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

Good morning, everyone. Welcome to S-OIL's First Quarter of 2021 Earnings Conference Call. I am Cho Yong-kuk, the Treasurer of S-OIL Corporation. I would like to thank you all for joining us today, and I wish you are doing well. For today's conference call, Mr. Ko Gwang-cheol, IR Team leader and other IR team members are here with me. Before Mr. Ko presents our first quarter financial results and market environment, I would like to start with a brief comment about the company's first quarter performance and efforts for future growth. We could all feel the importance of our normal daily lives in the COVID-19 pandemic after it lasted for more than 1 year. In the face of a long, heavy, difficult situation, we have an expectation that 1 day we would return to our normal daily lives. I am very pleased to be able to deliver good news at the first earnings release of this year that started with the expectation. In the first quarter, the company achieved significant profit improvement. Operating profit for the first quarter was the highest driver of quarterly performance in recent years. It allowed the company to move one step closer to normalizing its earnings and relieve concerns about its [ close year ] earnings outlook. Following [indiscernible] last quarter, the company's first quarter operating profit increased sharply, thanks to the stable operation of competitive [ SG ] upgrading facilities, strong [ both PO ] and lube base oil margins as well as the recovery of oil margins for major refined products amid consecutive rises in crude oil prices. In particular, the RUC/ODC facilities played a pivotal role in improving profit, while differentiating our profit structure fundamentally. So [ a high connect ] with the RUC/ODC based on propylene max technology has allowed the company to maintain our high utilization make of old production facilities which, unlike other refineries, made it possible to fully enjoy our historic profile margin of propylene oxide and lube base oil. In order to fully capitalize on the record high margin level of both [ polyol ] and lube base oil, the company [ recently lapped up ] the operation rate of #2 RFCC and PO plant up to 110%, 115% of [indiscernible] capacity, respectively. In addition, the company increased #1 RHDS production capacity by 6,000 bd to 48,000 bd, which increased [ high-value added PO ] production. With these efforts, the company has successfully emerged from the slump caused by COVID-19, and this strength of earnings recovery will continue for the time being, along with the normalization of demand for major products, especially gasoline and diesel and the full operation of the company's excellent facilities. Next, I would like to say about the company's active efforts and activities to prepare for uncertainties in the future and respond to climate changes. The company will expand the petrochemical business up to 25% of total level by 2030 through timely preparation and execution of the Shaheen project to secure sustainable growth and to be ready for beyond [ fuel age ]. At the same time, the company is saving future growth engines in new business areas, which have high growth potential. The company has invested in areas such as [indiscernible], which has strength in specialty chemicals, smart plants and advanced materials. In addition, in March, the company acquired 20% share of FCI, a fuel cell company, which provides green, reliable and robust energy solutions specialized in solid oxide fuel cell. Fuel cells is anticipated as one of the promising future business areas on the strong drive on hydrogen society [ by approval of government ]. Lastly, the company received strong commitment to ESG management in all business activities. In line with the company's Vision 2030, the company set up a carbon reduction road map to reduce carbon emissions by 20% compared to BAU by 2030, and carried out activities such as investment in eco-friendly facilities in the refinery and MOU to supply CO2 as industrial feedstock in the first quarter. There is a saying that [ output speaking ] is half the battle. The company has made a successful first half, overcoming difficult times through efforts of its members and U.S. support. The company will continuously make effort to become the most competitive, creative and clean energy chemical company based upon the business' successful start without being [ centered ]. Again, thank you all for listening, and I would like to ask you to support the company's development and growth with interest. Now I hand over to Mr. Ko. Mr. Ko, please.

