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

[Interpreted] Good afternoon. We'll now start LG Chem's 2026 Second Quarter Earnings Conference Call. This is Gyeong-Seok Gim, Head of IR at LG Chem. Thank you for taking an 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 2026 Q2 earnings performance. Then our CFO will present the highlights of this earnings announcement, after which we will move on to the Q&A session. Please note that the presentations will be interpreted simultaneously, while the Q&A session will be interpreted consecutively. 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; Cheol-Ho Yang, Head of Business Strategy from Petrochemical Division; Young-Suk Lee, Head of Business Strategy from Advanced Materials Division; and Dal-Mi Hwang, Head of Business Strategy from Life Science Division. Next, I will walk you through our second quarter business results. On Page 3, consolidated Q2 sales and P&L. Q2 sales was KRW 14,176 billion. Operating profit was KRW 600 billion, and net profit was KRW 67 billion. Profitability improved in Petrochemicals and at LG Energy Solutions, enabling the company to achieve an operating margin of 4.2%. Next, Page 4, consolidated financial status. As of the end of Q2 2026, assets were around KRW 112, 200 billion; liabilities, KRW 63,300 billion and capital was KRW [ 48, 900 ] billion. Debt ratio increased Q-o-Q to 129.6%. Next, performance and outlook by business division. First, Page 5, Petrochemical Division. 2026 Q2, Petrochemical business' sales was KRW 5,329 billion. Operating profit was KRW 427 billion, and operating margin was 8.0%. Although sales were impacted by the shutdown of the Yeosu 2 NCC plant, supported by positive inventory lagging effects resulting from higher feedstock prices and wider spread, profitability improved compared to the previous quarter. However, in Q3, due to negative lagging effects from declining feedstock prices and higher logistic costs, profitability to come under great pressure compared to the previous quarter. Next, Advanced Materials. In Q2, Advanced Materials sales was KRW 999 billion, and operating profit was KRW 20 billion, returning to profitability. Driven by higher cathode material ASPs and expanded separator shipments, battery material sales increased. In addition, the ramp-up of mass production for electronic materials and products improved both revenue and profitability for the division. Beginning in Q3, battery material sales are expected to grow as shipments to new cathode material customers ramp up and separator volumes for ESS application gradually increase. Electronic materials is also expected to deliver solid performance, supported by expanding sales of new products and a portfolio of high value-added products. Next, Life Sciences. In Q2, sales was KRW 369 billion and operating profit was KRW 60 billion. Compared with the previous quarter, driven by higher export shipment volume, sales and profitability improved. However, in Q3, as export shipments of certain products, including vaccines are expected to be concentrated in Q4 and R&D expenses are projected to increase in line with the progress of key clinical development programs, thus, profitability is expected to decline Q-o-Q. Next, Farm Hannong. Q2 sales was KRW 274 billion and operating profit was KRW 25 billion. Supported by increased sales of crop protection products and stronger front-loading demand for fertilizers as a result of the Middle East conflict, solid operating performance was maintained. In Q3, while sales of crop protection and seeds businesses are expected to increase due to higher raw material costs resulting from weaker Korean won and increased R&D expenses, profitability is projected to decline Y-o-Y. Lastly, LG Energy Solutions. LG Energy Solutions presented their performance in detail and we had -- in Q2 sales was KRW 7,560 billion and operating profit was KRW 113 billion. With increased shipments from greater ESS capacity in North America, sales grew driven by robust expansion of EV battery supply. Also, with greater EV battery volume and lower fixed cost burden from increased ESS production in North America, the business returned to profitability. In Q3, driven by solid demand, which accelerates the growth of North America ESS volume, we expect sales to grow backed by stable growth in EV battery shipments. Furthermore, with stabilization of North America's ESS line operation, profitability to be improved from higher EV plant utilization also secured demand-driven growth momentum. This concludes the Q2 earnings presentation. And now CFO, Dong Seok Cha, will present the future outlook.

