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

[Interpreted] Good afternoon. We will now start LG Chem's 2022 Fourth Quarter Earnings Conference Call. And I am Hyun-Suk Yoon, Head of IR at LG Chem. Thank you for taking the time to join this call and for your interest in our company. We will begin with a brief introduction of 2022 Q4 earnings performance, followed by the CFO's presentation highlighting 2023 outlook and strategies, after which we will delve into more details on each of the business areas and their strategies and outlook, and then end with a Q&A session. The presentation will be interpreted simultaneously while consecutive interpretation will be provided for the Q&A session. The material presented during this conference call can be viewed by those with web access, and 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 with us CFO, Dong Seok Cha; Yeong Suk Lee from Business Planning; [ Ki-daeb Yan ] from Petrochemicals; Young-suk Lee from Advanced Materials; and [ So-Hee Yoon ] from Life Sciences. Let's begin with the business performance. On Page 3, consolidated Q4 sales and P&L. Q4 sales was up approximately 27% year-on-year, reporting KRW 13.852 trillion. Operating profit was KRW 191 billion, and EBITDA was KRW 1.120 trillion. Next page is full year business performance. 2022 annual sales backed by Advanced Materials and Energy Solutions growth was up approximately 22% year-on-year to KRW 51.865 trillion, breaking KRW 50 trillion in sales, while operating profit came in at on a consolidated basis to KRW 2.996 trillion. Next, Page 5 is our consolidated financial status. Assets as of end of '22 was around KRW 68 trillion; liabilities, KRW 30.5 trillion and capital was KRW 37.5 billion. Value present showed a steep year-on-year rise to KRW 402,000. Next, earnings by business division. Page 6, Petrochemical division. 2022 Q4 sales was KRW 4.279 trillion, turning to operating loss of KRW 166 billion. On the back of continuing petrochem market deterioration and one-off factors such as scheduled turnaround at Yeosu NCC and its downstream facilities as well as truckers union strike, culminated into a loss. However, high value-add premium products, such as POE and SAP on relatively solid demand continued to generate robust profitability. Next, Advanced Materials. 2022 Q4 sales was down 27% Q-on-Q to KRW 1.883 trillion with operating profit reporting KRW 18 billion. For battery materials and cathodes in particular, shipment was slashed due to inventory adjustments at customers and weakening downstream IT and semiconductor market all drove a decline in profitability. Next, Life Sciences. Q4 sales was KRW 245 billion, and operating profit was KRW 11 billion. On growing sales on core products, including vaccine and growth hormones, we achieved a record high quarterly sales and profitability also improved. Next, Farm Hannong. Q4 sales was KRW 135 billion and operating loss, KRW 14 billion. With the seasonality in the second half of the year, the business posted negative earnings while backed by higher domestic sales of crop protection products, there was a year-on-year rise in sales. Lastly, Energy Solutions. On the 27th, Energy Solutions presented their earnings in greater detail during its earnings call. Nevertheless, let me walk through some of the highlights. Q4 Energy Solutions sales were KRW 8.538 trillion; operating profit KRW 237 billion; and OP margin was 2.8%. Driven by increases in shipments to key OEM customers and GM JV operation coming fully online, the company recorded the highest quarterly sales sustaining the impact of economies of scale, while this profitability dipped on one-off expenses. On this note, we will conclude Q4 earnings update, I will now invite our CFO, Dong Seok Cha, to walk through '22 corporate-wide results and to share our 2023 outlook and business strategies.

