Lotte Chemical Corporation (A011170) Earnings Call Transcript & Summary

Good afternoon. This is Young Kyung Hwang, Head of IR at Lotte Chemical. Thank you all for your continued interest in the company and taking time out of your busy schedules to join Lotte Chemical's earnings release conference call. Today's event will begin with an introduction of our participating executives, followed by a brief presentation on our Q1 earnings results and outlook for Q2. After that, our CFO will provide some comments on key issues and the company's future outlook. We'll then conclude with a Q&A session. Please note that the earnings results and the business outlook will be delivered via simultaneous interpretation, while the Q&A session will proceed with consecutive interpretation. Now let me introduce the executives who have joined us for today's earnings call. From HQ, we are joined by our Vice President, Min-Woo Kim, the CSO; and Vice President, Nak-Seon Sung, the CFO. From the Basic Chemicals business, we have Vice President Giseop Kwak, Head of Corporate Planning Division of Basic Chemicals; Vice President Jo Hyun Kwoun, Head of Monomer Business; and Vice President Yang-Sik Cheon, Head of Polymer Business; from the Advanced Materials Business, Executive Vice President Woo-Hyun Cho, Head of Business Support, is also with us today. First, let me walk you through our business results for the first quarter of 2025. Revenue for Q1 amounted to KRW 4,901.8 billion, up slightly from the previous quarter. The operating profit posted a loss of KRW 126.6 billion, an improvement of KRW 107.5 billion compared to previous quarter. EBITDA is also improved by KRW 74.1 billion, posting KRW 173 billion. Pretax earnings and net profit posted a loss of KRW 241.1 billion and KRW 246.3 billion, respectively, improving significantly as the one-off factors recognized last quarter was absent. Next, on the financial status of the company. As of the end of Q1, assets came to a total of KRW 34,763.1 billion; liabilities, KRW 14,497.2 billion; capital, KRW 20,265.9 billion. LOTTE Chemical is continuing to implement its asset-light strategies to advance its business portfolio and improve the financial structure. Due to such efforts, in Q1, the financial indicators were improved Q-o-Q. Cash and equivalent was up KRW 148.2 billion Q-o-Q to oppose KRW 3,619.4 billion. Borrowings is down Q-o-Q by KRW 412.9 billion to post KRW 9,992.5 billion. Debt ratio is down 1.4 percentage point Q-o-Q to post 71.5%. And the net debt ratio comes to 31.4%, improving Q-o-Q. Next is financial performance and outlook by business. In Q1, Basic Chemicals recorded revenue of KRW 3.3573 trillion and operating loss of KRW 107.7 billion. There were some factors causing production disruption in Q1, such as Daesan plant power outage, but the loss margin narrowed by a significant extent from the previous quarter, thanks to stable feedstock prices and positive exchange rate. The downward stabilization in feedstock prices is expected to continue. But given that maintenance is scheduled at Daesan plant and major overseas subsidiaries in the second quarter, performance improvement may be limited. Next is Advanced Materials. Sales in Q1 was KRW 1.1082 trillion. Operating profit was KRW 72.9 billion, up KRW 43.2 billion Q-o-Q, and operating profit margin was 6.6%. Spread grew due to stabilized feedstock prices and improved demand. Financial performance improved by a large extent Q-o-Q, thanks also to improved exchange rate and reduced shipping costs. But the impact from external uncertainties such as policies of major countries is expected to keep our performance flattish in Q2. Next is LOTTE Fine Chemical. The company already provided detailed explanation in its earnings release on April 29, so I will be brief. LOTTE Fine Chemicals revenue in Q1 was KRW 445.6 billion. Operating profit was KRW 18.8 billion, up by over 50% Q-o-Q, thanks to rising international prices and strong exchange rate. Operating margin was 4.2%. Sales is expected to decline in Q2 with scheduled maintenance coming up, but we intend to increase sale of existing inventory. Last is LOTTE Energy Materials. LOTTE Energy Materials also explained in detail in its earnings release on May 9, so I will be brief. Revenue in Q1 was KRW 158 billion and operating loss was KRW 46 billion. Loss continued from the previous quarter following customers' inventory correction, but profitability is expected to gradually improve with downstream inventory correction coming to an end, which started from the second half of last year. As for our investment plan, it remains unchanged from the previous quarter with existing projects underway on schedule. And this concludes my presentation of Q1 2025 results and outlook. And now I turn over to CFO, Sung Nak-Seon, to discuss key issues of Q1.