[Interpreted] Good afternoon. I'm CFO, Dong Seok Cha. Thank you to our shareholders and investors for your interest and participation in today's earnings presentation. First, a review of our second quarter performance. Despite continued market uncertainty driven by heightened geopolitical risk in the Middle East and increased volatility in key raw material prices, through production and sales optimization as well as ongoing efforts to strengthen our cost competitiveness, we remain focused on improving profitability. In petrochemicals, supported by favorable inventory lagging effect, spreads for key products widened and earnings improved significantly. Advanced Materials and Life Sciences, driven by increased sales of their key products also delivered solid performance. LG Energy Solutions, supported by higher shipments of batteries for ESS applications returned to profitability. As profitability recovered across our businesses, we achieved an operating margin of approximately 4% in the second quarter. Looking ahead, as volatility in raw material prices continues and customers maintain a conservative purchasing stand, we expect market uncertainty to persist for the time being. In response, we will further strengthen our ability to navigate short-term market fluctuations accelerating the transition of our existing businesses toward a portfolio centered on high value-added application. At the same time, by fostering future growth businesses in semiconductors, mobility and robotics materials, we will reinforce our long-term growth foundation. First, in petrochemicals, by completing the final approval of our business restructuring with our refining partner and establishing the collaboration model within this year, we will accelerate our business transformation. At the same time, by increasing the sales contribution of high value-added application products, including EV-grade SSBR, semiconductor-grade IPA and ultra-high molecular weight PVC, all of which are expected to deliver sales growth of more than 40% Y-o-Y from approximately 10% in 2026 to more than 25% by 2030, we will continue to build a profitability-focused business portfolio. Within Advanced Materials, through expansion into new high value-added applications, Electronic Materials aims to double its revenue by 2030, and we began mass production in Q2 of SGF, a premium film for automotive applications that enable adjustable transparency. In addition, for semiconductor materials such as CCL for non-memory semiconductor and NCF thermal adhesive films will expand customer specification in projects and through the development of next-generation packaging materials, including packaging adhesives and glass substrates will create new growth momentum. In Battery Materials, we expanded cathode material shipments to new customers in the second half and increased separator sales for ESS applications; we will focus on generating stable earnings. At the same time, by developing next-generation battery materials and securing metal recycling and low-cost solution technologies, we will strengthen both our cost competitiveness and technological leadership. Lastly, in Life Sciences, we will continue to strengthen the market position of our flagship products, including diabetes, treatments and growth hormones. At the same time, with the goal of bringing 6 oncology programs, including treatments for head and neck cancer, hematologic malignancies and cancer cachexia to market on schedule, we will accelerate AI platform-based drug discovery and new drug development, thereby enhancing the competitiveness of our oncology pipeline. By executing these growth strategies across each business without disruption, we will accelerate the qualitative transformation of our business portfolio and establish a more stable foundation for sustainable earnings. In parallel, we'll continue to strengthen our management focus on cash flow and financial discipline to maintain a solid business foundation amid rapidly changing market conditions. Dear shareholders and investors, despite the uncertain business environment, we will continue to improve the quality of our business portfolio by strengthening profitability and fostering future growth businesses to secure sustainable growth drivers. We remain fully committed to ensuring that these efforts translate into higher long-term corporate value and shareholder value. Thank you for your continued trust and support.

[Interpreted] [Operator Instructions] The first question is from the line of [ Sung Lee ] from [ Securities ].

[Interpreted] There are 2 questions that I would like to ask you. The first question is that if you look at the second quarter performance for your petrochemical business, it seems to be that it has been very solid. So, if you could please describe the drivers behind that or the background behind that, that would be appreciated. In addition, if we look at the second half of this year, I do think that there are uncertainties within the market. But what is the company's view about the way going forward? The second question that I would like to ask is about your cathode business in terms of the overall volume. How do you see the second half of the year evolving? And for the overall volume trends, what are your expectations for next year?

[Interpreted] So maybe I can take the first question that you have had, which was about the second quarter performance drivers and also the second half outlook that we have for the petrochemical business. I think first to talk about the second quarter, as the CFO mentioned during his opening remarks, we did actually see a positive inventory lagging effect. And also, in terms of the backdrop, the spreads did improve. So as a result, those drivers did contribute. And in addition to that, we also had some one-off factors such as the U.S. reciprocal tariff refunds. So therefore, this all in total, led to the significant improvements that we have been able to see. For the second half of the year, as you have mentioned, we do think that there are a lot of uncertainties that are existing within the environment. So therefore, as of now, it's challenging to share a view. However, we do think that on the inventory side, there will be a negative lagging effect that we will see. And also, if we look at the ship freight in terms of the overall cost levels compared to the first half of the year, on the second half of the year, we do actually see a 60% increase. So that will also be another factor of consideration. However, that have been said, on the company side, of course, we do think that from the second half of the year, we will be able to, in a full-fledged manner, expand our overall premium products. So that should contribute to our overall profitability. At the same time, in terms of our raw material costs and also utility-related costs, this is an area in which we are trying to cut back on costs to the extreme so that we can reach efficiencies. So, through these means, we are going to make our utmost efforts to try to defend our bottom line.

