SK Innovation Co., Ltd. (096770.KS) Q2 FY2025 Earnings Call Transcript & Summary

[Interpreted] Good morning. I am Chung Soyoung from the IR team at SK Innovation. Thank you for joining the company's second quarter 2025 earnings presentation. have with me SK Innovation's CFO, Geon-ki Seo; and Head of Corporate Finance Planning Office, [ Peh Giram ]; and also the management from each business. For the call today, CFO, Seo Geon-ki, will first run through the company-wide business results for second quarter 2025, followed by presentations from each business division, after which we will have a Q&A session. Please note that the numbers we are presenting today have yet to be audited by the external auditor, and thus are subject to change upon review. With that, let me invite CFO, Seo Geon-ki, to present the second quarter performance.

[Interpreted] Good morning. This is Seo Geon-ki, CFO of SK Innovation. Allow me to start by thanking shareholders, investors and analysts for your continued interest in the company. I will begin with the highlights of the second quarter 2025 business performance. Yesterday, the company disclosed SK Innovation's corporate value enhancement strategy. Recently, the energy industry has faced growing uncertainties amid the ongoing energy transition. So to overcome these challenges and ensure sustainable growth, from last year, the company has been engaging in extensive portfolio rebalancing efforts across all affiliates. In 2025, we will further strengthen the execution of our portfolio rebalancing initiatives and thereby solidify trust with customers and the market and ultimately enhance SK Innovation's corporate value. First, on the business structure side, we have decided to merge SK On and SK Enmove to accelerate growth in the electrification area, which we see as a core future industry. SK On is focused on EV and ESS batteries as well as battery-related trading, while SK Enmove is engaged in base oil lubricants, including EV fluids and immersion cooling and EVAC refrigerants. Both companies are core SKI subsidiaries in the electrification and EV-related sectors. And thus, we believe that combining their business capabilities will generate significant synergies and further enhance our competitive edge. Through this merger, we expect to generate additional EBITDA of over KRW 200 billion by 2030 by integrating the businesses and customer bases of both companies. In addition, financially, the merger will bolster SK On's financial profile by expanding its earnings power and capital base. The business and financial synergies from this merger ultimately will lead to better growth and profitability for SK Innovation as a whole. Next, let me elaborate about our financial structure enhancement plan. The core of the financial structure enhancement plan is comprehensive asset optimization and proactive large-scale capital raising. First, on the asset side, we will actively divest and also securitize noncore assets to reduce borrowings by more than KRW 1.5 trillion within this year and further reduce net debt in 2026. To establish a more stable financial structure, we will also proactively raise a large amount of capital. Based on the BOD resolution, we have secured KRW 5 trillion in capital, including a capital injection from our parent SK Inc. In addition, we are planning to raise an additional KRW 3 trillion within the year. With these efforts, SK Innovation aims to reduce net debt by KRW 9.5 trillion or more in 2025. Finally, let me share our mid- to long-term vision for SK Innovation. First, we will strengthen the fundamental competitiveness of our existing oil and petrochemical business and domestic LNG power business through operational improvements by thereby ensuring industry-leading profitability. Based on these stable earnings, we will actively foster our global LNG, power, energy solutions and battery businesses as future growth engines and also position SK Innovation as the most competitive total energy company in the era of electrification. In particular, we aim to achieve robust and stable growth. Therefore, by 2030, we will increase EBITDA to KRW 20 trillion, while reducing net debt to below KRW 20 trillion. With improved business profitability and a solid financial structure, we will further enhance corporate value and maximize our shareholder returns. We appreciate your continued support and interest in SK Innovation as it embarks on this journey of growth and innovation. Thank you. Now let me move on to the second quarter performance of our business. First, for the second quarter 2025 in terms of the top line, revenue from the battery business increased, but sales from SK E&S and the refining business fell, resulting in total revenue decreasing KRW 1.84 trillion quarter-over-quarter to KRW 19,306.6 billion. For operating profit, though higher battery utilization rates generated less losses, the refining business turned to the red due to lower crude prices. As a result, operating profit declined KRW 373 billion quarter-over-quarter to record a loss of KRW 417.6 billion. On the nonoperating side, factors including commodity derivative losses led to a decrease of KRW 555.4 billion quarter-over-quarter to post a loss of KRW 843.2 billion. In detail, FX-related gains were KRW 220.3 billion; product derivative losses, KRW 169.2 billion; net interest expenses, KRW 315.5 billion; equity method gains, KRW 15.4 billion; and other expenses, KRW 594.2 billion. Next, let me move on to our financials. As of the second quarter end, total assets stood at KRW 101.8 trillion, which is a decrease in cash and trade receivables from the refining and petrochemical business, and a decline in tangible and intangible assets due to the stronger won, leading to a decrease of around KRW 8.7 trillion. Liabilities were KRW 68.2 trillion, a decrease of around KRW 2.7 trillion, due to a decline in trade payables, but the increase in borrowings for the battery business led to net debt increasing approximately KRW 4.7 trillion. The net equity ratio was up by 24 percentage points versus last year to end at 203%.

