Ecopro Materials Co., Ltd. ($A450080)

[Interpreted] Good morning and good evening. Thank you all for joining the conference call for the EcoPro earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] we will begin the presentation on EcoPro's First Quarter of Fiscal Year 2026 earnings results.

[Interpreted] Good afternoon. Thank you for joining the company's earnings conference call. Joining me today from EcoPro, we have Jang-hoon Cho, Head of Business Management Office; [ Kyoung-han Oh ], Head of Finance and IR Office. And from EcoPro Materials, Kyu-bong Lee, director of Management Division. From EcoPro HN, Soon-joo Kim, Director of Management Support Department; and [indiscernible] Kim, Team Leader of R&D planning team. And please also note that the results are subject to change upon external auditors review at a future date. With that said, we'll now begin the earnings presentation of EcoPro for the first quarter of 2026.

[Interpreted] Good afternoon. I am Kyoung-han Oh, Head of Finance and IR at EcoPro. In today's call, I will first briefly talk about the Phase 2 investments in to Indonesian nickel smelter project, followed by earnings results of 3 EcoPro-listed affiliates and then end with a Q&A. Turning to Page 4 of the material. Subsequent to successful completion of investment into smelters at IMIP complex, we plan to make investments into new smelting plants with annual nickel production capacity of 66,000, currently under construction at IGIP, which stands for International Green Industrial Park. The initial plan was for us to focus our investment into Phase 2 of the IGIP smelting plant project for Phases 1 and 2. But in consultation with partner companies, we've decided to take the lead in making investment into Phase 1 construction for this time being. Both EcoPro and EcoPro BM are making co-investment into this project as we seek investment gains and maximize cost competitiveness over cathode materials. And similar to existing projects investment will be made through a partnership with Indonesian mining companies and China's GEMs to manage commercial and technical risks. The plant is currently under construction and mass production is expected to commence during the first half of next year. Moving on to business results of EcoPro HN on Page 6. The company's first quarter '26 revenue was KRW 34.7 billion, marginally down Q-over-Q while operating profit came in at KRW 5 billion, recording a steep rise of KRW 2.3 billion Q-on-Q and KRW 3.4 billion year-over-year. Driven by customers' solid demand for chemical filters, business performance across all business domains is showing an improvement as we are gaining new order wins, including Fine Dust Reduction business for overseas power plants. Also, our downstream semiconductor customers are ramping up capacity addition, which is driving growing order backlog of EcoPro HN, and we look forward to sustaining the earnings up trend. Next on Page 7 is EcoPro HN's financial position. Total assets as of Q1 end '26 was down 1.8% Q-on-Q to KRW 450.7 billion. Total liabilities, down 5.6% Q-on-Q reporting KRW 145.6 billion, and total equity increased 0.1% Q-over-Q, reporting KRW 305.1 billion. There are no particulars to note for the financial statements of Q1 of 2026 as we maintain stable financial position. Next is EcoPro Materials business results on Page 8 of the material. The company consolidated Green Eco Nickel in its financial statement, starting Q1 of 2026, which drove revenue up by around 45% Q-on-Q, reporting KRW 166.5 billion, while operating profit made a 5x increase to KRW 15.7 billion, attesting to improvements in earnings capacity. We are expecting revenue up trend moving ahead on higher precursor sales for ESS and onboarding of multiple new customers. As such, we expect Green Eco Nickel to continue its contributions to quarterly results as we go forward. Next is financial position of EcoPro Materials on Page 9. As of end of Q1 '26, assets totaled KRW 2,885.4 billion, up 67% Q-on-Q. Liabilities totaled KRW 1,395 billion, up 139% Q-on-Q with equity expanding 30% Q-on-Q, reporting KRW 1,490.4 billion. As mentioned, Green Eco Nickel was consolidated into the financial statement starting this quarter, which drove increases in both assets and liability. Debt ratio was 94%, which is a slight increase following Green Eco Nickel consolidation, but still maintaining a steady level nevertheless. Total cash and equivalents held reported KRW 65.9 billion, up 46% Q-over-Q. Moving on to Page 10. I will now run through the holding company, EcoPro's consolidated results. Q1 '26 consolidated revenue of EcoPro was KRW 822 billion, up 15% Q-on-Q while operating profit reported KRW 60.2 billion, expanding 29% Q-over-Q. Subsidiaries in the cathode value chain are mostly showing strong performances and coupled with consolidation of Green Eco Nickel, metal prices and FX movement all worked positively for the company's consolidated results. In Q2, cathode plant in Hungary will start its mass production and with new order wins by cell customers in Europe, we expect an uptrend in cathode sales. And as mentioned before, EcoPro HN and EcoPro Materials expect stronger downstream industry backdrop and new customer wins, which are bound to support consolidated performance improvement of the company. On Page 11, I will briefly talk about the performance of the holding company's business as well as non-listed affiliates. The holding company revenue, which captures the smelter business, is shown as the blue bar on the graph which fell marginally Q-over-Q in the first quarter due to a temporary decline in utilization. But in Q2, as utilization normalizes, we expect top line will reclaim its upward trajectory. As our core projects, we are making investment into smelting plant, including the new smelters at the IGIP in order to secure a new engine for growth and to gain cost competitiveness. Now for the lithium business, which takes up the biggest portion of the non-listed businesses has seen Q-on-Q revenue rise by around 59%, reaching KRW 95 billion on the back of rise in the lithium price and higher volume purchased by customers. Moving into the second quarter, we expect rise in lithium prices will start to feed into the ASP, the selling price underpinning and sustaining stronger performance. For other businesses, including the recycling business, although its revenue mix is not significant, we've seen revenue grow 27% Q-over-Q, which is a display of overall tailwind. Next is consolidated balance sheet on Page 12. Q1 2026 total assets increased 16% Q-on-Q, reaching KRW 11,368.4 trillion. Total liabilities was up 20% Q-over-Q, reaching KRW 6.357 trillion, and total equity was up 12% Q-on-Q to KRW 5,032.7 trillion. Overall, we saw top line expand following Green Eco Nickel consolidation, while consolidated debt-to-equity ratio increased marginally from 118% last quarter, reaching 126%. Debt ratio of respective companies are sound at below lower 100% level and cash and cash equivalent in Q1 '26 dipped somewhat, but we still own around KRW 900 billion of ample liquidity. Also, the PRS swap contract, which was executed in Q4 of last year, has mostly been settled on the back of strong share price of EcoPro BM with KRW 180 billion cash inflow from April 2026 settlement. Well, this brings me to the end of the presentation, please refer to the appendix for more detail.

