LG Chem, Ltd. (A051910) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. We will now start LG Chem's 2022 Third Quarter Earnings Conference Call. This is Hyun-Suk Yoon, Head of IR at LG Chem. Thank you for taking interest in LG Chem and joining this call despite your busy schedules. We will begin with the brief introduction of 2022 Q3 earnings performance, followed by the CFO presentation, highlighting the company's earnings results, then a Q&A session. The presentations will be interpreted simultaneously while the Q&A will be interpreted consecutively. The material presented during this conference call can be viewed by those with web access. It is also available for download from our corporate website. Let's begin today's call with the introduction of the management team. We have CFO, Dong Seok Cha; Yeong Suk Lee from Business Planning; [ Ki-Dap Young ] from Petrochemicals; Young Suk Lee from Advanced Materials; and Jin-Soo Park from Life Sciences. Let's begin with the business performance. On Page 3, consolidated sales and P&L. Q3 sales grew by 34% Y-o-Y and 16% Q-o-Q to KRW 14.178 trillion to record the highest ever quarterly sales for 4 consecutive quarters. Operating profit was KRW 901 billion, and OP margin was 6.4%. Next page is a summary of our earnings performance, excluding LG Energy Solution. Sales was KRW 8.316 trillion, a slight increase the previous quarter, and operating profit was KRW 450 billion. Next, Page 5 is our consolidated financial status. As of the end of the third quarter 2022, assets were around KRW 69.6 trillion. Liabilities were around KRW 31 trillion and capital was around KRW 38.7 trillion. Net asset value per share was KRW 416,000. Next, earnings by business division. Page 6, Petrochemical division. 2022 Q3 sales was KRW 5.493 trillion, operating profit was KRW 93 billion and operating margin was 1.7%. With the supply increase in petrochemical industries, coupled with recession from the global inflation, the rapid deterioration of the market environment led to a fall in sales and profitability on quarter. Particularly, a significant tightening in the spreads of downstreams are key products such as PVC and ABS, which have been posting solid profits. However, high value-add premium products, such as POE and SAP with relatively solid demand, continue to generate robust profitability. Next is Advanced Materials. In Q3, Advanced Materials sales was KRW 2.582 trillion, a 30% increase Q-o-Q, and operating profit was KRW 416 billion. With the deterioration in the downstream IT market, sales and profits fell for the IT materials. However, for battery materials and cathodes, in particular, increase in ASPs and shipment backed by the rising metal prices led to sales growing around 60% compared to the previous quarter. Next, Life Sciences. In Q3, sales was KRW 225 billion, operating profit was KRW 6 billion and OP margin was 2.6%. Sales increase for key products such as the growth hormones. However, profitability fell due to the delay in the recovery of aesthetics business from the prolonged COVID lockdown in China and an increase in R&D investment for full-fledged clinical trials for global new drugs. Next, Farm Hannong. Q3 sales was KRW 157 billion and operating loss was KRW 3 billion. With the seasonality in the second half, the business has posted negative earnings. However, sales and profitability improved Y-o-Y with the increase in sales of crop protection products at home and abroad, including greater exports of Terrad'or. Lastly, Energy Solutions. On October 26, Energy Solutions presented their performance in detail during its earnings release call, however, we will briefly present the earnings here. In Q3, Energy Solutions sales was KRW 7.648 trillion. Operating profit was KRW 522 billion and OP margin was 6.8%. The company recorded the highest quarterly sales backed by the increase in shipments, thanks to the greater demand from key OEM customers in Europe and North America and consequently with economies of scale and higher ASPs from rising metal prices. Profitability also improved. And on this note, we will conclude the Q2 -- Q3 earnings presentation and invite CFO, Dong-Seok Cha, to present the highlights of the company's earnings performance.

