Lotte Chemical Corporation (011170.KS) Q2 FY2025 Earnings Call Transcript & Summary

Good afternoon. I am [ Young Kyung Hwang ], Head of IR at Lotte Chemical. I'd like to thank everyone for taking part in today's conference call despite your busy schedule. Today, we will give a brief presentation on Q2 business results. And afterwards, the CFO will take you through the key highlights of the quarter's business performance. We'll then proceed to a Q&A session. The earnings presentation and business outlook will be in simultaneous interpretation and Q&A will be conducted through consecutive interpretation. And today's presentation materials can be downloaded on our website. Let me now introduce the senior management members joining us today. We have with us Kim Min-Woo, the CSO; Sung Nak-Seon, our CFO; Kwak Giseop, Head of Corporate Planning Division of Basic Chemicals; Kwoun Jo Hyun, Head of Monomer Division; Cheon Yang-Sik, Head of Polymer Division; Cho Woo-Hyun, Head of Corporate Planning Division of Advanced Materials. First, let me walk you through the Q2 business results on a consolidated basis. First, please go to Page 2 of P&L. The sales in Q2 posted KRW 4,197.1 billion. Operating loss came to KRW 244.9 billion. Impact from turnaround schedule and external uncertainties were reflected, so losses widened on a Q-o-Q basis. EBITDA posted KRW 48.3 billion, and pretax loss and net loss that posted KRW 501.7 billion and KRW 471.3 billion, respectively, owing to exchange rate fluctuations, nonoperating expenses was reflected. Page 3 is a look at the consolidated financial metrics. As of end of Q2, we have total assets of KRW 33 trillion, liability of around KRW 14 trillion and shareholder equity around KRW 19 trillion and debt-to-equity ratio was 76.3%. Next, let's look at results and outlook by division, starting with the Basic Chemicals on Page 4. Basic Chemicals Q2 revenue was KRW 2,687.4 billion, operating loss, KRW 216.1 billion. The scheduled turnaround of Daesan plant and subsidiaries, combined with falling monomer prices narrowed spread resulting in an operating loss. Even though uncertainty in business environment is likely to continue in Q3, we expect business results to improve as one-off factors in Q2 are removed. Next, for Advanced Materials, Q2 revenue was KRW 1,045.5 billion. Operating profit was KRW 56 billion and OP margin was 5.4%. Dampened downstream demand amid tariff uncertainties decreased revenue as well as profitability. In Q3, we expect the impact of external uncertainties to continue and profitability to be similar to Q2. Next for LOTTE Fine Chemical. Since the company had a separate earnings call on July 30, I will only briefly recap the results. LOTTE Fine Chemical's Q2 revenue was KRW 424.7 billion. Operating profit was KRW 8.7 billion. In Q2, profits decreased Q-o-Q due to the scheduled turnaround. In Q3, however, LOTTE Fine Chemical's earnings is expected to improve with removal of one-off factors and higher product prices expected. Lastly, to briefly recap LOTTE Energy Materials, which also had a separate earnings call on August 6, and so I will only briefly recap. Q2 revenue of LOTTE Energy Materials was KRW 204.9 billion. Operating loss was KRW 31.1 billion. Its profitability and revenue improved from higher utilization driven by increased sales volume to its major customer. In the second half, even though uncertainty is expected to continue downstream, it is expected to see more stable operation in the second half versus first half, thanks to preemptive inventory adjustments effect. That completes a look at our Q2 results. And now our CFO, Nak-Seon Sung, will address some key business topics.

