12. Financial Position and Operating Performance

Summary of Auditor’s Report

  Auditor’s Office : KPMG PHOOMCHAI AUDIT LTD.

  Names of Auditors: MR. VICHIEN THAMTRAKUL

 Auditor Number 3183 or

MR. WINID SILAMONGKOL Auditor Number 3378

From the audits carried out upon the generally accepted standards, the
auditors formed the opinion that the financial statements of The Siam
Cement Public Company Limited and subsidiaries present fairly, in all
material aspects, the financial position as at December 31, 2004, 2003,
and 2002, and the result of their operations and their cash flows for
the years the ended in conformity with generally accepted accounting
principles.

 

 Consolidated Financial Statements and Financial Ratios

of

The Siam Cement Public Company Limited and Subsidiaries

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 Financial Statements and Financial Ratios

of

The Siam Cement Public Company Limited 

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Management Discussion and Analysis

Operating Performances and Financial Position of The Siam Cement Public Company and Subsidiaries

Business Overviews

The Siam Cement Public Company Limited reported 2003 Consolidated Sales
of Baht 148,865 million, representing an increase of Baht 20,664 million
or 16% over last year. Domestic sales rose 20% whereas exports increased
8%. These increases were attributed primarily to the strong performance
of the petrochemicals Paper and cement divisions.

The Company and its subsidiaries accomplished net profit of Baht 19,954
million, an increase of Baht 5,350 million or 37%. Moreover, Operating
Profit Before Extraordinary Items registered 17,806 MB, a growth of 60%,
a result of strong performance of the Cement Business and the
Petrochemical Business. The business units with highest profit are
Petrochemical, Cement, and Paper and Packaging Businesses.

Equity Income in 2003 totaled Baht 6,747 million, up 19% or Baht 1,070
million from last year, with contribution from the following:

-   Baht 3,962 million from petrochemicals’ associates, mainly in the
    SM, MMA, and PTA businesses, representing an increase of 26%.

-   Baht 2,785 million from other associates, mainly in the tire,
    automotive parts, and steel businesses, representing an increase of
    10%.

Due to the Group’s restructuring, it reduced some investments in its
affiliates such as Thai Tokai Carbon Products Co., Ltd. Besides, it sold
shares and warrants in Millennium Steel Public Company Limited. In
addition, it sold parcels of land at Don Muang and Sathupradit in
Bangkok as well as at Amphur Cha-am in Petchburi. Gain on investments
and assets sold for restructuring, provision for decline in value of
investments, and others - net of income tax, totaled Baht 2,148 million.

In 2003, the Company and subsidiaries’ Cost of Sales and Operating
Expenses ascended 12% from previous year to Baht 135,470 million. Cost
of Sales increased 15% as a result of surging domestic and export sales.
Interest and Financial Expenses declined Baht 1,937 million or 19%
because the Group was able to lessen its net debt of Baht 11,445 million
from operating cash flows. Selling and Administrative expenses rose 10%
from normal business operation.

Provision for Income Tax in 2003 grew Baht 1,425 million or 57% to Baht
3,944 million. This was a consequence of (1) Corporate Income Tax for
the year, increasing Baht 606 million or 52% to Baht 1,778 million (2)
Deferred Income Tax – net, augmented Baht 819 million or 61% to Baht
2,166 million.

Operating Performances of Strategic Business Units

Petrochemical Business

Year 2003 was characterized by highly volatile pricing and demand
scenario of the first half, especially from the Middle East War and SARS
outbreak in the second quarter. The second half witnessed solid recovery
of margins on the build-up of intrinsic demand, tight supply, and high
energy prices. Moreover, the price gap (Naphtha to HDPE) during 2003
improved to $350/ton, compared to the $310/ton in 2002. Polyolefins
sales volume grew 3% from last year, benefiting from the 11% increase in
domestic demand as a result of the general health of the domestic
economy, while 2003 export ratio dropped to 40% from 44% in 2002.
Moreover, SCC’s petrochemicals operations continued to run at full
utilization.

