Good afternoon. We will now start LG Chem's 2025 third-quarter earnings conference call. This is Kyung-suk 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 the brief overview of the 2025 Q3 earnings performance, followed by the CFO presentation highlighting key developments. Following the presentation, we will open the floor to questions. Please note that presentations will be interpreted simultaneously, while the Q&A session will be interpreted consecutively. For those with web access, 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 , Seol Ho Young from Petrochemicals, Jung Yoon Seo from Advanced Materials, and Soon‑Shin Cho from Life Sciences. First, an overview of our financial highlights for the quarter. On page three, consolidated Q3 sales and P&L. Q3 sales was RMB 11.196 trillion. Operating profit was RMB 680 billion, and operating margin was improved to 6.1% from the previous quarter. Net income was RMB 447 billion, marking a turnaround to profit. Next, page four, consolidated financial status. As of the end of Q3 2025, assets were around RMB 98.5 trillion, liabilities were around RMB 52.2 trillion, and capital was around RMB 46.2 trillion. The debt ratio recorded a slight increase, year-over-year, to 113%. Next, performance and outlook by business division. Page five. Petrochemical division. 2025 Q3 Petrochem business sales was ₩4.461 trillion, and operating profit was RMB 29 billion.
Improved spreads from lower raw material prices and cost reduction efforts drove the turnaround to profit. Next, Advanced Materials. In Q3, Advanced Materials sales was RMB 838 billion. Operating profit was RMB 7 billion, and OP margin was 0.9%. Due to customers' conservative inventory management following the expiration of U.S. EV purchase subsidies, shipment volumes of battery materials declined, leading to lower sales and profitability compared to the previous quarter. Next, Life Sciences. In Q3, sales was RMB 375 billion, and operating profit was RMB 101 billion. Driven by the receipt of the remaining upfront payment from the out-licensing agreement for a rare ability treatment, both sales and operating profit increased. Next, Pharma Nom. Q3 sales was RMB 102 billion, and operating loss was RMB 20 billion, marking a turnaround to a deficit. Sales declined due to inventory adjustments by overseas customers. Lastly, LG Energy Solution.
On October 30, LG Energy Solution presented their performance in detail during its earnings call. However, we'll briefly present its performance here. In Q3, Energy Solution sales was RMB 5.7 trillion, operating profit was RMB 601 billion, and OP margin was 10.5%. Although demand for EVs remained weak due to factors such as the expiration of U.S. EV purchase subsidies, profitability improved quarter-on-quarter thanks to increased shipments for North American ESS and new small-sized products, as well as ongoing cost reduction efforts. This concludes Q3 earnings presentation. Next, CFO Dong Seok Cha will present the future outlook.
Good afternoon. I'm Dong Seok Cha, CFO of LG Chem. I'd like to express my sincere appreciation to all shareholders and investors for your great interest and participation in our earnings presentation. Let me begin with a review of our third-quarter performance.
Petrochemical division returned to profitability supported by cost reductions stemming from lower feedstock prices. In Life Sciences division, the recognition of remaining upfront revenue from the out-licensing of the rare obesity treatment, along with Energy Solutions' improved performance, contributed to enhanced overall profitability. Despite rapid changes in the industry landscape, we generated improved earnings through growth across our diverse portfolio, one of our key strengths, and through company-wide cost reduction efforts throughout the entire value chain. Due to weak global demand amid the easing of U.S. environmental regulations and continued geopolitical uncertainties between the U.S. and China, the business environment remains challenging. We expect it will take some time before the impact of this demand contraction to fully subside. In the meantime, we will continue to accelerate the shift toward a high-value, high-profit business portfolio while also pursuing new growth opportunities and optimizing operations to navigate through these difficult times.
