Good afternoon. We will now begin LG Chem's 2026 Third Quarter Earnings Call. I am Kyung Suk Kim, Head of IR. Thank you for your interest in LG Chem and joining us today amidst your busy schedule. We will begin with a brief overview of the 2026 Q3 Earnings and Business Outlook. Then our CFO will present the highlights, which will be followed by a Q&A session. Please note that the presentations will be interpreted simultaneously, while Q&A will be interpreted consecutively. For those who are joining online, the materials are available real-time and can also be downloaded on our website. Now, let's begin today's call with an introduction of the management team who are present.
We have Dong-Seok Cha, CFO, Cheol-Ho Yang, Head of Business Strategy of the Petrochemical Division, Young-Seok Lee, Head of Business Strategy of the Advanced Materials Division, and Dal-Mi Hwang, Head of Business Strategy of the Life Science Division. Now, I will walk you through our third quarter business results. Please turn to page three, consolidated revenue and P&L for Q3. 2026 Q3 revenue amounted to KRW 15.496 trillion . Operating profit was KRW 561 billion, and the company's operating margin showed slight QoQ decrease to 3.6%. The company recorded a net loss of KRW 600 billion, as stronger won resulted in a valuation loss of LG Energy Solution's foreign currency denominated asset and liabilities. Next, on page four, I'll go over the consolidated financial status.
As of 2026 Q3, total assets stood at KRW 102.2 trillion , total liabilities at KRW 58.6 trillion, and total capital at KRW 43.6 trillion. The debt ratio increased QoQ to 134.4%. Now, I will go over the business performance and outlook for each business division. First, Petchem Division on page five. As of 2026 Q3, the Petchem Division recorded revenue of KRW 4 trillion 755 billion and an operating loss of KRW 176 billion. The reverse lagging effect of feedstock reduced the spread of main products, while increasing transport cost and Korean won appreciate led to a loss. In Q4, elevated oil price due to continued geopolitical risk and regular maintenance of the Yeosu plant should weigh on P&L. However, expansion of high value-adding products such as semiconductor-grade IPA and EV-grade SSBR, cost reduction, and inventory optimization should contribute to profitability improvement. Next is the Advanced Materials Division.
As of Q3, revenue was KRW 1.73 trillion , and operating profit was KRW 40 billion. Volume growth of electronic materials and one-off profits supported the revenue and P&L of the division. In Q4, volume growth of electronic materials is expected to carry on. However, the one-off base effect should keep profits at similar levels to the previous quarter. Next is Life Sciences. In Q3, revenue was KRW 337 billion, and operating profit was KRW 23 billion. Export shipment volumes decreased QoQ, and higher R&D costs caused both revenue and profit to decline. However, in Q4, exports of vaccines and certain products are expected to be concentrated. Also, the license-out contract amendment of a rare obesity treatment generated additional payment advances for the company, which should lead to stronger revenue and profitability QoQ.
Next, Farm Hannong in Q3 recorded revenue of KRW 100 billion and an operating loss of KRW 21 billion. Crop protection and seed revenue grew. However, the base effect of first-half fertilizer front-loading caused revenue and profit to slightly decrease YoY. In Q4, while crop protection overseas sale is expected to increase, fertilizer revenue decline and higher R&D costs should result in weaker YoY profitability. Last is LG Energy Solution. The results have already been presented on the LG Energy Solution earnings call on November 3. Q3 revenue was KRW 9.643 trillion , and operating profit was KRW 756 billion. ESS shipment jumped, while EV cylindrical type and high-voltage mid-nickel pouches showed robust increase to drive revenue. In addition, higher volume and utilization enhanced profitability. In Q4, ESS production capacity in North America should drive both volume and revenue growth.
Also, ESS and 46-series cylinder pouch local production optimization should support efforts to respond to customer demand. This concludes the business results presentation of Q3. Now, CFO Dong-Seok Cha will present the future outlook.
Good afternoon. I am Dong-Seok Cha, CFO of LG Chem. I would like to thank the shareholders and investors who have attended our earnings call. First, looking at Q3 results, heightened oil price from geopolitical risk in the Middle East and greater commodity price volatility have continued market uncertainty. The company has been focusing on profitability and business competitiveness to defend earnings. The Petchem division turned to loss due to the reverse price lagging impact of feedstock. However, the profitability improvement of advanced materials and LG Energy Solution enabled company-wide performance to remain stable. Looking ahead, amid continued geopolitical risk and global economic uncertainty, downstream demand recovery should gradually become more visible.
