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 2022 first 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 2022 first quarter earnings resulted by OCI.

Good afternoon. This is Woo-Hyun Lee of OCI. I would like to go with the 2022 first quarter earnings announcement. I will start with Page 4, consolidated income statement session. So 2022 first quarter, we have recorded slightly over KRW 1 trillion, which is about similar the number compared to the last quarter, which is 2021 fourth quarter. However, our operating income went down by 26% quarter-to-quarter from KRW 218 billion to KRW 162 billion. Mostly, it was due to our planned maintenance of our Malaysian polysilicon factory. We haven't done any turnaround maintenance for Malaysian facility due to the corona pandemic. However, this February and March, we have conducted 6 to 7 weeks long regular maintenance for our polysilicon facility that inevitably lowered our production volume. And that negatively impacted on our earnings because the production went down. So the total sales went down. However, all the maintenance and operating costs went up. So that was the negative impact, which was the main cause of this operating income decrease. And also, our petrochemical and carbon products experienced high skyrocketing, the raw material cost increase, that also made certain level of negative impact, which I'm going to discuss more details at a later stage. I will go to Page 5 in the Basic Chemicals sector. The polysilicon business accounts for quite a substantial portion of our Basic Chemicals business, so we would like to focus more on the polysilicon side. As I mentioned earlier, we have conducted 6 to 7 weeks long regular maintenance of Malaysian factory. And this has been, I mean, quite substantial event, because this is not only for our regular maintenance activity. However, we have conducted the hooking up work for our 5,000 ton expansion that we currently is undergoing. So after, maybe one quarter later, we should be able to complete our 5,000 ton mechanical completion of our new capacity, which should be onstream by third quarter of this year. However, during this year, due to the maintenance activity, overall production of polysilicon went down by 44% quarter-over-quarter. And that also related to approximately 40% decrease in sales because of this maintenance. In addition to that, we normally have approximately 2 months of the lead time from the oncoming raw material cost increase or decrease to the final sort of the pricing of the product. And we have experienced quite a rapid increase in metallurgical silicon price in the last quarter, which means fourth quarter of 2021, and that increase in raw material actually made a negative impact on our first quarter operation, and that also made some further impact. However, we normalized most of metallurgical silicon purchasing during the first quarter of this year, so we do not expect any further impact on metallurgical silicon in this quarter, means the second quarter of 2022. So as I mentioned earlier, during the second quarter, we anticipate that we should be able to complete 5,000 ton capacity expansion in Malaysia factory. And hopefully, we can go into the commercial scale operation of this additional capacity in Q3. And next is Page 6 on our Petrochemicals & Carbon Materials. If you look at on the chart, the revenue is about the same from the last quarter of KRW 414 billion to KRW 417 billion. However, the operating income went up from KRW 23 billion to KRW 34 billion. There are many things happened, especially the most substantial event was 2 Olympic Games. One is the Winter Olympic Games in China, and also the Paralympics in China. During those Olympic periods, Chinese government has recommended many of those industrial operations to minimize their operation rate in order to keep the clean air. And that obviously made a negative impact on our operation in 3 manufacturing operations in China. OCI has 2 of the core chemical refinery businesses in China and 1 carbon black operation in China. So we were only able to maintain approximately 50% of the operation rates during the Olympic games. That event inevitably increased our operating cost quite substantially. In addition to that, due to the war in Ukraine, many of our raw materials went up quite substantially in the first quarter, and we were not fully able to pass through the raw material cost increase. However, we successfully managed to diversify the sales to many different areas. So despite all of these many negative issue in the first quarter, we were able to have some improved performance during the second quarter. However, the second quarter, we have another planned maintenance in our Pohang and Gwangyang factory, which is 2 large scale factories. Even though this is going to be 2 weeks, however, that will inevitably also make some negative impact on our operations. So hopefully, we can expedite this maintenance facility, so we can minimize the cost increase impact on our second quarter. I will go to Page 7, with Energy Solutions business. If you look at those charts below, the revenue went up from KRW 140 billion to KRW 156 billion, mainly due to the increased price in SMP, which is the substantial portion of our revenue from the Energy Solutions business. SMP is normally decided by the electricity wholesale, the trading market. And normally, the SMP pricing is a function of underlying energy cost, which is normally natural gas and the crude oil, and also the core pricing. And during the first quarter, due to the war in Ukraine, they have a substantial increase in most of energy stores globally that made a substantial increase in raw material purchasing price that inevitably impacted on the SMP price. So there was a 45% increase in SMP price in first quarter compared to the last quarter. So that made some positive impact on our operation. And also, there was a 33% of increase in REC, which is renewable energy credit sales. So both the factors made a positive impact on the performance segment of Energy Solutions. So when you look at our SMP price in the first quarter, during February, it went up all the way to KRW 200, which was pretty much the highest level since 2012. So, so long as the energy costs stay high, we expected it to have actually positive impact on our Energy Solutions side. In second quarter, the LNG price is expected to go up even further, and normally, it takes 1 or 2 quarters of some lagging for the pricing. So the outlook for energy market is it is actually going to be a quite tight market, that might actually cause some positive impact on the Energy Solutions segment. While our Energy segment performed well during the first quarter, our -- Page 8, on the Urban Development sector. The