PT Semen Indonesia Persero Tbk : Transkrip Earning Call 9M

SIG 9M2022 Earnings Call

Date: Wednesday, 2 November 2022

Time: 02:00 - 03:00 PM JKT Time Zone

Panelists:

Mr. Andriano Hosny Panangian - Director of Finance and Risk Management Mrs. Febriandita Kusuma - GM of Investor Relations

Mr. Radityo Widinugroho - Investor Relations Senior Officer

Radityo : Ladies and gentlemen, Good day and welcome to SIG 9M 2022 earnings call. Before we start, kindly fill the attendance list using the link provided on the chat box. Thank you.

We have released our 9M 2022 results on Monday 31 October of 2022 and the reports are available on our website at sig.id under the Investor Relation menu. My name is Radit, and I will be the moderator for today. Let me begin with a rundown of today's agenda, as well as some functions of Microsoft Teams platform. Today's call, will begin with an opening presentation delivered by our GM of Investor Relations, Ibu Febriandita, followed by a Q&A session. If you would like to ask a question, please press the raise hand button on the top right of your screen. When your name is called upon, I will proceed by giving you access to unmute your mic. Please remember to click the unmute button after that before speaking. Alternatively, you can type your question on the chat box.

On the line with us today, we have Bapak Andriano Hosny Panangian, Director of Finance and Risk Management, Ibu Febriandita Kusuma GM of Investor Relations, and the- colleagues of IR team. And let us begin the call. I would like to give the floor to Ibu Febriandita for the presentation. Thank you.

Febriandita : Thank you Radityo, and thank you all for joining earnings call today. We have a publish unaudited financial statements for the 9M 2022 period which can be accessed through IDX as well as on website sig.id.

Allow me to briefly present our 9M 2022 performance. As you know that main challenges in Indonesia cement industry are still continuing. National cement demand continued to be contracted by 3.6% up to September 2022, contributed by -8.8% lower bag demand year on year, while bulk demand still improving around 15% year on year. Competition also continued to be high from the economic players while coal price was still relatively high, around 75 to 90 USD per ton coal with 4200 calorific value. In responding to those challenges, we were focusing on managing the top line by passing through the increasing costs to the ASP, where we recorded 8% increase in blended domestic ASP and 25% increase in blended export ASP resulting 15% increase year on year in 9M 2022. As we have secured coal requirement at domestic price obligation for the rest of the year, we were able to manage the incremental our fuel and energy costs below the market price which enable us to maintain the increasing impact to the COGS. While efficiency efforts through clinker factor reduction and TSR increase are still on track in line with our de-carbonization targets. And as a result, in the next slide, we continuously reported strong performance in nine months financial results. Absolute EBITDA improved 0.6% year over year with 0.2% increased EBITDA margin to be 22.7%. Net profit and net profit margin recorded IDR 263 billion and 1% higher versus last year. So going into more detail on the nine-month performance, revenue was relatively stable as the decrease in sales volume were compensated

by the ASP increase. Domestic cement ASP YTD September increased 8% year on year while export ASP increased 25%. Despite significant increase in coal and fuel price, COGS only increased 1.6% as we have managed to secure coal for the rest of the year using domestic price obligation, as well as continuing to reduce clinker factor and increase Thermal Substitution Rate which not only supporting the de-carbonization target, but also helped us to maintain the incremental on production costs. Operating expenses consistently contribute to the improved performance as we recorded around 7% decrease mainly from lower transportation, promotion, and labor costs. And finance costs still significantly contribute to the net profit improvement, where such cost decrease by around 303 billion year on year. So thus, we record an increase in EBITDA and EBITDA margin, as well as increase in net profit and net profit margin for the 9M 2022 period.

Through our leadership in increasing value prices capability and managing fuel costs and overall cost of revenue, 9M performance was continuously better than our peers, our EBITDA, EBITDA margin, net profit, net profit margin for 9M 2022 period recorded growing year on year, while peers recorded decrease in profitability in such period. On the sustainability performance, as we are still on track in terms of managing financial performance, we are also continuously able to deliver improvement on sustainability performance, especially on de-carbonization initiatives. Average clinker factor on 9M 2022, recorded 1% lower year on year while Thermal Substitution Rate was increased 1.6% year on year, resulting 2.1% decrease in CO2 emission intensities scope 1 to be 591 kilogram CO2/ton cement equivalent. So, that was our brief update for the SIG 9M performance and we can now continue to the Q&A session. Thank you Radit.

Radityo : Thank you Bu Febri for the presentation. Ladies and gentlemen, if you have any questions, please press the raise hand button and I will mention your name and give you access to unmute yourself. And also you can type your question on the chat box.

We have a question coming from Madhav Mardha. Hello Madhav, you can unmute yourself and ask the question. Thank you.

Madhav : Yeah, hi. Can you hear me?

Radityo : Okay Madhav, we can hear you.

