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Edited Transcript of SCC.BK earnings conference call or presentation 26-Jul-19 10:59am GMT

Q2 2019 Siam Cement PCL Analyst Meeting

Bangkok Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Siam Cement PCL earnings conference call or presentation Friday, July 26, 2019 at 10:59:00am 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

* 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 sorry for that brief delay. We understand that there are some traffic issues outside. Welcome back to Bang Sue for the first half of 2019 results analyst conference. For safety purpose, please note the 4 exits in this room, 2 are behind you and 2 are in front of you. So there's 4 in total in each corner.

And now onwards with today's afternoon program, beginning with the President and CEO of SCG, Khun Roongrote Rangsiyopash, and in order of presentation, next will be followed up by the financial updates highlighted by the CFO of SCG, Khun Thammasak Sethaudom. For the business units, beginning with the CBM, or what we call Cement Business Unit, Khun Nithi Patarachoke; and he's followed up by Khun Cholanat Yanaranop, who is also doing his last presentation as President of SCG Chemicals; and lastly, the newly appointed President of the Packaging business, 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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Okay. Good afternoon. Okay. The second quarter result. I think you have seen the result. I think basically there are a few factors that contributed to the decline in the performance of our group. One is the global macro factors. Basically, the trade war between the U.S. and China, I think, not only creating the decline in the demand in the Chinese market but also at the same time, the realignment of the supply chain between those 2 countries also impact the demand of our products. Secondly, I think we also are seeing the spotty recovery of the cement consumption in several markets in Southeast Asia.

In terms of packaging, I think what you also see is that the major product prices actually went down. However, we also have been able to manage it in such a way that our margins remain relatively no change.

So starting with the second quarter revenues is THB 109 billion, which is down by 9% year-on-year, and that is mainly from the chemicals product prices. Secondly, in terms of EBITDA, the total EBITDA, including the dividend from associated companies, was THB 19.8 billion, down by 25% year-on-year. And again, that is mainly coming from the sharp drop in the Chemicals segment. Equity income, I think nonchemicals, relatively no change, whereas the chemicals sector drops significantly. I think that's mainly coming from the Indonesian associates company.

Profit for the period. I think, as you know, we had reserved for the severance pay adjustment from the 300 days upon retirement to 400 days of the retirement compensations. So that's impacting us around THB 2 billion. Without this provision, the profit for the period was THB 9 billion, down by 27% year-on-year. And that's come mainly from the Chemicals segment. Without -- with the provision on the severance pay, the net profit as reported is around THB 7 billion, which is down 43% year-on-year.

If we look at the first 6 month of the year, profit down by about 7%. EBITDA dropped by 19%, in line with the decline in the Chemicals segment. Profit for the period was THB 20.7 billion, and again, down by 16% from the first 6 month of last year. And that's not including the provision for the severance pay. With the provision for the severance pay, the reported net profit for the first 6 month is THB 19.7 billion -- or THB 18.7 billion.

Segmentation from the revenue standpoint. The first half of this year, Chemicals account for about 42% of our total revenues, whereas Cement-Building Materials accounted for 39% and Packaging accounted for 19%. In terms of profit, Chemicals account for 51%. And as you can see, the prior 6 month of the year -- the first 6 month of last year, Chemicals accounted for 65%. So basically, the decline is mainly coming from Chemicals' drop in the net profit, whereas Packaging account for 15% of the net profit and Cement-Building Materials account for 23%. In terms of the segmentation by the geographical market. As you can see here, Thai, the domestic is -- account for 60%. And ASEAN, the operations, ex Thailand, is 25%. And 15% is the others market.

Export segment. As you can see, the -- China has dropped from 24% to 21%. And ASEAN increased slightly from 37% to 40% in terms of the export segment. And again, this is export from Thailand. High value-added product and service actually improved by 2% and now account for 42% of our total revenues.

Now I'd like to pass this along to Khun Thammasak for the financial updates.

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

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Okay. Thank you. For the financial update, we -- before I get into the detail, you can see many lines that we are showing mainly because by the end of June, we closed the transaction for Fajar acquisition, and it's exactly by the end of the month. So we consolidate balance sheet of Fajar, but the performance is not come yet because it's by the end of the month. So we separate the line to 3 graph for you, okay?