[Interpreted] That ends the presentation on the earnings of the company. We now move on to the business outlook for Q2 of 2026 and the second half.

[Interpreted] I'm [ Cho Jang-hoon ], Head of Business Management. I will be walking you through the outlook on the second quarter as well as the second half for the Holdco. For Q1 results, the secondary battery business, including EcoPro BM rebounded in terms of sales following the end of inventory adjustment at downstream customers. Uptrend in metal prices, including lithium price, had positive impact on our average selling price, driving meaningful revenue growth. For the Environmental Solutions business, because semiconductor customers took on a conservative stance in making investments last year, performances were muted, but this year due to strong semiconductor rebound, customers are accelerating their CapEx spend. So we expect solid results which we see in Q1 to continue onwards into the second quarter and expect gradual profit uptrend to be sharper in the second half of the year. For detailed outlook on listed subsidiaries, i.e., EcoPro Materials and HN, I will come back to it later. I would rather right now focus on our non-listed entities and our business and investments in Indonesia. Firstly, on EcoPro Innovation, the lithium business, it successfully achieved turnaround in profit last fourth quarter and if you look at Q1 revenue and operating profit, it recorded a significant expansion on a Q-on-Q basis. Basically, against the global lithium price uptrend, customer demand focused on stocking of inventory, which led to higher utilization. And starting Q2, higher lithium prices will start to transfer to selling price of EcoPro Innovation and we expect additional expansion in margin and spread on the back of lagging impact between lower cost materials, sourced in advanced and higher ASP. In terms of the second quarter outlook for Indonesia smelting plant, you may have already seen the news. But in February, there was unprecedented torrential rain that hits the IMIP region, causing disruption to the use of the storage tank for byproducts. Thus, smelters inevitably had to experience, although temporary, lower run rate. Now having said that, all of the safety inspections and surveys were completed in March, and starting April, 4 smelters, to which we invested, recommenced operations. Ramp-up is currently therefore underway, and we expect to see normalized levels by June. Thus, starting the third quarter, we will see projected profits coming from Green Eco Nickel and equity method gain from other smelters to be fully reflected in the consolidated statements. All in all, Q2 and the second half of 2026 is when the effects of strong ASP based on the lithium price and recovery of Indonesia's nickel smelters will come into play at a perfectly synchronized time line. We will make sure that earnings capacity of upstream value chain can be shown through higher performance numbers as we move forward. Thank you.

