PT Semen Indonesia Persero Tbk : Transcript SIG Conference Call Right Issue

SIG Right Issue Conference Call Transcript

Capital Increase Through Pre-emptive Rights

Date: Thursday, 8 December 2022

Time: 10.00-11.00 am (JKT Time)/11.00-12.00 (SGT Time)

Platform: Zoom Meeting

Panelists:

Mr. Andriano Hosny Panangian - Director of Finance and Risk Management Mr. Andi Krishna Arinaldi - SVP of Business Innovation

Mrs. Febriandita Kusuma - GM of Investor Relations

Mr. Radityo Widinugroho - Investor Relations Senior Officer

[Call started]

Radityo: Good morning, ladies and gentlemen, and welcome to the SIG analyst meeting. Before we start kindly make sure your Zoom display name showed "your institution name_your name". Thank you.

First of all, we would like to extend our gratitude to all of the participants in join the meeting. We have published a public disclosure and prospectus in regards to our Capital Increase Through Pre-emptive Rights on 5 December 2022, and you can access the documents from IDX website or our website at sig.id.

My name is Radit, IR team member of SIG and before we begin, I would like to introduce you to the speakers we have online with us today. We have Pak Andriano Hosny Panangian, Director of Finance and Risk Management, Pak Andi Krishna Arinaldi, SVP of Business Innovation, Bu Febriandita Kusuma, GM of Investor Relations, members of SIG IR Team and also Joint Lead Arrangers team.

Today's call will begin with an opening presentation delivered by our GM of Investor Relations, Bu Febriandita, followed by Q&A session. If you would like to ask a question, please press the raise hand button first on the Zoom platform. When your name is called upon then you may ask your question. Please remember to click the unmute button after the call before speaking. Alternatively, you can type your question on the chat box. Without further ado, I would like to give the floor to Ibu Febriandita for the presentation and thank you.

Febriandita: Thank you Radityo and good morning, everyone. And thank you for joining our analyst call today. As we have published the final prospectus for right issue on Monday 5 December 2022, we would like to directly update you with the information related to the right issue transaction.

So, right issue that we conducted is in regards to the president decree on increasing government capital on SIG with the main purpose is to integrate all cement SOEs under SIG. Government will exercise their right by swapping their 75.51% share in SMBR and according to the evaluation conducted by the independent valuer or we called KJPP, which has been approved by the Ministry of Finance, the value of such share is, for SMBR share, is around 2.85 trillion Rupiah. So, the maximum proceed for the right issue is 5.6 trillion Rupiah.

If a public shareholder exercise their rights, we expect to get cash proceed of 2.7 trillion Rupiah and we are planning to use the proceed to finance the ESG capex of around 1.68 trillion Rupiah

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SIG Right Issue Conference Call Transcript

to support our de-carbonization commitment, through increase internal substitution rate and reduce clinker factor.

We also consider to use the proceed to expand our business in building material sector which can provide higher margin, higher growth opportunity as well as having potential synergies with SIG.

From this slide, you can see the slight profile of SMBR. SMBR is the market leader in South Sumatra. The production capacity is 4.5 million tons with 3.85 million tons integrated plant capacity and around 700,000 tons grinding plant capacity. And SMBR cover around 53% market share in South Sumatra, while SIG currently our market share in South Sumatra is around 15% to 17%. So, if we combine SIG and SMBR market share it will reach around 70%, and it still have high potential to be improved further.

So, during the due dilligence, we see, we expect around 1.7 trillion potential synergy that we can achieve within five years, from the area of Sales and Marketing, Supply Chain Management, Production, Procurement, Shared Services, Financing and so on. So, if we look into the detail in marketing and sales result potential to increase Semen Baturaja pricing as currently, even though they are market leader which represent 30% market share but their price is around 5.6% lower versus our brand. Our brand currently around 15% to 17% of market share. And with a combined market share of 70%, it will be easier for us to increase ASP or to penetrate further the market through cross selling. So, for example, selling our products in SMBR stores, or selling SMBR in our stores, and even acquiring new retail stores that hasn't serviced SMBR as well as SMGR products. On supply chain, we will no longer send our product from Semen Padang plant in west part of Sumatra or from our Java plant to southern part of Sumatra, because it's quite costly. And we can produce other cement needs on Semen Baturaja plant, increase the utilization as well as reduce cost to serve. On production, we can implement the best practice and capability that we already applied into SMBR production. In terms of optimizing clinker factor, increase the thermal substitution rate, and other best practices, such as an alternative raw material, implement lower calorific value of coal and installing plan optimizer to basically optimize production indexes and to reduce the energy consumption. And on the procurement, they can get the benefit of best tariff and economies of scale from SIG, especially for freight costs, raw materials, spare parts, services, and others. And not to mention the potentials synergy that they can get from in terms of financing. So currently, SMBR have 1.5 trillion Rupiah of debt, with interest rates around 9.5%. While SIG, we already have standby facility that can be used by our groups, including later on SMBR which cost of debt of around 6.5% interest rate. So potential interest rate savings should be around 3%.

