Lotte Chemical Corporation (A011170) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Kim Hoon, Head of the IR team at Lotte Chemical. I welcome and thank everyone for your interest in joining us at this conference call. We will now begin the earnings release conference call for first quarter 2022. I will first introduce the executives present here with me today, followed by the company's business performance in Q1 2022 and outlook for Q2. We will then entertain your questions. Please be informed that the business performance and outlook report will be conducted in simultaneous interpretation and the Q&A session in consecutive interpretation. I will now introduce the executives. First, Executive Vice President, Kim [indiscernible], of the ESG Strategy Group; Director, Kang Jeong-won, of Finance and Accounting Division; Executive Vice President, Yim Donghee, of Business Development Division; Director, Kim [indiscernible] of Monomer Division; Executive Vice President, [ Yoon Sung-Ho ], of Polymer Division; Director [ Yi Han-Hyun ], of Aromatics Division. From Advanced Materials Strategy Management Division, we have Directors from [ Sung Nak-Seon ] and from LC Titan we have Executive Vice President, [ Philip Kong ] of Corporate Planning. I will first go over the business performance in Q1. Consolidated revenue in Q1 was KRW 5.5863 trillion, up 8.3% Q-o-Q. Operating profit was KRW 82.6 billion. Operating profit margin was 1.5%. Performance slowed somewhat due to rising feedstock prices and weakening market as demand was dampened by worsening external environment. EBITDA was KRW 290.8 billion, representing 5.2% of the revenue. Equity method income was KRW 43.1 billion, down KRW 16.6 billion Q-o-Q. Net income was KRW 116.6 billion, up KRW 42.6 billion Q-o-Q. Next is the company's financial position. Asset at the end of Q1 was KRW 23.8534 trillion, increasing by KRW 983.5 billion from the end of last year. Cash and equivalents was KRW 4.4245 trillion, decreasing by KRW 58.1 billion from year-end. Liabilities were KRW 8.5236 trillion, up by KRW 1.1049 trillion from the end of 2021. Borrowing was KRW 4.2569 trillion. Shareholders' equity was KRW 15.3298 trillion, lower by KRW 121.4 billion from the end of 2021. Debt to equity ratio in Q1 was 55.6%, up 7.6 percentage points from year-end. Net debt to equity ratio was minus 1.1%. Next is performance and outlook by business. Before I go into the report, please be informed that from the first quarter of this year, olefin and aromatics business divisions will be reported together under the Basic Chemical division. Let me first report on Basic Chemicals business division. Revenue in Q1 was KRW 3.4747 trillion. Operating profit was KRW 17 billion with operating profit margin of 0.5%. In the first quarter, rising cost proved to be the biggest burden as oil price surged. Supply burden also increased with continuous entry of new volume from facility ramp-up. Demand slowed down due to Chinese lockdowns. The market in general was sluggish compared to the previous quarter. Having said that, some products maintained robust demand such as materials for food packaging, medical use and PV. The one-off costs reflected in the previous quarter were eliminated. Profitability in general, therefore improved slightly Q-o-Q. Let me now present the outlook for Q2. Improvement in the spread is expected for some products Q-o-Q, but the challenging market condition is likely to continue into Q2. External uncertainties will persist such as high oil prices, slow demand in China and interest rate hikes and the scheduled maintenance in Yeosu plant started this week and will last until mid-June. Opportunity cost thus will be reflected, which will result in a slightly lower profitability in Q2 from Q1. Next is Advanced Materials division. Revenue in Q1 was KRW 1.3142 trillion. Operating profit was KRW 54.5 billion with operating profit margin of 4.1%. Demand from the Americas and Europe remained relatively stable, but the slowdown in pent-up consumption, geopolitical risks and Chinese lockdowns limited improvement in demand in the downstream. Profitability improved Q-o-Q as was the case for Basic Chemical, one-off costs were eliminated. As for the Q2 outlook, risks of demand slowdown are expected to continue due to external conditions, but profitability is expected to improve on the back of expanding high value add products in ABS and decreasing cost burden in PC products, but the scheduled maintenance for some PC lines will also lead to some opportunity cost. Next is the results for the LC Titan. In Q1 of 2022, the revenue of LC Titan posted KRW 791.3 billion. Operating profit came to KRW 7.4 billion and OPM posted 0.9%. As we see Basic Chemical, the surge in oil prices led to higher naphtha prices increasing the cost pressure and with the spread of COVID-19 within division, a wait-and-see attitude took hold among the buyers, leading to weaker profitability. In the case of the market situation in Q2, easing of COVID restrictions in Southeast Asia, reopening of borders is reviving demand. Thus we expect profitability to improve going forward. However, as new capacity hits the market and high oil prices continue, the risk of macro instability continues. Finally, the business results of LC USA. The Q1 sales as of USA in 2022 posted KRW 162.3 billion. Operating profit posted KRW 16 billion and OPM 9.9%. Despite a number of factors underpinning global uncertainty, our strong ethane cost competitiveness and high energy prices in US and Europe is driving solid profitability. Also, starting from the end of last February, the scheduled turnaround of the ethane crackers began as such, the short term opportunity loss for the operating profit of KRW 16 billion was also reflected. The turnaround of ethane crackers has been completed in mid-April and is now in stable operation. Let me walk you through our outlook for Q2. As the geopolitical risks continued, the strong ethane prices is expected to be maintained, but higher prices in the back of absolute increase in supplies in the North American region is expected to gradually decline. Also the MEG products despite facing supply pressures from capacity increases, the lifting of lockdowns and arrival of the summer holiday season will lead to rise and downstream demand, resulting in overall -- resulting downstream demand increases. Let me now explain the progress of our key investment plans. The first is the HPC project. The commercial production schedule has been discussed with our partner within the first half of the year, we expect commercial production to begin. Secondly, about Lotte GS chemical investment project. This project is a JV project with GS energy and the panel included the C3 chain production plant and DD included C4 chain production composes this new production facility. In the case of the C4 oil facility, we are targeting mechanical completion within Q2 and move on to pilot production from there on and our plan is to start commercial production in the second half of the year. We will inform the market of our continued profits of each project every quarter going forward. For more details of the rest of the projects, please refer to the slide. Finally, I will touch upon the newly reinforced shareholder return policy. Our company has announced mid-term shareholder return policy during the March disclosure. Along with a separate P&L based dividend payout ratio of 30% starting this year, we intend to pay interim dividend and we plan on treasury buyback of KRW 300 billion over the next few years. At present, we are reviewing the right timing for this. And after the review is over, through BOD decision, we will finalize this and proceed with the plans. Also in addition to the treasury share buyback, the senior management intends to strengthen accountable management through stock purchases and we'll make interim shareholder return policy announcements every 3 years. We'll continue to pay heed to the opinion of our shareholders and we will also continue to build a relationship of trust by enhancing the stability of our shareholder return policies. I thank the investors for your ongoing interest in the company. This concludes our earnings report. And we will now take your questions.

