Next, Life Sciences. In Q2, the segment recorded a revenue of KRW 337 billion and operating profit of KRW 25 billion, moving back into the black. Strong sales of key products such as vaccines, oncology, and autoimmune disease treatments contributed to improved profitability. Next, Farm Hannong. In Q2, Farm Hannong recorded revenue of KRW 242 billion and operating profit of KRW 13 billion won. While sales of crop protection products and seeds remained solid, profitability declined slightly compared to the same period last year due to increased raw material costs. Finally, LG Energy Solution. As we provided detailed information during the earnings briefing held on July 25th, I will keep this presentation brief. In Q2, Energy Solution recorded revenue of KRW 5.56 trillion won, operating profit of KRW 492 billion won, with an OP margin of 8.8%.
While revenue declined slightly due to customers' ongoing conservative inventory policies, profitability improved in Q2 thanks to product mix enhancements and ongoing cost reduction efforts. Operating profit, excluding North American production incentives, also turned to positive territory. This concludes the presentation of our Q2 results. I will now hand over to our CFO, Dong Seok Cha, who will share the outlook moving forward.
Good afternoon. I am Dong Seok Cha, CFO of LG Chem. Thank you all for taking the time out of your busy schedules to join our earnings presentation today. First of all, allow me to begin with a review of our Q2 performance. Modest improvements in overall profitability, largely attributable to the earnings recovery of our subsidiary, LG Energy Solution. The business environment remains difficult and has weakened due to the ongoing U.S. tariff dispute and heightened geopolitical tensions in the Middle East. In addition, customer inventory policies have remained cautious ahead of the anticipated early termination of EV subsidies. Looking ahead, while the volatility from the U.S. IRA and reciprocal tariff policies appears to be subsiding as they are now finalized, we expect the resulting demand slowdown to take time to recover.
We will continue to strengthen competitiveness through business optimization and focus on high-value, high-margin areas to enhance corporate value, while reinforcing and optimizing operations to navigate the current challenges. In the Petrochemicals business, the finalization of U.S. reciprocal tariff rates has eased uncertainties and partially relieved cautious market sentiment. While improved supply-demand dynamics are anticipated in the second half, supported by potential additional stimulus and production cut policies from the Chinese government, the overall demand weakness caused by strengthened U.S. tariff barriers is expected to persist. The company aims for gradual profitability improvement by minimizing tariff impacts through expanding its high-value portfolio, including automotive ABS, modified SSBR, and C3, IPA, and diversifying sales regions by accelerating portfolio restructuring and implementing reverse cost-cutting initiatives.
Meanwhile, the country's first eco-friendly bio-oil plant, capable of producing sustainable aviation fuel and biodiesel and bio-naphtha, has commenced construction as planned and is scheduled for completion in 2027. Through technological innovation and commercialization in eco-friendly fuels and bio-based materials, the company aims to further strengthen its global leadership and competitiveness. In the Advanced Materials business, battery material sales volume growth is expected to be limited in the near term due to continued conservative inventory management by customers ahead of the EV subsidy phase-out, as well as the impact of high U.S. tariffs on steel, aluminum, and copper, which will lead to higher vehicle prices and reduced demand.
In response to the increasing importance of local presence in North America and securing non-China supply chains, we are actively pursuing additional new orders by leveraging the local supply advantage from our first cathode materials plant in Tennessee, scheduled for mass production next year, along with the competitiveness of our non-China value chain and differentiated technology. We anticipate 2026 to be a pivotal year marked by substantial volume growth fueled by the diversification of our customer portfolio developed over the past three years, including the ramp-up of cathode material shipments to Toyota beginning next year. Meanwhile, we are accelerating mass production preparations for mid-to-low-price solutions and diversifying our portfolio to proactively secure new business opportunities. At the same time, we'll rigorously manage operations by improving utilization rates and reducing fixed costs to ensure profitability.
