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

[Interpreted] Good morning. I am [ Ji-yoo Lee ]. I am product leader at SK Innovation. Thank you for taking the time to join us today in this Q3 Earnings Call for 2021. Today's presentation has yet to be reviewed by our external auditor, so the results are subject to change based on such review. For your information, we have a separate earnings call for SK IE Technology starting from this quarter, so please hold on to your questions related to SK IE Technology for its earnings call scheduled today at 2 p.m. Now without further ado, I invite the CFO, Mr. Yang-Sub Kim, for the presentation.

[Interpreted] Good morning. I am Yang-Sub Kim, CFO at SK Innovation. At the outset, I would like to thank our shareholders and investors, for your continued interest in the company. On the call with me today are executives from SK Innovation and its major subsidiaries to entertain your questions. With that, I will present to you SK Innovation's Q3 business results for 2021. First, let me take you through the overall Q3 performance, including sales and operating profits. Sales in Q3 increased KRW 1.1809 trillion quarter-on-quarter and recorded KRW 12.3005 trillion, as crude oil prices climbed and subsequently pushed up the prices of refinery and petrochemical products. Operating profit rose KRW 112 billion versus Q2 and came in at KRW 618.5 billion, supported by rebound in petroleum product cracks particularly driven by middle distillates and lubricants strong margin and robust sales. Nonoperating profit posted KRW 85.1 billion, thanks to gains from the sales of Seorin building and SK Energy gas stations despite FX- and derivative-related losses as the Korean currency weakened against the [ green back in Q3 ]. To elaborate: FX-related losses recorded KRW 75.7 billion, derivative-related losses KRW 139.5 billion, net interest expenses KRW 89.9 billion, equity-method evaluation (sic) [ valuation ] gains KRW 173.6 billion and others KRW 216.5 billion. Next, let me go over the balance sheet. As of the end of Q3 2021, assets totaled KRW 48.9602 trillion, up by KRW 10.4621 trillion versus the end of 2020, [ supported by ] increased inventories and accounts receivable resulting from rising oil and petroleum product prices. Liabilities recorded KRW 29.6385 trillion, up by KRW 6.5989 trillion versus the end of 2020 due to increased accounts payable and borrowings fueled by crude oil rally. The debt-to-equity ratio posted 153%. Meanwhile, net debt stood at KRW 7.7507 trillion, down by KRW 974.7 billion compared to the end of 2020 despite increased CapEx, thanks to cash inflow following SK IE Technology's IPO and divestment of a majority -- minority stake in SK Lubricants. Next, let me walk you through Q3 market overview and business results of each business. So first is the refining market backdrop. Crude oil prices in Q3 was bullish, as Hurricane Ida disrupted crude oil production in the U.S. LNG prices soared, and continued COVID-19 vaccine rollout pushed up demand outlook. Product cracks in Q3 stayed strong despite increased output by refineries, with upbeat demand forecasts as vaccination rates in the U.S. and Europe continue to climb. Gasoline crack rose quarter-on-quarter, as Hurricane Ida disrupted supply and China slashed its exports. Diesel crack also strengthened, as Europe saw a solid mobility demand and reopened from lockdowns, on one hand; and supply is expected to tighten due to supply disruptions, on the other. Kero crack rose quarter-on-quarter as well, backed by a rise in diesel crack and as the demand for air travel makes a gradual comeback. Next, I will discuss Q3 refinery business performance. Refinery operating profit posted KRW 290.6 billion, up by KRW 57.5 billion quarter-on-quarter, supported by rising oil prices and middle distillate product margin recoveries, including kerosene and diesel. However, Q3 operating profit edged up only slightly as such tailwinds were concentrated in the month of September. Q3 inventory-related gain for refinery was KRW 242.6 billion, including LCM. Refining margin is projected to gradually post