[Interpreted] This is Kyu-bong Lee, Director of Management Division of EcoPro Materials. I will talk about EcoPro Materials second quarter and second half business outlook. I believe EcoPro Materials will be able to solidify its profit-making operations as we move into the second half and display a trend of top line expansion, coupled with improvements in profitability. For the precursor business, we're seeing strong growth from data centers in the United States, which is expected to drive steep growth in our downstream markets for ESS, which are BBUs, Battery Backup Units and UPS, Uninterrupted Power Source businesses. We started selling precursors for ESS in North America starting the first quarter and we expect sales towards North American ESS to expand this year. And in terms of downstream market, which was mostly geared towards EVs, we are planning to diversify into other markets, including ESS for now, but eventually to autonomous driving and robotics as well. We are also seeing sharp rise in non-PFE precursor demand and are currently talking to multiple new customers regarding supply of precursors. Some customers are in the final test phase and we expect sales to begin before the end of the year. Together with the downstream market through customer diversification, we will be laying the basis for recovery of the precursor business. For the smelting business, EcoPro Materials had Green Eco Nickel, a nickel MHP smelter in Indonesia, consolidated as its subsidiary beginning in the first quarter. GEN utilization fell temporarily recently, but starting April, we expect it to rise gradually. And in the second half of the year, Green Eco Nickel's results is expected to continue on an upward trend. Also, price of cobalt, which is a byproduct from secondary smelting process, has recently surged further driving the MHP demand, which is leading to higher prices for MHP as well. Green Eco Nickel is thus expected to generate higher profit than the original estimate that we've made at the timing of acquisition. And under such environment, our cost competitiveness is strengthening as we have integrated processes for MHP smelting, RMP and precursor production. This year, we are planning on solidifying the foundation for recovery of the precursor business of EcoPro Materials. And through the results from the smelting business, we will improve the cost profile of the company. We will also work towards driving a stepwise growth for the precursor business as well as the smelting business as we move ahead towards the end of the year. Thank you.

[Interpreted] I'm Soon-Joo Kim, Director of Management Department; and EcoPro HN, and I will run through the business outlook for the company for Q2 of 2026 and onwards. Due to the characteristics of the environmental solutions industry, Q1 is considered to be a slow season with the size of the revenue being the smallest in Q1. Signaled by a gradual recovery in the first quarter, we, however, expect clear top line trend -- uptrend on a year-over-year basis in the environmental plant business as we go forward. As part of the initial results, last March, we had an order win for core eco-friendly facilities amounting to KRW 23.9 billion for an LNG plant in Taiwan. This was meaningful because it's a testament to our technological power in the environmental solutions facilities and cost competitiveness in the eco-friendly power generation market. On the tailwind from the overall operational backdrop, we expect order backlog from major customers to continue to expand. Based on visible results and overseas customer wins, we would place further momentum behind expanding our global revenue. By each business segment on the back of fab capacity additions and process upgrades in global semiconductor industry and clean room chemical filter is showing stable performance, underpinned by solid demand growth supported by higher semiconductor production. For GHG, the greenhouse gas reduction, we expect Q2 results will show large-scale order wins driven by large investment by semiconductor sector and greenhouse gas solutions is expected to drive overall top line growth starting from the second quarter. Fine Dust Reduction business is expected to expand its scale driven by order wins for LNG power plants, both domestic and overseas. Lastly, to share our plans on value of disclosure, the disclosure will be made in the near future, which will highlight the company's mid- to longer-term corporate enhancement plan. We will focus on quickly recovering our recent decline in sales through active business operations, and through securing momentum for future growth. Building on this recovery, we intend to improve capital efficiency and enhance corporate value while maintaining a proactive shareholder return policy that prioritizes shareholder value. Thank you.