In addition to battery materials, we will focus on nurturing core businesses such as electronic materials and engineering materials, with an emphasis on new growth areas like semiconductor and mobility materials. We plan to continuously expand growth momentum by targeting materials with high entry barriers that offer greater profitability. Lastly, in the Life Sciences business, R&D investments continue to accelerate the development of existing oncology projects, including phase 3, advanced cancer trials in immuno-oncology, and phase 1 cancer cachexia studies, and to introduce promising new oncology candidates to strengthen the pipeline. At the same time, there is an increasing emphasis on enhancing gate reviews to improve drug approval success rates and ensure efficient resource management. Following our diagnostic business in 2023, we have also decided to sell the aesthetics business based on a favorable valuation offer from the market.
Going forward, we plan to continue our portfolio rebalancing to further strengthen our capabilities and resources in the oncology field. For example, regarding the rare obesity treatment licensed out last year, positive results from the partner's phase 2 clinical trial were recently announced, raising expectations for stable milestones and royalty income in the future. We will continue to pursue such strategic options and partnership opportunities going forward. Dear shareholders, amid unprecedented market volatility and a challenging macro environment, we remain committed to actively optimizing our portfolio. We see this as an opportunity to accelerate transformation toward high-growth, high-profit businesses. In addition, we will enhance flexibility across investment and operations to adapt to internal and external business changes and demand volatility, and improve management efficiency to minimize earnings fluctuations while maintaining positive cash flow and strengthening financial soundness.
Also, we will strive to continuously strengthen our leading and differentiated technological capabilities to sustain robust mid-to-long-term growth. We sincerely appreciate your ongoing support. Thank you.
Next, we will have a Q&A session. To give more people a chance to ask questions, please limit your questions to two per person. If you have questions, please press star followed by one. If you want to cancel, press star followed by two. Thank you.
Myung Lee from Shinhan Securities. Please ask your question.
The first question is from the line of Jin Myung Lee from Shinhan Securities. Please go ahead.
[Foreign language]
I have two questions. One question for the Advanced Materials, second question for Life Sciences each. First, regarding your cathode material business, can you give us a more detailed breakdown of your second quarter results and share with us your outlook for third quarter as well as full year outlook? We are noticing that the tax-related subsidies will be sunsetting from Q4. And do you think that that will have an impact on your cathode material business, and how do you plan to respond? My second question regards the Life Sciences business. You've actually announced today that you will be selling the aesthetic business. I want to hear a bit more detail and background about that deal to sell, and also what are your plans of using the proceeds from that sale?
Do you have additional plans for M&As going forward in your Life Sciences business?
[Foreign language]
[Foreign language]
I'll address your first question regarding the cathode material. First, to give you a bit more detail about Q2 results. During Q2, our North American GM shipments maintained steady levels. However, overall, there was dampened purchasing sentiment given the volatility around policies, including the tariffs. Also, there were some inventory adjustment movements and also phasing out of existing models supplied to the European customers. So overall, in Q2, we saw a considerable decrease in shipments on a QOQ basis. In terms of Q2 ASP, the ASP also decreased around 10% on a QOQ basis, mainly driven by fall in exchange rate and metal prices. So combined in Q2, we recorded a loss.
Regarding Q3 outlook, with the sunset of the IRA subsidies approaching, the American OEMs are continuing to maintain conservative inventory policies, and we also are seeing that North American new projects are being postponed in terms of mass production. So overall, we think that in Q3, shipment decrease on a QOQ basis would be inevitable. On a full year basis, to share you the outlook as well as our response strategy, looking at 2025 on a full year basis, we think that negative growth, a contraction of the cathode business, is inevitable given the weakened EV demand in the U.S., which is being caused by the phasing out of the subsidies as well as lifting of fuel efficiency regulations and also tariffs being imposed on vehicles.
