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

Good afternoon. We will now start LG Chem's 2024 Second Quarter Earnings Conference Call. This is Hyun-suk Yoon, Head of IR at LG Chem. Thank you for taking an interest in LG Chem and joining this call despite your busy schedule. We will begin with a brief introduction of 2024 Q2 earnings performance, followed by the CFO's presentation on the highlights of this quarter's earnings, then we'll close with a Q&A session. [Operator Instructions]. Let's begin today's call with the introduction of the management team. We have CFO, Dong Seok Cha; [ Junho Lee ], in-charge of company's Business Planning, [ Cheol Ho Yun ] from Petrochemicals; Young Suk Lee from Advanced Materials and [ Hijung Cho ] from Life Sciences. First, Q2 business performance on Page 3, consolidated Q2 sales and P&L. Q2 sales increased Q-o-Q at KRW 12,300 billion. Operating profit was KRW 406 billion, and OP margin was 3.3%. Next on Page 4, consolidated financial performance. As of the end of the Q2 2024 assets were KRW 84 trillion; liabilities, KRW 39.9 trillion and capital was KRW 44.3 trillion. Borrowing ratio was 90.2% similar to the previous quarter. And while total liability to equity ratio decreased Q-o-Q, net liability equity ratio price increased. Next, earnings by business division. Page 5, Petrochemical division. 2024 Q2 Petrochemical business recorded sales of KRW 4.966 trillion and operating profit of KRW 32 billion. Despite strong raw material prices, we recorded an operating profit backed by increased sales of ABS and other major products as home appliances and other downstream markets enter their peak season. Going forward, we expect a gradual improvement in the supply-demand balance, but the improvement in profitability will not be significant as global demand remains sluggish, such as in China and factors such as rising freight rates. Next, Advanced Materials. In Q2, Advanced Materials sales was KRW 1.728 trillion, a 9% increase Q-o-Q and operating profit was KRW 170 billion. Despite concerns about slowing EV growth, battery material sales and profitability both improved due to expanded battery material shipments. And the profitability of the Advanced Materials division improved due to an increase in the share of high value-added products in other segments such as electronic materials. In the third quarter, we expect battery material shipments to decline slightly due to weak downstream demand. However, we expect profitability to further improve as metal prices stabilize. Next, Life Sciences. In Q2, sales were KRW 404 billion, and operating profit was KRW 109 billion. In addition to the growth of major products such as diabetes treatments and vaccines, sales and profitability temporarily increased due to the recognition of down payments for out-licensing of rare obesity treatment. Sales of major products are expected to continue to be solid, but profitability is expected to be low for the time being due to clinical trials for projects such as Phase III gout treatments. Next, Farm Hannong. Q2 sales was KRW 238 billion, and operating profit was KRW 20 billion. Overseas sales of crop protection products continue to expand, but profitability declined year-on-year due to lower fertilizer prices. Lastly, Energy Solutions. This morning, Energy Solutions presented their performance in detail during its earnings call, however, we'll briefly present its performance here. Energy Solutions Q2 sales was KRW 6.162 trillion. Operating profit was KRW 195 billion and OP margin was 3.2%. Lower metal prices continue to impact selling prices, but with higher shipment volumes due to new EV launches by North American customers, sales and AMPC amount both increased. We expect sales to decline from the initial forecast due to slow EV growth and continued weakness in metal prices. Based on the changing market demand, we plan to improve operational efficiency by managing utilization rate through production speed adjustments. And on this note, we will close -- conclude the Q2 earnings presentation and invite CFO, Dong Seok Cha, to present the earnings outlook.