additional growth in Q4 as COVID-19 recedes and demand returns. Next, let me move on to the petrochemical market. First, polymers: In Q3, new large capacities came online in Northeast Asia and drove up supply in the region. Moreover, instability in logistics and freight rate hikes hampered downstream product exports to other regions, taking a further toll on supply-and-demand imbalance. As a result, both PE and PP spreads weakened Q-o-Q. Aromatics also witnessed a weak spread quarter-on-quarter as spread [indiscernible] towards quarter end as China's power shortages and power rationing forced downstream businesses to shut down or scale back their run rates, which put a damper on demand. I will next talk about Q3 performance in the business. Petrochemical operating profit recorded KRW 84.4 billion, down by KRW 83.5 billion Q-o-Q due to spread and margin squeezes across the board and higher energy [ bills as sparked by ] rising oil prices, although sales did pick up again following the completion of PX turnaround in the previous quarter. Among the polymer products, PE is expected to see its spread improve in Q4 compared to Q3 despite new capacities coming on stream as coal-based PE plants face operation restrictions. And a modest demand is projected during the year-end peak season. On the other hand, PP is expected to see its spread soften despite Chinese coal-based PP plants' output cuts because of sluggish demand -- downstream demands triggered by global semiconductor shortages and new capacity additions in the region. As for PX, the main aromatics, spread is expected to bottom out in Q4, as many PX plants in the region have TAs scheduled and PX producers cut their output in the face of a recent plunge in spread. Nevertheless, China's ongoing energy shortages will push PX spread further down in Q4 versus Q3. Next, I will brief on lubricants Q3 performance. Lubricants operating profit increased KRW 102.8 billion Q-on-Q to KRW 329.3 billion, thanks to increases in sales prices and margin as well as stronger sales in the U.S. and Europe. In Q4, base oil supply is expected to gradually increase, led by improved petroleum product market outlook, while demand is projected to decline due to seasonal factors. This will ease tight supply and subsequently weaken base oil spread. Next is E&P performance in Q3. E&P operating profit rose KRW 12.8 billion Q-o-Q to KRW 16.4 billion as oil and gas prices as well as sales volume all increased, while SG&A expenses decreased. Next, I will move on to the battery business. Since their commercial production in the first half of 2021, plants in Yancheng and Huizhou, China raised their utilization rates. And as a result, battery sales in Q3 rose KRW 186.6 billion Q-o-Q to KRW 816.8 billion. Increase in sales and gross profit margin helped improve gross profit, but increases in SG&A expenses, including R&D, resulted in an operating loss of KRW 98.7 billion, similar to Q2. Aside from the Yancheng and Huizhou plants in China that started commercial production in Q1 this year, plant number one and two in the U.S. and number two and three in Europe are under construction. Plant number one in the U.S. and number two in Europe are near completion and ready to come online next year. As you are well aware, SK Innovation and Ford Motor Company agreed to launch a JV recently. Together, we plan to build battery production campuses in Kentucky and Tennessee with a production capacity of [ 86 and 43 gigawatts, respectively ], on top of SK Battery America's production sites in Georgia. Please refer to the appendix for more detailed CapEx plans by region. Because of recent automotive semiconductor shortages, we expect battery sales in 2021 to hover around KRW 3 trillion and jump to mid-KRW 6 trillion level next year. Next, let's take a look at SK IE Technology's Q3 performance. SKIET's consolidated operating profit in Q3 dropped KRW 1.3 billion Q-on-Q to KRW 40.1 billion, despite stable production in the Chinese plant, due to a lackluster demand for IT, especially in China's smartphone market. Please refer to the appendix for more detailed LiBS CapEx plans per region.

