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 Fourth quarter Earnings Results by OCI. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 fourth quarter earnings results by OCI.

Hello, good afternoon. This is Woo-Hyun Lee from OCI. I'd like to go ahead with 2022 fourth quarter earnings release. I'll go with the first, Page 4, 2022 Annual Consolidated Income Statement slide. 2022, we have experienced a lot of unexpected issues, especially sparked by the war between Russia and Ukraine that disrupted many of supply chain issues globally, not only energy crisis, but also many other key raw materials for industrial activities and that also disrupted global logistic issues that made a quite negative impact on overall the business environment. However, thanks to all the investors, significant effort by the employees, and our partners and our customers, we were able to make actually the good result in 2022. And in terms of sales revenue, OCI has recorded the KRW 4.67 trillion, that's about 44% increase year-over-year compared to the previous year, and our operating income has recorded close to KRW 1 trillion, which is KRW 981 billion, which was a 57% year-over rise compared to year before and this is the largest sort of the profit since 2012, which we are quite proud of. Going to the Page 5. This is the quarterly earnings. Our quarterly sales recorded KRW 1.3 trillion. That's about 4% year-over growth. However, the operating income, we have a record KRW 348 billion, which is a 21% quarter-over-quarter increase. And despite of many maintenance activities in domestic plants, however, the strong market for solar PV market drove polysilicon price strong and also the volume tight and that tremendously helped us to achieving such a good result. I go to Page 6 on the Basic Chemicals sector. Basic Chemicals sector includes polysilicon and many other semiconductor-related inorganic chemical business, including hydrogen peroxide and phosphoric acid. However, the biggest contributor for the good result of KRW 571 billion of sales and with KRW 249 billion of this operating income for the last quarter was thanks to the strong polysilicon sales, which went up by 13% by volume and 5% by pricing, and that made a good contribution to the good results. However, early January 2023, which is the first quarter, we have experienced a sudden price fluctuation in polysilicon price and also many other [indiscernible] bases because prior to the Lunar New Year holiday, many of the Chinese companies, they intend to minimize some of their inventory, some of the carrying costs. So they stop purchasing the upstream product, especially polysilicon and wafer. I mean that drove overall polysilicon and wafer price down quite substantially. However, after the Lunar New Year holiday, many of Chinese operations went back to normal and they have resumed some ordinary procurement activity that also helped us to recover a substantial portion of the solar value chain, the pricing. So we anticipate that relatively stable polysilicon pricing over this quarter. Go to Page 7, which is the Petrochemicals & Carbon Materials business. This is the segment that we have been mostly impacted by the war between Ukraine and Russia, because that not only drove global -- the carbon price went up, especially the crude oil and natural gas and coal, and because of this, many of the consequence from the war, it actually inflated so much on the raw material cost section. However, due to the global sluggish economy, led by strong interest rate hike by the U.S. Federal Reserve, and then that also negatively impacted on some of the downstream market. So while the upstream price went up, but the downstream market actually became weaker, that actually drove entire Petrochemicals & Carbon business in a very difficult position. However, we were able to maintain certain level of margin by maximizing our productivity and minimizing the raw material costs from the hike. And so we have recorded KRW 490 billion of the quarterly sales. We have recorded KRW 30 billion of operating income. We believe this is a fairly marked number, especially considering the sluggish business environment, and also we have went through our annual turnaround in one of our flagship factory, Gwangyang factory. In addition to that, we have closed down the VIP, Vacuum Insulation Panel, business last quarter. This was over 10-year-old in the business that we internally developed technology for high-performance insulation material business. However, we could not secure enough actually market and we have not been able to turn around those to the business. So we decided to close down this business and anticipated the loss related to closure of this business is approximately KRW 7 billion. So the first quarter outlook is, while lower demand anticipated and also the weak economy, so we have been seeking the best effort to protect the margin and the spread between the raw material and our end product pricing. So hopefully, well, we can actually keep as much as this spread, so we can generate some decent margin in this first quarter. Go to Page 8 of the Energy Solutions side. This Energy Solutions business, we have 2 separate businesses. One is local utility business in Korea based in Saemangeum area of Korea and another one is Solar PV developing business in the United States. The bigger impact for this Energy Solutions business is actually domestic part because our utility business by the Saemangeum Energy, they have 2 types of revenue recognition, one is electric tariff sales