Good afternoon. This is CFO Dong Seok Cha of LG Chem. Thank you for taking time out of your busy schedules to join our earnings call. Thank you for your interest. First, looking back at our performance in the second quarter, we continued to face challenging conditions in the petrochemical industry and slowing growth in the global EV market. But we posted improved results compared to the previous quarter due to a turnaround in our Petrochemicals business, greater battery materials shipment and the recognition of upfront revenue from the out-licensing of an orphan obesity treatment drug. As we look to the third quarter and the full year, looking ahead, we expect the business environment to remain challenging for the foreseeable future. With the global economic downturn continuing, including weak demand in China, lower-than-expected growth in EV demand and rising freight rates. In particular, due to the slowdown in EV sales, we recognize that there are a number of concerns about the outlook for LG Energy Solutions battery business and LG Chem's battery materials business. However, while demand for EV may be volatile in the short term, depending on a number of variables, we believe that the market will grow robustly in the mid- to long-term as better quality EV models are scheduled to be launched by our OEM customers. In these challenging times, we want to get back to the basics and do everything we can to improve the fundamental competitiveness of our businesses. First, for mid- to long-term growth, we will continue to strengthen our business competitiveness by focusing on investment and R&D activities to foster 3 new growth engine businesses. Second, we want to be more conservative and prudent in our investment decision-making and investment execution, taking into account industry conditions, market volatility and macro uncertainties. We're also expanding our cathode capacity in line with our efforts to expand our customer portfolio and will flexibly adjust the pace of investment in line with market demand. Third, to improve profitability, we will continue to optimize our operations by further enhancing our management capabilities, including cash flow management and cost reduction. Shareholders and investors. Even in a difficult business environment, we see the opportunity to enhance our business competitiveness by fiercely improving efficiency internally and preparing our growth engine business as well, and we'll do our best to become a company that can take a further leap forward. We look forward to your support. Thank you.

[Operator Instructions]

The first question is from the line of Jin-Myung Lee from Shinhan Securities.

There are 2 questions that I would like to ask you. The first question is about your Advanced Materials business. This morning, LG Energy Solutions did do their earnings release during which they did mention that the guidance for the year would be adjusted downward and also that with regards to the supply to GM, that would also be somewhat adjusted. So as a result of that, for LG Chem, what is the outlook for the second half of the year and also for the full year? In addition, for the catalyst business that you have in terms of any capacity adjustments, if you could talk about that business, that would be appreciated. Secondly, I would like to ask about your Petrochemicals business. It does seem to be that the market, again, is turning towards a slowdown. In China right now, there is the trade out deal for new type of policy in place and other measures. So towards the second half of the year and for the full year, what would be the outlook for the market?

So this is Young Suk Lee from Advanced Materials. And maybe I can address your first question about the cathodes guidance for the year. If you look at the key OEMs this year for EV production and also the overall volume that they are producing, it is somewhat being adjusted. And LG Energy Solutions, as you have mentioned during their morning earnings conference call, also adjusted their overall guidance for the year in a downward method. So as a result of that, for the company also according to the adjustments that are taking place at our clients, we also, with regards to shipment are adjusting our guidance from the previous 40% plus on a Y-o-Y basis to 20% on a Y-o-Y basis. In addition to that, in the third quarter, for the ASP, as metal prices are stabilized, we do believe that it will be maintained at a level flat to the second quarter. And in addition to that, at the key customer level, there are various inventory adjustments and also production adjustments that are taking place. So we think that versus the second quarter in terms of the overall volume, it will decrease by around 20%. However, in terms of profitability, we do think that the negative effect from the lagging metal prices versus the previous quarter will decrease. And as a result of that, on a Q-on-Q basis, that profitability should improve versus the second quarter. Towards the second half of the year, though we do believe that there will be some adjustments in volume for the overall total volume in the second half of the year, we still believe it will grow 20% on a Y-o-Y basis. And in addition to that, if you look at the ASP side due to the fall in metal prices, which have fallen more than 40%, we do think that the overall full year revenue as a result, will decline by 30%. However, for the full year profitability because of the 20% plus increase in the overall volume and also the lessen effect of the metal prices on ASP, we do think that full year profitability will be in the mid-single-digit level. So maybe to address your second question about the Petrochemical outlook that we have and also the impact from China's policy for -- to trade old with new. If you look at the second half dynamics between the supply and demand situation, we do expect it to be a gradual recovery. However, in terms of the actual support measures that have been released by the Chinese government, the effects of that do not seem to be very large. And added to that, right now, if you look at the freight cost for shipping in general, it has increased significantly. So as a result of that, we do think that the second quarter will continue in terms of the momentum and towards the second half of the year so that the market backdrop and also profitability outlook should be similar. For the Chinese trading old for new policy, we do think that the impact of that will be different from product to product. However, in terms of the overall balance on the supply and demand side, we don't think that it will be very large. So to look at it in more detail by product. If we look at the electronic goods and also the ABS and also rubber area, the overall recovery and the demand, it does not seem to be very large. However, there does seem to be some better situations taking place in terms of the overall supply situation. So as a result of that, we do think that, that will have an impact. On the PVC side, related to construction material, the overall demand does not seem to be taking place in terms of recovery. However, and in addition to that, on the supply side, the oversupply situation continues to prevail. So as a result of that, the market is not recovering yet.

