Good afternoon. This is Young Kyung Hwang, Head of IR at Lotte Chemical. We would like to thank everyone for joining today's conference call and for your continued interest in Lotte Chemical despite your busy schedules. Today's conference call will proceed as follows. First, we will provide a brief overview of our fourth quarter results. Afterwards, our CFO will discuss key management issues. Finally, we will have a Q&A session. Please note that the presentation will be conducted with simultaneous interpretation, while the Q&A session will be conducted with consecutive interpretation. The presentation materials for today's call are available for download in our website. Let me now introduce the senior management members from Lotte Chemical who are joining us today.
Joining us today is Nak-seon Sung, our CFO, Min-woo Kim, the CSO, Giseop Kwak , Head of Corporate Planning Division of the Basic Chemicals, and Kwoun Jo Hyun, Head of the Monomer Division, and Yang-Sik Cheon, Head of the Polymer Division, Kyung-Sun Park, Head of Corporate Planning Division of Advanced Materials. First, let me walk you through our full year 2025 financial results. For 2025, our sales decreased by 7.1% year-on-year to KRW 18.483 trillion , and we recorded an operating loss of KRW 943.6 billion. With a delay in the recovery of the petrochemical industry owing to the slowdown in demand for EVs, losses by Lotte Energy Materials have grown over last year. However, the performance of the Advanced Materials business and the Lotte Fine Chemical improved, and the company-wide profitability was not significantly different from last year's level.
We will now move on to our consolidated financial results for the fourth quarter of 2025. Fourth quarter sales amounted to KRW 4.7099 trillion , while operating loss totals KRW 433.9 billion. Due to product price declines associated with seasonal off-peak demand and the impact of the initial ramp-up of LCI operations, a wider loss compared to previous quarter was posted. EBITDA recorded a loss of KRW 69.5 billion, while loss before tax and net loss amounted to KRW 1.7363 trillion and KRW 1.609 trillion respectively, owing to the Q4 asset impairment losses. On to our financial position on a consolidated basis. As of the end of the fourth quarter, assets are approximately KRW 31 trillion, liability KRW 13 trillion, and shareholder equity KRW 18 trillion, with debt to equity ratio of 76.4%. Next on to business results and outlook by division.
First, Basic Chemicals. Fourth quarter sales recorded KRW 3.3431 trillion and operating loss was KRW 395.7 billion. Profitability declined from the start-up of LCI commercial operations and the start of the seasonal off-peak period toward the year-end. While external uncertainties are expected to persist, profitability is projected to improve quarter-on-quarter, supported by a gradual recovery in demand following the end of the off-season and enhanced operational stability. Advanced Materials. Fourth quarter sales were KRW 929.5 billion, operating profit KRW 22.1 billion with operating margin of 2.4%. Sales volumes declined due to the onset of the seasonal off-peak period and year-end inventory adjustments by customers, leading to a quarter-on-quarter decline in profitability. In the first quarter, we expect performance to see gradual improvement quarter-on-quarter, supported by wind down of the year-end inventory adjustment season and a recovery in downstream demand. Next, Lotte Fine Chemical.
As this was already covered in today's preliminary earnings disclosure, today I will briefly hit on the highlights only. Fourth quarter sales were KRW 439.1 billion, operating income KRW 19.3 billion with OPM of 4.4%. Amid weakness in downstream demand, sales volume decreased and profitability declined quarter-on-quarter. We expect demand to remain soft for the time being and first quarter profitability is expected to largely be flat in the first quarter. Lastly, Lotte Energy Materials. Since this was also covered in detail during the conference call yesterday, I will just briefly highlight the key points. Fourth quarter sales recorded KRW 170.9 billion, operating loss KRW 33.8 billion. Despite stagnant demand in the global EV market, profitability improved quarter-on-quarter from diversification of the portfolio into applications such as ESS and PCB foils.