[Interpreted] This is the end of our presentation. We will now start the Q&A session. [Operator Instructions] Also please note the Q&A session will be conducted with consecutive interpretation.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by Hyunryul Cho from Samsung Securities.

[Interpreted] There are 3 questions that I would like to ask you. First is about your battery business. You recently had a announcement that you would be investing in Solid Power. Could you provide some of the details about that overall situation? The second question that I would like to ask you is about LFP. Your competitors are engaging in development of LFP. And I also understand that the company is also reviewing the possibility of developing LFP technology, so if you could share some details about that in terms of the overall time line that you have and what your thoughts are, that would be appreciated. The third question that I would like to ask you is that right now, if you look at your Chinese operations, it seems to be that, in terms of the number of production sites and capacity that you have, there continues to be an expansion in this area. However, the Chinese government has recently embarked upon various regulations to try to curb the overall electricity consumption of the country, so as a result of these measures, if you look at the fourth quarter for your overall operations and also into next year, what would be the overall impact from these measures?

[Interpreted] Yes, thank you for your question. Maybe I can take your first question. I am [ Eugene Suk ] from SK Innovation, and I will address your question about the Solid Power investments. And I do believe this is something that we have mentioned various times before, but in terms to acquire the technology required for solid-state batteries, SK Innovation is embarking upon a 2-pronged approach. The 2-tiered approach would be that, first, we are trying to collaborate with various very promising start-ups and R&D centers that are located in Korea to engage upon open innovation to develop the technology. And the second approach is that, through our own internal research center that we have for next-generation technology development and research, we are trying to develop the -- our own proprietary technology. So therefore, the overall partnership that we have with Solid Power comes from this backdrop, and there are 3 main areas in which we will cooperate. So as mentioned before and as have already been announced, the first area would be that we will be making a equity investment into the overall company of around USD 30 million. So this is something that we have already determined to do. And the second area would be that there will be joint development that we will be embarking upon to be able to develop a solid-state battery technology that would be applicable to electric vehicles. So this is the second area. And the third area is a more comprehensive agreement. If that -- if the joint development that we are embarking upon does go successfully, then we will open the opportunity or open the overall options that we have in commercializing this technology down the road. So as a result of that, the partnership does represent both an investment and a joint development opportunity for the company. So with regards to the overall arrangement that we have with Solid Power, we do believe that it is a leadership. It does have leadership in its own form of solid-state battery development. And therefore, in terms of the overall processing, also it does have its own differentiated technology. So based upon the overall capacity that the -- and capabilities that this company enjoys, we do believe that we will be able to reach various progress with regards to the development of solid-state battery development.

[Interpreted] So this is Yoon Hyung-jo from SK On. And maybe I can address your second question, about LFP batteries. If we look at the current state of LFP batteries based upon the abundant amount of iron that they have as the main material and also the high state of stability, in the beginning states of EV market development in China and focusing around the Chinese manufacturers, there has been growth taking place in this area. In addition, versus NCM batteries, if you look at LFP batteries in terms of the overall energy density, it is at a lower state. It only provides around 60%, in comparison. So as a result of that, this is a form that was not really aggressively adopted outside of China by the global market. However, recently, Tesla and Volkswagen and others have actually announced that they will be adopting LFP batteries for some of their vehicles, which has led to the current and recent interest. So as a result of that, we do see a spread taking place of LFP battery adoption going from China to more of the global market and going from the commercial vehicles to more of the passenger vehicles. However, there are clear shortfalls that LFP batteries have. So as mentioned before, in terms of the overall energy density, it does provide a lower level. And also it does account for and takes up a lot of space, so whether this battery format will be the right solution for the performance that the OEMs actually require is something that we still question. And if you look at our company right now, in light with the technology trends that are taking place and also demands from our customers, in addition to the NCM batteries that we have, of course, we continue to explore the development of a wide variety of different chemistries. So with the high-energy-density NCM battery markets that we have continued to lead with our high technical expertise. For the existing LFPs, we are looking at and exploring the development of LFP batteries that do provide a higher energy density and also fast charging -- and better fast-charging capabilities. So that would be the overall area that we're focusing on in terms of our research and development, and the overall target would be to create a battery and which we would be able to mass produce. So maybe I can also address your third question. Recently because the relations between Australia and China have been deteriorating, the Chinese government has suspended the import of Australian coal. And as a result of that, from September of this year, there has been a overall energy crisis taking place in China. So as a result, for the central Chinese government, they have ordered of -- all of the local autonomies in China to actually cut down on the overall consumption of electricity. And as a result of that, for our Chinese entities also, they have received requests to look into ways to try to cut electricity use. However, based upon very detailed discussions in cooperation with the local autonomies in China at -- where our sites sit, we have embarked upon various electricity-saving measures to an extent in which it would not hinder the overall production that we have. So as a result of that, our overall production lines are in operation as normal. In addition, in light or to be prepared for a situation in which the overall electricity situation could prolong, we'll continue to monitor the situation very closely. In addition to that, we are closely discussing various issues with the Chinese government, including the local autonomies, also our material partners and local JV partners to ensure and -- to ensure that we take the utmost efforts to make sure that -- in terms of the overall supply and also production, that there are no issues. Thank you.