[Interpreted] And maybe I can address your second question about our cathode outlook going forward. First, if we look at the second quarter in terms of the overall sales volume, it is true that there has been a continuous increase since the second half of last year. However, if you look at the North American overall demand environment and also the suspension of Ultium Cells production and some of the adjustments that were made on the customer side, in terms of the actual growth in itself, it was somewhat limited. If we look at the second half of the year, one, of course, we will have more supply that we were providing to a new customer. And also, in terms of the overall volume that we are going to supply to LG Energy Solutions, that is also expected to increase. So, for the second half of the year versus the first half of the year, we do think that this will lead to a meaningful increase in our overall volume. In terms of the overall level of increase that we are expecting, we do think that the fourth quarter will represent a higher level than what we see in the third quarter. However, that has been said, versus the beginning of the year, if you look at the overall speed of recovery that is taking place in the North American EV market, versus our initial expectations, I do think that it is somewhat slower. So therefore, for that reason, if we look at our initial forecast or plans for the 2026 in terms of total volume, we do think that as of now, it will be a bit challenging to meet that target level. To talk about 2027, from the second half of this year, we do have new projects that are going to start and on go. And therefore, there will be an increase in volume from that. That will be reflected in full in 2027, and that volume increase will also again start from the second half of this year. So, for that reason, if we look at the overall forecast for 2027, we do think that the overall volume will be a significant increase versus what we have seen today. In terms of the market going forward and also the customer demand, of course, we will be setting forth a more detailed business plan for next year. Once that is available, of course, I do think that we will be able to share more details about the volume growth that we are expecting for 2027.

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

[Interpreted] There are 2 questions that I would like to ask you. One is about your petrochemical business. After you suspended the operations of your Yeosu NCC in March, when are you -- or are you planning to actually restart and reoperate this facility? So that would be the question. And added to that, are there any large-scale TA plans for this year? The second question that I would like to ask you is about your plans to monetize the LGES stake that you have. Are there any details of that plan that you would be able to share with us? And with regards to the proceeds of that monetization, are you planning to use that to invest in your business? So, for example, would it be a resource that would be able to be invested into inorganic growth?

[Interpreted] So maybe I can address the first question that you had on the petrochemical side about the restart of our petrochemical NCC. So, if you look at the overall utilization of our [ cracker ] in the first quarter of this year, it was in the mid-70 level. And then come the end of March when we actually suspended our Yeosu # 2. For the second quarter, it was within the mid-50% level. For the second half of the year, we do also believe that in terms of the naphtha sourcing that there will continue to be some uncertainties related to that situation. So, for our cracker utilization, we are planning to run the facility at a similar level to the first half of the year. In the fourth quarter, we do actually have a regular turnaround that is planned for our Yeosu 1 NCC. And before that turnaround actually takes place, in light of the inventory, I do think that there may be some adjustments to our utilization.

[Interpreted] So, maybe I can address the second question that you had in terms of our plans with regards to utilizing and monetizing the LGES stake that we have. As we have disclosed in terms of our plans going forward, the company's overall intention is to sell down to around 70% in terms of the LGES stake that we have by 2030. So therefore, in 2025, we did do a PRS transaction through which we did dispose of some of the sales. and we use that to improve our overall financial profile. So, it was used to redeem some of the debt that we had outstanding and also some of it was allocated to contribute to shareholder returns. So, for each year, we will look at the best options that we have available and then set forth the monetization plans accordingly. So, over the longer-term goal that we have to be a converting company that is based upon various technology competitiveness, I do think that we are looking into the details of plans of how we can actually build up and grow our overall premium businesses. So therefore, as a part of that initiative, we do think that there could be inorganic growth options that we would try to explore. And if so, the LGES monetization proceeds could be used in that area. However, that have been said, as of now, we don't have any definitive plans in this area. Once we do have more final plans, we will make sure to share that with the market.

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