As such, we will work to strengthen responsiveness to short-term market fluctuations, expand into customer collaboration-based high value-adding businesses, and accelerate business restructuring to boost profitability and business competitiveness. First, the Petchem division. We have been expanding joint development projects with customers like Volkswagen to expand the converting business. Also, high value-adding applications such as semiconductor-grade IPA, EV-grade SSBR, and ultra-high molecular weight PVCs are driving business restructuring. This year, revenue is expected to grow by 50% YoY. Expanding the high value-adding business should strengthen the profitability-oriented business portfolio. Moreover, the petrochemical business restructuring is continuing. Despite some of the procedural delays, we are making utmost effort to submit the business restructuring plan by year-end. Cathodes in the advanced materials business, due to demand adjustment by some customers, showed short-term shipment fluctuations this year. However, from next year onwards, increased supply to new customers should drive volume growth in earnest.
For LFP cathodes, high-density LFP technology has already been secured. Currently, we are focusing on establishing the non-China supply chain to secure differentiated competitive edge. Going forward, market demand growth will be considered for further commercialization. For electronic materials, semiconductors and mobility will continue to drive high value-adding products to generate stable growth. In life science, recently, the license-out agreement amendment with Rhythm Pharmaceuticals for a rare obesity treatment has enhanced profit visibility by converting portions of future royalty profit to assured cash inflow. This will enable the company to secure a stable investment base for new drug development. The secured funds will be invested in key oncology pipelines, including treatments for head and neck cancer. Lastly, I will go over shareholder return.
According to the principles we have mentioned before, the funds secured by selling Energy Solutions shares are being used for investment in growth, strengthening financial soundness, and shareholder return in a balanced manner. This time, about 20% of the after-tax cash inflow from the equity sale will be used for shareholder return. Accordingly, the company will be acquiring treasury stock. In the future, regarding the sale of LGES equity, while balancing investment in growth and financial soundness, we will continuously review and implement diverse shareholder return measures, including dividends and share buyback and cancellation. Shareholders and investors, despite a challenging business environment, the company has continued to strengthen business competitiveness and future growth engines. Going forward, we will continue to improve profitability and business fundamentals while managing financials to establish a foundation for stable growth. We will also remain committed to enhancing corporate and shareholder value.
We ask for your continued interest and support. Thank you.
We will now open the floor for Q&A. To ensure everyone an opportunity, please limit your questions to two per person. If you have a question, please press star and one on your phone. To cancel your question, please press star and two.
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The first question is from the line of Jinho Lee from Mirae Asset Securities. Please go ahead.
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Thank you very much. I have two questions. First question is about the Petrochem. On a quarter-on-quarter basis, can you break down the main causes of where you're seeing differences in your Petrochem business results in Q3 versus Q2? For example, how much was a negative lagging effect, how much was inventory, and how much due to change in spread? Also, can you provide us some guidance on the Q4 Petchem business outlook? Also, given that customers are running on very low inventory, do you think we can expect to see some restocking demand to show up? Second question is about the cathode business. Can you give us some guidance on Q4 and 2027? Also, can you give us an update on how much variance gap you currently have in your cathode business versus your 2026 plan?
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To answer your first question about our Petchem business results in the third quarter, on a quarter-on-quarter basis, Q3 saw an increase in volume. Our cost-saving efforts resulted in better expenses. However, there was the negative lagging effect in feedstock, which suppressed spread. Also, increase in transportation logistical cost and the drop in Korea won dollar exchange rates had a negative impact on our business, and we recorded a loss in Q3. Looking towards Q4, we expect Middle East geopolitical risks to continue. With higher oil prices and higher interest rates continuing, it seems that customers are still waiting to see before they actually start purchasing. Also, in Q4, we have planned the regular turnaround of our Yeosu No. 1 NCC. The exchange rate has been falling, and these two will be a burden on our Q4 performance.
You've also asked about whether we can expect some restocking demand to show up in Q4 and next year first half. As you know, still the oil price fluctuation is quite high. When oil prices and feedstock prices are fluctuating so much, customers tend to prefer to run tight inventory. We think that demand will return once not only the oil price but also transportation logistical costs start to show some clear direction. Until that happens, our policy would be to run flexible sales operations across different regions for the time being.
