OCI Holdings Company Ltd. (A010060) Earnings Call Transcript & Summary

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2021 Fourth Quarter Earnings Resulted by OCI. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the Fiscal Year 2021 Fourth Quarter Earnings Resulted by OCI.

Hello. Good evening. This is Woo-Hyun Lee, the Vice Chairman of company. I will start with the annual consolidated income announcement for 2021 on Page 4. Despite of many restrictive operating condition and market condition due to the ongoing corona -- COVID-19 pandemic, the OCI was able to achieve sales of KRW 3.2 trillion or -- and the KRW 626 billion of operating income in 2021. And this number is about -- the sales number is approximately 62% increase by -- compared to year-over-year. First, I need to point it out that we had many hurdles like many other manufacturing companies. Because of coronavirus pandemic situation, we had a very hard operating condition because whenever any -- the patient happen at the workplace, we have to reschedule our manning shifts. And also because of this coronavirus pandemic, it actually caused a lot of troubles and global logistics issue. So sometimes we had a hard time to bring in some raw materials, and sometimes, we had a hard time to export it out. And despite all of the difficulties, all of our staff at the OCI worked really hard and dedicated to the company's operation, and we really thank for the effort. Going forward, the quarterly result for Q4, on Page 5, and company was able to record more than KRW 1 trillion in the quarterly revenue. And this is -- I mean this is quite actually some remarkable achievement. This is a 14% quarter-by-quarter improvement. And compared to year-over-year, this is almost 80% increase in that, and thanks to manufacturers. The first is the polysilicon, which is our -- the #1 sales item. The sales price went up quite strongly, and we were able to sell one of our Texas-based solar PV power plant project. And our -- the power plant business in Korea, we were able to achieve much higher SMP, which is a base price for electricity sales and REC, which is a Renewable Energy Credit price, and all of these factors contribute to higher the sales number, and that actually help us to achieving this goal. And another item is deferred tax assets in Malaysia, our OCI Malaysia. And when we acquired the OCI in Malaysia from Tokuyama in 2017, Tokuyama already have quite substantial the loss carry-forward and also the investment tax credit amount. In the meantime, OCI was not able to make sufficient profit so we will not able to utilize this ITC in Malaysia. However, starting from 2021, we were able to make some good profit and that -- so we were able to utilize this ITC and this loss carryforward items in Malaysia, and that actually help us to change our deferred tax assets into some -- the realized gain items, and that actually contribute to this quarterly earnings. I will go to the Basic Chemical sector on the Page 6. The first, our solar grade polysilicon price went up quarter-by-quarter by 12%. And that helped us a lot. And in the meantime, during the third quarter and fourth quarter, the metallurgical silicon, which is a key raw material for polysilicon, the price went up quite exponentially. The metal silicon price in early of 2021, with first quarter, was about $2,500 per ton price, and it -- that price went up all the way to almost $10,000 per ton. So it becomes quadruple in 2-, 3-quarter time frame. However, we were able to successfully diversify our purchase sources and also we maximize the use of our existing inventory, and we were successfully able to renegotiate some of the terms from our existing supplier. So we were able to minimize those -- the price increase impact. So that helped us to realize some good result. Our 2022 first quarter, we are having annual turnarounds because of coronavirus. We were not able to do the turnaround of Malaysia factory in 2020 and 2021. So starting from this Lunar New Year holiday, we shut down our Malaysia factory, and we are going through approximately -- slightly over 30 days time of annual turnaround, so we'll be looking into all our facility in details, and we hope that we can successfully complete all of our turnaround in early March, so which you can able to restart in the factory as soon as possible. So anticipated the quarterly operating rate of our Malaysia factory will be going down to 67%, wherever, I mean, typical operating rate has been 97% to 100% for the past several quarters. Going to Page 7, Petrochemicals & Carbon Material due to the rise in the raw material price, which is oil-based. So considering the oil price change in quarterly, for last year, the first quarter, WTI oil price was about $58, second quarter $66; and third quarter, $71; fourth quarter, $77. So we have been experiencing gradual increase in the oil price. That actually gave us a lot of troubles. However, due to strong the marketing effort, we were able to pass through most of this -- the cost increase of our raw material. In the meantime, we finally decided to do the annual turnaround of our key factories in Korea, Pohang and Gwangyang factory. So that actually brought our fourth quarter earnings down. However, in the first quarter of this year, we fully reflect all of the cost increase from the oil price increase in this quarter. And because we successfully completed all the turnaround in the last quarter, this quarter should be far better quarter than the previous quarter. I will go to Energy Solutions business in Page 8. So one of some difficult portion -- feature of this Energy Solutions is we have a 2 separate business segment. One is, we're running power plants in Korea. So the primary revenue source is by selling electricity. We earn some electricity tariff and