[Interpreted] Good afternoon. This is Dong-Seok Cha, CFO of LG Chem. I want to thank all of you for joining us today and taking a great interest in LG Chem's earnings release despite your busy schedule. As stated regarding the Q3 earnings, just to summarize, profitability fell due to the full-fledged downcycle in the Petrochem industry on the back of the global recession. However, we were able to raise the growth and profitability in Advanced Materials and Energy Solutions. And on a consolidated basis, profit had slightly increased compared to the second quarter. This was possible because we built a more stable business portfolio through the rapid business expansion of the company's new growth drivers. In the fourth quarter, which is going to be increasingly difficult to forecast, we will be facing a challenging business environment and, in particular, the cycle continues in the Petrochem business. However, recently, ASP's key products are stabilizing, Likewise, for feedstock prices, and thus, additional weakening of the market conditions is likely to be limited. Therefore, we forecast that Petrochem's market condition will bottom out in the fourth quarter. In case of cathodes, which is the foundation for Advanced Materials, we forecast that ASP will fall due to a more downward stabilization of metal prices and thus for the next 1 to 2 quarters. Maintaining such very high margin that we experienced previously may be somewhat difficult. However, when we look at shipments, they continue to increase, led by the electric vehicle market, and thus, we will further increase the business profit through continued business expansion. Dear investors, as mentioned earlier, uncertain macroeconomic environment at home and abroad continues to persist. The company will continue to maintain competitiveness through creating more differentiated and increased customer value and through thorough supply chain management, and also thoroughly manage cash flow through more prudent investment execution and working capital management. On the other hand, for the continued growth of LG Chem, we will also proceed on track in investing and fostering the top 3 growth engines for the company. Through the recently announced acquisition of AVEO, we believe we can secure a strong foundation and capability in the global new drug business. And we are in the final stages of completing the North America cathode capacity expansion plan to expand the battery material business, and we will be able to communicate the plan shortly to you. Dear investors, under continued adversities, everyone's share at LG Chem will endeavor to identify opportunities and create bigger growth. And I would like to ask for your strong and continued support. Thank you.

Next, we will begin the Q&A session. To give more opportunities to ask questions, we will limit 2 questions per person.

[Interpreted] [Operator Instructions] So the first question is from the line of Young Suk Shin from Morgan Stanley.

[Interpreted] There are 2 questions that I would like to ask you. First is about your overall Petrochemicals business. I do believe that the CFO just now has talked about the market backdrop and saying that the market is challenging. However, there was mention that there should be a gradual improvement in place. So the question that I would like to ask is how much of an improvement do you think that it would be possible? And in addition to that, in terms of the market actually showing a rebound in full, when do we expect that, that would be able to take place? The second question that I would like to ask you is, I guess, about news that the overall market has been waiting for, and that would be on the cathode side of your business. When would we be able to know about your updated capacity expansion plans or maybe expansion into the U.S?

[Interpreted] Yes, maybe I can take your first question, which would be about the overall petrochemical market outlook. I do believe that this is a question I can address by talking about the overall utilization rate. So if we look at one of the main indicators, which would be the utilization for excellent products, right now, it is running at around 80%. So it is true that within the market as a whole, there has been some adjustment in the overall utilization. And if we take into consideration the supply and demand dynamics within the overall market and the market backdrop, we actually believe that this is a trend that will continue into next year at a similar level. On the downstream side, due to the overall supply demand dynamics and also the difference in competitiveness by each of the different companies, we do think that there could be some differences into the experience that each company has. And in the case of our overall situation, if we were to look at the situation -- sorry, for the more common PO products and for some other -- with the exception of those areas, we do believe that the overall utilization would be at around 90%, which would be more at the normal levels. However, because of the global nature of our overall business and the uncertainties that we see within the overall economic backdrop, we are a bit cautious about next year. Taking into consideration the overall oil price levels and also the demand that we see within the market, we do think that the possibility of there being a further deterioration from the current situation would be a bit limited. And as we pass through the first half of 2023, we do think that we will be able to experience an overall improvement within the market.

[Interpreted] So maybe I can talk about your second question, which would be the overall capacity expansion plans that we would see in North America. So if we look at North America, it is true that we are looking at the possibility of expanding our capacity and take into consideration the overall metal sourcing, also the lack or availability of land and also the sales pricing and the metal sourcing possibilities and also the overall situation at our customer side. We do need to take various -- a wide variety of elements into consideration before we are able to come up with our final conclusion. So right now, we are in the final stages of discussions with our customers about the overall situation. So targeting the year 2025 in terms of the overall capacity expansion, as of now, we are looking into the environmental-related areas in terms of what would be the overall construction environment, what the setup is required and what other elements we need to have in place. At the same time, because the Inflation Reduction Act has been announced within the U.S., we do believe that there is an increase in overall need for localization of the various materials. So right now, we have been approached by a multiple number of OEMs and sell manufacturers about what our schedule will be going forward and what type of capacity or size we would be able to produce. So as a result of that, versus the initial plans that we had for our capacity expansion, we do believe that there could be possible to be an upside in terms of the overall plans.