Madhav : Yeah, my question is, firstly, why is the bag cement demand so weak in Indonesia at this point, like what is driving down volumes for bag cement?

Febriandita : Okay, maybe later Pak Hosny may want to add something, so it's still continuing on what happened in the first half. The first half until June, we see that it's already weak, for bag demand mainly because people start to be more active going out, not anymore work from home. So last year, lots of renovation going on, despite the situation with the Covid that bag demand increased quite significantly, if we compared to the bag demand last year. So this year, when people start to focus more on other types of consumption, spending more on the- for leisure, traveling and transportation, so not so much this year, on the rennovation and property as well. And most of the property actually, properties itself this year, actually, inventory property. So it's already been completed in the previous year or on the like, more than a half finished. So not so much needed or consumed bag cement. So, I think that's what affecting the demand for bag, and then because people also would like to be more cautious and to saving more this year, because they see that what could happen in outlook 2023. I think that's also impacted the bag demand.

Madhav : And in terms of outlook for recovery for the next one or two years, you know, Indonesia, like I would think like India is, it's under penetrated market and there's a lot of new houses that should be built. So I mean, when do you think demand growth comes back?

Hosny : Yeah, this is Hosny. Just like Febri explained. So we see post COVID I think the way that people consumed this year is more to tarvelling, leisure and fulfill their basic needs, while the property market, this is filled with inventory of properties which already finished or semi-finished. Next year I will say it's a political year in Indonesia. I will say that basically next year with all these economic situations going on in Indonesia, inflation push, I think it's going to be if there's an increase, still going to be a gradual increase. But I think the big momentum will come in 2024 onwards. So I would say it's starting 2024-2025 after the election, the new office is coming to the administration. And I will say, it will also boost the infrastructure projects in Indonesia. And that's actually the biggest matter to increase again the demand. And I was hoping that because we're still underpenetrated, we're still optimistic on 3-5% growth on the next two to three years, I mean, it could be possible magnitude situation, because you know the market has been very soft since after the pandemic until, I would say, next year.

Madhav : Got it. And my second question was more on the margin side. So despite new competition, and coal price volatility, we've managed the margins quite well, which is very commendable. So how should we think about, like competitive intensity? Like do we think the two new entrance from last year ramped up their capacities? Or do you think there could be some more pressure from that side next year, or just broadly how you're thinking about pricing power and competitive intensity, and then the impact how it has on margin?

Hosny : So, I don't think there will be a new capacity coming up in the market. There will be no further installations of new capacity in the next two to five years. Purchasing power wise since, you know, the requirements for cement, as long as we still have the development in property and also the infrastructure and considering also the price for cement in Indonesia per capita is still very low. I would say there is still quite a big purchasing power in the market. And it's- for us, we already find the most optimum way of operating this business, in terms of the cement business itself because it has been going on. And we've tested and we've actually done a lot of new processes in our operations. So, we are very confident that we should be able to manage cost management and as also been described in our previous meetings, that we have one of the pillars on strategies to strengthen our backbone in how we manage the market and control the market up to the stores level, optimizing it with the supply chain, as you also already heard on the news that we are also working together with financial institution to support financing of the stores up to the retail level. So it will give multiplier effects in terms of purchase power and will also improve margin furthermore, when we see this an opportunity to increase price in line with the increase in the demand going forward. So, we're pretty confident in terms of managing the industry.

Madhav : Understood, and just the last question from my side. I think we have secured supply for coal under the DPO for CY 22. That's fine understanding as we go into CY 23. Do we continue to have the low price coal available? Like how should we think about it? And does that hold true for the entire cement industry in Indonesia? Or will we get, sort of, more preference on supply of this DPO?

Hosny : Okay, so there's no question anymore in terms of the fulfillment condition. We already completed to 100% and next year up until now we should be able to reach up to 65% of completion on getting the DMO price for the next year. And for us, as long as we are able to manage the

overall costs, and manage the top line in terms of how we deliver the products, provide solutions to the customers and also ensure that all the supply chain is even more efficient. I think, for us, in terms of the coal price is no longer any issue of how it impacted our profitability. And I think, up until nine months, we already be able to maintain our profitability. And I think our four pillar strategy is actually going to the right track, to the right direction. So I would say, we make sure we are ready to basically face whatever the new challenges in market and try to maintain or even increase further our profitability margin.

Madhav : Okay, and the carbon tax implementation. Is there a timeline? Do we know that if 23,24 like, is there a specific timeline?

