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

Good morning and good evening. First of all, thank you for joining this conference call. And now we will begin the conference of the Fiscal Year 2023 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 2023 first quarter earnings resulted by OCI.

Good afternoon. This is Woo-Hyun Lee. I'm the Vice Chairman of OCI. I will be charged off for the earnings release for first quarter of 2023. I will go with the Page 4. So before we start, as you might be aware, there was the shareholders' approval on the corporate spin-off. So the company will be split off to one part portion with the OCI Holdings and another company will be OCI Company that will be predominantly will be in the chemical manufacturing business. The split will be done on May 1. So this earnings release is going to be the last earnings release before the split off. So when we look at on the Page 4, this number is going to reflect what's the number look like at a holding company level alone before it turning to some holding company structure. So when we look for the independent number only, the first quarter revenue was KRW719.5 billion, and operating income was KRW203.6 million. However, if you go to Page 5, this would be a lot more familiar the figures that should be in line with what has been as a consolidated number and based upon those -- the pre-spin-off basis, the first quarter revenue is KRW1,195 billion as a revenue and operating income is KRW251.8 million, so this is -- the revenues are about 10% down and operating income went down by 27%. Due to the several reasons, and I will get back to you in divisional section, but mostly the polysilicon price was fluctuated when overall the solar PV, the market fluctuate during the Chinese Lunar Year, the time which was the last week of January and first part of February. So there was a substantial some turmoil in the overall solar PV market and also for domestic, the factor was there were substantial increase in domestic electric price that actually inevitably caused a negative impact on the earnings. And furthermore, starting from last December, the Korean government has reduced SMP, which is system marginal price for electricity wholesale pricing and starting from December 1 last year, the government decided to cutoff by almost 30% of the revenue of all the power generation business that inevitably caused a negative impact on our business. So this KRW1,195 billion of the revenue with KRW251.8 billion of operating income has been the result of those -- the negative impact, but however considering all those negative factors, we were able to minimize those negative factors that we were able to produce quite decent performance like as we reported to you. I will go to Page 6. This is going to be our -- pre-split-off the basic chemical business that includes the solar PV, the polysilicon and also the semiconductor grade polysilicon and also semiconductor grade, the chemical business. The first highlight is the sales and operating income fell down and volume-wise dropped by 10% and also ASP also went down by 10% due to substantial turmoil in every pricing of the solar PV value chain. However, starting from March, the pricing for most of solar PV value chain has been stabilized, and that actually helped to maintain certain profitability. And other, the domestic business-wise, the profitability has been negatively impacted by increased electricity price, that's almost like 41% year-over-year. So there has been some of the negative impact on the first quarter. For outlook for the second quarter is, we anticipate stable market demand for polysilicon. So despite all the incoming excess capacity out of China, however, due to strong demand for clean module, that means the solar PV module mainly out of non-Chinese value chain has been actually quite strong. So despite that there might be certain price adjustment, the demand for the non-Chinese polysilicon market has been stable and also quite strong. So we should be able to maintain certain profitability in second quarter. Going to Page 7, petrochemical and carbon material, this entire unit will move to OCI, the new -- the operating company. So the first quarter, we have recorded KRW518 billion of revenue with KRW39 million of operating income. That market was somewhat -- we went through another turmoil in this sector because our petrochemical and the carbon material, the pricing of these products are highly correlated to oil price movement, which was somewhat quite up and down extensively in the first quarter. In the meantime, the overall demand for petrochemical products globally has been quite weak due to some of the concerned recession in many key markets. So we experienced both the increased cost for feedstock, but also unstable market. So we had a somewhat sluggish time for this market. However, we were able to defend some of the pricing for our key products that actually enable us to generate a fairly decent return on this business. Second quarter will be even more the turmoil because as you might be aware, many of those petrochemical complex has been downsizing their operation. So many of our competitors outside of Korea, they lowered their operating rates by minimum 20% or as low as 40%. So many of the market is currently running in a much lower capacity utilization, that issue because many of our -- the company are concerned about some of the weaker demand going forward. So we are paying attention to the supply side and also the demand side. So we will try to make sure that we maintain a certain profitability despite all the turmoil in the market. I'll go to Page 8. Energy Solutions is made out of pretty much two separate business. One is OCI SE that is combined heat, the power producer in Korea in Kunshan area and their business has been negatively impacted by the adjustment in SMP, the pricing, so-called [indiscernible] implementation of SMP cap. That means the government forced the market mechanism, so the power generation player like OCI, we have just immediate 30% revenue cut by the government intervention starting from December and this will likely last until end of November this year. So we have been negatively impacted on