And if we look to the fourth quarter also slightly decline as well. And this is again, in terms of supply, it's not that -- not so much. So that's why I think we can maintain the gap. And at the same time, in PP segment, we also have a kind of high value-added in the automotive, electrical appliance and we also produce a kind of [thin film] for the Packaging.

If we look at -- I mean, as I mentioned about the PVC, gap improved. The main reason is the -- actually, there's an improvement in the demand in Asia, especially in India. After election complete, the demand, especially in the agricultural and construction, improved substantially. And at the same time, the feedstock EDC price also declined. So in terms of the gap in the third quarter, it's quite okay. In the fourth quarter, I -- we do believe that we can maintain the gap.

Benzene and toluene. Actually, the third quarter gap is coming up, I mean, substantially and mainly because of the outage of the capacity in U.S. and in China. So there's a lot of cargo move from Asia to U.S. So the Benzene-toluene gap has improved substantially.

For MMA and naphtha, like I said, the gap has declined because of the global economy slowdown from U.S. and China trade dispute. But for -- but again, for MMA, if we look to the Q4, we think that now the gap is maintained at this level. And BD-naphtha gap improved, as I mentioned, that there's also a tight supply in terms of the BD. And some collector, they collect more LPG, so the capacity will be a bit less than when compared to the second quarter.

In terms of sales, polyolefin sales volume. I will say that both cracker and polyolefin plant will run at full capacity. So you can see that third quarter and even -- I mean we can compare 9-month this year and last year, the volume slightly increased 1%. And if it -- so this means we can push order volume.

Similar to the PVC sales volume, actually, we have 1 plant turnaround for VCM in the third quarter. So that's why Q-on-Q may be reduced 4%. But if we compare 9-month this and last year, the volumes went up 4%.

Financial. Financial, as Khun Roongrote mentioned, if you look at financial figure in terms of revenue, it decreased 4% Q-on-Q and 24% year-on-year and mainly from the lower product price and compare 9-month, reduced 19%.

For EBITDA. EBITDA In the third quarter, if we look at this -- the one that we have here is mainly the EBITDA from the operation. Actually, so this portion is -- grew up to THB 5,700 million. But we -- I mean the dividend from association, I mean, in the third quarter is -- compared to second quarter, you see a bit small. And actually, in the third quarter, we have 1 maintenance turnaround -- I mean plant turnaround from one of our associate company in ASEAN. So that's why the number is lower. And if we compare the 9-month this year and last year, the EBITDA margin is 13%. But one thing that I would like to mention that we -- what we have seen now, the gap is -- I mean for example, PE and naphtha seemed to be low, I mean, quite low. But compared with the previous situation, for example, in the 2012, at that time, I think our gap allowed to $350 or $360 per ton. The EBITDA margin is only 3%. So the message that I would like to communicate is that, as we mentioned about the HVA that we developed for some THB 13 billion, this quite, I mean, support our margin.

For the profit for the third quarter, actually, as Khun Thammasak mentioned about the DTA, that we have to take into account THB 1 billion. So if we include in our profit, profit will be THB 4,300 million. And compare 9-month this year and last year, it reduced 44%.

Outlook. We expect that crude oil price will be maintained at this level. And naphtha price, we also -- we think that naphtha may be maintained at this level and maybe slightly increase because it -- now some players, they use more naphtha compared to, I mean, LPG. And for polyolefin, I think now -- actually, the fourth quarter, I mean, that you can see, when we mentioned about the fourth quarter margin, the lower to $360, $370 per ton, and mainly, in the fourth quarter, it's like seasonal, the lower demand for the polyolefin.

And PVC, we -- the outlook, we think that maybe slightly drop in terms of PVC price due to some competition. Normally at year-end, there will be some U.S. cargo they send to the Southeast Asia.

Company update. What we have, we have 2 major projects, debottlenecking of the MOC. Actually, now the process is quite -- I mean on plan. We have allowed 60%, 65%. And we plan to start up at first half of the 2021.

And Long Son Petrochemical in Vietnam, now progress is still also on plan. We plan to start up 2023. You see the picture of the debottleneck -- the MOC expansion and it -- now we do what we call site preparation, and we do the piling work. So that's all I have.

May I pass to Khun Wichan. Thank you.

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Wichan Jitpukdee, The Siam Cement Public Company Limited - President of Packaging Business [6]

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Good afternoon. Next will be the Packaging business. First of all, before I start, on behalf of Packaging business, I'd like to thank SCG Board of Directors for approving equity listing of SCG Packaging business. Thank you.

May I start with the market situation for Thailand domestic market. Food and beverage segment a bit dropped due to the customer maintenance shutdown seasonal and the flood situation in the northeast of Thailand. For consumer, demand increased due to the promotional campaign and the higher export. For electronic and electrical appliance, or E&E, demand a bit dropped. This is due to the lower export. However, this is offset by the increase of the production reallocation from China. This is due to the trade war. So that will be the Thailand domestic market.

For ASEAN market, in Vietnam, all demand increased. This is due to the export, especially in footwear and E&E segment. In Indonesia, demand also increased. This is due to the higher domestic consumption and the seasonal demand, especially for the export of the E&E segment. In the Philippines, overall demand also going up and higher consumption, especially in food and beverage. As you know, that in the Philippine, they are saying that they will start the celebration, start ber month, meaning start from September there. So the consumption of food and beverage will be going up. This is due to the seasonal.

