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

Good afternoon, everyone. Welcome to S-oil's Fourth Quarter 2020 Earnings Conference Call. I would like to thank you all for joining us today. I'm Yong-kuk Cho, the Treasurer of S-Oil Corporation. I wish you all a bright and prosperous New Year. Participating in today's call with me will be IR Team Leader, Mr. Gwang-Cheol Ko and other IR team members. Especially today, Mr. Bang Ju-Wan, the CFO, is joining this conference call to communicate with you directly. Before Mr. Ko presents our fourth quarter's financial results, I would like to start with a brief review on this environment and our performance. Last year, the company had a difficult time in the face of unprecedented crisis caused by the global COVID-19 pandemic. The worldwide lockdown measures to counter the spread of the pandemic led to a collapse in demand for oil and chemical products, which forced the company to record our largest operating loss last year. During the crisis, all the members of the company gave their best they could and worked hard to make internal process more reliable, profitable and efficient to put the S-Oil on a strong footing post COVID-19. Thanks to gradual recovery of demand and all our efforts like this, the company's quarterly earnings have continued to improve since the big loss in the first quarter. Eventually, the company's fourth quarter earnings turned to positive and marked the exit from the -- from our long-term of deficient. Now the time of hope is just around the corner for everything to return to normalcy. With the development and rollout of the COVID-19 vaccine, global mobility will be picking up and the demand of refined products will be revived robustly. Therefore, refining margins are expected to rise gradually and rebound to pre-COVID levels in this year. Also, the company would be able to capitalize on the market condition improvement throughout this year without any shutdown of major plants for planned maintenance. Next, I would like to share the company's future growth strategy to prepare for uncertainties in the future business environment and respond to rapidly changing global trends, including energy conversion and carbon emission control. Late last year, the company newly [ announced ] Vision 2030, the most competitive, creative and clean energy and chemical company and the strategic directions to attain the vision. First, the company will enhance cost competitiveness and maximize value for existing business by way of cost disruption, safety and reliability improvement and digital transformation across business activities. Second, the company will expand petrochemical business for mid- to long-term growth with a goal of doubling its petrochemical portion in 2030. In this regard, our company plans to carry out Phase 2 petrochemical project that will further increase the company's petrochemical business in continuously growing Olefin Downstream. In addition, the company will seed future growth engines in new business areas, such as hydrogen, fuel cell, recycling and carbon emission-related business, which have high growth potential. Lastly, the company will keep strong commitment to environment, social and governance management in all business activities. In particular, to become a more responsible corporate citizen, the company will reduce carbon emissions from its plants. With this, I would like to close my presentation. Again, thank you all and ask for your interest and support for the company's sustainable growth. Now I will hand over to Mr. Ko. Mr. Ko, please go ahead.