[Interpreted] Next, we will present the second quarter performance by business line. The performance and outlook for each area will be presented by management from the respective businesses. First, for the refinery business, from SK Energy, we have the Head of Corporate Planning, [ Choo Young-gyu ], who will give the presentation.

[Interpreted] Good morning. This is [ Choo Young-gyu ], Head of Corporate Planning from SK Energy, and let me go over our refinery business for the second quarter of 2025. In the second quarter, the refining business posted an operating loss of KRW 466.3 billion, a decline of KRW 502.6 billion quarter-over-quarter. Refining margins had improved, but the weaker performance was due to lagging effect and inventory valuation losses due to lower crude prices and a stronger won. Crude prices at the beginning of the second quarter declined because of U.S. tariff policies and OPEC+ production increases and then showed large swings stemming from the Israel-Iran conflict. Prices ended at a lower level than the first quarter. Refining margins on the supply side were supported by capacity shutdowns in the U.S. and Europe, capacity adjustments due to complex and climate change and restructuring in China, coupled with the high season, which led to margins to improve from May. Next, let me share our third quarter market outlook. For crude, OPEC+ production increases are expected, but sound refining margins and solid demand driven by less tariff risk is expected to limit a decline in prices. Refining margins may experience a temporary downside pressure due to higher OSPs, but EU sanctions on the India Nayara refinery and capacity shutdowns in the U.S. and Europe are expected to continue, which should lead to solid trends continuing. As refining margins improve, we are planning to increase utilization rates versus the second quarter.

[Interpreted] Next, on the petrochemical business from SK geo centric, we will have Kim Yong-soo, Head of Management and Planning Office, present.

[Interpreted] This is Kim Yong-soo, Head of Management and Planning Office of SK geo centric. Let me discuss the petrochemical business performance. For the second quarter, lower naphtha prices improved olefin spreads, but benzene spreads weakened and Ulsan PX capacity went into maintenance, which resulted in operating losses of KRW 118.6 billion. Next, let me discuss the third quarter outlook for our key products. Aromatic spreads are expected to show limited improvements due to PX capacity utilization increases, a temporary decline in demand in July, August following the higher polyester season in the second quarter and less benzene exports to North America. In addition, for olefins, a slower actual recovery from regional downstream product demand and global macro uncertainties such as tariffs are expected to result in a weak market environment. Against this unfavorable business environment, we will continue optimization capacity utilization and operations to improve profitability.

[Interpreted] Next, on the lubricants business, SK Enmove, [ Kim So-won ], leader of business management team will present.

Let me explain the lubricants business. This is [ Kim So-won ], leader of the business management team for SK Enmove. In the second quarter, key suppliers engaged in turnarounds decreasing supply, which led to solid sales prices. In addition, lower crude prices led to better costs, which drove margins higher, resulting in operating profit increasing KRW 13.2 billion quarter-over-quarter to KRW 134.6 billion. In the third quarter, supply will decrease as TA ends and demand is expected to increase due to the summer driving season and stockpiling of inventory before the hurricane season, which should lead to stable profitability.

[Interpreted] Next, on the E&P business results from SK Earthon, we have Kim Kyoung Jun, Head of Planning and Support Office to present.

[Interpreted] Hello, this is Kim Kyoung Jun, Head of Planning and Support at SK Earthon, and I will present on the E&P business. Operating profit for the E&P business fell KRW 11.4 billion Q-over-Q, reporting KRW 109 billion due to the impact of lower global crude price and changes in the gas price versus the first quarter. In May 2025, we confirmed additional oil reserve discoveries at the Pink Camel structure in Vietnam, 15-1/05 Block, through exploratory drilling. Also at China's 17/03 Block, which is currently under production, there was additional production drilling in Q1, which drove good results. And thus, we are planning on drilling 2 more production wells in Q4 of 2025. Also, for Block 15-2/17 in Vietnam, we will be assessing the overall feasibility of the structure by drilling 3 evaluation wells beginning Q3 of '25 at the HSV structure, where we made a successful find back in January.

[Interpreted] Next, [ Cheon Yeo-noo ], Head of Financial Support Office from SK On will run through our battery business.