[Interpreted] Good afternoon. I'm Dong Seok Cha, CFO of LG Chem. I would like to thank all of you for joining us today and for taking a great interest in LG Chem's earnings release despite your busy schedules. A quiet tumultuous year of '22 is now behind us as we welcome the start of the New Year. In looking back, year 2022, despite challenging internal and external circumstances driven by growth of Advanced Materials and LG Energy Solutions, we achieved growth breaking KRW 50 trillion in sales. Despite year-over-year decline in profitability on the back of sluggish petrochemical business, deteriorating market conditions, we were able to build a steady business portfolio, driven by expanding Battery Materials business underpinned by speedy expansion from new growth engine businesses, generating KRW 6.4 trillion of solid consolidated EBITDA. In projecting what's to come in 2023, we expect inflation-led economic slowdown and prolonged high interest rate cycle will persist, making operational backdrop yet again, quite challenging following last year's trends. However, even under such a headwind, we will continue to drive growth and strengthen the very foundation for future quals and in so doing, we will focus on 3 major action items. First, even in the midst of challenges for 3 major new growth engine businesses, namely the Sustainability business, Battery Materials business and New Drug Development business, we will be steadfast and channel our resources such as investments and personnel to continue to foster and grow these businesses. Second, on top of efficient use of resources for new growth drivers, we will maintain financial soundness. To that end, we will endeavor to improve internal efficiencies and rigorously manage working capital and be more prudent in CapEx decisions. Third, to achieve net zero target by 2050, we will actively explore and implement ideas for carbon reduction to preemptively equip ourselves with low carbon competitiveness. We therefore plan to complete carbon footprint measurement through LCA for all our products, domestic and global before the end of this year and find ways to expand to Scope 3 emissions. Dear investors, we've presented today a bit of a slowdown in Q4 earnings under a difficult and challenging operational backdrop. But as previously mentioned, we will faithfully implement strategies we've outlined today to power up LG Chem to generate greater value going forward. We ask for your generous support. And next, I will invite heads of strategy from each of the business divisions and they will present on the details of their respective businesses. Thank you.

Now we will take the time to delve into the details of each of the business divisions. First, [indiscernible] in charge of business strategy from Petrochem business.

[Interpreted] Yes. If you look at year 2022 for Petrochem business, mainly around China, we have experienced triple challenges, including rising supply, increase in crude oil price and sluggish demand. And especially because of the slow demand in China, we've experienced a decline in profitability for major products including ABS and PVC. However, thanks to our strong marketing in terms of the high value-add premium products, including POE/CNT/SAP, we were able to bring growth and hence, limit the decline. In 2023, we expect oversupply will continue. However, we are looking forward to a gradual improvement on the back of rebound in demand following China's reopening. And as we believe that sometime around the 2 political sessions scheduled in March, we -- and once the stimulus packages are communicated, we expect domestic demand in China will start to recover. Our company's major strategic direction is to migrate to low carbon structure for our existing products and also strengthen our capabilities in high value-add products and grow sustainability in new businesses. Hence, we are focusing on gaining low-carbon technology as well as energy transition, and we've set up and appropriately set out an organizational changes gearing towards high value-add and sustainability businesses.

[Interpreted] Next, we invite Mr. Young-suk Lee from Advanced Materials.

[Interpreted] Hello. I will first review '22 business performance and then look at '23 business outlook and strategies. If you look at year 2022, Battery Materials business was up 2.8x year-on-year, and all of the IT materials businesses showed growth going up 67% year-on-year. Rise in metal prices and FX rates were some of the external factors. But thanks to a beefed up product portfolio that had a strong margin focus, for the NCMA cathodes, semiconductors and OLED materials, profitability was up by 7 percentage points year-over-year. We expect business backdrop to be a drag in 2023 on the back of overall slowdown in the downstream markets, namely auto, semiconductor and display markets. However, we believe volume growth for battery materials to continue, led by North America and through customer diversification and build out the business space for North America, we will continue to strengthen growth potential and stability of our businesses. Around the growth businesses, including material businesses for batteries, semicon and e-mobility, we will not only expand and strengthen our R&D investment, add new global capacity for volume growth, but also continue to invest to bolster the value chain, including for metals.

[Interpreted] Last but not least, we would like to invite [ Su-Hee Yoon ] from Life Sciences.

