Good afternoon. We will now start LG Chem's 2025 First Quarter Earnings Conference Call. This is Kyungseok Kim, Head of IR at LG Chem. Thank you for taking an interest in LG Chem and taking the time to join us today amidst your busy schedules. We will begin with a brief overview of the 2025 Q1 earnings performance, then the CFO will talk about the Q1 performance highlights. Finally, we will have a Q&A session. Please note that the presentations will be interpreted simultaneously, while the Q&A session will be interpreted consecutively. For those with web access, the materials presented during this conference call can be viewed online and are also available for download from our corporate website. Let's begin today's call with the introduction of the management team.
We have CFO Dong Seok Cha, General Lee in charge of company's business planning, Ho Young Seo from Petrochemicals, Chang Woon Seo from Advanced Materials, Sun Shin Cho from Life Sciences.
First, an overview of our financial highlights for the quarter. On page three, consolidated Q1 sales and P&L. Q1 sales was KRW 12,171,000,000, a slight decrease QOQ. The company recorded an operating profit of KRW 447,000,000 with an OP margin of 3.7%. Net profit was KRW 260,000,000. Next, page four, consolidated financial status. As of the end of Q1 2025, assets were around KRW 95,100,000,000, liabilities were around KRW 47,000,000,000, and capital was around KRW 48,100,000,000. The debt ratio recorded a slight increase QOQ to 97.7%. Next, performance and outlook by business division. Page five, Petrochemicals division, 2025 Q1 sales was KRW 4,781,000,000 and operating loss was KRW 56,000,000.
Deficit was reduced QoQ thanks to cost-cutting efforts and the impact of the strong exchange rate. Next, Advanced Materials, i n Q1, sales was KRW 1,490,000,000, up QoQ. Operating profit was KRW 127,000,000 and OP margin was 8.5%. Profitability improved thanks to the increase in high-value-added product sales, including electronic and engineering materials. Next, Life Sciences. In Q1, sales was KRW 286,000,000 and the operating loss was KRW 13,000,000. Profitability worsened with a QoQ decline in sales due to differences in export shipment timing of autoimmune disease treatment and vaccines. Next, Farm Hannong. Q1 sales was KRW 246,000,000 and the operating profit was KRW 31,000,000. Sales and profitability were similar year- over- year with the increase in sales of seeds and crop protection products. Lastly, LG Energy Solution. This morning, LG Energy Solution presented their performance in detail during the earnings call, so we'll briefly present their performance here.
In Q1, Energy Solution sales was KRW 6,265,000,000 and operating profit was KRW 375,000,000 with an OP margin of 6%. Sales declined slightly due to conservative inventory policies of customers, but operating profit was reported thanks to the absence of one-off costs incurred in the previous quarter and continued cost-cutting efforts. This concludes the earnings presentation. Next, CFO Dong Seok Cha will present the future outlook.
Good afternoon. I am Dong Seok Cha, CFO of LG Chem. Thank you for your interest in joining our earnings presentation. Looking back on our performance in the first quarter, the business environment remained challenging due to market downturn and rapid geopolitical changes, but thanks to the reduced deficit in petrochemical business through cost-cutting efforts and an increase in high-value-added product sales such as electronic and engineering materials, profitability in Q1 improved QoQ. Moving on to the outlook.
Due to increased volatility around policies of major countries such as tariffs and demand for reshoring, there are concerns over economic slowdown globally, so we anticipate much volatility and change in our business environment. We will focus on strengthening fundamental business competitiveness through operational optimization and developing new growth drivers to overcome the current challenges. For our petrochemical business, with continued pressure for capacity expansion and sluggish demand for China's exports due to high tariffs of the U.S. and China, it is difficult to expect supply and demand balance to recover anytime soon. However, thanks to falling prices of raw materials including oil and naphtha and the start of the seasonal peak in Q2, profitability is expected to improve gradually.
We will accelerate the business restructuring focused on high-profitability applications such as EV SSBR, automotive ABS, and ultra-high molecular weight PVC, and actively utilize local sales capability and production hubs in the U.S. to sell products whose import shares are high in the U.S., including ABS and synthetic rubber. Regarding battery materials, there is great demand volatility due to policy changes in the U.S. As EV downstream demand is expected to slow down after the imposition of automotive tariffs in April, impact on cathode material shipment is deemed inevitable for the time being. We are closely monitoring the market situation, and local production response is becoming increasingly important, so we are looking for ways to strategically utilize the advantages of the Tennessee plant in the U.S. that we secured as a production base preemptively.