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To answer your second question about the cathode business, especially as we entered the second half, we had supply to new customers and also increased shipments to LG Energy Solution. On a first half versus second half basis, we have seen a meaningful increase in volumes. The meaningful increase in volume in second half has been mostly concentrated in the- is expected to be concentrated in the fourth quarter versus third quarter of this year. That said, the North American market volume was smaller than what we had originally expected. Some of the projects that we were expecting to start supplying this year was delayed. Therefore, overall, we expect our shipment volumes to be below our original plan that we had for 2026.
Looking towards 2027, some of the projects that we started to supply from third quarter this year will continue supplying next year. With full year effect on these projects, we expect that next year our shipment volume would be almost double, 2x 2026. However, despite the increase in volume, if the metal prices continue to remain soft as it is currently, despite the increase in volume, our revenue increase would be less and would be more muted versus volume increase.
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The next question is from the line of Woo-j ae Jeon from KB Securities. Please go ahead.
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I have two questions. First question is about the LFP capacity. We are noticing that some of your cathode competitors are announcing plans to expand their LFP capacity. I am wondering if you have made your decisions regarding investments in LFP capacity. Can you give us an update on, for example, when you expect that to be commercialized and what kind of size of investment you are thinking of in LFP capacity? Also, compared to other LFP suppliers, what would be your competitive advantage in detail? Second question is about the restructuring discussions that are happening in your Petchem business side. Can you give us some expected timeline on the restructuring? What kind of effects do you expect with the restructuring plan approved? When are you targeting to submit that restructuring plan to the government?
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To answer your first question about our LFP capacity, we have actually excluded low-density LFP from our business scope, given that that would be an area where competition with the Chinese suppliers would be inevitable. Therefore, within the LFP space, we have been focusing intentionally on the high-density LFP, and we have secured the technology, and also we are working on completing the supply chain in order to differentiate ourselves. We believe that the customer demand for LFP will start to materialize at meaningful scale between the 2028 - 2029 timeframe, and we are preparing our capabilities with that timeline in mind. We are currently talking details about a supply contract of around 40,000 ton scale. Our technology has many advantages, including the fact that we do not use the FP precursors, which are mainly Chinese dependent.
Therefore, we are able to create a non-Chinese supply chain for our high-density LFP. Also, we are able to recycle the metal that comes from our customers, creating a closed loop. This is how we plan to differentiate ourselves from Korean competitors.
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To answer your question about the restructuring plan, we still stand by our original plan of completing closing our decision-making regarding the restructuring before the year-end. Therefore, we are currently engaged with our partner in working out the details, and we will be communicating to the market the details of the restructuring plan once they are decided.
The next question is from the line of Cho Hyun-yeol from Samsung Securities. Please go ahead.
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I would like to inform you that there is a communication error and we are in the process of a quick recovery, so please wait a moment.
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Thank you for your patience. We have had some network connection issues. To resume with the conference call, starting from the English translation of the question that was asked from Samsung Securities. The first question was about where we plan to use the proceeds from the recent sales of LG Energy Solution shares. Also, we note that this is the first time LG Chem is planning to go through a share buyback and cancellation. Can you share with us some of the rationale and background to how the company came to that decision at this point in time? Second question is about the ABS industry. ABS market situation is further deteriorating. What does LG Chem think is behind this worsening market situation of ABS?
Also, given some of the information that we are hearing about new capacity and delay of some projects, what do you think would be the outlook for Petchem business overall in 2027? When do you think we can expect the supply and demand situation to balance out?
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To answer your first question about where we plan to use the proceeds from the LG Energy Solution share disposal and the background behind the decision to do a share buyback and cancellation. As the company has repeatedly and consistently been announcing, we have a very clear principle to where to use the proceeds that come from the monetization of LG Energy Solution shares. It will be used for three major areas in a balanced manner. First being investments to ensure our future growth potential. Number two, to ensure our financial soundness and ensure that we maintain global credit ratings given the current tight cash generation situation at our own company level. Also, we will use the proceeds for shareholder return, a certain level and above of shareholder return.
