S-Oil Corporation (A010950) Earnings Call Transcript & Summary

I would like to thank you all for joining us today. I am Cho Young-Il, the Treasurer of S-Oil Corporation. I am glad to be here to communicate with you. Your continuous support will be highly appreciated. IR team leader, Mr. Ko Gwang-cheol, and other IR team members are with me here. Before Mr. Ko presents our second quarter financial results, I would like to start with a brief review on business environment and our performance. The second quarter was another worst quarter but meaningful in that its recruits the recovery from the prolonged stagnation initiated by COVID-19 pandemic. From the second quarter, oil demand and oil prices started to recover on the back of a resumption of businesses and industrial activities across the globe. The company's operating loss significantly reduced from the previous quarter, thanks to the rebound of oil prices, despite downward pressure on refining margins in the midst of massive product inventory built up in the first quarter. Moreover, solid level of PP&PO and lube base oil margins contributed to the company's profit, partially offsetting the losses in refining businesses. Looking ahead, the business environment would continue to improve further as the global economy is expected to steadily get out of the impact of the COVID-19. Refining margins would recover further, and hedge available PP&PO and lube base oil margins would remain intact on the back of demand recovery. Finally, I would like to highlight the company's active responses to the unprecedented market conditions caused by the spread of COVID-19. First, coping with the financial crunch, which has now significantly eased down, the company has secured sufficient liquidity available. And we will keep enough liquidity in preparation for uncertainties for the time being. Second, we are focusing on things we can control and bring our best to strengthen or improve them, such as product yields, energy efficiency, minimization of nonessential expenditures in CapEx and OpEx, facility availability, activities for safe environment. I believe the worst situation is already behind us. We will continue to do our best to strengthen our competitiveness for sustainable growth through our all business factories. Again, thank you all for joining us today and keeping interest in our company. I would like to conclude my presentation here. From now on, Mr. Ko will take you through presentation on the second quarter financial results and third quarter business outlook.

