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

Good afternoon. I am Chung Soyoung, Head of the IR Communications Team at SK Innovation. Thank you for joining the company's Second Quarter 2026 Earnings Presentation. On today's call, we have with me SK Innovation's CFO, Seogeon Ki, Head of the Corporate Finance Planning Office, Bae Gilak, and management from each of the businesses. For the call today, the CFO, Seogeon Ki, will first run through the company-wide business results for the second quarter, followed by presentations from each of the business divisions, and then 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, Seogeon Ki to present the second quarter highlights and earnings results.

Good afternoon. This is Seogeon Ki, CFO of SK Innovation. Allow me by starting by thanking our shareholders, investors and analysts for your continued interest in the company. So I will begin with the highlights of the second quarter of 2026. So first, SK Enmove was able to post solid performance on the back of its product competitiveness in the high-end Group III lubricant base oil market and its global production and sales network. Amid continuing geopolitical risk, SK Enmove using its global #1 Group III production capabilities and multiple production hubs was able to address supply chain uncertainties. In addition, it has been able to use its sales subsidiary in each of the key hubs to quickly and flexibly adjust to changes in customer demand. So going forward, SK Enmove with its Group III production competitiveness and global business foundation will strengthen its stable business structure while also further strengthening its competitiveness as a lubricant base oil provider trusted by the market and customers. In the case of SK On, in the second quarter of 2026, we have completed the unwinding of the BlueOval SK, which was the JV with Ford. The former BlueOval SK Tennessee factory is now fully owned by SK On under the name SK On Tennessee. Moreover, as part of this restructuring, the former Kentucky factory is now fully owned by Ford. And SK On will be able to save on approximately KRW 300 billion in depreciation and KRW 200 billion in interest expenses per year, which should ease the financial burden on the company. In addition, in November, we have signed an equity swap with EVE Energy to swap SKOJ and SKEUE shares, and this is expected to close within the quarter. SK On will acquire 100% of SKOJ and fully divest its interest in EUE. As a result, SK On has gained a more flexible and proactive business framework. So based upon this, it will respond to the EVE and E&S customer demand in a more agile manner and strengthen profitability. In addition, portfolio rebalancing efforts will continue. And based upon the market environment and strategic needs, SK On will be able to review strategic alliances and cooperate possibilities in many forms in a more flexible manner. So this was the highlights. Next, let me talk about the overall performance. In the second quarter, revenue was up by KRW 4,866.2 billion quarter-over-quarter at KRW 29,157.2 billion, driven by stronger revenue across all energy businesses, including refining and lubricants. On the operating profit side, due to the stronger profits on the lubricants and battery business, it increased by KRW 1,325.1 billion quarter-over-quarter to KRW 3,487.3 billion. On the nonoperating side, the recognition of SK On and SKIET-related PRS derivative valuation losses, of around KRW 1.2 trillion and SKIET-related impairment losses of approximately KRW 1.4 trillion resulted in higher nonoperating losses. To provide the breakdown in more detail, FX-related losses were KRW 73 billion; product derivative losses, KRW 1.2 trillion; net interest expenses, KRW 251.9 billion; equity method gains, KRW 37.2 billion and other losses, KRW 1.4 trillion. Next, let me discuss our financial structure. As of the second quarter 2026, total assets stood at KRW 102 trillion, and this was due to a decrease in cash as net working capital increased and less assets following the closing of BOSK JV unwinding. So it represents a decrease of KRW 3.6 trillion versus 2025 end. Liabilities were KRW 64.2 trillion, which is a decrease of KRW 5 trillion due to less borrowings and the closing of the BOSK JV. The debt equity ratio was down by 20% points at 170%. Net debt was KRW 23 trillion -- KRW 23.7 trillion. And as cash balances decreased, it has been up by KRW 1.1 trillion versus the end of 2025. Next, we will go over the second quarter performance by company. We will have a look back on key companies and provide an outlook for the future. So for each of the results of each company, please refer to Page 6. And on Page 7, we will go over the look back and also outlook. So let us start with SK Energy.