this part. However, in the Tamang area due to rising of energy cost, many of the battery related company, those battery recycling player or those who are making the advanced anode product for battery are coming to in Tamang industrial zone where OCI has an exclusive right to serve some of the utility service. So going forward, the market -- the perspective on our power generation business in Korea is actually getting much better and better year by year. However, at this moment, we have been negatively impacted due to the sudden implementation of SMP Cap announced by Korean government in November last year. So for the next two quarters, we will be likely impacted by the SMP Cap. And that's the domestic part. And second part, our Energy Solution, this includes the solar power generation, the business and also MSE, emission solar energy that's our US subsidiary for module making. So they are doing quite well and we believe they will continue to do well, and this will be another growth engine for OCI. And so this is a snapshot of first quarter. But second quarter, as I mentioned earlier, the SMP Cap is still there in Korea and this is actually negative part for our profitability, but we already announced 110-megawatt solar project was sold through our international buyer and we are pretty much confirmed to monetize another 310 megawatt of assets that will be highly likely closed in this second quarter. So we have some of the good news and bad news. And hopefully, we're trying to improve the circumstance going forward. In Page 9, urban development, business-wise, nothing special. And so most of the P&L is just based upon the sales and operating income recognized from those construction for these residential units that we sold in 2021. So ever since we have not gone into any additional residential unit sales yet due to sluggish market economy and also, we still have some regulatory issues that we need to settle with [indiscernible] government. So we anticipated all the remaining regulatory issue will be done and hopefully end of this quarter or at least end of third quarter. And once we complete all of the regulatory approval done, then we will look for some of the ideal time for our residential sales activity because still the housing market in Korea is not so active now. So we most likely we will not go into any residential apartment sales activity end of this year [Technical Difficulty] as early as first quarter next year or realistically for the second quarter of next year. So until then, our activity in this urban development has been quite stable and quite limited, and this will likely stay that way. On to the financial position, which -- I mean, normally, we used to call the [Technical Difficulty] Page 10. Nothing substantial changes because we have been recording some of the positive cash flow. So most of our -- the financial position paper has been improved mostly. And as you can see, the net debt number in the bottom of those table, you can see that KRW534 billion of net debt end of last year, it went down to KRW173 billion. So hopefully, by end of next quarter or going into third quarter, hopefully, we will see some negative net debt number going forward. And as I've been doing this earnings release announcement for more than past 10 years, I have been always pressed out the importance of a sound financial position and we will make sure that despite our business, we'll be put into OCI Holdings and OCI for the operation business and discipline for managing the sound financial position will be to stay there and we'll make sure that we will continue to improve. So this is the end of the earnings release, and I go to some of the business updates, going to Page 12. And you can see on those at the table, we have been experiencing high roller-coaster or something like the turmoil in the pricing in every solar PV value chain. The reason it happened on January is in the US and Europe, the product mostly exported from China that was paid in the US customer office and also European customer office was released by end of actually January, that actually caused just -- to inevitably cause oversupply situation in every product category, that actually drove many of the price down quite substantially in the end of January. However, after two weeks from the release of those constrained inventory, the pricing has been stabilized and all the supply and chain and supply and the demand incubated has been somewhat stable. And as you can see on the page too, and this has been some -- it's a trend that the polysilicon made in China and polysilicon made outside of China that the pricing premium on the non-China-based polysilicon pricing has been actually -- there has been -- the premium on this non-China-based polysilicon has been strong because this is mostly due to the strong demand for clean module in the US and also the Europe that, I mean the many institutional investors wish to secure all the important solar PV, their patent components and source from exclusively from non-China basis. So the pricing premium for the non-China-based polysilicon has been quite strong, and we anticipate that this premium will last fairly in some time. And for OCI, we are supplying to our customer and our more than two-third of our sales volume, it will be actually has been sold close to the premium pricing rather than remaining on the China product. So we would like to do our best to make sure that our quality stay ahead of our competition and also, we would like to maximize this marketing opportunity on this non-China-based polysilicon pricing. When I go to the Page 13, solar PV installation is also still looking strong because due to the war in the Ukraine actually spark the need for energy independence and that actually embark the strong demand for the PV solar, the value chain. So PV solar industry in general experienced 40% year over growth in [2021] and 2022 and based upon our interaction with the market and supplier and also our vendors and our customers, we anticipate the key market in the world will continue to grow minimum at least 10% per annum for the next five to 10 years. So the installation demand is actually quite strong that only the concern from the market is