Let's say, for the EBITDA on asset, if we include everything, it's 11.5%. But if you deduct the Fajar balance sheet, it's 12%. And if you exclude the ongoing project, it's 12.6%. So this is the 3 breakdown that we show. The EBITDA margin still stood at 15%. For net debt to EBITDA, we do the same, we separate into 3 graphs. If we exclude Fajar, it's 2x. And if we exclude the project under construction, it's 1.6. For CapEx and investments. For the first half, we registered at THB 40 billion, roughly THB 40 billion. And this includes the Fajar acquisition. You can see that Packaging is now expanding to 60% in terms of the CapEx and investment. Interest and the financing cost amounts stood at THB 3.2 billion, and the interest cost, it's 3.1%.

In term of the financial highlight and outlook, we report to the SET that the dividend is THB 7 and payable on August 23, this the XD date on August 8. Second quarter, we have a onetime provision, THB 2 billion, to the net profit. And this is a result of the severance pay adjustment according to the new labor law. We still have a strong cash position. Cash and cash under management at THB 42 billion by the end of the second quarter, and it's already paid for the closure of the Fajar acquisition.

Outlook. For the full year 2019, CapEx and investment will be approximately THB 70 billion plus. Last time we gave guidance around 80s, okay? Fajar earning will be consolidated into the SCG Packaging financial from the beginning of the third quarter, as I explained to you earlier.

I'll 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. For CBM, generally, cement demand was positive for ASEAN countries and continued high competition but less for the Cambodian market. For Thai markets, grey cement demand continue to increase 3% year-on-year, thanks to the continuous growth in the megaprojects, infrastructure and government projects. The average cement price increased year-on-year to be within the range of THB 1,750 to THB 1,800 per ton. Ready-mixed concrete demand dropped 4% year-on-year. The average selling price of ready-mixed concrete still remain in the same range of previous quarter. Demand for housing products and ceramic tile were flat year-on-year.

Cambodian market, 33% year-on-year. The strong growth were mainly derived from Chinese investment. Indonesian cement demand dropped 5% year-on-year due to very weak domestic demand. A new recovery for second half is on wait-and-see. Myanmar cement demand increased 5% year-on-year. It was still on the road to recovery in private construction segment. Vietnam cement demand increased 7% year-on-year mainly driven by private investment projects.

Revenue from sales. Revenue in second quarter increased 3% year-on-year from the sales growth in Thailand but dropped 5% Q-on-Q on seasonality. EBITDA in the second quarter increased 4% year-on-year from higher sales growth in Thailand but dropped 21% Q-on-Q on seasonality. Similarly, profit increased 10% year-on-year, dropped 14% -- dropped 40% Q-on-Q. However, if factoring the change in the Thai labor law, profit for the period declined 48% year-on-year and 71% Q-on-Q. ASEAN and other sales growth decreased 3% year-on-year due to weak demand in Indonesia market. Cement export from Thailand in the second quarter dropped 5% to 1.1 million tons with an average FOB price of approximately USD 51 per ton. Average selling price of ceramic tiles decreased due to high competition and the weak demand in Indonesia.

For Thailand sales segmentation. Thailand domestic sales increased 7% year-on-year from higher volume of cement sales and non-SCG products but dropped Q-on-Q on seasonality. Cement demand in Thailand continue to grow 3% year-on-year. Government segment remained the most important driver, which was mostly derived from the accelerated disbursement of the mega infrastructure projects. Commercial and residential segment were slightly improved from the last year as a result of the continuing improvement in both farm income and nonfarm income, which were the fundamental factor supporting the household purchasing power, especially in provincial area.

Outlook. ASEAN demand for cement and building materials product in 2019 is expected to see growth in selected markets. Cement demand in Thailand for 2019 is expected to see continued growth at approximately 3%, which will be mainly driven by demand from megaprojects and a slightly recovery of residential growth in provincial area, while demand of housing products and ceramic tiles in Thailand are projected to be flat in 2019.

Company update. In 2019, we have additional capacity of 5.5 megawatt solar power. And we have just invested in additional 24.5 megawatt solar power in Thailand that will start up by mid-2020. This is for pursuing our sustainable development and improve our profitabilities.

SCG Nichirei Logistics invested in a second phase of the temperature-controlled warehouse, which increased warehouse total service area to 21,000 square meter by 2020. The retail franchise format achieved the official opening of 3 store in the first half of 2019.