Thank you, Mr. Cho. And I want to add my welcome to all of you joining today. Before starting, I would like to draw your attention to our cautionary statement. 2021 first quarter financial results are provisional, and thus, the results are subject to change after external auditor's review. Also, over 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 begin the presentation of our first quarter financial results on Slide 4. We delivered KRW 5.3 trillion in revenue, 25% quarter-over-quarter advanced, owing to high cost selling prices. Prices went over more than 30% quarter-on-quarter on higher crude price, while sales volume reduced around 6%, affected by [indiscernible] [ CFU from old economies ]. And inventory increase is due to better [ fuel weather ] in late March. Operating income remarkably expanded quarter-on-quarter posting KRW 629 billion, the best quarterly performance since the second quarter 2016. The company has made the refined product spread. Gasoline and diesel improved quarter-on-quarter. Moreover, propylene oxide and lube base oil margins became stronger, rising to very [indiscernible]. The company's upgrading facilities, including RUC/ODC and lube base oil plant were run stably and optimally throughout the quarter, whereby making the most of the favorable market opportunities. In addition, [ we provide ] in crude prices, include in [ rising months ] in inventory-related gains, estimated at KRW 285 billion for this quarter. On the other hand, the low operating income line was KRW 110 billion of FX loss on net [indiscernible] from won depreciation versus U.S. dollar, which partially offset operating income increase. As a result, first quarter pre-tax income was KRW 467 billion, increased by KRW 297 billion compared to last quarter. Moving on to next slide, our financial status. Balance sheet continue to improve as well. First quarter end cash balance was about KRW 1.9 trillion. It increased by [ KRW 8.8 trillion ] during the quarter, mostly caused by sizable earnings and increasing the short-term borrowing balance from payment of tax by [indiscernible] on March end. Accordingly, net debt balance consecutively reduced to KRW 4.6 billion and net debt-to-equity ratio further declined to 76%. ROE and ROCE jumped to 23% and 16%, respectively, while EBITDA was KRW 600 billion. Now moving on to the first quarter performance by business segment on Slide 6. In refining business, sales revenue expanded 22% quarter-on-quarter. While operating income [ reaped ] by KRW 440 billion from the previous quarter, registering KRW 342 billion. It obtained profits for the first time after the outbreak of COVID-19. Due to slow or steady demand recovery, gasoline and diesel spread continue to be widened. Also, inventory related gain increased to about KRW 250 billion, with crude price rising [ consecutively ]. In nonrefining business, its performance strengthened more. Petrochemical sector [indiscernible] improving operating profit, 49% quarter-on-quarter, posting KRW 98 billion, with sales revenue increase of 24% quarter-on-quarter. Further expansion of propylene oxide spread and improvement in other market spread contributed to the better performance amid all this plant full operation. Lube business posted income advanced to 73% to KRW 188 billion. That is the widest quarterly profit since third quarter of 2011. Strong lube base oil margin and record quarterly sales drove the remarkable results in lube business. Turning to the capital expenditure and refinery operation. In the first quarter, KRW 18 billion was spent on capital expenditure. Most of them was used for minor project and construction. During the first quarter, #1 RHDS revamping work was completed to increase its capacity by 6,000 bd. Also #1 VCU, Vapor Combustion Unit, was successfully constructed and started off. So VCU, which is connected 19 storage tanks will efficiently and safely control the air pollutants emitted from the tank. Depreciation first quarter was around KRW 150 billion. As a heads up, at the previous quarter's earnings call, this year, there is no overall plan for major plants as the one-time multiyear maintenance cycle was [ the overall ] in the previous year. Looking at utilization rate of our major plant for the first quarter. As mentioned earlier, average CDU run rate rose to 94% because of [indiscernible] of lower economics. #1 RHDS unit revamping work slightly reduced the utilization rate of operating facilities in refining sector. Nonetheless, RUC/ODC as well as lube plant was fully operated to fully capitalize on very strong situations in propylene oxide and lube base oil markets. Also, paraxylene plant's run rate considerably increased to 96% from 81% a quarter ago on the improved economics in paraxylene business. Next, let me explain first quarter market environment and second quarter outlook by each business at Slide 8. First, looking at refining business. Singapore refining compression margin remained as weak as the previous quarter, recording minus $1.7 per barrel on average. However, each product margin moved in a different direction as fuel oil and propane and butane decreased quarter-on-quarter, whereas diesel and gasoline increased consecutively as global mobility and economic activities continues to improve. Due to the margin improvement in the company's main product, the company's fundamental refining margin increased quarter-on-quarter, although market margin, which is the weighted average of all refined product margin, sidelined. In the second quarter, refining margin is expected to further improve as the demand continues to recover, driven by the progress of COVID-19 vaccinations and incoming driving season. Third, new capacity impact on supply side is mostly offset by the closures of [indiscernible]. Moving on to polymer and petrochemical sector. Fuel spread went up, maintained its bullish movement, further widening to $1,640 per ton as the supply was more tightened by unplanned -- or planned shutdown of plants with full year demand strengths continuing. Meanwhile, PP spread slightly reduced but remained healthy, supported by unplanned shutdown and continuous demand robustness in packaging and medical sectors. Looking forward to second quarter, PO's further strength will likely continue. Demand portfolio in automotive and home appliance sectors would remain strong enough to offset the supply increase from couple of new PO plants. PP's spread is forecast to stay at decent level by global demand. Turning to other markets, next slide. PX further recovered to $185 per ton on average, driven by demand improvement of polyester chain products, and supply disruption from planned and unplanned plant outages. Benzene spread strongly rose from $120 to $184 per ton on the back of increase of demand from downstream sectors, such as [ Thailand ] and [indiscernible] due to economic recovery and planned shutdown in U.S. Looking ahead, second quarter PX spread is expected to advance more as supply demand balance will remain slightly tight due to continued demand recovery in downstream sectors. Benzene spread would move up from current level, affected by demand robustness in downstream sectors, lower regional inventories and strong arbitrage opportunities in U.S. market. Lastly, looking at lube base oil market at Slide 11. Lube base oil spread strongly up, tightening to $62 per barrel as market tightness continued amid the lower utilization rates of global refineries and fast recovering demand. Lube base oil high spread is expected to continue in second quarter as the supply shortage would remain intact from lower run rate of the global economies amid planned and planned turnaround of major suppliers. That concluded my prepared presentation. Thanks for listening. Now we would be happy to take your questions.