We will also strictly manage utilization rates and inventory while diversifying our customer portfolio through new product acquisitions so that we can respond promptly to demand uncertainty. In addition, we will accelerate the development of new products and process technologies that are cost-competitive, including LMR cathode material and LFP cathode material, to continue to identify and secure new business opportunities. Finally, on life sciences, we plan to further strengthen our new drug pipeline through strategic prioritization on oncology new drug initiatives. Along with a phase III clinical trial for our head and neck cancer program, we will accelerate the development of existing oncology programs such as immuno-oncology drug and a phase I clinical trial for cachexia treatment while maintaining R&D investments to secure late-stage oncology assets. To increase new drug success rates, we plan to strengthen the GATE review to consider commercialization potentials from early clinical trial stages.
Dear shareholders and investors, although it is a challenging time with increasing uncertainty due to the macroeconomic situations, we will continue to explore strategic options more actively and boldly and take this as an opportunity to speed up the restructuring of our portfolio to focus on high-growth, high-profitability businesses. We will also improve our investment priorities and continue to improve operational efficiency while maintaining a cash flow surplus this year as well as last year through better working capital management and intensive cost-cutting activities, and in this way, we will continue to improve our financial soundness. We will strive to further strengthen our fundamentals and minimize earnings volatility and do our best to maintain solid mid- to- long-term growth. We sincerely appreciate your continued support. Thank you.
This concludes our presentations, and we will now proceed to the Q&A session.
To ensure that as many participants as possible have the opportunity to ask questions, please. Each person will limit their questions to two. If you would like to ask a question, please press the star key followed by one on your phone. If you wish to cancel your question, please press the star key followed by two.
The first question is from the line of Hyun-Ryul Cho from Samsung Securities. Please go ahead.
Good afternoon. This is Hyun-Ryul Cho of Samsung Securities. First of all, thank you very much for giving me this opportunity to ask questions. I have two questions. My first question is related to your petrochemical business. With the recent decline in oil prices and expectation rising for the cessation of the Russia-Ukraine war, I do anticipate that there will be some positive impact on your petrochemical business. Under this backdrop, can you please share with us, with these changes that are happening externally, can you share your outlook for the market per business unit for petrochemical business? My second question is related to the advanced materials. I can see that your earnings performance has improved in respect to the overall increased sales for cathodes.
I would like to understand whether or not the company sees this as a positive change in demand or could it possibly be a short-term stockpiling by your customers, and at the same time, I would also like to ask about the company's guidance related to the second quarter as well as full- year 2025 in respect to your sales volume, SP, and profitability.
To address your first question on the petrochemical business, you asked about the impact that the recent changes in recent decline in oil prices and the rising expectations of the end of the Russia-Ukraine war will have on the petrochemical business. The answer to that question is that we have actually seen a full swing effect starting from March of this year related to the lagging effect coming from the decline in oil prices, naphtha prices, and BD prices. Thus, we do anticipate that overall there will be an improved product spread when it comes to the PO, PVC, and synthetic rubber starting from the second quarter of this year. In respect to the U.S., you know, tariff war, we also believe that there could be a dampening of the actual demand happening as a result.
We believe that under this backdrop, it is very important for the company to maximize the opportunity and leverage the opportunity to restructure the supply chain as a result of the recent changes in the tariff policy. Moving to the second part of the question related to the expectation for the end of the Russia-Ukraine war, in respect to the demand side, there is an expectation that there will be some benefit as the country is focused on reconstructing the housing, road, and infrastructure, and for us, we are currently reviewing the possibility of reallocating some construction-based PVC as well as road-based SBS export volume to Europe. In respect to the naphtha that is sourced from Russia, the Chinese companies have been benefiting from that.
As a result, we believe that once the war ends, it's also possible for us to reduce the cost gap that currently exists with Chinese companies. At the same time, I would like to also mention that the actual reconstruction project, it will take some time for it to materialize. At the same time, this is also likewise for sanctions on Russia as well. That's why we do have to anticipate that there will be some time that's going to be required for all these things to materialize. Thus, we do not expect that the expected benefit will be large in the short term.