[Interpreted] Good afternoon. I would like to present on the '22 performance and '23 outlook for Life Sciences. If you look at the 2020 annual sales, it was up 20% year-on-year, reporting KRW 909 billion and operating profit was KRW 73.5 billion, while Op margin reported 8.1%. From the current portfolio, core product, Zemiglo, antidiabetic drug and Utrophin growth hormones are sustained growth by solidifying our market position while autoimmune meds, Eucept and Zelenka quickly expanded market share in Japan. And polio vaccine Eupolio launched in '21 posted a steep growth, reporting a growth of 20% year-on-year. In terms of new drug R&D, tigulixostat, our in-house developed treatment for Gout, started Phase III clinical trials in its main markets in the U.S. and in China by entering into a licensing agreement last December with Innovent Biologics of China, we further opted the likelihood of commercialization in the Chinese market. Following the October announcement of acquisition of AVEO, a U.S.-based new anticancer drug developers, we closed the deal on January 20th securing a foot hold for global expansion. AVEO is based in Boston U.S. and as a specialized oncology pharma company, have been growing fast since it gained 2021 U.S. FDA authorization for FOTIVDA, which is a medication for treating kidney cancer. Through this acquisition, we have been able to gain core capabilities and specialties for the U.S. oncology market. In short, in 2022, we brought solid growth from the current business portfolio to global new drug R&D a step ahead and also acquired AVEO, all in an effort to power our momentum to rise as a global leading pharma company. Through product portfolio diversification and higher global sales, we expect '23 to see sustained growth from existing businesses. While with AVEO consolidation, Life Sciences divisional annual sales will expand to the tune of KRW 1.2 trillion. Competition may deepen for some products, including diabetic meds, but with last year's launch of autoimmune medication Zelenka and stronger lineup of products, including Eutropin and [ Aspen ], we project steady growth on the back of rise in global sales on key products such as for aesthetics and fertility and vaccine. Under the new drug R&D time line for '23, Gout medication tigulixostat will go through Phase III global clinical trial, and we're planning on Phase II trials for an orphan drug for obesity. One of the key things we must do in '23 is successful post-merger integration with AVEO to lay the foundation for global business, so is to lead in the U.S. oncology market. To that end, we plan to work towards early stabilization of AVEO to internalize commercialization capabilities and devise ways to maximize synergies between the 2 entities. Also, the speedy product introduction and development we will enhance our competitiveness for the oncology pipeline and be fully prepared to take the leap as a global leading pharma company with a strong underpinning of anticancer drugs.

[Interpreted] This ends the presentation by the company on the earnings performance. Next, we will begin the Q&A session. To give as much opportunity to as many people, we ask that you ask no more than 2 questions per person.

[Interpreted] So the first question is from the line of Jay Song Yoon from Hana Financial Investment.

[Interpreted] I have 2 questions. My first question is related to your comment related to the sales guidance for the Advanced Materials, which you shared at KRW 10.5 trillion. I would appreciate if you could actually share the breakdown of this number. And I would also like to know from the company, the assumptions used for the cathode in terms of the pricing as well as the overall volume? And my second question is related to Q4 performance of the Advanced Materials. And in your performance, I just want to better understand the effect of the reverse lagging? How much impact does that actually had in your overall earnings performance?

[Interpreted] You asked 2 questions, but I will just answer the 2 questions with just as 1 answer. And please, I would like to share -- mention that it's going to be very difficult for me to share the details of our P&L performance. But in terms of what we actually experience for the sales of cathodes in the 4Q, as we have previously mentioned there has been on the customer side, they made adjustments to their inventory level at the year-end and also affected from the previous quarter the overall decline in sales, it also affected our ASP. And so as a result, we actually experienced a more than 30% reduction in the overall sales of the cathodes. But in terms of the adjustments that were made to the volume and the changes that had happened in the [ metal ] prices and also, there were some one-off expenses related to the compensation pay that we had to make, we actually saw a significant decline in our operating profit. But going forward, as we look at 2023, of course, we will not be able to have the same experience as we did in -- back in 2022 as we saw a steep rise in metal prices, and we were able to actually generate some profit margin as a result of the inventory or stock level that we were holding. But we will continue to make sure that our profitability is within 10% range as we actually continue to ensure that their -- and secure new demand and continue to improve our price competitiveness.