In petrochemical business, we will actively participate in the restructuring initiatives aimed at strengthening the competitiveness of Korea's petrochemical industry to alleviate oversupply within the sector. In addition, including high-performance SSBR, automotive ABS, and ultra-high polymer PVC, by expanding our portfolio of high-value-added application products and diversifying our sales regions, we plan to accelerate the shift toward high-value-added petrochemical products. Meanwhile, Korea's first eco-friendly bio-oil facility, the Daesan HVO plant, is progressing as scheduled toward completion and commercialization in 2027. Through technological innovation and commercialization in the eco-friendly fuel and bio-based raw material sectors, we aim to further strengthen our global leadership and competitiveness. In advanced materials business, driven by the termination of EV subsidies and conservative inventory management by our customers, we expect the decline in demand to continue for some time.
Starting next year, we plan to begin new cathode material shipments for Toyota and successfully finalize ongoing new order contracts, thereby securing growth momentum for the cathode materials business by 2026. Meanwhile, due to factors such as tariff and IRA policy changes and China's export control announcements, external volatility remains high, heightening the need to establish a non-China supply chain. In September, we adjusted the Chinese ownership structure of our Gumi joint venture, which produces cathode materials for the North American market, and by leveraging the precursor production capacity secured through Korea Precursor Co Limited, we plan to further strengthen supply stability. In addition, by improving product maturity and accelerating mass production readiness for mid-to-low-priced solutions, we will diversify our product portfolio and proactively secure new business opportunities.
Within the core electronics and engineering materials segments of our advanced materials business, we are also actively expanding into new areas such as semiconductor materials for AI and e-mobility applications. Leveraging our accumulated film technology expertise, we have completed the development of a liquid PID for high-performance AI semiconductors and to become the world's first company to commercialize photopolymer film, a key material for next-generation vehicle displays. We signed a supply agreement with Germany's ZEISS. In life sciences business, including AVEO's ongoing global phase III clinical trial for head and neck cancer, we will accelerate the development of our existing oncology programs to strengthen our in-house R&D capabilities. Also, by evaluating the introduction of promising external anti-cancer candidates, we will continue to enhance the competitiveness of our oncology drug pipeline.
Lastly, through proactive portfolio optimization, including the divestment of our water solution and aesthetic businesses, and by partially selling our stake in energy solution via PRS issuance, we aim to further improve our financial soundness. With disciplined investment execution, we plan to maintain positive cash flow for a second consecutive year. Dear shareholders and investors, even amid a macroeconomic environment filled with persistent uncertainties, we will continue striving to strengthen the fundamentals and competitiveness of our existing businesses, explore new growth opportunities for the future, and enhance our financial structure. Through these efforts, we aim to turn today's rapidly changing and challenging business landscape into an opportunity for future growth. We sincerely ask for your continued support and interest. Thank you. This concludes our presentation, and we will now proceed to the Q&A session.
To ensure that as many participants as possible have the opportunity to ask questions, we kindly ask that each person limit their questions to two. If you would like to ask a question, please press the star key followed by one. To cancel, press the star followed by two.
[Foreign language]
The first question is from the line of Kang Dong-j in from Hyundai Motor Securities. Please go ahead.
[Foreign language]
Yes, this is Kang Dong Jin from Hyundai Motor Securities, and thank you for the opportunity to ask questions. There are two questions that I would like to ask you. The first question is related to your petrochemical business. I would like to know what the company's view is for the fourth quarter and 2026 in total with regards to the market outlook. In addition to that, in more detail, if there are any products in which you believe that the overall market backdrop will be positive for, explanations about that would be appreciated. The second question that I would like to ask you would be about battery material. We understand that from China, some battery material exports are being restricted. What impact is that having, if any, on the company's business? With regards to the precursors specifically, what efforts are being made to ensure that the dependency in China is decreasing?
[Foreign language]
Yes, maybe I can take your first question related to the petrochemical outlook for the fourth quarter and also with regards to what we believe the market will be like in 2026 in total. First of all, if we look at the overall third quarter, because the overall material prices decreased in terms of feedstock and also we were able to defend upon our ASP, our overall spreads have improved, which have led to better profitability for the quarter in Q3, and that led to the turnaround to the black for our overall performance.