Moving to your question for the advanced materials, I will talk about the performance as well as outlook for our cathodes business. In the first quarter of 2025, there was the inventory adjustment at the end of 2024 by our customers, and they maintained a positive policy when it comes to their inventory management. This persisted throughout the first quarter, and as a result, in terms of the shipment volume, it was very similar to the previous quarter. There was a recent rise in the ABS as a result of exchange rate, and thus we have experienced a slight improvement in our profitability QoQ, and we recorded our profitability in the low- single digit. As we move on to the outlook for the second quarter of this year, there's going to be an extreme volatility when it comes to external policies.
This will lead to uncertainties in the demand from our downstream customers, and we also anticipate that our customers will continue to remain conservative when it comes to operating their inventory. That's why we believe that it will be inevitable in terms of experiencing a reduction in the overall volume compared to the previous quarter. As I look into the full- year 2025, in respect to our annual volume guidance, we do have to take into consideration the possibility of our major OEM customers revising their annual guidance. And as such, we are taking into consideration the possibility of downside risk related to our volume shipment. As we continue to closely monitor the developments in the market, we will come to the market and communicate to you on a timely basis if there are any changes to our guidance.
The next question is from the line of Jae-Sung Yoon from Hana Securities. Please go ahead.
I also want to thank you for this opportunity to ask questions. I am Jae-Sung Yoon from Hana Securities, and I will also ask two questions. My first question is related to the impact the U.S. and China tariff war will have on your petrochemical business, and I believe that there will be a direct and indirect impact to your petrochemical business. If I were to first talk about possible direct impact in respect to your sales to the United States for your ABS as well as polycarbonate, could you please share us in detail what impact do you foresee in respect to the sales outlook for these products?
And moving to more indirect impact and looking at the Chinese importing ethane and propane from the United States, this will be a challenge, and as a result, this could actually have an impact on the utilization of PDH and ECCs in China. And also, there is also news that there is an oversupply of propane in Korea. And thus, there's also a discussion that this could be used instead of naphtha as well. So I would just like to take this opportunity to better understand the potential or the outlook of the usage of propane in various aspects. So I really appreciate your detailed questions on this. And secondly, I would like to ask about how the company is planning to divest any of its assets and how it's also going to be managing its CAPEX as well.
I know that the company has been working very hard to improve the financial health of the company, so if you can actually give us more detailed guidance in respect to any divestiture plans or CAPEX, that will be very helpful.
This is the petrochemical business, and I will address your first question. You asked about the impact that the recent dispute related to tariffs between the U.S. and China will have on our business. You also asked about the tariff policy related to how China will be responding to the imports of the U.S. ethane and propane. In the first quarter, this was before the U.S. tariff policy was announced, and as such, our customers did actually procure in advance, and there was some positive impact as a result of this. However, due to the U.S.-China tariff dispute, we anticipate that China's exports to the rest of the world will decline, and at the same time, this could actually have a slowdown in Chinese domestic consumption as well.
As such, excluding the United States, we anticipate that there will be greater market competition in regions such as Europe as well as Southeast Asia. In respect to LG Chem's export to the United States, if we are talking about the U.S. market, out of the total petrochemical sales, the U.S. portion is still a small share in the single digits, and we mainly export ABS and synthetic rubber. We do see that compared to other exporting countries, Korean companies do have an advantage to a certain degree in respect to the tariff rate that's going to be applied. However, in respect to the additional tariff that's going to be imposed for imports, this could have inflationary effect within the U.S., and there's a concern that this could actually have a dampening of the market demand as well.
For our company, we will continue to leverage our sales and distribution capabilities within the United States to address this. We will make sure that we utilize the opportunity that the different tariff rate that is being imposed country by country. This will give us an opportunity to secure volume from the competition, and that's going to also be a response measure that we will have in place as a result of the recent developments on the tariff side. Moving to your question about the expected effect related to what's going to happen for the ethane and propane going to China, it is true that when we actually look at the activities of Chinese ECC or PDH, and specifically for PDH, there is news that they have either ceased utilization or clearly they are recording a lower utilization rate.
But of course, the Chinese government is actually working very hard to address this situation, and they are strategically managing this, and as a result, the impact of the recent policy changes we believe that will be limited. As we look at the ethane, it is true that for the U.S. based ethane, it has a superiority in terms of cost competitiveness, and likewise, here in Korea, we also are looking into setting up the infrastructure with a possible input being the ethane going forward. And we also see that in some other parts of some other countries such as Southeast Asia and ECCs are also looking into the possibility of using ethane going forward.