May I pass this to [Pino Khun].

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Unidentified Company Representative, [5]

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Good afternoon. For Chemicals, you might remember in Q1 when you saw the full impact of trade war and the sluggish demand. Well, the bad news is that still continue into second quarter, okay? But even worse news is that we saw the surge of crude in second quarter around 7% due to the tension in the Middle East, and that drove up the prices of naphtha, okay? However, the -- for the products side, running down from ethylene, propylene, that dropped quite significantly. Also HDPE dropped a little bit. PP, not so bad. But we see a crunch in the margin, okay, for polyolefins. For PVC, margins has been holding up, but as the reason because EDCs dropped at the same pace as PVC. So out of the 3, PVC seems to be holding up quite better than the others.

We see a lot of other petrochemical products losing their ground and struggle to hold the prices up. Naphtha, for example, MMA, which is a high value-added product, is -- dropped significantly the price. And the spread between MMA and naphtha dropped 14% from the last quarter, same as butadiene to naphtha.

So I think in general, our petrochemical products were quite weak. And this is due to, on top of the trade war between U.S. and China, the impact from that, is that the second quarter is a quarter which has low buying interest. We have -- because we have a lot of holidays like Ramadan and that kind of thing.

For HDPE, you can see the continuous drop from the last year, second quarter last year compared to second quarter this year, that HDPE to naphtha lost around USD 200, okay? So that's around almost 25%, okay? And you can see the numbers in Q3 is -- has lost ground even further. We see some stabilization as we speak, okay, but that's already at the point below USD 500 per ton.

For PP. PP, the trend was similar, but I think in Q2, we see the spread for PP to naphtha coming to a stabilization. And now we see in this week the drop from almost USD 600 now is kind of holding at around $576, and that's because of the outages of the PP facilities in Asia.

PVC, relatively calm so far. But as we speak, we see an uptick of spread between PVC and EDC. And that generally came from India, which we have renew buying interest from India, which -- where the market basically switched off around the time of Indian election in April and May, so Indian market has come back.

Benzene and toluene. For benzene, we see slight improvement from last quarter. But to date, the spread between benzene and naphtha has improved markedly to around USD 150 per ton, and that's because of the outages from the refineries in the U.S. And I don't know how long that's going to last, but so far, we hear some news that some refineries in the U.S. have been permanently shut down, so taking out some amount of benzene out of the market. So that should help the benzene price. For toluene as well, the price has been increasing from the last quarter.

Just to see the trend of the prices for products of our associates. The spread of MMA and naphtha that I mentioned has been dropping since the start of the trade war, which is around Q3 of last year. It's been dropping and dropping and still not showing sign of recovery, okay? For butadiene into naphtha, that has been swinging around because of shutdowns and outages of capacity in the region that helps from time to time BD price to recover.

From the not-so-good picture of the spreads, we have a kind of better picture from the sales volume, the sales volume of polyolefin. You can see that among the sluggish demand, market demand, we have been able to hold up the volume. We have assessed the sales volume. So compared to last -- first half of last year, which didn't have the trade war, the volume of second -- first half of this year is similar to the one last year. So we are pretty solid in terms of sales volume. PVC volume, we -- actually, we have the uptick of volume compared to the first half of last year, around 3%.

Revenue on sales. Because of the price being down significantly, so we have -- we can see the price coming down from the first half of last year around 16%. And if you look at the year-on-year quarter price -- sales -- revenue from sales, that's around 19%. EBITDA is a good reflection of the crunched margins. It's now almost 50% year-on-year and about 40% compared to the first half of last year. Profit for the period, down the same degree, 46% compared to last year. And if you look at the first half of this year compared to the first half of last year, it's down 35%. And we can note that there's an inventory loss of around THB 1.1 billion in the second quarter of this year.

Outlook, still quite uncertain. We are hoping that the price -- prices will pick up in the late -- early Q4. So far, what we've seen in the 2 months that already passed for Q3, that's not been good. But there'll be a time that agricultural season in China will -- supposed to help the price to stabilize and maybe increase in the latter half of the -- this quarter and also the first part of the fourth quarter, okay?