The next question is from the line of Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] I also have a follow-up question to what was asked earlier related to Advanced Materials. Recently, as we see what's happening in the market. We know that our OEMs are actually pricing down their EVs. And at the same time, there is growing about the overall demand for the EVs in the market. And so as we look at what happened at the end of 2022, there have been talks about OEMs are cutting their orders, also lowering their sales prices. This has actually created some concerns in the market. So my question to you is I want to better understand how you see the current situation? And what is your outlook for the demand and shipment volume for 2023? Can you actually talk about this compared to Y-o-Y? So compared to 2022, how do you forecast the demand and the shipment for this year? And you have previously mentioned that you want to maintain your profitability to be within or around 10% level. But I want to better understand when you believe that this will actually be realized. Would it be something as early as the earnings performance results that we will see in the first quarter of this year? Or would it take place in the first half or possibly second half of this year? So in terms of what you have mentioned related to your overall profitability guideline, when do you believe that your expectations will be realized? My additional question is visiting CES, I could hear from the downstream industries specifically electronic companies as well -- home electronics companies as well as automotive -- automobile players, that there are comments -- message is that they're going to use less plastic products going in the future. Under this backdrop, how is the company going to respond to this. What is your strategy for this? And what is your strategy to continue to secure profitability in this business?

[Interpreted] This is Advanced Materials, and let me address your first question. I also am very aware of the market concern related to the overall slowdown that they believe is happening on the EV side. However, if we actually look at what's happening in 2023, we see that we have forecast where we see EV market to grow at least by KRW 20 trillion or 40%, and our business division is also sharing this view as well. And so in respect to your comment about OEMs cutting their orders, this is not true because if we actually look at what's happening in the first quarter of this year, we're seeing a Y-o-Y growth of 70%. And for the 2023 full year, our expected growth rate Y-o-Y is actually 60%. And so in terms of how we'll be performing on a quarterly basis or on a half yearly basis, I don't think there will be a very high variant in terms of what we will be generating in our earnings. And we believe that -- and that's why we maintain the position that we will be able to perform with the profitability of -- within 10%.

[Interpreted] And to address your second question, this is from the petrochem business. And as you have mentioned, it's very important and it's very clear that in order to continue to deliver value to our customers on the plastic side, we have to make sure that we move away from the high carbon generating business as well as to also address the concerns our people have related to the plastic waste as well. And so for the company, our strategy has been set and we want to be a market leader on the sustainability side. So we want to make sure that our business is actually transformed so that we are actually creating a low-carbon and eco-friendly business structure going forward. In order to do this, we are focused and we have already put in a lot of resources to develop our key materials and solutions for this. Of course, in order for this to be more visible, it will take some more time. But in terms of the need to actually grow the recycling area and to further build our sustainability initiative, it's very important that we cooperate with external parties, and we continue to identify good opportunities to further this business initiative. And so while we are doing this, at the same time, we want to make that we are generating a very strong cash flow through our stable business. And specifically, I'm talking about the high value-added business that we have already put in place.

The next question is from the line of Woo-Hyung Choo from HSBC.

[Interpreted] And I will ask 2 questions. One question is on the investment side. And the other question is on your Life Science business. The first question related to the investment specifically for the investment the company will be making for the Battery Materials. The company has plans to make significant investment in this area. So I'm actually very interested in the funding plan for the company. And I'm just wondering, in the short term, is it possible that one funding source for the company is a divestiture of your shares in LG ES? Moving to the Life Sciences business, I have already heard that you have completed the acquisition process for AVEO. But I would just like to get a little bit more progress update on what has happened, and if you can specifically talk about the PMI plan and also strategy going forward as you operate AVEO business.

[Interpreted] Regarding your first question, this is the CFO. And you asked about our overall funding plan for -- for us to fund the 2023 CapEx needs. Now in 2022, our CapEx expenditure was KRW 3.5 trillion. We increased that to KRW 4 trillion for 2023. We are actually facing many uncertainties in the macro environment. So it's very important for the company to exercise prudent -- and that's why when we execute our investments, we'll make sure that we'll do it in a prudent manner. But nonetheless, of the 3 main growth engines that we have already announced. We will continue to make investments in these areas to further reinforce the new growth engines for the company. But in terms of how we will be funding the KRW 4 trillion that's required for our CapEx. One main funding sources is really the cash flow from our operations. And at present, we have already secured funding KRW 1.4 trillion. This was actually done in January as we issued our corporate bond onshore and also there were some offshore funding that we actually are successfully secured. But of course, going forward, there will be some additional funding requirement that we will say -- we'll be facing, but unless there is any specific special circumstances, we'll be able to do that through some borrowings. And for the possibility related to the divestiture of the LG Chem Holdings or the LG ES shares. I think that rather than looking to this, we also have other options. For example, we will be looking into noncore assets and businesses and to be more asset light and to make sure that we have a very efficient asset portfolio. We'll make sure that this actually -- is another route that will be considered. And if we believe that we also do need additional funding then we will be going out to the market then.