Thank you, Mr. Cho. And I want to add my welcome to all of you. Before starting, I would like to draw your attention to our cautionary statement. Second quarter financial results are provisional, and thus, the results are subject to change after external auditors review. Also, during the course of this conference call, we will make forward-looking statements that is based on our current expectations, assumptions, estimates and projections. We caution you not to place undue reliance on any forward-looking statements, which may involve risks and uncertainties. Now I will start today's presentation with financial results on Slide 4. We delivered KRW 3.4 trillion in revenue, a 34% quarter-over-quarter decrease. It is because average sales price were lowered around 38% quarter-on-quarter by crude price declines. Although sales volume increased 6%, thanks to the company's proactive sales activities. Operating loss rate largely diminished to KRW 164 billion, improving more than KRW 840 billion from our quarter ago due to sizable deductions of inventory-related loss. Dubai crude prices have turned up from May after falling to below $15 per barrel in April, as global demand started to recover from COVID-19 impact, while Singapore refining margin worsened quarter-on-quarter, pressured by massive product inventory as of over the past months. Since the oil prices rebound, second quarter inventory-related loss decreased to KRW 169 billion, from KRW 721 billion a quarter ago. On financial market side, easing concerns of COVID-19 impact brought won appreciation versus U.S. dollar during the quarter, which produced FX gain of KRW 34 billion below operating income line. As a result, the company reported a pretax loss of KRW 156 billion in the quarter. Moving on to the next slide, our financial status. Balance sheet also became healthier in the second quarter. Decrease in working capital requirement as well as the quarter-on-quarter sales growth remarkably increased cash balance and lowered net debt-to-equity ratio. Second quarter end cash balance was KRW 2.5 trillion, around KRW 1 trillion increase during the quarter. Whereas, the borrowings decreased by KRW 0.3 trillion. Therefore, net debt balance contracted by KRW 1.3 trillion with net debt-to-equity ratio declined to 105%. Profitability and cash flow improved as well. ROE and ROCE bottomed out, recording minus 31% and minus 19%, respectively, while EBITDA registered minus KRW 19 billion. Now turning to the second quarter performance by each business segment on Slide 6. Sales revenue in refining business declined 34% quarter-on-quarter, while its operating income improved KRW 830 billion from the previous quarter, posting minus KRW 359 billion. Demand recovery and resulting oil prices rebound was the main contributor to the meaningful loss reduction by decreasing inventory-related loss. On the other hand, non-refining business continue to record decent operating income, partially favoring loss in refining business. In particular, petrochemical sector's operating income expanded to KRW 91 billion from KRW 66 billion in the previous quarter in spite of more decreased PX spreads and ongoing maintenance of PP&PO plants. So better performance this quarter was attributable to decent levels of PP&PO spreads and some inventory-related gains. Lube business posted KRW 103 billion of operating income, which is a slight decrease of about KRW 13 billion due partially to quarter-on-quarter sales reduction, while OP margin ratio further improved to 38%. Turning to the capital expenditure and refinery operation. First half capital expenditure was about KRW 140 billion, less than half of annual budget because plant maintenance, the main budget item, is ongoing, and thus, its budget will be spent more in second half. Looking at maintenance, the company will carry out some plant maintenance in the third quarter following second quarter. Planned turnaround for #2 RFCC and PP&PO units, which started from June, will be complete by the end of July. In addition from late August, #1 CDU and Group II base oil plant will be shut down for maintenance during about 1 month. With those, all the company's planned maintenance for this year will finish. During the second quarter, CDU was operated fully to capture demand recovery and the company's improving refining margin. However, #2 RFCC and PP&PO units' run rate were lowered, caused by shutdown in June for maintenance, while lube base oil plants were operated at 80% due to reduced demand from customers in global markets. Next, let me explain the second quarter market environment and third quarter outlook by each business on Slide 8. To begin with refining business. Singapore refining compressed margin further declined to minus $1.7 per barrel. Product demand started turning up from May but refining margin bottoming out lead to demand recovery starting from June due to pressure from high inventory build-up in the previous quarter. In the third quarter, we think refining margin would continue to recover. More and more countries will join in lifting lockdown measures and reopening businesses and borders. While cautious ramp up of operation rates by refineries will draw inventory. Moving on to aromatics in petrochemical sectors. Second quarter witnessed more narrowing spread. Demand was still sluggish, while growing supply from new plants offset overall operating rate cost in the region. PX spread declined to $204 per ton on average, while benzene spread tumbled to below $100 per ton. Looking forward, in the third quarter, PX spread and benzene spread both would remain squeezed as downstream demand will recover at slow pace and expand and high inventories will continue to proceed. Turning to olefin markets on the next slide. PP spread of naphtha strongly rebounded quarter-on-quarter, thanks to relatively decent demand and plunged naphtha prices, while fuel spread remained healthy on heavy maintenance in the region. In the third quarter, PP spread is forecast to be underpinned at decent level by healthy demand from fiber and packaging sector and reduced supply from increased maintenance in China, while fuel spread also to stay as gradual restoration of downstream demand would offset supply increase from resumed operation of regional plants after maintenance. Lastly, turning to lube base oil market on Slide 11. Lube base oil spread moved flat due to the more decline of feedstock prices, although market demand weakened due to global-wide lockdown. Third quarter, the spread would be supported by a gradual demand recovery, rather by extension of lifting of mobility restrictions. With that, I'd like to conclude my prepared presentation. Thank you for listening. Now we would be happy to take your questions.

[Operator Instructions] The first question will be given by Baek Young-chan from KB Securities.

