Lotte Chemical Corporation ($A011170)

Good afternoon. This is Young Kyung Hwang, Head of the IR team at LOTTE Chemical. I thank everyone for your time and interest in LOTTE Chemical and your participation in this conference call. We will start with a presentation on the company's 2026 Q1, followed by a briefing by the CFO on the main business issues, then a Q&A session. Please be informed that the presentation will be conducted in simultaneous interpretation and the Q&A in consecutive interpretation. The presentation slides can be downloaded from the company's website. I will now introduce the executives in attendance. First, from the HQ, Vice President and CFO, Nak-Seon Sung; Vice President and CSO, Min-Woo Kim; from Basic Chemical, Vice President, Kwak Giseop, Head of the Strategy Management Division; Vice President, Jo Hyun Kwoun, Head of the Monomer Division; Vice President, Yang-Sik Cheon, Head of the Polymer Division. From Advanced Materials, we have Vice President, Kyung-Sun Park from the Corporate Planning Division. Let me now turn to business results of '26 Q1. Page 2, Q1 profit and loss on a consolidated basis. Revenue in Q1 was KRW 4.9905 trillion with operating profit. The company turned around to profit -- operating profit of KRW 73.5 trillion (sic) [ billion ], thanks to improved performance in Basic Chemicals. EBITDA was KRW 412.8 billion. Pretax income and net income in Q1 were KRW 46.2 billion and KRW 33.5 billion, respectively. Next is Page 3, the company's financial position on a consolidated basis. Asset at the end of Q1 was KRW 31.9 trillion. Liabilities were KRW 13.8 trillion. Shareholders' equity was KRW 18.1 trillion. Debt-to-equity ratio stood at 76%, improving slightly Q-o-Q. Next, I will explain the performance and outlook by business division. First, please refer to Page 4, the Basic Chemicals. In the first quarter of 2026, the Basic Chemicals recorded revenue of KRW 3,449 billion, operating profit of KRW 45.5 billion and an operating profit margin of 1.3%. Amid expanding geopolitical risk in the Middle East region, product selling prices increased, leading to improved spreads. In addition, positive lagging effects resulting from higher raw material prices were also reflected contributing to the return to profitability. Next is the Advanced Materials division. In the first quarter of 2026, the division recorded sales revenue of KRW 1,023.3 billion, operating profit of KRW 61.5 billion and an OPM of 6.0%. Following customers' year-end inventory adjustments, profitability improved significantly compared to the previous quarter, driven by recovery in the downstream industry demand and increased sales volume. Next is LOTTE Fine Chemical. As the details were already explained as in the earnings release presentation on April 28, I will briefly go over the results. In the first quarter, the company recorded sales revenue of KRW 510.7 billion, operating profit of KRW 32.7 billion and OPM of 6.4%. Performance improved due to rising international prices of major products and increased sales volumes. Last is LOTTE Energy Materials. As the details were also covered during the earnings conference call held earlier this morning, I will briefly summarize the results. In the first quarter, the company recorded sales revenue of KRW 159.8 billion and an operating loss of KRW 5.0 billion. Despite continued uncertainties in downstream industries, profitability improved as positive lagging effects resulted from higher raw material prices were reflected. This concludes the explanation of the company's first quarter 2026 business results. Our CFO, Nak-Seon Sung, will now provide further details on the results and the key management issues.

