Good afternoon. We will now start LG Chem's 2021 third quarter earnings conference call. This is Hyun-suk Yoon, Head of IR at LG Chem. Thank you for taking an interest in LG Chem and joining this call despite your busy schedules. We will begin with a brief introduction of 2021 Q3 earnings performance and outlook, followed by the CFO presentation highlighting the company's earnings results, then a Q&A session. The presentations will be interpreted simultaneously, while the Q&A will be interpreted consecutively. The material presented during this conference call can be viewed by those with web access. It is also available for download from our corporate website. Let's begin today's call with the introduction of the management team.
We have CFO, Dongs eok Cha, Myeong-seok Lee from Business Planning, Ki Dae Bae from Petrochemicals, Kyung Duk Koh from Advanced Materials, Heuis ul Park from Life Sciences, and Seungse Chang from LG Energy Solution?
Let's begin with the business performance for Q3 2021. First, the Q3 P&L. Q3 sales grew by 41% YoY and fell by 7% QoQ to KRW 10.6 trillion and operating profit was KRW 727 billion . These numbers include the one-off provisioning loss related to energy solutions GM recall. If you turn to the next page, page four, you will see our performance excluding the one-off factor. Excluding the one-off factor...
You will see our performance excluding the one-off factor. Excluding the one-off factor in the second quarter, which increased sales continued its growth on quarter. Operating profit was around KRW 1. 35 trillion, and OP margin was around 13%. Next, our financials.
As of the end of the third quarter 2021, assets were around KRW 49,800 billion. Cash was around KRW 4.3 trillion. Liabilities were around KRW 27 trillion. Borrowings were around KRW 14 trillion. Borrowings ratio was 119.7%. Total liabilities to equity ratio was 42.7%. Due to the $1 billion green bond issuance in July, liabilities ratio increased slightly. Next, earnings and outlook by division. First, Petrochemicals. 2021 Q3 sales was KRW 5.63 trillion. Operating profit was KRW 1.087 trillion, and OP margin was 19.3%. While profitability slightly fell with the normalization of the global supply issue and the stabilization of the downstream industry demand, which was partially overheated in the first half, backed by the company's differentiated product portfolio, core downstream products including ABS, PVC, and NBR, recorded solid profits, with demand remaining strong.
Despite the overall petrochemical business in off-season, and despite the scheduled turnarounds, including one for Daesan NCC in Q4, due to the impact of the supply issue in China from the recent government's power usage restriction measures and rising coal prices, as well as the overflow demand improving from the living with COVID trend, supply is expected to remain tight. Next, Advanced Materials. In Q3, Advanced Materials sales was KRW 1.158 trillion. Operating profit was KRW 49 billion, OP margin was 4.2%. Due to the supply shortage in downstream industries, automotive, semiconductors, shipments of the company's cathodes and engineering materials decreased. Sales and profitability fell QoQ. In Q4, challenges are expected with the continued supply shortage of automotive and semiconductors, IT industry in off-season, et cetera.
However, continued sales growth is expected due to the business expansion focused on battery materials, including the full-fledged launch of the separators business. Next, Life Sciences. In Q3, sales was KRW 177 billion and operating profit was KRW 9 billion. OP margin was 5.3%. While sales grew for core products such as for growth hormone and diabetes, sales and profitability decreased from the overall of the aesthetics business distribution network in China and operation suspension from turnarounds in some product lines. In Q4, sales are expected to increase with greater supply of Eupenta and polio vaccine and market share expansion of major products. In line with the progress in new drug development, we are planning to increase R&D investments. Next, LG Energy Solution. In Q3, sales was KRW 4.027 trillion.
Operating loss was KRW 373 billion, and OP margin was -9.3%. Despite the increase in the sales of automotive cylindrical batteries and IT used batteries, total sales declined partially from the customer's production disruptions brought on by the supply shortage of automotive semiconductors. Profitability was at a loss due to the additional provisioning recognition of around KRW 620 billion in the third quarter, due to the GM Bolt recall decision. You can see the earnings performance that excludes the one-off factor on page 10. Q3 recurring operating profit was around KRW 250 billion, and that is quite similar to that of the previous quarter. In the fourth quarter, while the impact of the automotive semiconductor supply shortage will continue, sales growth is expected from the continued sales growth of global EV sales and increased demand for IT products.
