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

[Interpreted] Good afternoon. We will now start LG Chem's 2023 First 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 2023 Q1 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; Young Suk Lee from Business Planning; [indiscernible] from Petrochemicals; [ Yoon Suk Lee ] from Advanced Materials; and So-Hee Yoon from Life Sciences. Let's begin with the business performance. On Page 3, consolidated Q1 sales and P&L; Q1 sales grew by 25% Y-o-Y and 5% Q-o-Q to KRW 14,486 billion, backed by the growth in Advanced Materials and Energy Solution. Operating profit was KRW 791 billion and OP margin was 5.5%. Next, Page 4, is our consolidated financial status; as of the end of the first quarter 2023, assets were around KRW 71 trillion, liabilities were around KRW 32.5 trillion, and capital was around KRW 38.4 trillion. Net asset value per share was KRW 405,000, increased compared to the end of 2022. Borrowings ratio was 84.6% and as a result of the preemptive funding of KRW 1.4 trillion in January to prepare against macro uncertainties, total liabilities/equity ratio increased compared to the end of 2022. Next, earnings by business division; Page 5, Petrochemical division; 2023 Q1 sales was KRW 4.579 trillion, operating loss continued at KRW 51 billion. However, the extent of the loss was reduced. While the Q1 utilization increased since last year Q4 turnaround, weakness in the core products continued due to the sluggish demand in home electronics and construction, amidst a sluggish market condition, and there was also the impact of falling exchange rate. However, robust demand continued for high value-added premium products such as POE, SAP, and CNG. As of 2023, Petrochem business realigned its organizational structure. Sustainability business unit focusing on eco-friendly products and Nexolution business unit focusing on high-value-added products were newly installed. Past earnings have been retroactively applied to the new business units. Next, Advanced Materials; in Q1, Advanced Materials sales was KRW 2.561 trillion, a 36% increase Q-o-Q, and operating profit was KRW 230 billion. Despite the continued sluggish conditions in the downstream market for IT and semiconductor materials, demand recovered Q-o-Q for the cathode business to realize a significant increase in shipments and profitability. Next, Life Sciences, in Q1, sales was KRW 278 billion and operating profit was KRW 16 billion. Sales of key products, such as vaccines and growth hormone increased, demand recovered in China's aesthetic business. And from February, AVEO's earnings were consolidated, following the confirmation of AVEO's acquisition. Next, FarmHannong. Q1 sales was KRW 265 billion and operating profit was KRW 34 billion. With greater sales of crop protection products at home and abroad, sales increased Y-o-Y. Lastly, Energy Solution; yesterday, on April 26, Energy Solution presented their performance in detail during its earnings call. However, we'll briefly present their performance. In Q1, Energy Solution sales was KRW 8.747 trillion, operating profit was KRW 633 billion and OP margin was 7.2%, led by the North American region, shipment increased, and with higher ASP, sales growth is continuing. Also, by reflecting the expected IRA tax credit amount to the Q1 earnings, profitability improved. And on this note, we'll conclude the Q1 earnings and outlook presentation and invite CFO, Dong Seok Cha, to present the outlook for the company's earnings.