[Interpreted] This is the Life Science business, and you asked a question related to the acquisition of AVEO. And as we have shared previously in respect the acquisition, we first announced the acquisition of AVEO and we made that official notification on November 1st, and then there was the shareholders' meeting on January 5th. And overall, we got approval for the foreign investors to invest in the company. And as such, we were successfully able to complete the whole acquisition process as of the first -- as of the 20th of January. And with this process completed, AVEO is a company, it is a subsidiary of LG Chem, but it will actually be operated in an independent fashion. Moving to the strategic focus for the company, for the PMI. We want to make sure that we are leveraging the strength of our book -- of our 2 companies. So in terms of the capability for AVEO, they have much competency and experience in terms of securing clinical trial approvals from the United States. And for LG, we have also capabilities in developing new drug pipeline as well as our processes to support this. And so we want the 2 companies to be able to create synergies by developing the strength even further going forward. And we want to make sure that for AVEO, we continue make sure that they are highly competitive in developing the new cancer drugs and to make sure that we have a very strong pipeline and to make sure that we're able to bring the clinical trial and accelerate this process as much as possible.

[Interpreted] The next question is from the line of Parsley Ong from JPMorgan.

I'm Parsley from JPMorgan. I have 2 questions on your Battery Materials, mid- to long-term strategy. So the first question is on cathode. Can you share us what is the impact from the December IRA guideline on your North America cathode plans given the high CapEx involved in U.S. versus other regions? Has there been any change in plan? Second question is, could you give us an update on your separator capacity build out? What kind of margins do you expect from the base separator and coating business? And what is the margin you are getting from the coating business right now. Similarly, is there any impact on your North America separator plans post the December IRA guideline?

[Interpreted] I will answer your question one by one. The first question is related to the cathode investment plan. And in respect the IRA December guideline, that has been announced, but the IRA implementation plan has not been fully disclosed. So as we just look at what was announced in December, it clearly shows that there is a little bit more room to maneuver for the LG Chem than we had anticipated. But of course, we do have to work with our customers and the North American OEMs as well as film makers to prefer and make a request to have suppliers have presence in North America. And so that is why we do not have any change in respect to our investment plan in North America. Of course, for the detail planning of the investment, it will be done in phases, and we'll closely work with our counterparts as we going further, and we'll have more details to develop for our investment plan as we continue our discussions with the customers.

[Interpreted] Moving to your second question related to the separators, LG Chem currently has a production capacity for these separators but this is only on the coating side. Our current capacity is 700 million square meters. And that's why we actually are not in terms of our profitability competitiveness, not as competitive when we compare ourselves to companies that also have the base production. And that is why the company has set up the Hungary joint venture with Toray. And so our target is to also have the base production capacity of 900 million square meters by 2027. And so in terms of our overall performance for the separators going forward, we believe that by year 2026, we'll be able to record sales of KRW 1 trillion and to enjoy double-digit profit margin. But of course, in terms of whether or not we'll be actually setting up any capacity in North America in the U.S., it's still very much early to talk about this because of the IRA implementation plan has not been announced. But once the plan is announced, then we'll be able to have some additional dialogue with our customers. At this time, we are really in the early stages of us exploring the possibility of setting up the separator capacity in the U.S.

The next question is from the line of Jin-Myung Lee from Shinhan Investment.

[Interpreted] My question is actually directed to the petrochemical business as well as to the cathode business plans. And so I would like to share from the company a little bit more about the opportunity costs related to the fourth quarter and the overall response plan as you actually look at the overall outlook for the downstream? And also for this year, of course, last year, we also saw how important the metal prices were for your business. So what is your outlook the metal prices for this year? And what is your metal sourcing plan for this year as well?

