Good afternoon. I am Kim Yongwon, Head of IR at LOTTE Chemical. Let me now begin the LOTTE Chemical E arnings Conference Call for Q2 of 2024. Today, we will introduce the senior management members present, and then after explaining the business results for Q2 and outlook for Q3, we will proceed to a Q&A session. All the presentations will be made through simultaneous interpretation, and for Q&A, we will have consecutive interpretation. Let me now introduce the senior management present here today. First, we have with us Sung Nak-sun, the HQ CFO, Kim Min-woo, our CSO, and also Kwak Giseop, Head of Strategy Management Division of Basic Chemicals, and Park Kyung-sun, Head of Monomer Division, and Yoon Seung-Ho, Head of Polymer Division, Lee Sang-hyun , Head of Aromatic Division, and [Kim Cheol Jung] from the Business Development Division of Basic Chemicals.
From Advanced Materials, we have Joo Woo-hyun, Head of Corporate Planning Division, and we have Seo Kyung Hoon, Head of Battery Material Business Strategy Division, and also Kim Yong-hak, Head of the Hydrogen Energy Division. First, let me go through the business highlights for Q2 of 2024. In Q2, sales posted KRW 5,248,000,000,000 , up 3.2% QoQ, and operating profit posted a loss of KRW 111.2 billion, improving KRW 24.1 billion QoQ. Due to improving downstream demand, the spread has widened and sales volume of advanced materials and fine chemical products have increased, while operational efficiency of the basic chemical business has improved, and also because of the positive FX impact as well, all contributed to the improvement.
However, during the quarter, owing to the fall in the feedstock prices, the loss on valuation of inventory increased QoQ, and the maintenance of the overseas subsidiary also had an impact, limiting the magnitude of improvement. The pre-tax income is down KRW 35 billion QoQ due to a fall in the gains of valuation of investment shares in our subsidiary, and EBITDA is KRW 207.9 billion, up KRW 36.4 billion QoQ. Next is on the financial highlights. As of the end of Q2 of 2024, assets posted KRW 35,709,800,000,000 , up KRW 579.7 billion QoQ. Cash and equivalent assets posted KRW 4,205,100,000,000 , down KRW 186.7 billion QoQ. Liabilities is KRW 15,338,800,000,000, Up KRW 629.3 billion QoQ, and borrowings is KRW 11,827,000,000,000 , up KRW 325.2 billion QoQ.
Because the borrowing is related to new projects such as the LINE Project and through the acquisition of construction assets, liabilities and assets increase with a debt-to-equity ratio at 35.3% and net debt ratio posting approximately 33.8%. Next is the business results and outlook by business division. In Q2, the basic chemicals posted sales of KRW 3,606,900,000,000 and operating losses of KRW 139.2 billion, similar to Q1. With entry into the high season and owing to the positive FX impact, product spread has increased, but the maintenance Lotte Chemicals USA Lotte Chemical Titan has led to an opportunity loss of approximately KRW 27 billion. In addition, loss on valuation of inventories is up QoQ, resulting in a slight fall in profitability.
In Q3, due to a reduction in new capacity add-on volumes, globally gradual improvement in supply and demand is expected, but due to the delays in demand recovery and rise of the freight cost, profitability is expected to remain unchanged. Next is advanced materials. In Q2, the advanced material sales posted KRW 1,134,400,000,000 , operating profit KRW 75.7 billion, and operating margin was 6.7%. Sales and profitability have improved on the back of increasing downstream demand, resulting in a widening spread for ABS and PC, and also thanks to the rising exchange rate. Q3 is traditionally a high season for the business with the shopping season coming up, but with the Chinese new capacity volume hitting the market and owing to the rise in the maritime freight cost, profitability is expected to remain weak or stagnant. Next is LOTTE Fine Chemical.
