PT Semen Indonesia Persero Tbk : Earnings Call 1Q Transcript

SIG 1Q 2022 Earnings Call

Date: Monday, May 30 2022

Time: 01:00 - 02:00 PM JKT Time Zone

Panelists:

Mr. Andriano Hosny Panangian - Director of Finance & Risk Management Director Mr. Aulia Multi Oemar - Director of Business & Marketing

Mr. Agung Wiharto - Director of Human Capital & General Affair Mr. Antonius Ardian Bermana - Chief of Strategy

Mr. Hasan Arifin - SVP of Finance Mr. Hadi Setiadi - SVP of Procurement

Mr. Oepoyo Prakoso - SVP of Sustainability Office Ms. Vita Mahreyni - Corporate Secretary

Mr. Nova Kurniawan - VP of Financial Plan & Analysis

Mr. Fajar Aristyanto - SM of Production Planning & Management Ms. Febriandita Kusuma - GM of Investor Relation

Febriandita: Good afternoon, everyone. We would like to thank you for joining our first quarter result earnings call this afternoon. I'm Febriandita Kusuma, Investor Relation of Semen Indonesia as the moderator for today's earnings call. We would like to remind you as well to fill the registration form from the link that we put on the chat box. And before we begin, let me introduce today's panelists. I have Bpk. Adriano Hosny Panangian as Director of Finance and Risk Management. I also have Bpk. Agung Wiharto as Director of Human Capital & General Affair, and present as well here Bpk. Antonius Ardian Bermana - Chief of Strategy, Bpk. Hasan Arifin - SVP of Finance, Bpk. Hadi Setiadi - SVP of Procurement, Bpk. Oepoyo Prakoso as SVP of Sustainability Office Ibu Vita Mahreyni as Corporate Secretary, and Bpk. Nova Kurniawan - VP of Financial Plan & Analysis as well as Bpk. Fajar Aristyanto, from production management. So we have quite a comprehensive team to hopefully able to address your concern this afternoon. And on today's call, we will present SIG performance for the first quarter 2022, which we publish on 27 of May 2022, through the IDX website and our website, sig.id. And our presentation today is available at our website and the presentation will be divided into three parts which are key highlights details of financial performance, SIG strategy and action plans. And as disclaimer this presentation contains several forward-looking statements which are based on current expectation and estimates of future events that may be affected by risks, uncertainties and other factors beyond our control, which may cause actual results to differ materially from historical results or expectations. So, to begin, I would like to give the opportunity Pak Adriano Hosny for the key highlights presentation. Please Pak Hosny.

Hosny: Thank you so much Bu Febri. So we published our audited interim cue quarter one 2022 on 26th ya, on 26th of May. In the first quarter, we recorded an increase of revenue around 0.7% mainly from the increase of average selling price of cement around 7.2%. Our ability to manage

the cost of the production and also our, our good relationship and ability to get most of our coal requirement with the domestic price obligations in the first quarter resulted in a more manageable cost of goods sold. And in addition to that our operational excellence also resulted in a more efficient operational expenses on top of our deleveraging program, which could reduce further our finance costs in the first quarter. And therefore our earnings after tax could increase around 7.7- 10.7% year on year. On the back of this result we also have put forward a robust strategy to manage our operational excellence and also our sustainability and ESG agenda. From the operational excellence side we have mainly focus on to further reduce our dependency of fossil fuel requirements and substitute some of our electricity with more environmental friendly source such as solar panel and we also enhance our ability to penetrate the market with a digitalization and enhancement of our business process.

So therefore, we can get a more efficient way of operating and also to consolidate our logistic with what we call optimizations on the cargo consolidation. On the ESG front, we put forth a robust plan on the scope 1, which is the internally processed production activities to reduce further our emission to be below on the target standards of IAE. And in order to do that, we also have put an agenda to increase further our thermal substitution rate and to reduce further our clinker factor, and these two sides besides can also reduce our emissions target, it also can reduce further our costs because main contributor of the cost now from the fuel costs mainly from the coal, we can substitute with more environmental friendly energy per source of fuel.