Good afternoon. This is Nak-Seon Sung, the CFO of Lotte Chemical. Thank you for joining our earnings call despite your busy schedules. First, for a look at our Q2 business environment. During Q2, while internal and external challenges continued, the turnaround and other one-off expenses caused the size of loss to increase on a Q-o-Q basis. I sincerely apologize for delivering disappointing results that fall below your expectations. The external uncertainties will likely continue in Q3, but some of the negative factors that weighed down Q2 has been removed, and we expect our Q3 results to show a gradual recovery versus Q2. That said, difficulties in the business environment, including the global economic slowdown and dampened demand is expected to continue for some time. Despite such a challenging environment, we continue our step-by-step structural transformation of our business fundamentals to secure mid- to long-term competitiveness with a particular focus on various restructuring efforts in the commodity petrochemicals side. First, we are strengthening our business portfolio by divesting noncore assets in Korea and abroad. The sales contract for the Pakistani PTA business was signed in February and await deal closing within Q3. Sales of our water treatment business in Korea was completed last month. To optimize our overseas petrochem business, especially focused on Southeast Asia, we're looking into various options, including sale of ownership stake or inviting a strategic investor, and currently engaged in early talks with multiple potential investors. We will share details with the market once specifics are decided. Regarding streamlining of our petrochemical business in Korea, recently, the Korean government and the Korean industry are discussing various restructuring approaches. Lotte Chem is also carefully studying the right direction that would strengthen the core competitiveness of our business in Korea, and we will communicate with the market in a timely manner once details are decided. We are also focused on operational efficiency through innovation activities such as equipment rationalization and utilization optimization. Also, the LINE project targeting the high-growth potential Southeast Asian market is scheduled to complete commissioning during August and move on to commercial production gradually. Our persistent business restructuring and operational efficiency efforts are delivering visible results in terms of financial structural improvement. For example, as of the first half of 2025, we have repaid a total of KRW 2 trillion in borrowings. And with large-scale projects coming to an end this year, we expect to keep CapEx execution within EBITDA from next year. We will continue to work on stronger financial stability by carefully monitoring the pace of industry recovery and making our commodity petrochem assets more efficient. While minimizing investments in inefficient assets by restructuring our commodity business, we are continuing to invest selectively in upgrading our business portfolio to expand our high-end product offerings and future growth engines. In particular, strategic investments by the Advanced Materials division in the global high-performance compound business and other new businesses, including the hydrogen energy are on track without delays. To elaborate on these 2 projects, the Advanced Materials division has been expanding its high-performance compound business, leveraging its global supply chain and technology capabilities. The new compounding plant under construction in the Yulchon Industrial Complex in Jeollanam province is currently undergoing commissioning and scheduled for partial mass production in October. After that, we plan to relocate the compounding equipment in Yeosu to Yulchon and have full commercial operation by the second half of next year, which will be the largest single compounding plant in Korea and strengthen our edge in specialty materials. In green energy area, we're expanding our preemptive response to hydrogen business in line with the energy transition. We are taking a strategic approach through joint ventures to build capabilities across the value chain, but with a focus on hydrogen power generation and distribution. The LOTTE-Air Liquide Ener'Hy hydrogen shipping center is set to start commercial operation during Q3 and LOTTE SK Eneroot hydrogen fuel cell power generation is on track with 20 megawatts out of its total 80-megawatt capacity running on brown hydrogen from Ulsan currently in operation after mechanical completion in May. The remaining 60 megawatts is scheduled to start operation during the first half of next year. In parallel to restructuring and upgrading our business portfolio, we also placed importance on maintaining a consistent shareholder return policy to enhance shareholder value. And as part of this, we have decided on KRW 500 per share interim dividend despite the challenging business environment. This decision was made in order to honor the trust placed by shareholders regardless of near-term business results. Dear shareholders, the petrochem industry is currently passing through a long tunnel of restructuring and faces many challenges amid uncertain external environments. By actively participating in the Korean petrochem industry restructuring, we will reduce the share of commodities and achieve stable finances, sending a stable signal to the market with improved financial metrics. The first priority is to regain stable financial position as before, and we are keeping -- we are determined to keep the size of investments within annual EBITDA from next year. Lotte Chemical is laser-focused on not just overcoming near-term challenges, but also making this an opportunity for transforming our business structure so that we emerge from this crisis more competitive and robust. I ask for your continued support. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Parsley Ong from JPMorgan.

So my first question is on the Korea government's chemicals rescue plan. Could you give us an update on the expected time lines? How do you expect all these proposals to benefit Lotte Chem? And I see that in second quarter, there was KRW 129 billion operating loss on your olefin division in the -- under the parent company. And under equity method income, there was a KRW 62 billion loss coming from Hyundai Chem. So if we go ahead and merge the Daesan naphtha crackers, what do you think will be the impact on your P&L? The second question is on -- could you just give us an update on how does Lotte Chem plan to structurally improve the business? And do you think 2024 might be the bottom for net profit? So over the mid- to long-term, what kind of goals does management plan to target?