[Foreign Language] The next question will be presented by Jae Sung Yoon by Hana Financial Investment. [Foreign Language]

[Interpreted] Yes. There are 2 questions that I would like to ask you. First is, over the short term, if we look at your overall petroleum business in terms of the short-term market outlook and also the longer-term market outlook, what would be the outlook for this business in general? The second question that I would like to ask you is more of a long-term-view question about the comprehensive plans that the company is working upon. Right now, for each of your business divisions, you are engaging upon a deep change transformation, so with regards to those efforts, if we look in the future -- [ what that represent ].

[Interpreted] So this is Lee Dong-yeol from SK Energy, and maybe I can talk about the overall outlook that we have for the overall petroleum market over the short to longer term. Due to the overall spread of virus and also distribution of vaccinations more aggressively and also due to the various trends in which people are staying at home to work for a longer period of time, we do think that for the petroleum products that are required for transportation processes -- transportation purposes, over the longer term, there will continue to be a decline. However, that have been said, if we look at the petrochemical industry in terms of the demand for naphtha and also propylene, there has been a continuous growth there. And as a result of that, for the refiners, they have been adjusting their overall operations and also facilities to make sure that they are optimized to make use of this opportunity. So as a result of that, the overall profitability is something that we do believe will become stronger. In addition, if we look at global refiners and the capacity in general, it is that there is continuous restructuring taking place. And some are decreasing the amount of capacity available, so as a result of that, we do think that, that will have an impact on the supply side. And overall, over the mid- to longer term, as a result of these various factors, we do think that profitability will improve. In addition to that, over the longer term, of course, there continues to be an energy transition in which we are embarking upon to ensure that we can meet and satisfy the overall trends for decarbonization and other such efforts. In addition to that, we are trying to identify our future growth drivers and the overall projects that we want to have in this area. So as a result, to decrease the overall carbon emissions that we have, we are embarking upon efforts to increase the overall energy efficiency, decrease our carbon footprint and also ensure that on the carbon side we are able to achieve net zero. So as a result of that, using the various gas station platforms that we have, we are looking at ways to try to also provide more fuel cell-based energy, which would be a distributed energy power generation or provision type of platform.

[Interpreted] So this is [ Eugene Suk ], the Head of Business Strategy Office for SK Innovation. And maybe I can take your second question. So through the story day that we had hosted before, SK Innovation has declared that the overall direction that we will be heading in going -- over the longer term would be carbon to green. And according to this overall target that we have, there are 2 areas through which we will pursue this target, which would be our carbon transformation and also the green anchoring efforts that we have. So -- [I'm sorry.] It's our overall green transformation that we want to achieve through the motto that we have from going to -- carbon to green. So according to this overall strategy, on the refinery side what we want to do over the longer term is that, in light with the overall changes in the demand that we see in a energy transformation that is taking place, we do want to adjust our facilities accordingly. So to deal with the overall carbon issue, we are looking at ways in which we can embark upon low-carbon operations and also try to solve the carbon issue to achieve a full transformation, yes. In addition to that, we are also looking at fundamental solutions to this issue such as CCS. So we are looking into various avenues through which we could actively adopt this technology. And for our petrochemical business, as we have indicated through changing the name of the business to SK geo centric, there will be a full revamp and a full change and transformation of our overall business with regards to the [ past ] products that we have. So as a result of that, the focus of our petrochemical business will be on a plastic recycling business. And as we have declared before for the overall transformation, it means that, for all of the plastics that we produce, we will change that or replace that with recyclable plastic or plastic recycled. So SK Innovation has declared that it will achieve net zero by 2050, so therefore, for our carbon businesses, that means that we will continue to curb and reduce the overall carbon footprint that we have and also address the carbon issues that the company faces. At the same time, we will be identifying new business opportunities so that we can achieve an overall transformation. In addition, in this overall transformation process, to acquire the resources that we require or also the technology or any competencies that we will need, we would also be open to exploring opportunities such as JVs with outside parties that have these capabilities.