[Interpreted] Good afternoon. I'm LG Chem's CFO, Dong Seok Cha. Thank you for taking great interest and participating in the company's earnings release conference call. First, a recap on our first quarter performance. We realized the best-ever quarterly sales from the growth in the Advanced Materials business with greater shipments of battery materials and the growth of our subsidiary, LG Energy Solutions. In respect to profitability, with the absence of one-off factors as we had in the previous quarter, we saw that our bottom line improved from the sales growth of battery material. In respect to future outlook, we expect a bumpy recovery, as uncertain macro factors, such as consumption, investment, exchange rate remain as global economic slowdown continues. So once again we will anticipate recovery, but it will be bumpy. However, we forecast positive earnings for the Petrochem business, as we enter the peak season from the second quarter and demand recovers. We forecast that Advanced Materials and Energy Solution will continue their robust growth. Moreover, despite the challenging environment, we are on track in expanding the company's top 3 new growth engines, and we are showing progress in many areas. First, in Petrochemical business, we restructured the internal organization to focus on fostering sustainability materials. As such, we have, as of 2023 January, newly created and are operating the sustainability business unit and the Nexolution business unit, responsible for high value-added products. Through this, we plan to accelerate the transition to a new business structure, and have a greater focus on fostering new growth drivers. In Advanced Materials, with the recent decline in metal prices, sales and profitability can be impacted in the short term. However, with the U.S. IRA coming into force from this year, we expect many opportunities in the mid- to long term. To respond to such regulation, we are working hard to secure the supply chain, including entering the upstream by constructing the precursor plant in Korea and actively reviewing various opportunities to expand local production capacity. Finally, in Life Science, with the earnings of AVEO, a U.S.-based cancer treatment pharmaceutical company that LG Chem has acquired, consolidated from the first quarter this year, we not only believe that Life Science's sales to go beyond KRW 1 trillion for the first time this year, but also by leveraging the synergy effect with AVEO, we plan to accelerate the pace of new drug development, by revamping the pipeline strategy, which will include new cancer treatment drug. Dear investors, by expanding the business of the top 3 new growth engines, even in this challenging environment, the company will continue to grow and improve its corporate value. I ask for your continued support. Thank you.

Next, we will start the Q&A session.

[Operator Instructions] The first question is from the line of Sunwoo Lee from Macquarie.

[Interpreted] There are 2 questions that I would like to ask you. The first question is related to an announcement that you made 2 weeks ago, which would be the overall investment that you're planning to make in the Saemangeum region with Huayou Cobalt. So as a result of that overall investment, did you make that investment with the overall concept that you did believe that such an investment would not follow under the IRA's Foreign Entity Of Concern definition? And in addition to that, do you have any plans to further expand your capacity within the U.S.? The second question I would like to ask you is, related to your Petrochemical business. With regards to that business, on the operating profit line level, when do you actually believe that there can be a turnaround of your business, and for the overall market backdrop and outlook going forward, how do you see the market evolving?

[Interpreted] So, yes, maybe I can address your first question about the investment that we made in the Saemangeum -- or planning to make in the Saemangeum area with Huayou Cobalt. So according to the overall intentions that we have behind making this investment, it would be that under the IRA, we do want to ensure that we are able to secure the critical minerals' requirement that we need to be able to solve, by having our overall capacity located within a FTA country, in which the U.S. has an FTA with. That having been said, the other intention also would be to expand the overall operations that we have, starting from the overall nickel sourcing, to actually producing the cathodes and also providing the smelting, that is related and necessary for the processing of such situations. In terms of whether we believe that the JV would be out of the scopes of Foreign Entities Of Concern, according to the IRA, I do think that once the overall definition is more finalized and more determined in detail, that we could actually flexibly deal with this situation, by adjusting the shareholding that we have within the JV to address the issue.

So maybe I can address the first question that you have asked with regards to the overall outlook that we have for the petrochemical business and also the way that we see our profitability moving going forward. So for the market as a whole, it is true that from the second half of this year to the first half of this year, we actually believe that this is the bottom of the overall market, and of course from product to product, there may be differences within the timing in itself, but from the demand side, we do actually believe that there will be a moderate recovery within the overall market that we see. It is true that oil prices and crude prices remain high in actuality, in addition to that, there is an over-supply situation that persists within the market. So as a result of that, we don't believe that the overall improvements that we are experiencing will be of a significant nature, but it will be more moderate in terms of the trends. However -- and in terms of the timing for the turnaround and so forth, I do think it's a bit early to be speaking about when we believe that, that will happen, but towards the second half of this year, we actually do see less new capacity being supplied into the market from the region, and if we do see an overall improvement in demand from China, we actually believe that there can be an improvement that will take place in our profitability.

