SK Innovation Co., Ltd. (A096770) Earnings Call Transcript & Summary

Good morning. This is Project Leader [ Ji-yoo Lee ] from SKI's IR team. I thank you for participating in SKI's Q1 2021 Earnings Release Session. Please note that the contents presented today have yet to undergo an independent auditor's review and could be subject to changes upon such review. The presentation will be delivered by Mr. Yang-Sub Kim, who heads the Finance division.

Good morning. This is Yang-Sub Kim from SK Innovation. I thank the shareholders and analysts for taking consistent interest in SKI. I will go over Q1 2021 management results in my presentation, followed by a Q&A session. To earnestly address your questions, we have here with us management and staff of SKI and major subsidiaries. First, on Q1 sales, operating profit and other management results. With the rise in oil price, the subsequent petrochemical goods price sales increased KRW 1.5622 trillion Q-o-Q and recorded KRW 9.2398 trillion. The cold spell in the U.S. and other supply glitches resulted in margin rise of petchem products. And that, coupled with inventory-related gain with higher oil price, led to an increase of KRW 745.9 billion Q-o-Q of operating profit, resulting in Q1 number of KRW 502.5 billion, realizing a turnaround. As for nonoperating profit, FX loss of KRW 71.7 billion and battery-related settlement of minus KRW 976.3 billion was reflected, resulting in a decrease of KRW 998.6 billion Q-o-Q at minus KRW 1.0301 trillion. Now on the company's financials. At the end of Q1 2021, the company's assets increased by KRW 4.4891 trillion compared to the end of last year, with petrochemical product price increase, inventory assets and receivables increase at KRW 42.9872 trillion. As for liabilities, with increase in payables with higher oil prices, it increased by KRW 4.6305 trillion compared to last year end, at KRW 27.6701 trillion. The debt-to-equity ratio is at 181%, and net debt increased by KRW 191.8 billion and recorded KRW 8.9172 trillion. Now on Q1 business results and market conditions First, on the refining margins. International oil price in the first quarter was influenced by the cold spell in the U.S. and voluntary production reduction of Saudi Arabia. With the new U.S. economy boosting measures amounting to USD 1.9 trillion and increased expectations for the COVID-19 vaccine, oil prices rose. With inventory burden eased due to operational glitches in the U.S. and Japan and also with expected demand pickup for oil with more vaccination, Q1 crack was strong. With gradual demand recovery centering around the U.S. and with the production disruption of U.S. companies with the cold weather, coupled with rapid decrease in inventory, gasoline crack rose. Diesel crack was also helped by the cold weather in the U.S., but with the winter demand gone and with tougher lockdown in Europe resulting in dampened demand, saw less stronger movement. Kero crack was also pushed upwards with the U.S. cold spell, but the rise was limited with worsening COVID situation in Europe. Let me now brief you on the results of our Q1 refining business. Refining OP was influenced by the big improvement in refining margins with the supply disruption caused by the U.S. cold spell and increased inventory-related gain with higher oil price. It increased KRW 608.6 billion Q-o-Q at KRW 416.1 billion. Q1 refining business inventory-related gains, including the lower of cost or market method, is at KRW 372.2 billion. With lesser influence from COVID-19 in the second quarter and the following demand recovery, the refining margin is expected to improve gradually. Now onto our petchem business. Steady demand from downstream business continued for olefin in Q1. And with North American facility trouble brought on by the cold weather and logistics limitation with container shortages, the quarter-end spread rose rapidly. With demand recovery for aromatics and facility trouble in different regions leading to supply decrease, PX and benzene spread improved over the previous quarter. I will now brief you on the petrochemical business results for Q1. Operating profit for petrochemical business was helped by spread improvement centering on PX, benzene and other aromatics and sales volume recovery with the completion of regular maintenance in the previous quarter and also inventory-related gain. It increased KRW 164.5 billion over the previous quarter at KRW 118.3 billion. The upcoming regional regular maintenance season and subsequent decrease in supply will result in continued strong spread in the second quarter, but new -- regional new volume will come on board after the planned maintenance and restart of troubled facilities. And that will gradually ease the supply situation at the end of the quarter. PX, the representative aromatic product, sees continued tight supply with regional, major players' regular maintenance. With operation of new PTA and polyester chain demand recovery, the spread is expected to gradually rise. Now on first quarter lubricants business. With tighter supply with the U.S. cold spell, sales volume decreased with global supply issues. However, with inventory-related gain with oil price increase, the business realized an OP number of KRW 137.1 billion, which is KRW 11.8 billion increase Q-o-Q. A tight supply and demand situation will continue for some time in the second quarter. With seasonal demand increase, spread is expected to remain strong. Next, on the results of our E&P business. Q1 E&P operating profit improved with more sales and sales price increase and recorded KRW 11.3 billion, which is an improvement over the previous quarter. Now on our Q1 battery business results. Q1 sales recorded KRW 526.3 billion, which is an increase of KRW 29.1 billion Q-o-Q. This was due to sales volume increase with Hyundai Motor Company's volume production of IONIQ 5 in the first quarter. Initial costs increased for our overseas sites that have begun commercial production or is slated to commence commercial production next year. With that, operating loss for this business increased KRW 67.8 billion Q-o-Q at minus KRW 176.7 billion. The Hungary #1 and China Changzhou plant had begun commercial production in 2020. Plants 2 and 3 in Europe and plants 1 and 2 in Georgia, U.S.A. are under construction. China's Yancheng and Huizhou plants have started commercial production in Q1. Please refer to the appendix for detailed regional facility expansion plans. Now on our I/E Materials business results for Q1. Productivity gain in the Chinese plant and reduction in raw material costs led to an OP increase of KRW 6.4 billion over the previous quarter at KRW 31.7 billion. The company continues to add new LiBS capacity. The output, which stood at 860 million square meters per year -- at the end of last year will increase to 1.37 billion square meters by the end of this year. The new line that will be completed in China at the second quarter of this year is expected to begin commercial production as soon as it is completed. The other global manufacturing site in Poland is well under construction on schedule and is expected to commence commercial production at the third quarter. For details, please refer to the appendix in the presentation deck. This concludes our prepared presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]