plus renewable energy credit sales. Renewable energy credit sales went okay. However, the electricity tariff sales business has been negatively impacted by government's temporary measure that restricts the power generation company to acquire a certain level of SMP, system marginal pricing, which is the base price for electricity tariff. So normally, last quarter and this quarter, average the electricity price in the wholesale market is approximately KRW 250 per kilowatt an hour. However, government came up with some 1-year term restriction, the order that power generation company can only recognize up to KRW 164 per kilowatt an hour. So that means all power generation companies in Korea have lost 1/3 of the revenue just overnight. So this act has been in place from December 1 of last year, up to November 30 of this year. So hopefully, they can lift the restriction in this December. However, in the meantime, we anticipate that the margin from this power generation business will not be very good due to this unanticipated intervention. However, our power generation business in the United States has gone quite smoothly and we'll come back to you with some more updates, but we would be able to complete some of our project development and hopefully, we can announce certain sale of our project either this quarter or at least the next quarter. On Page 9 for Urban Development business side. For this quarter, we have recorded KRW 133 billion of revenue with a KRW 24 billion of operating income. This is in line with some of revenue and the profit recognition by existing sale of our apartment unit that we did in 2021. So based upon the progress, the construction schedule, we have successfully and smoothly recognized all of the sales and the profits. However, last year we want to go into the sale of additional 4,500 units of apartment sales, that has been postponed last year. And this year still, we have not been able to achieve some of the right permits for the sales activity. Currently, we are in discussion with city development of Incheon for improving the soundproof system for the highway that are going through some of the land. So once we settle with the Noise Control Act, then we should be able to resume some the real estate development business. So once we have settled all of this required punch line items, then we will be able to resume this activity shortly. So once we do, we will come back to you, and we'll actually report you back about the progress. Page 10 is the financial position numbers. Due to strong performance of company and overall, so there are not many actually noticeable things, but when you look at our inventory number, we're even improved. So there are not, I mean, any substantial things to report. So only negative is for our increased account receivables is not because we have excess actually some overdue numbers, it's actually our real estate business side, recognition of AR for the sale of presales, the existing the advance, the numbers. So because of the progress revenue recognition, all of the presales in advance, the number actually is becoming the account receivables. So this is a more likely accounting issue, not actually real any substantial method. Going to Page 11. I want to show some of our financial ratio of the current company. For the past 15 years, we have stressed out that we will not [indiscernible] just the growth. I mean, growth is important for the company. Without growth, I mean company will not have any future. However, we strongly believe that the growth should be backed by sound financial structure. So every time whenever we came up with earnings release, we always have been emphasizing on importance of having a sound financial position of the company. As you can see, our net debt-to-equity ratio, in 2020, it was 43%, which was not that high. But I mean, we were even able to lower all the way to even 13% level. And the net debt-to-equity ratio is less than 0.5x. And one of the most important management issue for the asset management is actually ROE number for last year and this year -- actually, 2 years ago. In 2021 and 2022, we were able to record over 20% ROE number. So OCI is a company with very good sound financial position with over 20% operating margin with above 20% ROE in the company. So far, our strategies has been well implanted. So in the future, we also look for just a lot of growth opportunity. However, in the meantime, we will make sure that our financial position will stay sound. That will be commitment from the management. So let me go to the business update and strategy on Page 13. So PV value chain, as I mentioned earlier, last year, there are many things happened, especially the war between Russia and Ukraine, that really sparked global energy crisis and also ongoing tension between U.S. and China that escalated many of those trading issues, and the introduction of IRA, that actually drove strong U.S. market for PV market, and also now the Europe is coming up with their own promotion program. So that really helped the overall sound business environment for solar PV value chain. However, early this year, in January, because of many companies' effort to lower the working capital and also inventory burden, so they suddenly stopped actually procuring any of those, the upscale, upstream solar PV value chain products, especially polysilicon and wafer. So that actually exhausted quite substantial portion of the polysilicon and also wafer inventory in the market. So right after the Chinese New Year, the market has rebounded