Lotte Chemical Corporation (A011170) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Kim Hoon, Head of the IR Team at LOTTE Chemical. I thank everyone for your interest in LOTTE Chemical and your participation today. We will now begin the Q1 2023 Earnings Release Conference Call for LOTTE Chemical. We will start with an introduction of the executives present here today, followed by a presentation on the company's Q1 business performance and Q2 outlook, then a Q&A session. Please be informed that the presentation will be conducted in simultaneous interpretation and the Q&A in consecutive interpretation. I will now introduce the executives in attendance today. First, Vice President and CSO, Kim Minwoo; Vice President, [indiscernible]; and Vice President, Kang Jong-Won, the CFO; and Vice President, Park Kyung-Sun, Head of the Strategy Management division; Vice President, [indiscernible], in charge of new business planning; Executive Vice President, [ Kim Cheuljoong ], Head of the Monomer Division; Executive Vice President, [indiscernible], Head of the Polymer division and Vice President, [indiscernible], Head of Aromatic Division. From Advanced Materials, we have General Manager, [indiscernible] from the Corporate Planning division and from LC Titan, we have Executive Vice President, Philip Kong from the Corporate Planning division; from Battery Materials, we have Vice President, [ Seo KyungHoon ], Head of the Battery Materials Strategy division; and from Hydrogen Energy, we have Vice President, [ Kim Yeon-hak ] Head of the Hydrogen Energy division. Let me now turn to business results of Q1 '23. Before that, let me give you an update on the major changes in the previous quarter. Acquisition of LOTTE Energy Materials, previously, Iljin Energy Materials was completed in March 2023, which is reflected in the company's consolidated financial statements from the end of March. Its profit and loss will be reflected from April and incorporated into the consolidated P&L from Q2. In addition, the company signed an agreement to sell off LCPL in January 2023, which is a PTA manufacturer in Pakistan. LCPL's earnings were thus excluded from the company's P&L. Revenue in Q1 was KRW 49,323 trillion, down by 8.2% Q-o-Q. There was operating loss of KRW 26.2 billion and operating profit margin was minus 0.5%. Product prices rose for some products on expectations on economic recovery and spread improved as naphtha and ethane prices stabilized. Operating loss considerably improved by KRW 398.2 billion from KRW 416.4 billion in the previous quarter. Recognition of inventory valuation loss was reduced Q-o-Q and costs also went down with freight costs stabilizing. Non-operating profit improved by KRW 429.6 billion. Insurance payment of KRW 159.1 billion for the [indiscernible] was recognized in Q1. Equity method loss for LOTTE E&C, among others, was reduced by KRW 30.5 billion. There was the base effect from recognition of impairment loss in the previous quarter. As a result, pretax income turned around to profit of KRW 278.3 billion, increasing by KRW 850.3 billion Q-o-Q. Next is on financial highlights. Assets as of end of Q1 2023 posted KRW 31,827.7 billion, up KRW 5 trillion YTD. Cash and equivalent posted KRW 5 trillion, up KRW 1.3 trillion YTD. As of the end of March, LOTTE Energy Materials was included in the financial statement as a consolidated subsidiary. And so there was an increase of LOTTE Energy Materials KRW 2.4 trillion of assets and cash equivalent of KRW 0.9 trillion. Assets also increased due to impact from loan recovery of KRW 500 billion from LOTTE E&C and the rights offering. Liabilities came to KRW 11,975.6 billion, up KRW 2.5 trillion Q-on-Q and borrowings came to KRW 8,152.6 billion, up KRW 2 trillion Q-on-Q. LOTTE Materials liabilities of KRW 0.4 trillion was reflected and acquisition financing of KRW 1.3 trillion and corporate debenture of KRW 0.5 trillion was reflected. Capital came to KRW 19,852.1 billion, up KRW 2.6 trillion Q-o-Q. Due to acquisition of LOTTE Materials, borrowings have increased. Net borrowing ratio is 15.9%. And on a YTD basis, it is up slightly, but liability ratio at the end of Q1 was 60%. It's being maintained at a stable level. Next is on business results and outlook by business area. In Q1 of 2023, Basic Materials posted KRW 2,792 billion in sales and operating profit posted KRW 28.5 billion and OPM 1.0% turning to the black. In the January of this year, because of the oil price