Hosny : So basically, there are two milestones. The first milestone is until 2030. Until 2030, basically the mechanic is that we have to reach below the two-degree scenario, which is already in our ESG framework. And actually it's going to the right directions with programs to increase our TSR- thermal substitution rate, also reduce our clinker factor. As long as we can reach that, we are good to mitigate the impact of the carbon tax whenever the government planned to implement it. Up until now we still don't know, but our focus is to get to below the two-degree scenario by 2030. So that's our focus. We don't want to know when the government- even if they weren't, they will implement or even not, but what we focus is actually on 2030 get below two-degree scenario. And then after that, we have the 2060, which is the net zero. That's when we have to make sure that our debit side and our credit side on the carbon is actually mapping to become zero. Some of the initiatives that we are looking- we haven't, you know, put that as a definite work programs, because we still have time actually until before 2030. Number one of the options is to install carbon capture, and number two, we could increase the carbon credit by one of the option is to invest on sustainability energy, and then waste management, and some other initiatives. That's actually the program that we find to formulata this in the future.

Madhav : Sorry, so if I understood it right, basically you're saying that we have certain targets, which you set out for 2025, 2030, which is there in your presentation. As long as we are under those emission targets, even if government implements carbon tax, there is not going to be a financial impact on us? Then that's fine with us. Is that what you're saying?

Hosny : Yes, that's right. So the focus is basically 2030 we have to be able to reach below the two-degree scenario. As long as the programm is still in line, it's actually within the right glide slope for us to be away from the carbon tax radar.

Madhav : Oh okay understood, I'll come back in the queue, thank you very much.

Radityo : Okay, thank you Madhav. And the next question comes from Arnanto Januari. Arnanto you may unmute yourself and ask your question. Thank you.

Arnanto : Thank you. A couple of questions from my side. Number one, second back on a demand. Can you give us some color on the demand in October? How's the trend? And second question, I think raw materials went down pretty significantly in the third quarter, compared to the quarter before. What's the reason behind this? And what is the outlook for raw material costs in the fourth quarter and going forward? Question number three, could you give us the split between power and energy costs? I think on a normal year before COVID, I think it was pretty much 50:50. But what's the split right now? And lastly, on pricing. Have you guys done any price hikes since June? Thank you.

Febriandita : Okay thank you Arnanto. So, demand for October we see that demand is year on year still decreasing by previous years. And we see that that's apply for all industries, all cement industries. And month on month might as well, October tend to be weaker compared to the September but we need to see, in September later on. By next week we can release our volume as well as the industry volume. And for the raw materials for the third quarter decrease, we tend to want you to see the for the second quarter- it will be better if you use the first half numbers divided by the first half volume. So that will represent the correct- more representative numbers for the raw material cost per ton. Because there's slightly difference in allocating the raw material for subsidiaries in the first and the second quarter this year. So, actually our raw material cost per ton relatively stable, despite the- some incrementals in terms of raw materials pricing, but we are able to be more efficient on the consumption index of the raw materials. So we can relative- the raw material cost per ton is relatively stable.

Hosny : Yeah, and I think it will be maintained until the Q4. So that's actually already part of the program that we have done and going forward until Q4 in terms for indexing and cost per ton basis. Coming up with the energy and electricity, so last year, our fuel contribution to our cost is 13.3%. And this year went up to 16.7% from the revenue. So 16.7% of the revenue. While the electricity actually is pretty much stable, around 10% of the revenue. Because I think- because of the price there is no change in terms of electricity per kilowatt hour price and also the indexing also, we are able to reduce you know. It's not that big in terms of the reduction of the index in electricity. But for the utilization of coal, I think if you compare it to the increase of the price, there is a bit- there is quite huge efficiencies in terms of the index in terms of the fuel. I think, in terms of the index, last year was 0.23 composite wise, and then we are able to reduce to 0.217. And it's quite significant to reduce 0.02 basis points in terms of the index of using the coal. I think we should be able to maintain this also towards Q4. Our composite coal consumption up to September is roughly 895,000. This is actually already include the logistic cost and transportation cost for transporting the coal. We're able to maintain this towards the end of this year also. But in terms of the cost itself, I think we already done the maximum that we can do. I think in terms of the cost management, we can assume the same thus far to Q3 towards the Q4 and we should be able to see pretty much a stable and maintain this position until the end of this year and for the next year also.

Febriandita : And for the rising price increase, we did a price increase in September and October. September it was in East Java. And- so we did this gradually, unlike the one we have done before, because in terms of demand, we see that demand is more soft compared to the first half. So we need to be more cautious on adjusting ASP. In October, we also adjust up ASP in other parts of Java especially West Java, DKI Jakarta as well as in Sulawesi. Oh sorry, on September was in south part of Sumatra, and East Java. And for October Sulawesi and the other part of Java.

Arnanto : And sorry Bu, just a follow up, what was the magnitude of the price increase this time?

Febriandita : Okay, so it's around 2-3% increased compare the last price that we have. Around 2000-3000 rupiah per bag.

Arnanto : Okay, final one Bu. Is this price increase enough to offset the increase in transport costs? Or you know, are you expecting any more price increase for this year?

Hosny : I think the price effect for the transportation cost is actually kicks in in October. But we are trying to compensate it through our increase of price- in October we'd increase the price also. And should be able to cover that transportation costs because the impact of increased of the fuel.