[Interpreted] The next question is from the line of Hyunryul Cho from Samsung Securities.

[Interpreted] There are 2 questions that I would like to ask you. First, on the cash flow side, you did discuss that in general that, overall, the overall metal prices have been stabilizing at a lower level. So as a result of that, you did think that the overall profitability and also sales prices in this area may follow suit. However, if we were to look at the overall direction of profit going forward, what type of expectation should we have on that side? In addition to that, if you look at your position versus where your competitors sit, I do believe that one of the benefits you enjoy is that you're able to directly source your metals. So as a result of that, how much increase in profitability or at what level do you think you would be able to enjoy because of this overall advantage? The second question that I would like to ask you is that since the IRA has been announced in terms of your overall strategy for your business over the mid- to long term, has there been any changes in that direction?

[Interpreted] So maybe I can talk about the first question. With regards to the overall profitability trends that we have seen, it is true that, in terms of the recent trends for metal prices, we have seen some moderation. And going into the fourth quarter, because of the overall situation, we do think that a lot of the inventory has been depleted and we will not see a significant increase in the overall performance. In addition to that, at the customer level, we do see that for inventory that they are moderating and somewhat managing the overall customer inventory for the end of the year. So we do think that there is a possibility that the overall shipment volume will decrease as a result of that. So as a result of that, on the fourth quarter basis, on a Q-o-Q basis, we do see that there will be a slight softening in the overall situation. For metal sourcing, of course, we are interested in making equity investments into the metal side. However, how much that would actually represent in terms of improvement is difficult to specify in terms an absolute number. But that have been said, within the overall cost that goes into the cathode, the metal does account for a large portion. So as a result of that, whether it be on the lithium side or whether it be on the metal side, through various joint venture arrangements and also partnerships, this is something that we are interested in putting in place so that in terms of the sourcing, we can enjoy a more stable sourcing base, and this is something that we do want to expand going forward.

[Interpreted] Maybe I can address your second question about after the IRA has been introduced, whether there is a difference in our overall strategy. So if we look at the overall details for the IRA in itself, we do think that it will take a bit more time. So we would have to be close to the year for us to know what the details will incur with regards to the requirements. But it is true that with regards to the overall demand, we have seen an increase in demand. In addition -- so as a result of that, for our overall strategy, we do want to continue on the road that we have for building out a global production base. And in addition to that, on the IRA side, because this is newly in place for metal sourcing, we do want to ensure that we can localize metal sourcing more. So as a result of that, we are trying to increase our overall relationships and volumes with suppliers from North America and also Australia, which would be FTA, countries that are also -- countries that have an FTA with the U.S. In addition to that, to ensure that on the consumer side that they would be eligible for the subsidies that are provided, we are going to continue to source our overall cathodes from, again, from FTA countries and, at the same time, continue with the overall cooperations that we have with other partners to ensure that we can meet all of the requirements that we have for local content. However, once again, for the more detailed discussions about what we need to do, we would have to have more details about the final details related to the IRA regulations and what the requirements would be. And once that is in place, of course, we will do as much as possible to try to satisfy those conditions. So therefore, we want to confirm what the progress is.

[Interpreted] The next question is from the line of Jin Ho Lee from Mirae Asset Securities.

[Interpreted] There are 2 questions that I would like to ask about your Petrochemicals business. The first is about the turnarounds that have been taking place. I do understand that recently within the third quarter, there has been some maintenance activity, and as a result of that, also some adjustments in the overall utilization have been taking place. If we were to go into the fourth quarter, I understand that there is a TA slated for your Yeosu plant. So if you could talk about what that actually would be and what impact that would have on your P&L that would be appreciated. The second question that I would like to ask you is about your mid- to long-term capacity plans or investment plans and capacity for your Petrochemicals business. I do understand that for the short term, there is no plans to invest. However, as the market does improve and the backdrop would improve. What would be your mid- to long-term capacity investment plans? And so if you could update that for us, that would be appreciated.