[Interpreted] This is [ Cheon Yeo-noo ], Head of Financial Support Office at SK On. I will run through the second quarter '25 battery business results and second half outlook. An improved utilization from U.S. plant and higher sales volume as well as growing sales to key customers in the European market, Q2 sales increased 31% Q-on-Q, reporting KRW 2,107.7 billion. Higher sales volume and easing of downtime loss following higher run rate drove Q2 operating profit improvement of KRW 233 billion, with operating loss coming in at KRW 66.4 billion. SK On thus successfully achieved quarterly turnaround on a consolidated entity basis. In the second half, U.S. will start leaving reciprocal tariffs in each nation and with OBBBA taking effect, subsidies and EVs will be removed, which works as a policy headwind in our core market, the U.S., further elevating uncertainties in downstream demand. For us, we also expect initial cost pressures as Kentucky #1 plant of BOSK, a JV with Ford, starts its production. Nevertheless, based on manufacturing capabilities built up locally in the U.S., we will closely work with customers and respond nimbly to market changes so as to do our utmost to safeguard profitability. Also, in order to actively respond to sharp rise in customer demand in Europe, we will increase utilization of European plants to safeguard profitability. And since policy headwinds and demand uncertainty is expected to continue for the time being, we decided on the merger with SK Enmove as a way to enhance our competitive and fundamentals and to solidify the foundation for mid- to longer-term growth. SK Enmove is global #1 premium base oil player and its stable profit generation, immersion cooling and EV fluid technologies will create good momentum towards fortifying SK ON's financial stability and product competitiveness. We are, therefore, committed to bringing business and financial synergies through the merger, including, for instance, developing thermal management solutions for EV and ESS batteries. Next is on SKIE Technology. For the material business, operating loss narrowed Q-on-Q on higher EV and ESS product sales to key customers, which drove marginal improvement in losses. In Q3, rise in sales mix from North America and continuing efforts placed behind growing the ESS customer base, we expect to see gradual improvement in business results.

[Interpreted] Next, presenting on Q2 SK E&S, I invite Head of Management and Planning Office, [ Kang Yoon-gwon ].

[Interpreted] Good morning, this is [ Kang Yoon-gwon ], Head of Business Planning at SK Innovation E&S. In Q2, SK Innovation E&S saw improved LNG value chain profit Q-on-Q, thanks to the efforts to secure additional low-cost LNG cargo, which helped defend profit amid declining power generation output following maintenances across the entire power plants in May. However, due to low seasonality, City Gas sales declined, driving operating profit down KRW 78.1 billion Q-on-Q, reporting KRW 115 billion. Third quarter is summer peak season where S&P is at its highest. So during this time, we will maximize utilization at the power plants, prioritizing allocation of low-cost LNG so as to maximize operating profit. Thank you.

[Interpreted] Thank you. This ends the earnings presentation. And now we move on to Q&A. We will first address several questions which we received on our website. For this earnings call, we received questions from the investors and analysts ahead of time and preselected the ones that was of most interest. And so for those frequently asked questions, we will provide the answers through simultaneous interpretation.

[Interpreted] Now the first question is on the AMPC guidance for the battery business and North America's EV market outlook for the second half of the year, I will ask [ Cheon Yeo-noo ] of SK On to address this question.

[Interpreted] I am actually [ Anh Gon ] from SK On. I will be responding to your question. In Q2, due to higher sales in the U.S., AMPC was up 60% Q-on-Q or KRW 102.6 billion, recording KRW 273.4 billion. As we move into the second half, we expect uncertainties around consumer demand will escalate on the back of tariff impact and removal of consumer tax credit following OBBBA, which are policy-driven changes. Thus, we expect North American OEMs will remain somewhat conservative in managing their inventories, which may mean marginal decline in demand. We will, therefore, respond with flexible line management plan to drive operational efficiency. And by continuing with operational improvement activities, we will endeavor to minimize the negative external impact and safeguard our profitability. We will also strengthen competitiveness in terms of product, technology, manufacturing and marketing in North America. And through new order wins and ESS business expansion, we will solidify the foundation for continuous growth into the future.

[Interpreted] Thank you. Moving on to the second question. It has to do with SK Earthon. The question is, there was a news article on SK Earthon in winning of operatorship in Indonesia and additional crude oil discoveries. And the question is on the business outlook going forward. I'd like to ask Kim Kyoung Jun of SK Earthon to take this question.