In the first quarter, we will continue to seek further diversification of our product portfolio, which we expect to drive improvement in performance. Now we will pass the mic to our CFO to take us through key highlights.
Yes, good afternoon. This is the CFO. My name is Nak-seon Sung of Lotte Chemical Corporation. I'd like to thank everyone for taking the time out of your busy schedules to attend our earnings call. First, we regret to report fourth quarter results that do fall short of investors' expectations. The fourth quarter performance reflected our entry into the weak off-peak season as well as initial impact from the commercial operation of LCI. In addition, recognition of impairment loss on goodwill and assets led to a wider operating loss compared to the previous quarter. However, we would like to emphasize that recognition of these non-operating expenses were unavoidable measures taken to preemptively manage risks in preparation for an uncertain market environment ahead. Looking back on 2025, despite challenging business conditions, we nonetheless steadily executed on key initiatives in transforming our business structure and strengthening competitiveness.
First, in line with the government-led restructuring of the domestic petrochem industry across industrial complexes, we have established a business reorganization plan centered on the Daesan plant and have been making speedy progress toward rationalization of the domestic commodity petrochem business. Also, we continue to make efforts to optimize utilization rate and improve operational efficiency across our existing plant sites. At the same time, we have boldly divested non-core assets, including in Pakistan and the rubber business in Malaysia as well, as well as other non-operating assets to secure added liquidity. We also continue to work towards building a foundation for future growth to address the structural limitations of our existing business. To respond to growing demand in Southeast Asia, the Indonesian Petrochem complex was successfully completed and commenced operations in the fourth quarter.
Construction is underway in the Yeosu area to build the largest functional compounding plant in Korea with capacity of 500,000 tons. We are also preparing to expand our eco-friendly energy business through operation of hydrogen power plants and hydrogen distribution centers utilizing by-product hydrogen. Although the business environment in 2026 is expected to remain quite challenging, we aim to accelerate our ongoing structural transformation of business to deliver visible results. Our strategy will focus on two key pillars, reducing exposure to the commodity petrochemical business and building the foundation for future growth. First, we will make every effort to successfully complete the ongoing Daesan business restructuring project within this year. At the same time, we will strengthen our competitiveness in high- value-added products such as functional materials, as well as in eco-friendly energy business domain as well.
Leveraging the Yeosu compounding plant, which is scheduled for completion this year at the hub, we plan to expand our portfolio of high-value-added products such as Super EP. In addition, we have been expanding to various materials businesses through our subsidiaries, which is expected to help gain momentum and contribute to the diversification of our portfolio. In battery materials, the U.S. cathode foil plant to address North American EV demand is nearing completion, and we plan to gradually expand our lineup of functional copper foil products, including PCB foil for AI applications. Our subsidiaries are scheduled to continue phased capacity expansions for semiconductor process materials and green materials for food and pharmaceutical end markets. We are also expanding our hydrogen energy business in line with the global clean energy transition.
Following the 20 MW scale hydrogen fuel cell power plant launched last year, an additional 60 MW plant is scheduled to commence operations this year. From a financial perspective, we will continue to strengthen our financial soundness by maintaining a conservative cash flow-based operating approach. Despite delayed recovery in our industry over the past several years, we have maintained a sound debt ratio in the 70% range. In particular, with completion of the LINE Project, we expect enhanced financial stability and CapEx discipline as future investments will be limited within EBITDA levels.
Finally, regarding shareholder returns, the company aims for a dividend payout ratio of 30% on a separate net income basis and are mindful of both dividend stability and yield as we seek to enhance shareholder value. Accordingly, following an interim dividend of KRW 501 per share, we have internally reviewed a year-end dividend also of KRW 501 per share.
The final proposed dividend will be confirmed at the shareholders' meeting in March. Dear investors and shareholders, while another challenging year likely lies ahead, we are strongly committed to continuing structural improvement to strengthen our future competitiveness beyond the short term. Through these efforts, we aim to build solid profitability and growth capacity so that we are well-positioned to deliver results and pay back our investors for your interest and support going forward. Thank you very much.
