Good afternoon. I am Young Kyung Hwang, Head of IR at LOTTE Chemical. Thank you for taking the time out of your busy schedules to join us for LOTTE Chemical's earnings conference call. On today's conference call, we will first provide a brief overview of our financial results for the second quarter of 2026. This will be followed by remarks from our CFO on key management issues, after which we will proceed to a Q&A session. Please note that a simultaneous interpretation will be provided during the presentation, while consecutive interpretation will be provided for the Q&A. Today's presentation materials are available for download from our website. Let me now introduce the executives joining us on today's earnings call.
Joining us today are Nak-sun Sung, our CFO, Minw oo Kim, our CSO, Ki-seop Kwak, Head of the Corporate Planning Division for the Basic Chemicals, Young-seop Shim , Head of Sales, and Yong-s eok Park, Head of Corporate Planning Division for Advanced Materials. Next, let me walk you through our business performance for the second quarter. Please turn to page two for our consolidated second quarter financial results. Revenue for the second quarter of 2026 was KRW 5 trillion and 689.4 billion, while operating profit came in at KRW 110.1 billion, posting an improvement QoQ. In Q2, the product spread of key business areas widened, leading to improved profitability over the previous quarter. EBITDA came in at KRW 458.1 billion. Profit before tax and net income were KRW 242.4 billion and KRW 194.4 billion, respectively.
Pre-tax profit improved significantly over the first quarter due to the increase in gains on equity method valuation on the back of earnings recovery of the major subsidiaries, as well as the impact from the valuation gains on derivatives owing to the changes in the FX rate. Next is the consolidated financial position. As of the end of the second quarter of 2026, total assets stood at KRW 32.8 trillion, total liabilities at KRW 14.2 trillion, and total equity at KRW 18.5 trillion, with the debt-to-equity ratio posted 76.8%, similar to last quarter. Next is performance outlook by business. First, basic chemicals. In Q2 2026, basic chemicals business recorded revenue of KRW 3.9403 trillion, operating profit of KRW 2.3 billion, and operating margin of 0.1%.
Profitability in Q2 declined QoQ, despite improved spreads for key products due to scheduled maintenance and the lagging effect from feedstock price volatility. In Q3, as global demand recovery continues to lag, increased volatility in raw material prices is likely to prolong market uncertainty as well. Next, advanced materials. In Q2 2026, revenue was KRW 1.1551 trillion, operating profit KRW 132.5 billion, and operating margin 11.5%. Profitability improved significantly QoQ due to wider spreads for key products and the FX effect. In Q3, product spreads are expected to slightly narrow QoQ due to the softening of the spread improvement stemming from rising raw material prices that were captured in Q2. Despite that, based on the high value add product portfolio, we believe that we will be able to maintain our solid profitability. Next, LOTTE Fine Chemical.
The details were shared in the earnings release on July 30th, so I will only go through the highlights. Revenue in Q2 was KRW 586.3 billion, and operating profit was KRW 61.9 billion, with operating profit margin of 10.6%. Results improved quarter-over-quarter thanks to higher international prices for major products, increased sales volume, and exchange rate effect. In Q3, with upstream industries remaining flat, downward pressure on major product prices is expected to continue, but solid profitability is expected to continue as well. Last, LOTTE Energy Materials. Details were already covered yesterday at the earnings conference call, so I will only run through the highlights. Revenue in Q3 was KRW 194.2 billion, and operating loss was KRW 16.9 billion. Although Q2 sales volume increased, profitability declined as the positive lagging effects reflected in the previous quarter were eliminated.
In Q3, sales volume is expected to rise with expanding demand for AI and ESS, as we plan to meet growing customer demand and strengthen our growth foundation through the ramp-up of a new overseas plant. That concludes the Q2 2026 results presentation. I will now hand over to our CFO, Nak-sun Sung, who will discuss our results and key management issues.
Good afternoon. This is Nak-sun Sung, Head of Finance at LOTTE Chemical. I thank the investors and shareholders who joined our Q2 2026 earnings conference call despite your busy schedule. I will briefly review our financial performance. Geopolitical issues in the Middle East continued to create global supply chain uncertainty this quarter, leading to increased volatility in raw material and product prices and a challenging business environment. In this environment, we optimized operations with a focus on profitability. There was some favorable feedstock lagging effect. Based on the feedstock competitiveness of our USA and cracker business, and improved results in advanced materials and fine chemicals, we maintain profitability on a consolidated basis for a second consecutive quarter. Given that domestic and external volatility is likely to continue, we will further strengthen our ability to respond to market changes and maintain profitability-focused operations.