back, and we believe there is sound demand for non-China-based solar PV value chain going forward. So we also see quite healthy growth overall in the market. Page 14 is solar PV installation outlook. So early January, there was another unanticipated event, which was a flood in Northern California. So as you know, U.S. is a very important market, and California is the largest market for some of the solar PV installation. But late last year and early this year, there had been quite severe flood in the Northern California that has negatively impacted on the installation market in general. In addition to that, there were nationwide influence by strong snowstorm from the Arctic that actually limited certain installation activity. So it slowed down some of the demand for Solar PV in early this January. In the meantime, there has been like some piles of many Chinese actually solar products in the U.S. harbor. And many of them were actually released by end of actually January, that actually drove sudden increase in solar value chain products in the U.S. market. So that actually disrupted first 2 months of this operation of the U.S. However, as weather becomes normalized and as the market pretty much has absorbed all of the sudden increase in the overdue of the Chinese product, so the market has become quite normalized. So we believe strong healthy growth in the U.S. market. And as I mentioned earlier, demand for solar energy non-China polysilicons is anticipated to increase due to this strong support by the U.S. IRA and Europe's introduction of new Net-Zero Industry Act, and also directive on the corporate sustainability due diligence process. These will continuously drive overall demand for non-Chinese solar PV products in general. So we believe stable growth in the demand for non-China-based solar PV business going forward this year. And also market-wise, the most hot item at this moment is TOPCon high efficiency module made by the n-type wafer. N-type wafer is made by mostly high purity polysilicon. That also helps also the high-purity polysilicon producer like OCI and many non-Chinese makers to come in the good advantage. So this would help us to keep some of the premium on our product. Going for Page 15. This is a price index for many of the petrochemical products that's substantially impacted by various activities, especially war between Russia and Ukraine, and also inflation in many countries. So because of the strong price, hike in those upstream markets. However, downstream, the market has been negatively impacted by high interest rate and also the inflation issue in many global markets. That actually drove the entire Petrochemical and the Carbon business in a quite difficult position. So in 2022, our key product, pitch rose, and aluminum price stayed strong. However, because of the sudden slowdown in the global economy, we believe the demand would become much weaker. And in the meantime, overall the demand will be high -- actually hard to predict. So we will do our best to minimize this downturn risk. And hopefully, we can keep certain level of our margin going forward. The only good news is, in 2023, strong recovery is anticipated after China canceled zero-COVID policy. So this will promote more trade and investment and production activity in China. So we will gradually monitor this impact. And next time we will try to make some updates when it's available. So Page 16 is our investment program. In 2023, so in polysilicon, the solar-grade polysilicon, we have 2 major important tasks. One is full operation of 35,000 tonne capacity that we have in Malaysia. Obviously, it's most important thing, and we have to make sure that we are in full production mode, and that will make us to minimize our production cost. In the meantime, we finally will launch our capacity expansion in Malaysia that has a total capacity over 30,000 tonnes. This is actually the same capacity that we closed down in 2020 in our Gunsan factory. So we will initiate some of the dismantle and to relocate this facility into our Malaysia site, and we will go into 3 phase installation of the body going forward. So we will complete our preparation in the first half of this year. And starting from second half, we will go into actual action program. So the initial stage will take much longer because this will involve a lot of dismantle and also the reassemble in Malaysia. So the first additional capacity will be coming on stream at best in 2025, mid-2025, and the remaining 10,000, 20,000 tonne capacity will be on stream after 2026. So this will be this year's highlight for our activity. And solar module side, we have been operating very small module factory in Texas, the capacity of 270 megawatts. However, I mean, because of our collaboration work with other vendors, we have managed approximately 400 megawatt of the module sales so far. By first half of this year, we will increase our module capacity from 270 to 350 megawatts. And by end of this year, we will complete all our module capacity up to 1 gigawatt. So starting from 2024, we will be going to the market with approximately 1 gigawatt of capacity. And this will be our new venture into the U.S., and we have everything under control and on schedule at this moment. Solar PV project, as I mentioned earlier, we diligently have successfully developed, under the collaboration with our local partner, CPS Energy of San Antonio, so we have secured a good project, and we are about to close our development phase. And because we do not have U.S. tax position, so it is most