Good afternoon. This is Sung Nak-Seon, CFO at LOTTE Chemical. Let me first thank the investors and capital market participants for taking the time out of their busy schedule to attend our earnings conference call. First, operating loss was narrowed and net income significantly improved in the first quarter despite continued challenging business environment. Spread and production efficiency improved and onetime costs in the previous quarter were eliminated. Looking ahead, global policy volatility is increasing, exacerbating uncertainty in the business environment and lessening the visibility into the timing of recovery. But we do anticipate gradual improvement in performance year-over-year as global ramp-up pressure is easing and feedstock prices are stabilizing downward. That said, the Daesan plant maintenance in the second quarter is expected to have a temporary impact, although its impact on profitability will be limited given the current market condition. We are pushing to overcome the current crisis by improving financial soundness and shifting the business portfolio. For example, the asset-light initiative targeting less strategically important assets has continued, improving both our business portfolio and financial structure. In February, we signed a share sale agreement for LCPL, a PTA production plant in Pakistan. In March, we raised KRW 650 billion through a PRS utilizing shares of our Indonesian subsidiary, LCI. In April, we sold our shares in Japanese Resonac Holdings, securing an additional KRW 280 billion in liquidity. In addition, the company is conducting company-wide innovation activities to reduce costs and improve productivity as well as financial restructuring activities. The LINE project is currently in the commissioning preparation phase and is scheduled to begin commercial production in the second half of the year, which is expected to alleviate the financial burden associated with large-scale investment and further improve the financial structure. While pushing ahead with asset-light strategy, the company is also strengthening our business competitiveness in non-general businesses where we already have presence. Investment in Advanced Materials' Yulchon compound is also ongoing as planned to be completed next year. In hydrogen energy, 20 megawatts out of the 80-megawatt eco-friendly hydrogen power plant currently under construction at our Ulsan plant was mechanically completed in January, scheduled to begin operation in the second half of the year. The hydrogen distribution center is scheduled to begin commercial operation in the second half of this year. So we have the asset-light strategy under the general petrochemical business and business portfolio upgrade to strengthen competitiveness in the non-general business, and we will make every effort to secure fundamental competitiveness to overcome the crisis and enhance corporate value. Finally, let me turn to our shareholder return policy. The company believes that enhancing corporate value to meet the trust of our shareholders is of utmost importance. And we are making every effort to faithfully implement shareholder return while considering the pace of performance improvement and financial conditions, among others. As a part of this, we paid out interim dividend and year-end dividend at KRW 1,001 per share each despite continued losses in 2024. Dear Investors, despite the ongoing challenges, we are doing our utmost to achieve structural competitiveness and efficiency that would help enhance our financial soundness even amid growing macro uncertainties through such efforts as asset-light, strict CapEx management and company-wide innovation activities. We are cautiously projecting a turnaround to positive cash flow this year. And once large-scale investment projects are completed this year, we may even be able to execute investment within EBITDA starting next year, as we have mentioned repeatedly. We will keep accelerating our work to improve the financial structure and to fulfill our expectations. We kindly ask for your continued support. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Hyung Jun Shin from Shinhan Securities.

[Interpreted] I have 2 questions. Can you share with us your outlook for the second half of 2025? Is there any possibility of the spread for the Basic Chemical business improving, owing to the steep plunge of the oil prices? And if not, what other business units do you think is possible to see improvements in its performance? And my second question has to do with your cost competitiveness. When the COTC is introduced into Korea next year, what would be the impact on the NCC of your company? And what kind of responses are you devising with regarding to this matter?

[Interpreted] Yes. I am Kwak Giseop. I am the Head of the Corporate Planning Division of the Basic Chemicals business unit. Let me answer the first question. Because of the worsening oversupply situation and also due to the global economic downturn, weak demand continues. And so in 2025 as well, it will not be difficult to put forth an optimistic view of the petrochemical industry. Owing to the continued capacity expansions, there are continued supply pressures and also due to the tariff policies implemented by the Trump administration, the uncertainty surrounding the business environment, both at home and abroad, is expanding. And so any sudden recovery of the market conditions, I believe, is difficult. However, due to the stimulus measures that are employed by the Chinese government and also due to the increase in supply globally of crude oil and also due to the downward stabilization of the oil prices, we believe through the resulting easing of the cost pressures in a limited manner and also through the gradual recovery of the sales prices, this will lead to a gradual improvement of the industry. And so compared to last year, we do believe that we will be able to narrow the losses. Yes, along with such improvement in the external environment, we will strive to improve our profitability through engaging in various innovation-related initiatives in order to enhance profitability as well as secure fundamental competitiveness of the company. Thank you very much.