[Foreign Language] The next question is from the line of Woo-Hyung Cho from HSBC.

[Interpreted] I would like to ask one question each from -- related to your Petrochemical business and also your Advanced Materials business. First, starting with the Petrochemical business, this year, if you look at the overall changes that have been taking place, you did revamp some of your business units. So as a result of that, for more environmentally-friendly plastics, what is the changes -- if you could provide an overview that is taking place there? And what would be your business strategy in this area going forward? The second question that I would like to ask you is about your Advanced Materials business. At the end of the previous month, of course, more details about the detailed regulations surrounding the IRA were announced. So as a result of those announcements, about your investment in the cathode area and also in the separator area, are there any changes in plans that you would have, as a result of those announcements?

[Interpreted] Yes. Maybe I can address your question about the overall Petrochemical business. Of course, for sustainability, this is an area that we have identified as a new growth driver for the future. So as a result of that, amid a very challenging business environment, with regards for you and more environmentally-friendly overall products, for example, related to the bio area and also for the recycled plastic area, the initiatives that we have ongoing are going to be pursued, at the same pace that we had initially planned. So as a result of that, on the PBAT side for biodegradable plastic, this is something in which we are planning to go into mass production in the first quarter of next year. On the PLA side, we continue to engage in various strategic discussions in terms of our cooperation with various partners. And on the recyclable plastic side, including mechanical recycling, we are also looking into various options available, including supercritical water for hydrothermal plastic recycling. So as a result of that, with regards to environmentally-friendly initiatives, both on the materials side and also on the technology side, continuous efforts will continue to be made. And added to that, with regards to our customer base and also the uses that we see for these various products, we will continue to discover more premium areas that we would be able to enter into. So as a result of that, we are in continuous discussions with various brand owners, and with that we do hope that our [indiscernible] brand will be able to meet production going forward. [Interpreted] So maybe I can address your second question about Advanced Materials. If you look at the IRA guidance that was announced at the end of March, in actuality, there was a lot of detail that was provided about the overall clean vehicle credits and subsidies that would be provided for EVs. However, on the advanced manufacturing production credit side, in actuality, nothing really new has been announced. So as a result of that, under the general assumption that the details that were provided in the white paper for the IRA are not modified, we are going ahead with our overall investment strategy, as we had initially planned. So as a result of that, on the cathode side, separate from the possibility of various impacts under the IRA, this is something that we are pursuing as a situation in which we want to localize our overall production in North America, because we have received various requests from our customers. So as a result of that, there will not be any change there. And in addition to that, if there are benefits that we can reap according to the AMPC and also with regards to various discussions that we have with our customers about our overall ASP levels, and, of course, that will be something that we will pursue. In addition to that, on the separator side, this also is something that is in discussion with our customers about the localization of separator capacity, and right now, we're at the level in which we're thinking about what the appropriate size would be.

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

[Interpreted] There are 2 questions that I would like to ask you. First is that, if you look at battery producers globally, I do think that there is a lot of development taking place on the LFP chemistry side. And as a result of that, I do think that demand for LFP cathodes is something that will increase going forward. So how is the company going to address this overall situation, and does it have any plans to deal with some of the demand that may be coming from North America, or to supply into that market? The second question, is a question that I would like to ask about your acquisition for AVEO. AVEO is something that has been consolidated in your performance from the first quarter. If you could provide an update about how things are going after the acquisition, and also in terms of your overall competitive edge that you believe you will be able to enjoy in the cancer treatment area for new drugs, that is something that we would appreciate.