The second scope is basically to reduce our requirements for electricity using the fossil fuel and increase the electricity source from the solar panel. And these two items, hopefully we could target until 2030. Furthermore, I think in terms of our strategy and in the market, we are balancing out our strategy to increase price while also maintaining our dominance in several areas. And we are using or optimizing our strong five brands to fight in the market more delicately and more cautiously. So, therefore, the usage of economic brand will be utilized in a more proper manner to basically maintain our, you know, presence in certain market around Indonesia. I think, on the back of that, we also have put forth a plan to re-profile some of our loan this year into sustainable linked financing. Basically, this is to show our focus on our ESG agenda whereby with sustainable linked financing, then we also have to commit on achieving a KPI for our ESG target. And this will show our focus and commitment on our ESG agenda. Because if we fail to do so, it will get, you know, consequences on our margin and also interest expense going forward. Now, to explain further for you on our presentations, I will let Bu Febri to continue.

Febriandita: Thank you Pak Hosny. Maybe to the next slide, please. Yes, so this is the net profit bridge to show you what's changing from the first quarter 2021 to 2022. The contribution of the incremental in net profit bridge are basically from the increase in revenue growth even though in terms of total volume we record a decrease, but in terms of revenue per ton was increased and resulting in 60 billion Rupiah improvement in revenue. And in COGS, as you might know that we experience a significant increase in coal price in terms of in the market however, we are able to secure better pricing with the DMO and integrated procurement for strategic items including coal that allow us to manage the incremental only 181 billion Rupiah in the first quarter. And then in

terms of operating expense, we are able to reduce as well by 74 billion Rupiah, mostly from the decrease in promotion as well as labor costs. And on the other expense and or income, we improve 96 billion, mostly is from the 116 decrease in interest expense as we have lower interest bearing debt compared to last year. So, if you can move to the next slide, here in terms of breakdown from the 0.7% revenue growth mostly contributed by increase in bulk sales volume, which increased 8.2%. And that improvement in terms of sales volume in Java Island as you might know that the margin is higher compared to outer Java and we were able to increase by 2% in the first quarter this year, and that regional sales recorded lower 29% compared to first quarter last year mostly because we are focusing on domestic and because we need to secure the coal availability to serve the domestic production and sales. And in terms of revenue per ton, we record a 7% increase from 833,000 to 891,000 in the first quarter mostly contributed by the increase in the domestic selling price by 2.3% and regional selling price by 27%. And in terms of proportion as well domestic sales volume that in terms of price is higher compared to regional price as well increased by 7% compared to the first quarter last year. And moving on to next slide.

On the cost side, even though our costs of revenue recorded increase, but the incremental is quite manageable, because if we compare to the industry coal price has been increased by almost 100% in the first quarter this year compared to last year. However, we are able to maintain the incremental of fuel and energy costs by 36% only in the first quarter because we're able to secure the most of our coal procurement using the DMO price which is around 47 US dollar per ton FOB. And on the other costs, we are able to be more efficient. You can see here that non fuel and energy COGS decreased by 3.2%, mostly from the efficiency in raw material as we are able to reduce the clinical factors by 1% this quarter compared to first quarter last year. And then operating expense also decreased 5.7% due to promotion and labor costs, finance costs as well decreased by 26% through the lower interest-bearing debt balance. And from that, we are able to report higher net profit that increased 10.7% and net profit margin increased by 0.5%. And if we compare to the peers, because we are able to record higher revenue per ton growth, lower COGS per ton growth and lower growth in fuel and energy cost per ton, we are able to achieve EBITDA growth that is only contracted by minus 3.5%, if we compared to peers that has been contracted around 30% and EBITDA margin expansion just decreased by minus 1%. While our peers contracted by minus 7.2%. Net profit we are able to record growth by 10.7% and our peers decrease almost minus 50% and net profit margin we are able to record 0.5% improvement while other peers record minus 4.8% in the first quarter of 2022.

And as Pak Hosny mentioned before maybe in the next slide, that we are moving forward we are focusing on four Strategy.