In terms of ASP, we will have to wait and see a bit more how the metal prices and exchange rates turn out in the second half. But in terms of shipments, it is the major OEM customers are starting to scale down their production, and so we are even open to a possibility of a considerable level of shipment decreases on a YOY basis. So given all of that, in 2025 full year basis, we do expect our profitability to worsen. But that said, looking towards next year, 2026, we are planning to ship to Toyota, and also we're planning to have new customer acquisitions. And with that, we are looking forward to a turnaround in both volume growth and also profitability.
[Foreign language]
[Foreign language]
I'll answer the second question regarding the sales of our aesthetic business and also whether we have additional plans for M&A. As you know, we have been focusing on our three new growth engines, and in order to further promote the growth around these three pillars, we have been revisiting and reshuffling our portfolio, especially around areas that we consider to have less synergy with our mainstay businesses. That's why the Life Sciences division has been focusing on the domestic and Asian businesses around pharmaceuticals, as well as the development of new cancer treatments on a global basis. And that is the background of why we decided to sell the aesthetic business. The aesthetic business itself has quite strong growth potential, for example, in aesthetics, beauty, as well as anti-aging.
However, in order to tap that growth potential, very active investments were necessary, and we believe that by handing over the business to a buyer that is willing to make those investments, both the seller, both the business, and the buyer would be able to benefit from that. The proceeds from the sale are going to be used in further improving our financial soundness, for example, by being used to pay down our borrowings or used to fund our investments. And of course, once the cash inflow timing arrives, we will be able to share a bit more detail on how we plan to use the proceeds.
You've also asked of whether we have additional M&A plans, and regarding that, of course, our focus is on onboarding and acquiring additional cancer treatment-related promising material projects that are preferably in late clinical phase, which would be able to generate strategic synergy with the pipeline that we have acquired through the AVEO deal. Currently, though, we do not have any additional M&A plans finalized yet, but we believe that by using our open innovation system to further accelerate our internal project development capabilities, we will be able to develop ourselves into a global pharmaceutical power. Also, in addition to the cancer treatments, we will also be focusing on similar cases, cases similar to the licensing out of the hypothalamic obesity project that will help us make more efficient use of our R&D resources.
[Foreign language]
The next question is from the line of Dong Cheol Shin from CLSA. Please go ahead.
[Foreign language]
Yes, I have two questions. First question goes to your petrochemical business. Can you give us your outlook for your petrochemical business in the second half? And also, can you break down the current market situation by different products? Also, in that line, recently China has been making some announcements that they're looking to reduce their production and restructure some of the industries, including their petrochemical upstream. Do you think that this is already having an impact on the market? Is it affecting market situations? And do you think this movement in China may have an impact? Is it possible that it would have an impact on the second half? My second question is for the Advanced Materials business. This ties in with the mid-tier cathode material development. We all know that the IRA subsidies are being phased out. This will probably increase the need for lower-cost battery material.
In that sense, can you give us an update on your mass-tier or mid-priced cathode material development status? Also, we are hearing that Energy Solution, Ensol, is planning to do an LFP-based ESS. With that in mind, can you give us an update on your LFP development process?
[Foreign language]
[Foreign language]
To answer your first question about the petrochemical business, the current market situation, yes, with the U.S.-Korea reciprocal tariff decisions made, some of the political uncertainty has been resolved. However, there are tariffs being imposed, and that will overall keep the demand dampened, we expect. Therefore, I think it's difficult at this point to expect a rapid improvement in market situations of any specific product. That said, we will be responding to this by focusing on our synthetic rubber products that are for tire applications, the high-end ABS products, expanding that, also improving the utilization of our Malaysian NBL plant, and also improving the profitability of our ABS compound facility in North America and India. We think that by focusing on these activities, our goal is to deliver better profitability in the second half versus first half. You've also asked about China, the so-called anti-involution policy, which was announced.
