Good afternoon. This is Kim Yong-ban, head of the IR team at Lotte Chemical. We will now begin the Q3 2024 earnings release conference call for Lotte Chemical. We will start with an introduction of the executive, followed by a presentation of the company's Q3 business performance and outlook, then a Q&A session. Please be informed that the presentation will be conducted in simultaneous interpretation and the Q&A in consecutive interpretation. I will now introduce the executives in attendance. First, from the HQ, Vice President and CFO, Sung Nak-sun, and Vice President and CSO, Kim Min-woo. From Basic Chemical, Vice President Kwak Ki-seop, head of the Strategy Management Division. Vice President Park Kyeong-seon, head of the Monomer Division. Executive Vice President Yoon Seung-ho, head of the Polymer Division. Vice President Bae Seong-su, head of Aromatic Division. Vice President Kim Chul-jung, head of Business Development Corporate Planning Division.
From Advanced Materials, we have Executive Vice President Joo Woo-hyun from the Corporate Planning Division. Vice President Seo Kyoung-hoon, head of the Battery Material Business Strategy Division. And Vice President Kim Yong-hak, head of the Hydrogen Energy Division. Let me now turn to business results of Q3 2024. Revenue in Q3 was KRW 5.2002 trillion, down 0.9% QOQ. There was operating loss of KRW 413.6 billion, widening from the previous quarter. This is due to the falling spread and rising one-off costs and the increasing loss from basic chemicals. Pre-tax income fell by KRW 592.1 billion QOQ as a result of lower valuation gain on equity investment in subsidiaries and decreasing gain on equity method. Next is the company's financial position. Asset at the end of Q3 2024 was KRW 34.487 trillion, down by KRW 1.2228 trillion QOQ.
Cash and cash equivalents was KRW 3.6106 trillion, down by KRW 580.1 billion. Liabilities are KRW 14.8278 trillion, down KRW 511 billion QOQ. Borrowings are at KRW 10.7225 trillion, lower by KRW 360.2 billion QOQ. Debt to equity ratio stood at 75.4% and the net debt-to-equity ratio at 36.1%, largely unchanged. Next, I would like to go over the performance and outlook by each business. In Q3, the basic chemical business recorded sales of KRW 3 trillion 628.2 billion, with an operating loss of KRW 365 billion, further widening the deficit. Although the raw material price declined in Q3, the spread narrowed due to the decline in selling prices caused by the delayed recovery in demand and currency depreciation.
In addition, we incurred the opportunity cost approximately KRW 90 billion due to the partial maintenance of our CPDL Lotte Chemical USA, and the deficit further widened due to higher ocean freight costs. Looking ahead to Q4, we expect profitability to improve compared to the previous quarter as ocean freight costs stabilize and one-off effects such as the partial maintenance of the CPDL are expected to disappear. In the mid- to long-term, we also expect a gradual improvement in supply and demand with raw material price stabilizing and a reduction in global capacity expansion. Next on advanced materials business. In Q3, advanced materials business recorded sales of KRW 1 trillion, 121.7 billion, and an operating profit of KRW 38.1 billion, achieving operating profit margin of 3.4%. Profitability declined as sales volumes and product spreads narrowed in response to higher ocean freight cost and slow demand from downstream industries.
In the fourth quarter, we expect ocean freight rates to stabilize downwards, but profitability is expected to be flat. We enter the seasonal slowdown, and customers make year-end inventory adjustments. Next is LOTTE Fine Chemical. LOTTE Fine Chemical already announced its earnings on October 31, so I will just cover the results briefly. For more details, please refer to the LOTTE Fine Chemical earnings presentation materials. In Q3 of 2024, LOTTE Fine Chemical recorded sales of KRW 420.4 billion with operating profit of KRW 10.3 billion, achieving operating profit margin of 2.5%. In Q3, profitability declined due to continued weakness in chlorine-relative market and reduced sales of ammonia-relative products. In Q4, international prices and sales volume of chlorine and ammonia-relative products are expected to increase, and green material products will see higher sales thanks to active promotion activities. Lastly, LOTTE Energy Materials.