That has been the consistent principle and policy we have been communicating, and that principle will be applied for the proceeds that will come from the recently announced disposal of LG Energy Solution shares. So, setting aside the 20% of the proceeds that will be used for share buyback, shareholder return, the rest will be used to pay down the borrowings that will come due and also to make investments that are necessary for our future growth. The question of where to use the shareholder return, 20%, whether to use it for dividends or a share buyback and cancellation, that decision was reached based on our deep study and examination of our current enterprise value, i.e., our share price, versus what we believe is the intrinsic value of LG Chem. Currently, we believe that versus our intrinsic value, our share price is considerably undervalued.
We have also comprehensively considered the various opinions that we have been hearing from our various investors. So, based on all of that, we considered that at this point, setting aside a minimum amount for a minimum dividend payout, using the rest for a share buyback would be the most effective way of achieving shareholder return. Going forward, we will continue to have shareholder return activities tied to any monetization of our LG Energy Solution shares. Exactly how to execute that will be determined at each junction by comparing factors such as the gap between our intrinsic value and share price at the time. So, we will decide the optimal mix between dividend payout and share buyback and cancellation.
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To answer your second question regarding the ABS market situation and our outlook for 2027. As you know, on the ABS side, there is the increase of supply coming from China. Also, there is a price competition going on. But on the downstream demand side, the recovery, major downstream sectors such as home appliances or automotive is being delayed. That's why customers are currently maintaining a wait-and-see attitude and have been running very tight new purchases. Given the situation, LG Chem has been focusing on further enhancing its premium ABS sales, including environmental-friendly, transparent, and flame-retardant ABS grades. Also, we've been focusing on developing new applications for our ABS products. Regarding next year, 2027, despite some global facilities closing down, we expect that the oversupply situation will continue next year.
Specifically, if we look at this area, Northeast Asia, even though there is around 8 million tons of facility close-downs expected in Northeast Asia until 2031, at the other end, there's around 29 million tons of new capacity also planned. Also, next year, the Shaheen project will start operation, and with that supply in the market, probably the competition and oversupply in Korea of commodity PE as well as basic petrochemical products is likely to worsen. Given this outlook, we will continue to focus on profitability by increasing our differentiated premium products and also try to minimize the impact on our bottom- line. At the same time, we will continue to emphasize our efforts towards the higher margin converting businesses.
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The next question is from the line of Shin Hong-ju from Shinyoung Securities. Please go ahead.
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I have two questions. First question is the update on your electronic material businesses such as non-memory CCL and SGF. Can you give us an update on whether you have been able to sign on new customers for these new electronic material products? Second question is for the Life Science business side. There was a public disclosure of a revise of the license out agreement regarding your rare obesity drug. Can you share some more details of what was changed in that license out agreement and what kind of impact can we expect on the bottom- line of LG Chem?
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To answer your question about the electronic material, we have been noticing a shift from memory to non-memory in the substrate business. We have already started, therefore, supply of the substrate-related new product to a global customer from 2026. We are currently in the approval process for the flip chip BGA application, and therefore we expect to be able to actually start recording business from the flip chip BGA application. Also, we are focusing on glass substrates. Currently, our TGV glass, which is used for glass substrate, is undergoing customer evaluation. In addition to the semiconductor chip-related product, we also have new products that we offer for packaging solutions, for example, adhesives or insulation layers that are undergoing processes. We will continue to expand our product portfolio in line with the development schedules of our key customers, IDM and OSAT.
On the automotive side, as you know, we have been supplying automotive-related adhesives on the body side, but we are now expanding that to the components, for example, sensors or motors or other power modules. We are planning to start mass production of such adhesives for automotive components from 2027 next year. On the automotive side, we also have the SGF, which are used on typically, for example, sunroofs of vehicles. We are already supplying that to a European OEM and working to develop business and move into other global OEMs. We also have a film that is used for the head-up displays, and we are doing business development activities for that as well.
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I think your second question about the revised, the amended license out agreement regarding our obesity drug. We signed the revised license out agreement with Rhythm, our partner, regarding our obesity drug as of November 3rd. That would be on 2nd of November on U.S. Eastern Coast time. This was changing the existing agreement that had been signed in January of 2024. There are two key aspects of the change. Number one is that the total value of the contract has been increased, which previously was KRW 400 billion, roughly, or $350 million, including development and commercial milestones. That was increased under the new agreement to a total of KRW 1.150 trillion , approximately, or $855 million. Also, the sales royalty structure has been simplified versus the previous arrangement.