[Interpreted] [Operator Instructions] The first question will be presented by Yoon Jae Sung from Hana Financial Investment.

[Interpreted] I have 2 questions. First of all, you said that the prices were quite strong in the European region and the US market and that profitability as a consequence was also very solid. So my question is what is the reason that the relative prices in the EU and the Americas is higher than the Asian region and among our products which has a higher share in the overall sales, for EU and United States compared to other regions? So that is my first question. And my second question is I understand from your disclosure that you are continuing to buy stakes within the Lotte Fine Chemicals. So how much more stakes are you intending to buy going forward and what are the reasons for such stock prices in Lotte Fine Chemicals. Those are my 2 questions.

[Interpreted] So let me answer. I am [indiscernible] Kim, Director of Monomer Division. Let me answer your question about why are the prices higher for the European as well as the American region compared to Asia. In the case of Asia, there is lot of new capacity additions that are coming online. However, compared to Asia, the situation is less so for Europe and United States. And also in the case of Asia, demand is rather stagnant because of issues coming from China. However, the situation is less so in United States and Europe. So the demand situation is more solid compared to Asia. And thirdly, the rises in the transportation cost and also the lower availability of vessels has led to less of production volume going from Asia to these European and Americas region. And that is the reason why the prices in these 2 regions are higher compared to Asia.

