Good afternoon. This is Young Kyung Hwang, Head of IR at Lotte Chemical. Thank you all for your continued interest in the company and taking time out of your busy schedules to join Lotte Chemical's earnings release conference call. Today's event will begin with an introduction of our participating executives, followed by a brief presentation on our Q1 earnings results and outlook for Q2. After that, our CFO will provide some comments on key issues and the company's future outlook. We will then conclude with a Q&A session. Please note that the earnings results and the business outlook will be delivered via simultaneous interpretation, while the Q&A session will proceed with consecutive interpretation. Now, let me introduce the executives who have joined us for today's earnings call. From HQ, we are joined by Vice President Minwoo Kim, the CSO, and Vice President Sung Nak-Sun, the CFO.
From the Basic Chemicals business, we have Vice President Kwak Giseop, the Head of Corporate Planning Division of Basic Chemicals, Vice President Jo Hyun Kwoun, Head of Monomer Business, and Vice President Yoon Seung Ho , Head of Polymer Business. From the Advanced Materials business, Executive Vice President Woo-Hyun Cho, Head of Business Support is also with us today. First, let me walk you through our business results for the first quarter of 2025. Revenue for Q1 amounted to KRW 4 trillion and 901.8 billion, up slightly from the previous quarter. The operating profit posted a loss of KRW 126.6 billion, an improvement of KRW 107.5 billion compared to previous quarter. EBITDA is also improved bKRW 74.1 billion, posting KRW 173 billion. Pre-tax earnings and net profit posted a loss of KRW 241.1 billion and KRW 246.3 billion respectively, improving significantly as the one-off factor recognized last quarter was absent.
Next, on the financial status of the company. As of the end of Q1, assets came to a total of KRW 34 trillion and 763.1 billion. Liabilities, KRW 14 trillion and 497.2 billion. Capital, KRW 20 trillion and 265.9 billion. Lotte Chemical is continuing to implement its asset-light strategies to advance its business portfolio and improve the financial structure. Due to such efforts in Q1, the financial indicators were improved quarter-over-quarter. Cash and equivalent was up KRW 148.2 billion quarter-over-quarter to post KRW 3 trillion and 619.4 billion. Borrowings is down quarter-over-quarter by KRW 412.9 billion to post KRW 9 trillion and 992.5 billion. Debt ratio is down to 1.4 percentage point quarter-over-quarter to post 71.5%. The net debt ratio comes to 31.4%, improving quarter-over-quarter. Next is financial performance and outlook by business.
In Q1, Basic Chemicals recorded revenue of KRW 3.3573 trillion and operating loss of KRW 107.7 billion. There were some factors causing production disruption in Q1, such as Daesan Plant power outage, but the loss margin narrowed by a significant extent from the previous quarter, thanks to stable feedstock prices and positive exchange rate. The downward stabilization in feedstock prices is expected to continue. But given that maintenance is scheduled at Daesan Plant and major overseas subsidiaries in the second quarter, performance improvement may be limited. Next is Advanced Materials. Sales in Q1 was KRW 1.1082 trillion. Operating profit was KRW 72.9 billion, up KRW 43.2 billion quarter-over-quarter, and operating profit margin was 6.6%. Spread grew due to stabilized feedstock prices and improved demand. Financial performance improved by a large extent quarter-over-quarter, thanks also to improved exchange rate and reduced shipping costs.
The impact from external uncertainties, such as policies of major countries, is expected to keep our performance flattish in Q2. Next is Lotte Fine Chemical. The company already provided detailed explanation in its earnings release on April 29th, so I will be brief. Lotte Fine Chemical's revenue in Q1 was KRW 445.6 billion. Operating profit was KRW 18.8 billion, up by over 50% QOQ thanks to rising international prices and strong exchange rate. Operating margin was 4.2%. Sales is expected to decline in Q2 with scheduled maintenance coming up, but we intend to increase sale of existing inventory.
Last is Lotte Energy Materials. Lotte Energy Materials also explained in detail in its earnings release on May 9th, so I will be brief. Revenue in Q1 was KRW 158 billion, and operating loss was KRW 46 billion. Loss continued from the previous quarter following customers' inventory correction, but profitability is expected to gradually improve with downstream inventory correction coming to an end, which started from the second half of last year. As for our investment plan, it remains unchanged from the previous quarter, with existing projects underway on schedule. This concludes my presentation of Q1 2025 results and outlook. Now I turn over to CFO Sung Nak-sun to discuss key issues of Q1.