That is the so-called restructuring policy. But when we look into some of the announcements, there still is quite a grace period that is allowed for the closing down of the facilities. There's also a possibility that instead of the facilities being completely closed down and scrapped, there actually may be additional reinvestments in facilities. So given that uncertainty yet, and also on top of that, considering that there are even large-scale new projects going on in China, I think that it's difficult to expect an improvement in the demand-supply situation in the near term. So our position is that we will take a conservative stance regarding improvement in external market situation and focus on our own capabilities to improve the structural competitiveness of our own businesses, and also continue to focus on shifting our portfolio more towards the high end.
[Foreign language]
To answer your second question about the lower-cost battery material development, as you know, we are currently preparing various mid-to-low-cost cathode material technology, including our new precursor technology, the LFP technology, as well as the LMR, high-voltage mid-nickel, and LFP, which targets the mass segment. You've asked about the LFP, and in the case of LFP, we are developing both targeting EV and ESS applications, and we will be deciding when to enter the business through discussions with customers on new projects. In our LFP development for the EV applications, our focus is on high-density LFP that will deliver longer drivable range than existing LFP, and also differentiated material that applies our own proprietary chemistry. We are currently going through a customer eval based on the equipment and facilities that we completed last year on a pilot basis.
For the ESS, our LFP development focuses on long life that will be able to support repeated charging and discharging over a long period of time. We are currently in discussion with multiple customers about product supply, customers wanting to divert away from China in terms of their value chain, and we will be sharing the details once they are determined through discussions on various conditions that would meet the customer needs.
[Foreign language]
The next question is from the line of Parsley Ong from JP Morgan. Please go ahead.
Hi, this is Parsley. Thank you for the chance to ask questions. My first question is a follow-up on chemicals. Could you give us an update on LG Chem's current status in upstream restructuring efforts, including the NCC operation? Recently, the Korean government has been considering restructuring support measures for the chemicals industry. Could you walk us through the various scenarios, and what do these measures mean for LG Chem in terms of potential impact and the likelihood of benefiting from the Korean government's supportive policies? The second question is in connection with the recent amendment to the Korea Commercial Act, which, as you know, is aimed at strengthening shareholder rights. Does LG Chem have any plans to enhance shareholder returns, for example, dividend buyback or even utilizing your stake in LG ES? Thank you.
[Foreign language]
[Foreign language]
[Foreign language]
To answer your first question about our upstream restructuring, as you know, LG Chem from two years ago has been downsizing its intermediate business, which is the commodity intermediate business, which is in an oversupply of around 1.4 trillion KRW. While we downsized our capacity, we started to source the intermediates from other Korean petrochemical companies and thereby contributing to the alleviation of the oversupply within Korea. When we look at the government, we've talked with the government on several occasions. Our understanding of the government's restructuring for the petrochemical industry is twofold. One is to resolve the overcapacity that there is on the upstream side, and also second fold is to focus on converting the downstream to more high-end products, and by doing that, the government aims to create a more sustainable petrochemical industry in Korea.
So when you consider what the government is focusing on and what we have been doing, our strategic direction is well in sync with the Korean government's policy. We currently have several strategic options to further enhance the competitiveness of our upstream, and we will be pursuing that at quite a speedy pace. And also we have communicated on several occasions with the government on what exactly would be the desirable shape of the Korean petrochemical industry as a whole to ensure sustainability. And we will continue to closely communicate with the Korean government so that we are able to shift the Korean petrochemical industry in a more sound and healthy direction. And we will be then able to learn more detail about the specific government support policies and whether we are in good place to benefit.
[Foreign language]
[Foreign language]
To answer your second question about the shareholder return, regardless of the amendment to the commercial code and regardless of the dividends paid or paid not by our subsidiary, we have been maintaining a dividend policy of a certain payout ratio based on our consolidated net profit. And we have been exerting our best in order to maximize our dividends within a scope that does not impact our financial structure, and our efforts to provide maximum dividends within that range will continue going forward. You've asked about the LG Energy Solution, the Ensol holdings that we have, and as we have repeatedly said before, our understanding, our perception of our Energy Solution shares is that it is a strategic resource for LG Chem to use to fuel its continuous sustainable growth.