declines, feedstock prices were stabilized. And after the closing of China's National People's Congress and reopening the earlier part of the year, expectations rose over an economic recovery, leading to an improved market environment and a turnaround to profit was posted. As such, valuation loss and inventory also fell over the previous quarter's loss of KRW 301.2 billion, KRW 329.7 billion improvement was made post KRW 28.5 billion in profit. The outlook for Q2 of 2023, entry into the traditional high season and concentrated retail TA will lead to an improved demand situation. But as we expect global economic slowdown and supply overhang going forward, profitability is expected to be similar to this quarter. Moving on to the Advanced Materials business. Advanced Materials posted KRW 1,495.5 billion in sales in Q1 of 2023 and operating profit came to KRW 45.5 billion and OPM, 4.3%. The global economic downturn led to a fall in product prices, thus reducing the total sales, but stabilizing feedstock prices and decline in shipping costs led to improved profitability Q-o-Q. In the case of Q2, along with the continuing economic downturn, ABS new capacity buildup is concentrated within this region, thus aggravating supply pressures. However, as we enter into the traditional high season, demand is expected to improve and profitability is also expected to improve over the Q1. Next, on the business results of LC Titan. In Q1 of 2023, LC Titan revenue posted KRW 574.9 billion and operating profit posted minus KRW 73.6 billion. Weak demand continued on the back of reprices in Southeast Asia and due to new capacity volume coming online as well as the economic downturn. However, because of the impact of improving spread resulting from fall in feedstock prices and falling valuation loss of inventories, the operating profit Q-on-Q has improved by KRW 38.1 billion and losses have declined. In Q2, we expect demand recovery to take place. But the supply overhang from the Southeast Asia new capacity add-on is expected to limit meaningful improvement in profitability. Now turning to LC USA. In Q4 of 2022, LC USA posted KRW 127.8 billion in sales and minus KRW 27.9 billion in operating profit. Product prices were down due to new capacity volume continuing to hit the market and last year shutdowns owing to cold wave to play until January 23, so the sales and revenue fell. The SM prices were stabilized at a low level, however, improving the spreads modestly. And the impact of Q1 profit of shutdown, which is one-off expense with approximately KRW 23 billion and excluding the impact of shutdowns profitability reached BEP levels. In Q2, normalized operations will lead to a recovery of production volume and revenue. And as SM prices were stabilized at a lower level, we expect that turnaround to profit will be possible. Finally, on the LOTTE Fine Chemical. There was provisionary disclosure about the Q1 business results on April 28. Let me go into details. In Q1 of 2023, the sales of LOTTE Fine Chemical posted KRW 525 billion and operating profit, KRW 42 billion and OPM, 8.0%. Sales grew on the back of normalized operations since the Q4 TA, but weak prices of the key chemical products led to profitability similar to last year. With regards to the outlook for Q2, owing to the global economic slowdown, weak demand is expected to continue for some chemical products but entry into the high season and firm demand for the green material business is expected to improve profitability modestly. Let me now walk you through the key investment plan. There hasn't been much change from what I have presented in Q4 last year. As for investment into the EV battery electrolyte solvent, EC-DMC, the mechanical completion is scheduled for the second half of this year. And for EMC-DEC, it is scheduled for first half of 2024. For the capacity add on at Daesan plant EOA, we are targeting for completion in second half of this year. For the other key projects, things are progressing as scheduled. And for further details, please refer to Page 10 of the IR materials. Finally, on the 2022 closing dividend. As we have disclosed during the Q1 earnings presentation, dividend for 2022 was approved at KRW 3,500 per share at the shareholder general meeting. And at the end of April, a total of KRW 190 billion was paid out. With this, we conclude our Q1 earnings release. Now for outlook for Q2, we'll now invite, Kim Minwoo, the CSO for a presentation on key issues.