Good afternoon. This is Sung Nak-sun, CFO at Lotte Chemical.
Let me first thank the investors and capital market participants for taking the time out of their busy schedule to attend our earnings conference call. First, operating loss was narrowed, and net income significantly improved in the first quarter despite continued challenging business environment. Spread and production efficiency improved, and one-time costs in the previous quarter were eliminated. Looking ahead, global policy volatility is increasing, exacerbating uncertainty in the business environment and lessening the visibility into the timing of recovery. But we do anticipate gradual improvement in performance year-over-year as global ramp-up pressure is easing and feedstock prices are stabilizing downward. That said, the Daesan plant maintenance in the second quarter is expected to have a temporary impact, although its impact on profitability will be limited given the current market condition. We are pushing to overcome the current crisis by improving financial soundness and shifting the business portfolio.
For example, the asset-light initiative, targeting less strategically important assets, has continued, improving both our business portfolio and financial structure. In February, we signed a share sale agreement for LCPL, a PTA production plant in Pakistan. In March, we raised KRW 650 billion through a PRS utilizing shares of our Indonesian subsidiary, LCI. In April, we sold our shares in Japanese Resonac Holdings, securing an additional KRW 280 billion in liquidity. In addition, the company is conducting company-wide innovation activities to reduce costs and improve productivity as well as financial restructuring activities. The LINE project is currently in the commissioning preparation phase and is scheduled to begin commercial production in the second half of the year, which is expected to alleviate the financial burden associated with large-scale investment and further improve the financial structure.
While pushing ahead with asset-light strategy, the company is also strengthening our business competitiveness in non-general businesses where we already have presence. Investment in advanced materials, Yeosu compound, is also ongoing as planned to be completed next year. In hydrogen energy, 20 MW out of the 80 MW eco-friendly hydrogen power plant currently under construction at our Ulsan plant was mechanically completed in January, scheduled to begin operation in the second half of the year. The hydrogen distribution center is scheduled to begin commercial operation in the second half of this year. We have the asset-light strategy under the general petrochemical business and business portfolio upgrade to strengthen competitiveness in the non-general business, and we will make every effort to secure fundamental competitiveness to overcome the crisis and enhance corporate value. Finally, let me turn to our shareholder return policy.
The company believes that enhancing corporate value to meet the trust of our shareholders is of utmost importance, and we are making every effort to faithfully implement shareholder return while considering the pace of performance improvement and financial conditions, among others. As a part of this, we paid out interim dividend and year-end dividend at KRW 1,000 per share each, despite continued losses in 2024. Dear investors, despite the ongoing challenges, we are doing our utmost to achieve structural competitiveness and efficiency that would help enhance our financial soundness even amid growing macro uncertainties through such efforts as asset-light, strict CapEx management, and company-wide innovation activities. We are cautiously projecting a turnaround to positive cash flow this year. Once large-scale investment projects are completed this year, we may even be able to execute investment within EBITDA starting next year, as we have mentioned repeatedly.
We will keep accelerating our work to improve the financial structure and to fulfill our expectations. We kindly ask for your continued support. 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 Ju Shin from Shinyoung Securities. Please go ahead with your question.
Thank you very much for giving me this opportunity to ask my questions. I have two questions. Can you share with us your outlook for the second half of 2025? Is there any possibility of the spread for the basic chemical business improving owing to the steep plunge of the oil prices? If not, what other business units do you think is possible to see improvements in its performance? My second question has to do with your cost competitiveness. When the COTC is introduced into Korea next year, what will be the impact on the NCC of your company and what kind of responses are you devising with regarding to this matter?
Yes, I am Kwak Giseop. I am the Head of the Corporate Planning Division of the Basic Chemicals Business Unit. Let me answer the first question.
Because of the worsening oversupply situation and also due to the global economic downturn, weak demand continues. In 2025 as well, it would not be difficult to put forth an optimistic view of the petrochemical industry. Owing to the continued capacity expansions, there are continued supply pressures. Also due to the tariff policies implemented by the Trump administration, the uncertainty surrounding the business environment, both at home and abroad, is expanding. Any sudden recovery of the market conditions, I believe, is difficult.
However, due to the stimulus measures that are employed by the Chinese government and also due to the increase in supply globally of crude oil and also due to the downward stabilization of the oil prices, we believe through the resulting easing of the cost pressures in a limited manner and also through the gradual recovery of the sales prices, this will lead to a gradual improvement of the industry.