Urban development sector didn't go very well as trended. The first quarter, it stayed normal. So we successfully completed 3x of our residential apartment sales unit of last year. So we sold -- as we announced earlier, we have sold over 3,700 apartment units last year. That actually provided progressive revenue recognition that provided very solid revenue and earnings increase. If you go to the second quarter outlook, we anticipated actually the 1,700 apartment unit sales in this second quarter. However, due to some regulatory issue, inevitably, we had to postpone our residential sales plan for approximately 6 months. So we originally planned to initiate 1,700 apartment unit sales in the first quarter, and we anticipated another 1,500 sales next quarter, and we anticipated another 1,500 apartment sales in November. However, we changed these plans and we now changed our schedule for going to onetime sales of more than 4,000 apartment sales in either October or November. So our revenue and earnings portion will be delayed by the 6 months from second quarter to the fourth quarter, that was a somewhat disappointing event, but we didn't have much choice, to follow the government policy. So that was some downside for our operations. On Page 9, we're talking about financial position. As we haven't done any apartment unit sales, which normally made a substantial impact on account receivable and inventory and account payable issue, especially whenever we sell apartment units, that made quite a difference in inventory numbers because now all those apartment volumes will be recognized as a working inventory. However, this quarter, we did not have any sales, and second quarter we will not have any apartment sales units. So inventory numbers will actually stay pretty much the same. Our account receivable number actually went up, mostly because most of raw material globally went up substantially. So all of our underlying final product pricing also went up. That's why -- so as we had more sales in higher pricing, obviously, that caused the increase in the account receivable numbers. But that was pretty much on the financial position. I will go with the market overview of the solar PV market in Page 11. Until this quarter, polysilicon price stayed relatively strong, mostly due to supply-demand imbalance. Still, I mean, there is some shortage of polysilicon as the market stayed strong. The war in Ukraine, that caused substantial energy cost increase, and also, Russia -- there is somewhat actually unstable supply to many of the European countries. That sparked much more unplanned demand in the EU sector for renewable energy, especially for solar energy. That creates an unexpected demand in Europe. And also, in China, they announced quite ambitious some of the market growth plan, especially for 200 gigawatts of renewable energy projects in remote desert area. So for this year and next year. And this is a 5-year plan in China. I mean, both of these plants actually caused very strong some the market rebound on overall demand. And however, all of those, the raw material supplier has not been meeting all of this strong demand. So I think in the short to medium term, there's a strong -- this polysilicon market will likely remain unchanged. However, some of the downside is, because of the war in Ukraine, it caused unusual surge in many of those raw materials, especially steel and nickel and graphite, carbon product and many things, that made an unexpected and also quite substantial impact on overall cost of construction of any manufacturing facility around the world. So polysilicon is no exception. So while many companies has been actually undergoing the expansion project, recent spike in this raw material made some negative impact on overall construction base. So hopefully, we can minimize the cost rise, so we can actually stay competitive. When you go to the Page 12, as we mentioned earlier, the PV market stayed strong, because all of the increase in demand from the RE100, the movement, global carbon neutral policy, and a rapid transition to ecofriendly renewable energy movement. This will lead to much stronger demand in the solar side. And as I mentioned earlier, polysilicon supply demand imbalance will likely continue throughout this year. And another important noticeable change is private PPA contracts become much bigger portion compared to last year or year before. Normally, especially in the U.S., the PPA market, the corporate PPA only accounts for less than 10% to 15% of the overall PPA market. However, due to the increased demand in corporate sector, now the corporate PPA market actually accounts for over 20% in the U.S. market, and this will likely rise due to the strong demand from RE100, the carbon neutral movement. And also in Europe, it has been mostly FIT-driven market. However, like the U.S., many corporations and many municipal governments decide to launch some of the PPA contracts, which is higher than normal, the low-cost bidding, the pricing. So especially, any of the developers who use non-China sourced material, and the recipients are willing to pay higher PPA to compensate all of the increased cost. So this will be a very promising, actually, news to non-China-based suppliers. So hopefully, I mean, we can materialize, I mean, the market trend. So as you can see on the right chart in the bottom, the European, the PPA market price, it rose to almost EUR 80 per megawatt an hour, that's almost like doubled compared to 3 years ago. So this is a positive impact on overall solar industry, and OCI will do our best to try to capture this movement. Page 13 is a brief description of our new long-term polysilicon supply. Our client is Korea-based solar giant, Hanwha solution. Hanwha has been the market leader in energy sector, especially solar PV sector, and OCI and Hanwha made a 10-year supply contract. The overall contract amount is $1.2 billion. This is a 10-year contract, and this is a stretch that is very important because for the growth in Malaysia, we need also a strong customer. And also for Hanwha, in order for them to continue their growth plan and in order for them to secure the polysilicon from non-Chinese stores, and this would be actually a very meaningful arrangement for both companies. Page 14 is a brief description of our investment in Bukwang Pharmaceuticals. So in February, OCI has invested 7.7 million shares of program, which account for approximately 11% of the company's shares. So we become the largest shareholder of the company, and we have invested KRW 146 billion. Our rationale for this investment is pharmaceutical and bio industry has a large potential for growth and Bukwang has a very strong open innovation-based R&D capability. So for OCI, we believe this