[Interpreted] Good afternoon. I am the Head of the Monomer division. My name is Jo Hyun Kwoun. I would like to take the second question. As you are well aware, some of the Chinese petrochemical companies and a certain company in Korea are trying to expand capacity of the crackers using COTC technology. So basically speaking, compared to the naphtha crackers, the crude oil is used in order to produce the ethylene oil products. This is what the COTC plant endeavors to do. It is undeniable that such plants do have a certain level of competitiveness. However, in the case of the light crude oil that is used by the COTC plant, it is not all of the full spectrum of the oil that can be used as feedstock in the COTC plant. And so there's a clear limitation in the feedstock that can be used in these COTC plants because only light oil that has certain compositions can be used in the COTC plant. In the case of our company, we cannot transition into plant facilities which rely solely on crude oil only as feedstock. We have been engaging in efforts to diversify the feedstock that is input into our facilities. And so in the case of the Yeosu plant and the Daesan plant, we have been increasing the input ratio of LPGs, which is relatively cheaper compared to naphtha, and we have already modified our manufacturing process to allow this. Together with these strengths, we will be making use and leveraging the high value-added products that are produced in the downstream polymer plants in order to enhance our competitiveness. That is all. Thank you.

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

[Interpreted] I have largely 3 questions. The first question has to do with the performance of the company. It seems that the operating profit of LOTTE GS Chemical is rather sound. However, in the case of your company, you have posted slight losses. So where lies the reason for this difference in the business performance? That is my first question. And the second question has to do with the background to the turning into profitability of the aromatics business. So what is the reason for this? And do you think this can be maintained going into the second quarter? And my third question has to do with the scheduled TA for the second quarter. Can you share with us the specific schedule and the scale of the TA that is planned? And my next question has to do with the asset-light strategy that you have been referring to since last year. So compared to last year, what is the progress made in terms of implementation of asset-light strategy?

[Interpreted] I am Giseop Kwak. I am the Head of the Corporate Planning Division of the Basic Chemicals business unit. I will be taking the first and the second question. Yes. In the case of the LTGS, their main flagship product is butadiene. And compared to the monomer and the polymer products in the Q1, the market conditions for this flagship product was actually better, and that's the reason why they have been able to post a good performance in Q1. In the case of the aromatics business, they are producing primarily PI and PET. In the case of PI, this is a product category that is actually turning profit. In the case of the PET business, we have 2 plants that produce this product in Ulsan and one of the plant was actually boxed up. And that is the reason why we have been able to save on the cost and also the reason why we have been able to produce sound results. The TA is being conducted for the Daesan plant. It is actually already underway. And starting from the 12th of April to the 16th of June for a total of 65 days, the TA will be carried out. And another TA is scheduled for LC USA, the MEG plant, and it is also already conducting the TA starting from the 30th of March to 16th of May, a total of 46 days of TA will be conducted.

[Interpreted] My name is Min-Woo Kim. I am the CSO. Let me take your last question. So the strategy to secure financial soundness and to reduce the share of the petrochemical business within the overall business portfolio, this strategy remains unchanged. And in the process of implementing this strategy, selling of controlling interest and partial sale of stakes focusing on our overseas subsidiaries is a process that is being carried out. There are those cases in which the sales process is going well, and there are other assets where no intention by buyer -- potential buyers are being expressed. In the case of the Pakistan subsidiary where there was actually talks that had taken place, but the talks fell through. Now an SPA has been entered into for LCPL in June of last -- in actually February of this year. So we are at the final stage of the filing of corporate merger filings and the public tender -- after the public tender, we believe by the month of July or August that we will be able to close the transaction. We have also conducted the PRS for the U.S. MEG production unit as well as Indonesia LCI. Given the nature of PRS as a financial product before the arrival of the maturity date, the actual divestment has to take place. Recently, interest have been expressed by the investor for our stake in LCI and so specific discussions are underway at present. When more concrete outcome is produced, we will be communicating this information to the market. Thank you.