If we look at the fourth quarter, we do believe that the overall global demand situation in terms of demand being lackluster will continue, and also we do think that there will be continuous negative situations that will be taking place within the environment. Added to that, because for our Daesan capacity, we will be going into a turnaround, as a result of that, we do think that the overall ASP and also our profitability will drop during this period of time. However, we will continue to take efforts to try to defend our profitability as much as possible by improving our overall ASP and engaging in various cost-saving efforts.
If we talk about our outlook for 2026, because in 2026 we do think that the new additions will continue in the north part and also east part of Asia, and added to that, for that reason, we do think that a significant improvement in the overall backdrop would be a bit difficult. However, on the company side, we will try to continue to improve our purchase unit price, engage in cost-saving activity, and also focus more on high-value-added products and also expand our overall revenues in the European and also U.S. markets. In short, we will continue to put in efforts to try to improve our overall profitability.
For specific product lines, I think that rather than talking about products that we do believe will represent a positive situation in 2026, I think that overall there will continue to be lackluster demand and also continue to be an oversupply situation. However, in the higher value-added products that are used for specific applications, I do think that on a relative basis we will see somewhat of a better dynamic. For example, on the AI side for AI semiconductors, there are some highly pure IPAs that will be used. In addition to that, for EVs and SUVs, which adopt more high-performance tires, we do think that SSBRs will be something that will benefit from that. On the overall recharging cables, there's also the high molecular weight PVCs that will be applied in these areas, so that should be areas in which there should be a better market situation.
[Foreign language]
Maybe to address the second question that you had with regards to battery materials. On this side, as you are aware, on October 30th, there was a summit meeting between China and the U.S., and as a result of that, there was some mention that the export controls on rare earth minerals would be deferred. We still believe that if we look at the dynamics between the two countries, there are still uncertainties. As a result of that, we do think that on the supply chain side, there continues to be a risk that we would perceive. In addition to that, at the customer level, we do think that there will be a continuous need to try to decrease their dependency for their value chain. First of all, if we look at the supply chain management for precursors ex China, this is something that we will continue to try to strengthen to ensure that we are addressing the overall policy uncertainties that may arise.
In addition to that, we have secured some capacity for precursors in Korea, which we will be using for the ex China precursor demand that we are looking at. In addition to that, to ensure that going forward we have a more stable supply chain in place, we are planning to strengthen our cooperation with the local precursor companies. In addition to that, we are also going to utilize metal recycling technology to see whether a cost saving would be possible. We are in the process of confirming and validating the own technology that we have in this area, which we do believe will be effective in managing the supply chain going forward.
[Foreign language]
The next question is from the line of Hyun Joo from Samsung Securities. Please go ahead.
[Foreign language]
Yes, thank you for the opportunity to ask questions. I have a question about the advanced materials business and also your petrochemical business. The first question that I would like to ask you is about your cathodes performance in terms of the overall sales volume for the third quarter and also the outlook for the fourth quarter in 2026 in terms of guidance. If there is anything that you can share, that would be appreciated. In addition to that, for any new orders that you have won, what would be the size and also the timing of that is something that I would like to ask. Secondly, on the petrochemical business, right now there is a government-led restructuring that is taking place within the industry. What would be the current status of those efforts that are being taken place? That's the first question. Added to that, at the company level e xcluding the amount that would be required for your downstream operations, for some of your ethylene supply that you have, do you have any plans to actually cut back on the capacity on that side?
[Foreign language]
For the advanced materials business, maybe I can take your first question about the cathodes' third quarter actual performance and the outlook for the fourth quarter and 2026. Because of tariff-related issues and also the end of IRA-related subsidies, if we look at the U.S. EV market, it does seem to be that the market is contracting. As a result, for the U.S. OEMs, they are operating their inventory at conservative levels. As a result of that, if you look at the third quarter shipments in terms of volume, there has been a significant decrease in that overall amount. We do believe that it would be very difficult for the overall trends in the market to improve within the year.