[Operator Instructions] The first question will be given by Parsley Ong from JPMorgan.

So I have two questions. The first question is on the lubricants division. Earnings is now the highest since 2011. Can you remind us what caused margin strength back in 2011? And how sustainable do you think the current margin is? Do you have an expectation on demand growth? And do you see potential for lubricant earnings to have actually peaked in first quarter? Second question is with regards to your dividend policy. Can you remind us what kind of payout ratio we should expect for interim and final dividend this year?

[Interpreted] Yes, for your first question on the lube base oil performance. Just as you mentioned, yes, we've enjoyed the highest margin since 2011. Just to remind you, in 2011, we were able to enjoy a sizable margin because the supply itself was quite tight. And as for this year, because of COVID-19 and the subsequent demand decline in the fuel sector, we -- a lot of the refineries had to cut down their capacity in the refining facilities to under 80%, which made the supply for the lube base oil feedstock quite tight and subsequently affected the supply of lube base oil around the world, which eventually resulted in a higher-margin in the first quarter of this year. Yes. So to answer your second question on the companies and dividend policy, we disclosed the company's official dividend guidelines in December 2019, and we have consistently honored this guideline since we made the disclosure back in 2019. And so far, there has not been any substantial changes in our dividend policies and guidelines. So according to our guidelines, we make a fair and balanced decision based on our overall consideration into our future investments to support the company's future growth, the company's financial settlements and the financial health and finally, the shareholder return. So based on all these aspects we made, we try to reach a conclusion and arrive at a decision that is fair and in a balanced manner. And also as for the number of dividends, we honor our policy of giving -- paying the dividends twice a year and keeping our dividend payout ratio at minimum 30% or above. So in respect of our performance in the first quarter of this year and the overall business environment, we do believe that we have room to do the interim dividend for our shareholders. However, the final decision-making is subject to the decision and the resolution from the Board.

The following question is by Hyunjung Park from KB Securities.

[Interpreted] So I'm Hyunjung from KB Securities, and I have 2 questions. First is, I would like to get a breakdown on the inventory impact on the operating income of each business segment. And also, I'd like to know the FX impact on the operating income of the 3 different business segments. My second question has to do with the investment plan. I know you're investing in both the existing business and a new business. Could you elaborate a little more on the company's investment plan?

[Interpreted] So to answer your first question on the inventory gains, which total about KRW 280 billion, about KRW 250 billion come from the fuel business and the remaining KRW 30 billion equal split half and half between the petrochemical business and the lube base oil business. And as for the FX impact on the operating income, it totals about KRW 40 billion, mostly coming in the fuel business. So to answer your second question about the company's investment plans to drive the future growth. As you know, we completed the RUC/ODC project, which was a mega scale project in 2018. And we're now preparing for the Phase II petrochemical project as a follow-up to the RUC/ODC project, which we call the Shaheen project. We have been in the preliminary engineering process for this project. However, the feed, the front-end engineering design was interrupted by the COVID-19 last year. But with the vaccinations rolling out around the world, we are conservatively and cautiously expecting things to pick up and resume sometime in the second half of the year and hopefully, get the final investment decision from the Board in the second half in 2022, with most of the CapEx realizing from 2024 and onwards. But in the meantime, we have been consistently doing the maintenance work and doing some investments and putting some investments to support the ESG in our refining facilities to ensure safe and reliable operation of our production facilities. And other than the Shaheen project, we are also investing in other areas for future growth, namely in the fuel cell business and some of the investments to reduce our carbon emissions and also in the venture capital. With -- and as time goes and when we have more confidence in the economics and feasibility of these investments, we plan to raise our investment.

The following question is by Hyunryul Cho from Samsung Securities.

[Interpreted] I'm from Samsung Securities. I have a question on the throughput. I know that S-OIL maintained the throughput of the CDU in the first quarter at 94%, which appears to be higher than the regional average. Could you -- if you do have the numbers, could you tell me what was the regional average on CDU throughput? And why you kept your CDU throughput at a high level? I also have a question on the PX throughput. It was 96% despite the fact that the spread was not very high at around only $180. What drove you to keep your PX throughput at such a high level?

