Good afternoon. I am Youngkyung Hwang, Head of IR at Lotte Chemical, hosting today's earnings call. We would like to thank you all for taking the time out of your busy schedules to participate in this conference call. Today's conference call will begin with a brief overview of our third quarter results, followed by our CFO discussing key management issues and earnings release related matters.
Then finally, we will have time for questions and answers. Please note that the presentation will be simultaneously interpreted, and the Q&A will be consecutively interpreted. You can also download today's presentation from our website. Now, I would like to begin by introducing our executives participating in today's conference call.
Today's conference call is attended by Nak-son Sung, CFO, and Min-Woo Kim, CSO, and Giseop Kwak, Head of Basic Chemicals Corporate Planning Division, and Kwoun Jo Hyun, Head of Monomer Division, and Yang Cheon, Head of Polymer Division, and Cho Woo-Hyun, Head of Advanced Materials Corporate Planning Division. Let me walk you through our operating results on a consolidated basis for the third quarter of 2025.
First, page two, profit and losses. Q3 revenue was KRW 4. 7861 trillion, and operating loss came to KRW 132.6 billion. The loss narrowed over the second quarter due to the elimination of one-off expenses, including the turnaround that were reflected in the previous quarter, and wider product spreads as feedstock prices stabilized. Loss before tax and net loss were KRW 245.6 billion, and EBITDA was KRW 167 billion.
With removal of the impact of the PRS valuation, which had been reflected last quarter, both the pre-tax and net profit improved QOQ. Next, page three, financial results on a consolidated basis. As of the end of Q3, assets came to KRW 33 trillion, liabilities of KRW 14 trillion, capital KRW 19 trillion, and debt to equity ratio is 75.7%.
Next, on the business results and outlook for each of our major business segments. Page four, Basic Chemicals. Q3 revenue was KRW 3. 383 trillion and an operating loss of KRW 125.5 billion. Due to the termination of the turnaround at the Daesan Plant and subsidiaries, one-off expenses were removed, and spreads improved due to the downward stabilization of feedstock prices.
Although feedstock prices are expected to remain stable in Q4, global demand is expected to remain weak due to external uncertainties and slowdown of the global economy. Next is Advanced Materials. Q3 revenues posted KRW 1. 222 trillion, operating income posted KRW 57.5 billion, and operating income ratio recorded 5.6%. Despite demand slowdown in downstream industries and conservative inventory management, we were able to maintain solid profitability through sales of high value-added products.
In Q4, we expect sales volume to slightly decrease due to entering off-peak season and from TA impact. Next is Lotte Fine Chemical. Since we explained the detailed results during our November 6th earnings call, I will briefly mention the major highlights. Q3 revenues posted KRW 443.4 billion, operating income posted KRW 27.6 billion, operating income ratio recorded 6.2%, and profitability greatly improved QOQ.
With the increase of sales prices of ECH and other chlorine-based products and reflection of TA completion effects, profitability improved. In Q4, although downstream industry demand is expected to remain flat, we expect to have a stable profit flow through high value-added product-based sales expansion. Last is Lotte Energy Materials. Lotte Energy Materials was explained in detail during the November 10 conference call, so I will briefly go over the overview today.
Q3 revenue posted KRW 143.7 billion and operating losses posted KRW 34.3 billion. Despite efforts to adjust inventory levels and to improve productivity, losses continued due to customers' inventory adjustments. In Q4, we expect to see strong raw material prices and downstream industry uncertainties continue, but through product portfolio diversification, we will continuously pursue sales expansion. With this, we will conclude 2025 Q3 earnings presentation, and I will invite our CFO, Nak-son Sung, to give a more detailed explanation.
Greetings, everyone. I am Nak-son Sung, CFO of Lotte Chemical. Thank you for taking time out of your busy schedules to attend today's earnings presentation. To elaborate on Q3 business results, despite ongoing internal and external challenges with the absence of TA cost, which was reflected in the previous quarter, performance improved. However, with ongoing weakness in global demand and continuous macroeconomic uncertainties, it is expected to take some time before supply-demand imbalance in the petrochemical industry eases.
