12. Financial Position and Operating Performance

Summary of Auditor’s Report

  Auditor’s Office : KPMG PHOOMCHAI AUDIT LTD.

Names of Auditors: MR. WINID SILAMONGKOL Auditor Number 3378 or

  MR. VICHIEN THAMTRAKUL

 Auditor Number 3183 

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 2004 Operating Profit
Before Extraordinary Items of Baht 33,707 million, representing a
healthy increase of 89% y-o-y, while Net Profit increased 83% y-o-y to
Baht 36,483 million. Moreover, Consolidated Sales increased 29% y-o-y to
Baht 192,395 million primarily on higher petrochemicals product prices.
Total domestic sales increased 32% y-o-y while export increased 23%
y-o-y.

Equity Income in 2004 totaled Baht 9,808 million, up 45% or Baht 3,061
million from last year, with contribution from the following:

-   Baht 5,594 million from petrochemicals’ associates, mainly in the
    PTA, Olefins, PVC, MMA and SM businesses, representing an increase
    of 41%.

-   Baht 4,214 million from other associates, mainly in the steel
    businesses, representing an increase of 51%.

In 2004, the company invested approximately Baht 7,200 million to
increase its stake in Thai Cane Paper (TCP), Phoenix Pulp & Paper
(PPPC), and Thai Plastic & Chemical (TPC) to 58%, 99%, and 40%,
respectively.

In 2004, the Company and subsidiaries’ Cost of Sales increased 23% from
previous year to Baht 136,522 million. Selling and Administrative
expenses increased 8% from last year while Interest and Financial
Expenses declined Baht 2,225 million or 27% because the Group was able
to lessen its net debt of Baht 14,272 million from operating cash flows.

Provision for Income Tax in 2004 grew Baht 751 million or 19% to Baht
4,695 million. This was a consequence of (1) Corporate Income Tax for
the year, increasing Baht 614 million or 35% to Baht 2,392 million (2)
Deferred Income Tax – net, augmented Baht 137 million or 6% to Baht
2,303 million.

Operating Performances of Strategic Business Units

Petrochemicals Business

Year 2004 was marked as a profitable period for petrochemical producers,
the result of increased global demand and limited new production
capacity. The year saw highly volatile naphtha prices, along with crude
oil prices, trading as low as US$ 308/ton in Q1/04, but rallied to a
peak US$ 486/ton in Q4/04. Similarly, HDPE prices rose throughout the
year, but at a higher pace due to limited supply. Naphtha cracker
by-products such as Benzene and Toluene also saw increased pricing,
rising to the annual high of US$ 1,235/ton and US$ 850/ton,
respectively, on higher derivative demand and tight supply. The
petrochemicals division continued to run at full production, while
polyolefins export sales volume in 2004 accounted for 38% of the total
sales volume.

Sale in 2004 improved 48% y-o-y to Baht 75,185 million on higher
products prices. Net profit increased 164% to Baht 20,523 million.
Equity income improved 41% y-o-y to Baht 5,594 million, resulted of
solid performance in PTA, SM and PVC business.

Paper and Packaging Business

Total Sales for the Paper and Packaging business (after the
consolidation of Thai Cane Paper) in 2004 improved 14% y-o-y to Baht
38,265 million, while operations ran at full utilization. As a result of
high raw materials prices and energy costs, Operating Profit decreased
3% from the previous year to Baht 4,125 million.

Packaging Paper: Domestic sales volume of Packaging Paper in 2004 grew
20%, benefiting from an increased activity in the domestic electrical
appliances and the food/beverage industry, in addition to the inclusion
of Thai Cane Paper’s (TCP) accounts. Export sales during the year were
22% of total sales. In 2004, the business improved sales volume in ASEAN
market, believing to be a future primary export market. Price of
packaging paper remained steady approximately US$ 415 per ton.

Printing & Writing Paper: In 2004 domestic sales volume grew 2% y-o-y,
attributed to debottlenecking in Q3/04, while export sales volume
dropped to 15% of total sales volume. The primary export market included
The United States, Hong Kong, Singapore, Vietnam and Malaysia. Realized
prices of Printing & Writing paper improved to the Q4/04 average of US$
805 per ton, on tight supply as well as rising pulp prices (since
mid-year 2004), attributed to decreased supply in North America, and
strong global demand. The Q4/04 average prices of pulp were $505/ton for
long-fibre and $440/ton for short-fibre.