that base price is SMP, and we are collecting REC, Renewable Energy Credit in addition to SMP, so that's the ongoing business model of energy solution. But in the meantime, we have been running the solar PV power plant to develop business in Texas, United States. And time to time, when we develop a solar PV power plant business in Texas and when we complete our negotiation, we sell these top line to the prospective buyers. So third quarter of last year and the fourth quarter, there was a 2x that we were successfully sold our, maybe, 200-megawatt scale solar PV power plant. So that actually helped us to recognize much better the sales and also this earning number. However, it's very unpredictable that when we can actually repeat this, the solar PV power plant sales because, this is, I mean depends on how soon we complete our negotiation with some investors. So we cannot generalize how many volume will keep selling every quarter. However, I mean, whenever we do it, we would actually immediately report it back to the investor that we are diligently doing this effort. So quarter 1 of this year, because of much higher fuel cost, the coal and LNG both, especially this -- early this year, Indonesia, they stop exporting the coal, which Indonesia has been one of the largest exporter of coal to many Asian countries. That actually made a huge impact on the power industry in general, not only Korea in pretty much all the Asia. So that actually helped us to gain higher SMP price because the SMP price is based upon both the coal and the LNG pricing. And because of the cold winter in Korea, electricity demand went up. So we believe, overall, the market condition for Q1 for this Energy Solutions is much better than normal. However, we cannot actually provide any guidance on whether we would have another sale of the power plant project in this quarter. Another good news is Korean government also increased the RPS obligation, which is a Renewable Portfolio Standard for large power plant, the players. So they increased for mandatory RPS from 10% of last year to all the way to 25% by year 2026. So this year, we anticipate that the changing in RPS for 2022 would be 12.5%. So this will -- this additional 2.5% increase in RPS should give strong actually demand factor for REC sales. So hopefully, we can monetize higher value the REC, I mean, this quarter. Going for Page 9, the Urban Development project. So this is the new segment of our business, we started covering starting from last year. So we start this business long time ago in 2004. And our initial sale of apartment units happened in the first quarter last year. So it took 17 years. So finally, we were able to start this commercial, the project. So we were -- in last fourth quarter, we were successfully able to sell 338 units of commercial facility, and it was completely sold out, which is quite good thing. And however, we recognized unusual KRW 40 billion of inventory valuation losses, so this is a noncash losses. This is actually accounting losses relating to studio unit sales. Because OCI is one of our very unique situation that's using IFRS accounting rule for the urban development project, and we might be the only company in Korea is doing this way, so we discussed with this matter with accounting firm for several months. And this was our final conclusion that because when we IFRS-based, the revenue recognition is based upon each the segment. So what it meant is in our real estate development, we have a 9 separate segments of the soft development project. So last year, we sold the commercial side with 3 segments. So that was the total of like 3,750 household units, so when we sell, there is 2 type of the units, one is apartment, which is a residential apartment. One other one is a studio in Korean terminology they call it officetel. So this is a 2 separate segments. The average unit price of the studio is slightly lower than apartment. So when we look into the profitability analysis on each segment, this studio sales, whenever it happens, this artificially look less profitable project compared to apartment sales. So that actually caused KRW 40 billion of inventory valuation loss, this is not a cash loss. This is just the valuation losses. So this was inevitable recognition by the IFRS the accounting recognition. However, another -- the complicated side is what OCI spun-off this DCRE, which is Urban Development unit in 2008, when we spun-off this DCRE, we recognized quite substantial number of unrealized profit at the time of spin-off, which is 2008. And during those -- this quarter and also throughout those year, and until 2021, we have not been recognized any sales. So all the unrealized profit has not been recognized. And because this is the initial year of the actual commercial activity, so this -- the accounting group actually start recognizing this -- the 1-year portion of unrealized profit. So when we add this KRW 40 billion of inventory valuation loss, together with this year -- I mean, 2021 portion of unrealized profit, overall consolidate, the operating income would be KRW 7 billion, so hopefully, we don't repeat this sort of very complicated issue going forward. However, I mean, this is actually what happened in this fourth quarter. So I apologize for a very long and complex actual explanation. But this is a very unique case that, that we are -- because we are the only, the large urban developer company who is using the IFRS the accounting standard. So making short, so for the quarter, we recognized approximately KRW 199 billion of revenue and KRW 7 billion of some operating income consolidated basis. So what's going to happen this first quarter of this year, we will go to another fourth presale of 1,700 households. Hopefully, we can sell out like what we did last year. And once we do it, then