[Interpreted] My name is [ Sung-Ho Yoon ]. I am the Director of polymer division. Because of these logistics issue and price issues, the supplies from the new capacity additions from Asia is not really moving on to Europe and America. And so that is the reason why there is this price difference and also in the case of our company, our PE products and PPE products, their sales into European countries and United States is expanding. So that this year as well as last year, the share of the sales into Europe and United States of the PE and PPE is more than 40% and that is twice as high as the sales volume to China.

[Interpreted] So I'm [indiscernible] Kim. I am EVP of ESG Strategy Group. Let me take the question about why we are buying stakes in Lotte Fine Chemical. First of all, we are buying these stakes because, as the largest shareholder of Lotte Fine Chemical, we would like to engage in accountable management, business management of the company and also because of a wide variety of different strategic factors, but this is not due to any specific M&A purposes. Since our acquisition of Samsung Petrochemical back in 2015, we have been reviewing the possibility of M&As with relevant companies in the mid to long-term perspective and so in 2022, we have acquired the Advanced Materials. With regards to the stakes in the Lotte Fine Chemical, in order to create further business synergies, we have been open to reviewing possibilities of a merger or other options as well. However, as of yet, nothing specific has been finalized. So going forward is based on business strategic needs. We may engage in further stock purchases, but at the present moment, nothing has been decided. And so if there is any updates on the issue, we will be sure to communicate those with the market through our disclosures and to our IR team.

[Interpreted] The next question will be presented by Parsley Ong from JPMorgan.

My first question is on your Advanced Materials division. You mentioned potential for increasing your prices of the higher value added products. Could you remind us from a volume perspective, how much is your high value-added or, I guess, compounding ABS and compounding PC. And in terms of price difference, what was the difference in price of margin in 2021 and what is your expectation for 2022. The second question is could you give us an update on your rent cuts across the various division. Maybe just recap what was the situation in the first quarter. Your second quarter situation and what is your expectation for second half.

[Interpreted] So let me take the question about the rent cut. First of all, for the NC, naphtha crackers, the operation rent rate, the rent cut has been adjusted to 94% and in the case of SM and EC, which is showing a low profitability, SM has been, the operation rate has been cut to 80% and EC, we have shut down the plants in Daesan, so now it's 75%. So I am [indiscernible] Kim, Director of Monomer Division. Let me give you an outlook for the second half as well as the first quarter of this year. So the business environment was quite challenging because of the following 3 reasons. There was a surge in feedstock prices, the raw material prices were so much so that it could not be transferred to the downstream products prices and also because of the coming online of new capacity additions as well as the lockdown in China, stagnating demand continued for our products and also rising inflation and the company interest rate hikes is leading to more gloomier outlook for the overall economy. In the case of the outlook for the second half, we do expect limited improvement for the business environment. The reason for that is as follows. First of all, we do believe because of the high oil prices, there will be a decline in demand for petrochemical products and because of the situation in Russia, we believe that in the end, there will be stabilizing oil prices going forward. And also with the ending of the summer season, in the second half naphtha, not the prices is expected to stabilize and the LPG prices also will come down to a certain extent and also, because after the lockdown is eased in China, we expect economic stimulus packages to come forward and we are looking to -- expecting that this will lead to a revival of demand for downstream products.

[Interpreted] Yes. My name is Nak-Seon Sung. I'm the Director of Advanced Materials Strategy Management Division. Let me answer your question about the share of high value products among our ABS product category. The high value added products in this category is 90% and for the PC high value-added products, consist of 50% of the total volume at present, but it's going to be raised to 60% going forward. [Foreign Language] So with regards to the price hikes. So there has been increases in logistics prices as well as utility costs. And so this will be reflected in the second half of the year, while reflecting this, the prices will be increased.

[Foreign Language] The next question will be presented by Baek Young-chan from KB Securities.

[Interpreted] My name is Young-chan Baek from KB Securities. I have 2 questions. First of all, I understand from your Basic Chemicals business, you have combined olefin with aromatics business segment. So can you give me a breakdown in terms of sales and operating profit between the 2 business segments? And my second question has to do with your strengthened policy on shareholder return that is indeed welcome news. You mentioned that you will be raising, you will be maintaining the dividend payout ratio of 30%, but will the same dividend payout ratio will be applied to the interim dividends that are paid out or can it be changed depending on the situation.