[Interpreted] As last May, we gained operatorship for Serpang and Binaiya in Indonesia, which are 2 prospective blocks in Indonesia. Both are offshore exploratory blocks, and Serpang is located northeast of Java Island, known to be the most promising prospective oil reserve site in Indonesia, where oil and gas are being produced from many of the nearby blocks. Binaiya block is located near offshore Maluku, where new exploration is most active in the eastern parts of Indonesia. We will conduct exploratory works, including geological and seismic surveys and the result of such analysis will help guide us to find structures for future drilling. We are also in the process of securing additional blocks in Indonesia, details of which I will share after we reach a conclusion. Last May, we had a press release on finding oil reserve at Pink Camel structure inside Vietnam's 15-1/05 Block by way of exploratory drilling. On this structure, we will make additional assessment and through reviews on the prospective development in conjunction with the Gold Camel structure, which is scheduled for start of production in 2026. Also in second half, starting Q3 by drilling 3 exploratory wells at the Golden Sea Lion prospect, we plan to confirm the size of the reserve. And through 2 additional production wells to be drilled in Q4 at China 17/03 Block, we can keep profit structure stable by sustaining the production volume from the blocks as much as possible.

[Interpreted] Thank you. Well, this ends the session on preobtained questions. We will now switch to live Q&A. Please do note that this session will be conducted through consecutive interpretation. [Operator Instructions]

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

[Interpreted] This is Parsley from JPMorgan. I have 3 questions. The first is, I think many of your peers have been making progress on the ESS business in the U.S. Could you give us an update on your LFP ESS commercialization time line? What is your order backlog right now? And what are some of the key technologies you have to differentiate yourself in the market? The second question is the tariff on Korea is now 15%. Could you give us an update on the status of your tariff cost pass-through negotiations and the impact on the business in second half in 2026? And the third question is after the placement as well as a perpetual bond issue, could you give us an update on the outlook for your balance sheet and cash flow?

[Interpreted] So thank you very much for your question. This is [ Cheon Yeo-noo ], the Head of Financial Support Office at SK On, and maybe I can address your question about our ESS in North America and also an update on the development of LFP. So on the ESS side, I think that, first, if we look at the overall situation, this is an area in which we started the overall preparations from this year. So of course, we're looking at the domestic market. But I think that in terms of the main target market, we have identified the U.S. as the main target market. So in the U.S. right now, with multiple customers, we are ongoing in various discussions with gigawatt level supply arrangements and supply contracts. However, this is a process that is still in discussions as of now. So nothing has been finalized yet. Once the details are finalized, I do think that we will have opportunities to share more with you within the year. So for the ESS chemistry, of course, we will be LFP-based. And in terms of the production region, we are currently planning to produce in the U.S. So on the ESS LFP side, I do think that we have developed LFP batteries for EVs in which we have been able to overcome some of the shortfalls, which would be the short-driving distances and also the output in low temperatures. So in addition to this, we also are continuously making efforts to improve the high-voltage [ mid-nickel ] situation. So as a result of this, this is something that is still ongoing in discussions. So on the LFP side, in short, I think that we can say we are developing LFP for EV and ESS purposes with more of an emphasis on the ESS side. But as of now, I think that in terms of production and also the overall orders, this is something that we are trying to achieve more progress and in a very fast manner. Maybe now I can move on to your next question, which would be about the tariffs. So if we look at the impact of the U.S. tariffs, this is not only impacting the EV vehicles or EV batteries, but is having an influence on the automobile industry as a whole. So as we look at the overall situation, as tariffs increases, of course, the overall appetite that investors -- that consumers have is decreasing. And as a result of that, profitability is weakening. However, in the case of North American OEMs, right now, I do believe that a lot of companies are refraining from increasing their sales price. So for the vehicles that have our batteries included, in terms of the overall production volume or in terms of the sales in general, it does not seem to be, and we have not seen any signs of there being contractions. So at the OEM level, I do think that they are continuously engaging in adjustments of their production and also cost strategies. And of course, from our side, we continue to have ongoing discussions with our customers. So as a result of that, I think that as of now, it's difficult to say what direction the overall impact would be in terms of the cost pass-through for the tariff issues. So as of now, it will be difficult to answer that. However, if we look at the overall situation between the suppliers, our customers and the EV battery suppliers at the end of the day, I think that we are trying to discuss and create a dynamic that would be in the best interest of all of the related parties. So in the case of the overall battery volume that we use for the U.S. right now, of course, the overall assumption is that most of it would be produced from our U.S. factories right now. And therefore, we do think that though there may be some impact from tariffs, a lot of it would be addressed. However, that have been said, in the short term, there may be costs that have been incurred or incurred. But again, utilizing the on-the-ground presence that we have and the production capacity, we will try to alleviate the risk as much as possible, including the overall situation in which we would be excluded because of the parts-related credits. Thank you.