this is going to be keep adding up. So last year, we sold 3x of presale with about 3,700 units of sales. And if we do it in this quarter of 1,700, every quarter, it's a progressive recognition ratio, our revenue will keep recognizing. So I think this year, the revenue comes from this -- the Urban Development will be actually much higher than last year because of all the recognized recognition of some of this construction phases of development phases and operating income should be much better than the last year. So sorry about some of the long and complex explanation, but that was pretty much what happened in this year. So going for financial position on page 10. The 3 things is actually noticeable. One is our account receivables went up by KRW 117 billion, and mostly because our -- most of the product sales went up, so our sales number goes up. So inevitably, accounts receivable also went up. So this is nothing to do with the loan receivable deals went up. So we're actually having a very healthy receivable terms with most of our customers. So in terms of healthiness of the accounts receivable, we are okay. Most of this KRW 117 billion of increase come from because of we have a much higher sales volume so that inevitably increased the accounts receivable. Our inventory numbers went up -- come from actually 2 sides. One, our product price went up and also our raw material price went up. Both contribute to higher the inventory number increased by KRW 285 billion, which is quite a large number. But the increase from the -- our the final product and raw material is actually less than 30% of this inventory portion. Most of them came from our Urban Development project. When -- before when we start actually selling the commercial projects, that entire asset has been recognized as a silent noncash-generating assets. Because of our initial stage and sales of commercial property, so we gradually start moving that respective portion from just other current assets to inventory. So this inventory number will inevitably will goes up as we keep selling more units of apartment and studios. So these numbers will finally -- will disappear when we complete those -- the construction phase, and if we receive the final payment from those -- the subscriber, then these inventory numbers will disappear. So for the next several years, our inventory numbers will rise inevitably because of -- on user activity from Urban Development, the project. However, I mean, this is a very healthy asset and we are not very concerned about this number. And the final thing is increase in debt. So despite all the strong performance, our debt number increased by KRW 73 billion However, mostly, this has also come from the Urban Development projects, especially 1 project, which is rental housing some of the projects that we have to carry as a part of Urban Development projects. One project, it borrowed KRW 160 billion of the project finance featured loans. So because of the active phase of the development of the project, so this inevitably keep increasing this debt. So let me go to explain our finance position more deeply on next to Page 11. So despite our debt number goes up, our free cash flow numbers become much better. So now we have a quite strong cash flow capability. And if you look at some of the bottom right, actually, table, when you look at the net debt to EBITDA which is our one of the very important management benchmark, so now you can see that our net debt-to-EBITDA ratio, it went down to even below 1x. So we can assure that OCI has a very strong and healthy financial position at this moment. So going to Page 13 of our main 2021 some of the recap. So the first is the polysilicon and energy project. Obviously, we had numerous times that we mentioned that we have a 2 track strategy also in Malaysia, based upon the strong -- the cost basis, we are focusing on the polysilicon sectors for the solar grade polysilicon. And our main partner, LONGI, we were able to having KRW 930 billion, almost like $900 million worth of long-term supply contracts, and we are actually currently in the stage of multiple negotiations with many other companies that hopefully we can announce it shortly. Second is because we closed down the main factory in Korea 2020, so we complete the relocation of a certain portion of our -- the polysilicon factory located Gunsan to Malaysia. We successfully completed relocating last October, and we are in the stage of tying into the existing facilities. So hopefully, we can complete the 5,000 ton debottlenecking projects completed by fourth quarter of this year. And we proudly announced that we were successfully complete all the 400 megawatts of U.S. solar PV power project that we signed in 2012 with CPS Energy in San Antonio, Texas. And energy solutions-wise, we are diligently working with Hyundai Motors Group, and this will be quite interesting project that we are working together with Hyundai Motors Group to rebuy the used battery from some used or abandoned automobile that we are actually using to revive the battery into ESS for renewable energy application. And we're currently doing in Korea and U.S.A. And hopefully, we can find some more visible results in this year. Second is we keep adding clients going into much higher value-added product. And last year, our #1 segment was semiconductor and electronic material, the size, and we expanded our business segment with SK Siltron, which is the #1 semiconductor wafer company in Korea. And together with our partner company, POSCO, our joint venture with POSCO the P&O Chemical, we are going into much -- the visible the growth in peroxide business by the constructing 50,000 ton capacity factory. This will greatly help us to gain strong market share in semiconductor grade hydrogen peroxide market. And we're going