Sales in 2003 improved 20% to Baht 50,767 million, attributed primarily
to higher product prices, while Net Profit increased by 47% to Baht
7,777 million, benefiting from the strong performance of the
subsidiaries in the olelfins/polyolefins business and increased Equity
Income from Associates. The Equity Income perceived a 26% climb from
rising MMA price and PTA capacity expansion whereas Styrene Monomer’s
profit is still strong.

Paper and Packaging Business

Sales in 2003 improved 15% to Baht 33,564 million on higher domestic
sales volume that commands better prices compared to exports. Sales
volume also resulted from production and service efficiency improvement
as well as major shareholding in United Pulp and Paper Co., Inc.,
Philippines. Operating Profit gained 4% at Baht 4,231 million.

Industrial Paper : Domestic sales volume of Industrial Paper in 2003
grew 2%, benefiting from the overall health of the domestic economy and
export growth, while export sales accounted for 24% of the total sales
volume, the same as 2002. The policy to develop Indochina to become
chief export markets led to its sales growth. Prices of Industrial Paper
remained steady for much of 2003, trading in the relatively narrow range
of $403/ton - $433/ton. Furthermore, delegates were sent to help improve
marketing, production, and raw material procurement systems at United
Pulp and Paper Co., Inc.

Printing & Writing Paper : Domestic sales volume of Printing & Writing
Paper in 2003 increased 10% as a result of continued strong demand from
the retail, printing, and advertising sector, while export sales dropped
to 20% of the total sales volume from 24% in 2002. Key export markets
were the U.S.A., Hong Kong, Singapore, Vietnam, and Malaysia. Prices of
Printing & Writing Paper remained constantly in 2003 at the $712/ton -
$724/ton range. In addition, the Business has developed the Web Ordering
System via the Internet for clients and helped develop their warehouse
management.

Container : Sales volume ascended 10%, mainly from exported frozen food
industry and electrical appliances, which recorded a high growth
together with relocation of production base to Thailand. The Business
has employed the Good Manufacturing Practice to upgrade production and
safety standards for food industry. Besides, it provided packaging
knowledge for general entrepreneurs and the ones in the “One Tambon One
Product” (OTOP) project.

In the first quarter of 2003, The Siam Pulp and Paper Public Company
Limited purchased all newly issued common shares of Thai Cane Paper
Public Company Limited for Baht 1,000 million, representing 40% of all
outstanding shares. In the fourth quarter, it acquired 9.99% more at
Baht 623 million, making its interest 49.99% as at December 31, 2003
(Direct and indirect shareholding by the Siam Cement Public Company
Limited equals to 49.05%).

In the second quarter of 2003, The Siam Pulp and Paper Public Company
Limited purchased 3.15% additional outstanding shares of Phoenix Pulp
and Paper Public Company Limited for Baht 284 million. As a result, the
Company’s interest in this Company as at December 31, 2003 becomes
64.41% (percentage of direct and indirect holding of the Siam Cement
Public Company Limited equals to 63.19%).

In the third quarter of 2003, The Siam Pulp and Paper Public Company
Limited purchased outstanding shares of United Pulp and Paper Co., Inc.,
Philippines (UPPC) from a group of foreign companies for Baht 424
million. Consequently, its interest in UPPC changed from 43% to 88%, and
UPPC then became a subsidiary of the Siam Cement Public Company Limited.
In the fourth quarter, the Company acquired outstanding shares and share
capital increased of UPPC for approximately Baht 3,013 million.
Therefore, its holding in UPPC changed to 99% (percentage of direct and
indirect holding of the Siam Cement Public Company Limited equals to
97%) The Group’s 2003 consolidated financial statements included the
performance of UPPC with total assets and total liabilities of Baht
4,304 million and Baht 285 million, respectively.

In 2003, The Siam Cement Public Company Limited purchased additional
10.88% of shares in the Siam Pulp and Paper Public Company Limited at
Baht 3,262 million, representing 98.11% of total shares.

Cement Business

The domestic construction industry continues to be strong, particularly
the residential construction sector, aided by continued low interest
rates. However, domestic cement demand growth from the commercial and
government infrastructure projects was a laggard from 2002. This
combination resulted in the 2003 domestic cement sales of 9.1 million
tons, up 5% over last year, while export sales volume registered 6.2
million tons, down 18% from 2002.