[Interpreted] I am Kim [indiscernible], the EVP of ESG Strategy Group. Let me answer your second question about the interim dividends and our dividend payout ratio. So starting from 2017, we have announced that we will be paying out as dividend 30% of our net income on a non-consolidated basis and we have been abiding by such a dividend policy. At present, we do not have any plans of a further raising such a dividend payout ratio. So other shareholder return in the form of dividends is important, just as important is enhancing the enterprise value and in order to continue to enhance the enterprise value, we are engaging in investment and efforts to promote growth. So we will continue to make such efforts to further enhance the returns to our shareholders. Thank you very much.

[Interpreted] I am the Head of the IR. And let me give you a breakdown between olefin and aromatics in terms of our operating profit and our sales. So in the case of the first quarter, the olefin sales reached KRW 2.628 trillion and the operating profit was a minus KRW 3.8 billion. In the case of aromatics, the sales was KRW 850 billion and the operating profit stood at KRW 56 billion.

[Interpreted] There is no participants with questions right now. [Operator Instructions] The next question will be presented by Parsley Ong from JPMorgan.

So a follow-up question. As part of your shareholder return policy, I think you're also incorporating plans to do share buybacks and cancellations, I think so. Could you just give us an update on that progress and your expected timing and size of it. And the second question, I guess would be could you recap your first -- I think there were some revisions to your historical numbers. So could you recap in first quarter, what was your maintenance opportunity cost for each division and what is your estimate of second quarter maintenance opportunity cost for each division. Thank you. [Foreign Language]

[Interpreted] I am Kim [indiscernible], the EVP of ESG Strategy Group. Let me take the first question about the treasury buyback. So through repeated roundtable meetings and through our disclosures, we have been communicating with the market about our shareholder return policies and the cost of that is that over a period of 3 years, we will be buying back our treasury shares in the magnitude of KRW 300 billion and this will be spread out over the 3-year period. However given the different business situations and environment that may be encountering in terms of the exact timing or in terms of the exact size of these share buybacks. So, it may be rather fluid. Also, we are currently reviewing the right timing for the treasury buyback for this year. It will be finalized within the year and through our BOD resolutions and through our market disclosures, we will be communicating our decision with the market. As to what we will be doing with the treasury shares that we have bought back, including cancellation we are looking into different options and possibilities and we will be reviewing these possibilities. Thank you. There was a question about the opportunity cost for the shutdowns or turnaround. So in the case of the first quarter in United States and in Pakistan because of these turnarounds the opportunity losses came to KRW 20 billion. In the case of the second quarter, in the Yeosu plant, we have a scheduled maintenance turnaround and we expect the opportunity loss to come to KRW 50 billion to KRW 60 billion and it the advanced material business as well in the second quarter, there is a KRW 110 billion to KRW 115 billion of opportunity loss that is our estimated. So all-in-all, the second quarter opportunity loss is coming from our regular scheduled maintenance will come to around the KRW 60 billion to KRW 70 billion.

[Interpreted] The next question will be presented by Jin Myung Lee from Shinhan Investment. Please go ahead with your question.

[Interpreted] So my name is Jin-Myung Lee. I am from Shihnan Financial Investment. I have a few questions. So first of all, with regards to polymer products, the new capacity additions in the first half. Can you give me a figure for the volumes turn from the new capacity additions and in the second half, is there any possibility of delays in the new capacity additions that are scheduled. And my second question has to do with this year's total CapEx. So in which business, are you going to inject CapEx spending. And my third question has to do with the secondary battery. Is there any updates to your secondary battery business.

[Interpreted] So my name is [indiscernible], I'm the Director of Polymer division. So, let me give you the outlook for the new capacity additions for the first half and the second half of the year for PE and PP. So in the case of PE products, this year our total of 3.5 million tons of new capacity additions is scheduled and in the case of the PP, 5.1 million tons of new capacity addition is scheduled. Mostly, these will come from China and the Middle Eastern region. However, because it is -- the said regions there is the possibility of delays taking place, but as of yet, nothing concrete has been disclosed.

[Interpreted] My name is Kang Jeong-won. I'm the Director of Finance and Accounting Division. As to the question about this year's CapEx for the Indonesian line project, investment of KRW 1.2 trillion is scheduled in the case of the equity stakes purchase in green business area, as well as new capacity additions, total of KRW 2.5 trillion in CapEx is scheduled for us this year. So all-in-all, KRW 2.5 trillion CapEx is expected for this year.