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

[Interpreted] Also I have 3 questions in total. I have questions regarding the LINE project. So are you planning on first operating the NCC for the LINE project? And afterwards, are you planning on starting the operations of the downstream products? Is that your plan going forward? And aside from the 250,000 tons of PP, are there other downstream products? If so, can you share this information with us? And my second question has to do with the number of customers that you have been able to secure for the LINE project. Have you been able to secure some customers for the LINE project? That's my second question. And the third question is, if the LINE project is carried out and completed, what kind of changes will be affected to your CapEx? And what is the expected depreciation and amortization?

[Interpreted] So this is Giseop Kwak. I am the Head of the Corporate Planning Division of the Basic Chemical business unit. I will be taking your first and the second questions. In the case of the LINE project, we will be test running the naphtha cracker in the month of May of 2025. And then afterwards, in a sequential manner, we will be starting the operation of the downstream plant. Yes. In the case of the production volume, ethylene, this is 1,000, PL 520, PP 250 and BD 140 and BTX 400. Let me take your second question. So in our Indonesian unit, we are selling polyethylene. And also, we are importing PP from Malaysia, and we are selling this product in the Indonesian market. Through the existing sales line and sales network, we have already secured our customers. And in the case of ethylene sales, we are pursuing long-term contracts for the domestic market of Indonesian. And already with several companies, we have been able to sign the contracts. That is all. Thank you.

[Interpreted] I am Nak-Seon Sung. I am the CFO. Let me take your third question. The total project cost of LINE project is KRW 3.9 billion -- or $3.9 billion, I'm sorry. The KRW 700 billion is executed this year, then all of the investment costs would have been disbursed. In terms of D&A, depreciation and amortization, on an annual basis, it is around KRW 180 billion.

[Interpreted] The following question will be presented by Jin Ho Lee from Mirae Asset Securities.

[Interpreted] I have just 1 question. It is about the impact of the changes in the tariff policies of the Trump administration. Do you have any special issues arising from the impact of the tariff policies on particular products, for instance? Is this leading to a reshaping of the supply chain of particular products? Or is this leading to particular movements of the spread? Can you focus your answers on the recent changes that have been taking place?

[Interpreted] My name is Woo-Hyun Cho. I am the Head of the Corporate Planning Division of the Advanced Materials business unit. Let me take your question. So in our overall sales revenue, the share taken up by the U.S. exports is in the mid-single-digit level. And of this, the share of the U.S. exports in the Advanced Materials segment is more than 10%. So it's relatively high. For 2025, for Advanced Materials products, our expectation is that the sales revenue for our products sold in the United States is around KRW 630 billion. And given the current present tariff levels, we believe the tariff amount takes up around 5% of the total sales revenue. And with different customers, we are having negotiations about price increases depending on the tariffs that are levied. So not only negotiations for price increase, but through our local production unit, we are reviewing the possibility of providing supplies through this local unit. And so we are making efforts to minimize any impact from the tariff policies. That is all.

I am Yang-Sik Cheon, the Head of the Polymer division. In terms of the sales revenue, it takes up only about 5% of the revenues for the Basic Chemicals business. So I don't think there will be any major impact from the tariff policy. However, it is the case that there is about 50 million tons of PE products made in the United States that is exported to China, and we believe there will be some impact concerning this volume. If this 50 million tons of U.S. products is redirected to markets other than China, then there is a possibility that these products will come into collision or overlap with our products. And so we believe because of the influx of the American products, this will lead to a weaker price trend. However, most of the product mix of the American products are general purpose products. And so only about 15% of the product categories overlap with ours. And so even if there is a clash between ours and the American-made products, the impact would not be that big. The impact from the tariff policies -- well, those products have already been sold in our case for the month of April and May. So we believe the impact will be felt starting from the month of June. That is all.

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

[Interpreted] I have several more questions related to your LINE project. So what is your plan for the operational rate? Because the market conditions right now is not that good. And so I would have thought you might have postponed the start of the operation of this plant. However, you didn't and you have started operation of these plants. Is this because of your confidence in the profitability that you will be able to generate? So what kind of profitability for the LINE project should we be thinking about for the second half of the year? That was my first question. And for my second question, what is the share of the domestic demand and also exports of the products that are produced in the LINE product plant? My question has to do with the market conditions of Southeast Asia. From which factor is it impacted more greatly, the volume from China or the volume from United States? And how would each scenario impact our profitability? That is my question.