[Interpreted] Thank you very much for those questions. My name is Kim Min-Woo. I'm the CSO. So let me answer your questions to the best of my ability. So with regards to the policy directions that will be pursued by the Korean government and also the relevant time line, well, as you are probably well aware, the major decision-makers in this government has only just been appointed. And so as of yet, it is too premature to disclose any targeted time line. So although the time line that is to be proposed by the government is important, but just as important is also the discussions that are ongoing among all the relevant companies. This is also a major factor. But as I understand it, the directions that is to be adopted by the individual companies and also the progress made internally in terms of decision-making varies depending on the companies. However, there is no denying that the government has a very strong commitment to ensuring that the petrochemical industry recovers its competitiveness, and they're giving a lot of thought to the various options that can achieve this end. And so going through various discussions and the relevant processes, I do believe that the government will reach a decision on this matter soon. And when that point in time comes arrives, then the market will be sure to be informed about it. So with regards to your question, I think it deals with references that have been made in various media reports about what is going on between Hyundai Chemical and our company. But at this point in time, we are not in a position to disclose any details. But on a general note, with regards to our views on the integration by industrial complex and also options to improve competitiveness, I do think that we can discuss this matter on a conceptual level. As included, most of the petrochemical companies are actually giving a lot of thought to optimizing the utilization rate of their naphtha crackers. And so also for the downstream plants as well, which plants to operate and at what utilization rate is something that we have really thought about in depth for the past 3 years. However, having said that, I do believe that optimization at the individual company level has made progress to a certain extent. But the market situation deterioration that we are experiencing nowadays is really much deeper than what we have experienced in the past. And so I do regret that we are not able to demonstrate any momentum in the recovery of the business performance at this point. However, based on our internal studies, if there is integration and consolidation within the industrial complex among different companies and if we are able to optimize the utilization of the naphtha crackers are also reducing the production of the loss-making products. This can work a long way in easing the excess supply issue. And also if individual companies work to further save cost and also reduce the sales of the loss-making products, then this can actually contribute significantly to improving the cash flow. So in conclusion, given the very difficult market situation based on a very conservative standpoint, we will do our best to protect the existing assets as much as it is possible and also seek ways to improve the profitability of the company. And so by going through the various discussion and processes, we do believe that we will be able to arrive at a viable solution. And this in connection with the government support, if it is provided, this may lead to visible outcome in the near future. And when these outcomes are actually produced, we will make sure that it is communicated to the market.

[Interpreted] The following question will be presented by Woo-Je Chun from KB Securities.

[Interpreted] I'm Chun Woo-Je from KB Securities. I have 3 questions. So the first question has to do with the one-off losses that was reflected in the second quarter. So I do believe the one-off losses had to do with the scheduled turnaround and the fluctuations in the exchange rate et cetera. So can you provide your answer based on these factors? I do believe that the changes in the exchange rate has already contributed to the losses. And so is it true that this was operating -- nonoperating losses that was posted? And my second question has to do with the increasing uncertainties surrounding the U.S. tariffs. So across the industry, the plastic exports to China in the second quarter has declined steeply. Is there any signs of recovery for this declining orders? So can you provide an update on the business situation about these matters?

[Interpreted] So I am Kwak Giseop, Head of the Corporate Planning Division of the Basic Chemicals unit. I would like to take your first question. So in the case of our scheduled turnaround, yes, in the Daesan plant, there was a turnaround that was scheduled. And also for LC USA, we had the MEG turnaround that had been scheduled. And so the opportunity cost that was involved due to the turnaround in Daesan plant in LC USA was a loss of KRW 80 billion in operating profit and also the impact from the exchange rate was KRW 18 billion.