We will exert great efforts to improve profitability through strengthening of quality and value chain competencies. Next, FarmHannong. Q3 sales was KRW 123 billion, and operating loss was KRW 10 billion. While the profitability was in the red due to the seasonality in the second half, sales and profitability improved YoY from the sales expansion of crop protection and fertilizer products. Despite the burden from rising raw material prices, annual earnings to improve from the strengthening of the portfolio, focusing on products such as specialty crop protection and specialty fertilizers which has the greatest customer demand, as well as overseas sales expansion. On this note, we will conclude the Q3 earnings presentation and invite CFO Dongs eok Cha to present the highlights of the company's earnings performance.
Good afternoon. I'm Dongs eok Cha, CFO of LG Chem.
I'd like to begin by thanking everyone joining this call, despite your busy schedules. Thank you for your kind attention. First, looking back on the third quarter, it was filled with challenges at home and abroad. Along with external issues such as the reduction in the downstream demand from the automotive semiconductor supply shortage, rising raw material prices, including oil and metal, as well as logistics crisis. There was also the additional provisioning for the GM recall internally, and as a result, profitability greatly deteriorated on quarter. However, excluding the one-off recall provisioning, Q3's operating profit was around KRW 1.3 trillion, and OP margin was 13%. When excluding the previous quarter's one-off factor, sales grew slightly on year as well as on quarter. Therefore, the continued sales growth trend, as well as the robust profit generation capability remains unchanged.
We are fully aware that there were great concerns in the market regarding the GM recall issue. Regarding the recent GM recall decision, companies are in agreement, and recall is progressing in close cooperation with our customer. On behalf of LG Chem and LG Energy Solution, I would like to express great regret and apologize for not only this recent event, but also other recall issue, including the one for ESS. The company would like to have such quality issue to be regarded in the future as a growing pain to leap forward, and thus made quality innovation activities a top priority in our business management, and has been continuously strengthening innovation activities, including fortifying the cell and module design, process innovation, including automated inspection of the entire process, and will dramatically improve stability through the implementation of even stronger product strengthening measures going forward.
Dear investors, while there are many difficulties at home and abroad to grow the company, the company is implementing associated action plans focused on the three new growth drivers that I have mentioned previously. First, in the case of eco-friendly sustainability business, we have announced a large-scale investment in Korea valued at KRW 2.6 trillion for high value-add eco-friendly materials, including biodegradable plastic, PBAT, and photovoltaic film, POE. To establish a plant for the biodegradable plastic PLA in the U.S., we are currently discussing ways to cooperate with ADM, a global major crop processing company. Second, as part of the company's growth strategy to become a general battery material producer, we will complete the integration process in the fourth quarter for the separator business acquired from LG Electronics. Launch the business as a part of the company's business division.
For cathodes, along with the plant expansion in Cheongju, establish a cathodes JV in Gumi to continuously expand capacity in proportion to customer demand. Regarding the battery materials business opportunities, including the future recycle business, we are reviewing various collaboration opportunities with third parties. Once we have more concrete details to share, we will communicate the developments with the market. Third, one of the new growth drivers, the global innovative new drug development. The gout treatment we successfully completed, the phase II clinical trial in the U.S., is preparing for phase III next year. Other projects in clinical trials are currently showing good results, and we also have secured other new drug developments in our pipeline. Once again, we will reach out to the market when there is progress to report.
In the case of energy solution, despite the challenges, including the recall, after GM, we are looking into establishing a presence in Indonesia with Hyundai Motor Company. With the signing of the JV MoU with Stellantis recently, various cooperative relationships are expanding smoothly with leading OEMs, and we expect to further solidify our leadership as a global market leader. Dear investors, in Q4, we also expect great uncertainties in the business environment at home and abroad.
Furthermore, during this quarter, profitability will be impacted due to the overhaul in Daesan NCC and turnarounds in Yeosu PVC and SAP lines. However, we believe the company's environment and safety management system will be further improved. By thoroughly preparing for the uncertainties and successfully concluding the turnaround through safe working process, we will lay the foundation for future growth. We ask for your continued support. Thank you. Next, we will have the Q&A session.