[Interpreted] This is Giseop Kwak, Head of the Corporate Planning Division of the Basic Chemicals unit. Let me take your question. With regards to the operational rate, initially, because we're in the early days of operating the plant, we need to stabilize the plant operations. And so we will be maintaining the utilization rate at around 65% to 70%. And then going forward, depending on the market conditions, we will be flexibly adjusting the input ratio of LPG and naphtha as well as the utilization rate of the plant. As you are well aware, this is a very large-scale project. And for such large-scale projects, it's not desirable to postpone or put forward earlier the point of operation of the plant. And that is the reason why we have proceeded with the start of the operation of the plant as has been scheduled. In the case of the Indonesian domestic market, their self-sufficiency rate when it comes to PE and PP is rather low, between 40% to 60%. And so more than 90% of the PP that is produced through the LINE project will be used to meet the domestic demand in Indonesia. And most of the PE and PP imports that come in to the Indonesian market are primarily from Middle East or within the Southeast Asian region. So relatively speaking, supply is falling short of demand. So there does exist domestic demand premium. And in order to further enhance our product availability, we are making efforts to uncover more local customers as well as engaging product partnership in Indonesia. Going forward, once the operational stability of the plant is achieved, and we have been able to establish a firm foothold within the domestic market of Indonesia, we will be expanding our production and sales into more high-end strategic products. Thank you very much.

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

[Interpreted] Hyunryul Cho of Samsung Securities, I have 3 questions. I have a question, first of all, about the LINE project. You said that there was a premium for the domestic demand. But I understand that one of the global players have been able to acquire the cracker in Singapore. Is there any possibility of the volume produced in that cracker coming into -- flowing into the Indonesian market? What kind of impact would that have on the LINE project? That is my first question. And my second question has to do with your projections for the second quarter. You said that the Basic Chemical business is expected to achieve a flattish trend going into the second quarter. If the prices of naphtha and BD products decline, wouldn't this deteriorate your outlook? That is my second question. And also my third question about the better performance of some of your subsidiaries. Was this due to any special factors? So my third question has to do with the improvement of the performance of the Advanced Materials business. Was there any premium effect? Or was there any one-off special factors that led to this improvement in performance?

[Interpreted] I am Min-Woo Kim, the CSO. Let me take your first question. In the case of the petrochemical asset of Shell that has been acquired by Chandra, the product mix is quite different from ours. There is no polymer products and primarily, their product mix is composed of MEG and EO derivatives, these downstream products. And it is quite an aged facility that they have acquired. And after the acquisition has been concluded, there was a new carbon tax scheme that was announced by the Singaporean government. And because of this taxation, it will be very difficult, we believe, for this facility to attain any cost competitiveness. Our understanding is that in the existing Indonesian facility that has been run by Chandra, they lack ethylene products. Some of our ethylene production volume has to be sold as ethylene, in itself, in its raw form. And so maybe this may cause some supply-related disruptions. However, the overall impact on our LINE project will be quite minimal. That is all.

This is Giseop Kwak, the Head of the Corporate Planning Division of Basic Chemical business unit. Let me take the second question. So in the second quarter, because of the fall of the BD price, this will have an adverse impact on the operating profit. But because of the fall in the price of naphtha in the month of May and June, the spreads will increase because of the low naphtha price. And that is the reason why we have projected that in the second quarter compared to the first quarter, the trend will be rather flattish.

This is Woo-Hyun Cho, the Head of the Corporate Planning Division of Advanced Material. Let me take your third question. There are 3 reasons behind the improvement in performance of Advanced Materials: First is the improved spread of ABS products; second is the fall in the maritime transport fares; and third is the stronger won trend. There was some improvement in the demand of our key home appliance customers in Q1. We do assume that there were some excess demand before the implementation of the universal tariffs by United States, but we don't think the magnitude was that large. We do believe that the demand going into Q2 and Q3 will show a rather flat trend and whether there will be any full-blown recovery of demand going into the second half is something that we have to wait and see. That is all.

[Interpreted] We would like to conclude the 2025 Q1 earnings conference call of LOTTE Chemical at this point. Those of you who have not been able to ask your questions, please contact our IR team. Thank you very much for attending this quarter's conference call. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]