Container: Sales volume ascended 8%, mainly from exported electrical
appliances, beverages and consumer products to Japan, the primary export
market. The Business has employed Total Productive Management to upgrade
production efficiency and management system. Besides, it developed
design and production process meeting international standard which
resulted in receiving awards for container design from both local and
overseas.

In 2004, investment stakes in Phoneix Pulp & Paper (PPPC) and Thai Cane
Paper (TCP) were increased to 99% (delisted in January 2005) and 58%,
respectively.

Cement Business

As a result of initial acceleration of government spending, particularly
the speed-up of the new airport, as well as the continued robust
residential construction sector, total domestic cement sales increased
20% from the previous year and Operating Profit increased 26%. Yearly
cement volume sold reached 10.1 million tons with the average cement
price of Bt 1,740 per ton. In the export market, the business exported 6
million tons, down 3% from previous year. Export prices (F.O.B.)
increased to US$ 29.4/ton in Q4/04.

For ready mixed concrete, total sales volume increased 25% over the past
year, reflecting the significant rise in domestic demand due to the
higher level of construction which is in line with the general economic
growth. Moreover, the trend is for increased sales volume, in part due
to the ease and user friendly product attributes. The business has
developed a system with the ability to deliver ready-mixed concrete in
small quantities of 1 to 2 cubic meters, making possible the delivery to
locations with difficult access. For increased convenience to the
smaller customers, CPAC has become the industry’s first to establish
product purchase points at plant locations, in addition to payment
options at Counter Services.

Building Products Business and Distribution Business

The residential housing market continued to show growths in 2004,
resulting in the Building Products business’ strong sales of roofing
products and ceramic tiles nationwide. Sales in 2004 increased 13% to
Baht 20,542 million, driven by higher sales volume, yielding a rise in
Operating Profit of 19%. Export sales grew 25%, with ceramic floor and
wall tiles accounting for more than 80 percent of the total.

The Distributions Business continued to grow, with sales growth of 21% ,
to Baht 68,558 Baht from higher sales of building materials to satisfy
the residential housing construction sector. Operating Profit increased
286% to Baht 968 million.

Cementhai Sales & Marketing Co., Ltd.:

With focus on domestic distribution, sales increased by 15%. The company
introduced Customer Relationship Management (CRM) to boost management
efficiency for wholesale, retail, and project distribution. In addition,
implementation of SAP CRM system for data collection and storage,
analysis, and marketing planning helped collaboration among every
function achieve higher efficiency.

Cementhai Logistics Co., Ltd.:

As an integrated logistics solution provider, sales rose by 19%, of
which 60% was domestic transportation related and 40% was export
transportation related. The primary exported product included cement and
clinker, while coal was the major imported item. Impact from the rising
oil prices was minimal, as the government absorbed the price
differential between the actual and world market prices. Regardless, the
company continues with its pursuit to improve transportation efficiency.

SCT Co., Ltd.:

Specializing in the global trading business, sales grew by 32%,
reflecting the growth of the Thai and world economies, especially the
China’s economy. Key exported products included steel and cement. Import
transactions accounted for 45% of the total sales, while export
transactions accounted for the remaining 55%.

Financial Position

Assets

Total assets of the Company and subsidiaries as at December 31, 2004
valued Baht 265,682 million, an increase of 6% over 2003. Key components
of total assets are Net Plant, Property, and Equipment at 28%,
Revaluation Surplus 27%, and Investments in Shares and Long-Term Loans
to Affiliates 19%. Ranking of asset values by business units is
Petrochemical, Cement, and Paper and Packaging Businesses respectively.

Current Assets : Equaled Baht 51,927 million as at December 31, 2004.
The main proportion was: Inventories 52%, and Trade and Notes
Receivables 34%. The Company and subsidiaries provided allowance for
doubtful accounts-trade at Baht 1,371 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 1,249 million or 3% from last year. Part
resulted from an increase in investments in Shares on Equity Method
(Thai Plastic and Chemicals increased Baht 2,892 million, Siam Mitsui
PTA Co., Ltd. increased Baht 1,487 million, Thai Cane Paper PCL
decreased Baht 1,852 million). Another part was from Available for Sales
Securities-at Fair Value decreased Baht 4,273 million (The Aromatics
(Thailand) Public Company Limited decreased Baht 3,930 million).