It also held a separate earnings call on November 1, so I will just briefly summarize the results. In Q3 of 2024, LOTTE Energy Materials posted sales of KRW 211.4 billion with an operating loss of KRW 31.7 billion, resulting in an operating profit margin of -15%. In Q3, reduced sales due to lower demand in downstream, currency depreciation, and higher inventory valuation losses resulted in a shift to deficit. Sales in North America are expected to increase in Q4 as a new joint venture plant starts mass producing for a key customer. However, demand recovery in the European market is likely to be limited due to customer inventory adjustments. This concludes the presentation of the 2024 Q3 result and outlook. Now, CFO Sung Nak-sun will discuss LOTTE Chemical's key issues and future outlook.
Greetings. This is Sung Nak-sun, the CFO of LOTTE Chemical. I would like to extend my sincere gratitude to all the investors and capital market participants for taking the time to attend our earnings presentation amidst your busy schedules. We regret to report that our performance in the third quarter did not meet the expectations of our investors.
In Q3, product spread declined due to the delayed recovery in demand and the currency depreciation, while one-off costs from the partial maintenance of our overseas subsidiary and higher ocean freight costs widened our losses compared to the previous quarter. In Q4, we anticipate that ocean freight costs will stabilize and the one-off factors that occurred in Q3 will be removed. From a medium to long-term industry cycle perspective, we expect that supply and demand will gradually improve as global supply pressures ease, international interest rates are cut, and the economy recovers. However, we acknowledge that in the short term, geopolitical risks and the ongoing downturn in the chemistry industry may continue to pose challenges. In response, as we mentioned in the previous earnings call, we are focusing our efforts on areas where we can exert more control to secure financial soundness.
As part of these efforts, in October, we secured approximately KRW 700 billion through the sale of our Lotte Chemical USA Corporation shares with a PRS agreement as disclosed. Additionally, we plan to expedite the sale of our Indonesian PT Lotte Chemical Indonesia shares to secure a total of KRW 1.4 trillion through further PRS transactions. In line with our ongoing basic chemicals asset-light strategy, we have also decided to liquidate our Malaysian synthetic rubber manufacturing subsidiary, LOTTE UBE Synthetic Rubber. We will continue to actively evaluate and execute strategic withdrawals from non-core, low-profit businesses. On the operational efficiency front, we will continue to generate liquidity from working capital, optimize plant operations, and reduce costs through our operational excellence project, which was implemented at the Yeosu site in the first half of the year and expanded to the Daesan site in the second half.
We will continue to identify additional areas where we can generate FCF in our day-to-day operations. While prioritizing these short-term activities to improve financial stability, we continue to develop new businesses to enhance our portfolio. In the hydrogen energy business, one of the pillars of our portfolio expansion, we won an additional 40 megawatts from the general hydrogen energy market through LOTTE SK Eneroot in September. A total of 80 megawatts of eco-friendly hydrogen power plant, including 20 megawatts from the tender in August last year and 20 megawatts from the RPS, will be built at our Ulsan site and will be sequentially delivered from September 2025 onwards. Despite the challenging business environment, we will continue to improve the competitiveness of our existing businesses and prepare for sustainable growth.
At the same time, we will do our best to meet the expectations of our investors by faithfully implementing our announced shareholder return policy. We ask for your continued support. Thank you.
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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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The first question will be provided by Baek Young-chan from Sangsangin Investment & Securities. Please go ahead with your question.
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Thank you for taking my questions. I have two. First is a simple one. With the Lotte Chemical USA increasing its natural gas production, this is likely to mean that the ethane price is going to fall in the near future. Does this mean that the company's profitability will also be increasing from the fourth quarter of this year or potentially in the first half of next year? The second question is, it seems like there are a lot of planning in the pipeline about new investment as well as facility increases, for example, LINE, et cetera. Given the current capital efficiency of the company as well as the current financial structure, does the company believe that these projects will be able to move on smoothly without a hitch?
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This is Kwak Ki-seop from the strategy management division, responding to the first part of your question. First of all, about the ethane price in the U.S. Last year it was $186 per ton. This year it is $150 per ton. As you can see, due to the increase in the natural gas stock, the ethane price has come down.
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After the shutdown in the cracker in the Q3, the Lotte Chemical USA, its plant is currently in normal operation. As a result, we do believe that there is going to be an improvement in the profitability in the fourth quarter, leading to a turnaround.
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This is Sung Nak-sun, the CFO, responding to the second part of your question.