[Foreign Language] The next question will be presented by Anna Park from Macquarie.

[Interpreted] There are 3 questions that I would like to ask you. First is that, with regards to the solid-state battery development that you're embarking upon, you did discuss your partnership with Solid Power and also the technology capabilities that they bring to the table in terms of the form factor that they are trying to develop and also in terms of the processing technology that they would have as a strength. The question that I would like to ask you is, from SK Innovation's side, what type of proprietary capabilities does the company have in this area? And how will that be utilized? The second question that I would like to ask you is that you have also explored a JV possibility with Doosan power cell -- or PureCell. And what would be the overall state of the situation there with this company, and what are you trying to do? The third question that I have is about the third quarter. If you look at the overall market, there does continue to be a semiconductor ship -- chip shortage for automobile chips and also on the magnesium side. So with regards to that impact on the third quarter, what was that? And if we look at the fourth quarter going forward, what would the impact be there?

[Interpreted] So maybe I can address your first question. This is [ Eugene Suk ], the Head of Business Strategy Office at SK Innovation. So the first thing that I can say is that, from 2019, the company, in collaboration with external professors and also experts in this area, has continuously embarked upon R&D efforts and various innovative efforts to try to develop the fundamental technology that is required in this area. So in the state of solid-state batteries, there are various areas that need to be solved. For example, the dendrite issues, also the transfer of the various ions within the solid-state factor would also be all factors that need to be addressed. So in this area, in collaboration with the outside partners that we have, of course, we do continue to have a global alliance in terms of the R&D efforts. And in addition to that, internally through the next-generation battery R&D center that we have, we continue to increase the head count and also the capabilities of our research side. In addition, for solid-state batteries, right now they are still being developed at a pilot stage. However, for they to -- for these batteries to be applied commercially, they need to be enlarged in terms of the overall size so that they can be applicable for EVs. So based upon the past experience and the track record that we have in creating EV battery cells, we do believe that we have the capabilities to take this lab-developed technology and also make sure that the technology can be applied to a larger-size and more applicable area for mass production.

[Interpreted] So this is Yoon Hyung-jo from SK On, and maybe I can address your question about the overall semiconductor chip shortage situation. So for the overall shortage that we are seeing in the automobile industry, we don't believe that this will be a situation that can be solved in the short term. And as a result of that, if we look at the current situation, we have had some impact from the situation and we do think that it will continue going forward. However, if we look at the overall magnitude, it has been limited. And if we look at the auto OEMs, in terms of the chips that they have secured and how they distribute those chips to be used for the various vehicles and also model types, it does seem to be that they have their own very selective policies in place. So as a result of that, we think that, versus the overall expectations, the impact on the EV sector specifically could be smaller than expected. So not only for this year, but in 2022, of course, we continue to monitor very closely what the overall situation and outlook is for semiconductor chips for the OEMs and also to monitor whether there are any changes in what the customer is requiring. So we will, as mentioned, continue to be diligent in this area, and if there is information that can be shared with you, we will be -- we will make sure to communicate it.

[Interpreted] So this is Lee Dong-yeol from SK Energy, and maybe I can address your second question about the collaboration with Doosan PureCell. As mentioned before from SK Energy's standpoint, of course, we are interested in using our overall gas station platform to look into generating power using fuel cells on a more distributed platform. And other types of energy solutions are also something of [ a niche ]. So as a result of that, with Doosan PureCell, in the area of these fuel cells and also leveraging the overall hydrogen charging infrastructure that is available, we have agreed to embark upon a joint development of a fuel cell that can use hydrogen as a power source. So for the -- more details about the technology that we are trying to explore, please understand that we will not be able to share the details about that at this time. However, if more information does become available, we will make sure to communicate it through the IR team.

[Foreign Language] The next question will be presented by Woo Ho Noh from Meritz.