In 2026, because of factors including the absence of IRA-related subsidies, also various regulations on carbon are being taken away. For the U.S. EV market, we do think that it may be difficult for there to be an improvement. However, from the company level, for the existing projects that we have won, specifically in North America, the batteries, the supply that we will be providing for Toyota batteries will start to actually be shipped out. We will continue to engage in winning new orders from new customers. As a result of that, we do think that on a year-on-year basis in 2026, we will be able to experience a significant increase in the amount of shipment volume that we see.
For the actual specifics about how much that volume would represent and the overall guidance for 2026, I do think that we can provide the details more specifically when we have the earnings conference call for Q4. However, to ensure that we do secure the overall top line and also profitability for our cathodes business. We are going to try to create a product portfolio that is well-diversified and aligned with our customer needs and also represent the quality competitiveness that is needed. There will be continuous efforts to try to broaden our new customer base and also secure the overall stable volume that is necessary for this business. With that, the various improvements in our productivity and cost-saving efforts will continue.
[Foreign language]
Maybe I can address your second question about the overall petrochemical business, specifically about the update or the current status on the restructuring that is taking place or the restructuring-related discussions that are taking place.
Also, secondly, the possibility of whether we would cut back on any of our capacity. First of all, I think that right now what we can say is that from the company level, of course, we are fully aligned with the government's overall policy direction and overall intention to try to strengthen the competitiveness of the local and domestic petrochemical industry. As an industry leader, we are deeply communicating with the government. Also, to overcome this crisis, we are in a process in which we are fully cooperating with the efforts that are being made. Based upon this, with the local petrochemical companies and refineries in Korea, we are trying to define and look at various models of cooperation that would be possible. We are very actively discussing various measures or options which would provide synergies for both sides.
We do think that through these initiatives, we will be able to strengthen our purchasing competitiveness for various feedstock and also cut back on our costs. In addition to that, in this process, we do think that there would be a possible situation under which we would be able to cut back on some of the facilities that we have. In addition to that, if you look at the past. Progress that we have made, preemptively, we have restructured some of our capacity. To date, that represents around RMB 1.4 trillion in a production decrease. In the Korean market, we have taken our own efforts to try to contribute to alleviating the overall supply situation that exists.
Going forward, based upon more efforts that we will be making to fundamentally improve our overall profit base, including that the options that we will be looking at would be cost savings and a wide other variety of options which are currently being reviewed.
[Foreign language]
The next question is from the line of Tim Bush from UBS. Please go ahead.
Thank you for the opportunity to ask questions. My first question is, what are the CapEx plans by major investment item from 2025 through 2027? My second question is on customer preference for low-priced products. What are the company's countermeasures and the expected timeline for commercialization of mid to low-end products? What is the company's production strategy for ESS cathode materials?
[Foreign language]
[Foreign language]
Maybe I can address the first question that you asked about our CapEx for the next two to three years. If we look at our CapEx for 2025, as we had initially planned or budgeted at the beginning of the year, we do expect that the CapEx for the full year will be similar to our budget at the upper end of RMB 2 trillion. If we look at the specific areas in which this CapEx was executed, a lot of it went into the U.S.
Tennessee cathode capacity, also the HVO factory, and also ABS-related repositioning. Mostly the items would be for various capacity expansions and also reconstructing that we had conducted. For the next two to three years, we do think that on the U.S. Tennessee cathode factory, the actual CapEx in itself has peaked out in 2025. From 2026, we do think that the overall amount of CapEx that will be required would be at a much lower level. As you are probably aware, in the petrochemical industry and also the advanced materials business, specifically for battery materials, there is somewhat of a sluggish downstream situation which has weakened our overall capability to generate cash. In addition to that, in the business environment, uncertainties continue to increase, and also the financial conditions are somewhat more challenging.