To give opportunity to ask questions to as many people as possible, we'll be limiting two questions per person. If you have a question, press star and number one. To cancel your question, press star and number two. The first question will be by John PK Park from CIMB Securities. Please go ahead.
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Thank you for the opportunity to ask questions. There are two questions that I would like to ask you. First is about your battery business. There was the GM recall recently. In terms of the underlying reason for that and how the situation actually took place, if there are any facts that you could share with us, that would be appreciated. In addition to that, do you believe that there will be a possibility of any large-scale recalls being requested by other OEM suppliers that you are working with? The second question that I would like to ask you is about your overall chemical business. Right now, there is a lot of concern about the long-term supply of coal-based chemicals within the market.
If you could share your overall outlook in terms of the supply and demand dynamics for PVC and also ABS, which is one of your major products, that would be appreciated.
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This is Jang Seung-seob from the overall Energy Business, LG Energy Solution or LGES, and maybe I can address your questions about Bolt and also the possibility of other OEMs also making similar requests. First, to talk about the GM Bolt situation. According to a joint investigation that was conducted between GM and LG, we do believe that the main reason for the fires that took place is because of a similar situation that is very rare, but can take place simultaneously, which would be that there was a sliding situation taking place within the separators, and also that the anode tab became disconnected at the same time.
As a result, to make sure that we put top priority with regards to the customer safety, for the initial production volume that was created, we are planning to conduct, and we have conducted an overall replacement of all modules and all packs. For the more recent productions that took place, we are going to use a BMS diagnostic software to ensure that we are able to identify the modules that need to be replaced on a selective basis. In addition, for all of the battery cell and module lines, there has been an improvement made to the overall production process, which has been completed, and therefore, production has restarted from the end of September. In addition, we do believe that come mid-October, we will have the full supply necessary for the replacement of all of the battery packs.
In addition to that, for the overall provisioning that was required for this incident, it was KRW 1.4 trillion in total. For the final determination about how much will be borne between LG Electronics and LG Chem, there has not been a determination on that front yet. According to the overall accounting principles, right now we have applied a rate of 50% according to accounting principles. As a result of that, for the KRW 750 billion in total, around KRW 620 billion was recognized in the third quarter, in addition to what already had been previously recorded in the second quarter.
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In addition, to move on to the second part of your question with regards to whether there could be recall or safety issues taking place with other customers that we have. Even if it is an internal combustible vehicle, for a wide variety of reasons, a vehicle can be subject to safety issues, including a fire. For an electric vehicle, it's no different. Therefore, there can be various safety issues that a vehicle can be subject to, including battery related issues. The reason behind that could also be because of various reasons. From LG Energy Solution standpoint, if there is a fire with a electric vehicle, of course, we will investigate what the root cause of that is with our customer.
In the case that there can be, or there may be some issues related to the battery, then we will make sure that we do a full analysis about the root cause to make sure that we can identify whether other models have the same issue or not. If we look at the recently produced batteries that we have, they have been produced upon more robust designs and also more updated processes and improved processes that we have introduced. As a result of that, we have significantly decreased the possibility of any issues taking place at the source. In addition to that, we also have an automatic inspection for such issues, and also we have eliminated, as much as possible, the possibility of any such issues being leaked outside of the company.
As a result of that, we do believe that the more recent batteries that have been produced represent a more safe model. In addition to that, in the case that there is a possibility of a battery safety issue taking place, we have put in place a more robust tracking system, which enables us to track down back to the semi-finished goods lot number. This is a risk management procedure that we have put in place. In addition to that, because we do have a stronger battery, a BMS diagnostic software in place, we are able to select and identify any issues that we would see in the field with a more updated procedure. As a result of all of these initiatives and efforts, we do believe that the possibility of a large scale recall taking place again would be very low.
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Maybe I can address the second question that you asked, which was about the outlook for 2022. If we look at the overall situation for supply and demand dynamics in 2022, we do believe it will represent a more eased situation than what the situation is currently. First, if we look at the overall demand side, because of GDP growth taking place, and also as economies return back to normal with a situation in which they're living with the COVID-19 crisis, we do believe that economic activity will continue to grow, leading to a more robust demand situation. On the supply side also, we do believe that when compared to this year, next year, there will be an increase in supply. If we look at the upstream right now, the overall capacity additions that have been taking place in Northeast Asia will continue into next year.