[Interpreted] Yes. Maybe I can address the third question that you asked about the overall capital raising activities that we would be engaging in and the disclosure that we made yesterday. So maybe just to disclose the overall and recap the overall disclosure that we had yesterday. In total, it would be a KRW 5 trillion capital raising activity, of which KRW 4.3 trillion would be a paid-in capital increase, and then there would be perpetual bonds issued of KRW 700 billion. So with regards to how the activities are going to be break down for the KRW 4.3 trillion in paid-in capital increases, if we look at where the capital increase will take place, KRW 2 trillion will take place at the SK Innovation level, KRW 2 trillion again at the SK On level and then KRW 300 billion at the SKIET level. In addition, the KRW 700 billion perpetual bond will be issued at the SK Innovation level. So if we look at the impact that this total KRW 5 trillion capital raising will have on our balance sheet, from a balance sheet perspective, it will have the impact of increasing our cash and also paid-in capital. And in terms of the cash flow situation going forward, we do believe that it will draw down or decrease the net debt level. So this is a view that we have formed based upon the external advisers and also accounting firms that we are working with. And in terms of the KRW 5 trillion of the capital, of course, this will strengthen the capital base of SK Innovation.

[Interpreted] The following question will be presented by [ Han Joo-shin ] from Shinyang Securities.

[Interpreted] I just have a very short question. On your nonoperating accounts, I see other expense amounting to KRW 590 billion. I would like to understand as to what items comprise this line item.

[Interpreted] I am [ Peh Giram ], Head of Corporate Finance Planning Office. Responding to your question about our other expenses amounting to about KRW 594 billion, it comprises of impairment on the facilities, which amounts to KRW 550 billion, for the financial liabilities amounting to KRW 52 billion and also with regards to the equity method gain of KRW 58 billion.

[Interpreted] The following question will be presented by Hyunryul Cho from Samsung Securities.

[Interpreted] There are 3 questions that I would like to ask you. The first question is that you did say that the capital increase in total would represent around KRW 5 trillion. However, if you take into consideration the fact that there are PRSs that would be mixed into the bunch, I do think that there would be a lot of fees payable. So if we look at the overall situation, you do have KRW 2.5 trillion, added to that, the perpetual bond of around KRW 700 billion. So if we apply, for example, an interest rate of around 5%, then the interest expenses alone could amount to KRW 150 billion in total. So in a situation in which your nonoperating expenses continue to increase, let's say that the total capital increase or the PRS-related portion is KRW 3 trillion in total, then what would be the actual interest expenses or the cost burden that the company would have to incur as a result of the overall impact? The second question that I would like to ask is with regards to the SK On financial investors that are exiting, if you look at the proceeds that would be required for the exit, it does seem to be that, that would represent around KRW 3.6 trillion. So with regards to this amount, how are you planning to finance it? Would it be 100% cash? Or as mentioned in the press, would it be possible for the company to issue CDs to maybe finance this situation? So the question that I would like to ask related to this is that, in addition to the paid-in capital increases and also the perpetual bonds that you're issuing, at the SKI level, will there be any additional capital raising activity that you would engage in going forward? The third question that I would like to ask is about SK On. If you look at this quarter's performance, it does seem to be that on the AMPC side that the overall performance was better than what the market expected, and that led to less losses that were generated in general. However, if you look at the second quarter at the HMC level, they did have new cars that were launched like the IONIQ 9 and other EV series. So as a result of that, I do think that the sales to the factories had a large increase. However, in terms of the retail sales to the end customer, that is, I think, a different situation. So if we look at the third quarter and fourth quarter outlook going forward, in terms of the overall utilization that you have in the U.S., do you think that you will be able to maintain the current level that you have as of now? And the reason why I ask this question is that with regards to the consumer tax credits going away at the end of September, you did say that you believe that the overall demand would be dampened slightly because of the situation. But I think that the market expectation is not a slight dent in the overall demand, but a significant drop in demand going forward. So as a result of that, for your operations in the U.S. for the third quarter and fourth quarter, what would be the overall expectations in terms of the volumes for production and the overall utilization for those facilities?