[Interpreted] Good afternoon. I'm Kim Minwoo, CSO of the LOTTE Chemical. I would like to express my deep appreciation to all of you for your interest in our company's earnings release. First, looking back on Q1, despite the challenging environment, the losses have been reduced significantly over the previous quarter. When one-offs were excluded, our business results were close to the BEP level and in the case of LOTTE Chemical on a separated basis, we have turned into the black in Q1 already. In addition, the acquisition of Iljin Materials, the producer of copper foil for secondary batteries, the acquisition process has started in the second half of last year and it was completed on March 14. The new company name is LOTTE Energy Materials and starting from Q2, it will be included in the consolidated financial statements. Going forward, we continue to expect a challenging environment due to economic slowdown globally, oil prices and exchange rate-related volatility to name a few. However, in Q2, we are entering into the high season and TAs or peer companies are concentrated in this period. And so we expect supply and demand situation to improve. Also from next year, we expect the supply overhead will be largely resolved. And so starting from second half, a gradual recovery of profitability is expected to be likely. Starting from Q2 of last year, a very difficult market environment has continued. And as a result, planned investments were reviewed again from a more conservative perspective. And while maintaining an emergency management system, we have been striving to secure financial stability. Even in the midst of such a difficult environment, new investment to secure the future growth engine has been made according to schedule. First of all, for our battery material business, we have completed the acquisition process of LOTTE Energy Materials and is currently proceeding with the P&I smoothly, and we're reviewing our medium- to long-term growth strategy. As planned, we expect to expand our copper to 60,000 tonnes by increasing the capacity of Malaysia lines 5 and 6. In the medium to long term, we plan to secure production base for foil in a competitive location by 2027 and continue to promote global expansion. We will prepare a concrete medium- to long-term strategy for LOTTE Energy Materials in the future. And we will be disclosing this to the market going forward. Considering the acquisition of LOTTE Energy Materials in our future growth plans, we have expanded the proportion of our battery material business in our 2030 new growth business sales target compared to our original plan. Investments in domestic production facilities for organic solvents for electrolytes are scheduled to be sequentially completed in the second half of this year and the first half of next year, we're also considering additional expansions in various regions with priority given to our U.S. factory. We'll share our plans with investors as soon as they are confirmed. In addition, the construction of our U.S. cathode factory is proceeding as planned and we are continuously reviewing various business opportunities related to cathode and anode materials. In the hydrogen business, we're actively reviewing various overseas hydrogen and ammonia projects, including the [indiscernible] project with our partners. We also plan to start construction of a hydrogen distribution center and fuel cell power generation business in Korea this year through a joint venture established last year. Regarding our existing business, the Indonesia LINE project is proceeding as planned and we expect it to contribute significantly to our consolidated performance at the time of operation in 2025 with improved business conditions compared to current market situation. The market environment of the petrochemical business is expected to see gradual albeit limited improvement in profitability, having bottomed out in Q3 and Q4 of last year. With the completion of large-scale ethylene capacity expansions in North America and China, by 2023, we anticipate that the supply situation will improve after 2024. Despite the challenging business environment, our company is maintaining a stable financial structure and consistently pursuing new growth investments to achieve our vision. We will strive to enhance our corporate value through continuous improvement, profitability in existing business and portfolio enhancement through new business. We ask for your continued support and interest. Thank you very much.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] Now I have 2 questions. First is about this year's CapEx plan. And also, the company has increased its borrowings as well as cash holdings. So, I'm wondering about the net interest expense for the company. So, that means excluding the interest income, so what would be the net interest expense? And second question is with regards to the Iljin Materials acquisition. So, it was reported earlier that the Iljin Materials acquisition was completed, but then there have also been press reports about the [ Stig ] investment as well as adjustment in the share. So, is there any update that the company can share with us regarding these issues?