Also on the downstream side, we do believe that one-off factors that took place this year, which disrupted some of the supply, for example, the extreme cold weather in the U.S. will not repeat itself again. As a result, we do think that overall supply will increase. However, because for LG Chem, we are positioned in the higher end product market, for example, for higher end ABS and POE products, we do think that even if the overall supply demand dynamics deteriorate, we will continue to enjoy a higher margin versus the overall market. If we talk specifically about our PVC and ABS products, again, we do think that the overall demand will be solid next year.
In addition to that, if we look at the ethylene-based production versus the carbide-based production, we do think that we have an overall upper hand in terms of the competitive edge, which we will continue to be able to enjoy. For ABS, in the second half of next year, there are some capacity additions that are being expected. That will have some impact. However, we don't believe it will be significant.
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The next question will be by Kang Dong-jin from Hyundai Motor Securities. Please go ahead.
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Thank you for the opportunity to ask questions. There are two questions that I would like to ask you. First is for your LG Energy Solution business. Some of your customers recently have been saying that they are going to expand the adoption of LFP batteries. I do also understand that for LG Energy Solution that you are looking to develop your own and also mass produce LFP batteries. In terms of the overall schedule going forward for development and production, what would that be? In addition, in the past, the company did point out the various cons that LFP batteries had to other battery form factors. In such a situation, why has the company made the decision now to go ahead with development? Versus the Chinese competition out there, what do you think the strengths of the company can be?
The second question that I would like to ask you is about the overall advanced materials business in the areas of nickel, cobalt, manganese, and also lithium. It seems to be across the board for raw materials, most of the prices have been increasing. If we look at the mid-to-long-term profitability and also the strategy for the different material types, has that had an influence on your business?
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To address your question about LFP. For LFP, in case, versus the overall cost competitiveness, there is a cost competitiveness that it enjoys versus NCM batteries, and therefore there is an increasing adoption that is taking place in the low-cost segments of EV vehicles. However, if you look at the downside of LFP batteries, they are very heavy, and also the energy density is low.
In terms of the overall mileage that you can get off of these batteries, there is a weak point. Overcoming this situation is one of the main pieces of head work or homework that needs to be done by the battery manufacturers and the OEMs together. For these reasons, in the case of Tesla also, they have announced that for their low-cost segment, which would be the standard range, that is only where they will be applying the LFP batteries. Whereas for the long-range models that they have, they will continue to look at high-nickel chemistries. In the case of LG Energy Solution, for the LFP chemistry in itself, we have already had experience in developing and mass producing these types of chemistries for the low voltage internal combustible vehicles and also for some EV vehicles that it could be applied to.
Taking in light the various strengths that LFP chemistry does provide, we do believe that there is a possibility, and we are focusing on the mass production for ESS purposes, which would be for cases in which there are no limitations in the space that is required or in terms of the overall weight of the battery in itself, because, of course, it does provide a cost-competitive solution. In the case of LFP for EVs, we are looking at ways in which we would be able to overcome the overall mileage situation and looking at cobalt-free chemistries that can be developed as an alternative. From the company's standpoint, we will continue to focus on products in which there is a market need and which the customer wants and make sure that we can provide a differentiated value perspective for our customers.
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Maybe I can answer your second question.
With regards to the overall metal situation, of course, it is true that we have recently seen a surge in the overall lithium prices. However, if you look at our general contracts that we have in place with our customers, it is that the overall sales price, there is a link with the raw materials price and the sale price in itself. There is a natural hedge that we're able to enjoy. However, in terms of the passthrough to the sales price in itself, it does not take place on a real-time basis. There can be some impact on our overall margins. If we look at the overall outlook going into next year, we do believe that lithium prices will continue to be very strong and that the overall supply situation will continue to be tight.
As a result, we are trying to engage into more long-term supply contracts with our suppliers and also continue to strengthen the partnership that we have with them. In addition, for our customers, because metals are a very important material, we are looking into opportunities to maybe invest, to try to stabilize some of the supply and demand dynamics.