[Interpreted] So this is [ Peh Giram ], the Head of Corporate Finance Planning Office. Maybe I can address your first and second question. So you asked about the interest expenses on the PRS-related side of our overall capital raising. I think that of the overall KRW 5 trillion that we have in total, if you look at the interest-bearing instruments that we have, it would be the PRS-related swap of KRW 2.3 trillion and then also the perpetual bonds of KRW 0.7 trillion. So with regards to the premium on this portion, it would be difficult to share with you the exact numbers. However, I can say that it is in line with the market norm for these type of products. And as you have mentioned, it will have the effect of increasing our nonoperating expenses. But on the flip side of that, at the maturity of these instruments, we do think that there is upside that we will be able to enjoy. So we do think that, that upside will offset some of the impact that we have had from the increase on the nonoperating expense side. So with regards to the amount that we will be providing to the FIs for the exit, you did mention KRW 3.6 trillion. I do think that it would be difficult for us to confirm whether this is the right or wrong number. What we can say is that for the proceeds in total, a significant portion will be paid in cash. And for the shortfall, that would be noncash. Right now, we are in the process of internally reviewing the options available and continuously discussing with the investors.

[Interpreted] Yes. This is [ Anh Gon ], the Head of the Planning Office at SK On, and maybe I can address your third question. So as you have mentioned in the U.S. for SKBA, the line adjustments that we were looking at have been completed, and therefore, they're all back up and running as of the end of the second quarter. So as of the second quarter, all lines are currently being utilized. So as a result, the ramp-up effect that we have seen from this and also from the utilization that has been increasing, we have seen a better overall performance. In addition to that, if we look at the demand from the local customers in the U.S., that demand has also increased. So in terms of the overall sales volume on a Q-o-Q basis, it increased around 70%. However, in the second half, as we have mentioned, for the consumer tax credits that are available right now, that will end on September 30. In addition, due to the tariff situation, we do think that the OEMs will be increasing their prices. So as a result, for the outlook going forward, we do believe that the backdrop represents significant uncertainties. So yes, accordingly, we do believe that the OEMs also will be very conservative in their inventory management. And as a result of that, we will experience a decline in our overall demand. So as mentioned before, although we do believe that the future is very difficult to forecast due to the uncertainties that persist in the U.S. market, we are trying to minimize the impact from any external uncertainties as much as possible by flexibly operating our lines. So we do have a plan in place in which we are looking at. So by flexibly operating the lines that we have, we do want to increase the efficiency of the lines themselves. And in addition to that, continue with the efforts that we have for operational improvements. At the same time, we'll also be making improvements to our cost structure so that we can defend our profitability.

[Interpreted] The following question will be presented by [ Han Joo-shin ] from Shinyang Securities.

[Interpreted] Yes, I would like to ask a follow-up question. With the commencement of your Kentucky #1 plant starting in the third quarter, I would like to gain some color as to how you would guide us in terms of the AMPC-related figures going forward. And also, if you could also share with us the utilization target of the Kentucky plant? And when do you expect the full running of this production line to actually take place. And also with the commencement of operation of these plants, I would expect that your fixed costs will also start to rise. So starting Q3, could also share with us what your forecast for your fixed costs are.

[Interpreted] Yes, this is [ Anh Gon ], I'm Head of Planning Office at SK On. Yes, we are following the plans that we have previously set. So Kentucky plant will start its operation. The SOP will commence from Q3 of the year. And certain lines will also kickstart their production commencement in a phased and consecutive manner. But as you would know, our Kentucky #1 plant is actually being jointly operated together with our joint venture partner. We are very closely currently discussing with our customer Ford in coming up with the overall operational planning, which at this point are undergoing certain adjustments as we speak. So Ford being our joint venture partner at the same time, our customer discussions with them are continuously ongoing. So please, I hope that you can understand that at this point, it will be quite difficult for us to share with you the details.

[Interpreted] The following question will be presented by Jae Sung Yoon from Hana Securities.

[Interpreted] There are a couple of questions that I would like to ask you. First is that for the company as a whole, if we look at the inventory valuation losses, what would that number be? And if we break it down by the business lines, if you could provide that information, that would be good. The second question is that if you look at the recent situation from the U.S. and EU, there are various Russian sanctions that are being announced. So with regards to the refining business, is there any impact there? The third question that I would like to ask is that, if you look at your competitors on the refining side for various products, petroleum products, there does seem to be an increase in the exports that we have to the U.S. -- that they have to the U.S. What is the situation for the company? Do you also see an increase in exports? And if that is, if you could break it down by the different product types, that would be also appreciated. And lastly, for SK On, you did mention that because of the tariff situation, you do think that costs would increase. So for the degree of the increase, how much do you think we should take into consideration for Q3?

[Interpreted] So this is [ Peh Giram ], the Head of the Corporate Finance Planning Office of SKI, and maybe I can address your first question. If we look at the second quarter in terms of the inventory-related situation, including the lower of cost or market, the overall for the company as a whole, it would present a negative, so a loss of KRW 370 billion, of which the refining business would account for KRW 300 billion.