is a good opportunity for growth further together with this strong R&D-based company like Bukwang. So rather than we make an investment by ourselves, we believe we should be able to create much bigger synergy working together with Bukwang. And right now we would like to having some wider range of collaboration with Bukwang, and hopefully, we can provide our know-how and experience in developing the international market and Bukwang management can continue to focus on this R&D activity. So both parties make some positive impact to each other, so we can make some win-win arrangement. So Page 15 is a business update. So we have announced several times before, and as we announced earlier, OCI has formed a joint venture with POSCO Chemical, the name is P&O Chemical, 49% owned by OCI and 51% owned by POSCO. And we pretty much completed our expansion of 50,000 ton of hydrogen peroxide plant in this quarter. And out of this 50,000 ton capacity, approximately 60% and 30% of the volume will be going to electronic grade market that should serve for the growing semiconductor and many other electronic fields. So this will be another some of the growth potential for both OCI and POSCO, and we should be able to generate some commercial operation within the second quarter. So hopefully, we can provide much better performance in the third quarter. And next is our shareholder value mix migration of corporate policy. From this shareholders meeting, we have agreed to provide KRW 2,000 per share dividend. So like we did in this March, we plan to maintain approximately 2% of the dividend yield policy for the corporate with approximately minimum 30% of the payout ratio. So hopefully, we can provide maximum value to the shareholders. In line with the dividend policy, we also made some approval for trust contract for our treasury stock acquisition program. So total amount will be KRW 50 billion, and this is to enhance our shareholder value. And whenever there's any stock market fluctuation, the company will be actively engaged in acquiring our treasury stock, so we can minimize those market fluctuations. So next, Page 16. So this is how we're going to deal with unusual market uncertainties. First is the CapEx, the cost of the management issue. As I mentioned earlier, due to the war in Ukraine, it increased so much the pricing and cost for many raw materials, especially steel and nickel. The carbon steel, which is the biggest proportional whenever anyone makes in construction, both in residential or commercial or even some industrial facility. Carbon steel price went up by almost 80% year-over-year, and nickel, particular, it went up by 2.5x compared to year-over-year. Metal is a very vital portion of stainless steel. Many of buying chemical or pharmaceuticals, many of the highly engineering facilities, it requires steel, lots of stainless steel. And currently, the stainless steel price almost doubled compared to last year. That made a substantial burden on whoever, including OCI, this made quite substantial burden on many of those, the companies who plan or is currently making an expansion on the manufacturing facility. So right now, we try to closely monitor any of our capital expenditure from of the program, whether -- and we would like to make sure that whether this is critical that which makes us a purchase order based upon this such a high pricing, whether we can possibly postpone some of those purchases, or if we have to make the purchase at this quarter, then we need to come up with some of the backup plan in order to minimize the sudden price increase. And the second issue is not the only cost increase, but also logistic disruption. So mainly 2 factors. This is the war in Ukraine and strong lockdown policy by the Chinese government in Mainland China. These are making quite substantial burden to any large scale company with a global business. So especially in OCI, almost 40% of our business activity is somewhat related to China. As the Chinese government put lockdown on Shanghai, which is the biggest entrance, in and out for the Chinese market. So because of lockdown, there has been a very serious disruption in many of the supply chain issues, and also many of the Southeast Asian markets, there have been negative impacts on many of the quarantine and lockdown policies by many countries. Like, especially in our Malaysian factory, for the past 2 years, the Malaysian government imposed almost 1 year of MCO, that's the movement control order, that's pretty much lockdown on most of the cities and towns. So all of our staff working in Malaysia, they were not even able to travel more than 2 years because of the very strong some of the current policy. So it's extremely difficult to predict such unplanned and/or sudden change in government policy. So we have to do a lot of some scenario analysis. So whenever there's any unexpected things happen, so we have to come up with some measures that can minimize the impact. The third sector would be the business risk on Urban Development and energy project due to policy change and tightened regulation. So unlike many other manufacturing businesses, OCI, the Urban Development side and the Power Generation business, these are somewhat regulated businesses. For the apartment residential business, for example, we cannot decide our final unit sales pricing per square meter or per square feet. Normally, government agencies provide actually suggested pricing. That's pretty much the ceiling over some of the pricing we can go for. And also, for energy sector, even though all those underlying raw material, like the coal or gas or some crude oil went up substantially, there's always 1 or 2 months of delay in passing through all of the cost increase. And also if there is any external factor that regulates the pricing increase of SMP, which is a basic electricity pricing, then this business is somewhat exposed to certain market mismatch. And we have experienced these sort of risks time to time, so going forward we have to come up with some solution, even though this may not clear all the issues 100%. However, we need to come up with certain measures that can minimize any of those government policy risk. So these are somewhat vague and also somewhat not clear, some better. However, this risk factor is something we cannot preplan or we can figure out in advance. So normal time, we will come up, we will try to analyze whatever the uncertainties going forward. And hopefully, we can come up with a multiple alternative plan, so whenever we face with uncertainties, we can come up with any countermeasure that can potentially minimize our business risk. So this is it for our OCI 2022 first quarter earnings announcement. If you have any questions, I'm happy to answer any questions.

