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

Good afternoon. We will now start LG Chem's 2024 Third Quarter Earnings Conference Call. This is Hyun-suk Yoon, Head of IR at LG Chem. Thank you for taking interest in LG Chem and taking the time to join us today amidst your busy schedules. We will begin with a brief overview of the 2024 Q3 earnings performance followed by the CFO presentation highlighting the key developments. We will also talk about future strategies and following the presentation, we will open the floor to questions. [Operator Instructions] For those with web access, the materials presented during this conference call can be viewed online and are 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; Jun-ho Lee in-charge of company's business planning; Cheol-Ho Yang from Petrochemicals; [ Jung-eun Seok ] from Advanced Materials and [ Sun-chin Cho ] from Life Sciences. An overview of our financial highlights for the quarter. On Page 3, consolidated Q3 sales and P&L. Q3 sales increased Q-o-Q at KRW 12,670 billion. Operating profit was KRW 498 billion, and OP margin was 3.9%. We were able to increase our profitability compared to the previous quarter. We were able to also complete the sale of our polarizer material business, and we were able to significantly increase our nonoperating income. Next, Page 4 is our consolidated financial status. As of the end of the third quarter 2024, assets were KRW 88.8 trillion. Liabilities were around KRW 43.2 trillion and capital was around KRW 45.6 trillion. The debt ratio recorded a slight increase to 94.7% compared to the previous quarter due to the rise in borrowings. Next, I'll explain the performance and outlook by business division. Page 5, Petrochemical division. 2024 Q3, the Petrochemical businesses sales was KRW 4,813 billion, and we recorded an operating loss of KRW 38 billion. The slight loss was due to temporary increases in raw material costs and freight charges as well as the impact of currency depreciation. Starting from the fourth quarter, driven by higher spreads from falling raw material prices, increased utilization of the new plant and expansion of shipments to North America, profitability is expected to gradually improve. Next, Advanced Materials. In Q3, Advanced Materials sales was KRW 1,712 billion, a slight decrease Q-o-Q. Operating profit was KRW 150 billion and OP margin was 8.8%. The shipment volume and ASP of battery materials slightly decreased compared to the previous quarter and, due to the impact of currency depreciation, the overall profitability of the Advanced Materials division also fell slightly. In Q4, due to year-end inventory adjustments by battery material customers and the seasonal off-peak period for products in the downstream electronic materials industry, we expect sales and profitability to decline. Next, Life Sciences. In Q3, sales were KRW 307 billion, and we recorded an operating loss of KRW 1 billion. Although the shipments of major products such as diabetes treatment, infertility treatment and vaccine showed strong performance, due to increased R&D costs for future products -- projects, including global Phase III clinical trials, a slight loss recorded. In the fourth quarter, a continued strong growth of major products is expected, however, as global clinical projects progress, R&D costs are also anticipated to increase, limiting improvements in profitability. Next, FarmHannong. Q3 sales was KRW 113 billion, and operating loss was KRW 20 billion. Domestic sales of crop protection products increased slightly. However, due to the withdrawal from the low-margin fertilizer chemical business, both sales and profitability declined Y-o-Y. Moving forward, we will continue efforts to improve our revenue structure by expanding domestic and international sales of crop protection products. Last, Energy Solutions. This morning, Energy Solutions presented their performance in detail during its earnings call; however, we'll briefly present its performance. In Q3, Energy Solutions sales was KRW 6,878 billion, operating profit was KRW 448 billion and OP margin was 6.5%. Sales increased due to greater supply volumes to European customers and increased production from the North America joint venture and profitability improved with stable metal prices. In Q4, we expect some customers to adjust their inventory and metal prices to fall. However, volume growth is expected to be sustained, thanks to the continued expansion of supply for EV and ESS. This concludes the earnings presentation. Next, CFO Dong Seok Cha will present the company's outlook.