[Interpreted] Thank you. That ends the presentation on the business outlook. We will now move into Q&A. But before we take on-site questions, we would like to first address a couple of questions which we received in advance. First question that we received in advance relates to the recent hike in the minimum price of the nickel ore that was affected by the Indonesian government and the question asks any potential impact for the EcoPro company.

[Interpreted] Responding to this question, I'm Jang-hoon Cho, Head of Business Management Office at EcoPro. Regarding the hike in the minimum price of the nickel ore, which was implemented by the Indonesian government, now first, the minimum price that was recently raised by the Indonesian government is not the actual market price but a government that reference price for taxation purposes. Now having said that, of course, since the price at which the taxation is based is higher, tax and royalty burden may rise, but its impact on the company's actual transaction is near minimal. And all in all, the hike and the floor price of the nickel ore is expected to have no meaningful impact on the bottom line of the company.

[Interpreted] Second question, which we received in advance has to do with any potential for changes in the guidance for EcoPro HN and also any potential impact coming in from the resumption of semiconductor investment that we are seeing in the market. So we would like to invite EcoPro HN to answer this question.

[Interpreted] Responding to your question, I am [indiscernible] Kim, Team Leader of R&D planning team from EcoPro HN. Let me talk about the semiconductor market and the impact thereof. As we're seeing investments speed up in the semiconductor market, which account for 60% of our revenue mix, we expect to be able to achieve our revenue guidance in a quite steady manner. Moving from Q1, which is usually a slow season, as we move into the second quarter, we will start to recognize revenues from large projects, and we see gradual expansion of our quarterly performance moving forward. Especially businesses that cater to the downstream semiconductor market will see most robust order and revenue performances-. We also expect to win large-scale orders from domestic and overseas customers in Q2 for greenhouse gas reduction solution as customers are making concrete time lines for advancing the operation of their new production lines. Usually, there is around 1 year lead time to booking of revenue, so the order wins in Q2 will support earnings until the first half of the following year. Faster speed of investment that we're seeing in the semiconductor industry is also expected to persist. Also, our sales efforts towards overseas expansion has now entered its final phase. So we expect to drive meaningful results in greenhouse gas reduction solutions for the global semiconductor market. Accelerated rate of investment in semiconductor sector is also expected to continue on for several years, and we expect revenue from greenhouse gas reduction solutions and chemical filters to show a steady uptrend in revenue.

[Interpreted] That ends the Q&A for the questions that we've received in advance, we will now be happy to take your questions on site.

[Operator Instructions] The first question will be provided by Minju Kim from Shinhan Investment & Securities.

[Interpreted] I am Minju Kim from Shinhan Investment & Securities. I would like to ask you 2 questions regarding EcoPro Materials. Recently due to the Iranian situation, there is a certain issue that we are seeing with regards to the Strait of Hormuz, which has had an impact on increasing and significantly actually increasing the price of sulfates. What impact does it have on your company's earnings? Second question, can you share with us any update on your onboarding efforts for new customers?