beneficial for us to sell this project to those who can enjoy the U.S. tax return basis. So we decided to sell additional 320-megawatt scale of solar PV projects that are about to be deployed in the first half of this year. So some of them will be able to be announced either in this quarter or at least in the next quarter. So we will be able to announce accordingly once it is confirmed. In the meantime, we are currently on schedule of developing additional 1 gigawatt of solar pipeline, and this will be another growth engine for OCI going forward. On Page 17, in addition to solar grade polysilicon, so we would like to strengthen our position as a semiconductor material supplier in semiconductor side. We currently supply to 3 out of top 5 global wafer companies, and we are currently about to sort our situation. So we are going to make some 2 of expansion projects, 1 is 2,500 tonne, the capacity expansion in Korea existing Gunsan factory, this will be actually timely investment. And however, in order for us to keep better the price and the cost competitiveness, we will expand additional 10,000 tonne of polysilicon capacity outside of Korea and most likely in Malaysia going forward. So this would be another very meaningful activity in 2023. And besides that, we are in many other areas, in semiconductor industry, including hydrogen peroxide and phosphoric acid and many others. So we will actually increase our capacity in order to respond for the increasing demand from our semiconductor customers that are strongly investing both domestically and in the U.S. So we will actually keep up with our customers' investment pace, and we will also enter into specialty action business using our existing silane-based competitiveness, and this will be another milestone for OCI going into high lucrative semiconductor material business. In terms of battery materials, we are already heading in collaboration with our joint venture partner, POSCO Chemical, which is world-leading anode and cathode manufacturers. So in the second half of this year, we'll be completing our investment project, and we're going into commercial production of high softening pitch business, which is about 15,000 tonne capacity. High softening pitch will be very important milestone for Korean battery material industry at this moment, because currently this is 100% imported from our competing country. Once we have this 15,000 tonne high softening pitch availability, this will reinforce our domestic battery makers in a much better position. In addition to that, we would like to also use our strong silane-based chemistry capability into this anode business that will also produce also high value-added some of the business opportunities. On Page 18, we have not announced any of our future business outlook. However, we have been requested by many investors on how OCI will look like in 5 years? So we have calculated and projected all of our growth projects that I have mentioned so far. So without actually adding any other new business or any M&A activity, once we complete our ongoing expansion project, at least this will provide 100% sales growth in 5 years and 65% growth in EBITDA numbers. As I mentioned earlier, we already are having over 20% EBITDA margin from the business. And maintaining 20% EBITDA is not an easy target considering our size and the nature of the business. However, as I mentioned earlier, our ultimate goal is sustainable growth activity. So while we are making changes in the growth activity, we will not sacrifice our profitability or any of our financial position issue. So this is our commitment. I can assure that this is a commitment from our management. So in 2027, hopefully, we can report at that time better results than this. On Page 19, this is an update of our ongoing corporate restructuring activity. Last year, as you are aware that we had announced horizontal spin-off of the company, the structure, the holding company, and the new company. So approximately 70% will stay as a holding company, but the 30% of existing most of chemical-related business will go into the new company. So this new company will be listed as a separate company. So last week, on January 27, so we have all the clearance by the Korea stock exchange that we have passed all of those screening tests. So within March 7, we will announce for the notice for shareholders meeting, and March 22, we'll have a shareholders meeting for approval for this spin-off. Once it is done, on May 1, the company will be splitted. And on May 29, the separate company will be separately listed and will be traded in separate on the Korean Stock Exchange. So we will come back to you with any updates that we might have going forward. On Page 20, this is just a briefing on our ESG activity. In 2022, KCGS, which is Korea Institute of Corporate Governance and Sustainability, this is nongovernment-based agency. They rate in order to brand company's activity, and they have reviewed OCI and they have granted for A grade for which is a high grade for our ESG effort. And also 14 consecutive years, OCI has been selected as the Dow Jones Industry Korea Sustainability Index for 14 consecutive years that we are very proud of. So on behalf of the management of OCI, we will pay attention to it, and we will do our best to comply with all those ESG-related requirements going forward. So this is about the end of the earnings release. If you have any questions, we'll be more than happy to answer the questions.

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

Okay. Thank you.