[Interpreted] I am Cheon Yang-Sik, Head of the Polymer division. So I would like to take your second question. Because of the postponement of the countervailing tariffs of China, starting from June to up until early July, there were some preliminary demand that had occurred. However, starting from the mid-July, this demand had disappeared. And at present, it is completely gone. And so we're also entering into the off-peak season. And so in terms of demand, the situation is indeed very bad.

[Interpreted] I am Kim Min-Woo, the CSO. I would like to take the question on LOTTE Energy Materials. So from the point of view of Lotte Chemical, we are not in a position to identify which specific customers for LOTTE Energy Materials has seen an increase in the order volume. So if you have any questions on that regard, we would have to post that question to LOTTE Energy Materials. So generally speaking, with regards to the EV market, there's been a significant growth slowdown and also the chasm issue and concerns are growing over these matters. But recently, we have seen a change -- a slight change in the mode into the positive. However, in terms of our inventory volumes, up until the second half of last year, we did not actually anticipate that the situation would deteriorate to this level. And so our inventory volumes were rather high. So starting from the end of last year and up until the first quarter of this year, we have been making efforts to reduce our utilization rate in order to bring down our inventory levels. And we do believe we have been able to achieve material results -- visible results. And recently, the market situation for the downstream industry is actually improving, and we are in a situation where we're able to raise the utilization rate to a certain extent. And on top of that, there's been improvement in terms of fixed cost and also improvement in the other cost as well. And so performance is gradually improving.

[Interpreted] The following question will be presented by Jae Sung Yoon from Hana Securities.

[Interpreted] Yes. I have 2 questions. First question has to do with the operation schedule of the Indonesia LINE project. And do you believe that in the current market situation, you will be able to realize profitability? When also do you believe the PC -- [ BEP ] point will be achieved? And my second question has to do with the sanctions against Iranian oil. Recently, there is sanctions against the oil from Russia and Iran. And so China and India companies are no longer able to buy cheap crude oil from Russia and Iran. Do you believe that this will help the competitiveness of the petrochemical companies? That's my second question.

[Interpreted] I am Kwak Giseop, the Head of the Corporate Planning Division of the Basic Chemicals unit. Let me take your first question. In the case of the LINE project, right now, we have completed the mechanical completion, and we are in the midst of commissioning. We will be completing the commissioning stage by September of this year. And after September, our plan is to enter into commercial production. In terms of the profitability, well, the overall situation for the petrochemical industry is not that favorable. However, if you look at the Indonesian market, they are still suffering from a shortfall -- shortage of supply of PE and PP. So when the LINE project will enter into normal operation starting from next year, even at that point in time, we -- our anticipation is that there will be 1 million tons of imports for PE and 1.5 million tons of imports for PP next year. So although it is difficult at this point to anticipate the exact timing of the [ BEP ], what we are actually doing right now is identifying local clients and also we are engaging in product collaboration. And after the plant operation has become stabilized and we have established a firm footing in the domestic market, we intend to expand our production to high-margin strategic products as well.

[Interpreted] Thank you very much for your question. I am Kwoun Jo Hyun, Head of the Monomer Division. I will take your second question. As you are probably well aware, earlier this year, U.S. -- United States had imposed sanctions against the petrochemical industry, the crude oil industry of Russia. And so there were specific sanctions imposed against the vessels as well as their refinery products. And if you look at the naphtha price, if we compare the general naphtha price with that of the Russian produced naphtha, there was a gap of around $30 to $20. And this price difference has been enjoyed by the Indian companies as well as the Chinese companies. And recently, the U.S. Trump administration has announced that it is going to impose a second round of tariffs for those countries whose companies are engaging in energy trade with Russia. And so we are waiting to see what kind of measures will be coming forth from the Indian as well as Chinese companies. So temporarily, there -- because of these restrictions placed on the trading volume, this might lead to greater volatility for the oil prices as well as the naphtha prices. But if the summit meeting between Russia, Ukraine and United States come through and truce is entered into, then there will be following measures that will be implemented and what kind of impact this will have on the petrochemical industry is something that we will be closely monitoring.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The following question will be presented by Hyunryul Cho from Samsung Securities.