Next is the packaging price. I'll start with the packaging paper. The price of packaging paper regionally dropped, continued to drop from third quarter last year, down to now about $440. This is due to the intense competition and slow demand in China.

For raw material recovered paper, or AOCC, the price also dropped from the third quarter last year. However, this third quarter this year, a bit due to the Chinese manufacturer, they use that quarter to import waste paper to China.

For revenue from sales. In 9 months, it's THB 65 billion. The THB 65 billion packaging take account for 79% and other paper, 21%. For packaging, 79%, if we separate into the product type, packaging paper account for 58%. Packaging paper -- paper-based packaging, or box, account for 35%, and the performance and polymer packaging account for 7%. If we separate into the customer industry, food and beverage account for 39%; consumer, 15%; E&E, 13%. These 3 segments account for 67%. The last, 30% is automotive, ceramic and construction and like that.

For revenue for sales by country. For this 9 months, THB 65 billion account for 59%, reduced from 61% to 59%; Vietnam down to 14%; Philippines down from 5% to 4%; Indonesia increased from 3% to 9%. This is due to the consolidation of the Fajar. And the last, 14% is the export, 14% in export to ASEAN and 10% export to outside ASEAN.

For packaging paper sales volume, this third quarter, we sell 977,000 tons. This is reaching 1 million ton per quarter and 53% Q-on-Q up and 52% year-on-year up. While the domestic in Thailand, 1% up Q-on-Q, minus 4% year-on-year drop. This means 9 months of this year compared to 9 months last year, the volume increased 16%.

For paper-based packaging, I mean, box sales volume, still maintained at about 200,000 tons per quarter. This is 1% up Q-on-Q and, in fact, year-on-year in total. For domestic, 1% up Q On-Q and 2% up year-on-year. This makes the total 9 months compared to last year a bit up 1%. Domestic Thailand is flat, but regional a bit up.

For performance and polymer packaging sales volume, this third quarter this year, we reached 9,427 tons. This is a record, the highest in the history. This is 10% increase Q-on-Q and 21% year-on-year. For the domestic, 20% up Q-on-Q and 23% up year-on-year. This is due to consolidation of Visy just for the 1 month. And for outside Thailand -- I mean, in Vietnam, we prepare the premarketing of the sale of the investment and volume packaging for the second factory that will be start up beginning of next year. And this cost to 9 months compared to last year, up by 9%; for Thailand, up by 10%.

For revenue from sales by business. For this third quarter, this about THB 24 billion, this is 20% improved Q-on-Q and 10% improved year-on-year and make the 9 months compared to last year almost flat. For packaging business up 2%, but for others, down by 6%.

For EBITDA. Last quarter, EBITDA reached THB 4.2 billion. This is 25% up Q-on-Q and 10% up year-on-year. And this make 9-month EBITDA even THB 0.5 billion, up 3% compared to last year. For profit, THB 1.5 billion for last quarter. This is 47% Q-on-Q, but minus 11% year-on-year. This is because of the financial cost that we have and then also for the profit, we've taken from Fajar only 55% that we have percent share. This leads to 9 months compared to last year, the profit, THB 4.2 billion, down from last year, about 12%. However, the EBITDA margin, we still maintain at 17% for 9 months this year.

For outlook, we still see positive of the domestic packaging demand. We will continue to grow from the Q3 to Q4. This is because of the pickup of the -- toward the end of the year and the celebration seasonal, especially on food and beverage and also recover from the flood in the northeast of Thailand, especially for the beverage.

For regional demand, we also expect to continue to grow also. This is because of the year-end spending. For recovered paper, or AOCC, we believe that the price will be maintained due to the import quota, with not that much to release from the government.

For company update, we closed the transaction of Visy at the end of August, as you know already. This is to respond to our vision to be packaging solution providers. We have successful start-up of VKPC in Vietnam. This we call debottleneck of the paper machine. This will increase capacity about 24,000 tons per year.

For Philippines, UPPC, paper machine #3 capacity of 230,000 tons per year now progressed 35% and on track, and this will be starting up in November next year. That's all for the Packaging business.

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Roongrote Rangsiyopash, The Siam Cement Public Company Limited - President, CEO & Director [7]

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I think in summary, for the 3 business units, Cement-Building Materials, the operations performed, I think, more or less steady. I think the new growth is actually going to come from the retail and the distribution business, including service.

On the Chemical business, the HDPE margins is already at a low point. I guess the questions, uncertainties that we are seeing is that how long will this low cycle will be. On the other hand, we have the growth initiative in the listing and IPO of the Packaging business. As we continue to expand across ASEAN, I think we do expect the leverage to remain at a very high level. This is at least until the projects under construction, mainly LSP and MOC debottlenecking is completed. And those 2 projects begin to start up and generate EBITDA.

In terms of how we are taking actions and measures, one is to make sure that the existing projects under construction is on track. On the other hand, I think we are executing the growth strategy of SCG Packaging, whereas the HVA and solution-based offerings, that's something that we continue to focus on. We will also start rolling out the technology usage for efficiency improvement, not only in Chemicals but also in the other 2 business, and this is while we are putting discipline on the working capital management for the whole group.

So this is just a summary of the outlook for the 3 business as well as what we're planning to do in order to weather through the low cycle and, at the same time, leveraging against the growth initiative of the Packaging business.