Compared to last year, we do believe that we will be able to narrow the losses.
Yes, along with such improvement in the external environment, we will strive to improve our profitability through engaging in various innovation-related initiatives in order to enhance profitability as well as secure fundamental competitiveness of the company.
Thank you very much.
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Good afternoon. I am the Head of the Monomer Division. My name is Jo Hyun Kwoun.
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I would like to take the second question. As you are well aware, some of the Chinese petrochemical companies and a certain company in Korea are trying to expand capacity of their crackers using COTC technology. Basically speaking, compared to the naphtha crackers, the crude oil is used in order to produce the ethylene oil products. This is what the COTC plant endeavors to do. It is undeniable that such plants do have a certain level of competitiveness. However, in the case of the light crude oil that is used by the COTC plant, it is not all of the full spectrum of the oil that can be used as feedstock in these COTC plants.
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There's a clear limitation in the feedstock that can be used in these COTC plants because only light oil that has certain compositions can be used in the COTC plants.
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In the case of our company, we cannot transition into plant facilities which rely solely on crude oil only as feedstock.
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We have been engaging in efforts to diversify the feedstock that is input into our facilities. In the case of the Yeosu plant and the Daesan plant, we have been increasing the input ratio of LPG, which is relatively cheaper compared to naphtha. We have already modified our manufacturing process to allow this.
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Together with these strengths that we will be making use and leveraging the high value added products that are produced in the downstream polymer plant in order to enhance our competitiveness. That is all. Thank you.
[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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Thank you very much for giving me this opportunity to ask my question. I have largely three questions. The first question has to do with the performance of the company. It seems that the operating profit of Lotte GS Chemical is rather sound. However, in the case of your company, you have posted slight losses. So wherein lies the reason for this difference in the business performance? That is my first question. The second question has to do with the background to the turning into profitability of the aromatics business. So what is the reason for this? Do you think this can be maintained going into the second quarter? My third question has to do with the schedule TA for the second quarter. Can you share with us the specific schedule and the scale of the TA that is planned?
My next question has to do with the asset-light strategies that you have been referring to since last year. So compared to last year, what is the progress made in terms of implementation of asset-light strategy? Thank you.
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I am Giseop Kwak. I am the Head of the Corporate Planning Division of the Basic Chemicals Business Unit. I will be taking the first and the second question.
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Yes. In the case of the Lotte GS Chemical, their main flagship product is butadiene. Compared to the monomer and the polymer products in the Q1, the market condition for this flagship product was actually better. That is the reason why they have been able to post a good performance in Q1.
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In the case of the aromatics business, they are producing primarily PI and PET. In the case of PI, this is a product category that is actually turning profit.
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In the case of the PET business, we have two plants that produce this product in Ulsan, and one of the plants was actually boxed up. That is the reason why we have been able to save on the cost and also the reason why we have been able to produce sound results.
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The TA is being conducted for the Daesan plant. It is actually already underway and starting from April 12 to June 16 for a total of 65 days, the TA will be carried out.
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Yes. Another TA is scheduled for Lotte Chemical USA, the MEG plant, and it is also already conducting the TA. Starting from March 30 to May 16, a total of 46 days of TA will be conducted.
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My name is Minwoo Kim, I am the CSO. Let me take your last question.
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The strategy to secure financial soundness and to reduce the share of the petrochemical business within the overall business portfolio, this strategy remains unchanged. In the process of implementing this strategy, a selling of controlling interest and a partial sale of stakes focusing on our overseas subsidiaries is a process that is being carried out.
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There are those cases in which the sales process is going well, and there are other assets where no intention by potential buyers are being expressed. In the case of the Pakistan subsidiary, where there was actually talks that had taken place, but the talks fell through, now an SPA has been entered into for Lotte Chemical Pakistan Limited in February of this year. We are at the final stage of the filing of corporate merger filings and after the public tender, we believe by the month of July or August that we will be able to close the transaction. We have also conducted the PRS for the U.S. MEG production unit as well as Indonesia Lotte Chemical Indonesia. Given the nature of PRS as a financial product, before the arrival of the maturity date, the actual divestment has to take place .
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Recently, interest has been expressed by an investor for our stake in Lotte Chemical Indonesia, and specific discussions are underway at present. When more concrete outcome is produced, we will be communicating this information to the market. Thank you.