Thank you, Mr. Cho, and I want to add my welcome to all of you out there. Before starting, I'd like to draw your attention to our quarterly statement. 2020 fourth quarter as well as full year financial results are provisional, and 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 statement, which may involve risks and uncertainties. Now I will start today's presentation with fourth quarter financial results on Slide 4. We delivered KRW 4.3 trillion in revenue, 9.8% quarter-over-quarter advanced, owing to not only volume increase but also price demand. So selling prices went up 3.4% quarter-on-quarter on higher crude price, while sales volume expanded around 7% due to full operation of crude distillation units amidst a continued demand recovery. Operating income was in the black after the lows in 3 quarters in a row, posting KRW 93 billion. The quarterly profit achievement was meaningful, in that in [ March ], the company has been emerging from long and harsh impact of COVID-19. With crude price consecutively moving up, inventory-related gains of crude were not as much as in the previous quarter. So margin was estimated at KRW 67 billion for this quarter. Refining margin continued improving marginally, whereas nonrefining business was fairly good, thanks to robust market centers of lube base oil and olefin products. Meanwhile, the company's [indiscernible] operation throughout the quarter due to timely completion of all maintenance work in the third quarter, which enabled the company to deal with fourth quarter market situation smartly and optimally. The low operating income combined with our performance also advanced by KRW 50 billion, mostly on increase in FX gains from strong won appreciation against the U.S. dollar. As a result, the bottom line, first quarter pre-tax income recorded KRW 181 billion, expanding more than KRW 150 billion compared to last quarter. Moving on to the next slide, our financial status. Year-end cash balance was around KRW 1.1 trillion. Compared to the end of 2019, cash on hold increased by KRW 530 billion [indiscernible] and decrease of borrowings. It was attributable to mainly working capital reduction from lower product price and won currency strength and deferred tax payments. As a result, net debt balance meaningfully reduced by more than KRW 1.1 trillion with net debt-to-equity ratio dropping to 88%. However, profitability and EBITDA founded to be negative numbers. ROE and ROCE recorded minus 13% and minus 8%, respectively, while EBITDA was minus KRW 603 billion. Now moving on to the fourth quarter performance by business segment on Slide 6. In refining, sales revenue expanded to 3.5% quarter-on-quarter, while operating income further contracted by KRW 32 billion from the previous quarter, posting minus around KRW 90 billion. With demand recovery slowing, market margin demand at low end of the previous quarter, while investor-related gains increased to KRW 65 billion. On the other hand, petrochemical sector posted positive operating profit of KRW 73 billion, making up for losses from third quarter, expanded revenue 28% quarter-on-quarter increase. Further demand in PP&PO and full operation of ODC plant mostly contributed to the performance improvement. Lube business posted KRW 110 billion of operating income, quarter-on-quarter increase by KRW 13 billion and maintained a high op margin ratio of 30%. Turning to capital expenditure and refinery operation. In 2020, KRW 397 billion was spent on capital expenditure. So [indiscernible] cut budget by KRW 93 billion. During the year, the company strictly limited its CapEx execution to items only to enhance operational availability and safety and environmental management. Following 2020, the company established 2021 CapEx budget based on authority policies, further reducing the budget to KRW 252 billion. As the construction of [indiscernible] an offshore Nordic facility was completed last year as planned, most of the budget items for this year are minor and required for the company's operation and sustainability. And also budget for maintenance is minimized as there is no planned maintenance for major plants. Meanwhile, annual depreciation cost for this year is estimated at KRW 607 billion. Looking at maintenance for fourth quarter and 2021. As mentioned earlier in the previous quarter, there was no maintenance across the refinery. Because of that, the company could fully run all the plants with the exception of PX units, which were subject to weak PX market. For the New Year, the company does not have any [indiscernible] plant or major plant as one part of multiyear maintenance was finished in the previous year. The company expects stable all year-round operation of the main plant will contribute to meaningful improvement in performance this year. Next, let me explain fourth quarter market environment and 2021 outlook by each business segment at Slide 8. Looking at refining business first. Singapore refining compression margins remained weak, as a demand recovery was slowed by recurrence of the lockdown measures, posting minus $1.7 per barrel on average. A global energy research firm estimates in the fourth quarter, global gasoline demand recovered to 93% of oil global level versus 92% in the previous quarter, while demand for middle distillates including jet/kero is 88% versus 85%. For 2021, we think the increase in COVID-19 vaccination will drive global mobility and [indiscernible] the pace of demand recovery, especially for transport fuel, which will step up refining margin gradually. Meanwhile, the price pressure from new competitive during this year would be limited with all economical plans continuing to your market. Moving on to our markets in petrochemical sector. The spread continues to be squeezed by full demand for downstream products remaining at $134 per ton on average, while benzene spread rebounded strongly to $120 per ton on the back of a robust recovery of demand for benzene derivatives. Looking forward, this year, the spread is expected to improve somewhat. Several new PTA plants in the region and PTA demand recovery would increase demand for PX, but overcapacity would hamper the meaningful expansion of PX spread. Benzene spread will move steadily at current level as the demand growth from normalizing downstream market would be mostly offset by supply increase from new naphtha sector addition. Turning to olefin market and next slide. PP and PO spread of naphtha both expanded further due to tightened supply by unplanned or planned shutdown of plant amid healthy demand for consumer goods from automotive, electronics in the region. PP spread rose to 621, while PO spread tightened by more than $600 per ton to 1,600 during the first quarter. This year, PP spread is forecast to be pressured by sizable capacity expansion, while PO spread would stay solid on robust polyol demand. Lastly, turning to lube base oil market at Slide 11. Lube base oil spread improved as maintenance of major plants further tightened the supply. In 2021, the healthy spread would be supported by consistently increasing demand for high-quality products, although tight supply would be eased as refiners increase utilization rates. That concludes 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 Young-chan Baek from KB Securities.