LOTTE Fine Chemical already released its earnings on July 30th, so I will only briefly go through the financial results. Please refer to LOTTE Fine Chemical's earnings release for more details. LOTTE Fine Chemical's revenue in Q2 2024 was KRW 422.1 billion, with operating profit of KRW 17.1 billion and operating margin of 4.1%. Revenue and profitability improved thanks to increased sales of chlorine-based products and expansion in the green materials industry. Revenues is expected to keep increasing in Q3 on the back of rising international prices and sales volume of chlorine-based products and growing sales of green material products and food and pharmaceutical materials. Last is LOTTE Energy Materials. The company also had its earnings released yesterday morning, so I will be brief. In Q2 2024, LOTTE Energy Materials posted revenue of KRW 262.7 billion and operating profit of KRW 3 billion.
In the second quarter, despite slowing growth in the EV market, we achieved the highest quarterly sales by diversifying customers and expanding strategic customer market share in North America. In Q3, revenue growth is expected to slow down due to declining demand from all industries and policy volatility. But we plan to respond by expanding global customers, diversifying applications for ESS and hybrid, and diversifying our product portfolio, including copper foil for next generation AI accelerators. This concludes my presentation of Q2 results and Q3 outlook 2024, and now I would like to turn over to the CFO, Sung Nak-sun, to discuss key issues and future prospects of LOTTE Chemical.
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 of all, I regret to report that our Q2 earnings did not meet the expectations of our investors who were waiting for a meaningful improvement in Q2. In Q2, we narrowed our loss, thanks to improved downstream demand for consumer electronics, mobility, as well as positive currency effects. However, improvement in profitability was limited due to the lagging effect of the decline in the price of naphtha, which led to increase in inventory valuation loss. There was also a one-time expense for partial maintenance of an overseas subsidiary.
Looking at the recent environment surrounding the petrochemical industry, we are still expecting a gradual improvement in supply and demand due to lower capacity expansion and expected interest rate cuts. But uncertainties in the business environment, such as delayed recovery in short-term demand and rising shipping costs persist. Under these circumstances, we will focus our execution on areas that we have more control over in the short term to strengthen our financial position. First, in response to uncertain market conditions and industry demand, we will improve our cash flow by pushing back existing investment plans and reducing items of lesser strategic importance, or those that do not align with our strategic direction. At the CEO Investor Day event held in July, we outlined our target to improve cash flow by KRW 1.9 trillion by 2025 through investment adjustments.
As of 2024, we plan to further adjust investment in overseas subsidiaries by approximately KRW 150 billion. Second is to improve cash flow by maximizing operational efficiency. In addition to securing KRW 0.8 trillion in cash by 2025, we plan to secure approximately KRW 400 billion in additional cash this year through securitization of working capital and plant operation efficiency projects. We will also remain on the path of our asset-light strategy, which is expected to generate approximately KRW 2.3 trillion in additional cash by 2025. Further details will be shared in due course as we make progress. Finally, let me turn to our shareholder return policy and responsible management. We believe it is of utmost importance to maintain our trust with shareholders, and our strategic direction is centered on enhancing shareholder value.
As for dividends, the key part of our shareholder return policy, we paid out KRW 3,500 per share as dividend for the fiscal year 2023, with a dividend payout ratio of 72%, far higher than our policy of 30%. In addition, we will be paying an interim dividend for the first time this year as part of our shareholder return policy. As announced in our July disclosure, KRW 1,000 per share will be paid out on August 9th. In addition, we have completed a total of KRW 100 billion in stock buyback to date. As part of our responsible management principle, we expanded our management stock purchase in May 2024, following 2023. Business environment today remains challenging, but we will strive to implement the shareholder return policies that we have committed to at the appropriate time, taking into account the pace of performance improvement and our financial situation.
We look forward to 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 Jae-sung Yoon from Hana Securities. Please go ahead with your question.
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Thank you very much for this opportunity to ask my questions. My first question has to do with the opportunity cost from the turnaround for the basic chemicals and also your losses on valuation of inventory. Can you provide an explanation using specific numbers? Also, I understand that your freight costs had increased in the second quarter compared to first quarter. Has this also had an impact? That is my first question. My second question has to do with some announcements made during the CEO Investor Day. You mentioned during the Investor Day that there is a possibility of collaboration with Middle Eastern companies. Can you provide an update on those? In addition to this matter, is there any updates or anything that has changed since the announcements that have been made at the CEO Investor Day?