[Interpreted] Thank you very much for the question. This is the CFO, Kang Jong-Won speaking, and I would like to first respond to your question about CapEx. The CapEx plan for the year of 2023 is KRW 6.4 trillion. Of this, KRW 2.9 trillion has already been spent in the first quarter, leaving KRW 3.5 trillion for the rest of the year. And let me also give a breakdown of the KRW 6.4 trillion. So, there is the KRW 2.4 trillion for the payment -- remaining payment to Iljin Materials and then also another KRW 2.6 trillion for equity investment and so forth and KRW 3.8 trillion for new capacity addition as well as ordinary investments. Sorry, so it's KRW 2.6 trillion, including the KRW 2.4 trillion and then the remaining KRW 3.8 trillion is for the new capacity addition. So again, for the new capacity addition and ongoing investment of KRW 3.8 trillion, a bulk of that is for the Indonesian project. So, KRW 2 trillion out of the KRW 3.8 trillion is for the LINE project in Indonesia. Next is about your question on the net interest expense. The net interest expense in the first quarter is KRW 18.9 billion. And for the year, in terms of the total net interest expense for the year, of course, it is difficult to predict this accurately because it is on a variable interest rate basis. But roughly, it is calculated at KRW 280 billion. That is all from you about these questions.

And this is Kim Minwoo, the CSO, and I would like to respond to your question about the Stig investment. Well, I must say that at this time, we do not have much details that we can share with the investors in terms of the response to this question. And of course, if there are any decisions made, any changes made, then we will make sure that they are communicated with the investors as soon as possible. As you would know, Stig is a major investor in the LOTTE Energy Materials Global and LOTTE Materials Europe, which is a company of LOTTE Energy Materials. And both sides are fully aware that the growth and development of LOTTE Energy Materials are in line with the interest of both sides. So, we are conducting negotiations and discussions under such assumptions. That is all for now. Thank you.

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

[Interpreted] I also have 2 questions. First is about the precision materials and I see that the business performance in precision materials continues to improve. So, what would be the main drivers for this? So for example, do you see that there has been an increase in the sales volumes to the major countries because we see that in the major countries, the finished car production volume has increased. And we of course, understand that there has been substantial volume going to the major countries. And so has there been increase in the sales for the finished car production in the major countries? And then next is -- the next question is about the improvement in the PX and [ BTX ]. So again, so I'm wondering what would be the background that has led to the improvement in the PX and the BTX and also what is the current utilization of the NCC downstream? Sorry. So, the first question was about the Advanced Materials.

[Interpreted] This is [ Kim Cheuljoong ], EVP of the Monomer division responding to your question. The second question about the PX and BTX. Now there has been improvement in the spread against naphtha for PX and BTX, mostly because the gasoline going into the seasonality. And as a result, there has been a octane. [Interpreted] And this is [ MyungChul Jung ] VP of the Strategy Management Division and I'm responding to your question about the NCC downstream utilization rate. Now for naphtha and for the Napa downstream, so we are trying to maintain utilization rate according to the market situation. So, we would be adjusting the utilization rate according to the market circumstances. And in the first quarter, the NCC downstream utilization rate on average was 85%. And as of now, it stands at 90% as a result of improvement in the supply and demand dynamics with many of the peers going into regular maintenance in the first half. So, that said, we will continue to adjust our utilization rate according to the market situation. [Interpreted] And this is [indiscernible], General Manager of the Corporate Planning Division of Advanced Materials, and I would like to respond to the first question about the improvement in the business performance of Advanced Materials. Now in the first quarter, the business performance of Advanced Materials improved despite the fact that the global economy remains sluggish. And that is because, first of all, the reduction in the high unit price inventory level. So, as a result of the inventory being reduced, it also boosted our profit and loss outstanding. And then also the logistics costs globally was reduced as well, and this also helped improve our business performance. And although the market situation has not fully recovered yet, we believe that it is going to gradually recover as we move into the second quarter of this year. So, there is going to be improvement in the overall market as well compared to the first quarter. Having said that, there is also the increase in supply coming from China, for example, increase in utilization rate in ABS. And so this is also going to pose as a risk factor.