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Regarding the investment, whether they will be able to continue on schedule, I would like to inform you that our capital planning is reflective of all the needs for the investment already.
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For the investment plan for the first half of next year, they will move on as scheduled.
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The following question will be presented by Woo Jae Jeon from KB Securities. Please go ahead with your question.
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I have three questions. First is about the maintenance in the Lotte Chemical USA. Could you elaborate on the causes of the maintenance, and is there any likelihood of this repeating itself in the future? Related to this, I believe that the maintenance would have also affected the utilization rate. So what does the company see as impact in the fourth quarter in terms of the utilization? For the new products next year, we see that, for example, hydrogen shipping as well as hydrogen generation is planned for the first half of next year. So what is the expected revenue for each of the new products and also for the TMAC product? Has the company secured any customer base in the IT sector yet?
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This is Kwak Ki-seop from the strategy management division of the basic chemical, responding to the first part of your question.
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The maintenance in the Lotte Chemical USA was required by the failure in the cold box in the cracker.
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To make sure that because the company puts safety first, we have consulted this with the vendor, and we got the view that it would be best, rather than to continue with the operations, it would be best to go ahead and repair and provide maintenance for this facility. That is what we have done.
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Given that we have given sufficient time and effort for repairing this facility in accordance to the views expressed by the vendor, we do not believe that the problem will be repeated.
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This is Kim Yong-hak from the hydrogen energy division responding to your second part of your question about the hydrogen shipping center as well as the hydrogen generation.
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First of all, the shipping center business will be conducted by Lotte Chemical's subsidiary, the LOTTE AIR LIQUIDE Ener'Hy . The revenue will be KRW 31.5 billion, operating profit KRW 9 billion, operating profit margin 30%. The sales have been 100% completed. This means that we will be seeing the operating profit as early as next year and at the latest by 2026. About the hydrogen generation, this will be conducted by LOTTE SK Eneroot, another subsidiary of ours. In the first half of next year, 20 megawatts will be completed. This will translate into KRW 42 billion in revenue, KRW 6 billion in operating profit, and 15% of operating profit margin.
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This is Kim Min-woo, the CSO. TMAC is a product of the LOTTE Fine Chemical. Obviously you would have to refer to LOTTE Fine Chemical for details of the response.
Allow me to provide my response to the best of my knowledge.
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TMAC that is produced by LOTTE Fine Chemical will be used for the TMAH, that will be produced by Hantok Chemicals, which is a 50% owned subsidiary of Lotte Chemical.
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The TMAH that is produced by Hantok Chemicals is used mostly for semiconductor cleanser as well as display. Most of the customers are the semiconductor companies of Korea.
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In terms of production ramp-up, capacity ramp-up planning, this would obviously be tied to any ramp-up planning by the customer as well as the qualification planning. For any potential ramp-up of the TMAC would then be linked to potential ramp-up of the TMAH.
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To conclude my response, I can say that we have secured our customer base.
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Please go ahead with your further questions.
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The following question will be presented by Jinwoo Kim from Eugene Investment & Securities. Please go ahead with your question.
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I have one question, and that is about the Chinese energy efficiency environment regulation. According to this regulation, what percentage of the facilities does company expect to see shut down? If you could give any specific number, please. Thank you.
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This is Park Kyeong-seon from the Basic Chemical Monomer Division.
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Basically, the facilities that are non-compliant to the Chinese regulations in terms of the ethylene capacity would be about 30%.
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This is part of the Chinese government's effort to integrate their industry from refinery to the chemicals between the public and the private sector. They are conducting a large-scale project for this purpose. What they are trying to do is to scrap the facilities that are either outdated, like over 30 years old or too small in scale. For example, with ethylene supply capacity of less than 300,000 tons per year.
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They are also planning to integrate the facilities into larger-scale facilities in the petrochemical and the refinery industries. By restructuring and upgrading the facilities, what the Chinese government is aiming for is to improve the cost efficiency and also to enhance the productivity.
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As I mentioned earlier, the non-compliant facilities in terms of the ethylene production capacity would be about 15 million tons, and this would be more than offset by the over 20 million tons of new increment facilities to go into operation for the three years from 2026 to 2028.
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We do intend to keep an eye on any consequences from the regulations' impact, as it could potentially limit the additional supply capacity coming out of China.