[Interpreted] So maybe I can do some of the translation for the first question first, before we go into the answer for the second question. So for LFP, it is something that is being more widespread in terms of securing the cost competitiveness for EVs. So as a result of that, on the OEM side and also on the battery producer side, we do see that there is more of an initiative on the LFP chemistry side that is taking place. In addition to that, under the IRA framework, there will be a limited supply available of LFPs that would qualify for IRR credit. So as a result of that, we do see a lot of customers asking us, if we would be able to supply RFP to them, as a result of that. So LFP is an area that we are continuously reviewing in terms of how we want to play LFP going forward, in terms of the cost innovation that is required, and also expanding our portfolio into the low-end solution area. We do think that it would be an attractive option, together with other types of technology that we would be able to produce, for example, high-voltage nickels or other technology. And in addition to that, on the raw material side, we continue to discuss with various partners about how we want to build out the value chain that would be able to [indiscernible] this business.

[Interpreted] Provider, we are defining what we want to have for -- in terms of our vision and also our growth targets and growth goals for the future. And in addition to that, through various integration programs that we are conducting, we continue to communicate closely with the existing employees and also management team of AVEO. So for the key personnel at AVEO, of course, we are trying to ensure that they can get back to work and concentrate as soon as possible. And if you look at the overall performance that we have seen for FOTIVDA, which would be the renal cancer treatment, on a Y-o-Y basis, we've actually seen growth of more than 60%. So under the consolidated vision for the future and to rapidly grow our position as a global cancer treatment provider, we are in the process of trying to set the details for our value creation plan going forward and we are also trying to accelerate the overall development pipeline that we would have for the future. In addition to that, through open innovation, we do also believe that there will be other growth opportunities that we will be able to actively address. To talk about what we believe our competitiveness in this area would actually be, of course, in the new drug development area, we do have a full value chain of capabilities that we have been able to secure, and based upon that, we are planning and we do have experience releasing various medications of various modalities in the U.S., Europe, Japan, and also China. So based upon that track record, we do think that we also will be able to continue to have a very strong performance in terms of development and also commercialization. So since we were merged into LG Chem in 2017, we have been focusing on new drug development in the area of cancer treatments and also metabolism disease treatment. And we do have a very clear strategic direction that we want to become a global pharmaceutical player within this market. So as a result of that, we have been making very bold investments into the key areas. And based upon the capabilities of providing drugs that support various modalities, I do believe that we will continue to delve into our plans and our efforts to become a global cancer treatment player within the market. Thank you.

[Interpreted] The next question is from the line of Jin-Myung Lee from Shinhan Securities.

[Interpreted] There are 2 questions that I would like to ask you related to your Advanced Materials business. So first, would be that if you look at the progress to-date, I mean, it does seem to be that you have been very active in new business acquisition, whether it'd be through M&As. There are also various partnerships that you have within the Advanced Materials landscape. So if you would have future interest going forward, what areas would that actually represent and through what division or business unit do you actually believe those type of initiatives could be pursued? In addition to that, on the non-core asset sale area, if there is anything that is ongoing and anything that you can discuss, that is also something that would be appreciated. The second question that I would like to ask you is about also your customer base. For new non-captive customers, setting aside LG Energy Solution, when do you think some of the orders from such customers would be able to materialize in more full force? So when do you believe the timing of that will be?

[Interpreted] Yes. Maybe I can address your question from a broader company perspective in terms of our intention going forward and what we're trying to do. As we have mentioned many times before in terms of the new growth drivers for the future that we want to foster in more full force, we have identified 3 main areas. And as a result of that, whether it be from a technology perspective or from building out the supply chain related to those operations, we did feel that just depending upon our own internal capabilities in terms of pursuing that business to the level of quality that we would like and also at the speed we would like is a bit -- it's not sufficient to do so. So as a result of that, to be able to catch up at the pace that we want to build these businesses at, that's why we have been pursuing various M&As and also JVs with strategic partners to be able to do so, and as a result of that, we continue to build out these areas and foster them at a faster pace. Going forward, I do believe that this overall stance is something that we will maintain. However, in terms of the areas of interest, again, it would be the 3 main areas that we have identified as new growth drivers. In particular on the Petrochemical side, as we have mentioned before, it would be sustainability-related areas, in the areas of bio, also more environmentally-friendly materials, and also recyclable plastics. And on the battery materials side, it would be supply chain-related or SCM-related initiatives. Maybe it could be battery components in which we are not present right now, in which we would be able to invest into. And then on the Life Sciences side, it would be areas in -- which would enable us to build out the overall cancer treatment pipeline that we have for the future. So those are the areas in which the resources available will be used. And I do think that the latter part of your question, in terms of the non-core asset disposal sales or such, is probably related to how we are going to fund this investment for the future in terms of resources, and maybe it's stemming from some concerns on that area. Of course -- and I think that, that is why you have asked about whether we have any intentions to sell or maybe withdraw from some of the businesses, in which we see more moderate growth taking place. Separate from how we're going to fund the investment for the future, I think that in terms of managing our overall business portfolio and also looking at our non-core assets, or in terms of the businesses that are growing at a slower pace, selling such businesses or maybe withdrawing from that is a normal part of our operations. It is something that we are continuously engaging upon and would be continuously monitoring.