[Interpreted] My name is Young-chan Baek from KB Securities, and I have 3 questions. The first question is about the inventory impact. Looking at the Dubai prices in 4Q, the Dubai prices increased the most in the 4Q. However, the inventory impact was lower than the impact in the third quarter. And my second question is about the refining margin. I would like to know the outlook for the refining margin in 2021 by quarter. And my third question would be the details about the second phase of chemical projects. Could you elaborate more details about the second phase chemical project of your company?

[Interpreted] I would like to answer your first question. The first question is about the reasons behind the lower inventory impact compared to the third quarter and fourth quarter. When we look at the prices of Dubai in the third quarter, Dubai prices increased dramatically in the third quarter. However, in terms of Saudi Arabian lives that we report in the majority portion, in the third quarter, the price increased by $12. However, in the fourth quarter, the price only increased by $4. This is the main reason behind the differences between the inventory impact in the third quarter and fourth quarter. So when we look at the Saudi Arabian live prices. Up to May, the OSP has been dramatically decreased and the prices were normalized in the third quarter. And it's due to the Saudi -- that's why we have the high inventory impact in the third quarter. And however, in the fourth quarter, the prices only increased by minimal compared to the third quarter. That's why we have less inventory impact in the third quarter -- in the fourth quarter compared to the third quarter. I would like to touch up on the second question. And the second question is about the recovery of the refining margin. So overall, we believe that the margin will recover during this year. However, I believe that it will be difficult to give the price out -- precise outlook for each quarter. However, I believe -- what I believe is that the vaccination rate across the globe will impact this year's flow of the refining margin recovery. So that means when more countries are vaccinated, that means that the more recovery we will see in this year. So again, global institutions expect that the significant number of people will be vaccinated in the second half of this year. So that means that we will see a slow growth in recovery in the first quarter and the main recovery will be witnessed in the second quarter of this year. So again, according to a number of energy institutions, they are expecting that the Asian region will witness the bestest recovery in this year. So in that extent, I believe that our refining margin will increase dramatically in the Asian region compared to other regions in the globe.

[Interpreted] Good afternoon. My name is Ju-Wan Bang. I'm a newly appointed CFO of S-Oil. I would like to talk about the second phase chemical project of our company. As a new future growth engine and in order to expand our profitability, we are planning to build steam cracker along with downstream by using TC2C technologies. However, due to the spread of COVID-19, as lockdowns are implemented throughout the countries in the world, our front-end engineering design has been postponed. So during this period, the company has been exploring ways to increase the economics of the project, including improving the production yield. And also, we are looking for the ways to reduce our investment expenses along with operation expenses. And entering into this year, many countries are producing vaccines and many people are vaccinated throughout the world. Therefore, we are now ready to start the basic design of the project. So I believe that by the end of -- by the second half of 2020, we believe that we will complete the FID. And also what we expect is that we would like to complete the construction of the project by the end of -- by 2026. As I have commented, the company is looking for various ways in order to reduce our investment expenses. Initially, we planned that our investment will be about KRW 7 trillion. However, with these activities, I believe that the investment expenses can be dramatically reduced. So when the basic design is completed, we will like to conclude the final prices for the investment and also our execution plans. This is the end of my answer for your third question.

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

[Interpreted] My name is Jae Song Kyoung from Hanwha Financial Investment. I have 3 questions. And first question is about your lube base oil sales. If you look at the Page 6 of your presentation, the sales has increased by 36%. I would like to know the reasons behind this drastic change. And my second question is about PO. And I see that you have enjoyed a dramatic increase in petrochemical business. And I think that the main driver of the good performance this year -- last year was PO. And I would like to know how much PO accounted for your petrochemical business. And again, I would like to know the reasons behind the PO's strong performance in terms of demand and supply. And my third question is about new businesses. I believe that Saudi Aramco is joining with Hyundai and Hyosung in order to pursue hydrogen or fuel cell businesses. And do you have any plans to collaborate with Saudi Aramco in terms of these new businesses?

