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'll begin the conference of the fiscal year 2022 third quarter earning results 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 third quarter earning results by OCI.

Good afternoon. Welcome to OCI's third quarter earnings release. My name is Woo-Hyun Lee. I am Representative Director and Vice Chairman of the company. First, for the third quarter, OCI has recorded KRW 1.28 trillion of the revenue and KRW 289 billion of operating income. This is -- for your reference, for the revenue of KRW 1.28 trillion, this is 22% improved by quarter-over-quarter and 44% improvement compared to previous year same quarter. This third quarter, we have experienced quite a series of events, but the most -- the memorable event was Typhon Hinnamnor. This particular typhoon was one of the strongest typhoon ever Korea has experienced and the typhoon left a lot of casualties and damage, especially in the southern part of Korea. Our Pohang factory, which is actually second largest factory in Korea for OCI, we have experienced quite serious flood issue, so our entire factory was covered by the flood, and that actually left us with a lot of damages because we have to shut down the factory. And it took actually several weeks to recover, bringing back the factory operation in normal stage. And so that actually occupied a lot of our time and money and the man hours to recover this. But despite all this unexpected operating losses from this -- from the typhoon, we have recorded relatively strong performance in this quarter. I will go to Page 5 of our divisional performance review. First is our Basic Chemical sectors. Obviously, polysilicon is one of the largest segments of this business segment. For this quarter, we have recorded over KRW 500 billion of revenue and together with KRW 200 billion of operating income. So this strong performance was driven by the [indiscernible] operation after we complete 5,000 tonnes of [indiscernible] polysilicon factory in Malaysia. And that actually gave us additional volume and also the lower overall the fixed cost of Malaysia factory. So for this quarter, our -- the volume increase was -- approximately 30% went up. But in terms of sales volume, it went up by 36% quarter-over-quarter. So for the quarter, price for the solar grade polysilicon remained quite high in Chinese renminbi. However, our U.S. -- our product sales is based in the U.S. dollar. And due to the strong U.S. dollar appreciation condition -- so even though the renminbi price remained strong, however, we have recorded slightly lower sales price due to this exchange rate issue. However, overall, OCI is over 90% of revenue on U.S. dollar denominated and less than 50% of our -- the cost is U.S. dollar denominated. So OCI in general are very dollar-long position. So due to the strong -- the U.S. dollar strengthened so that actually helped some export competitiveness and also that gave us a much higher cost margin. So I will go to Page 6 on our Petrochemical and Carbon Materials. And as I mentioned earlier, this segment was hit negatively due to the Typhoon Hinnamnor. However, the division was able to manage there the overall cost down. And also due to strong activity of marketing and also pricing negotiations, we were able to increase our sales by 12% quarter-over-quarter of the main -- most of main products. So that gave us the strong performance of KRW 530 billion of revenue with KRW 40 billion of operating income. So the fourth quarter, we are somewhat optimistic at this moment because normally we conduct the overall maintenance of our 2 major factory of Pohang and Gwangyang. However, due to the flood issue during the September, we -- while we are recovering our -- the Pohang factory from the flood, we also did some overall maintenance during the same time. So we don't have to go through the annual turnaround in our Pohang factory. So even though we will actually conduct annual turnaround on our Gwangyang factory, overall, the production volume for fourth quarter would be higher than normal fourth quarter. So long as we keep those -- the pricing competitiveness, we should be able to target much higher the performance in fourth quarter. I will go to Page 7, the Energy Solution business. We have 3 different business in this segment. One is we have the power generation business in Korea, then our subsidiary company named OCI Saemangeum Energy, OCI SE. We're making some -- the power generation business in Korea. In addition to that, we also have a power generation business in the U.S. by OCI Solar Power. This is 100% renewable energy, especially solar power plant business in the United States. And we are doing 200 megawatts, the module production business by MSE, Mission Solar Energy. So these 3 segments, all of them did pretty well. So for this quarter, we have recorded over KRW 200 billion of revenue and we have recorded KRW 24 billion of the operating income. And it was fueled by strong -- the continuous increase of SMP, which is a base -- the price factor for our energy sales to KACO, and our strong price increase in REC, renewable energy credit to our -- the local power market. And that gives us a 21% increase in SMP and 14% increase in REC, actually provide us with strong -- some of the momentum for growth in this segment. And especially in September, SMP of KRW 235 per kilowatt an hour has been one of the highest price in [ Korean history ]. And third, the sales and also the [indiscernible] solar power generation business remains very strong, thanks to the strong -- the policy support from the U.S. government and also strong market demand in the United States. So the fourth quarter -- so we will closely monitor the SMP and the REC movement, trying to maximize the profit in our OCI SE business. And in addition to that -- so we will continue to look for business growth opportunity, both in our solar power business in the U.S. and also the module business in the United States. And I will come back to you after our -- the press release -- our earnings release report. We will go to a separate section to go through some of our -- some of the new endeavors. I will go to Page 8. On Page 8, we have some slowdown in some of the business. 2021 in our first year of our -- this Urban -- the development project. We have sold 3,750 apartment units in 1 year by 3x of official sales process. However, due to the some pending regulatory issue, we have not initiated any -- the apartment sales in this year. So, we originally planned to sell over 4,000 apartment units in 2022. However, we could not meet those guidelines. So this has to be postponed to the first or at least the fourth quarter of next year. However, when we think about the current actually weak condition in both -- in the financial sectors and also housing sector, we believe the delay in our -- the apartment sales or the process will not actually entirely -- slowing our performance. It actually gives us more breathing room to avoid any of those -- the market -- the bad market conditions. So hopefully, we can come back to the sales process again under much more improved market conditions, both in financially and also housing. Going to Page 9. This is the financial position paper. We used to call it balance sheet in old financial accounting terms. But after Korea adopted the IFRS, I mean, we named -- changed the name from balance sheet to financial position factors. When you look at the cash and short-term financial assets, the cash