Benefiting from the normalized domestic cement prices throughout the
year, 2003 Sales increased 12% to Baht 30,552 million. This accompanied
the rising demand of every domestic product stimulated by the recovery
of the real estate sector. Net Profit climbed 165% to Baht 5,313
million.

Grey Cement : Net Sales increased 17% from a domestic rise of 26% and a
little drop of exports to command better return on local sales.

Ready-Mixed Concrete : 25% addition of Net Sales relied on increasing
domestic demand.

White Cement : Total Net Sales accomplished 4% more while domestic and
export sales improved 8% and 14% respectively.

Dry Mortar : Total Net Sales rose 50% with local sales increase of 55%.

Refractory : Net Sales grew 3% based on additional 48% exports.

Building Products Business and Distribution Business

As a direct benefactor of the domestic up-swing in residential
construction boom, the Building Products Business witnessed strong
demand for roofing products and ceramic tiles nationwide, particularly
towards year’s end. For 2003, sales increased 13% to Baht 18,147
million, driven by increased middle to high-end roofing product sales
volume of 37% and ceramics sales volume growth of 18%. With increased
production efficiency stemming from the higher plant utilization rates,
Operating Profit grew 48% to Baht 2,253 million. Exports climbed 4% with
main products in ceramic floor and wall tiles, composing 80% of total
exports. Major export markets consist of the U.S.A., ASEAN, Australia,
and Europe.

The Distribution Business witnessed further active growth, with sales
growth of 8% to Baht 56,551 million from higher sales of building
materials to satisfy the residential housing construction sector.
Operating Profit dropped to Baht 251 million, compared to Baht 586
million in 2002, largely as a result of the bad debt write-off.

Financial Position

Assets

Total assets of the Company and subsidiaries as at December 31, 2003
valued Baht 249,726 million, an increase of 6% over 2002. Key components
of total assets are Net Plant, Property, and Equipment at 29%,
Revaluation Surplus 28%, and Investments in Shares and Long-Term Loans
to Affiliates 20%. Ranking of asset values by business units is
Petrochemical, Cement, and Paper and Packaging Businesses respectively.

Current Assets : Equaled Baht 39,216 million as at December 31, 2003.
The main proportion was: Inventories 52%, and Trade and Notes
Receivables 34%. The Company and subsidiaries provided allowance for
doubtful accounts-trade at Baht 1,296 million, complying with their
accounting policy of setting up allowance for doubtful accounts, which
deemed sufficient to absorb possible losses.

Investments in Shares and Long-Term Loans to Associates and Other
Companies : Increased Baht 13,789 million or 39% from last year. Most
resulted from: Investments in Shares on Equity Method at Baht 2,595
million, and Available for Sales Securities – at Fair Value at Baht
10,876 million. The latter stemmed from The Aromatics (Thailand) Public
Company Limited at Baht 7,949 million and Thai Olefins Public Company
Limited at Baht 2,991 million (In 2002, it was recorded at cost for Baht
1,133 million). Thai Olefins Pcl. was transformed from a private company
into a public company on May 13, 2003.

Revaluation Surplus : Starting in the 1997 accounting period, the
Company adopted a policy to present 3 classes of assets which have
carrying values substantially lower than the replacement costs. This
includes land, buildings and machinery and equipment. The Company
engaged American Appraisal Company (Thailand) Limited as independent
appraiser, to appraise the value of buildings and machinery and
equipment. The Company also has a policy to revalue every year.

As at December 31, 2003, the Company recorded the surplus as follows:

-   Land – at appraised value of the Land Department with a revaluation
    surplus of Baht 6,720 million.

-   Buildings, machinery and equipment – at appraised value (fair value
    basis) reported by an independent appraiser dated January 13, 2004
    with a revaluation surplus of Baht 64,289 million as at December 31,
    2003, consisting of Baht 6,287 million for buildings and Baht 58,002
    million for machinery and equipment.

Other Assets : Declined Baht 1,226 million or 7% from previous year.
Main components were from falling Deferred Income Tax – net at Baht
2,558 million or 21%, rising Excess of Cost over Net Book Value of
Investments in Net Assets – Net at Baht 751 million or 67%, and
ascending Deposits, Claims, and Deferred Charges – net at Baht 440
million or 24%.