[Interpreted] And this is the CSO providing some additional explanation about the questions about the volume specifically. So, for the Advanced Materials volume in the second quarter, we expect this to increase by 10% quarter-on-quarter and this has a lot to do with the seasonality as was explained earlier. And as was mentioned earlier, for the Advanced Materials, the ABS spread itself, the improvement is not that large. So, we believe that the improvement in the second quarter versus the first quarter is going to come mostly in the form of increased volume as we move into seasonality.

[Interpreted] The next question will be presented by [ Yong Seung Bae from Shinhan Investment Securities].

[Interpreted] Now, I also have 2 questions. Now first is about the global outlook for ethylene capacity addition for this year and next year. And related to this, there have also been issues coming from the supply increase in China. So, how do you see -- how does the company see the ethylene capacity addition in China for the mid- to long-term? And another question is about the ethane. So, as was mentioned during the presentation that the ethane price has also stabilized and how does the company believe that this is going to affect the profitability for MEG.

[Interpreted] This is Kim Cheuljoong, EVP of Monomer division, responding to your first question about the outlook on the ethylene capacity increase. In 2023, it is expected at 10 million tonnes. And in 2024, the increase is going to be considerably less down to about 3.5 million tonnes, meaning that in 2024, we are looking forward to opportunities for a significant market rebound. And as for the capacity in China for the mid- to long-term now for the global ethylene capacity increase, we believe that it is going to come mostly from the U.S. and the Middle East where they have advantages in the feedstock as well as from China, where there is a huge market. So, we believe that in China, the capacity is going to continue to increase. Next is your question about the profitability for MEG related to the LC USA. Currently, the natural gas in the U.S. is maintained at $2. And as a result, the ethane price has also been maintained at a relatively low $150. Now on one hand, it is going to be difficult to see vast improvement in profitability in EG for the short term. But then given that the ethane price is remaining relatively low, we believe that in the second quarter, LC USA will be able to achieve profitability at an operating profit of over 10%.

[Interpreted] The next question will be presented by Hyunryul Cho from Samsung Securities.

[Interpreted] Now my first question is about the profitability improvement in basic chemicals. I see that the profitability improved for basic chemical more so than for LC Titan, so I wonder what the factors were that drove up the profitability. So for example, were there any special factors like inventory-related factors? And the second question is about the company's battery revenue outlook. So initially, it was at KRW 5 trillion. But now with the acquisition of the Iljin Materials, then has this been increased? And also does the company also expect that there can be sales or profitability to be gained not only from the copper foil, but also from other products, like, for example, solvents?

[Interpreted] This is the CFO, Kang Jong-Won, responding to your question. Now you asked about whether there was one-off factors for the performance improvement for basic chemicals. And I would say that there was no such factors that was reflected. And if we are to see the inventory valuation as a factor, then the inventory valuation for basic chemical in the first quarter was KRW 21.4 billion.

[Interpreted] This is the CSO speaking. Now regarding the performance improvement for basic chemical more so than for Titan, I would just like to explain a bit about the background. And for Titan, it focuses mostly on the Southeast Asian market. But then given the fact that the Southeast Asia markets are mostly handling commodity products, then compared to the non-regional markets as well as the domestic market, and I would say that the opportunities were limited in terms of performance improvement. And also for basic chemical, when we look at the ethylene plant, then in terms of the size, the size allows a cost advantage over Titan as well. So let's say, if in the market, if the products are selling at below marginal profitability, then the more production capacity that you have, then the more disadvantageous you're going to be. But now when the spread is improving and when the spread is in our favor, then I would say that in such a case, the fundamentals of basic chemical in this case, as shown the fundamentals made it possible for basic chemical to improve profitability.