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This is Yoon Seung-ho from the Basic Chemical Polymer Division, adding my comments to this in terms of the potential impact on the polymer business.
Because of the regulation, it is also likely that by 2030, under the polymer products, then for PE, about 12 million tons per year of facilities and for PP 6.5 million tons per year of facilities would be shut down.
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This is going to be equivalent to about 18% of the total PE production coming out of China as of 2030 and 11% of total PP production by 2030.
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The following question will be presented by Hyunryul Cho from Samsung Securities. Please go ahead with your question.
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Now I have four questions. First is about the ethylene supply and demand next year. What is the company's project outlook for the ethylene demand and supply next year? Second question is about the Chinese market. Since the economic stimulus package provided by the Chinese government in September, are there any changes in the market situation in China? If not, then will there be any such changes or uptick in the market situation in next year, 2025? The third question is now with the re-election of Trump: how will this bode for the Asian petrochemical market? Will this be negative or positive? The fourth question is, the PRS contract that the company has regarding the U.S. subsidiary, it is the MEG production subsidiary, not ECC.
Does this mean that the company is also planning to shift away from the MEG downstream, meaning that there will be another direction for the downstream business?
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This is Park Kyeong-seon from the Basic Chemical Monomer Division. I would like to respond to your first question about the global ethylene new capacity buildup as well as supply and demand outlook.
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The ethylene capacity buildup for this year is all coming out of China. In the first half of this year, there was a small-scale capacity buildup in the volume of 800,000 tons coming from three companies whose capacity buildup plan was delayed from last year.
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For the second half of this year, total 4.2 million tons of capacity buildup was planned, out of which 3 million tons has been deferred to next year.
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Of the capacity buildup plan among the major global companies, some of the petrochemical integration planning by Middle Eastern countries is also being delayed, is being reduced.
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For example, Saudi Aramco actually has canceled its plan to construct a new chemical plant and instead opted to invest more in Asia by investing in joint venture in the region in a way to handle the demand coming from Asia.
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For the next four years, from next year to 2028, the global capacity buildup for ethylene is going to be 33 million tons, and of which 6 million tons will be coming from the Middle East.
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For the next four years, the global ethylene demand is projected to grow by 4%-5% per annum, reaching about 26 million tons per year by then. 26 million tons, yes, by then.
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The incremental supply is going to outpace the demand, meaning that it is going to keep the utilization rate at around 80%-85%.
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This is Yoon Seung-ho from the Basic Chemical Polymer Division, responding to the second part of your question.
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China has announced a series of stimulus policies this year. In the first half of this year, there was a stimulus on infrastructure as well as facilities and also the trade-in policies for consumer electronic goods as well as automobiles. Coming into September and October, they cut rates and also tried to stimulate domestic demand in areas like real estate.
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In October, China's PMI, we see that the PMI has gone over 50%, exceeding the level in the past six months.
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We see that perhaps impact was not that large, but then, yes, there was some visible impact.
And also for the spread for PE and PP, we are also seeing a widening spread compared to August and September.
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Having said that, the consumer sentiment in China still remains sluggish due to the low disposable income as well as lack of the asset or the wealth effect coming from the real estate. And we cannot expect the kind of stimulus packages that we have seen in the past.
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But then additional stimulus policies are expected December and on. So for the industry overall then it is likely that in 2024 there is going to be some more positive effects to be gained from the stimulus policies.
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This is Kwak Ki-seop from the Basic Chemical Strategy Management Division, responding to your third question.
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Well, for the time being, it would be quite difficult for us to predict the kind of impact that the Trump second term is going to have on the Asian petrochemical market.
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But then, what the market has already seen from the previous experience, the policies that we can likely to expect, for example, the deregulation on fossil fuel and also increased production of energy, are likely to drive down energy prices.
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That obviously is going to be positive for the refining and petrochemical industries. But on the flip side, stronger protectionism in the form of increased tariffs are likely to weigh down on trade and exports.
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So as you can see, there are going to be a complex set of factors, meaning that this could potentially drive up uncertainties in the market.
The company will remain attentive to any trends or changes in the market situation and will be ready to respond agilely and quickly whenever it is necessary.
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This is Sung Nak-sun, the CFO, responding to your fourth question. The PRS was executed as part of the asset-light initiative, and there is no additional investment that is being planned by Lotte Chemical USA in the downstream.