[Interpreted] Yes. Some of the questions that I wanted to ask actually overlap with previous questions already addressed, so maybe I can ask a question about your petrochemicals business. You did mention that for SK geo centric the focus going forward would be on recyclable plastic and plastic recycling in general and also creating more ecofriendly plastic. So in this area, if we look at what has already been achieved in 2021, what has the company done? If you could share some information about that, that would be appreciated. And also going forward, in terms of the main areas that you want to focus on, what would those areas be in terms of the type of projects that the company is interested in? And also, in terms of the profitability guidance, if you could share some color about that, that would also be appreciated.

[Interpreted] Yes. My name is [indiscernible], and I am the Head of the Planning Office at SK geo centric. So from SK geo centric's standpoint, in terms of the green transformation that we want to achieve, there are 2 areas through which we are going to do so. The first would be waste to zero, and the second will be carbon zero. And under the overall initiative to go waste to zero, that is where we would be conducting our overall waste plastic recycling business and also adopting more ecofriendly materials. So for building out the overall waste plastic recycling business, actually, acquiring the next-generation technology and new technology that can be applied in this area is something that is very critical. So as a result of that, this year, the focus has been on acquiring that technology and we have made some progress. And for 2022, one of the main projects that we will be embarking upon is that -- using the technology that we have acquired, building the overall manufacturing facilities that would enable us to commercialize that technology is the focus that we will have. Now in terms of the economics of this business, because it's still in the early stages, it is difficult to share a lot of detail. However, we do believe that -- once the overall premium for these recycled products is recognized and as there will be a overall carbon-mitigation effect coming from this business [ which will ] enable us to also enjoy some benefits in terms of the carbon credit that we get, we do think that over the longer term we will be able to secure the profitability required. And in addition to that, to ensure that we can expand the overall ecofriendly material that we use, we are looking at a global expansion. So the global expansion that we will be looking at is through the proprietary technology that we have developed in the Nexlene business and also through the technology that we have acquired through Dow chemicals and Arkema -- would be the source through which expansion would take place. And so for this global expansion next year, the focus would be that -- for the facilities required for production, the [ BTP, BDP ]; and also the overall design. And also the groundbreaking of that site would be one of the focuses that we have. And for the second initiative, which will be the carbon net zero initiative, through the waste-to-zero initiative that we have, we do think that there will be a natural effect out of carbon mitigation which would enable us to reach net zero in terms of our carbon emissions. And through our recycling business and our also green business, the overall target is that, by 2030, we do want to cut our carbon footprint by 50% versus 2019. And we do think that, over the longer term, we will be able to achieve our target of reaching net zero before 2050.

[Foreign Language] The next question will be presented by Woo-Je Chun from Hanwha Investment & Securities.

[Interpreted] There are 2 questions that I would like to ask you. First is that, for your overall battery operations, in terms of the metal recycling and also lithium recycling, what would be the strengths that the company has in this area? What's your target? And what is the current state of that type of operation? The second question that I have is about refining margins. As refining margins improve, I do think that some of the CDUs that you had not been using may be in running right now. So in terms of the overall situation there. And also, in terms of the breakdown between the gasoline that you have and also the jet fuel, if you could share if there have been any changes in that way.

[Interpreted] So maybe I can address your first question. My name is [indiscernible], and I am the Head of Portfolio Option Development Office at SK Innovation. So as have been mentioned during the press various times, for the overall cathodes that we use for SK Innovation, we have embarked upon a technology to be able to recycle the lithium that we have in a form of lithium oxide. So in the past, using different types of technology, there was a technology available to be able to recoup the lithium. However, the economics were not supported in this type of technology. However, using our technology, the lithium that we are able to recover is not a low-purity lithium that would be used for industrial purposes but more of a high-purity lithium that can be used for battery purposes. So as a result of that, the lithium can be directly used for high-nickel batteries that we produce. So right now we have completed the verification that we need at a [ pilot plant ] level, and right now we are creating a demo plant in [indiscernible] for the next step. In addition, for various capabilities that the company currently doesn't have, we are looking at various avenues through which we would be able to partner with companies that don't have that type of capacity or capabilities. And as a result of that, the target would be to have production sites in the U.S., China and Europe by 2025.