Good afternoon. This is CFO Dong Seok Cha of LG Chem. I would like to express my greatest gratitude to all of you for taking the time to attend our company's earnings presentation despite your busy schedules. First, our Q3 performance has shown a slight improvement in sales and profitability compared to the previous quarter, thanks to the earnings improvement of our subsidiary Energy Solutions and a stable performance of Advanced Materials. In this challenging business environment, through cost advantage based on the company's excellent processing technology and efforts to improve internal efficiency, we are creating differentiated results within the industry. However, due to the geopolitical risk, slowdown in global economic recovery, chasm in EV and further declines in metal prices, there are heightened concerns about uncertainty at home and abroad. In such challenging environment, to achieve higher growth in the medium to long term, it is crucial for the company to strengthen its fundamentals and enhance its core business competitiveness. We are preparing for this step-by-step, and we will continue to strengthen our efforts moving forward. First, considering the industry outlook, market volatility and macro uncertainties, we are making investment decisions and execution more conservatively and cautiously. Initially, we had planned around KRW 4 trillion in CapEx this year, however, in light of changes in the market conditions and demand growth, we intend to reduce this to the mid-KRW 2 trillion range. Next year, we will look at market conditions again, and we plan to maintain a conservative investment stance. Second, to improve profitability and manage cash flow, we will enhance our management capabilities through rigorous working capital management and cost reduction activities. We will continue to carry out operational optimization efforts. Third, even in times of crisis, we will continue to foster investments in R&D activities on nurturing our 3 key new growth engine businesses, steadily preparing for future growth. This year, we're actively fostering new businesses based on eco-friendly materials, including the commissioning of a pyrolysis oil plant incorporating supercritical technology, preparation for establishing a joint venture for next-generation bio-oil, or HVO, and the initiation of the development of the bio-based raw material CHP. Alongside the construction of a North American cathode material plant, we are also actively expanding our external customer base for cathode materials to thoroughly prepare for the future. Thanks to these efforts, this July, the chemical industry publication CNEN ranked our company fourth among global chemical companies. This recognition is seen as a testament to our various achievements resulting from the transformation of our business portfolio even amid challenging market conditions. Dear shareholders and [ investors ], the management environment before us remains challenging, but we believe that we can endure this difficulty period by intensifying our internal efficiency and fostering our top three new growth driver businesses. And in so doing, we will proactively seize future growth opportunities and further expand our differentiated performances. We'll do our best to ensure that LG Chem can take a significant leap forward. We ask for your continued support. Thank you.

Next, we will have a Q&A session. [Operator Instructions]

[Foreign Language]

[Interpreted] Thank you for the opportunity to ask questions. There are 2 questions that I would like to ask you. The first question would be in regards to your Petrochemicals business. And the second question is related to your Advanced Materials business. For the Petrochemicals business, the question that I would like to ask you is that if you look at the recent developments in China, the government has been releasing various fiscal measures and also stimulation -- economic stimulation measures in place. So how do you believe that this will improve your overall demand? In addition, if you could talk about the fourth quarter and 2025 overall market situation and also your performance guidance, that would be appreciated. The second question that I have is about your Advanced Materials business, in particular your cathodes production. If you could talk about the fourth and also full year volume, ASP and also profitability outlook, that would be appreciated. And for 2025, if you could talk about each of your different markets, specifically the European market and the U.S. market, in terms of your overall volume expectations and performance expectations, that also would be appreciated.

[Foreign Language]