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I'm Kwak Giseop. Let me take the question about the valuation loss in inventories. For the basic chemicals business, in terms of the loss valuation in inventories, it was KRW 16 billion , and for Titan, it was KRW 14.7 billion . So in total, KRW 31 billion was recognized as loss in valuation on inventory.
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In the case of the opportunity loss related to the Lotte Chemical Titan, it was krw 8.6 billion, and Lotte Chemicals USA it was KRW 18.5 billion. So in total, KRW 27 billion was recognized as opportunity loss in relation to the TA.
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Let me take the question also about the rise in the maritime freight cost. In order to respond to the unfair trade practices of China, the U.S. government had announced that they are going to raise the tariff rates against the Chinese-made products.
Since this announcement has been made, there has been increase of transportation volume from China to United States.
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Because of this, there has been a shortage of freight space from Korea, and also in the months of June and July, there has been a rapid hike in terms of the maritime freight cost. However, the increase in the maritime freight cost was mostly reflected in the month of June, and compared to the first quarter, the impact on the second quarter is not that large.
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Also, after the mid-July, the Shanghai Containerized Freight Index is showing also a downward trend. It is stabilizing. Internally, we are adjusting the export price condition terms in order to ensure that the rise in the freight cost is reflected in the sales price.
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In order to ensure that there is no carryover of sales due to logistical disruptions, we are thoroughly managing our shipments and also expanding our early sales in order to minimize any impact on the third quarter.
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This is the CSO, Kim Min-woo. Let me take the second question. When it comes to the asset-light strategy that we are pursuing, simply put, it means that we are going to downsize the basic chemical business that we have to an appropriate level. Internally, we have almost nearly completed the listing up of our portfolios and items that needs to be evaluated based on those priorities. Based on that context, we are contacting a number of different investors, and for some of the projects, significant progress has already been made.
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However, given the market situation, such as the interest rate level and also the delay in the recovery of the market due to these myriad of factors, the market environment at present is not really feasible for selling off commodity assets like the basic chemicals.
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However, among the assets that are held by the company, given that there are certain promising locations in the emerging markets of these assets, and also the attraction of minor investment perspective, some of the investors are actually showing an interest in our assets.
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For some of the projects, yes, we are in the early discussion stage, and so there are a lot of things and developments going on, but at the moment, there is no specific details that we can share with the market.
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As soon as we have reached some conclusions, we will make sure that we share this information with the market.
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I am Sung Nak-sun, the CFO.
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At the CEO Investor Day, what we have announced was KRW 2.3 trillion for the asset-light strategy and also for the investment related reduction, KRW 1.9 trillion and KRW 800 billion for operational efficiency.
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For the KRW 2.3 trillion for the asset-light strategy, as has been noted by the CSO, it is currently under discussion.
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For this year's reduction of new investment, which was estimated at KRW 1 trillion, already 50% of that has been achieved.
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The KRW 800 billion that was planned for operation efficiency, already KRW 450 billion of that has been achieved.
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With regards to operation efficiency, we have set up an additional goal of KRW 430 billion.
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With regards to the investment that had been planned for the second half, it is going to be canceled or deferred, as has been planned. This free cash flow will be improved as planned. In case of the asset-light strategy, although it will take some time, we will make the effort to ensure that it is achieved within the year.
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The following question will be presented by Woo-j ae Jeon from KB Securities. Please go ahead with your question.
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Thank you for this opportunity to ask my question. I have an additional question about the freight cost. I would like to know what share of your vessels or contracted vessels, and if the share of contracted vessels is high, do you normally renew your contract every six months? Is the renewal of the contract done in the first quarter and the third quarter? That is my first question. My second question has to do with domestic demand for chemical products. My understanding is that demand is very sluggish for chemical products domestically. What is your outlook for the chemical products in the second half, both for domestic and for the export volumes?