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I'll take the next question. The next question will be from Meritz Securities, Noh Woo-ho, please go ahead.
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Maybe I can address your first question, which was about our overall capacity expansion plans for the battery business. It is true that this year, going into the end of the year, and maybe also going into next year, the overall semiconductor chip issue for vehicles will continue to be a issue that will have a short-term impact on the supply and demand dynamics. However, that have been said, there are continuous launches of new models that are based on a EV-dedicated platform that are being announced. As a result, we do believe that the overall growth trends of the market will continue and be maintained. For the capacity for this year, including the overall cylinder type batteries that we have for electric vehicles in general, we do believe that we will secure around 150 GWh.
If we include the JVs that we have with the likes of our customers, which would include GM, Hyundai Motors and Stellantis, we do think that this is something that we continue to grow to 430 GWh by 2025. That is the overall expansion plan that we have currently. As mentioned, if we were to break down that 430 GWh in 2025 by the pouch type and cylindrical type, it would be that the pouch type capacity would represent around 310 GWh, whereas the cylindrical type would represent 120 GWh. In addition to that, in line with the overall growth that we see in the market and also the continuous capacity and increase and strengthening overall capabilities that we have, we will continue to maintain and execute this plan accordingly.
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Maybe I can address your question. We do believe that for 2021, it was a year in which we were able to make meaningful progress in terms of the overall development that we have had. Of course, there continue to be preclinical and clinical tests that we continue to conduct. As a result of that, we do think that we have been able to create an overall global development mode for the company and also build out a portfolio for the main illnesses in which we want to address. If we look at the overall situation for the gout treatment that we have, we have been able to complete the overall phase II and will be moving into a phase III next year.
In the U.S. for the overall NASH treatments that we have and also the obesity treatments, we have been able to make progress on the phase I and continue to be able to treat and continue to make progress there. In addition to that, if we look at the overall immunotherapy treatments that we have and also some of the gene therapy, there was an approval in June for the phase I IND. We do believe that come November, there will be an overall IND phase II approval coming forth for other types of treatments. In 2022, we do think that there will continue to be progress that we will be able to make. In total, there are 24 projects that will be ongoing.
For the gout treatment that we mentioned before, again, there will be the phase III clinical trials that will take place in the second quarter. For the NASH treatment also that phase II will also take place in the second quarter. At the headquarter level, we also have identified anti-cancer therapy as one of the next growth drivers that we will want to have for our next generation treatments. In this area, we will be developing the fundamental technology that is required to have a cell treatment that can be developed for anti-cancer purposes.
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The next question will be by Baek Young-chan from KB Securities. Please go ahead.
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Thank you. There are two questions that I would like to ask you. One is about your Advanced Materials business. If you could provide us with an update for advanced materials, for example, for the battery recycling business and also for the new materials that you have in general, that would be appreciated. The second question that I would like to ask you is about your Chemicals business. Recently, there has been a electricity shortage in China that has been taking place. As a result of that, we do think that overall chemical prices have been very strong. However, there are some that say that if this crisis does continue, that on the downstream side, it could actually lead to slower demand on the downstream side. From the Chemicals business, how do you see this overall situation playing out?
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Maybe I can address the first question that you had about the Advanced Materials business and the overall battery materials and new materials business in general. First to talk about our separators, as you are aware, we did acquire LG Electronics separator business, and this will be merged into officially part of our business as of November. Right now there are various plans that we do have to cooperate with external parties and also try to expand this business. As of now, there's not a lot that we can share with you. Once the time is right, then we will try to share more information about our plans going forward. For the four major battery materials, including cathodes, outside of that, we are trying to identify other opportunities.
In anode binders into the cathode dispersants, and also in terms of the thermal conductive adhesives that are being used. If we look at the overall market sizes that these materials represent, it is more of a niche market, it is a high growth, high value market in general. We do want to continue to identify such items for development and invest into these areas going forward. You specifically asked about the battery recycling business. For the battery recycling business, we do think that there is more smelting and other types of technology that is required for us to be engaged in this business. This is something that we are currently reviewing in ways or avenues on how we want to pursue to acquire that technology. This is a work in process right now.