So from Q -- from half -- first half of this year, you see a sharp drop in the margin, also the Thai baht depreciation (sic) [appreciation] against U.S. dollar, inventory loss. And we got -- had to book some provision for the severance payment around -- close to THB 500 million for Chemicals, okay?

For the second half, we see a strong demand coming from India for our PVC. So that will be a big, big plus for us. Aromatics also is still quite getting tight. So benzene and toluene should be performing better. Seasonal buying should be back like I mentioned earlier. And on the negative side, the global economic turndown is still a big risk to us. And as we move into Q4, there will be new regional capacity in ASEAN starting up. So that will be -- that will -- that translate to around 1.5 -- 1.4 million to 1.5 million tons of polyolefins. So that's going to be a big challenge to the overall market in ASEAN and Asia.

I have an update on the Long Son Petrochemical. I'll show you the video for a change, something -- okay?

As you know, Long Son Petrochemical is our petrochemical project in Vietnam, located in Ba Ria-Vung Tau. It's around 100 kilometers from Ho Chi Minh, okay? So that's the -- how -- what it looks like, the 460 hectare of lands that being developed piece by piece, part by part by part for the facilities -- for the various facilities on the olefin crackers and the downstream units, okay? You can see in that various facility will be -- will come up, the jetty, the construction jetty in the process of being constructed. You can see the dredging because the part of the land is -- needs to be dredged to make room for the vessels to come into the jetty. So that's a lot of earth we have to move out from the front part of the -- our land in the sea and dump it in the designated area some 34 to 40 kilometers away. So that's the overview of the Long Son Petrochemical. This is part of this warehouse. So there's a lot of activity.

Now the progress of construction. You may say, yes -- as of May, it says 15%. But as of today, it's around 20%, okay? There were a lot of rocks, boulders in the land, so we had to blow them up and clear the land, okay? So that's some video on the land development progress of Long Son Petrochemical.

And lastly, I just want to say that -- we've mentioned about high value-added products. And I'm pleased to say that the new technology that's out is our in-house HDPE, it's called SMX, which just started up the end of last year, is now -- has been undergoing customer verification. So now we are planning to commercialize 2 products in this year and maybe 3 products in the beginning of next year, okay? So that has been moving on quite nicely.

On another note, we have just -- we open -- that was an opening ceremony for the advanced material lab. This is a functional material called CIERRA that we co-developed with Oxford University lab. And now we decided to establish our own lab outside Oxford University but still in Oxford. And this lab has been invested for the capability of prototyping the CIERRA product for customers in various applications like recyclable food packaging, plastic used in flame retardant and catalyst supporters and catalyst precursor. So that's a specialty chemicals that goes into the catalyst.

So that's it for Chemicals. I'd like to pass the microphone on to the new handsome person, Khun Wichan, who's now in charge of Packaging.

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

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Thank you, [Pino], for your compliment. Good afternoon. Next will be the Packaging business. May I start with the Q2 market situations. Overall demand dropped Q-on-Q mainly due to the long holiday and seasonal. For domestic, food and beverage and consumer dropped due to long holidays and less promotions. However, for the electronics and electrical appliances, the production had been increased due to the relocation of some products from China to -- in Southeast Asia, in Thailand also and in Vietnam. This is due to the trade war.

For the ASEAN market. In Vietnam, the overall demand increased due to the footwear. Also this is the same reason they moved up relocation on the footwear manufacturing from China to Vietnam. But for Indonesia, the demand dropped due to the Hari Raya this year is quite a bit long. For the Philippines, consumer segmentation is also reduced.

Okay. For packaging paper price, you can see the price continued to drop from the Q3 last year until the second quarter this year. The price now dropped from the first quarter from $510 to $450, reduced $60 in the past quarter. In the same thing and the same time, the recovered paper, AOCC also reduced from $165 to $135. This is due to the high supply and the soft demand of the recovered paper.

For revenue from sales, the first half of this year is THB 41 billion approximately. But this THB 41 billion is the Packaging account for 77%. But if we look in the packaging sales by customer industry, the biggest one is the food and beverage, which account for 41%. The next is consumer goods, 14%; electronic and electrical appliances account for 11%; and the others 34%. The others is auto part, petroleum product, construction material, footwear and garments.