Despite the difficult environment, we are steadily moving ahead with strategies to reinforce our fundamental competitiveness and build a medium to long-term growth foundation. First, we are actively participating in the government-led petrochemical industry restructuring to solidify fundamental competitiveness of our basic chemicals business. In Daesan, the spin-off procedure was completed in June, and the integrated company with Hyundai Chemical will be launched in September to begin full-scale integrated operations. Yeosu received government approval for its restructuring plan, and we will proceed with splitting off of the Yeosu plant and establishing an integrated operating system with Yeochun NCC. These integrated operations are expected to improve operational efficiency and product portfolio synergy, and to gradually strengthen financial soundness through asset and capital structure optimization.
Through the restructuring, we will heighten competitiveness of our basic chemicals business while reducing its relative share, and build a more balanced portfolio by fostering high value businesses in advanced materials and fine chemicals. For longer term growth in advanced materials, we are moving ahead with the Yeochun compounding project on schedule to expand functional and high value businesses, targeting completion and commercial operation within the year. This will help enhance our compounding production capabilities and to continue increasing the share of high value specialty products such as Super Engineering Plastics. In fine chemicals, we continue to invest in and develop technologies for high growth, high value materials like semiconductor and medical grade materials. We are also expanding capacity for TMAC, a precursor for semiconductor developers, to actively respond to growth in the semiconductor materials market.
Along with such portfolio upgrade, we are keeping up our work to improve our balance sheet through investment optimization and cash flow focused management. With the completion of our longstanding large investment projects, future investment levels will be managed at a more stable pace, and we expect to run our finances based on the principle of keeping investment within EBITDA. We will consistently maintain selective investment that considers growth and profitability, and to keep conservative financial management. To our investors and shareholders, while uncertainties persist around the petrochemical industry, we remain unwavering in our push to strengthen competitiveness through restructuring, upgrade our portfolio towards higher value businesses, nurture future growth areas, and improve our financial structure. We will continue to respond flexibly to market changes, build a sustainable growth foundation, and enhance corporate value. As always, we will do our utmost to meet your expectations and trust. Thank you.
[Non-English content]. Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant. The first question will be provided by Hong-joo Shin from Shinyoung Securities. Please go ahead with your question.
Thank you for giving me this opportunity to ask my question. I have two questions. The first is the outlook for the second half. For the basic chemicals and the advanced materials, can you give us an outlook for the second half going forward? My second question has to do with what has been reflected in this quarter. In terms of the inventory valuation gains and losses, what has been reflected? Also, are there one-off items that has been reflected? If you can share those information. Thank you.
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This is Sung Nak-sun the CFO. Let me take your question about the outlook for the second half.
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In the case of the basic chemicals, we believe that the tight supply situation and also the strong prices that we have seen in the first half will be somewhat eased. Also going into the second half, the feedstock prices changes and also the supply of new volumes will have an impact. Also, we will sequentially reflect the changes in the consolidated earnings structure in line with the business restructuring of the domestic industry. In the case of advanced materials, we have been managing our pricing very flexibly and also the spreads have improved, and so this was reflected in the performance. Going into the second half, we believe that the major factors that will be affecting the performance of these businesses will be the recovery of demand of the downstream business as well as of the economic recovery trends.
Also we will be focusing on our strategic customers and also pursue further expansion of our high value added products.
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This is Ki-seop Kwak, the Head of Corporate Planning for the Basic Chemicals. Let me take your question about the second quarter inventory asset valuation losses and also the one-off losses pertaining to the TNA. In the case of the basic chemicals, there were losses related to the valuation of inventory was recognized in the second quarter and the losses came to KRW 100 billion. The main reasons was owing to the impact of the Middle East war in the second quarter. The naphtha prices rose in the month of April to May and then it sharply decreased in the month of June. Accordingly, the sales prices also fell and this led to increased losses for the valuation of inventory in the month of June.
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In the case of the Malaysian business and our Indonesian business as well, they have business structures that are based on naphtha and so they are impacted by fluctuations in the feedstock prices. Due to reasons similar to basic chemicals in the second quarter, similar level of losses related to valuations inventory occurred. Next, I am going to talk about the impact on the earnings by the TNA in the Yeosu NCC. LOTTE Chemical undertook in the first half our scheduled TNA for the Yeosu plant with the aim of ensuring the reliability of our facilities and long-term safe and stable operation. In order to enhance the efficiency of our measures to respond to the risk arising from the Middle East conflict on our supply chain, compared to our original schedule, we undertook the TNA earlier than the original plan.