equivalents, we have increased KRW 288 billion of increase in the cash. While in the meantime, our total debt stayed about the same. So that means our company has improved from of our financial status quite, I mean, dramatically. So I can assure that OCI has maintained very solid financial -- strong financials at this moment. Let me go through some of the steps in order to give you some better reference. On Page 10. On page 10, in financial position, when you look at the first section, the net debt to equity position, it is only less than 14%. And net debt to EBITDA, which is a typical, common -- some reference point for the lenders, our net debt to EBITDA is actually 0.5x. So our net debt to EBITDA is even less than 1x. And when you go to the EBITDA to interest coverage, we have over 30x of EBITDA to interest coverage. So this gives us -- this indicates the strong financial position of OCI. And if you look at the bottom line, we have recorded about 13.7% ROA and 24% of ROE. Then that -- we care and we try to improve all these, the asset efficiency numbers in order to meet on the expectations from the investors. So this is about it for our -- the earnings release [indiscernible] and go to the Page 12. We would like to go through some of the market trends in the solar business. At this moment, the polysilicon price continues to remain strong throughout the quarter 3. And this is, I mean, due to several factors. First is tightened supply from maintenance of major manufacturers in China and the power shortage in the Sichuan area of China and also delay in the ramp-up of new capacity in several Chinese companies has all added up for the slowing down in the supply of polysilicon sectors. So price of solar product continued to rise in China, but the price adjusted of those -- the product is actually a little bit lower due to the strong U.S. dollar. So these are -- actually, it's a little bit complicated external issue, but all of the supply side slowdown in the Chinese solar value chain sectors actually caused or fueled some of the supply shortages. And we believe the strong solar market position -- the solar supply situation will likely last a few more months. And we believe -- I mean, the market size of global solar business of last year was 180 gigawatts. We originally thought that this year's market size, it will be somewhere near 200 level. However, we need to upgrade our market view of overall market size of somewhere between 230 to -- as large as 250 gigawatts. That actually caused some of the major issue for the short supply situation. Next year, we are seeing minimum 270 gigawatts of the global size for the solar. However, if the market demand reaches the 300, overall, the supply shortage situation might last even much longer than we anticipated. I'll go to Page 13. There has been some strong activity both in the U.S. and -- actually, even recently, the European Union decided to set up some sort of independent value chain for solar power or other renewable energy sectors. However, when you look up this data, you know, or some of these some charts, it's not easy to set up an independent -- the supply chain in solar business without any Chinese involvement. When you look at it, polysilicon controls -- 80% is still occupied by the Chinese player. Wafer is like 97% occupied by the Chinese companies. So when you look at the strong dominance of Chinese players, I think complete exclusion of Chinese player will not be realistic even though they want to promote some of their own -- the manufacturing business in their own country. However, it will be very difficult to do it without any strong support from Chinese players. So this will be more closely and objectively monitored in order to come with the right actually marketing decision. Going to Page 14. OCI has been running this -- the module manufacturing business, our 100% owned subsidiary named MSE. It has been running about -- approximately 210 megawatts of capacity. We recently announced that we're going to expand our overall capacity to 1 gigawatt capacity in 2 years. One big difference between our expansion story and with other -- many other expansion stories is, we already have sufficient enough space in our building that we can expand. So no need for the building or structure-related investment. All we need to do is reconfiguration and also retrofitting of our existing manufacturing from the facility. So at best, we can come up with about 12 months of investment and commissioning state. But at least we should be able to bring our gigawatt of the capacity before -- within next 14 months. So with 1 gigawatt of new capacity on stream, we should be able to expect actually positive the cash -- the compensation by U.S. government based on Inflation Reduction Act. So this we currently view as a very high profile and also high return investment for us. So we will do our best to complete this execution work in a timely manner. On Page 15, I'm going to go through some of our solar power development projects. Our OCI Solar Power, which is U.S. subsidiary of OCI, is focusing on some [ new brand ] power generation business. We're currently developing 5 solar power development projects and 1 ESS project. The project total will be approximately 1.15 gigawatts, which is quite sizable project. In the meantime, we are currently running 60 megawatts of existing facility. And for our this 1.15 gigawatt of capacity project, it will be difficult for OCI to continue to own this project because we do not have sufficient enough tax appetite. So likelihood is -- we indicated when we should be able to monetize this -- develop the project. As soon as we are ready, we should be actively seeking the monetization and the opportunity to -- for this project because that will give us not only the profit, but it will give us some more -- some the cushion for another expansion activity for us. And investors should be happy to invest in a good project that they can fully utilize in there some ITC-related tax position. On Page 16 is just the brief that we have -- we had started some construction on this project. This is a 49% to 51% the joint venture with POSCO Chemical, which is Korea's largest manufacturer of battery-related key materials, especially for the anode and cathode, both, some the materials. This P&O Chemical, which is a JV between OCI and POSCO, are specialized manufacturers both in the hydrogen peroxide for semiconductor uses and another one is high softening pitch products. High softening pitch product is a key raw material that we actually use for anode material for battery, lithium battery. And POSCO, which is the mother company of POSCO Chemical, produce some of the coal residue, which is coal tar, that OCI brings its coal tar from POSCO, and we reprocess this -- the coal tar for making the binder pitch. The binder pitch mostly go into the aluminum and the silicon metal manufacturing as a binder pitch. And if we actually use this -- the binder pitch go through another round of value-added process, we will be able to make actually 15,000 tons of highly specialized carbon product that goes into the anode portion of the battery. And this will give us a great opportunity to grow, because, currently, Korea is 100% relying on the importation both from Germany and Japan. So this would be a very lucrative business for us and both for -- a win-win situation for both OCI and POSCO. So this is it for our -- the business [indiscernible]. So if you have any questions, we're happy to answer.