Despite this challenging environment, we have continued to pursue structural improvements to our business fundamentals with a particular focus on strengthening competitiveness through business portfolio transformation. First, with regard to improving efficiency in the commodity petrochemical sector, we are actively participating in the government-led restructuring initiative of the domestic petrochemical industry.
Unlike previous restructuring efforts, this initiative aims to create a more resilient business structure capable of maintaining competitiveness even in a downturn by fostering synergies among companies and ensuring stable operations. As previously announced, we are working closely with our partners to optimize the utilization of assets within the Daesan Industrial Complex, and progress has been relatively swift compared to other discussions under the government's industry restructuring framework.
However, as certain details have not yet to be finalized, it is difficult to share specific information at this stage. Once the direction becomes more concrete, we will promptly communicate the details to the market through official disclosures. We will do our utmost to ensure that this initiative not only enhances the competitiveness of our commodity petrochemical business, but also contributes to the structural efficiency of Korea's petrochemical industry as a whole.
In parallel, the divestment of non-core assets is also steadily progressing. Regarding the Pakistan PTA business, following the signing of the sale contract in February this year, the transaction is expected to be completed. We have also decided to transfer the HEFA loss manufacturing facility asset in the Yeosu factory to Lotte Fine Chemical, which has been operating it under contract. In addition, we have decided to sell a portion of our stake in Lotte GS Chemical, which is our consolidated subsidiary, to our partner company.
This series of non-core asset divestment is expected to strengthen Lotte Chemical's financial stability by reducing the proportion of commodity assets, securing cash liquidity, and improving key financial metrics through a decrease in consolidated debt. Along with efforts to enhance operational efficiency in our domestic business, we are pursuing business structure optimization overseas, particularly in Southeast Asia.
As a part of these efforts, the Indonesia LINE project that commenced construction in 2022 was completed in May this year and began commercial production in October. Given the current market conditions, achieving the initially expected level of profitability will be challenging. But as new facilities operate with greater efficiency than before, profitability is expected to gradually improve once market conditions recover.
Through this project, we have strengthened our business foundation in the Southeast Asian market, where supply is limited but growth potential is high, and this shift is serving as an opportunity to restructure our commodity petrochemical business, traditionally centered in oversupplied Northeast Asia toward high growth markets. In addition, although specific details have not yet been finalized, we are continuing discussions on various initiatives, including attracting investors for Southeast Asian commodity petrochemical assets.
As these efforts progress together, we expect to further accelerate the optimization of our business structure in Southeast Asia. The completion of LINE project is also significant in that it marks the conclusion of large scale investment phase that had weighed down on our financial metrics. With this, we expect a reduction in CapEx burden and an improvement in cash flow. From next year onward, we will prioritize financial soundness by adhering to our principle of maintaining investments within EBITDA.
Beyond improving efficiency in our commodity petrochemical business, we are also steadily advancing the sophistication of our overall business portfolio. Construction of a new compounding plant aimed at expanding our functional compound business is underway in the Yulchon Industrial Complex in Yeosu, with completion targeted for the second half of next year.
In addition to the hydrogen fuel cell power generation project that began commercial operations in the first half of the year, Lotte Air Liquide Enerhy Hydrogen Distribution Center held its completion ceremony yesterday and is now in full operation. Through these initiatives, we are accelerating our entry into the hydrogen energy sector and will continue our efforts to secure future growth engines aligned with the global transition toward clean energy.
Dear investors, the petrochemical industry continues to face a challenging market environment and external business conditions remain highly uncertain. However, as mentioned earlier, we view this period not merely as a time for short-term response measures, but as an opportunity for structural transformation, and we will do our utmost to emerge from this challenge with stronger competitiveness that meets our investors' expectations. We sincerely ask for your continued support and encouragement. Thank you very much.
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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.