I think that what we can say right now is that we are preparing ourselves to engage in the battery recycling business, and if more information comes available, we will share that with you.
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This is the second question that you asked about the overall chemical situation and the electricity shortage that is taking place in China. If we look at the short-term impact that it is having on the market, it is true that it has improved the overall supply-demand dynamics. As a result of that, we have seen better prices. However, what the overall mid- to long-term impact will be is something that we will have to continue to wait and monitor. If you look at where there has been an impact in limitations, it has been applied to the vehicle side and also for overall home appliances. For the downstream demand for some of those areas, there has been some impact, but it has been limited.
Whereas for the more higher energy consumption industries, for example, for CTO, for MTO, for carbide-based processes, and PVC, it has led to an overall contraction in the supply that is available from these industries. As a result of that, if we look at the ethylene spread or the PVC spread, there has been a spread improvement as a result of this situation. We do think that the spread improvement is a situation that will continue into the first quarter of next year. However, how the situation will play out thereafter will depend upon how Chinese policy develops and evolves. We will continue to monitor that situation.
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Due to the time, we will now take the last question. The last question will be from Min Hoonsik from Credit Suisse. Please go ahead.
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Yes. Thank you for the opportunity to ask questions.
The first question that I would like to ask you is about your IPO timeline for LG Energy Solutions, and also the overall IPO structure in terms of how many primary versus secondary shares would be offered in the overall offering. The second question that I would like to ask you is about your CapEx for 2021 and 2022, and also in terms of your financing plans that you would have to fund that CapEx.
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This is Yoon Hyun Seok from the IR division, and maybe I can take your first question about LGES IPO. Right now it is that the company to list on the KOSPI market has submitted the preliminary registration form for IPO to the KRX. Because of the GM recall issues recently, there was a slight delay in our overall schedule. However, we are now back on track with the IPO process.
For the specific timing of the IPO in itself, it would depend upon the overall process that is required for the IPO approvals that would be forthcoming from the related agencies. We do want to pursue this as early as possible with regards to the timing. In addition to that, for the structure, in terms of the primary versus secondary shares, this is something that has not been determined yet. It is something that we will be determining in the future based upon the cash flow of the two companies and also the liquidity that is available in the financial market.
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Maybe I can address your second question about the overall CapEx that we have. This is Lee Myoung-seok from the planning and coordination department.
If we look at the facility investments that we have been making this year, it has been going on the chemical side into the number two NCC, on the advanced materials side into our cathode business, and also on the LG Energy Solution side to expanding the capacity that we have for the overall battery business. As a result of that, for the full year of 2021, we do think that our CapEx will end up in the mid to higher level of KRW 6 trillion. For 2022, we are still in the process of formulating our business plan. We don't have the details ironed out yet. This is something that we do think will be available in the beginning of next year.
However, maybe to give you a general ballpark about our ideas as of the current time, we do want to continue to strengthen our ESG-based business investments in developing more eco-friendly materials and also EV battery related materials. Expanding those business areas would be one area in which we would continue to invest. Also for safety and environment, that is the second area. Expanding our overall battery capacity would be the third area that we would be focusing on. As a result of that, if we look at the full company CapEx, we do think that it would represent, in general, a higher number than we have for the CapEx of this year.
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Then maybe to talk about our financing plans accordingly to fund this overall CapEx.
For LG Chem, we do think that the EBITDA that we're able to generate should be sufficient to cover the overall needs that we have. We do understand that the overall business environment does have a high level of uncertainty. We do want to make sure that we do take preemptive actions when necessary to secure the funding from outside if we need to do so. In addition, for LG Energy Solution, if the current IPO that we are contemplating goes ahead as planned, then there should be no issues in financing the CapEx in general. However, again, we do understand that the overall external environment does have uncertainties embedded. We will continue to monitor the overall financial market situation to ensure that we have a competitive way of sourcing the funding if necessary.
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With this, we would like to end our conference call for the third quarter of 2021. We do apologize for not being able to take all questions because of the time limit. If you have any unanswered questions or if you have any follow-up questions, please do not hesitate to contact our IR team at any time. We would like to thank everyone who has participated in this call, once again, for taking time out of your busy schedule to do so. Thank you very much.