[Interpreted] This is [indiscernible], Vice President of the Battery Materials Strategy Division. And yes, for the battery materials performance outlook by 2030, it was KRW 5 trillion. But with the acquisition of Iljin Materials, we believe that even conservatively speaking, KRW 7 trillion will be more than doable. And as you have asked, in addition to the copper foil, yes, also a solvent and then also from aluminum foil and separator materials, we are looking forward to about KRW 3 trillion by 2030. And as was explained earlier, we are currently revisiting our business plan for the medium to long-term for copper foil. So, I believe that we will be able to give you more specific numbers or more specific outlook after we have completed the review.

[Interpreted] The next question will be presented by Woo Jae Chun from KB Securities.

[Interpreted] Now I also have 2 questions. And first is about the Indonesian LINE project. So, I wonder whether in this case, it is also focusing on the Southeast Asian commodity products as is the case with Titan. And also in terms of the cost competitiveness, then will it be somewhere between the domestic LCC and Titan? So, that's the first question. And the second question is I understand that the company has recently signed an MOU with CF Industries. So, then out of the hydrogen business, what is the area that the company intends to focus on?

[Interpreted] This is [ Seo KyungHoon ] Vice President of the Business Development Planning team. And first, about the LINE project, the main products overall are ethylene and propylene. And then for the downstream, then it is PP and BD. And it is correct that what you have asked about that it is focusing on commodity products in the Southeast Asian markets. And in terms of the cost, so the cost itself would also be somewhere between the Korean market and Titan. And in terms of the feedstock, the company plans to use naphtha and LPG. So, the machinery is being designed in a way to accommodate 50% LPG. And in terms of the LPG input or the feedstock input, then we are going to adjust the LPG input depending on the market circumstances. So, the normal range is going to be between 30% to 50% for LPG. So, considering this feedstock then when it comes to the cost competitiveness, then I believe that it is going to be higher than the between level. [Interpreted] This is Vice President, [ Kim Young-hak ] of Hydrogen Energy division and I would like to explain about the company's plans about the hydrogen business. Now first of all, LOTTE Chemical is already engaging in byproduct hydrogen business. And then also, we have the ammonia business from one of our subsidiaries, Fine Chemicals. But then I believe that this is what your question is pertaining to and that is about the green hydrogen and green ammonia. So these are new businesses where most of the companies are now all standing at the starting line. So for LOTTE Chemical, who already is engaging in hydrogen business as well as ammonia business through its subsidiary, we plan to engage in the entire value chain of hydrogen starting from production to supply and transport as well as technological development.

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

So, you mentioned earlier your 2023 CapEx is KRW 6.4 trillion. Could you share with us the outlook for 2024, '25, '26? Or basically, over the next few years, how much CapEx per annum will you spend? What are your financing methods? And do you have any mid- to long-term net debt-to-equity target? The second question is, could you share with us the detailed breakdown for your non-operating profit for first quarter because your operating profit was a negative number, but your pretax was over KRW 200 billion. So, maybe could you share with us some of the drivers behind that.

[Interpreted] Now this is the CFO responding to your second question about the operating profit and the difference with the pretax income. So, it is true that there was operating loss, but then the pretax income was in the profit. And the major difference was the insurance payment. And then also, there was the valuation of our share in the Advanced Materials. And also, your first question about the CapEx outlook for 2024, '25, so for both years on a consolidated basis, the CapEx is planned at around KRW 3 trillion. And you also asked about the debt-to-equity ratio target and for the company on a consolidated basis, we target 70%.

[Interpreted] That concludes the LOTTE Chemical's first quarter 2023 earnings release conference call. Thank you very much for your participation. And if there are further questions and please refer them to the IR team. We hope to see you again in the second quarter conference call. Thank you.