into HSPP, which High Softening Point Pitch, the business. This will be one of the key materials for battery -- high-performance battery manufacturing. And currently, the Korea is relying 100% on the overseas import, and hopefully, we can team up with domestic -- the battery giant to coming up with this -- some of the new business. And our the Kumho P&B joint venture, and we're going to ECH business that we'll actually elaborate later. And we're going into some more eco-friendly business, and this is -- we will actually go into more detail in a later stage and urban development that we discussed. So we have successfully sold 3,750 households, including apartment and studios as a part of our urban development project. And we're also going into new oncology medicine, the joint event -- or joint investment opportunity with the Panolos Bioscience. And this was the recap of 2021 business activity. 2022 is -- so now we are looking for much, the growth-oriented opportunity. The capacity expansion is one of key -- the focus of our business. Polysilicon segment, because we complete the 5,000-ton capacity, the project, we started last year October. And hopefully, we can complete this expansion by fourth quarter this year. In addition to that, as we are currently in discussion with many other also, the downstream and the players for additional polysilicon capacity expansion opportunity. Right now, we are even targeting 30,000 to 40,000 ton capacity expansion in Malaysia. And we have idling capacity because after we shut down in 2020, we have a 30,000-ton capacity coming from our P3, the factory in Gunsan, which we closed down 2020, and we have also the P4 asset that is the shovel-ready the condition at this moment. So it depends on our progress and our discussion with important -- our downstream customers, we would like to go into much bigger scale -- the expansion when time comes and when we successfully made some long-term supply agreement. So the completion of hydrogen peroxide facility with the P&O is important for us. And in addition to our expansion, this is also related to our Malaysia project. Our Malaysia project has been very successful. Now we are going into -- in some different dimension of growth because we have still a lot of unused sort of free land, and we have high abundant source of eco-friendly energy infrastructure, which most of the energy is coming from the hydro power plant, which is a huge success in these days because many buyers are asking how our product is made out of which energy source we are using. So Malaysia, we are having a strong abundant source of hydro power plant. That's a huge some plus. Second, we mentioned we will be completing 5,000 capacity this year, and we will be going into much bigger scale expansion soon, then that will give us some much substantial volume increase that will bring overall costs down additionally. And that's important. Second thing is going into other business segments like the ECH and CA and Chlor-Alkali, that will give us some diversifying opportunity for our Malaysia operations. So our Malaysia operation will no longer rely solely on polysilicon pricing fluctuation. So this will make our Malaysia, the company, in much more independently sustainable some of the business. So -- and third is our ongoing expansion of high value-added specialty products. And this is our ongoing project. And this is what we have done for the last several decades. So whenever we find some of the higher -- the growth opportunity, we will actually more aggressively identify and seize it. And hopefully, we can materialize it. And this year, 2022 hopefully, we can make it our some more monumental year for us for this expansion of high value-added side. So as I mentioned earlier, Page 15, I'd like to more elaborate the ECH project. This is a 50-50 joint venture project between our subsidiary, OCI Malaysia-backed company and the subsidiary of Kumho Petrochemical in Korea, which is their subsidiary, Kumho P&B Chemical, so this is a 50-50 joint venture to produce 100,000 metric tons of ECH which is epichlorohydrin. This is a raw material for epoxy resin. And this is mostly used for the blade material for the wind mills and also many other specialty application, mainly in home appliance and even semiconductor applications. So the demand for this product has been rising quite substantially. The most noticeable feature of our joint venture with Kumho is this ECH manufacturing process will be based upon 0 waste water -- the basis. This is going to be extremely environmental-friendly process. There are many existing players who produce ECH globally, but the biggest problem is this -- the old process inevitably produce high substantial amount of waste water. And this has been a quite actual big headache, and this factory will be one of the most eco-friendly factory in the world. And hopefully, we can get the both -- some of the cost competitiveness and also the environmental friendly -- the feature, so hopefully, we can win the situation. And Kumho P&B is substantial, the manufacturer of the epoxy resin. So all the, almost 70% of all the products come out of this joint venture. We'll be serving to the Kumho P&B's internal the captive of the market, and this will help us to stabilize our initial operation going forward. So hopefully, we can make both OCI and more successful the venture going forward. And solar value chain briefly talk about this on Page 16. As you can see on those -- some of the charts below, 2020 and 2021, we're experiencing huge roller coaster type some turbulence in the market. So there are many factors that during those pandemic time in 2020, polysilicon factory has been less affected because many of the polysilicon factory located rural area. In the meantime, downstream the market -- the makers