[Interpreted] Yes. My understanding about the regional CDU throughput in the first quarter this year was about 73%, whereas we have been keeping it at stable at around 94% or higher mainly because of our competitiveness and our optimal upgrading facilities. As you know, from the second half of last year, many refineries lowered their refining capacity which caused some tightness in the lube base oil supply. But -- however, this is because most of the other refineries were not able to cover for the negative simple refining margin with their operating margin, as opposed to the company where we were able to more than offset events were highly competitive and optimal upgrading facilities, which allowed us to max produce the polymers and the lube base oil. And I believe a big part of this is attributable to the RUC/ODC that we've built in 2018. In the third quarter of last year, we did an early turnaround for the RUC/ODC to boost its performance and also raise the propylene yield. At the same time, we also improved the design capacity of RFCC and PO. So I would say then most of the performance and the operating income in the first half of this -- in the first quarter of this year comes from the RUC and the lube base oil plant, and we expect this to continue through the second quarter. And once the COVID-19 vaccinations accelerate, we also expect this to bring a boost in the demand for fuel products and the PX and eventually raise the overall performance of the company. I think your second question has to do with the PX throughput. Why we were able to keep it high, even though the spread was under $200. Well, my presumption is that all the refineries, including the company, we raised the throughput only when we believe that the unit or the complex can create income through the optimal operation. And I think this very assumption allowed us to run the PX unit at a high rate and the belief that we'll be -- that we are able to create income out of it.

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

[Interpreted] So I have 2 questions. I am from Hanwha Financial Investment. First is on the petrochemical performance. Well, it looks like in the first quarter of this year, the margin for PX, benzene, they both went up. The PX unit ran at a high rate. But even so, I believe the improvement in the petrochemical business does not seem to correspond to this margin increase. My guess is, maybe this has to do with some of the loss in the PX. Could you confirm this for me. And also, I would like to know the overall direction -- overall environment and the conditions in the second quarter of this year? And my second question has to do with the fuel business. Other than the income generated with relation to the oil price, it looks like you made a profit in the first quarter of this year as opposed to KRW 100 billion negative in the fourth quarter of last year. What makes this difference given the fact that the spot margin seems to be the same in the last quarter and in the first quarter? Does it have to do with the lagging effect or something else?

[Interpreted] So to answer your first question on the performance in the petrochemical business, as you said, the spread has partially improved. We saw a sizable improvement in the benzene spread, improvement in the PX spread, but to a smaller extent and also some improvement in the PP/PO. But as for the PP&PO, we have been seeing a recovery from the fourth quarter of this year. For benzene, I know the margin and the spread is very strong, but the portion of our benzene business is not very big. And as for the PX, although we have seen some improvement, it is still far from the boom that we enjoyed in the past. So I would say most of the performance improvement in the petrochemical business in the first quarter of this year owes to the minor spread improvement compared to the fourth quarter of this year -- last year. However, as the trend continues towards the second quarter, and particularly, if we see a pickup in the PX spread, which, in fact, has risen to $250 in April this year and it was see this continuing throughout the end of the second quarter, we expect to see a big improvement in the PX and performance and make it a big contributor to the petrochemical business. And as for our performance in the fuel business, other than our positive that we marked from an increase in the oil price. As you said, yes, we did post a positive in the first quarter of this year, while the market margin was still in the negative territory. This is largely because of an improvement in the spread of gasoline, which is a big portion of our business and also the spread increase of our products that are used as a feedstock for petrochemical products. So compared to the market margin, the company's own contribution margin posted a positive as a result of the combination of these factors. And we do not expect this trend to reverse in the second quarter or onwards since we are seeing the vaccinations rolling out and demand picking up. And in particular, as we see demand recovering, particularly for diesel and the kerosene where -- which has been on a recession for a very long period of time, once the demand for these products pick up, we expect the fuel business to make a bigger contribution to the company's overall performance.

[Interpreted] And to pick up on what Mr. Cho has said, on the gasoline spread, it was $5 an average in the first quarter, but it picked up to $9 in April. And so we are quite positive and quite optimistic about the spread, particularly for diesel and gasoline as the situation in the market improve. And we also hope to widen the gap between the company's refining margin and the Singapore refining margin, which is still at a fairly low level.

The following question is by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] I'm from Hyundai Motor Securities. I would like to know the portion of gasoline before the RUC and ODC. So the gasoline volume out of total field production, was this changed before or after RUC and ODC? Could you give me the numbers?

[Interpreted] So if my recollection is correct, in the fuel business, in terms of the volume, gasoline represented about 16% prior to RUC and ODC. After RUC and ODC, it increased to about 19%.

Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] Well, if there are no further questions, please allow me to close the earnings release for the first quarter of this year, and I hope to return to all of you with a better performance and stronger performance in the next quarter. Thank you very much for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]