So maybe I can address your first question about what effects we do believe the Chinese policy measures will take and how that will lead to an improvement in demand for each of our products and also the outlook and also performance guidance that we have for the fourth quarter and also 2025. If we look at the recent Chinese government measures, they are engaging in not only monetary and fiscal policy, but also are planning to issue -- financial policy, but are also planning to issue a lot of government bonds. So as a result of that, there is high expectations that this will lead to various fiscal stimulus measures. As a result of that, we do believe that there can be some improvement in the overall real demand in terms of the overall improvement in consumption and also a recovery in the real estate economy. So we do think that this will gradually take place going forward. As a result of that, we do believe that we will somewhat be able to come off of a gradual recovery from a situation in which there is accumulated global supply and see a gradual recovery in the overall supply and demand balance going forward. So if we talk about in more detail our overall strategy for each of the different markets according to the market situation and how we want to deal with such a situation, first, starting with PVCs, we do think that there will be some recovery expectations with regards to the Chinese real estate market. But in addition to that, in the Indian market, we also believe that the supply-demand dynamics will improve. And in addition, in particular, there will also be in India, the BIS certification program that will be introduced, and as a result of that, Chinese produced corporate-based PVC exports will not be able to be used. So as a result of that, we do believe that within the Indian market, there will be an overall high end -- high price point market that we will be able to enjoy going forward. With regards to ABSs, due to the various economic stimulus measures the Chinese government is taking, we do think that there will be a gradual improvement in various commodity-type products. And also, if we look at the more heat-resistant ABSs and ASAs that are uses for China -- for cars and other types of high-profitability application products, we do think that there will be an expansion in this area. And that also for the higher price point market, we are also looking by region to the overall U.S. market to expand ourselves in that area. For high-performance materials, because of the overall movement in China to try to turn out or change the old into new, we do think that there will be continuous solid demand for automobiles in China and also tires so that the utilization in this area will continue to be strong. And as a result of that, we do think that that will lead to strong demand or solid demand for auto vehicle SSBRs. So in the high value-added areas, we do think that we will be able to continue to expand our overall sales volume. So based upon this market backdrop and our strategies, if we talk about our performance guidance going forward, first, for the fourth quarter, we do expect that it would be difficult to achieve a very dramatic improvement in our overall performance. However, that has been said, we do think that product spreads will improve as the overall raw material costs have dropped. And added to that, we also believe that there will be improvements in our overall utilization of the new capacity that we have. And also in terms of the increase in volume that we see going to the Americas. So as a result of that, we do think that there will be a Q-o-Q improvement in our profitability. For next year, we do think that there will be a stronger -- we will have a stronger high -- premium product portfolio and that we will be able to rationalize some of our lower-profit lines and also improve the productivity of our existing lines, together with various efforts to stabilize the utilization and the overall utilization that we have of new factories, which in all should be adding to and contributing to our target to have better profitability versus this year.

[Foreign Language]

[Interpreted] So maybe next I can talk about your question related to the Advanced Materials business in terms of our guidance for our cathodes in the fourth quarter and also full year outlook. If we look at the shipments in the fourth quarter versus the initial plans that we have, some of the volume was actually preemptively pulled in into the third quarter numbers, and also, towards the end of the year, we do think that there will be some inventory adjustments that will be taking place downstream. So as a result of that versus the third quarter, we do think that in terms of shipments, there will be a reduction of around 30%. In terms of the ASP, because lithium and nickel prices have continuously been falling from July, and this has been reflected into prices versus the third quarter, we do think that there will be around a 10% drop. So taking these factors into consideration for the fourth quarter in terms of our overall top line and profitability for cathodes, we do think that the fourth quarter will be lower than what we have seen in the third quarter. For the full year this year and our expectations. As we take into consideration our third quarter performance and the outlook that we have for the fourth quarter and take all things into consideration, for this year, in terms of our shipments on the cathode side, because of the volume growth that we have seen in the North American market and also a stronger market share within LG Energy Solutions, we do think that the shipments as a whole for the full year should increase by around 25% Y-o-Y. However, on the ASP side because of the significant drop in metal prices, we do think that the ASP for cathodes for the full year will be less by around 40% Y-o-Y. And as a result of that, the profitability should be slightly weaker than what we have seen last year.

[Foreign Language] In addition to talk about our overall outlook for 2025 in the case of the U.S. and European market in terms of demand. In the case of the U.S., focusing on GM, there will continuously be new EV models that will be released. And in the European market, there will be stronger CO2 emission regulations put in place. And also in Germany, there has been a recovery of the overall subsidy program there. So because of these policy measures and basically speaking, we do think that for next year EV sales that the growth will be higher than what we have seen this year. However, as this year represented a chasm for the EV market, we also cannot rule out the possibility that sales volume may not be as strong as we had expected, but there can also be a scenario in which it would be more conservative. So as a result of that, we continuously monitor the trends that we see in EV sales and in the EV market. So to talk about volumes for next year, in 2025 we will continue to expand our sales volume, focusing on the large North American customers, which show a lot of growth. For example, GM, Tesla and Stellantis. However, as of the current time, because we are in a process in which we're closely communicating with our customers to talk about the details of business plans for next year, in terms of the actual volume and the outlook going forward, I do think that we will have future opportunities in which we will be able to say more.