Of the total contract value of KRW 1 .150 trillion , the upfront of approximately KRW 130 billion or $100 million had already been received by LG Chem in 2024 and 2025 period. With the new revised contract amount, there is an additional upfront that is payable to LG Chem of KRW 470 billion or $350 million. This incremental increase upfront will start to be received starting from Q4 of this year over a four-year period in installments until Q4 of 2029. Also, there are milestones that have been defined under this revised agreement depending on approvals and sales conditions. That was increased from roughly KRW 270 billion or $250 million to approximately KRW 550 billion or [$415 million. The royalty structure was also changed.
It was simplified to 1% of net revenue of Rhythm from the MC4R [agonist] portfolio total annual net revenue. Before, it used to be a royalty rate of between low single to mid-single digits depending on the number of indications that are acquired for the bivamelagon product, but it has now been simplified to just flat 1%. The receiving, the collection of royalties would start from the earlier of January 2029 and the first revenue generation of bivamelagon.
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To add explanation about the background to this amendment, as you know, Rhythm had announced a meaningful decrease in body mass in phase II clinical trials of hypothalamic obesity patients using bivamelagon in July of 2025. Based on those positive phase II results, Rhythm has been preparing to start phase III clinical global trials of bivamelagon within the year. Therefore, the two companies have agreed to revise the contract terms reflecting the positive results from phase II, preparations to run a global phase III trial, and also efforts to increase indications for the drug. We believe that with this revision, LG Chem has been able to increase the size of definitive revenue, also has been able to recognize earnings earlier than the previous contract terms, also increase the predictability of cash flow from this license out agreement.
Also from Rhythm side, with the simpler royalty structure and less burden, bivamelagon results will continue to be developed by Rhythm. Therefore, we believe that this amendment balances evenly the interest of the two parties.
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We will be getting the last question. The last question is from the line of Youngkwang Choi from NH Investment & Securities. Please go ahead.
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I have a question. First question is about your regular turnaround of the Yeosu NCC No. 1 that you are scheduling in Q4. Can you share some details? In connection with that, can you share some details of your NCC operation plans in the remainder of the year, especially what you plan to do once the TA is completed? Second question is about the Tennessee plant. Even though North American EV demand seems to be continuing to remain soft, we have the Tennessee plant that is ready. When do you plan to operate the Tennessee plant, and what kind of curve or slope are you planning in terms of ramp up? Also, given that GM has recently changed some of its EV plans, would that impact your plans to operate the Tennessee plant in any way?
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To answer your first question, the Yeosu No. 1 NCC is going to undergo a regular TA. This is the regular TA that we do every four years. This includes maintenance activity as well as statutory required inspections and tests. Looking back at the year, you will recall that with the Middle East situation earlier this year, we had temporarily stopped the operation of our Yeosu No. 2 NCC in March and have been running our No. 1 Yeosu NCC and Daesan NCC at high utilizations. But with Yeosu No. 1 NCC expecting to go into TA, we restarted the No. 2 NCC in Yeosu in early October in order to secure sufficient supply of our basic petrochemical products.
Regarding what we plan to do in terms of operation after the TA and the remainder of the year, our thoughts are to operate our cracker capacity flexibly depending on the oil price and naphtha supply situation.
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To answer your second question about the Tennessee cathode plant, currently the cathode plant in Tennessee is going through test mass production and will be concentrating on preparing for full operation before the end of the year. However, looking at the inventory situation of the customer, Ultium Cells, and also their production plan, most likely the Tennessee plant would start mass production sometime in Q1 of next year. We are also currently talking with a customer about mid to long-term supply volumes and compensation plans. Our target is to have that agreement reached before the end of the year. At the same time, we believe that the Tennessee capacity offers strategic value given the uncertainty around U.S. import tariffs and also the customers' need to secure a resilient and stable supply chain.
Therefore, using this strategic advantage, we will continue to seek other potential customers other than GM, using our advantage of a local supply in order to increase our utilization and expand our customer base.
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Thank you very much. This completes the 2026 Q3 Earnings Call of LG Chem. If you have any further questions, please forward them to the IR team. Thank you very much.