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 Parsley Ong from JP Morgan. Please go ahead with your question.
Hey, this is Parsley. Thank you for the chance to ask questions. My first question is on the very large impairment loss in fourth quarter. Could you give us some details on which chemical asset that relates to, and would that just be the Daesan cracker or some other crackers? If we proceed with further restructuring, would we expect another round of impairments when the plant shuts down, or is everything already booked in? Also, could you give us an update on your other restructuring potential initiatives? That's the first question. The second question is, you mentioned earlier that you might be expanding PCB foil for AI applications.
Could you give us a sense of the capacity CapEx timing and the grade of PCB foil you're expecting? Is it like HVLP3 or 4? How would the margins and prices compare versus your existing copper foil product? Thank you.
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This is Nak-seon Sung, the CFO.
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As to the impairment loss related question. The amount is similar to last year at KRW 1 trillion. Half of that is related to goodwill, and half of that is related to the impairment of assets.
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As of yet, we are still discussing with the accounting firm about the final amount of the impairment loss. When the final number comes out, we will be sure to share it with you through our IR team.
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Also with regards to your second question, with regards to the recent impairment loss, this has nothing to do with and is unrelated to the cracker shutdown that is carried out in connection to the business restructuring.
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This is Min-woo Kim. I am the CSO. Let me take your second question.
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For further details, it would be better if you inquire through Lotte Energy Materials. But since you have asked your question, let me briefly give you an overview of this matter.
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Aside from the EV applications, the application for the copper foil is first of all the ESS and secondly the PCB foils for AI applications for which growth is actually taking place at a very rapid pace.
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In the case of the ESS applications, broadly speaking, it's probably similar to the general battery foils. In terms of margins, there's not much difference with the EV applications.
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In terms of the copper foils overall, they are also suffering from oversupply. In terms of supplying to the battery companies, we're not yet realizing any significant profitability. However, in tandem with the growth of the ESS applications, we do believe that as the utilization rates are recovered, margins will also rise in the second half of the year.
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In terms of the PCB foil for AI applications, there is a very limited number of copper foil suppliers that have been approved by the customers and are able to provide the supply. We are looking forward to high margins. For more specific details, I think you need to inquire to the Lotte Energy Materials.
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With regards to CapEx. For Lotte Energy Materials for Malaysia, the ESS applications are leveraging the very low price electricity costs locally. For the PCB foils, we are planning to transition the facility in the Iksan in order to have it become a dedicated facility for producing PCB foils.
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In case of the Malaysian plant, because of the current level of utilization rate, we do have surplus capacity. We do not view that any additional capacity expansion is required there.
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The facility in Iksan to produce the PCB foils, we do need to add the facility for back-end facility processing. However, the front-end processing facility can be used as it is. We are able to engage in competitive CapEx expansion with regards to the Iksan facility.
[Non-English content] The following question will be presented by Woojae Jeon from KB Securities. Please go ahead with your question.
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Thank you for giving me this opportunity to ask my question. With regards to the sectors such as aerospace, aviation, and robot, which has very great growth potential. Do you have any high value added products that fits and is suitable to be applied to these sectors? What level of commercialization have you reached regarding the product? That is my first question. My second question has to do with your restructuring effort. As the restructuring takes place in the second half of the year, which loss-making products do you believe will undergo additional reduction in terms of production? What are the results that you are anticipating in terms of the level of improvement of portfolio product mix?
Also, I do believe that in order to maintain the minimum level of utilization rate for your plants, there would have been those contracts through which you have sold your products at a very low price domestically. What is the share of these products that have had contracts at a discounted price compared to the international prices?
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This is Min-woo Kim. I am the CSO. Let me answer your second question first.
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You asked a question about the level of production decline for the loss-making products in accordance with the business restructuring initiatives at the Daesan complex. With regards to this question, we intend to undertake a flexible response depending on the market situation of each individual product at the time when we will have to adjust the utilization rates of these plans.