Liquidity

At the end of year 2003, the Company and subsidiaries had cash and cash
equivalents about Baht 2,307 million, a fall of Baht 1,449 million from
last year. Firstly, the Group generated Cash Flows from Operating
Activities at Baht 22,228 million, an increase of Baht 4,284 million
from higher operating profit. Secondly, Cash Flows Used in Investing
Activities amounted to Baht 399 million, compared with Cash Flows
Provided by Investing Activities for Baht 6,508 million in 2002, derived
from Sales of Investments and Assets under Restructuring for Baht 7,705
million. Finally, Cash Flows Used in Financing Activities was Baht
23,278 million, a decline of Baht 5,346 million, due to Net Decrease in
Borrowings at Baht 10,546 million and more Dividend Payment at Baht
5,400 million.

Long outstanding Accounts Receivable as at December 31, 2003 were aged
as follows:

  Over 3 to 6 months 17 Million Baht

  Over 6 to 12 months 9 Million Baht

  Over 1 year 1,308 Million Baht

  Total 1,334 Million Baht

Regarding the liquidity ratios, the Company and subsidiaries earned a
Current Ratio of 0.65 while the Cash Flow Liquidity is 0.40. Their
Average Collection Period lasted 34 days whereas the Average Payment
Period was 28 days. The Inventory Turnover Period was calculated at 32
days, making the Cash Cycle of 38 days. The cash flows and liquidity
ratios ensured that the Company and subsidiaries possessed adequate
liquidity for business operation, accompanying with overdraft accounts
with various banks for about Baht 4,300 million. Furthermore, the
Company still earns a good profitability ratio and higher efficiency
ratio.

Source of Funds

Net Debt (Interesting-bearing debt less cash and short-term investments)
position of the Group as at December 31, 2003 declined Baht 11,445
million to Baht 114,851 million. From the third quarter, the performance
of United Pulp and Paper or UPPC has been included. Net Debt included
Baht 90,500 million unsubordinated and unsecured debentures issued by
the Siam Cement Public Company Limited and the Siam Pulp and Paper
Public Company Limited (As per notes to financial accounts number 12,
page 38). The remaining long-term debt is mainly foreign loans at the
interest rate of 4.05% per annum, most of which were hedged from foreign
exchange risk by some financial derivatives. The Company and
subsidiaries entered into currency swap agreements for almost all
long-term foreign loans with overseas banks.

Net Debt to EBITDA ratio was 3.1, compared with 4.2 of last year.
Interest coverage ratio was 3.96, against 2.9 for 2002. Improvement of
the former ratio reflects better Group financial structure. Interest and
Financial Expenses in 2003 were Baht 8,101 million, falling from Baht
10,038 million of the previous year.

Dividend Received from Associates in 2003 totaled Baht 3,484 million,
representing an increase of 90%, most of which coming from the
Petrochemical Business.

On April 1, 2003, The Siam Cement Public Company Limited made a
redemption of debenture number 3/1999 of Baht 12,000 million at 8%, with
half of the cash redemption coming from the issuance of new 4-year, 3.5%
debenture number 1/2003. On November 1, 2003, the Company redeemed
debenture number 5/1999 of Baht 6,000 million at 8% coupon rate while
issuing new 4-year series of Baht 10,000 million at 3.25% as number
2/2003.

From better financial position and operating performance in 2003, the
Board of Directors seeked the approval of the Ordinary Shareholders’
meeting, regarding the dividend payment of Baht 6 per share, totaling
Baht 7,200 million. The Company paid interim dividend for Baht 2.50 per
share, in total amounting to Baht 3,000 million on August 28, 2003. It
would pay the final portion at Baht 3.50 per share, totaling Baht 4,200
million on April 21, 2004.

In summary, the operating performance and financial position of the Siam
Cement Public Company Limited and subsidiaries in 2003 has been growing
from 2002 as a result of rising demand from improving Thai and global
economies. The Company earned more revenue and more net cash flows,
while debt has been continuously declining under efficient business
strategy and financial policy. Financial instruments were appropriately
practiced to reduce interest rate and volatile foreign exchange risks,
hence diminishing financial risk. The Company has a stronger financial
position, adding value to shareholders and supporting the country’s
prosperity from now on.