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

This is Parsley from JPMorgan. Firstly, on your Advanced Materials division, it seems to be doing quite well in 2024 compared to the weakness that we are seeing for LGS, as you mentioned earlier. But looking out longer term, could you give us some color on the market conditions you're seeing? What capacity or volume plans are you expecting? Is there potential for any changes in your capacity or CapEx plans? And if you could give us more color individually for cathode separator, IT materials, et cetera, that will be appreciated. Second question is on chemicals. So very encouraging to see the profit turnaround. I think looking out longer term, company has been pursuing efforts to improve the profit. So can we get an update on your chemical business restructuring. For example, previously, you were thinking of doing a partial sale of your naphtha cracker or doing a joint venture or other restructuring plans? What are some of the measures LG Chem is pursuing to enhance the profitability and cash flow longer term?

So maybe I can address your first question about the capacity adjustments that we would have for the cathode business. If you look at the overall capacity expansions that we have had that started at the end of last year in terms of groundbreaking, for example, with regards to the Gumi factory. Right now, we are going ahead with the ramp-up as scheduled. And also with regards to the U.S. plant expansion in site, which is targeting 2026 for the initial production that is on plan as we have expected. However, if we look at the situation after 2026 with regards to NCM cathodes and also the Morocco LFP investments, we do believe that there will be some pushback in those capacities. So we want to first focus on the existing capacity that we have available in enhancing the overall utilization of that and also enhancing the capacity operational effectiveness and efficiencies before we think about our CapEx expansions. So as a result of that, for 2026, if we look at the U.S. alone, we think that, that expansion will be around 200,000 tons. And then if we look at after 2026 to 2028, we do think that in the capacity plants. For our plants outside of the North America capacity that we have, we are in the process of re-reviewing that. I mean I do believe that we will be able to share the details later on. And maybe to answer the second question about our Petrochemicals business and the overall longer-term plans to try to structurally improve our profitability. Right now, with regards to the market backdrop in dealing with the sluggish demand and also overall supply situation that we have right now to ensure that we are able to strengthen our core competitiveness, the company is looking at various options that are available. However, with regards to specifically the NCC JV, as of now, we have not made any determinations there. If you look at the first half of the year on the SM and EG side for capacity that we had, we have halted capacity there. And for the smaller scale noncore business areas and also for the intermediate material in which alteration would be possible, we are in a process of rationalizing those business areas and engaging on restructuring efforts. In addition, for cycle-based materials or for more commodity-type areas, we are trying to look at how we can enhance the overall cost competitiveness of those areas. And over the longer term, for the high-value areas and also the sustainability-related areas, we do want to gradually expand our presence in those areas. By region, with regards to our overall sales and production capabilities, the Americas would be an area in which you want to engage upon various diversification strategies so that we can strengthen our overall mid- to long-term competitiveness.

Our next question is from the line of Jin Ho Lee from Mirae Asset Securities.

There are 2 questions that I would like to ask you. With regards to your battery materials business, we do believe that this is a business that could be impacted according to the results of the U.S. elections. So how do you see the outcome of the elections impacting your business? And how, if at all, strategy would change accordingly. In addition to that, if we were to talk about in more detail, the impact that you can see on the IRA side with regards to the election outcome and also any changes in your plans for the Tennessee cathode capacity that would be appreciated. The second question that I would like to ask about is your mid- to long-term CapEx-related plans. Are there any adjustments that you are foreseeing in that area? And if so, in what areas would adjustments take place? In addition, for your funding plans, could you share your funding plans, including any plans to utilize the share that you have in LG Energy Solutions? Any discussion about that would be appreciated.