And if you look at here in our slide, it can give you highlight of our figure or our financial performance post the integration, we use audited 2021 numbers here. And we expect improvement in all level, especially in EBITDA, EBITDA margin, net profit, and ROIC after including this synergy you can see here all are improving.

So, as I mentioned before, that the cash proceeds from the right issue is planned to be used to finance our ESG capex of around 1.68 trillion Rupiah. The capex is mainly for increasing the capacity of our feeding facility that allow us to consume more alternative fuel and raw material, which resulting higher thermal substitution rate allowing us to have a lower clinker factor, lower emission as well as efficiency in fuel costs. So, every 1% increase in the thermal substitution rate, we expect to be able to contribute 40 billion Rupiah reduction in fuel costs assuming using coal at DMO price, and every 1% reduction in clinker factor, we expect to get a result of COGS decrease around 4000 Rupiah/ton cement.

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And, also as I mentioned earlier, that we also consider to use the cash proceed to support our initiative in expansion into building material business. Currently, we are still doing the early study on this, we are mapping some types of building material products and we categorize each based on the profitability and the type of products whether it's a commodity type of product or brand sensitive products. So, we consider brand game product to be more suitable currently, as it provided better margin. And there are some potential synergy with SIG that can- that we can leverage by integrating SIG with the building material industries. So, what we want to leverage is literally our current distribution channel and logistics. We cover more than 70,000 building material stores. We operate 10,000 trucks and covering more than 3,000 routes in almost all areas in Indonesia. So, we currently consider either paint, ceramic roofing or ceramic tiles as what we see now, those three types of products currently serve a high margin, with high growth potential and in terms of demand and having potential synergy with our capability.

And then referring to our public disclosure and final prospectus on capital increase through preemptive rights, the maximum new shares that we're going to issue assuming 100% shareholders exercise their right will be 846,215,318 new shares with nominal value of 100 per share. And the maximum proceed will be 5.6 trillion Rupiah, the ratio of right is every 100 million old shares would be eligible for 14,266,416 rights with the pricing for each new price would be 6,600 Rupiah. So, in deciding the exercise price, we consider historical discount-to-TERP and the feedback from investors in NDR that we have done previously. And in terms of the timeline, the last date of stock trading with the pre-emptive rights or cum-right will be on 12 December 2022. The start date of stock trading without pre-emptive rights or ex-right will be 13 December, the last recording date to obtain the pre-emptive right is going to be 14 December. Distribution of pre-emptive rights certificates will be on 15 December. And the pre-emptive rights registration, payment, and exercise period will be on 16 to 22 December. The delivery period of shares is going to be during 20 to 26 December 2022. And the last date for additional new shares payment if there are a shareholder with additional order and shareholders that did not execute the rights will be on 26 December. On 27 December will be the date for additional new shares allotment. And 28 December is going to be the refund date. And this right issue will allow shareholders to order new shares more than their portion and the allotment mechanism will be carried out proportionally based on the number of pre-emptive rights that has been exercised by them. And arranger that has been appointed for our right issue transaction is Mandiri Sekuritas, BNI Sekuritas, and CGS CIMB. And the share registrar to support the administration is Datindo Entrycom.

So that's the update that we would like to inform you this morning and we can continue to the Q&A session. Please Radit.

Radityo: Thank you Bu Febri for the opening presentation. Ladies and gentlemen, if you have any question, please press the raise hand button or you can write your questions in the chat box and I will read it by myself.

Once again if you have any other question, please press the raise hand button and I will call your name to ask the question or alternatively you can text your question on the chat box.

Okay, we have our first question come from Rafdi Prima. You can ask your question Rafdi. Thank you.

Rafdi: Hi Pak. My question would be about SMBR going forward. How do we expect the utilization rate in next two years for the SMBR Baturaja? And how SMGR will have the cost of financing of

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SIG Right Issue Conference Call Transcript

the cement Baturaja? Is there any specific or certain action to be taken in next one year? Thank you.

Hosny: Okay, I think, let me answer this question. So as we explained, basically, after the acquisition, the market in South Sumatra will be dominated by our group around 70% to 75%. And currently, we are delivering the products from our Semen Padang and some actually from our cement Tuban also. With this new facility in South Sumatra, means that basically, we are going to optimize the utilization for our brands and also sales in South Sumatra using the Baturaja plant. So currently, Baturaja utilization around 50%. So, and then after the merge it will theoretically goes up to around 70% to 75% utilization, because the utilization that we provide from our other plant will be actually moved to Semen Baturaja for the production. And what we're going to do with the capacity that we use to use for the products that we send to South Sumatra, we're going to optimize that, depending on the market situation in domestic. If let's say the domestic is- the condition is not increasing aggressively, then we want to utilize the position for export market. So, we want to optimize still the utilizations on our other plants for the export market, because we have the capability. And the price- also the market price for the export market countries is actually pretty good. We still can get contribution margin of around $10 currently, you know, with the market price. On top of that, also if we consider also the foreign exchange USD and IDR, we can get another potential 2-3% increase. So even if we include all the fixed costs, we still have quite a bit of a margin of around $3 to $4 using set by selling the clinker for the export market. So that's the answer.