are located mostly urban area. So their activity was more heavily influenced by this pandemic situation. And also, there was a huge power shortage in China that also spark the surge in the metallurgical silicon pricing and also operating condition difficulties in many polysilicon factory, and that actually inevitably some caused and the price increase. And the polysilicon price actually went up much higher than our downstream products. However, the market condition-wise, still the market is experiencing the polysilicon, the shortage at this moment. Going into Page 17. Despite all of the difficulties, 2021, the global solar market reached 170 gigawatts of the market, which is almost 20% higher than the previous year. And this year, too, 2022, we anticipate minimum global market over 200 gigawatts. So this increase in the global solar demand is also -- it's pulling those demand for much higher supply of the key raw material, and polysilicon happened to be one of them. So we are currently in discussion with many other downstream players and once we complete all of those negotiations and hopefully we can announce this the next round of expansion -- capacity expansion together with long-term supply agreements with our key customers. And hopefully, we can capture the certain portion of this the growth pace. On Page 18, is actually more straightforward things. And as I mentioned, our first quarter, second quarter, third quarter, fourth quarter, we have been experiencing gradual increase in the oil price. And in addition to that, we have been experiencing almost more than a year of logistical nightmare. I mean it has been so difficult to stabilize the operation. So because of many the demerge and some operational issue in many import and export ports in many countries, especially in the United States and also the Europe. So as an operator, it has been very difficult to predict when we'll be getting our raw material supply from overseas. And also when we export, we had a trouble of securing some the shipping line. And also, we had a tough time to finding smooth lending in some -- the import process. So that actually helps. It may actually made very difficult time even more difficult. However, thanks to all the staff members great effort, we were able to pass through many of those cost increase and stabilize the operation without any noticeable accidents, and we were able to achieve some of the good performance. So -- and this year, I mean we are still experiencing the difficulty. Still, the pandemic situation is going on, and global logistic nightmare has been a little bit eased somewhat. However, it has not been gone yet. Still, many of the port has been quite series of the demerge is happening, so we will actually do our best to stabilize the operation and minimize the cost and also some of the seize or whatever of the marketing opportunity to buy asset, is a good market, so we can continue our -- from the operational excellency. On Page 19, One of our key issue for -- in terms of sustainable -- the management, well, the sustainable, profitable growth has been our #1 the moto of our company One of the segment is how can we minimize the electricity consumption in Korea domestic market. That has been one of our -- the key segments. Our electricity price from 2011 to 2016, it went up by almost 16%. So the practically, our cost went up quite substantially and also because of ESG-related point of view, it's -- I mean, we were demanded to minimize our some electricity consumption in domestic market, which many substantial portion of our electricity coming from fossil fuel-based. So like you can see those -- the table below. At some point, we used to reach like a 3.5 gigawatt hour of very, I mean, heavy use of electricity consumption in 2014, which was the peak year. And next, the 7 years, we were able to lower our electricity consumption by 74% in 7 years and -- which this is an annual decrease of 18%. In the meantime, we were expanding our use of more electric -- the environmentally clean energy sources, which is hydro power plant generating, the electricity in Malaysia. So we would like to secure more eco-friendly energy source and try to meet those -- the carbon neutral the goal. In addition to this minimizing our domestic the electricity consumption, we have been emphasizing on several other factors, which is no waste water process, which I -- like I explained in our ECH, the joint venture in Malaysia, we are trying to change all of our the global manufacturing base for non-wastewater generating process. And also OCI has been one of the most world-leading company for waste heat recovery system, we are -- we plan to maximize our waste heat recovery system in global operation. So -- and also, we're trying to maximize our recycling of our by-product. So by chasing all of these important effort, so hopefully, we can step up in terms of as a very eco-friendly company status. Going for next page of 19. So as I mentioned through our efforts on environmentally clean operation, so we are actually doing our best to make sure that we are who are one of the well-recognized ESG, the leading company in Korea. So we have received A grade on ESG Integrate Grading. And also, we were included in, 13 consecutive years of Dow Jones Industry Index for Korea 13 straight years. And we got award for sustainable management awarded by the Ministry of Trade of last year. So hopefully, we can do better to lead all of these, the important category. Right now, the only the B grade in our ESG is actual environment protection. So after we complete all of this environmental-friendly effort, hopefully, we can get all of the A or above credit rating and ESG assessment in this year 2022. So this is the end of those presentation. And if you have a question, please feel free to ask.