So maybe I can address your first question about the outcome of the U.S. election and the impact that we foresee. In the case that Trump does take office, right now, he is promising that he will get rid of the IRA Act. However, we do believe that realistically, rather than it getting abolished all in itself that it probably will move in a direction in which the subsidies available would be less. And as a result of that, in the case that the subsidies do decrease, the EV demand in itself may be impacted in a negative manner. But over the long term, we do believe that the overall growth is something that will continue. For the short-term investments that we have right now, the focus will be in increasing the efficiency of the existing capacity that we have and also ensuring that we have more cost innovation that is taking place. So based upon the volume contracts that we have, already locked in with our customers, we are trying to take a more conservative stance towards investments that we have in general. However, as already mentioned, with regards to the Tennessee capacity, this is something that even though GM has indicated that they have some change and their plans will not change because this is capacity that is being built out under an already agreed upon long-term arrangement. So therefore, we are going ahead as planned with the target of reaching mass production in 2026. So maybe to address your second question about our CapEx plans. Right now, of course, CapEx for this year will continue to be focused on our 3 main new growth drivers for the future. So initially, we had expected CapEx to be around KRW 4 trillion for the year. However, in light of the changes that have been taking place in the market backdrop and overall demand situations and also the macroeconomic uncertainties that we are seeing, we have decided to take a more cautious stance and conservative stance towards our CapEx execution. So as a result of that, we do believe that CapEx for the year will be similar to that of last year at around the low to mid KRW 3 trillion level. In particular, if we talk about our investments in the cathodes area, of course, there is no change in that our cathodes investment will remain a top priority. However, in light of the fact that our downstream customers are cutting down on their production for the year-to-year CapEx plans in themselves, we do believe that on a sequential basis, there will be some adjustments to that plan. And with regards to our sustainability business, we are going to invest capital into those businesses in which we clearly see a profitability and feasibility dynamic taking place. In addition to that, in light of future volatilities within the market, we will continue to try to ensure that we execute our CapEx in a more conservative and strict manner. In terms of our funding plans to secure cash, in March of this year, we did issue KRW 1 trillion in corporate debentures, Korean won denominated corporate debentures. And towards the second half of the year, we will be receiving the proceeds from the disposal of our polarizer and polarized material business. So as a result of that, for this year, we don't have any additional funding needs. However, that has been said, specifically about the utilization of the shares that we have in LG Energy Solution. As we have continued to communicate to you before, we are not excluding the possibility of utilizing these shares. However, as of now, we do not have any detailed plans or anything that we have decided to share with you.

The next question is from the line of Jae Sung Yoon from Hana Securities.

There are 2 questions that I would like to ask you. First is about your Petrochemicals business. First, if you look at your competitors, it does seem to be that some of the competitors are increasing their supply and adding supply into the market. So if we look at our business and the portfolio that we have in terms of product areas, in what areas do you actually see notable increases in volume coming in from the competition? And to what degree is that taking place? The second question that I would like to ask you is about your EV battery materials business. You did talk about moderating the speed of expansion. However, specifically to ask you about your intentions for CapEx related to or investments related to your separators business and on the upstream side, I do understand that you have plans there initially. So is there any change in that stance.

So to talk about where we see the volume increase in terms of sales taking place on the Petrochemicals side, because we have entered into a seasonal high season, it is different from sector to sector. But within the portfolio, as you have mentioned, we do see sales increase taking place. To share some of the examples side, first on the polyolefin side from Gumi, we do see some increase there. Also related to electronic goods, ABS is increasing. And also for automotive rubber, there have been increasing there. And for related semiconductors, C3 IPA has also been increasing. So if you look at the level of increase versus the first quarter, it has been around 5% to 10% -- 15% based upon the top line. In addition to that, with regards to more green products for the bio naphtha-related ECV business. We have had various constructive discussions with brand owners in terms of new demand, and that has also been beneficial in terms of sales. So maybe to address your second question about our separator business. In light of the changes in demand that we see on the EV battery side and also the competitive dynamics coming from the Chinese players. Right now, with regards to our plans for separators, this is something that we are currently re-reviewing. So specifically, with regards to upstream investments and separator [ raw roles ]. As Toray has changed its strategic direction in this business and due to the changes in the market environment that are taking place. Right now, any discussions that we have with Toray are being re-reviewed. And as a result of that, we're in a position right now in which we are reviewing all of the strategic options available to us.

The next question is from the line of Yu-Jin Jeon from Hi Securities.

There are 2 questions that I would like to ask you. The first question is related to the Petrochemicals business. And if we look at the Petrochemicals business, I think that's something that you had mentioned is that you are planning to expand your product portfolio with regards to North America. So as a result of that, how -- what would be the actual contribution that North America makes now? And how do you see that expanding going forward? In addition to that, if Trump wins the election, what impact do you think that, that will have on a Petrochemical business as a whole? The second question that I would like to ask you is about your Life Sciences business. Due to the license out of the rare obesity drug in itself, I do think that, that has provided you with an uplift in terms of your overall profitability for the quarter. Over the short term, do you think that there will be any similar other cases of this nature that you would be able to update us about?