Revenue from sales in the first half of this year, as mentioned, THB 41 billion. Thailand, still the majority, 63% in total; followed by Vietnam at 16%; and Philippines, 4%; Indonesia, also 4%. The rest is other in ASEAN and outside the ASEAN. Revenue from sales. As mentioned earlier, 70% is from Packaging. If you close now to the sales by product type of the Packaging, 54% is packaging paper, 39% paper-based packaging, or another word is box. For the advanced material and polymer packaging, this is our flexible and rigid plastic. So this account for 7%.

For the packaging paper sales volume is flat year-on-year and up 3% Q-on-Q. However, you see the domestic -- Thailand domestic is dropped 4% year-on-year and dropped 4% Q-on-Q. But this is thank for the export, the export increased. This helped us to maintain the volume. For the first half of this year, the sale volume dropped 2%. Again, for the domestic in Thailand also dropped 5%. For the paper-based packaging or box, dropped 2% year-on-year and dropped 5% Q-on-Q. And for Thailand, it's flat year-on-year and dropped 5% Q-on-Q for. The first half of this year, in total, dropped 2%. And for Thailand domestic, it's flat.

For the advanced material and polymer packaging, flexible packaging and rigid packaging. So this is up 9% year-on-year and 8% Q-on-Q. This is mainly up from the Vietnam operation because we have prepared for the second factory. The second factory will be finished end of this year and will be start up beginning of next year. So this is the [myriad] effort of the sale team. And also you see the green color. In Thailand also the year-on-year is still up 6% and 1% up Q-on-Q. Summary, in the first half of the year, the volume increased 5%.

For revenue from sales. Revenue from sales dropped 6% year-on-year and dropped 3% Q-on-Q. This is due to the soft demand and effect from the China. For the first half of the year, the revenues dropped 5%, mainly from the packaging paper has dropped 6%. Both the volumes [and maintenance] mainly from the price. For the EBITDA. EBITDA dropped 10% year-on-year and 11% Q-on-Q. However, the first half of this year compared to the first half of last year, EBITDA dropped only 1%. For the profit for the period, it dropped 14% year-on-year and dropped 18% Q-on-Q. Summary, in the first half of the profit this year compared to last year has dropped 2%.

So for the outlook, we see the pickup of the demand due to the seasonal third quarter because they have the promotional campaigns in the fourth and they will adjust. And also we can see the regional packaging demand also pick up due to the electrical appliance from the China. Some product has been moving to ASEAN country. And we see the size of the seasonal price rebound for the recovered paper. And also there is the side from China. And because of this month, the comment of China released the quota importation of the recovered paper at 1.6 million tons. So that can be a driver.

Company update. Following the acquisition of the PT. Fajar Surya Wisesa 55%, the transaction has been finished end of June, actually the 28th of June, and expect to be consolidate the funding for the third quarter this year. So that's all for the Packaging business. Thank you.

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

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I think we are seeing very challenging macro factors as well as a lot of uncertainties. But at the same time, in addition to just tightening belt and trying to squeeze efficiencies from operation as much as we can, I think we still believe that a lot of our projects, particularly some growth projects in the high potential countries, for example, Long Son projects, or the packaging paper in Philippines, those are the projects that I think will deliver long-term values because of the potential of the market itself and the competitiveness of the projects.

So I think from the -- our ongoing strategy standpoint, we'll prioritize some of those projects. For the projects that are not led to either efficiencies or high potential projects, I think those projects will be a delay or hold for a while. At the same time, if you look at the -- in this business unit, Cement-Building Materials, I think we try as much as we can to take advantage of the recovering of the ASEAN markets. At the same time, we are transforming by adding more expansion in the retail and service segments, which require not much capital.

On the Chemicals, I think a lot of challenges in terms of how to manage the Chemicals margin and also demand/supply and cycle. I think one thing that we can do is to continue to put innovation investment as well as turning out the HVA products to the market. I think we also are saying here that circular economy, so for example, like PCR, post-consumer recycle, those are the type of technology that we will continue to invest.

Packaging, I think we still believe that the business had a good prospect for growth. So I think we'll focus on speed, our execution and efficiencies. At the same time, we continue to look for good opportunities in terms of acquisitions because that allow us to get into the market quick. So I think you should expect to see more of those in the next -- in the near future.

So that's about all in terms of the summary of our forecast for the next 6 months. Thank you.