The first one is domestic market leadership and then moving closer to customers with a solution and products, operational excellence and value chain digitalization and the last one is driving sustainable growth. If you look at the initiative, one by one and the next slide and in terms of domestic market leadership, we are basically going to strengthen more our present in retail market as well as in the bulk market. We have five strong brands that are premium in each area and we are we are still able to leverage those brand by selling at a more premium compared to competitors. And we are also our focus is basically to make sure that we are available in every layer and and

can serve all types of customers that are brand sensitive as well as customers that are price sensitive. And we develop this strategy selectively based on the situation competition level of competition and situation in each area. So, for example, in West Sumatra, where we have very significant market share and very low competition only two competing brands other than us and our market share there is almost 100%, 96%. So, there we are able to strengthen our brand equity and selling at the very premium price. And compared to that, if we see the East Java, we have eight competing brands, so it's the competition level is different. So, here we introduce the Semen Padang as a competing brand for example. So, basically, it's to manage our market share as well as to be available for the customers that are more price sensitive. And in the bulk market, we already actually already have secured 75% share of wallet in 2021. Basically, for the for the national strategic projects, and we are aiming to increase our share of wallets in those projects by serving various tailor-made solution for the specific project requirements and supporting as well by the nation one, nationwide production and supply chain facilities that we have along Indonesia.

And the second strategy we are not only focusing on the existing market, but we are aiming to tap into the new market with the new product, we have developed various product value added products for example, we are addressing the 12.75 million units backlog housing that need to be that become a homework for the government. So, the government now in 2022 planning to build around 240,000 units of cheap house for the low-income groups. And we are aiming to support that initiative through our product called Dynahome that able to serve or build the small house in four times faster. So, in terms of cost and time is faster as well as maintain the quality. And then we also have developed value added, various value-added products with better margin like SpeedCrete, that is fast drying concrete and then ThruCrete that able to help us to have more area to prevent from flood. And then we also have mortar, is instant cement, as well as Masonry cement that is cement with a lower clinker factors and suitable for non-structure application based. So basically, it's also in terms of costs, it's lower and can serve our target to reduce emission or de- carbonization. And we also want to increase our involvement in how we can support to small infrastructure programs in village level that mostly supported by the government budget.

And then to the next slide is we are continuing to improve our operational excellence; we implemented utilization and apply industry best practice. So, for example, we are in progression of implementing plant optimizer to basically able to optimize our production process, the index as well as composition and consumptions of materials and energy. So hopefully, we are aiming to secure our or to be more efficient in terms of electricity and thermal consumption by 2%. And at the end, we'll achieve improvement in overall equipment effectiveness that we aiming to achieve around 85% based on the industrial leading practice. And then we also want to implement solar panel. Now it's still small in terms of portion but we are aiming to increase the portion to 25% in 2025, and hopefully it would it is expected to reduce the tariff by up to 15%. And then we also aiming to be more efficient in terms of distribution costs by implementing backhauling cargo consolidation, as already mentioned before by Pak Hosny, and estimated to be able to serve to reduce freight costs of around 10%, when it's 100% implemented.

And the last but not least, our commitment to the de-carbonization, it's very important for us. We are, previously, our target is only 18%. But we are revisiting our target up to 2030. We benchmark

with the International Energy Agency's. The standard is at least to reduce to 520 kilogram CO2 per ton cement equivalent. And we are aiming to achieve 493 kilogram CO2 per ton cement equivalent in 2030. So, it's translated into 30% reduction compared to baseline 2010. And how to achieve that, we would conduct two approach. First is to increase the thermal substitution rate. Currently, we are at 5.5% level and we are aiming to achieve 20%. And to also reduce the average clinical factors, currently, we're at 70% and we're aiming to achieve 61%. And not only focusing on target CO2 emission intensity scope one, we also put strategy to put target to reduce to emission scope two as well. So, we expand as well our focus to scope two and we are aiming to reduce up to 24% in 2030. And how we achieve that? It's through two approach, first is to implement a plan optimizer as well as to implement solar panel to replace some portion of our electricity consumption. So, I think that's what we can deliver now. And we are we can now move the Q&A. So, if you have any question please raise your hand and we will allow you to unmute your speaker.

Febriandita: Okay, we have Madhav Marda. Can we allow, allow to unmute please.

Madhav: Hello, am I.. (unclear voice)

Febriandita: Yeah Madhav, you can unmute yourself.

Madhav: Hello, I'm on the below. Can I speak?. Hello? Hello?

Febriandita: Hello

Madhav: Yeah, can you hear me?

Febriandita: Yes, we can hear you Madhav.

Madhav: Sure, sure. Yes, so my question was, what percent of our coal requirement is coming from DMO, like in the last two or three months or last six months. What percent of coal is DMO?

Febriandita: Okay, Pak Hosny?