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Currently, there are no participants with questions. Please press star one, star and one to give your question.
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The first question will be provided by Hyun Cho from Samsung Securities. Please go ahead with your question.
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Thank you very much for giving me this opportunity to ask my question. Looking at the sales or revenue of Lotte Chemical Titan, it seems that some of the LINE has already started operation. For your ethylene and also for PE, some of it will be supplied to the Indonesia and also for PP as well. It also appears that there are some remaining monomers as well. You did say that the profitability will not be up to expectations, but that it will nevertheless be at a fair or sound level. Do you believe that the operating losses of Lotte Chemical Titan will come down significantly in the fourth quarter? That is my first question. With regards to my second question, it pertains to Daesan. Based on the media reports, we have been able to confirm that a plan has been submitted.
You also mentioned that synergies is to be generated. Unless there is any changes in the feedstock, just when negotiating on the facilities itself does not appear to lead to significant synergies effect. Do you have any plans to change your feedstock? Is there any hidden synergies that we are not aware of? If there is, can you share what those are? Thank you very much.
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I am Giseop Kwak. I am the Head of the Basic Chemicals Corporate Planning Division. Let me take your first question.
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Currently, the utilization rate of LCI is at around 80% level and of the ethylene that is produced here, 450,000 tons is being provided to Lotte Chemical Titan.
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60% of the production volume is being supplied to Lotte Chemical Titan Nusantara and the remaining is sold externally.
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We have been supplying to the pipeline of Lotte Chemical Titan Nusantara, and previously we have been supplying through the maritime vessels. Now we will be able to save on the freight cost and this will lead to moderate contribution in reducing the operating losses for Titan.
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My name is Min-Woo Kim. I am the CSO. Let me take your second question.
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Yes, as you have already mentioned, just by combining two NCCs and naphtha crackers with the same feedstock, would it lead to any significant synergies? I do understand that is the speculation held by many.
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However, this assessment does apply when the naphtha cracker shows 100% utilization rate or utilization rate at the design level.
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In the case of our plants and the plants of HDC, given the design requirements of naphtha crackers and also the characteristic of these facilities, there is something called turndown ratio below which a ratio, the utilization rate cannot be lowered any further.
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When we are determining the utilization rate, we would have to consider the turndown ratio, the production cost of the ethylene, and the balancing ratio, and also the profitability of the downstream units.
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Despite this being so, and despite the fact there are a number of products that are unprofitable that is being produced by our subsidiary downstream plants. In a typical situation, because of the multiple factors that we have to consider, including the burden of the fixed cost of these plant facilities, normally this would call for a plant shutdown. However, at the current phase, we are incurring losses, but despite bearing such losses, we are continuing to operate the plants.
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We do have two naphtha crackers located here domestically. One is in Yeosu and one is in Daesan. We have divided sites. Because of that reason, we have not been heretofore create much synergy. That is true.
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Within the same Daesan site, we have looked into ways in which we can overcome this problem. We have made a lot of studies and reducing the production of ethylene and propylene, these are basic oils. If the market situation calls for it, that means that we can shut down one naphtha cracker.
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Our internal review assessment has shown that in keeping with the ethylene balance, if we operate those downstream subsidiary plants depending on their profitability, then we are able to reduce a substantial amount of losses and actually enhance our profitability by several hundreds of billions of KRW.
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The crux of the discussion at present is to overcome the limitation in optimizing the individual company's operational assets.
That is the key to the discussion that is underway in Daesan. This is very effective when the market situation is difficult. The focus right now is to reduce the losses as much as is possible.
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This effect will be reduced as the market situation recovers and the utilization rate goes up. Still, this will remain a valid option in order to enhance the effectiveness within the same industrial complex. That is all. Thank you very much.
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The following question will be presented by Parsley Ong from JP Morgan. Please go ahead with your question.