[Interpreted] So this is Lee Dong-yeol from SK Energy. Maybe I can address your second question. It is true that refining margins have been on the upper trend recently. However, rather than focusing on the CDU production, we have been optimizing our facilities so that the secondary processing can be maximized. So if we look at the third quarter, due to the low product crack levels, on the CDU side the utilization was at around 70% of overall capacity. However, for gasoline crack, because that was a very robust area, for the RFCC capacity, that would be -- that was being run at a normal rate. So going into the fourth quarter, because the overall product crack levels are improving, we do think that the utilization as a whole will be adjusted to a higher level. However, rather than focusing at the CDU level, we do want to optimize the facilities so that the overall product output by the petroleum products can be optimized to maximize the benefit to the highest. So therefore, it will be more focused on the VRDS and also RFCC capabilities that we have, and optimization will take place with that focus. And to address your question about the portion of gasoline and also jet fuel as a whole. If we look at it versus the 2020 level, on the gasoline side we have seen an improvement of about 3 percent points taking place. And on the jet fuel side, there has been a negative 5 percent point adjustment downward. And if we look into the fourth quarter, according to how the product crack levels change, we do think that this will be further adjusted.

[Interpreted] Maybe we can take a last question.

[Foreign Language] The last question will be presented by Nikhil Bhandari from Goldman Sachs.

Just a couple of questions around the battery business. Given you mentioned about higher SG&A and R&D in the third quarter, what's the broader expectations relative to previous guidance on EBITDA breakeven on the battery business by this year and EBIT breakeven for next year? Do we still see those targets as achievable? And how far are we from EBITDA margin breakeven in the third quarter. So I think that will be my first question, on battery. The second is can you talk about your new SKI [ battery-based ] new EV model pipeline. What are the key models which will be launched in the next 6 months that we should keep an eye on? And lastly, if there's any further update on the order book from the [ last that you ] disclosed during the previous quarter. [Foreign Language]

[Interpreted] So this is Yoon Hyung-jo from SK On. And maybe I can address your first question, which is about our overall profitability. If you look at the situation in 2021, though there were new sites that we opened for production which incurred some initial costs, the overall existing facilities that we have were operated at a very stable level and added to that, which actually was very synergistic because of the experience that we had before. And added to that, there was new volume that we were able to enjoy from our new sites. So as a result of that, there was an improvement in our EBITDA level. So if you look at the recent developments in the market, because of the automobile chip shortage that we had mentioned before, there was some adjustment in our client volume. And as a -- and in addition to that, for a key material, some of the unit prices of that material have been on the rise. So as a result of that, for a EBITDA breakeven for the full year of 2021 which was initially the target that we have, we do think it will be a bit challenging to be able to achieve that target. However, if we look at the fourth quarter alone on a per-quarter basis, we do think that we will be able to achieve a EBITDA positive level. And for 2022, as of now, in terms of the overall guidance level that we have for our profitability, we are maintaining the outstanding guidance that we have provided. So as a result of that, the EBIT level, the target would be to be positive. For next year, if we look at our production sites. For our first factory in the U.S. and the second -- and number two factory in Hungary, these will all go into mass production. So as a result of that, in addition to supplying and continuously supplying to Hyundai motors and also Daimler like we have been doing, next year, from the U.S. factory we will be able to supply to Ford and also their MEB platform; and then from Europe, to Volkswagen and their MEB platform. And if you currently look at the order book. Because of the effect of the JV that we have with Ford, the outstanding order book currently stands at 1.6 terawatt hours. And if you translate that into Korean won terms, that would be KRW 220 trillion. So in addition to that, of course, from our existing customers, which would be Hyundai, Kia motors, Daimler, Ford and Volkswagen, not only for the business that we have and enjoy with them, of course, we also look at other OEMs and are engaging upon efforts to acquire new orders from other clients. So when there is an update available, we will share that information with you.

[Interpreted] So with this, we would like to close the Q&A session and also wrap up the conference call for the third quarter of 2021. Thank you once again for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]