On the second question. Currently, we are finalizing the sustainable-linked financing. We already- our debt structure mix currently already around 60% fixed. And then 40% we leave it as floating, but we're going to convert all to sustainable-linked financing, which has an ESG covenant on it whereby we already have our ESG framework and also our ESG program towards- until 2030. We're going to also add an accordion facility on our facility in SIG in particular for the Semen Baturaja. So, after the effective consolidation of Batruraja to SIG, this accordion facility will kicks in that has the interest rate around 3% lower than what we're paying right now. Because actually it has a structure whereby it has a cost default with the SIG facility in the holding. So that will impact to the reduction of the finance cost because they still have 1.5 trillion of loan in their book. So that's where the reduction of the finance costs will come from. And it's actually already approved by the syndicate banks and we are actually finalizing this and hopefully by next week or later by the 19th of December we signed the facility agreement. And after the effective of Semen Baturaja in January will kicks in the accordion facility.

Rafdi: Thank you Pak. If I may follow up, my next question will be, besides the financing costs that would be lower, you see more efficiencies that can be applied to Semen Baturaja as we know that the operating margin is really low in Semen Baturaja compared to Semen Indonesia by this point. Any comment on that? Thank you.

Hosny: Okay. Number 1, we come from the first, the largest cost contributors, energy. Energy around 20- 25% from the costs. Currently, the thermal substitution rate in Semen Baturaja is still around 0.5%, right. In some of our plant, like in Narogong, and also in Cilacap already reaching around 14% to 15%. Average for SIG is around 7%. We increase this 1% in Baturaja, it will basically generate efficiency around 40 billion IDR. So that's something that we are targeting to implement, or the in the first year to increase to reach around 5% of TSR. And it's actually not really rocket science, because to basically increase to around 2% to 3%, actually, we only need

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a small processing facility, and also can use the biomass for replacing the coal. That's number one.

Number two on the raw material. We actually see an opportunity for using a more efficient products and raw material, like for example, purified gypsum. Currently basically they are only using it around 70% and we are going to increase it around 90%. And then in regards to optimizing the plant, because our integration team already in Baturaja, looking around at basically making sure all this synergy will happen immediately, in the first year. We see that the plant optimizer system that we are now currently using, it's actually will provide, you know, efficiency in terms of utilizing the plant that can also impact to the reductions or maintenance costs. And also, if you see from the distribution, and also the cost to serve, it will also bring, you know, more efficiency, because now we are no longer sending the products from our Semen Padang or our other plants to target the market in South Sumatra.

Rafdi: Thank you.

Radityo: Okay, thank you Pak Rafdi. Next question comes from Robin. Please go-ahead Robin.

Robin: Hi thank you Pak Hosny, Mba Febri, and Radit. So, I guess first off, will these slides be shared with us after the call? And secondly, on the sort of the new entity, the capex? When are we likely going to see that coming into actualization? And at this point, is there, sort of, which of sub segments are we likely to see greater likelihood of SIG entering in? And thirdly, I guess thank you for sharing this synergistic angles. But I think, can we sort of have a look at the other angle to this thing? So, could you perhaps share that sort of projected top line post merger in 2023, and also the projected bottom line? That will be all for now. Thank you.

Hosny: Yeah, so the proceeds that will come from the public shareholders, partly we're gonna use to make sure that our ESG program will come into the picture faster than planned, because we need to make sure that we get the benefit of the incremental thermal substitution rate. We're going to try to utilize this first to make sure all of our plant can get even higher thermal substitution than our target, including the Baturaja.

Secondly, on the expansions to our portfolio, so we have two things. Number one is basically expanding the portfolio not only cement but also to other building material. The structure that we are thinking is not directly acquisitions because the multiplier effect is actually- multiple is actually already pretty high in some of these markets. So, we're going to use, you know, the structure either we're going to do a JV or also co-branding and more utilizing our distribution network as catalyst and also our retail coverage as a catalyst to basically increase our EBITDA composition from non-building material. Secondly, is looking into the potential also to utilize our resources in limestone, because if you see the function of this limestone, we can also enhance the usage for certain building material and we can process it to become derivative of other- of chemicals that can be useful for building materials such as the AAC and also the paint itself, ceramics as raw materials that they can utilize. Thirdly is on the logistics. The logistics, as I mentioned, the cargo consolidation, when it comes into the play, it will bring also a value add whereby it's an ecosystem that can be utilized by other products, including also the initiative that we're going to do with this other building material potential. And it also bring the value add not only reducing the logistic costs, but also potentially give a revenue stream, new revenue streams from this logistic distance. And then the last one is actually on the how are we going to utilize the- our cement derivative products like readymix, and also we have mortar right now. It's a quite a sizable market, and I think what we're gonna do is more into looking into the channels to increase the revenue stream

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