This is the CFO, and I will address your question related to the CapEx outlook. As you may have heard, there was a recent news in respect to our business sales. But just to first address the CapEx side first, our initial annual guidance for CapEx was KRW 2.8 trillion. We have very much been focused on continuously trying to improve our financial structure and also strengthening our capability to generate EBITDA. And thus, we have to revisit our initial guidance, and we have to set priorities in terms of where we want to actually invest. And of course, inevitably, we do believe that we do have to revise downward our initial guidance for CapEx.
But if you look at the breakdown of our capital expenditure for this year, a majority of the planned expenditure is related to the three growth engine areas, which we believe is going to serve as the core business for the company. And at the same time, the remainder is related to the various projects that have already started and are in progress. And that is why we are not going to be able to have significant reduction in our annual CapEx budget compared to what we announced initially for this year. Moving to the news about our asset sales, I can tell you that there is nothing that has been confirmed so far. But as you know, for several years, LG Chem has been very much focused on strategically and preemptively working on our portfolio in and out and restructuring.
We focus on our growth areas, and that's why we set up our portfolio to support the three growth engines of the company for the future. But as we talk about the mid- to- long term horizon, we'll continue to be very much looking closely at the possibility of any of our businesses that are not as competitive. So if we feel that some of our businesses are not competitive or there's a potential that it will lose competitiveness in the future, or if we believe that such business no longer has synergy to the enterprise-wide business, then we'll continue to work on this and we will restructure our business portfolio accordingly. And so in short, I can tell you that nothing is confirmed, but at the same time, we are also very much open to any possibilities, and that's how we are preparing for this end.
We can say that going forward, compared to the speed of the activity that you have seen for the company's portfolio in and out, it's possible that we will pick up the speed even further going forward.
The next question is from the line of Han-Geun Park from CGS. Please go ahead.
Thank you for this opportunity to ask questions. I'm Han-Geun Park from CGS, and you have already mentioned the impact related to the tariffs on your chemical business, but I would like to ask two questions to Advanced Materials for the cathode business. The first question is the impact that the imposition of the U.S. tariffs will have on your cathode business, and could you please also share with us an update related to your schedule for the production utilization for your U.S. Tennessee plant? My second question, you already mentioned your outlook for Q2, but at the same time, could you actually share with us in detail exactly when do you think that there will be a meaningful improvement in your shipment for cathodes? And also, can you give us an update related to what's happening in terms of your external customers other than LG Energy Solution?
Can you share with us some of the meaningful achievements that you have made in this area?
I will answer your question one by one, and I will address the first question related to the U.S. tariff having what sort of impact will it have on our cathode business. With the tariffs that are imposed for automobiles in the U.S., and as a result of reciprocal tariffs, we do expect that within the United States there will be a cost increase when it comes to manufacturing vehicles in the United States, and as such, U.S. MSRP for vehicles will also likely increase as well. This could actually be a factor that will dampen demand for all vehicles, including EVs in the United States, but of course, excluding China, all countries were given 90-day waiver when it comes to the application of reciprocal tariffs by the United States.
Of course, the countries around the world have been imposed a universal tariff of 10% starting from April 5th. As such, we anticipate that it will be inevitable to not see an increase in purchasing prices for any cathodes that are exported to the United States. So our purchasing price will increase for cathodes that are being exported to the United States. However, our company, we continue to proceed with our plans for the U.S. Tennessee plant, which is scheduled to start operation from 2026, and that we believe that we will have a competitive advantage in responding to customer demand, especially for customers who are requesting that local supply is a requirement for them to buy.
And at the same time, by leveraging this in terms of any possible changes to our plan for the expansion of our U.S. Tennessee plant, we are currently in the process of pulling in the start of operation. But at the same time, this is very much dependent on the discussion that we will have in understanding the local customer's needs as well as discussion related to our supply price. So it will only be decided after such discussions are concluded. But we believe that internally, we want to take this opportunity in respect to the U.S. tariff policy has provided us and to utilize our local production base as much as possible. Now, at present, as planned, we are planning to start the mass production of the Tennessee plant. The target production amount is 10,000 tons in 2026, and the plan to expand that to 60,000 tons by 2028.
That plan is still on track.
Now moving to your second question, you asked about when our cathode shipment will improve, and at the same time, you also talked about some progress update related to our third-party sales. To address your first question about the when, as you are well aware, there is greater uncertainty when it comes to the growth potential for the downstream market, and as such, we have to be very conservative in our perspective, and we are currently revisiting our overall shipment plan as well. If there are any changes to not only our annual guidance or any revision is made related to our plan, we'll make sure that we timely communicate this to the market.