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My name is Kwak Giseop. Let me take the first question. With regards to the contract of the vessels for exports, we engage mostly in term contracts, and it is contracted on a quarterly basis. The term is set rather short. This allows to respond very flexibly to the ongoing market situation. That is all. Thank you.
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I am Yoon Seung Ho. I am the Head of the Polymer Business Division. Let me answer your second question.
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In case of LOTTE Chemical in various different applications that we are currently the number one player in the PE and PP market. After 2021, with the increase of supplies from the new capacity add-ons domestically and also with the sluggish demand continuing, intensified competition is being played out in terms of sales for domestic uses.
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Our strategy is to shift away from the selling of low margin products and increase the share of our sales of high profit products. We will leverage the strength that our company has to the maximum and continue to defend our position in the domestic market. For your information, the domestic market takes up 45% of our total sales of PE and PP.
[Non-English content] The following question will be presented by Jinho Lee from Mirae Asset Securities. Please go ahead with your question.
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I am Jinho Lee from Mirae Asset Securities. I have two questions. According to my understanding, there seems to be a difference between the sum of the operating profit of different business division and your total operating profit. Where does this difference come from? That is Lotte Chemical Titan operating profit. even compared with the Olefin, it seems that your P&L has deteriorated significantly. What is the reason for this? That is my second question.
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I am Sung Nak-sun, the CFO. Let me take up the question about the difference in the operating income. There seems to be a difference between the total sum and also the disclosed consolidated basis numbers.
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The reason why there is a difference is because there is PPA LOTTE Energy Materials and the LOTTE Fine Chemical, and that number is about KRW 55 billion on a quarterly basis. That is the reason why there seems to be a difference.
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Yes. Let me answer the second question. I am Kwak Giseop from the Strategy Management Division of Basic Chemicals. There are two reasons why there is a difference between Lotte Chemical Titan. in the case of Olefin, the composition of the products that were sold Lotte Chemical Titan. in the product portfolio of Olefin, it included Benzene and BD, these monomer products which showed a rather strong performance.
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The second reason is Lotte Chemical Titan, starting from the month of April for 47 days, there was a scheduled turnaround that took place, and this had a negative adverse impact on the performance.
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The next question will be presented by Parsley Ong from JP Morgan. Please go ahead with your question.
Hi. Thank you for the chance to ask questions. Earlier you mentioned a lot of measures to reduce your CapEx burden and improve the business structurally. Can we get a summary or can we get your updated CapEx and cash flow guidance over the next three years? I think you mentioned that you are almost done with a list of assets internally that you can downsize. Also you mentioned that the market environment is not appropriate for selling basic chemical assets. Could you maybe share with us how much are you planning to raise from this downsizing? How much cash are you planning to raise from this downsizing of the chemical assets? Also, if the market environment is not appropriate for selling basic chemical assets, does that mean you are not planning to sell a stake in your naphtha cracker?
think Lotte Chemical Titan has been struggling in terms of its margins for a while, even compared to other naphtha crackers in Korea or in the region. Could you share with us, in your opinion, what are why Lotte Chemical Titan's margins are lower than, let's say, LOTTE Chemical's other naphtha crackers or within the region, for example, lack of specialty downstream, high shipping costs. Are you taking any measures to improve the profitability? Thank you.
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I'm Sung Nak-sun, the CFO. Let me take the first question.
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In the case of our investment plans on a consolidated basis, in 2023, our original plan for CapEx was for KRW 3 trillion, but by 2025, the original plan for 2024 was KRW 3 trillion, but by next year, 2025, we are going to reduce that to KRW 1.7 trillion.
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During the CEO Investor Day for 2024 and 2025, we said that for the free cash flow, we intend to reduce KRW 4.9 trillion.
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Amongst that number, the asset-light strategy takes up KRW 2.3 trillion.
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Amongst that KRW 4.9 trillion, this year we foresee an improvement of KRW 2 trillion-KRW 2.5 trillion.