Hi. Thank you for the chance to ask question. Earlier on in the call, you mentioned that you have done several non-core asset sales, including, I think, PTA sales, HW asset sales, so on and so forth. Could you give us some color on how much cash inflow do you expect from that and when? You also mentioned that you think CapEx has peaked now that the Indonesia LINE project is completed.
Could you give us an update on your 2026, 2027, 2028 CapEx outlook? Is there any change to, I think, previously market expectations were close to maybe KRW 1.5 trillion or something. Any update there? The second question is congratulations on your narrowing of the operating loss in the third quarter, and I think market is pretty encouraged by the restructuring efforts.
Are there any divisions where you expect a weaker earnings outlook in Q4 and first half 2026? I think you mentioned earlier that you're expecting the Indonesia LINE project to be loss-making initially. How much of a loss are you expecting? Would it be better than the Korean plan? If it's loss-making, why not delay the plan start-up time until it's profitable? Thank you.
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I am Nak-son Sung. I am the CFO. Let me take your first question.
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About the non-core asset sales that I have mentioned during my message previously, that was referring to the sales of LOTTE Chemical Pakistan Limited and the sales amount was $15 million, and the amount will be received within this week.
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Let me touch upon the CapEx guidance.
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With regards to the CapEx, our overall investment principle is to make the future investments within the EBITDA levels.
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Aside from those investment that is necessary for safety, environmental reasons, leaving aside these critical essential investments, all of the future investments decisions will be made solely on the profitability. That is all. Thank you.
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I am Giseop Kwak. I am the Head of the Basic Chemicals Corporate Planning Division. Let me touch upon the market situation outlook for the Q4, as well as the first half of 2026.
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For the basic chemicals, due to the expectations of increased production from OPEC countries and also from increased supplies from other regions of the American and European naphtha, we do believe that stable supply prices will be maintained. As we near the end of the year, due to several different factors, we do believe that weak sales prices can be expected.
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However, due to our proactive efforts to restructure our business structure and also due to our initiatives to improve our profitability, we do believe that we will be able to significantly reduce our losses going forward.
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Also for your information, in the case of advanced materials and fine chemicals, due to the expanded sales of high value-added specialty products, we are expecting very solid profitability coming from these segments.
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Next, let me talk about the LINE project.
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Because there seems to be a lot of interest in the market about this LINE project, let me go into more detail about this. In the case of PT Lotte Chemical Indonesia, mechanical completion has been undertaken in the month of March of this year. Starting from May of this year, we have undertaken pilot production as well as stabilization phase. Starting from actually 15th of October, we have transitioned to commercial production and the current utilization rate stands at 80%.
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LCI is located within the Indonesia petrochemical industry, and this is an industry that is showing a CAGR growth rate of 5% annually. But in terms of the ethylene, the domestic self-sufficiency rate stands at only 40%. This is a market that is characterized by shortage of supply. In the case of our company, by operating this plant, we intend to secure a strong foothold for mid to long term growth within this demand centered market.
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In terms of profitability, although we are making efforts to increase the sales volume and also identify new customers, because of the weak market situation of the overall petrochemical industry, and also given the fact that we are still in the early phases of stabilization, we do believe that any meaningful contribution to the performance in the short term will be quite limited.
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However, in the case of the LINE project, it is a strategic investment made in order to strengthen our presence within the Southeast Asian market, which has high growth potential. Once the plant operation is stabilized, and after we have secured a stable foothold within the domestic market, we are expecting that there will be gradual improvement of profitability going forward.
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At present, we are stabilizing our supply chain through entering into long-term contracts for monomer and polymer products. After the operational stability has been secured, we will be expanding the input of LPG feedstock and diversifying our feedstock so that we can also strengthen our cost competitiveness as well.
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We'll also been continuously improving our profitability by identifying new local customers, as well as expanding the production and sales of high value added and strategic products. Thank you.
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The following question will be presented by Hongju Shin from Shinyoung Securities. Please go ahead with your question.
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Thank you very much for giving me this opportunity to ask my question. My first question has to do with your outlook for the petrochemical industry next year. My second question has to do with the assets for sale. In addition to the assets that have already been sold, are there any other non-core assets that you are planning to dispose of as well?