In light of that fact, we are trying to focus and to put top priority on the three main growth drivers that we have identified for our investments going forward. We're trying to refine the investment items and trying to optimize the amount of resources that we allocate. Those would be the focus of our efforts.
[Foreign language]
Maybe I can address your second question about the efforts that are being made right now. In order to secure the cost competitiveness that we need, we are focusing on LFP and also more mainstream segments right now. For example, LMR and high voltage mid-nickel and LFP. There is a wide variety of technology that is currently being developed.
First, if we look at the high voltage mid-nickel products right now, with new processing technology for precursors, we have been able to secure a capability to create products that will be on par with our competition. In addition to that, we are focusing on improving our cost competitiveness further so that we would be able to launch products at around 2027. That is the current plan that we have. With regards to LMR, which recently a lot of the market attention has been focused upon, we are developing products right now for 4.35 V. We are in the process of securing the mass production technology that is needed for this product. The next stage or phase II would be for 4.5 V products. We are trying to differentiate our products and also secure right now in creating a supply chain that would not be dependent upon China.
Starting with the 4.35 V in 2028, we will be supplying to North American OEMs. In the case of LFP, which are usually applied for ESS, right now we are developing technology for both EV and ESS use. However, if we were to apply the same processing technology that is used by the Chinese players, we do believe that it would be difficult to secure the profitability that is required. Right now what we're focusing on is trying to use material that would not depend upon China and also try to verify some technology that would apply a new processing technology. By doing that, we are going to try to secure the cost competitiveness or cost saving effects that are required. By doing that, we do think that for the LFP side, we can actually iron out the details as necessary.
In addition to that, for ESS purposes, we are looking at SIB, sodium-ion battery cathodes also, as a low-cost solution for next-generation batteries. This is something that we are actively reviewing.
[Foreign language]
The next question is from the line of Jin-Myung Lee from Shinhan Securities. Please go ahead.
[Foreign language]
Yes, thank you for the opportunity to ask questions. There are two questions that I would like to ask you.
The first question is that recently the company has used some of its LG Energy Solution shares to sell the shares through a PRS structure. The question that I would like to ask is that is the company interested in selling down further in terms of its stake? For the proceeds of the recent transaction, where is it planning to use those proceeds? The second question that I would like to ask about is in terms of your cathode for cylindrical batteries. Right now, for the new 2170 cathodes and also for the 46 series, what is the overall development in terms of the current process or progress?
[Foreign language]
Yes, maybe I can address the first question that you have asked.
On October 4th, the company did provide a disclosure that it was planning to sell 5.75 million shares of LG Energy Solution, and at the same time it would engage in a PRS contract with the buyer as part of the transaction. On November 3rd, we are planning to sign the agreement, and once the transaction goes through, we do believe that we will be able to immediately receive approximately RMB 2 trillion in proceeds. If we look at the purpose of where we will be using the overall proceeds, first it will be to try to improve our overall financial position and financial soundness, and some of it will also be used for future growth. Investments in that area is one of the planned areas that we have.
However, that having been said, in terms of the shareholder return, if you look at our regular principle or the general principle that we have for our dividend policy, any non-recurring profits are actually excluded from the pool, from the resources that would be dividended out. However, this time around, in light of the shareholder value enhancements efforts that we would like to make, we are looking into the possibility of using some of the proceeds to actually provide to our shareholders. In addition to that, you also asked about whether we had any plans to utilize the LG Energy Solution stake that we had in more detail. I think that, as we have always said, we do believe that to expand our future competitiveness and also enhance our shareholder value, we do believe that this is an asset that can be used at any time.
However, that having been said, we will continue to review various options that are available to us, but as of the current time, we don't have any additional plans or we don't have any decisions that we have made as of the current time. Once there are decisions that are made, we will make sure to communicate to the market.