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However, given the product profitability trends of the recent years, the EVA has been profitable to a certain extent, but some grades of the HDPE and PP products are not as profitable. In the case of the polymer product, it is not just a single grade that we produce. We produce multiple grades of the polymer products. Some are profitable, some are loss-making grades. Going forward, we will reduce the overall production volume of this product category and focus more on those more profitable and products with higher margins. Also, part of your question pertained to what percentage of the products that are sold domestically are sold at a discount compared to the international prices. Basically speaking, the domestic prices are not sold at a discount compared to the international prices.
Because of the reason that the domestic market is more profitable compared to the international markets, most of our peers have been focusing on the domestic markets over the years. So the premium is less here in this market. However, we cannot deny that compared to the international market, it is easier to post profitability in the Korean domestic market. With regards to the improvement of the portfolio product mix, I think I can speak about this topic in probably two ways. Financially speaking, as we are participating in the restructuring of the Daesan Industrial Complex, the plan is that we will take 50% of the stake. As you are well aware, when that happens, that means we become deconsolidated from the Lotte Chemical books. So the entire Daesan portfolio will be deconsolidated from Lotte Chemical.
However, we will still be holding 50% of the stake of the JV. If you look at the actual impact, in terms of the portfolio mix changes, when we assume that when the crackers of the two companies, the utilization rate is maintained at 80%-85%. When one of that is shut down, the reduced volume will be equivalent to the amount that is shut down by a single cracker.
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My name is Kyung-Sun Park. I am from Advanced Materials. Let me take your first question. With the advanced materials business, we were mostly focused on the PC business of the ABS for the home appliances and mobility. So internally, in the process of reviewing the next generation promising businesses for the future. Those sectors that we believe will be highly promising businesses in the future are firstly aerospace, robot, 6G, data center, and energy.
As we are seeing the emergence of the manifold physical AIs in the market, we are developing at the advanced materials business level materials that can be applied to these areas. Most of the materials that will be applied for the next generation promising business areas have the characteristics of high strength, lightweight, replacing metals, and are able to discharge the heat of the batteries. What we are doing right now is we are looking at different EP materials, looking at the Super EPs, the general EPs, and looking at the matches with different industrial applications. In the case of the high-end products, we have PP, LCP, and PPS products. We have actually already started development in conjunction with a domestic large company. For some of the products, we have already finished testing and have started commercial production of these products.
When the time is right for us to share more information about these high-end Super EPs, we will be sure to share this information through our IR team.
The following question will be presented by Hyunryul Cho from Samsung Securities. Please go ahead with your question.
I have two questions. In the case of China, they are planning on increasing their consumption tax on naphtha and also reducing the rebates on the value-added tax. Will this have a meaningful impact on the potential recovery of the market situation in Asian region? That is my first question. My second question has to do with the LEP compounding plan. I understand that you are planning on operating this plant already second half of the year. When this plant is ramped up and goes into operation, what is the expected annual sales and profitability?
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My name is [inaudible] . Let me take your first question about the consumption tax in China. There has not been, as of yet, an official announcement regarding the naphtha consumption tax.
We understand that the general policy direction of China is that they will be engaging in a full implementation of the consumption tax on naphtha, then afterwards transition toward rebates. The impact of this measure is that in the short term this will lead to an increase in the demand for imports in China. However, because utilization rates will be reduced in the long term, the impact will be limited. We also believe that this will lead to higher cost burdens for the petrochemical companies of China. The competitiveness of some of their products will decline, leading to an advantage and benefit for the Korean crackers products.
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This is Yang-Sik Cheon from the polymer division. Let me take your question about the value-added tax and the rebate.
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The recent Chinese government announcement to reduce or suspend altogether the rebates for certain products in order to curtail the intense competition for lower price products, also to alleviate the oversupply situation. With regards to those products that impact us is those products with solar applications and battery materials.