In respect to the progress related to the third-party sales, as you are also very familiar with, the company has been working very hard to diversify its customer pool in order to secure a stable supply of demand, and at the same time, we have been able to make some progress. So starting from our shipment to the Toyota battery plant that's located in the United States, the shipment will start from the second half of this year, and we're continuously trying to expand our third-party customer base as well. We had initially set that we target the third-party sales to be 30% by 2028, and to meet this target, we are very much focusing and actively working to secure new orders, mainly in the U.S., mainly in the North American market. Thank you.
We'll be getting the last question. The last question is from the line of Seung-Woo Lee from Macquarie. Please go ahead.
Thank you for this opportunity. Good afternoon, and I'm Seung-Woo Lee from Macquarie. I also have two questions. My first question is related to the progress update related to the restructuring of the company's petrochemical NCC and commodity business, and also could you share with us if there are any impacts related to the government-announced petrochemical competitiveness enhancement plan? I would like to also ask about the related to the company's development update for the LFP as well as the cathode technology.
I will answer the question related to the petrochemical business. You asked about the progress update related to the restructuring of LG Chem's petrochemical NCC and commodity business. You also wanted to know the possible impact related to the government's petrochemical competitiveness enhancement plan. Recently, there were various articles that were talking about how the refiners in the Middle East are investing in various ways into the petrochemical business. As such, LG Chem is also looking into various strategic options available to us. However, due to the various uncertainties or variable changes in the external environment, there is a slight delay in terms of how we want to actually do the restructuring, but the main focus remains as such.
Our focus and our main strategic direction is to strengthen our downstream business competitiveness, and as such, we focus on cutting costs as well as improving our competitiveness in sourcing raw materials, and at the same time, we continue to look into various other strategic options as well. Moving to the update related to the government-announced petrochemical competitiveness enhancement plan, this was announced in December of last year to encourage the restructuring of Korea's petrochemical industry, and as such, the government has announced specific support packages, but at the same time, the scope that's actually given to the large enterprises is very limited, and as a result, domestic petrochemical large enterprises are in continuous discussions and are talking with related ministries in order for the large enterprises to be included in the plan for providing tax benefits and also to be included into the overall plan with a greater scope.
As such, MOTIE is currently looking at how to address the oversupply in the petrochemical market and to look into further reinforcing the structural competitiveness of the industry. For this end, they received consulting as a result, and we believe that they will come back with a supplementary support package sometime in the first half of this year.
Next, you asked about our technology development roadmap for cathodes. In respect to this, we are currently working on developing differentiated materials that are a much improvement to the traditional LFP, such as high-density LFP, and also a new material that's going to apply a standalone chemistry. In respect to the target application and as well as the production site, this is something that we are reviewing, and thus the commercialization plan will be made more concrete at a later time after we closely review the U.S. tariff policy as well as the economics of the development. However, other than LFP, we are also developing various technologies that's going to actually help us to, for example, reduce the cell cost. So we have a new processing technology for precursor, as well as high-voltage mid-nickel, as well as manganese-rich cathodes, such as LMR.
And so, going one by one, in respect to the new process for the precursor, this is actually what we call the precursor free. So, we're going to be able to eliminate the step that's going to be in for the production of the traditional compared to the traditional precursor, and be able to calcine, synthesize directly to the tailor-made metal. Secondly, compared to the cathodes that are based on the traditional precursor, by having this technology, we'll be able to not only reduce investment costs on the precursor side, but at the same time to also have cost reduction in the processing of the material, and thus this is going to help us to secure greater cost competitiveness. And at the same time, there are waste as well as CO2 emissions in the process of producing precursor.
So by being able to reduce such emissions, we're going to also be able to have more environmentally friendly solutions available as well. Also, to target the low-end segment, we are also looking into developing high-voltage mid-nickel as well as LMR that's going to support being very conducive to improving cost competitiveness as well as stability. By being able to have greater energy density through the low-voltage operation, this is going to help the company to have a differentiated competitiveness, and we are planning to launch our related products into the market at the time that our customers will go into the SOP mass production stage. Thank you.
On this note, I would like to thank you and would like to conclude LG Chem's Q1 2025 Earnings Performance Call. For those who have not been able.