[Foreign language]
To address your second question about the cylindrical cathodes for the new 2170s and also the 46 series, what we can say is that because this is related to a project with a specific customer, it would be difficult for us to provide any details. What we can say is that for the new 2170 upgrade, we are developing a product right now and we are planning to enter into the market in the second half of 2026. In addition to that, for the next generation 46 series cylindrical high nickel products, the overall target would be first in, and we are in the process of evaluating the samples with an overall objective of trying to develop and meet the SOP in 2028.
[Foreign language]
Will they getting the last question? The last question is from the line of Yoo Jin Jeong from IM Securities. Please go ahead with your questions.
[Foreign language]
Yes, thank you for the opportunity to ask the last questions. There are two questions that I would like to ask you. First, related to the petrochemical business, not only in Korea but also in China, we do understand there are discussions about restructuring for their industry that are taking place.
If there are any impacts that you would see by product line from the Chinese restructuring, please share your view with us. The second question that I have is that if you look at your advanced materials business, it does seem to be that for electronics-related materials there is a gradual growth that we are experiencing in this business. For semiconductors and OLED products, what would be the long-term business. Views and plans that the company has?
[Foreign language]
To address your first question about how the Chinese restructuring would have an impact for our specific product lines, I think that for that what we can say is that in July the Chinese government did come out with a restructuring policy.
However, if you look at the purpose or intention behind this, this is to try to refrain from entering into too much competition and also to alleviate such a situation so that there can be more qualitative growth that takes place within the industry. It is more like a guideline as we understand. Therefore, with regards to specific regulations and specific penalties for people that do not comply, there is nothing that is available yet. As a result of that, we do not believe that this guideline will lead to any decreases in the capacity over the short term.
However, that having been said, if we do look at the relatively older aged and older capacity that does exist, of course from product line to product line it may differ in terms of the overall size, but we do think that in general it would be around 10%- 20% of the capacity available. Even under a scenario in which this capacity may be shut down, we would also have to consider the new additions that are taking place and also the possibility of existing facilities being used at higher run rates on the flip side of that. All in all, if we take these factors into consideration, we do think that the impact would be somewhat limited.
That having been said, in the automobile areas for consumer electronics and also semiconductors, Chinese influence in the global market is something that is increasing, and as a result of that, for the more premium or high-end product, there is continuous demand growth that we are seeing. Therefore, we do want to utilize the opportunities that China presents for the wide variety of high-end products that we have and high-value added products that we have. That would be the intention that we have going forward.
[Foreign language]
Maybe I can address the second question that you had with regards to our electronics-related materials. At the company level right now, if you look at the semiconductor materials for AI purposes and also the mobility-related materials, across the board for these highly functional new type of materials, we do think that these will experience high growth going forward. We do want to expand our business presence here, and by doing so, we want to strengthen the overall soundness of the portfolio that we have in the advanced materials side.
First, to talk about semiconductor materials for the existing CCL that we have and also the film material and the overall technology expertise that we enjoy in this area, we are in the process of developing advanced packaging material that is required for high-performance semiconductors. In addition, with the global leading customers, by having various development cooperation and collaboration, we do want to expand the overall products that we would have in the semiconductor material side for AI purposes. Because the AI semiconductor market will be growing going forward, in line with that, of course, we do think that there will continue to be new needs that the customers will have. Therefore, in these next generation products, we will try to be more present with more spec-ins activities that we would be able to enjoy.
On the mobility side, based upon the technology know-how that we have for films and adhesives, we are currently planning mass production in 2026 of film with adjustable transparency for vehicle sunroofs. In addition to that, we are also pursuing new inroads into electronic vehicle electronics-related adhesive materials. Lastly, on the OLED material side, right now we are trying to expand our presence with global key customers so that we can utilize the opportunity in this area to generate higher profitability.
[Foreign language]
Thank you very much. With this, we would like to wrap up the earnings conference call for the third quarter of 2025 for LG Chem. For those of you who have not had an opportunity to ask a question or may have additional questions, please do not hesitate to contact our IR team. Once again, we would like to thank everyone for taking time out of your busy schedule to participate in today's call. Thank you very much.