[Interpreted] My name is Baek Young-chan from KB Securities. I have 3 questions to submit. First question is about FX impact. I see that you have benefited from the increasing $1 FX rate on your operating income. So I would like to know the details of the FX impact on your operating income? And second question is about lube base oil. And I see that your operating income on lube base oil has increased by 38%. And however, when I see your spread for the first and second quarters, they seem very similar. And I would like to know the reasons behind your increasing operating income? And also, I would like to question about the outlook of the second half of this year? And the third question is about CDU operation rate. And I saw that many of your competitors in the market, they have decreased their run rate. However, in the second quarter S-Oil maintained the run rate of CDU. And I would like to know your sales strategies behind your maintaining of your CDU run rate?

[Interpreted] Yes. As you have commented, we had a positive impact of FX on our operating income, and the value is about KRW 18 billion. And yes, for the question about lube base oil operating income, the reasons behind the rising operating income on lube base oil was that we have focused on selling Group II and Group III, while maintaining our profitability. As we have commented in the presentation, we have decreased our run rate of lube base oil. And also, as you have said, the spread during the first and second quarter was very similar. And for CDU run rate, as you know, because the oil prices have plummeted during the first quarter, so therefore, we have to optimize our run rate of CDU. However, in the second quarter, as you may have noted, the oil prices have been recovering during the second quarter. So -- and also, we have positive hydroskimming margin, so we have to maintain our run rate of CDU during the second quarter. So in terms of marketing, as you know, the COVID-19 impact has been seen in a different time zone in a different time matters. So in the case of China, Europe and the U.S., in the case of China, this is a major market for our company, they have been recovering quicker than other territories. So from the middle of the second quarter, we have seen that the demand has been recovering in the region. So we have been actively conducting our marketing and sales actions. So therefore, we could recover our sales, which has been diminishing in the U.S. and Europe in the second quarter to China. So -- and also, as you know, the impact of COVID-19 has seen in the United States and Europe later than those have been seen in China. For production, the sales have been decreasing for kero and jet. So therefore, we decreased the yield for kero and jet while we have been increasing the production yield for diesel and VLSFO.

The following question is by Kyoung Jae Song from Hanwha Financial Investments.

[Interpreted] I have 3 questions to submit. And first question is about inventory losses in your refining business. So I would like to know the details about the inventory losses in the refining? And the second question is about the petrochemical business. I have seen that like some of your products, such as PX, there has been increase in operating income. So I would like to know if there has been any impact of the replacement of the product within S-Oil? And third question is about NCC investment. So do you have any specific plan for the further investment in the NCC?

[Interpreted] For the inventory losses, as we have presented, we have recorded KRW 170 billion of losses in the second quarter and KRW 720 billion in the first quarter. The difference is not because of the volume of the inventory, it's because of the changes in prices. So if you -- if it's -- if you allow, we would like to give you detailed information later on. And specifically from the refining business, we have recorded almost a whole package of the inventory loss of -- KRW 670 billion of inventory loss from the refining business. And during the last quarter, KRW 670 billion of inventory loss came from the refining business. For the petrochemical businesses operating income, you have said that PX and PTA the sales -- operating income has increased compared to the last quarter. It's because we had the solid olefins spread and while the prices of naphtha decreased through the period. So decreasing naphtha prices helped lifting the income of PX and PTA. And also, basically, the naphtha's prices has been increased during June compared to the end of March. So therefore, we had a slight improvement in the inventory impact. You're asking us about the investment plan for NCC project. But we call it [ Shaheen ] project. At the moment, we have no specific change in the project implementation. However, we initially planned to have a feasibility study. However, it has been postponed for 2 to 3 months because of the spread of COVID-19. It was restricting the movement of engineers, and it was impossible and hard for us to continue the meetings with engineers in overseas. However, we don't see that this will make a huge difference in the schedule of the project. We would like to utilize this period in order to come up with ideas to improve economics of the project. And also, we will use this time to remove any uncertainties for the project. So can have a solid plan for the project. So therefore, overall, we will continue to respond to various changes in the market. And considering those market changes, we'll like to make a final decision in the later.