[Foreign Language]

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

[Foreign Language]

[Interpreted] I have a question that I would like to ask about Advanced Materials and also the Petrochemical business. For the Advanced Materials business, if we look at our subsidiary LG EnSol. Recently, there have been new projects that have been won with the likes of Ford and also Renault. So will we be supplying the cathodes that would go into those new products, is a question that I would like to ask. And if you could elaborate a bit more about your strategy for Europe, that is also something that we would appreciate. With regards to the Petrochemical business, my question is about restructuring. If you look at the developments that have been taking place this year, companies such as SABIC and ExxonMobil have been talking about closing down some of the crackers that they have. So for the company in terms of the NCCs or maybe any possible JVs that you are currently reviewing, what type of measures are you taking to revamp or restructure your portfolio so that you can improve your overall profitability? If you could talk about measures in that area, that is also something that we would appreciate.

[Foreign Language]

[Interpreted] So maybe I can address your first question about the EnSol new projects and also our overall strategy for the European market. First, with regards to new projects that our customers have in terms of the overall supply of cathodes and other details about the supply chain related to that, that is something that is going to be determined and finalized in the future. So for new projects and new orders, in principle, and basically speaking, I do believe that there is a large growth that we are expecting going forward. And as of a result of that, our overall priority would be to target the U.S. market in terms of securing the volume that we require there. And for any Europe-facing projects that we have, of course, in light of our overall volume, the product competitiveness that we have in that market and also the overall competitive landscape of the market in itself, we will continue to discuss with our customers about opportunities going forward.

[Foreign Language]

[Interpreted] Next, let me talk about the second question that you asked in terms of our overall efforts or initiatives that we are taking, including the NCC or cracker restructuring and other methods that we're taking to improve our profitability and the competitiveness of our Petrochemical business. With regards to restructuring our NCC, as of now we do not have anything that we have determined yet. However, we do want to improve the fundamental competitiveness of our Petrochemical business. So we are in a process of reviewing various alternatives that we have in front of us. When the time comes of us making more detailed decisions, we will make sure to communicate with the market through disclosures. Including upstream restructuring to improve the competitiveness of our Petrochemical business and also to improve the overall profitability of this business, there are 3 operational strategies that we are currently engaging upon. First, from a business structure perspective, for those areas in which we believe the size is small and also in which our long-term competitiveness is difficult to secure in the non-core areas, and also for some older lines that we have, for example the Yeosu PVC, and also for areas in which we do believe the intermediate materials can be outsourced, for example SMs, we will be rationalizing these business areas to try to reduce the overall losses that we are generating there. From a product portfolio perspective, in areas in which we do have a differentiated premium portfolio, for example for C3 IPAs, automobile-related ABSs, EV, SSBRs, we do want to continue to expand our portfolio in this area and also continue to try to secure more competitive edges in terms of the material, the technology and our customer base, so that we can expand our sustainability-related products. And lastly, from a regional portfolio perspective, in the sales and marketing areas, we do have on-the-ground people in the case of the U.S. and European markets. And also for the North American and Europe ABS compound areas, we do have global production centers that we are currently expanding. So in the non-China areas and focusing on the American areas, we are trying to diversify our sales.

[Foreign Language]

[Interpreted] The next question is from the line of Sonny Lee from Macquarie.

[Foreign Language]

[Interpreted] There are two questions that I would like to ask you. The first question is related to your Advanced Materials business. If we look at the products outside of your high nickel batteries, for example, for LFP batteries or for the high-voltage mid-nickel batteries, what type of progress are you making in those areas in terms of the timing? And if we look at our competitiveness versus our peers, in what areas do you think that we have a higher competitive edge? The second question that I would like to ask you is about your CapEx plans. For this year, would there be a downward adjustment in your CapEx plans for the year? And if so, in what areas have you been adjusting CapEx? And over the mid- to long term for your capital utilization plans, including possibility of utilizing some of the LGES stake that you have, what type of plans does the company have?