Other Assets: Declined Baht 2,163 million or 13% from previous year.
Main components were from falling Deferred Income Tax – net at Baht
1,999 million or 20%, declining Deposits, Claims, and Deferred Charges –
net at Baht 57 million or 2% and rising Goodwill – net at Baht 715
million or 38%.

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, 2004, the Company recorded the surplus as follows:

-   Land – at appraised value of the Land Department with a revaluation
    surplus of Baht 7,378 million.

-   Buildings, machinery and equipment – at appraised value (fair value
    basis) reported by an independent appraiser dated January 18, 2005
    with a revaluation surplus of Baht 65,480 million as at December 31,
    2004, consisting of Baht 8,040 million for buildings and Baht 57,440
    million for machinery and equipment.

Liquidity

At the end of year 2004, the Company and subsidiaries had cash and cash
equivalents about Baht 3,465 million, a rise of Baht 1,158 million from
last year. Firstly, the Group generated Cash Flows from Operating
Activities at Baht 37,258 million, an increase of Baht 15,030 million
from higher Operating Profit. Secondly, Cash Flows Used in Investing
Activities amounted to Baht 5,197 million, compared with Cash Flows
Provided by Investing Activities for Baht 399 million in 2003. Finally,
Cash Flows Used in Financing Activities was Baht 30,903 million,
compared with Baht 23,278 million of last year due to Net Decrease in
long-term borrowings at Baht 10,714 million and more Dividend Payment at
Baht 10,800 million.

Long outstanding Accounts Receivable as at December 31, 2004 were aged
as follows:

  Over 3 to 6 months 71 Million Baht

  Over 6 to 12 months 86 Million Baht

  Over 1 year 1,368 Million Baht

  Total 1,525 Million Baht

Regarding the liquidity ratios, the Company and subsidiaries earned a
Current Ratio of 1.03 while the Cash Flow Liquidity is 0.68. The
Company’s Cash Cycle was 35 days (Average Collection Period + Inventory
Turnover Period - Average Payment Period). 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 3,800 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, 2004 declined Baht 14,272
million to Baht 100,579 million. This was despite the consolidation of
Thai Cane Paper’s (TCP) outstanding debt. The remaining long-term debt
were mainly foreign loans at the interest rate of 4.5% 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 1.8, compared with 3.1 of last year.
Interest coverage ratio was 7.75, against 3.96 for 2003. Improvement of
the former ratio reflects better Group financial structure. Interest and
Financial Expenses in 2004 were Baht 5,876 million, falling from Baht
8,101 million of the previous year.

Dividend Received from Associates in 2004 totaled Baht 4,267 million,
representing an increase of 22%. Morever, extraordinary gains amounted
to 2,776 MB, the result of asset sales.

From better financial position and operating performance in 2004, the
Board of Directors seeked the approval of the Ordinary Shareholders’
meeting, regarding the dividend payment of Baht 15 per share, totaling
Baht 18,000 million. The Company paid interim dividend for Baht 5.50 per
share, in total amounting to Baht 6,600 million on August 26, 2004. It
would pay the final portion at Baht 9.50 per share, totaling Baht11,400
million on April 19, 2005.

In summary, the operating performance and financial position of the Siam
Cement Public Company Limited and subsidiaries in 2004 has been growing
from 2003 as a result of rising demand from improving Thai and global
economies as well as higher petrochemicals product prices. 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.

Fees for auditors (for the year ended December 31, 2004) 

1.  Audit fees

  The Company and subsidiaries pay the audit fees for the fiscal year
  for the audit firm which an auditor works for individual or related
  parties of an auditor or an audit firm which the auditor works for, in
  amount of Baht 22,438,000. This amount does not include the audit fees
  paid by associated companies.

2.  Non-audit fees

The Company and subsidiaries are not rendered non-audit fees for the
fiscal year from the audit firm which an auditor works for individual or
related parties of an auditor or an audit firm, which the auditor works
for.