Good afternoon. This is Nak-Seon Sung, CFO of LOTTE Chemical. I would like to sincerely thank all of you for taking interest in and attending our earnings presentation despite your busy schedules. In the first quarter of this year, uncertainties in business environment increased due to geopolitical risks in the Middle East, and there remained various different views regarding the persistence of the current situation and its subsequent impact. As positive raw material lagging effects were reflected amid feedstock price increases caused by risk in the Middle East region, our first quarter results recorded KRW 5 trillion in revenue and KRW 73.5 billion in operating profit. With external uncertainties expected to continue going forward, the company has proactively secured feedstock at a level sufficient to maintain stable operations, and we will continue to actively respond to risk based on flexible operational strategies such as diversification of raw material procurement and inventory optimization. In addition, even under such business conditions, the company is steadily pursuing its mid- to long-term strategy in the direction previously communicated, maintaining and strengthening competitiveness in the basic chemicals business while building a more balanced portfolio through expansion of our future growth businesses. First, we are actively participating in the petrochemical restructuring initiatives for domestic industrial complexes currently being promoted by the Ukraine (sic) [ South Korean ] government. Following government approval, the Daesan business restructuring secured approximately KRW 2.1 trillion in financial support. And after the planned physical spin-off on June 1, we are targeting the launch of the integrated corporation and commencement of integrated operations in September. The Yeosu plant -- the Yeosu business restructuring will also proceed in phases through cooperation with the government and partner companies following the submission of the restructuring plan on March 20. Through these restructuring efforts, rather than simply downsizing the basic chemicals business, we aim to pursue high value-added transformation centered on profitability and continuously strengthen business competitiveness by improving operational efficiency in existing businesses based on ongoing investments for future growth. At the same time, we will continue to expand Functional Materials and high value-added businesses over the mid- to long term, centered on the Advanced Materials business. Based on our global supply chain and the Yulchon compounding project scheduled for completion within the year, we also plan to significantly expand high value-added product lines such as Super EP. In addition, we will continue to promote investment in technology development and future growth industries such as functional semiconductor materials, food and pharmaceutical materials, AI circuit foils and high-end electrofoils and eco-friendly hydrogen businesses while fostering high value-added growth businesses aligned with changes in the global market. Even amid the prolonged challenging business environment, the company continues to maintain a sound debt ratio in the 70% range, and we expect our financial structure to gradually improve through this restructuring. Furthermore, under a cash flow-oriented management principle, we'll secure financial stability by conservatively managing investment execution within the scope of EBITDA. Dear investors and shareholders, although the petrochemical industry is currently facing a highly uncertain business environment, the company is moving forward smoothly with the ongoing Daesan business restructuring. Thanks to your continued interest and support. At the same time, we also -- we were also able to achieve meaningful earnings improvement during this quarter. Going forward, we will continue to do our best to enhance corporate value based on sustainable growth and repay the trust and support that you have shown us. Thank you very much.

[Interpreted] [Operator Instructions] The first question will be provided by YeongSu Shin from Shinyoung Securities.

[Interpreted] I have two. The first is about the naphtha stock as well as the utilization. So the -- what is the number of days of holding of naphtha, both in Korea and also in Malaysia and Indonesia? And also, what is the utilization plan for the second half of the year? The second question is because of the Middle Eastern war, there are quite a lot of changes and fluctuations in the industry at this time. So what is the company's short-term outlook for this year, 2026? And also what is the longer medium-term outlook up until 2028? Does the company -- when does the company believe that the turnaround to profit can be achieved?

[Interpreted] This is Vice President, Jo Hyun Kwoun from the Basic Chemical division -- Monomer division responding to your question. Now with regards to the naphtha in South Korea as well as from Malaysia and Indonesia, we are getting stable procurement and the procurement continues, meaning that our utilization is seeing no disruptions or problems. And as for additional procurement, when it comes to the domestic supply, then we intend to get the domestic naphtha first, combined with overseas procurement as well. So again, for the domestic supply, we will be getting the naphtha from inside Korea combined with overseas supply. And then also for our businesses in Indonesia and Malaysia, we would also procure them from nearby regions like Singapore. And as for the utilization plan for the second half of the year, we will keep a close watch over the market movements and try to adjust our utilization according to the market circumstances.

[Interpreted] I'm Kwak Giseop of the Corporate Planning Division responding to the second part of your question. As you would know, in the first quarter, the profitability in Basic Chemical division has improved considerably turning around to profit. I understand that one major factor was the positive inventory lagging effect caused by the Middle Eastern risk. For example, the increase in the major product spread as well as the rise in the naphtha cost. Now looking ahead to the second quarter, one positive factor may be the continued tight supply of feedstock, but we believe that the performance improvement will continue for the time being. One negativity could be the inverse lagging effect, meaning that the soaring naphtha prices that were caused by the war since February would then be input into production in the second quarter, meaning that this is going to increase the production cost. And as for the outlook for 2026, please understand that given the fluidity of the Middle Eastern war, it is quite difficult for us to look ahead into the performance of this year. And as the market already knows, the capacity addition continues in China, so the petrochemical industry outlook into '27, '28 is not entirely bright. So the company continues to keep a close watch over the market even after the market normalization and respond according to the changes.

The following question will be presented by Parsley from JPMorgan.

[Interpreted] So for the first question, could you give us some numbers on the first quarter one-off? For example, you mentioned the raw material impact or inventory gain. How much was that -- could you quantify that number in first quarter? Or maybe break down the profit between January, February and March? And then for the second question, I think the outlook for naphtha cracking margins is or outlook for chemicals is gradually getting better following industry consolidation. So could you just give us a status update on your Yeosu and Daesan restructuring? How much effective capacity LOTTE had before and then after? So what is your long-term aim in terms of how much capacity you plan to have after all this restructuring is done?