The following question will be presented by Woo-je Chun from KB Securities. Please go ahead with your question.
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I have three questions in total. I have questions regarding the LINE project. Are you planning on first operating the NCC for the LINE project, and afterwards, are you planning on starting the operations of the downstream products? Is that your plan going forward? Aside from the 250,000 tons of PP, are there other downstream products? If so, can you share this information with us? My second question has to do with the number of customers that you have been able to secure for the LINE project.
Have you been able to secure some customers for the LINE project? That is my second question. The third question is, if the LINE project is carried out and completed, what kind of changes will be affected to your CapEx and what is the expected D&A?
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This is Giseop Kwak. I am the Head of the Corporate Planning Division of the Basic Chemicals Business Unit. I will be taking your first and second questions.
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In the case of the LINE project, we will be test running the naphtha cracker in the month of May of 2025. Afterwards, in a sequential manner, we will be starting the operation of the downstream plants.
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Yes. In the case of the production volume, ethylene, this is 1,000 and NPL 520 and PP 250 and BD 140 and BTX 400.
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Let me take your second question. In our Indonesian unit, we are selling polyethylene and also we are importing PP from Malaysia, and we are selling this product in the Indonesian market.
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Through the existing sales line and sales network, we have already secured our customers.
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In the case of ethylene sales, we are pursuing long-term contracts for the domestic market of Indonesia. Already with several companies, we have been able to sign the contracts. That is all. Thank you.
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I am Sung Nak-Sun. I am the CFO. Let me take your third question.
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The total project cost of the LINE Project is $3.9 billion. I am sorry.
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The KRW 700 billion is executed this year, then all of the investment costs would have been disbursed.
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In terms of D&A depreciation and amortization on an annual basis, it is around KRW 180 billion . Thank you very much.
[Non-English content] The following question will be presented by Jin Ho Lee from Mirae Asset Securities. Please go ahead with your question.
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Thank you very much for giving me this opportunity to ask my question. I have just one question. It is about the impact of the changes in the tariff policies of the Trump administration. Do you have any special issues arising from the impact of the tariff policies on particular products? For instance, is this leading to a reshaping of the supply chain of particular products, or is this leading to particular movements of the spread? Can you focus your answers on the recent changes that have been taking place?
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My name is Woo-Hyun Cho. I am the Head of the Corporate Planning Division of the Advanced Materials Business Unit. Let me take your question. In our overall sales revenue, the share taken up by the U.S. exports is in the mid-single digit level.
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Of this, the share of the U.S. exports in the advanced materials segment is more than 10%, so it is relatively high.
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For 2025, for advanced materials products, our expectation is that the sales revenue for our products sold in the U.S. is around KRW 630 billion .
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Given the current present tariff levels, we believe the tariff amount takes up around 5% of the total sales revenue.
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With different customers, we are having negotiations about price increases depending on the tariff that are levied. Not only negotiations for price increase, but through our local production unit, we are reviewing the possibility of providing supplies through this local unit. We are making efforts to minimize any impact from the tariff policies. That is all.
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I am Yoon Seung Ho , the head of the polymer division. In terms of the sales revenue, it takes up only about 5% of the revenues for the basic chemicals business. I do not think there will be any major impact from the tariff policies. However, it is the case that there is about 15 million tons of PE products made in U.S. that is exported to China, and we believe there will be some impact concerning this volume. If this 15 million tons of U.S.
products is redirected to markets other than China, then there is a possibility that these products will come into collision or overlap with our products. We believe because of the influx of the American products, this will lead to a weaker price trend.
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However, most of the product mix of the American products are general purpose products, and so only about 15% of the product categories overlap with ours. Even if there is a clash between ours and the American-made products, the impact would not be that big. The impact from the tariff policies, those products have already been sold in our case. For the month of April and May, we believe the impact will be felt starting from the month of June. That is all.
The following question will be presented by Jae- Sung Yoon from Hana Securities. Please go ahead with your question.
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I have several more questions related to your LINE project. What is your plan for the operational rigor? Because the market conditions right now are not that good. I would've thought you might have postponed the start of the operation of this plant. However, you didn't, and you have started operation of these plants. Is this because of your confidence in the profitability that you will be able to generate? What kind of profitability for the LINE project should we be thinking about for the second half of the year? That was my first question. For my second question, what is the share of the domestic demand and also exports of the products that are produced in the LINE project plant? My question has to do with the market conditions of Southeast Asia.