[Interpreted] So I'm Kim [indiscernible]. I am the EVP of ESG Strategy Group. Through various IR-related roundtable meetings, we have announced to the investors that we will be making KRW 4 trillion investment to post KRW 5 trillion in sales by 2034 in our battery material business. So in the case of our company, we are already producing and selling the secondary battery separator materials and with regards to the electrolyte organic solvent, we are planning to complete the construction of these relevant facilities by the end of 2023. So in the case of our battery separator materials, the total volumes that are produced is 7,000 and the sales from those production comes to KRW 15 billion. In the case of the electrolyte organic solvent once the construction of the facility is completed and full-scale production kicks in, then we expect sales to come to KRW 150 billion and OPM levels to reach 20%, making significant contributions to our profit. Also in the case of our company, aside from the lithium-ion battery early this year with we had made equity investment into Standard Energy, which is a producer of vanadium battery and we have secured the position as its second largest shareholder and we are together pursuing identification testing of SF linked charging station, as well as investment into quasi commercial plant for vanadium battery electric lines. Also last April we have entered into an MoU to review the possibility of constructing a plant -- gigawatt level plant for lithium-metal and the project size is about $200 million and it will last till 2025. So we have entered into this MoU with a company called Soelect, which is a startup company that develops lithium-metal anodes and solid state electrolyte. So we are making preparations to expand our business into a wide variety of different battery materials. So our strategy for battery materials is as follows. All the businesses that we are already conducting, we are planning on expanding our business by entering into larger markets like United States. In the case of those battery materials that we have not yet entered into, we plan on cooperating with those companies that have the necessary technological capabilities and thus expand our business in that manner. So with regards to the discussions that are currently underway, we're not at a stage where we can communicate anything in detail to the market, but when there is meaningful progress, we will be sure to communicate these updates through our IR team.

[Interpreted] The next question will be presented by [ Desmond Law ] from Citi.

Yes. Actually, this is Oscar. Thank you for the chance to ask questions. Could you just give us a bit of color about why you are delaying the Phenol project. Is it because of the weak margin because previously, I think, you were targeting maybe second half 2023 and now you're expecting 2024. If this current weak market condition continues, do you plan to cancel the project or delay further? Second question is about, could you share with us a little bit color about how much revenue does EOA contributes right now because you have this project that is expanding EOA quite aggressively and what's all of OP margin is EOA is currently making right now.

I think you need to repeat your first question because we didn't quite get the name of the project that you were referring to.

The Phenol PPA, under the Lotte GS JV. Whether there will be possibility of further delay, given some of the large number of new projects in China?

Yes, thank you.

[Interpreted] So Donghee Yim, I'm the VP of Business Development Division. So let me answer your question about delays related to the projects conducted by Lotte Chemical and Lotte GS. So some of the products that we are pursuing together is being delayed, originally the schedule has been to complete those projects by the end of 2023. It has been delayed by about a year to the second half of 2024 and the reasons are follows. First of all, there has been delay in some of the basic designs that have to be submitted to us. And secondly, because of the rise in the raw material prices, this has led to the increase of the EPC cost as well. And so in the course of reconfirming and checking again the economics of this investment project, there has been delays, but that's not to say that the project will be canceled. We are about to enter into the EPC contract and after the EPC contract is signed, then we will continue to pursue the project.

[Interpreted] So I am Kim [indiscernible], I am the Director of Monomer Division. With regards to your question about EOA, so in the case of our company, our capacity for EOA production is 280,000 tons and in terms of sales, the sales posted by EOA product is KRW 500 billion. In terms of profitability it's more than 10%. So in the case of Daesan plant, by the end of 2023, we are planning on increasing the capacity by another 150,000 tons and that will bring up the total capacity for EOA to 430,000 tons. And in terms of the overall market situation, the situation continues to be quite challenging for the Chinese market, however, our mainstay market is Europe as well as United States and for these 2 markets, because of various infrastructure related projects, the outlook is quite bright.

So with this we would like to end earnings presentation for Q1 of 2022. If you have any further questions, please contact our IR team. So thank you very much for your presentation. We'll meet you next time with the next quarter's presentation. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]