The feedstock that was occurred during the TNA period was utilized in the operation of other facilities, thus maintaining production stability. Also during the TNA period, we have given prior notice to our customers and we have engaged in consultations with our customers regarding the reduction in the production volume during this period. We have responded in a way that ensured that there was no disruption in the supply of our products to the customers. During the TNA period, there was a reduction of the production and sales volume. Also due to the delay in the schedule for restarting, around KRW 50 billion of one-off losses had occurred.
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Going into the second half with the completion of the turnaround, we are looking forward to positive impact, including increase in the production efficiency. This is all. Thank you.
[Non-English content] The following question will be presented by Parsley Ong from JP Morgan. Please go ahead with your question.
Thank you for the chance to ask questions. Can I clarify, earlier you mentioned, I think KRW 100 billion inventory loss in basic chemicals and KRW 200 billion inventory loss in LOTTE Chemical Titan in second quarter. So total KRW 300 billion inventory loss. Despite that, you got KRW 110 billion OP in 2Q. Can you help me quantify how much was the positive impact from feedstock lag so that we can get a sense of how much of your second quarter earnings was core recurring earnings versus one-off caused by the oil price volatility? The second question is, now that your Daesan restructuring is completed, could you just tell us or share with us the expected impact on your OP versus equity method income?
For example, if we use the second quarter earnings as an example, then theoretically going into third quarter, how much would your OP and equity method income change by? Thank you.
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This is the CFO, Sung Nak-sun. Let me take your second question first.
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The restructuring of the Daesan business is quite significant, not only in terms of enhancing our business competitiveness, but also in improving our financial structure as well.
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In the case of the restructuring of the Daesan business already in terms of bonds, KRW 1.6 trillion has been completely transferred.
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In the case of the Yeosu business restructuring, as we progress with the relevant process, the borrowings will be transferred. As such, the financial structure will undergo additional improvement.
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As of the end of 2025, on a separate basis, the debt-to-equity ratio stood at mid 60% range. When the restructuring is completely completed, we believe that the debt ratio will come down even further.
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When the business restructuring at the Daesan site is completed, in terms of our earnings, we expect that the business portfolio will become more efficient, thus leading to less losses and improvement of our profitability.
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Because the share of the basic chemicals will go down, our expectation is that the volatility of the earnings owing to market condition change will also be eased.
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Finally, compared to the second quarter, the gains and losses on equity method into the third quarter. Because of the completion of the restructuring of the Daesan plant, we believe this will be improved.
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This is Ki-seop Kwak. We head a corporate planning of the basic chemicals. Let me take your first question about the inventory as well as the feedstock issues.
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In the case of Basic Chemicals division, as well as Titan, each of the businesses saw the losses on inventory valuation of KRW 100 billion each.
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In the case of the lagging effect, because of the war in the Middle East, in the case of the month of April in the second quarter, there was positive lagging effect. But in the case of May and June, because of the fall in the feedstock prices, the reverse lagging effect occurred.
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The size of the total reverse lagging effect is at a level that is similar to the losses that we have incurred in terms of the inventory valuation.
[Non-English content]. The following question will be presented by Woo-j ae Jeon from KB Securities. Please go ahead with your question.
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Thank you very much. I have two questions. First has to do with U.S. ECC and MEG. Can you share the status of the operating rates for the second quarter and also the sales price? In the case of the U.S. plant, I understand that you are selling to China. Because of the geopolitical issues, did you also experience any rise in the freight cost? Or because you are using specialized vessels, there has been no change in terms of the freight cost. That is my first question. Can you also provide an update on the Uzbekistan ECC as well? My second question has to do with the fact that after June, with the lifting of the blockade, oil prices have gone down, and this led to reduction of demand by customers. With the new developments globally, is demand picking up again?
What is your outlook for the month of August?
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This is Ki-seop Kwak, Head of the Corporate Planning for the Basic Chemicals. Let me take your first question.
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In the case of LC USA, it uses as feedstock ethane that is produced within the U.S. So there has been no impact in terms of rising the feedstock prices owing to the Iranian war.
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However, in terms of the products, the LC USA has a high share of products that are sold to the European markets. In the case of Europe, typically the share of MEG imports from Middle East is around 30%.
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Because of the war in the Middle East, there were disruptions in the importing of MEG from Middle East. This had an impact in increasing the product prices. Compared to the first quarter, the product spread has increased by more than $100. There was a positive impact.
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In the case of the operating status in the second quarter, cracker, MEG are undergoing normal operation at 100%.