[Interpreted] Related to your question on the petrochem business for Q4, if we talk about the opportunity cost, then that would roughly translate into KRW 120 billion as we did the turnaround. And also as a result of the unionized truckers' strike that amounted to about KRW 20 billion. So in total, the size was around KRW 140 billion to KRW 150 billion. You also talked about the downstream utilization level for 2022. And for NCC and PO due to the over concerns or the oversupply in the market, the utilization level was at around 80%. But of course, for our core business areas such as PVC and ABS, in terms of the utilization level, it was actually at a very close to the normal level.

[Interpreted] And to address your question related to the outlook for metal prices and metal sourcing. We believe that on the nickel side, we will not see a strong -- the fluctuation in prices in 2023. The outlook for the team is very dependent on the demand side in China. But if we look at the overall market concern that they do -- of course, the extent of the decline may vary by source, but the overall market view is that the lithium prices will also fall. And in terms of what we will be doing, we'll do actually a stronger monitoring what's happening to the lithium market. We'll make sure that we are more flexible and less in terms of how we manage our inventory. And we will also make sure that in terms of the sourcing side, we'll make sure that we're able to source precursors from companies that are able to actually give us a very favorable prices. And on the lithium sourcing side, we will be making sure that we'll continue to develop strategic partnerships or cooperations with companies that are currently in countries that U.S. had FDAs with. And so in terms of cooperation, it could be possibly some equity investment, it could also include some equity investments in these companies as well.

The last question is from the line of Woo Ho Rho from Meritz Securities.

[Interpreted] This will be the last question, and thank you for this opportunity. I would like to ask about the overall company's strategy for cathode specifically for 2023? And also, if you can share your mid- to long-term business strategy for cathode as well? And for a very considerable time as a Battery Materials business under LG Chem and also LG ES. In light of LG ES, you also continue to have communicated that you're working hard to continue to secure new customers. And in light of LG Chem's sharing your plan to add capacity on cathode side and at the same time, as we look at what's happening, and there have been many announcements not only by LG ES, but other cell makers, they've also come back to the market announcing many capacity expansion plans as well. And so if the company can share your progress and some results you have been able to make in the last 1 or 2 years, and how you have been able to develop and secure new customers. This will be very helpful and it's possible that some results could be actually be realized in a very near future? And also, going back to the comment on the Petrochem business and as we look at the overall outlook for 2023 or full year performance, you also mentioned that you are anticipating that overall positive development be happening as China actually hosted the 2 sessions. And so in terms of your outlook for the downstream, what's going to be the overall profit margin outlook for your downstream products, including the commoditized NCC products as well?

[Interpreted] To answer your question, the company will continue to expand high value-added product lines including the NCMA single particle as well as high nickel product. And we will continue to make sure that we are stabilizing production of cathodes in China, which will also further strengthen the company's cost competitiveness as well. We'll continue to build relationships with the mining companies so that we'll be able to secure metal products in a very favorable prices as well, once again help the company to be even more cost competitive as well. We have been talking with global cell makers over time, and we want to -- we are able to -- and this is in line with our efforts to diversify our overall customer base. And we believe that from this year, we'll be able to show some visible results.

[Interpreted] And this is the Petrochem business. And in terms of giving you more color in terms of how we see Petrochem business performing this year, it's not so easy we believe that there is very high uncertainties and fluctuations that could happen in the market in terms of the oil prices as well as the exchange rate. So in terms of what's going to happen, we believe that in terms of PBS and ABS, the market will -- market situation will improve in China. So there's room for improvement for PVC and ABS. However, on the NCC PO side, it is still going to be an oversupply situation. So we will be facing challenges there. But in terms of giving you more additional information, I think we do have to go beyond Q1 as we see some more tangible changes in China, and then we'll be able to share with you more meaningful communication.

[Interpreted] On this note, we will be concluding LG Chem's Q4 earnings performance call. Thank you very much for your participation. And if you have any questions, please feel free to contact the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live Call.]