[Operator Instructions] The first question will be given by [ Alacio ] from Bloomberg.

This is Rob Barnett. Can you hear me?

Yes, we can hear you.

Sorry. I think we got a cross signal on the line. Rob Barnett, senior analyst at Bloomberg Intelligence. I was wondering if you could shed any more light on the Inflation Reduction Act and whether you're going to consider U.S. polysilicon production. I think there is a $3 per kilogram credit, I mean, from the polysilicon side. Any thoughts on that?

Yes. I mean, right now, we do not have any plan to invest our polysilicon facility in the U.S. because maybe 2, 3 reasons. First, investment costs in the United States for polysilicon is very expensive compared to our investment in Malaysia. This is -- this facility is to produce pretty much identical products, but the overall investment cost in the United States is minimum 2x or 3x higher and also the overall production -- or the construction time will be actually quite long, for 3 years, if we go with some brand-new green glass project. Second, we can invest in the existing facility, but same issue. Many of these -- the asset, they have not been proper the maintenance or investments. So this is actually quite outdated actually factory. And in order to upgrade it to where we need to be, this -- I mean, first, we did not have a chance to look at the facility closely, but this will be quite costly and also this will be also quite time consuming. So due to the quite high price and also much longer lead time, this wouldn't be seen as a good opportunity for us. It will be better for us to focus on our expansion in Malaysia. That can be on stream in less than 18 months. Together -- and overall investment cost will be, I think, minimum 1/3 -- almost 1/3 of if we invest elsewhere. So at this moment, we do not plan of any investment in -- polysilicon-related investment in the U.S. However, if there is any other opportunity we can consider, sure we will consider. But at least we do not have anything yet in our hands.

And one follow-up question, if I may. One item that we've been watching just generally on the polysilicon space is the potential for a reversion in polysilicon prices. I know our colleagues at BloombergNEF are quite bearish on where they could head over the next 12 to 18 months. Have you been taking any action to lock in higher polysilicon prices? Or do you generally just take kind more of a spot pricing on polysilicon?

So our -- pretty much 100% of our customers are contract-based customers. And both our customers and us, we experience quite severe pricing fluctuations. And both we and our customers, we agree that no one is actually gaining anything whenever we go through too much fluctuations. So in our contract, we have a mutual understanding of both some ceiling and some of the bottom arrangement. So when the prices go below bottom or it goes beyond the ceiling price, we again sit and discuss further. However, we haven't reached for the downside yet after we signed all of this floor and the ceiling concept. But I think based upon our own experience, this should be discussed in a good place because not only us, but our customers, they all know that we need to go to the long run. So I think -- so our -- these are also some of the negotiation based from the contract. But suppose it has some room to play with -- so if the price go below a certain level, so we can hold certain percentage of the downside. But if you're experiencing much higher pricing condition, then we are giving up some upside. But we are actually -- so this is more likely some give and take for mutual protection. But difference is -- at this point, despite actually high polysilicon price, all of the solar value chains are actually doing quite well. And it will be more issue rather than cheaper cost of China. I think more our buyers are focusing on whether these material or these products are sourced from non-Chinese sources. I think that's what they care more, because IRA clearly provides a very strong incentive to use non-Chinese actually -- involved actually product or any value chain. So I think that's a good plus for us.

As there are no further question, we'll now end the Q&A session. For any additional inquiries, please contact our IR department.

Thank you.

This concludes the fiscal year 2022 third quarter earning results by OCI. Thank you for your participation.

Thank you so much. So we look forward to seeing you in next earnings release.