[Interpreted] Yes. This is [ Choo Young-gyu ], the Head of Strategy Operational Division at SK Energy, and maybe I can address your second question. So from the U.S. and EU, as you have mentioned, there are various policies that are being announced for sanctions on Russia, and we do think that this will be positive for the refining business. And the reason why we believe it will be positive is that if you look at the overall situation surrounding the Nayara capacity in India, they themselves have been subject to various difficulties or challenges in importing crude. And as a result of that, their overall utilization has been falling. So we do think that from the sanctions of the U.S., in general, the import of various Russian produced crude will actually start to decrease. So maybe to move on to the next question about our exports to the U.S. If you look at the overall situation, it is true that there has been an increase that we have seen. And if you look at the main products there, it would be the middle distillate-related products. So for example, in the case of jet oil, if you look at the situation versus the first quarter of last year, there has been an increase of around 700,000 barrels.

[Interpreted] So maybe I can address the last question that you asked, which would be what would the tariff impact be on the cost in the third quarter. Of course, we would like to give you a specific number if that would be possible. However, as mentioned before, this is an ongoing discussion that we currently have with our suppliers and also customers. So as a result of that, as of the current time, we do think that it will be difficult to give you indication of what the degree would be. But having said that, I think that what we can say is that if you look at the second quarter specifically, the tariff-related cost accounts for 2 months. And I think that for the second half, if we look at the monthly impact that we expect going forward, we do think that, that would be similar to the second quarter level.

[Interpreted] The following question will be presented by Woo-Je Chun from KB Securities.

[Interpreted] I would like to ask you some further question on the potential synergy that will be created for the merger from SK On and SK Enmove. So my question is, first, with regards to the battery, when do you think that the use of the coolant fluid will be used on a prevalent basis? And would it first be used for EVs or ESS? And also from the lubricant business side, would this merger bring synergies in a manner that it will further increase the sale of the lubricant or the use of the lubricant for the battery purposes would really drive up the ASP of the battery price, thereby increasing the profit. So I would like to understand the mechanism based upon which the synergies are produced. And the second question has to do with your E&S business. Your second quarter figures are a little bit subdued because of the low seasonality factor. Can you also guide us as to what your earnings guidance is as we move into the second half of the year? And also for the fourth quarter, for the gas reserves at Caldita-Barossa, the CB gas field, could you provide us with an update as to the estimated production that you are looking to gain from this gas field?

[Interpreted] This is the CFO. In terms of the fluid, the coolant fluid that you've mentioned, it will be in the sequence of EV first and then ESS. Our company, SK Innovation, will pursue such initiatives in that order. So if you look at the battery business and ESS business under SK On, as we prepare for the upcoming era of electrification, the technologies that these companies hold are very essential, especially also the thermal management, EV fluid technology that Enmove has works as a very critical aspect of that preparation. So if we bring thermal management, EV fluid technology and use that to support our SK On's battery and ESS business, it's a core technology that could further enhance the safety profile of the batteries and ESS that SK On produces. So once these capabilities are combined, we believe that we could have a very distinct market competitiveness. And also the EV fluid business under SK Enmove, we are currently expanding that across the EV OEMs in the market. So we're in the process of expanding that business. So as we can leverage off of the customer base that each of these companies have and by combining the business capabilities of the 2 entities, we will be able to respond to the trend of electrification. And based upon that by year 2030, we will be able to create synergy in the amount of around KRW 200 billion in EBITDA.

[Interpreted] I will respond to your question on E&S, first touching upon the subdued earnings that we saw in Q2 and our guidance for the second half. The reason why we saw a slump in terms of the operating profit in the Q2 is because of the decline in the S&P pricing and also to prepare against a steady operation for the upcoming summer season, we had gone through the maintenance process, which push down on the top line revenue. And on the cost side, in the first half of the year, before the use of the production amount that comes from the CB gas reserve, the entire mix, if you look at the import mix, spot actually accounts for the bigger portion, so which means that with the increase in the JKM price, that's going to drive up the cost base and press down and squeeze down on the margin. However, as we are able to prioritize the use of the low-cost input gas and with the commencement of the commercial production of the CB gas field starting in the fourth quarter, we will be able to reduce the spot mix out of the total blend, which means that we will be able to significantly reduce the profit and loss fluctuation that is linked to the fluctuations in the JKM price. Just to add on the CB gas field-related issue, most recently, the whole injunctive period with regards to the injunctions that were filed by the environmental groups on the rescission or the scrapping of the license that's been given out, that hold period has now been expired. With that being expired, with regards to the injunction being filed, the whole license-related and permit-related issue is now removed. And if you look at the current milestone, the progress milestone rate, it's 97%. So without any unforeseen issue, we believe that we can go into commercial production as scheduled in the fourth quarter.