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The characteristics of these products is that China has the absolute dominant market share in the world with regards to these two products. In the case of the materials for the solar application, they have 90% of the market. For battery materials, they take 80% of the global market.
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With regards to these products ahead of the rebate reduction, there is a push out exports that are increasing. In the case of the solar application, the measure for which has been decided to take place in April, we are seeing an increase in the import volume.
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However, given past patterns, whenever we have these push export volumes increase, afterwards there is a steep decline in prices. In the long term, the impact will be quite minimal.
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This is Kyung-Sun Park from the Advanced Materials Business Unit. Let me take your second question.
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First, let me briefly explain about the compound complex in Yeosu.
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We are a dedicated facility for the global functional materials. In order to enhance the competitiveness of these compounding products, we are building the largest single factory for this product in Korea.
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Currently, a total of 11 production lines are in operation. Newly instituted five production lines have started operating in October of last year, and transferred production lines. Six of these lines have started operation in January of 2026.
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By the year-end, we intend to operate 23 lines in total. By the second half of the year, the annual capacity of this compounding complex will come to 500,000 tons.
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The annual sales volume of our advanced materials products come to 1.4 million tons a year, and we are actually planning the sales of high value added compounding products at 1 million tons per year.
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By the year-end, when all 23 production lines are completed at the Yeosu site, the annual capacity will come to 500,000 tons, which is 50% of the entire compounding volume.
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In terms of sales, our anticipation is about KRW 2 trillion, and for OPM, 5%-10%.
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In the case of the Yeosu plant, we are providing high functional materials for the IT business as well as the mobility business. Also, we are engaged in producing the Super EP products as well. This is a facility that will be dedicated to high value added specialty products.
[Non-English content] The following question will be presented by Jae-Sung Yoon from Hana Securities. Please go ahead with your question.
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My first question has to do with the LINE Project. There has been substantial losses that was posted in the fourth quarter. How much exactly was the initial cost that went into the ramp-up of this project? What is the current utilization rate and also the current sales figures? Once the initial ramp-up expenses come down, by when do you believe that the performance will turn meaningfully positive? That is my first question. My second question has to do with your product that is less subject to the global capacity add-on volumes hitting the market in 2026 and 2027.
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I'm Giseop Kwak. I'm Head of the Corporate Planning Division of the Basic Chemicals Business Unit. Let me take your first question.
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In the case of LCI, it started commercial operation on October 15, 2025.
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In the initial phase of the commercial production, there was impact of the fixed cost and this was coupled with the weak market conditions of the Southeast Asian region in the fourth quarter. This led to losses.
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It's difficult to specify the accurate figures for the initial expense, but coupled with the cost of the pilot production as well as the fixed cost, this had a burden on the initial performance of this plant.
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Most of the crackers in the Southeast Asian region are running at a utilization rate of 75%-90%, and utilization rate of LCI is not much different.
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Once the plant operates in a stabilized manner and as we enhance the efficiency of the production and the profitability of domestic sales go up, we will be turning in the meaningful performances going forward.
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This is Yang-Sik Cheon from the Polymer division.
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Let me take your question about the capacity add-ons.
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This year, the expected capacity add-on volumes is for PP 6 million tons, HDPE 5 million tons and LDPE 3.5 million tons.
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Next year, we believe the volumes will be largely similar, maybe a slight reduction from this year.
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If you look at the capacity add-ons that are going on currently globally compared to the demands, although it differs slightly by the product, it is about 6%-10% of the overall demand.
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Normally we anticipate about 4%-5% growth in the demand for our products. There is capacity add-ons going on that exceeds the demand levels.
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However, among the planned capacity add on, some of them is scheduled to be postponed. We believe that overall the supply will be slightly exceeding the demand levels.
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With this, we would like to conclude the 2025 fourth quarter Lotte Chemical earnings presentation. If you have any further inquiries, please direct those inquiries to the IR team. Thank you very much for your time.