[Interpreted] For the increase of sales in lube base oil business, we have 2 factors behind this good performance. First, our production has been increased Q-on-Q. In the third quarter, our one-offs, our lube base oil unit was in turnaround. So therefore, now during the fourth quarter, the unit went on normalization and our production has -- production increased. The second reason would be, obviously, the demand has -- demand increased across the globe. And during the second quarter, due to the impact of the COVID-19, we have suffered from decreasing demand. However, during the third quarter, we have seen the recovery of demand. And in the fourth quarter, again, we witnessed the substantial recovery of demand. In order to meet the demand, we operated our units for -- at 100%. Again, the prices increased as the crude oil prices increased. So therefore, our demand and supply factors both impacted the increase of sales in our lube base oil business. For -- in order to answer your second question, I would like to say that it is regrettable that we cannot give you the accurate numbers for the contribution of each product of petrochemical business. However, I can say that in overall PO, PP and benzene, they contributed the most in the great performance of petrochemical business in the order. Maybe -- I would like to go into the details. In terms of PX, even though they have seen some recovery, we didn't see -- we didn't enjoy a great addition from the PX. And also, if you want to look details about how our product portfolio is, maybe you can check up our production capacity by each product. I would like to touch upon the third question you asked about the new businesses that are pursued by Saudi Aramco and the company. And after the Shaheen project that has been planned, the company will be working on to find out ways to secure our future growth engines. So if you look at Page 15, 1-5, of our presentation, you can see the appendix with the list of our potential new businesses. However, our company will not be limited to those list of the businesses that we are showing. We will explore more opportunities for investment and for also new businesses. And as you commented, our shareholder, Saudi Aramco -- with Saudi Aramco, we are closely cooperating with our major shareholder. So for several projects, we have signed MOU. However, it is regrettable that we cannot give you details about what kind of projects we are signing on MOU. However, I would like to make sure that we are closely cooperating in order to create synergetic effects after Shaheen project. And also, we would like to look out for many ways for our sustainable growth of the company. And I would like to add more comments for the second question regarding PO's strong performance. In terms of demand, in the fourth quarter, we have seen a dramatic demand recovery in China, especially in the industry of -- industries of automobiles and home appliances. So major demand growth was driven by China's demand increase. And also in terms of supply, there were some units of the refined -- some units, which went on T&I. Because of the T&I, we have seen a tight supply in the region. Therefore, we have enjoyed great performance during the fourth quarter. And I believe that we will see this great performance of PO in the coming months. However, I believe that the supply will increase after T&I is completed. But I believe that China will have their economy recovered and also the Chinese government is planning to give some more stimulus package for their economy. So I believe that this demand for automobiles and also like consumption will increase in China, which will lead to increase of demand in -- demand of PO. In order to make the most of the favorable market situation of PO, usually, we produce 300,000 tons of PO that is our capacity of unit. However, we overrun our units by 30,000 or 40,000 during the fourth quarter. So if this favorable market continues, I believe that we will operate our PO unit at a higher rate.

The following question is by Oscar Yee from Citigroup.

Mr. Bang, congratulations on your promotion to CFO. It's Oscar. Could I ask a bit more about your new business strategy? So in terms of the weight of the investment, do you consider this kind of investment as a sort of -- more sort of passive role, meaning you take a stake in this, like, future projects? Or you plan to do it just by yourself internally? Or do you plan to do more sort of becoming a bit more aggressive on the M&A side given you do not have the expertise in those sort of new business areas. So I just want to hear a little bit about your thinking behind this new business development? And second question is just more on the sort of financials. Could you tell us about what is the sort of FX impact for your 4Q on the OP side given won has appreciated a lot. So there should be some sort of negative impact, right? So I want to know roughly what the number is.

[Interpreted] Thank you, Mr. Oscar. [Interpreted] After Shaheen project, the company will be looking for various ways to maximize our profit and also maximize our shareholders' value. We have not -- we are considering various investment options. But at the moment, we have no confirmed ways to make our investment in new businesses. We can do M&A. And also, we can build up our own capacities -- capabilities in order to enter into new businesses. However, at the moment, we have not confirmed any detailed directions in order to enter into new businesses, but we will look into the essence and also the type of new businesses when we are going to decide the investment option. So I would like to answer your second question regarding asset impact on OP. During the third quarter, we have seen strong won, appreciation of Korean won. Therefore, we had negative impact of KRW 90 billion on our operating income. This is the end of our answers for your questions.

[Interpreted] This is Treasurer, Y.K. Cho. Since we don't have any further questions, we would like to wrap up today's conference call. And if you have any further questions regarding our materials or any other questions, please contact our IR team, we would like to answer your questions. And also, I guess, due to the COVID-19, everyone is suffering. So I -- but I hope that we can remain healthy, and we can see you again for the next conference call. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]