[Interpreted] I have a question about the China's plans to restructure its petrochemical industry. And so there are a lot of expectations in the market of such restructuring coming out of the Chinese industry. And because of the decline in the demand for the refinery products in China, there are anticipations that the Chinese facilities, the Asian facilities need to be shut down. So in terms of ethylene or the basic oil perspective, we believe that this restructuring in the Chinese industry will have a positive impact on the Korean chemical industry. What is your views on this matter?

[Interpreted] Thank you very much for your question. My name is Kwoun Jo Hyun. I'm the Head of the Monomer Division. Let me take your question. So with regards to the plans that has been announced by the Chinese government to undertake reform of the supply in the petrochemical industry. So these are the contents that were included in the plans. First is to shut down aging and small NCCs and also limit the approval for new facilities. And in addition, consolidate the large crackers and turn them into more high value-added facilities. In accordance with these plans, it is expected that those aging facilities in China with over 20 years of service is going to be closed down in phases, and this encompasses a total capacity of 10 million tons of ethylene. And we are awaiting follow-up measures to implement this plan from the Chinese government. However, even if those plans are implemented as has been scheduled originally, this year alone, there is 9.37 million tons of new capacity volume that will be released into the market. And in 2026, there is 9.43 million tons that will be released into the market. And so because of this volume from the new capacity add-ons, we believe that the impact of these supply reform plans will be quite limited.

[Interpreted] The following question will be presented by Hyung Jun Shin from Shinhan Securities.

[Interpreted] My first question has to do with the imposition of the European ABS antidumping tariffs. What kind of impact would this have on the Advanced Materials business of Lotte Chemical? And what would be our response measures to this? And in the case of Taiwan, I understand that they were hit by a tariff rate that was higher than ours. Do you think you will be able to benefit from these developments? My second question has to do with the fact that there was a recent media report about the Yeosu Industrial Complex, NCC plant #3 that it had gone into unlimited suspension of operations? And what kind of impact would this have on Lotte Chemical?

[Interpreted] I am Cho Woo-Hyun, Head of the Corporate Planning Division of the Advanced Materials unit. Let me take your first question. So with regards to the Europe ABS antidumping tariff, there was a preliminary ruling that came out on the 18th of July, and our company was imposed with 5.8% tariff. So although this tariff rate was rather higher than the other chemical companies in Korea compared to the Taiwanese companies, it was actually a lower rate. We plan to consult with our customers about sharing the tariff-related cost and also reflect this in the sales price, thereby minimizing any impact on our P&L. And also for those markets that are supplied with the Taiwanese products, we will be focusing our efforts in developing new clients so as to minimize the impact of this.

[Interpreted] I am Kwoun Jo Hyun, Head of the Monomer Division. Let me take your second question. So according to the actual announcement that was made, the YNCC plant #3 suspension of operations, the capacity involved is 470,000 tons of ethylene. However, the utilization rate of the # 1 plant and the #2 plant of YNCC has been raised, offsetting the impact of the suspension of operations of #3 plant. So all in all, the actual reduction in production on an annual basis comes to 180,000 tons according to our estimation. So if we estimate that this amount of volume is actually exported to overseas market, then it's not that significant about volume. So this may bring about a slight improvement in the ethylene prices. However, we do not foresee any major impact on the market.

[Interpreted] The following question will be presented by Jae Sung Yoon from Hana Securities.

[Interpreted] So this is a follow-up question to the one that I have previously asked. There is a question about the Indonesian LINE project. You have mentioned that you are going to start commercial production after September. And that means the business results of the LINE project will actually be reflected in the company's performance starting from fourth quarter. Is my understanding correct?

I am Kwak Giseop, Head of the Corporate Planning Division of the Basic Chemicals unit. Let me answer your questions. So our plan is to complete commissioning by the month of September. And also, we are planning to complete the guaranteed test for each licensor. Although the date has not been finalized yet, our expectation is that the commercial operation will start after October. And when that date is indeed finalized, we will be sure to inform the market about it.

[Interpreted] With this, we would like to conclude Lotte Chemical 2025 Q2 earnings presentation. For those of you who have not been able to ask your questions, please direct your questions to the IR team of Lotte Chemical. Thank you very much for attending this earnings conference call. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]