[Interpreted] So maybe I can address your second question about our non-captive business in terms of more clear orders and more visibility on that side. Right now, we are engaging with various global customers and talking about supply terms and conditions for our cathode with non-captive customers. And we do think that we would have some more realization take place this year or maybe at the beginning of next year. So that having been said, in terms of finalizing the actual volume of which would be supplied, this is something that is related to the capacity expansion plans that we have. So as a result of that, for the actual signing of such agreements, there could be some flexibility as a result of the coordination that is required.

[Interpreted] The next question is from the line of Oscar Yee from Citi. The next question is from the line of Nikhil Bhandari from Goldman Sachs.

I have 2 questions, both on the cathode business. Firstly, can you talk about where is LG Chem's own technological capability to make their own precursors in future, or how long will it take to build their own capability in making precursors without any, let's say, partnership with the other companies, like the one you have done from China? And in the particular JV plant you announced with Huayou Cobalt, it suggests that it's going to complete by 2028. So I'm just wondering why is the construction time or the ramp-up time so long for that particular plant. The second question is on your cathode margins. It was commented in the opening remarks that the revenue and margin can come under pressure from the metal price correction. Can you talk about, given cathode prices have already materially started to correct, how low can margins go in the upcoming couple of quarters? Last quarter -- last year, in particular, for 2Q and 3Q, your margin did very well when metal prices were going up. So should we expect a material underperformance of the margins in the next 2 quarters, or is there any reason why margins will still be stable?

[Interpreted] So maybe I can take your questions one-by-one in terms of addressing the points that you have mentioned. First, if you look at the overall investment that we're making in the Saemangeum area, in actuality, the underlying technology that is going into building out that capacity is our technology. So based upon the mother factory that we have built in Iksan for precursors, we have been able to improve the overall productivity of our capacity and we do think that we have been able to secure a stable technology base that would enable us to enjoy this higher level of productivity going forward. So as a result of that, for the Saemangeum investment, we will be applying a new process technology to this capacity, and as a result of that, we do think that the overall Saemangeum site in itself, will be of a higher quality and also higher productivity level as a result of the -- in terms of our overall production. The reason why the timeline spans out to 2028 in terms of our productions, is that internally, based upon the basic design that we have for the capacity and also the fact that we're applying new technology to this factory in terms of the processing technology, we did want to make sure that we had a certain amount of room to be able to deal with it in a moderate pace. However, of course, internally, we are going to try to move things as fast as possible, so that we can reach mass production as soon as possible.

[Interpreted] So to address your second question about our margins and the profile that we would have, if you look at the overall margin profile that we have for our cathode business, under the assumption that metal prices remain stable, we do think that this is a business that will represent a high single-digit type of margins. However, if you look at the recent situation, lithium prices have been dramatically dropping, and as a result of that, we will have some burden from inventory taking place, and we do think that, that may have an impact on our overall profitability. So we want to minimize our inventory on this side as much as possible. Last year, as you had mentioned, lithium prices have surged. And as a result of that, we were able to secure early on a lot of inventory in this area. So with that, we were able to maximize the benefit of the lagging effect to a maximum level. However, in a reverse situation, where lithium prices are dropping, we will try to minimalize the impact as much as possible by adjusting our inventory levels accordingly.