right now a certain part of the US and certain parts of the China and also certain part of Europe, there the supply of renewable energy power generation has been too much dominating source in terms of the supply volume. So there has been potential risk for curtailments on -- because of the congestion in grid. So the need for yes, the word collaboration with ESS for the renewable energy has been more important and that is becoming critical in order for this entire industry to continue to grow. So OCI will also pay attention to the need of working together with ESS, and we will make sure that we can stay ahead of those competition. On Page 14, this is a simple business update that our -- we went through the rating agencies revaluation on corporate bond on OCI and we're proud to announce that our rating has been upgraded from A0 Positive to A+ Stable and this is a fairly high and very stable status for -- and confirmed by rating agency and we're very pleased to be back to A+ Stable because -- so we were able to be this position in almost in 11 years and we will make sure that at least do we stay here or hopefully, we can actually to even upgrade from a lot more from this. And second is High-Purity Phosphoric Acid business, this will go into our new operating company. So 25,000 tonnes has been in full operation, and we're actually expanding our market and we have been selected as a prime supplier of this phosphoric acid to Samsung's new foundry factory in Taylor, Texas and we will start supplying the product first half of next year and this will be the beginning of our new expansion in the semiconductor grade, the chemical market and hopefully, we can announce more of this [indiscernible] some of the new expansion of our semiconductor-related product business. In case of solar-grade polysilicon, the OCI, the Malaysia factory has been working diligently to improve our quality and also to make sure that maximizing some of our production capacity, and we are currently making serial expansion because it's not economical and also it's a bit too expensive to making some just one lump-sum big expansion. So we are making pretty much about 10,000 tonnes per annum type of some serial expansion in Malaysia and make sure that we lead in this non-China-based polysilicon supplier market and also make sure that we are to take advantage of this clean module demand, this situation. And solar PV module, which is done by our MSE, which is our US subsidiary located in Texas and this second quarter will be completing second phase expansion that will make us to 350 megawatts of capacity and we will continue to work hard to complete our third expansion by end of this year. So early next year, we'll be able to have minimum 1 gigawatt of the capacity that will be predominantly serving for the faster-growing lucrative US market. And also solar PV project, as I mentioned earlier, in April, we already completed sale of 110-megawatt project sales and also in the first half, which is this quarter, we should be able to sell two more projects that will be close to 310 megawatt, the project scale. So additionally, we already secured over 1 gigawatt of some of the pipeline. So this will make us -- we're currently being number one power generation developer in Texas and we are diligently working hard to being the more substantial player in lucrative US market. And hopefully, I mean, this will turn into another growth engine for OCI. And Page 15 is something, I just illustrate how volatile in our -- the coal and petrochemical market, as you can see, some of the pricing has been crazy, actually goes up and down and we had some issue of some securing some -- the feedstock in a stable pricing, I mean, that has not been on the case for the first quarter, and it's going to be the second quarter because the global market has been tumbling so much. And so we will do as we will try to stabilize our supply source and also try to do more the aggressive marketing, try not to keep any inventory anytime long. So we should be able to monetize as soon as possible to try to minimize the impact of some of the market fluctuation. So the last one would be the Page 16, and this is going to be the snapshot of the corporate split-up process. So as I mentioned earlier, the OCI will be split into two companies. So surviving company, our name will be changed to OCI Holdings and the split new company will be the operating company, but they will assume the OCI Company name, so the new company will assume our old name and the surviving company will change our name in this way and this whole process was approved by our shareholders' meeting in March 27 and our company shares will be stopped trading this Thursday and this two separate company will be split on May 1 and our two separate start of two companies will be re-listed in Korean stock market on May 30. And after that, there's going to be a tender offer of the shares for the new company and we anticipate that in the fourth quarter, then the holding company will be structured, will be completed, and the new governance structure will be completed. So on Page 17 is the financial impact on each businesses. So OCI Holding and OCI, the both company will have this type of the financial structure. And starting from this July, the separate company will have independent earnings release going forward and we will come back to you in three months and try to update you what happened and will also share more about some new companies perspective going forward. So this will be the end of my -- the earnings release, and I have been doing this -- the earnings release since second quarter of 2006. So we have been doing this for over like 17 years. So this will be my last earnings release and starting from this July, the other management team member of both OCI Holdings and OCI will have separate earnings release. So thank you very much for your support, and I will take any questions if you may have.

Since there are no participants with the questions, we will now end the Q&A session. For any additional inquiries, please contact our IR department. This concludes the fiscal year 2023 first quarter earnings resulted by OCI. Thanks for the participation.

Thank you very much.