[Operator Instructions] The first question will be given by Johannes Bernreuter from Johannes Bernreuter Research.

First, on the considerations of capacity expansion in Malaysia. Will it be reasonable to assume, given a successful conclusion of your negotiations that the new capacity would come online in 2024 or earlier? And the second question regards the electronic grade polysilicon plant in Gunsan. I think you had a target of -- production target of 2,000 metric tons for 2021. How far have you achieved that?

The first -- this year, targeting the electronic grade polysilicon is actually much above that. So hopefully, we can remain our maximum capacity to 3,000. Hopefully, we can reach close to our maximum target. If we reach the initial target of 3,000, we will consider reviving our P2 facility, which is fully capable of producing an additional 10,000-ton capacity of electronic grade polysilicon. So that's our next level of goal. So first, we would like to -- when we reach for the sellout stage of our first phase, P1 factory, then we will consider for upgrading our P2 factory for additional 10,000-ton capacity. Whether we will keep P1 at that time, we're not sure. That's based upon the customers' request. So that's our #1.

But my question was about last year. I think your target for last year was 2,000 ton. How far have you come with that?

Yes. I mean last year, we sold more than 2,000.

Okay.

So this year, we're hopefully reaching to 3,000, and it takes about half a year to upgrade our -- the P2 factory. Then if we think we need more capacity, then we will consider the operating our P2 facility then hopefully, then we will have a much bigger capability to serve the semiconductor -- the sector because globally semiconductor -- I mean there's a booming, and obviously, there's a lot of challenges. So we do not want to actually , I mean, to move to aggressively in this space. So we would like to cautiously do it. And second, an answer to your first question, we are currently in discussion with many -- it's hard to say many, but several other -- actually, the solar downstream players for additional contract for polysilicon long-term contract. So hopefully, we can complete this negotiation by this quarter, then we will announce then the additional -- the capacity supply contract, then we need a new factory. Then if we start this year in second quarter, then we should be able to complete the new capacity online in early 2024 because we're moving into the existing facility to Malaysia. So we are -- and our first phase construction and tie into existing facility is going very well and is on schedule.

Okay. May I add a question for understanding regarding the electronic grade production in Gunsan, the P1 plant had a solar-grade capacity of 6,500 metric tons. So is the electronic grade capacity only half of that?

Yes, correct. Because this requires more -- it's a lot more complicated also. And also the usage is actually much lower than typically less than 60 to 60 -- about 2/3 -- 2/3 is typically the maximum capacity. And we would like to make sure that we would like to do the full control -- the quality control. So now we think our P1 factory can produce maximum 3,000.

[Operator Instructions] As there are no further questions, we will now end the Q&A session. For any additional inquiries, please contact our IR department. This concludes the fiscal year 2021 full quarter earnings resulted by OCI. Thanks for the participation.

Thank you very much. I look forward to seeing you again in several months later, okay.