Good afternoon. This is Chuan Gu, Head of Corporate Planning from SK Energy. Let me discuss the second quarter performance. SK Energy's second quarter operating profit was KRW 651.2 billion, down by KRW 632 billion quarter-over-quarter. Dubai crude, which surged on an average $128 in March dropped to $79 in June, but the valuation of inventory on book is reflected on a cumulative basis. So inventory-related gains in the second quarter was still around KRW 560 billion. When excluding this effect, though the market was strong, profitability has declined due to the government's cap on crude prices and turnaround in May and June. Crude prices and refining margins are expected to show a lot of volatility based on the changes in shipments in the Strait of Hormuz in Red Sea, a degree of damages on Russian refineries and flow changes in the oil and refinery products. So therefore, as uncertainty continues rather than forecast the future, we will closely monitor the market and try to be flexible and quick to maintain optimal operations. Thank you. Next, we will move on to SK geo centric.

Good afternoon. This is Kim Yong-soo, Head of the Management and Planning Office of SK geo centric. For the second quarter, so -- with regards to our overall utilization, we actually saw a decrease in the overall products. And in the third quarter, if we look at the aromatics because of the stocking there, and also on a seasonal basis, we do believe that there will be some recovery. However, uncertainties on the external side will continue and feedstocks that also will be volatile. So we do think that in terms of the overall performance versus the second quarter, it will be flat. Yes, next on SK Enmove, we will discuss the performance there.

Good afternoon on the lubricants business from SK Enmove CIC, I am Kim, Head of Corporate Planning and Development Office. For SK Enmove's operating profit, it was KRW 503.4 billion quarter-over-quarter to KRW 691.9 billion due to the inventory effect and higher margins stemming from supply issues by peers due to the Middle East situation. In the third quarter, there could be some volatility based on the Strait opens, but spreads are expected to gradually moderate if our competitor supply issues are solved. The recent geopolitical risks have pinned the market's attention to our stable supply capabilities based upon multiple production hubs, and the company is able to provide optimal operations using these multiple sites. In addition, we are able to supply in a timely manner to regional sales hubs and increase fleet resourcing, which results in a framework for stable supply. Going forward, we will leverage the supply chain capability, and we will continue to provide a differentiated value to customers and further solidify our leadership in the Group III market. Next is SK Earthon.

Good afternoon. I am Kim Kyoung-jun, I am Head of Planning and Business Support at SK Earthon. SK Earthon's Q2 operating profit due to a decrease in sales volume driven by the shipment schedule of the crude in China decreased KRW 34.8 billion Q-o-Q to record KRW 29.9 billion. For reference, the aforementioned figures exclude the performance of the Peru block, which driven by higher oil and gas prices amid the war, recorded operating profit of KRW 79.6 billion, up KRW 16.9 billion Q-o-Q. Accordingly, both SK Earthon's own assets and the Peru block delivered solid performance. For Q3, geopolitical uncertainty persists, but we are continuing efforts to sustain daily output and improve profitability, including drilling additional production wells at our own blocks in China, Vietnam and elsewhere. Next is an update on our key operations. First, at China Block 17/03, the 3 additional production wells drilled to sustain output are being brought online sequentially with completion expected within August. At Vietnam Block 15-1, we're proceeding as planned with the drilling of 4 additional production wells and the construction of production facilities at the SGG field. In addition, at Vietnam Block 15-105, development of the LDV structure is currently underway, encompassing production well drilling and facility fabrication. We're targeting first production in Q4 2026 upon completion of the related development activities. Finally, at Vietnam Block 15-217, drilling of all appraisal wells have now been completed. Based on the drilling results, we'll work with our partners on a detailed analysis of resource volumes and discuss the development plan. Next is SK On.