That said, currently the downstream industries are facing quite a challenging situation overall, and this even strengthens, increases the need for us to make investments to shift the company towards more of a high growth, high profitability business structure. Therefore, we will be using not only the energy solution shares but other assets that we have at the right time. Currently, we are very actively studying the best way of using the Ensol shares and other assets at the right time to support our sustainable growth. In terms of specific execution of those plans, we are facing a difficult EV industry situation, and there are also, as I know, some technical complications, for example, requiring some prior public disclosures before actually going through with the process. These do pose some challenges.
But that said, we will be using it to enhance the enterprise value of LG Chem, considering the cash flow situation and market situation. And once we have the detailed plan and timings ready, we will immediately communicate that with the market.
[Foreign language]
We'll be getting the last question. The last question is from the line of Hongju Shin from Shinyoung Securities. Please go ahead.
[Foreign language]
I have two questions. The first question is for the Advanced Materials Division about the FEOC regulations under the IRA Section 45X. What is your understanding and how are you planning to respond from the Advanced Materials Division's perspective? Second question goes to both the Petrochemical and Advanced Materials. The reciprocal tariffs have been decided. From both divisions, what do you think will be the business impact and how do you plan to respond?
[Foreign language]
To answer your first question about the Advanced Materials' understanding and response to the IRA FEOC regulation, the IRA 45X is designed to gradually increase the restriction on Chinese company content share on a year-by-year basis, so it's a gradual increase. That said, it is definitely a stronger FEOC regulation than before, and this is expected to further increase the importance of companies to secure less Chinese supply chain in order to qualify for AMPC. We are currently working on an optimization plan for our SCM operation for cathode material that will be in line with the requirements. For example, we are currently very actively considering adjusting the equity ownership of a Chinese company in our Gumi JV plant that produces cathode materials for North America. We will share the details once this adjustment, the final details of it, is determined.
Even though there's still a bit of room for interpretation on what is the exact scope of the supply chain that will be used to calculate the direct material cost being sourced from China and other entities of concern, we are at this point taking a conservative position, and we're using the entire supply chain, and we plan to revisit our entire sourcing as well as production location strategy with a preference on non-Chinese material.
[Foreign language]
To answer your second question about the impact of the reciprocal tariffs, if I answer first on behalf of the Advanced Materials business, as you know, the Korea-U.S. reciprocal tariff rate was decided as 15%, which is around 10 percentage points less than the original 25% that people had expected. But that said, even at 15% reciprocal tariff rates, we think that it is inevitable there will be an import cost increase factor on cathode materials supplied from Korea to the U.S. That said, if we look at the mid to long term, this may actually create a business environment that is favorable for companies with U.S. local cathode capacity.
We do have in plan our first U.S. cathode plant in Tennessee, which will become available from next year, and we plan to use this strategically as much as possible to actively capture demand of customers who are looking for local supply, and also we think that considering the impact of the tariffs, we would also be able to make that supply with a cost competitiveness.
[Foreign language]
And to answer that second question about the reciprocal tariffs from the petrochemical business side, I think the negative impact of the reciprocal tariff, one, would be that there will be a decrease in demand. Second is that we would be put in a less competitive position versus companies within the U.S. That said, there are products such as ABS or synthetic rubber that is a net import from the U.S. perspective. They have to be imported. These are areas that we have a differentiated competitiveness. And so we think that actually as the supply chain reshuffles among this tariff situation, there will be opportunities for us to tap. Also, we have the newly operated North American ABS compound facility.
We also have the U.S. local sales organization, which has become much more local, and these are things that we will actively leverage to defend our profitability as much as possible. And at the same time, we will be looking towards markets outside the U.S. so that we would be able to also take advantage of shifting our portfolio to non-U.S. areas to further defend and improve our profitability.
[Foreign language]