So maybe I can address the first question about the overall contribution that we have coming from the America region or the U.S. market in terms of our Petrochemicals business. If you look at the products specifically that are performing in the U.S. market, we have the polyolefin and also the ABS that is used for household purposes. In addition to that in new product areas, we also have the biodegradable PBAT product and also POE that is used for solar energy panels. In addition to that, right now, in the first half of the year in the American region, we also have the compound capacity that will be going online. And as a result of that, we do expect that our overall business presence in the U.S. should increase going forward. According to the expansion strategy that we have, the overall direction in which we want to move would be to decrease our overall dependency or concentration in the Chinese market and try to diversify outside to other markets such as the U.S. that do provide higher profitability. In terms of the overall size, we will continue to monitor the profitability by region and adjust our balance accordingly in a flexible manner. So maybe I can address your second question about additional license out opportunities that we may see on the horizon. With regards to the license out contract that we have for our rare obesity treatment, of course, we continue to try to develop and seek out strategic partnership opportunities and also try to create opportunities that would make our investments more official and increase the possibility of success of our new drugs. However, as of now, there are no determined or decided additional license out opportunities or projects that we have in the pipeline.

Next question is from the line of Nikhil Bhandari from Goldman Sachs.

I had 2 very quick questions. We heard from LG Energy Solutions in the call today about winning more customers for LFP, both the one recently customer for energy storage battery, but also recently for EV battery. So I just want to understand LG Chem's preparation and plans for manufacturing LFP cathodes going forward in order to help with the supply chain of LG ES? And the second, I just want to confirm the cathode capacity targets are cut right. In the previous presentation, I think the capacity guidance for cathode was 280 ktons for 2026. Now it appears in the PPT, it is about 200 ktons. So just want to confirm that there is a meaningful cut here to your guidance for, in particular, the Korea plan for 2026. Am I reading it correct? I just want to confirm.

So maybe I can address both the questions that you had with regards to the LFP cathodes and also the capacity guidance for cathodes in general. First, to talk about the LFP cathodes. Right now in Cheongju of Korea, we do have a pilot line for LFP production in place. And right now, we are focusing on the product development side of things. At the same time, we are currently looking into the feasibility of investing into mass production capabilities. So for the focus of our LFP development, it's not on the traditional LFP products that are available now, but it would be on a more enhanced or upgraded version of the LFP chemistry. And in addition to that, rather than for ESS purposes, we're more focusing on EV LFP capabilities. So as a result of that, right now, we are engaging with multiple OEM parties and discussing possibilities of supply. In addition to that, we are pushing back 1 year, the overall plans that we have. Initially, it was 2026. Now it would be 2027 mass production for EVs. And right now, that is what we are developing and what we are working on as an overall assumption in terms of our investments and development targets. And with regards to your second question about the capacity guidance adjustment, it is that for 2026, the overall capacity for cathodes on a global basis would be adjusted from 280,000 to 200,000, and this is including the adjustments that we plan in Korea and also pushing back the Moroccan investment by 1 to 2 years.

We'll be getting the last question. The last question is from the line of Young Suk Shin from Morgan Stanley.

Actually, I only have one question that I would like to ask you, and that is regarded to an issue that you had discussed previously. I think that what management have communicated to the market is that in terms of value creation for shareholders, that for the time being, the focus would be on investing into growth and for the future. And as a result of that more stronger shareholder returns may be a bit difficult. However, you have discussed your intentions over the midterm to adjust some of your capacity and expansion and also CapEx plans. So utilizing the assets that you currently have, would there be any update on your position with regards to your shareholder return intentions?

So I think that at the LG Chem level, of course, growth is a main driver that we believe at the end of the day, will enhance the overall firm value of the company and also shareholder value as a whole. So on that stance, I don't believe that there is any change in our position. If you look at the businesses that we're currently engaged upon, we do have very challenging situations. So for the time being, we do want to focus on addressing these difficulties and at the same time, doing our best to ensure that we remain competitive and also continue to grow.

So with this, we would like to wrap up our conference call for the second quarter of 2024. Again, thank you for everyone who has taken time to participate on this call. If you have any further questions, please do not hesitate to contact us. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]