Good afternoon. I am Kim Yong Guang, Head of Financial Support at SK On. I will address battery business performance in Q2 2026 and share our outlook for Q3. Before presenting our Q2 results, I would like to note that starting this quarter, we have changed the financial statement presentation method for tax credit amounts arising under the U.S. IRA tax credit for battery products made and sold in North America. Previously presented separately from sales as other operating revenue, these amounts are now judged to be substantively reflected in customer price negotiations and transaction terms given the expansion of our North American business and changes in transaction structures. Accordingly, the company determined that presenting these amounts together with sales as sales plus other revenue more appropriately reflects the actual operating performance and revenue structure of our North American business. This change constitutes a reclassification of presentation items and has no impact on operating profit, net income or net assets. Q2 revenue driven by expanded sales volume in Asia, customer compensation payment and higher A&P Q-o-Q came in at KRW 2.94 trillion, a substantial increase from the previous quarter. As for Q2 operating profit, while there were onetime factors at play, I would like to emphasize that thanks to the increasingly visible effects of our cost reduction efforts, a genuine improvement in profitability was evident. As a result, we swung to an operating profit of KRW 821.8 billion. Turning now to our business outlook. First in Europe, local production incentive policies and EV-related support policies remain in place. We will leverage our strength in European production basis to enhance operational stability and strengthen our negotiating power with customers. In North America, we're staying actively engaged with our existing OEM customers as EV demand gradually recovers, and we'll do our best to win and deliver additional orders in the currently robust ESS market. In particular, we're working quickly -- or rather, we're moving quickly to expand orders with customers such as hyperscalers and power utilities, building momentum for SK On's mid- to long-term profitability improvement. We continue to pursue portfolio rebalancing, including the conclusion of the BOSK joint venture structure and the launch of SK On's stand-alone plan. As a result of fixed cost reduction effects, approximately KRW 300 billion in annual depreciation and KRW 200 billion in interest expense will be reflected on a full year basis. Together with our continuously pursued operational efficiency initiatives, these are expected to translate into profitability improvements over the second half of the year. In the second half, we aim to enhance our responsiveness to market volatility and customer requirements, thereby securing EV sales expansion and ESS order visibility. Next is SK Innovation, E&S business.

I'm Kangyung Kwon, Head of Management Planning and SKI E&S, and I will present on SK Innovation's E&S business. SK Innovation E&S posted Q2 operating profit of KRW 105.9 billion, down Q-o-Q as city gas demand softened heading into the off-peak season and as we carried out plant maintenance to keep power supply stable through the peak summer demand months. In Q3, we expect SMP to rise as power demand enters into seasonal peak and oil prices climb. However, with geopolitical instability heightening again, LNG spot market price volatility is expected to be a variable affecting earnings. That said, the Australia Barossa gas field in which we hold an equity stake is in the final stage of commissioning, and we expect it to move into full commercial operation within the second half of the year. We'll keep working to sharpen our cost competitiveness while doing our part to strengthen nations and energy security. Thank you. This concludes the presentation we prepared today, and now we will move on to the Q&A session.

Before taking questions from the floor, we would like to first address precollected questions. Investors and analysts shared with us many questions, and we've selected some of the questions where a lot of interest was shown. I will introduce the questions in order and invite the relevant business representatives to answer. First question concerns our battery business -- many questions from our investors. I would like to invite SK On to address.