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Thank you very much for your question. My name is Kwoun Jo Hyun. I'm the Head of the Monomer Division. Let me take your first question.
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In the case of this year, the global NCC utilization rate was maintained at around 84%.
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But in the case of this year, we are seeing continuous new capacity add-on volume hitting the market. Also there are new capacity from China that is expected to come online this December.
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In addition, globally there will be an additional 10 million tons that will come live on stream globally next year.
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From this volume, 70% is concentrated in Northeast Asia.
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Because of these new capacity add-on volumes coming online next year, we do believe that the global naphtha crackers utilization rate will come down from the present 84%.
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Because of these factors, we do believe it will be difficult to raise the utilization rate in the short term. It is only starting from 2028, when the new capacity add-on volumes will actually become smaller than the demand. Then we do believe we can expect an improvement of the market situation. Thank you.
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This is the CSO, Min-Woo Kim. Let me take your second question.
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Actually, I do believe that the market is very well aware that we have raised some funds from the market through the product called PRS, and that is premised on the assumption that we will be selling some of our assets.
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However, this is actually closer to selling our invested stakes, raising investment funds through selling some of our shareholdings, but not selling our management control.
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In this respect, with regards to LCI, which was the unit that was responsible for the Indonesia LINE project, there is a potential investor who has shown an expressed interest in LCI. Discussion is underway, but nothing concrete has as of yet come out. We are not in a stage where we can disclose anything to the market.
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With regards to your question, as to whether there are any plans to sell non-core assets in the future that entails management control, I do not think this is something that can be disclosed through our earnings release presentation. If among the several different options that we are looking into, anything becomes concrete, we will share them with you on a separate basis. Thank you very much.
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The following question will be presented by Woo-je Jeon from KB Securities. Please go ahead with your question.
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I have two questions. First, although I am sure you are not in a position to fully disclose much details about this, with regards to the restructuring that is planned for next year, if the restructuring takes place because of the difficulties in securing raw materials for the advanced materials, do you believe this will lead to a decline in your utilization rate of your plants? That is my first question, and my second question has to do with Lotte Energy Materials. Among your specialty products or high value-added products, do you foresee any substantial increase in the sales of these high value-added specialty products going into semiconductors and other advanced applications going forward?
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I am Woo-Hyun Cho . I am the Head of the Advanced Materials Corporate Planning Division. Let me take your first question.
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In the case of advanced materials, we do procure some of our raw materials from Basic Chemical Division, but also we are procuring our raw materials from the other companies within the industrial complexes as well as from overseas. We do not believe that there will be any significant impact on our utilization rate.
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I am Yang Cheon. I am the Head of the Polymer Division. Let me take your second question.
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From the basic chemicals products, those that have a high contribution to the overall sales and profit are as follows. There are high value-added products, separators, and there are those products that goes into battery materials, and also products that go into the medical applications. Those are it. Thank you very much.
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I am Woo-Hyun Cho, Head of Advanced Materials Corporate Planning Division.
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In the case of advanced materials, if you look at our high value-added products, in the case of the PC, we have our high heat tolerance and also combustion tolerant products. Those are very profitable.
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In case of the ABS products, we do also have products that show very high tolerance to heat and high temperature, and these show very high profitability as well.
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I am Nak-son Sung, the CFO. Let me add to that. We have a JV called Handok Chemical, which is a JV that we have formed together with Tokuyama.
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A key product that is produced by this JV is a cleaning product that are used for semiconductor applications, and this is also very profitable product.
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At present, we are building a new plant in the Pyeongtaek region, and once the construction of this plant is completed and it goes into operation, the sales and operating profit will expand significantly. That is all. Thank you.
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With this, we would like to close Lotte Chemical 2025 Q3 conference call. If you have not been able to ask your questions or you have any additional comments to make, please contact our IR team. Thank you very much for attending despite your busy schedule.