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After the ceasefire in April, because of expectations of stabilizing supply chain, the international prices have fallen. Since then, in the earlier part of July, with a new escalation of the conflict and also the blockade of the Strait of Hormuz, an additional Red Sea risk, the uncertainties surrounding the supply chain has been reignited, and this had led to a rising international price trend.
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However, we do not foresee any steep or sharp increases as we have seen in the earlier stage of the war. Still, the ethane prices within U.S. is not seeing any major changes. Compared to the second quarter, our outlook is that the product spread will drop slightly. However, we do believe that very solid profit generation will be maintained.
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In the case of Uzbekistan, the ethane cracker there, based on the stable ethane prices and the stable supply and demand situation, very stable operations are being undertaken and profit is being generated in a solid manner.
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This is Shim Young-seop, the Head of Sales. Let me take your question about the re-escalation of the Iranian war. Regarding this risk, we are responding by making use of the stable naphtha supplies from the domestic market and also using LPG as an alternative feedstock and also utilizing our non-Middle East sources of naphtha supply. Stable operations are being undertaken.
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In the case of the inventory levels of the customers, our take is that they have entered into the normalization phase.
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If you look at their recent purchasing pattern, they are shifting to a pattern that is focused on the actual underlying demand.
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If the geopolitical risk emerges again in the third quarter, our understanding or our outlook is that the likelihood of restocking occurring at the level that we have seen in the second quarter will be quite limited.
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[Non-English content] The following question will be presented by Yujin Jeon from iM Securities. Please go ahead with your question.
[Non-English content] If you can hear me, we welcome your questions.
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Thank you very much for this opportunity to ask my questions. I have three questions. The first question has to do with inventory levels of China. I understand that their inventory levels for MEG and such minor products have gone down. But leaving aside these minor products, what about the key products like PE, PP, ABS? Do you have an understanding or take on what is the Chinese inventory levels when it comes to these major product lines? Can you give us a comparison of the inventory levels before and after the outbreak of war? My understanding is that the price of LPG is actually lower than that of naphtha. Can you share the information regarding the blending percentage of LPG into your feeding system? My third question has to do with your borrowing.
In the course of restructuring, you said that KRW 1.6 trillion of borrowings will be transferred. Can you give us an idea of how much net borrowings will be transferred by the end of 2026?
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This is Kwak Ki-seop, the Head of Corporate Planning of the Basic Chemicals. Let me take your question about the blending ratio for LPG and naphtha. In the case of our company, in order to secure feedstock competitiveness and to enhance the operational flexibility, we are running facilities that enable the feeding of LPG as alternative feedstock. In case of the second quarter, due to the turnaround of the Yeosu plant, we have input LPG in a limited manner. After the completion of the turnaround, when the restart was implemented in July, the LPG blending ratio came to 37% for July.
Going into the second half, based on the feedstock economics and also the facility operating conditions, we intend to flexibly manage and operate our facilities. When the conditions permit, we intend to expand the blending ratio of LPG. Thank you very much.
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This is Shim Young-seop. I am the Head of Marketing. Let me take your question about the Chinese inventories. In the case of Chinese plants in the months of May and June, many of their crackers actually have undergone turnaround. In the case of the two top petrochemical companies, their inventory levels is assessed to be around 600,000 to 650,000. I am referring to the PE and PP inventory levels. Our outlook is that up until the third quarter, their inventory levels will not be maintained at a high level.
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This is Park Yong-seok, Head of the Corporate Planning for the Advanced Materials.
Let me take your question about the inventory levels for ABS. Recently, due to the weak demand in the Chinese market, the utilization rate of their plant in the first quarter was 65%, and in the second quarter it went down to 58%. Currently, their stocking levels have increased by 87% in the second quarter compared to the first quarter. That is all. Let me take your third question of the estimation of the net borrowings by the end of 2026. As of the end of June, on a consolidated basis, due to the rise of feedstock prices as well as the rise of the product prices, and also due to the impact of the foreign exchange rate, compared to the end of 2025, net borrowings have increased.
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By the end of this year, our estimation of the net borrowing is that it will be at a level that is similar to the transferred amount for the Daesan restructuring. However, in the case of our company, assets in foreign-denominated currency is actually quite large. The volatility of the FX takes up a large portion. If we exclude that part, then the net borrowings at the end of the year will be similar to what has been transferred.
[Non-English content]. With this, we would like to conclude the earnings conference call for the second quarter of 2026 for LOTTE Chemical . If you have any further questions, please contact our IR team. Thank you very much.