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I am the CSO. Let me take up the latter part of your question.
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Basically speaking, we are not yet at a level where we can talk about referring to specific assets or any specific capacity. We ask for your understanding about this matter.
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But as has been announced during the CEO Investor Day, reducing the commoditized chemical business within our overall business portfolio is a mid to long-term strategy that we intend to pursue going forward.
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When carrying out these projects to improve our business structure, I was simply trying to emphasize that the view of the potential buyer regarding the market situation of the petrochemical industry does have an impact, is reflected on his buying decision. That wasn't what I was trying to say and not that because of this, that because of the market situation, we will not be able to engage in any sales activities.
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There is a difference in terms of the rate of progress by different projects and by different issues. On a project-by-project basis, when the time is right for us to communicate with the market, we will be sure to do so.
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I am Kwak Giseop, the Head of the Strategy Management Division of the Basic Chemicals. Let me take up your question about why Lotte Chemical Titan in Q2. as i have already noted, there has been the scheduled turnaround that had Lotte Chemical Titan, the share of polymer products such as PE and PP is quite high.
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In the case of Q2, compared to other products, the polymer products market situation was more aggravated, and this was because of the higher maritime shipping cost. Because of the higher freight cost, the makers within the region, they were not able to export to offshore or overseas markets, but they increased their sales in the Southeast Asian markets. This is the reason why competition in this region had intensified.
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In order to Lotte Chemical Titan business, we intend to increase the share of high value-added products in our product portfolio and also enhance our operational efficiency.
[Non-English content] The following question will be presented by DongJin Kang from Hyundai Motor Securities. Please go ahead with your question.
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Yes. I wanted to ask a question about the PPA write-off that you mentioned regarding the Lotte Advanced Materials. What is the backdrop to this write-off of KRW 55 billion? You said that it was done on a quarterly basis. Does that mean that it may continue going forward? How much of a balance remains for this matter?
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I am Sung Nak-sun, the CFO.
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With regards to the PPA, at the time of acquiring the Lotte Advanced Materials business and the LOTTE Fine Chemical, in addition to the book value, we have acquired the PPA.
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With regards to the remaining years for the write-off, it would depend on the customer value, but typically it would take from 15- 20 years. With regards to the exact balance that remains, I cannot actually disclose the figures at the top of my head at the moment. We will come back to you through our IR team.
[Non-English content] If you have any additional questions, please ask them now. [Non-English content] The following question will be presented by Cho Hyun-ryul from Samsung Securities. Please go ahead with your question.
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I'm Cho Hyun-ryul from Samsung Securities. I have one question. It seems that the macro indicators coming from China in the months of June as well as July is deteriorating. This is also true for the manufacturing sector in the U.S. So both U.S. and in China, it appears that there is a slowdown in demand. For the basic chemicals business, you have mentioned that you are expecting delays in the recovery of demand. Do you think that going forward into the third quarter and fourth quarter, is it your outlook that profitability will continue to deteriorate in the future?
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My name is Kwak Giseop. I'm the Head of the Strategy Management Division of Basic Chemicals.
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If you look at the product spread and also this product sales volume at present, our outlook is that there won't be much difference between Q2 and Q3.
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However, starting from Q3, our outlook is that there can be a gradual recovery for a wide range of different product categories. Compared to Q2, I think in Q3 and Q4 we can expect an improvement.
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I'm Joo Woo-hyun. I'm the Head of the Corporate Planning Division of the Advanced Materials.
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Despite the downturn in the Chinese economy going into the third quarter, this is the high season for ABS and PC for the downstream industry for ABS and PC. We believe the sales will be increasing going into the third quarter.
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In case of the advanced materials business, in order to counter the slowdown in demand owing to the economic downturn, what we plan to do is increase our market share for key customers and also enhance the quality of our products to expand the sales.
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That is all.
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With this, we would like to close the Q2 2024 LOTTE Chemical earnings conference call. If you have any further questions, please contact the IR team. We will meet you again in the third quarter. Thank you.