From which factor is it impacted more greatly, if the volume from China or the volume from United States? How would each scenario impact our profitability? That is my question.
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This is Giseop Kwak, Head of the corporate planning division of the basic chemicals business unit. Let me take your question.
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With regards to the operational rate, initially because we're in the early days of operating the plant, we need to stabilize the plant operations. We will be maintaining the utilization rate at around 65% to 70%. Going forward, depending on the market conditions, we will be flexibly adjusting the input ratio of LPG and naphtha, as well as utilization rate of the plant.
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As you are well aware, this is a very large-scale project. For such large-scale projects, it is not desirable to postpone or put forward earlier the point of operation of the plant. That is the reason why we have proceeded with the start of the operation of the plant as has been scheduled.
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In the case of the Indonesian domestic market, their self-sufficiency rate when it comes to PE and PP is rather low, between 40%-60%. More than 90% of the PP that is produced through the LINE project will be used to meet the domestic demand in Indonesia.
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Most of the PE and PP imports that come into the Indonesian market are primarily from Middle East or within the Southeast Asian regions.
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Relatively speaking, supply is falling short of demand. There does exist a domestic demand premium. In order to further enhance our product availability, we are making efforts to uncover more local customers as well as engage in product partnership in Indonesia.
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Going forward, once the operational stability of the plant is achieved and we have been able to establish a firm foothold within the domestic market of Indonesia, we will be expanding our production and sales into more high-end strategic products. Thank you very much.
[Foreign language] The following question will be presented by Hyunryul Cho from Samsung Securities. Please go ahead with your questions.
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I am Hyunryul Cho of Samsung Securities. I have three questions. I have a question first of all about the LINE project. You said that there was a premium for domestic demand, but I understand that one of the global players have been able to acquire the cracker in Singapore. Is there any possibility of the volume produced in that cracker coming into flowing into the Indonesian market? What kind of impact would that have on the LINE project? That is my first question. My second question has to do with your projections for the second quarter. You said that the basic chemical business is expected to achieve a flattish trend going into the second quarter. If the prices of naphtha and BD products decline, wouldn't this deteriorate your outlook? That is my second question. Also my third question about the better performance of some of your subsidiaries.
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My third question has to do with the improvement of the performance of the advanced materials business. Was there any premium effect or was there any one-off special factors that led to this improvement in performance?
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I am Minwoo Kim, the CSO. Let me take your first question.
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In the case of the petrochemical asset of Shell that has been acquired by Chandra Asri, the product mix is quite different from ours. There is no polymer products and primarily their product mix is composed of MEG and EO derivatives, the downstream products. It is quite an aged facility that they have acquired. After the acquisition has been concluded, there was a new carbon tax scheme that was announced by the Singaporean government. Because of this taxation, it will be very difficult, we believe, for this facility to attain any cost competitiveness.
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Our understanding is that in the existing Indonesian facility that has been run by Chandra, they lack ethylene products. Some of our ethylene production volume has to be sold as ethylene in itself, in its raw form. This may cause some supply-related disruptions. However, the overall impact on our LINE project will be quite minimal. That is all.
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This is Kwak Giseop, the Head of the Corporate Planning Division of Basic Chemical Business Unit. Let me take the second question. In the second quarter, because of the fall of the BD prices will have an adverse impact on the operating profit. But because of the fall in the price of naphtha in the months of May and June, the spreads will increase because of the low naphtha price.
That is the reason why we have projected that in the second quarter, compared to the first quarter, the trend will be rather flattish.
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This is Woo-Hyun Cho, the Head of the Corporate Planning Division of the Advanced Materials. Let me take your third question. There are three reasons behind the improvement of performance of advanced material. First is the improved spread of ABS products. Second is the fall in the maritime transport fares. Third is the stronger won trend. There was some improvement in the demand of our key home appliance customers in Q1. We do assume that there were some excess demand before the implementation of the universal tariffs by United States, but we don't think the magnitude was that large.
We do believe that the demand going into Q2 and Q3 will show a rather flat trend and whether there will be any full-blown recovery of demand going into the second half is something that we have to wait and see. That is all. We would like to conclude the 2025 Q1 earnings conference call of Lotte Chemical at this point. Those of you who have not been able to ask your questions, please contact our IR team. Thank you very much for attending this quarter's conference call. Thank you very much.