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

This is Parsley. I have 2 questions. So the first question is on the IRA in your Huayou Cobalt joint venture. I think earlier you mentioned that, if the U.S. adopts a stricter definition of the Foreign Entity Of Concern, whereby all Chinese companies are defined as a Foreign Entity Of Concern, you might adjust your ownership stake in the JVs where necessary. Does this mean that LG Chem might consider taking over Huayou Cobalt's stake? And if so, what would be the reason for doing a joint venture with Huayou on the precursor, instead of just doing it 100% LG Chem right now? And if you have to adjust your ownership stake, what would be the potential acquisition cost, or just will there be some kind of licensing fee agreement, something like that? So how will this affect LG Chem? On a net basis, would you say, if China -- if the whole of China is a Foreign Entity Of Concern -- on a net basis, would this be a good thing or bad thing for LG Chem, in your opinion? And the second question is on AVEO. Could you just clarify that the earnings contribution to first quarter and your outlook over the next few years, and how much do you plan to spend on biotech CapEx, or including potential M&A over the next few years?

[Interpreted] So maybe I can address your first question about the FEOC definition and how we view that overall situation. Of course, none of the details with regards to the actual definition of the Foreign Entity Of Concern have been finalized yet. However, we are working under the assumption as of the current time, that the definition would be similar to the definition that we see, within the Chips Act that apply to the semiconductor sector, i.e., it would be -- the overall watermark would be an ownership of 25% or more. So that is the overall level that we're expecting to apply for the IRA. And the reason why we have pursued the JV with Huayou Cobalt, even though we did know that there was an FEOC-related risk, was because of the benefit that Huayou can provide in terms of sourcing the raw material that is required for the production. So in the area of the nickel intermediary goods that are needed for sourcing, to actually create and produce the precursors, Huayou does have a very strong advantage and we did believe that this was something that we would be able to enjoy. So that was the motivation behind the JV in itself. And in the extreme situation in which all Chinese interests or any company that has any form of Chinese interest would be defined as an FEOC. Then we did take into consideration the possibility of acquiring the full stake of ownership for the company. However, such a transaction would only go ahead under the assumption that in advance of such a deal that we would have a supply agreement in place to secure the raw materials that are necessary. That having been said, to answer the last part of your question about -- on a net basis how we see the FEOC as an implication on a larger scope, we do think that at the end of the day it does have -- if China is included as an FEOC, then we do believe that, that has the benefit of lowering the level of competition or the degree of competition that we would see within the market, and we do think that that is beneficial for our business.

[Interpreted] So to address your second question about AVEO, in the first quarter, because of the overall -- because if we look at the first quarter alone, on an operating profit basis, there was a moderate or a very small loss that we generated from the AVEO business in terms of its profitability. And the reason for that is that for the FOTIVDA product in itself, it's still in the very early stages, and added to that there were also one-off costs that we recognized in the fourth quarter that led to this overall loss. However, if we look at it on a full-year basis, we do think that this is something that will turn into the black for the full year. And going into next year, we do think that there will be a profitability improvement that we will be able to see and profitability contribution that we will be able to enjoy thereafter. In terms of the CapEx requirements for this business, as we have mentioned, since the acquisition, we are right now in the process of going through and establishing the value creation plan that we want to have for the operations. So, since this is not available yet, we wouldn't be able to talk about what our expectations would be for the future as of the current time, but we will share that once that is available.

[Interpreted] So with this, maybe we can wrap up the conference call on the first quarter of 2023 earnings for LG Chem. For those of you who are not provided with an opportunity to ask questions or for any of you that have follow-up questions, please do not hesitate to contact our IR team, and thank you for your time today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]