[Operator Instructions] Currently, there are no participants with questions. [Operator Instructions] The first question will be given by Mr. Johannes Bernreuter from Bernreuter. Please go ahead, sir.

This is Johannes Bernreuter from Bernreuter Research in Germany. I would have 2 questions. First, can you translate the contract amount with Hanwha into shipment volume? And the second would be, what is your current state of planning for the expansion of the polysilicon plant in Malaysia?

Thank you for the question, Johannes. Unfortunately, we -- and this is a request from our customer, Hanwha, that we decided not to disclose on the contract volume or the contract pricing. I mean, for the sake of some of the business policies. So I apologize that we cannot share the pricing -- sorry about this, the volume. And the expansion program. So we planned much earlier, the expansion of our Malaysia facility. However, as I mentioned earlier, Malaysia has conducted very strong the quarantine policy. In fact, I mean, they just opened the border as of April 1. For the past 2 years, there has been very significant quarantine policies. So whoever travels into Malaysia, they normally have to stay in Kuala Lumpur for 2 weeks. And when they travel to Sarawak, where our factories are, they need to go through another 2 weeks of quarantine, which normally requires 4 weeks of quarantine. So it has been very difficult for us to move around some of the people. And also, in order to accelerate the construction program, we need some foreign workers to conduct actual construction work. And since mid-2020, Malaysian government started issuing some working visa for foreign workers that actually made it somewhat difficult for us to expedite the process. For 5,000 ton capacity expansion, we were able to do it among ourselves with those that in Sarawak. However, in order to conclude and in order to expedite our next phase, which is 30,000 ton capacity expansion, this will inevitably require more and more detailed engineering study, which requires more involvement from more number of engineers. And also, we need a lot more construction workers to be closely engaged. So now, they just opened the border, so we'll be having more people that go in and out. I think for the next several months, we should be able to conclude our expansion program in more details. So hopefully, we can announce some additional expansion program in detail. However, there has been somewhat restricted environment for us to do anything. In fact, I was in Malaysia for the past 10 days and I just came back this morning, and we had a very constructive meeting with both the Sarawak regional government and also the vendors in Sarawak. And so hopefully, we can come up with some expansion program, which I look forward to doing so.

Short follow-up. Last quarter, you said you could possibly start production with expanded capacity in early 2024. Considering what you said now, would it be more reasonable to assume that production could start in late 2024?

Actual construction will only take about 14 to 18 months, because we are moving substantial portion of our factory equipment from Korea to Malaysia. So we do not have many loan delivery items. So that's why, if we can complete all of the engineering work and the local clearance with power supply in regional government. So if we can complete those, the homework in the early stage, we'll still be able to meet the commercial operation scheduled in 2024. Maybe, 1 quarter, or maximum 2 quarter discrepancy. However, since many things have been disrupted. So we have to clear all of this issue in time. So considering our experience of moving our 5,000 ton capacity factory, the actual construction and revamping and commissioning only takes 10 months. So for 30,000 capacity, this will take about 14 to 18 months. And now, we have a track record, and we now feel more confident. However, now we need to make sure that we don't have any surprise. So this -- I mean, as I mentioned earlier, we never dealt with these kind of uncertainties so far. I never had to consider pandemic into our business plan and also the war in Ukraine, this was something we could not preplan. And that was not an easy issue, because sometimes we cannot find the right vessel to move certain equipment. So...

Currently, there are no participants with questions. [Operator Instructions] As there are no further questions, we will now end the Q&A session. If you have any additional inquiries, please contact our IR department. This concludes the fiscal year 2022 first quarter earnings resulted by OCI. Thanks for the participation.

Thank you very much.