[Interpreted] Responding to your question, I am Kyu-bong Lee, Director of Management Division and EcoPro Materials. I will respond to your question about the recent surge and the price of sulfate. So sulfate is used as a reagent in smelting of MHPs and 75% of which, used in Indonesia, is imported from the Middle East. And with the situation unfolding at Strait of Hormuz, there was a surge in the prices of sulfur as well as sulfuric acid which, to a certain extent, is impacting the profitability of Green Eco Nickel's MHP smelting business. However, despite such cost pressures, selling price of MHP is actually on the rise. So we expect profit per ton on an absolute basis will rather increase. Also to ensure profitability, we're scaling up the smelting business, currently reviewing the feasibility of smelting rare earth elements and Scandium, which are the byproducts of the MHP smelting process. By fortifying the upstream chain, we will strengthen competitiveness of the company. Now moving on to your next question about new customer acquisition. Since the year before last, we have been actively expanding our sales efforts towards external customers to enhance business stability and to secure engine for growth. As a result, we expect the share of noncaptive sales to exceed 60% this year, and we particularly anticipate securing multiple number of new customers in the second half of the year. We're also carrying out tests with many customers based on our product portfolio, including existing high nickel precursors and LMR precursor and high-voltage mid-nickel precursors and also precursors for solid-state batteries. EcoPro Materials will continue to identify new customers based on our product technology.

[Interpreted] As we are running under a time constraint, we will take the final question.

[Interpreted] The last question will be presented by Yushin Park from HSBC Securities.

[Interpreted] I am Yushin Park from HSBC. I have 2 questions to EcoPro, the holding company. You briefly mentioned the PRS valuation gain. Can you provide a little more detail with regards to the PRS valuation gain? And also what is the actual impact and the cash inflow that you will be booking in the second quarter? And what is the outstanding balance for the PRS swap contract? Second question, you mentioned the IGIP investment in Indonesia. What do you -- what's your plan in terms of the CapEx? And would there be any additional CapEx that will be required going forward?

[Interpreted] This is Kyoung-han Oh. I'm the Head of Finance and IR at EcoPro. I will combine the 2 questions that you have asked regarding the PRS as well as the funding plan for the investment in Indonesia. Now as you would know, last October, we executed a PRS contract for KRW 800 billion of EcoPro BM shares as underlying assets and the swap arrangement is such that, as you know, the gains based on the investors selling price. So when the investor actually sells the holdings to the market, if there is any difference or gain or profit, then that is shared with the company. And if there is any loss, then that extent of the loss is compensated by the company as well. So that is the arrangement of the PRS contract. So if the share price of EcoPro BM actually goes up, then that gain or the difference in price is attributed to the holding company, EcoPro and the vice versa is true. If there is loss, then the company would also bear loss. Now the share prices have moved from KRW 170,000 at the timing of the execution of the contract to recently KRW 200,000. So at the timing of the first quarter and settlement, basically the share price -- the underlying share price was KRW 200,000. So we were able to book under the nonoperating valuation gain account. So that was the explanation on the valuation of the swap arrangement. So -- and you've also asked about the outstanding balance. So we've been continuously executing the unwinding of the swap up until yesterday. And so the initial size of KRW 800 billion. Out of that, about KRW 700 billion have been unwound and there is about balance of KRW 100 billion. And every 3 months, the settlement date actually arrives. And as of today, we have KRW 180 billion of cash inflow as part of that settlement made based on the swap contract. And the funds that we will be gaining will be used as funds for our IGIP Indonesian investment. Now in terms of the IGIP investment and the funding plan, the EcoPro as well as EcoPro BM is taking the lead in this investment project, and we estimate total CapEx required for all of the smelters to be around USD 1.4 billion or KRW 2 trillion. But the investment will be financed and not just by our own funds, but partners' co-investment into equities and also shareholder loans, and if need be, facility borrowing by the smelter plants themselves. And depending on the future discussion with our partners, EcoPro Group Companies, final investment amount will be determined. So the final amount that will be required is yet to be determined, but the plants have currently commenced their construction. So for the initial required capital, as part of the disclosure that we made in September of last year, up until month of June, basically, we will be making paid in capital of USD 140 million by end of June or that which will be KRW 200 billion. And so this first phase can sufficiently be paid off through our PRS funds, which we have already received. For any add-on investments in the future, we will discuss with our partners to finalize the Indonesian investment structure. And once the details are all ironed out and set, we will come back to the market with more information. Thank you.

[Interpreted] Well, thank you. That ends the earnings call for the company. Once again, thank you very much for joining us this afternoon. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]