[Interpreted] The following question will be presented by Hyun-hee Jung from Daiwa Capital Markets.

[Interpreted] There are a couple of questions that I would like to ask you. First is about the PRS. You did mention that at the end of the maturity, you did believe that there would be some upside that the company would be able to enjoy. So in terms of the valuation upside, is this something that comes and is recorded at the end of the contract only? Or is it something that has interim evaluations that take place, for example, on a per quarter basis or on a per year basis? And if so, is the valuation reflected each and every time you actually do an assessment? So with regards to the assessment cycle, if you could share that with us, that would be appreciated. Secondly, also, it's a 3-year PRS contract. So at the end of the 3-year term, does the full contract have to be redeemed? Or is there a possibility of it being extended? If there is a possibility of extension, under which conditions would the company actually look at extending the contract? The next question that I would like to ask is about the battery business. You did say that in the U.S., the overall volume did increase by around 70%. So if that is the increase for the U.S., if we look at the full company volume increase, how much would that represent in the second quarter? The next question that I have is about the asset write-offs that you talked about before. Are these assets related to the battery business? And if so, could you explain in more detail what that actually represents?

[Interpreted] So this is [ Peh Giram ], the Head of the Corporate Finance Planning Office at SKI, and maybe I can address your first question. With regards to the PRS, it's not something that we would evaluate at the end of the contract only. So there are interim monitoring or evaluation periods that would take place. However, the cycle in itself differs upon whether the underlying security is a listed company or an unlisted company. And it is something that does require some discussion with our external auditor. So it's difficult to give you a simple answer of whether it would be monitored on a per quarter basis, half year basis or full year basis. And with regards to the obligation of redeeming at the end of the maturity, that is not an obligation that we would bear. So the investor would be able to sell under the current structure that we have. So therefore, whether we would extend the contract or not would depend upon the discussions that we have with the investor at the end of the contract period.

[Interpreted] So this is [ Anh Gon ], the Head of Planning Office at SK On, and maybe I can address your second question. So as mentioned before, if we look at the first quarter in North America, because the first quarter in itself was a period during which we were ramp up in capacity, which was completed in the second quarter. If you look at the second quarter versus the first quarter, there was a significant increase. In Europe, in the second quarter, if we look at the developments from the Hungary side from SK On, there was additional lines that we dedicated for forward volume. And then for Volkswagen also, the overall supply volume increased, so as a result, the overall capacity utilization did improve. So as a result of that, if you look at the sales volume increase for Europe in the second quarter, on a quarter-over-quarter basis, it would be 30%. So in total, if we look at the volume increase that we experienced in the second quarter on a Q-o-Q basis, it would amount to 37% in total.

[Interpreted] So this is [ Peh Giram ], the Head of the Corporate Finance Planning Office. And the last question that you did ask was about the details of the asset write-offs that we conducted. I do think that it would be difficult to address that question in this forum right now. But if you do require more information, please contact our IR office, and we will try to address and provide as much as possible.

[Interpreted] We will now take one last question. The last question will be presented by [ Han Joo-shin ] from Shinyang Securities.

[Interpreted] I'm [ Han Joo-shin ] from Shinyang Securities. With regards to the reciprocal tariff that's been levied and decided by the United States, I hear that there's possibility that U.S. will expand its energy product export into the Korean market. If that is the case, do you think that for your import of petroleum and for your E&S business, would you predict that there will be more U.S.-based LNG and crude oil import coming into each of these entities or your companies? And what impact would they have on your respective affiliates?

[Interpreted] Yes, responding from SK Energy first on the refinery business. In order for us to increase the import of the crude oil, it has to be economically feasible from our perspective. And also, we have not yet been presented with any specific terms and conditions. Once we are presented with the required conditions, then we will, of course, proactively review its feasibility and the possibility. But at this point, none of that exists.

[Interpreted] Responding to your question from SK E&S, already, I can tell you that SK Innovation E&S is the biggest importer of U.S. LNG out of all the private LNG operator in Korea. And once our CB gas field goes into operation in the second half, I can tell you that we have sufficient amount of sources, LNGs, that is under a long-term offtake arrangement. But of course, we will actively review the economic feasibility and competitiveness of sourcing from different regions in line with our demand development that is being undertaken under our LNG business. So where we will be sourcing specific amount of LNGs going forward, once again, will be tied to our overall demand project that will look at different options in terms of geographies and the time line.

[Interpreted] Yes, that was a quite long Q&A session for us. This brings us to the end of the SK Innovations earnings conference call for the second quarter of 2025. Thank you, everyone, for joining us. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]