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The following question will be presented by Parsley Ong from JP Morgan. Please go ahead with your question.
Hi, this is Parsley. Thank you for the chance to ask questions. The first question is, could you give us an update on your CapEx outlook? I see on page nine of your slides that you still have quite a lot of new project expansions, especially in the battery material space. Given the U.S. election outcome, do you see potential for any changes in your plans? The second question is actually for Lotte Chemical. The company's earnings have been weak for quite a while. Could you remind us what are some of your key strategies in this current environment where we have weaker for longer chemical spreads and uncertain outlook for batteries? Then, could you tell us what are your key strategies to improve your business profit structurally and return to profit?
Do you have a target on when you expect to return to profit? The third question is, I see that you have your Indonesia LINE Project cracker starting in mid-2025. Right now your other two naphtha crackers are loss-making. Could you remind us, what is the difference in the cost base for your Indonesia cracker versus your existing other naphtha crackers? Should we expect it to have better margins than the rest? And if so, then where does this margin advantage come from? Thank you.
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This is Sung Nak-sun, the CFO, responding to your first question.
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Now, in terms of the investment. We have the investment reduction plan that we came up with in the first part of the year. Except for the LEM Spain investment, which we have deferred until 2025, there are no other changes, and we plan to continue as planned.
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For next year, we have made additional review to the investment reduction plan and added. We plan to reduce this by KRW 1.7 trillion.
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As for the CapEx, we have not determined the reduction plan compared to the medium to long plan after 2025.
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The reduction plan will be finalized depending on the financial soundness of the company.
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Having said that, the CapEx in 2025 will stay within the EBITDA level.
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This is Kim Min-woo, the CSO, responding to the second question.
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I believe that it would be realistic for me to say that any turnaround to profit in the existing business would be premised on improvement in the market situation.
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For the market improvement for the existing products, we believe that there are two points for expectation. First is the potential overall improvement in the demand and supply dynamics. For example, improvement in demand and also the completion of the capacity buildup.
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Second, what we have experienced so far is that due to the Russia-Ukraine war, in terms of the procurement of the feedstock, we believe that there is quite a lot of competition with the players who have access to the Russian feedstock.
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From these two perspectives, if there is a market pickup, then this would also mean that for our existing businesses, we could also look forward to improvement in profitability.
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Now, in terms of our mid- to long-term strategy, we are obviously aligned with the message that our CEO has given to the investors recently.
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Basically, we will continue to maintain our fiscal soundness as we try to transform our business platform, business portfolio, and also for the businesses that have been sluggish for some time. For example, the basic materials. We will also try to lighten the asset in what we call the asset-light initiative.
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I cannot go into detail regarding each and every asset type. But basically we have differentiated between the core assets and the non-core assets. For the facilities that are low in efficiency, or for the facilities that we can operate on our own, then we could shut down some of these facilities and also for other assets. For example, the Pakistani subsidiary, we could choose to hand over the management rights of the company. For LINE, we could also decide to attract some investment into the company. By doing so, we could also lower our financial burden on the company.
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But again, for these types of asset deals, these would have to be linked with market improvement. Also for the LINE Project, this would also be premised on successful startup.
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So what we intend to do now is to move ahead as planned in transforming our business portfolio. As we continue to move forward, whenever the plan is ready for each asset, then we will communicate this to the market in due time.
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This is Kim Chul-jung from Basic Chemical Business Development Corporate Planning team. I would like to respond to your third question.
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Now, for LINE, it is designed to accommodate as feedstock LPG up to 50%.
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With such design superiority in terms of the facilities and also with its geographic proximity to the Middle East, which will help source LPG at a more competitive price, we do believe that we have secured the cost competitiveness for LINE.
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As for the downstream product, polypropylene in Indonesia, the rate of self-sufficiency now is 40%.
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Even after 2025, when the LINE Project and especially the PP plant goes into operation, we believe that the demand and supply will remain tight, meaning that it is going to bode well for the pricing.
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That is all. Thank you.
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That concludes the earnings release conference call for the third quarter 2024 by Lotte Chemical Corporation. Thank you very much for your participation. If there are any further comments or questions, then please contact the IR team. We will see you again at the next earnings conference call for the fourth quarter. Thank you.