Head of Financial Support Office at SK On. I will address our battery business turnaround strategy. First, our battery business turnaround is showing visible results driven by structural cost reduction. In Q2, even excluding onetime factors, our earnings improved Q-o-Q through our cost reduction activities. We're focused on cost reduction as the path to fundamental competitiveness, cutting material costs through supplier diversification, value engineering yield and other loss improvements and stronger inventory management while also lowering processing costs and SG&A through automation and AI-driven operational optimization. We continue to identify and execute cost-cutting initiatives across the board and drive profitability improvement, and we expect even more visible results in the second half. On EVs, in North America, we expect volume recovery in the second half, driven by the reintroduction of California EV subsidies and the recent recovery in demand. In Europe, we are also in discussions with major OEMs on volume stabilization and pricing, and our portfolio is improving as we shift focus towards higher profitability programs. In sum, cost cuts and recovering volumes are putting us on track for gradual quarterly profit improvement in the near term. Over the mid- to long term, we will drive a qualitative shift in our business portfolio through ESS order growth, moving fast on both order taking and production.

The second question concerns SK Energy's response to the Hormuz Strait situation following the Middle East conflict and its plans going forward. Investors have also shown strong interest in crude procurement security and sourcing diversification. I would like to ask SK Energy to address this question.

Yes. This is Head of Corporate Planning of SK Energy. In Q2, we responded to the disruptions in Hormuz Strait transit by purchasing crude at Yanbu and Fujairah and dry on swaps with government held strategic resources or reserves. We cover the remaining volumes held through non-Middle East imports. The situation in the Hormuz Strait and the Red Sea is shifting rapidly. And if current conditions persist, some cargoes could be affected. That said, by drawing on cargoes we've already secured and sourcing alternative cargoes and using reserve swaps, we don't expect any issues maintaining normal utilization levels for the time being. Reducing our dependence on the Middle East won't be easy in the near term, but over the long term, in step with government's crude sourcing diversification policy, we'll look at investing in facility upgrades and in expanding our diversification ratio.

That concludes our pre-submitted questions. We'll now move on to the live Q&A session. Please note that consecutive interpretation will be provided for this Q&A session. [Operator Instructions] The first question will be provided by Jin-Myung Lee from Shinhan Investment & Securities.

I have 2 questions that I would like to ask. The first question is that across all of the businesses, for the company as a whole, if you could break down the inventory-related gains or losses, that would be appreciated. And the second question that I have is that recently, there have been news reports that for Hynix's Yongin cluster that E&S will actually provide the power source for that. So if you could actually discuss E&S' mid- to long-term overall plans and the target timing for this type of operation.

Yes. This Chung Soyoung is from the IR Communications team. Thank you for your question. And maybe I can address the first question that you have had with relation to the inventory-related gains and losses across each of the business lines. So if we first talk about the second quarter in terms of the pro company inventory related gains, including the overall effect of the lower cost of market, that would be KRW 1,194.9 billion, which on a Q-o-Q basis was up by KRW 169.7 billion. So to break it down by company, it would be for SK Energy, KRW 562.3 billion SK geo centric, KRW 92.2 billion; SK IPC, KRW 446.9 billion; and SK Enmove around KRW 39 billion -- KRW 93 billion rather. However, that have been said, please understand that this is an accounting item and inventory-related gains and losses will fluctuate according to the market conditions.

So this is Kang, Head of the Management Planning Office at SK E&S, and maybe I can address the second question. So in the Yongin Semiconductor cluster in which SK Hynix's semiconductor fab will actually be located. Right now, there is a consortium that we have formulated between kumico and SK Innovation E&S to actually build a LNG cogeneration power plant that would be 1,050 megawatts in size. So this community energy facility will actually provide the steam that is necessary within the cluster for Fab #1 to 4. And by providing a stable energy supply, we do believe that it will contribute to increasing the overall production competitiveness of the semiconductor facility. So with regards to the timing and the schedule going forward from December of last year, we have actually started the overall construction, which is ongoing for the LNG pipeline and also the heat source facilities. And if the overall schedule does not have any issues, then we do believe that from the second quarter of 2030 in a gradual manner that the overall cogeneration facilities will be able to start the commercial operations. So that have been said, going forward, needless to say, we will continuously focus to do our best to pursue this project and ensure that we can provide a stable energy supply.

The following question will be presented by Jin Ho Lee from Mirae Asset Securities.