[Interpreted] This is the CFO, Nak-Seon Sung responding to the first part of the question about the gain from the inventory valuation loss reversal as well as the one-off costs. Now first of all, in the first quarter, the reversal in the inventory valuation was in the amount of around KRW 50 billion, thanks to the rise in the naphtha prices as well as the rise in prices of polymer and monomer products. As for others, there were no other major one-off gains that occurred in the first quarter.

[Interpreted] This is Kwak Giseop from the Corporate Planning division. And I would like to respond to your question about the lagging effect of the feedstock. As you would know, since the Middle Eastern war, there has been positive lagging effect because of the rise in the naphtha prices in the amount of about KRW 250 billion for the feedstock.

[Interpreted] This is Min-Woo Kim of the CSO responding to your question about the business alignment and particularly about the ethylene production before and after the realignment. Now given the 1.1 million tons that we currently have at Daesan plant and the 900,000 tons that we have at the Hyundai Chemical plant, so then based on this cracking capacity at this time and assuming that we will be having 50% share, that will leave about 1 million tons at Daesan plant. And then for Yeosu, we currently own 1.23 million tons YNCC owns 2.3 million tons and assuming the company's share of 1/3 (sic) [ 1/2 ], that will leave 1.1 million tons for us. But now here, I would like to explain one caveat. Now, for both the Yeosu and Daesan, the assumption is that the petrochemical industry for the next 2 to 3 years is going to really suffer. So we are assuming efficiency to be gained from an integrated operation. So then for the Daesan plant, out of the two naphtha cracking facilities, so out of the two NCCs, one is -- one would yield less efficiency from integrated operation. And then in Yeosu, out of the four NCCs, two would have less efficiency coming from integrated operations. Our plan is that after the business realignment is completed, then it is likely that we will be shutting down these less efficient NCCs. So of course, it would largely depend on the market circumstances. But during the period of the business realignment, then the NCC capacity that we would be running would be less than it used to be. But also at the same time, for the NCCs that would be temporarily shut down, given the -- so depending on the market improvement, it is also likely that they can be reopened within the next 3 years or so. But again, after the business alignment for both the Daesan and Yeosu, our share will fall below 50%, meaning that they will be excluded from the consolidated financial statements like the profit and loss statement and the balance sheet.

The following question will be presented by Yu-Jin Jeon from iM Securities.

[Interpreted] I also have two questions. Now first, it was explained earlier that starting in the second quarter, the higher price naphtha will be input. So does that mean that now there will be inverse lagging effect to be applied, meaning that is there a likelihood that the company will turn to loss again after the second quarter. So I would just like to seek your guidance on the performance outlook. And then the second question is about the ethylene. So since the Middle Eastern crisis, then what does the company foresee in terms of the global ethylene capacity increase? So will there be any changes in this?

[Interpreted] This is Kwak Giseop from the Corporate Planning Division responding to the first part of your question. Now given the high fluidity in the market today, it would be very difficult to predict when the inverse lagging effect is going to occur. So to this day, we see that the product prices have gone up since the beginning of the war and also the prices of the finished products have also gone up. At the same time, the spread has improved. And now if the prices for the products and the raw materials were to fall, then yes, it is likely that some inverse lagging effect will occur. But at the same time, if it is gradually drawn out until the end of the year, then we believe that the impact coming from it is not likely to be large. And given that right now, there is a little improvement in the supply-demand situation, so we will be very closely watching the market circumstances.

[Interpreted] This is Yang-Sik Cheon is from the Polymer division. Now, I'll respond to the second part of the question. Now since the outbreak of the war in the Middle East, of course, how much the ethylene or PET and PTA production has fallen is different by country and regions. But then in the case of Korea, the utilization rate has fallen by about 15%, whereas in China, it has fallen by about 10%. Similarly, in Southeast Asia as well as the Southwest Asia, the supply has fallen by about 10%. And in the Middle East, in the early April, there were some attacks by Iran on the surrounding countries, including Saudi Arabia. So the facilities that have been attacked, about 60% to 70% of them have been shut down and supply has yet to go back to normal. Now where supply has fallen in the Middle East and in Asia because of the situation in the Middle East, now it is being made up for by the ethane cracker in the U.S., where the utilization rate has gone up by more than 15%, 30%. And also in the other regions, we see that the inventory continues to fall since April. So unless the Middle Eastern supply goes back to normal in May, then the tight supply is likely to continue.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] Thank you very much. That concludes the earnings release conference call by LOTTE Chemical for 2026 Q1. If you have any further comments or questions, then please contact the IR team. Thank you very much for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]