Good morning. I am Joe Lee, IR Project Leader at SK Innovation. Thank you for taking the time today to join us at this 2022 second quarter Earnings all. Today's presentation has yet to be reviewed by our external auditors, so the results may be subject to change based on such review. With that, let me hand it over to CFO, Mr. Yang-seob Kim for the presentation.
Good morning. I am Yang-seob Kim, CFO of SK Innovation. First, let me start by thanking our shareholders and investors for your continuous interest in the company. On the call with me today are executives from SK Innovation and its major subsidiaries, who will answer your questions during the Q&A. Now let me start the presentation on SK Innovation's 2022 second quarter highlights.
First, the company's second quarter operating profit was KRW 2,329.2 billion. Following the record of the first quarter, we again posted the highest operating profit for a quarter. Against the market backdrop where the spread between high and low sulfur FO was widened, the company with its No. 2 VRDS, which represents the largest FO desulfurization capacity in Korea, was able to achieve competitive margins. In addition, leveraging the current high volatility market, we increased our trading gains. Second is SK On second half earnings outlook. Driven by the ramp-up of new capacity, including the No. 1 factory in the U.S. and price adjustment discussions on increasing material prices, SK On is planning to improve its profitability and also continue top-line growth in the second half with the operation of the China Yancheng No. 2 factory.
Last is our new business initiative. SK Innovation is committed to enhancing its corporate value by establishing a differentiated green portfolio in the energy and material sector. To this end, we are pursuing many new businesses. These are the highlights that we would like to emphasize for the second quarter, and during the later parts of the presentation, I will go into more detail on each item. Now let me discuss the second quarter business performance. I will start with the full company performance, including sales and operating profit. First, on the top line, second quarter crude and refinery product prices rose, leading to a QoQ increase of KRW 3,643.8 billion to end at KRW 19,905.3 billion.
On operating profit, stronger refining margins and higher oil prices led to higher inventory gains, resulting in an increase of KRW 680.1 billion to KRW 2,329.2 billion. On non-operating losses, larger FX related losses driven by a weaker won and an increase in interest expenses due to more borrowings led to an increase of KRW 46 billion to a non-operating loss of KRW 319.1 billion. In detail, the non-operating losses can be broken down into FX related losses of KRW 145.3 billion, derivative losses KRW 109.5 billion, net interest expenses KRW 99.4 billion, equity method gains KRW 39.4 billion, and other losses of KRW 4.2 billion. Next, let me go over the balance sheet.
As of Q2 end, due to stronger inventory and trade receivables on the back of an increase in crude and refining product prices, and also due to an increase in tangible and intangible assets from investments, total assets increased KRW 14,892.7 billion to KRW 64,427.7 billion. Due to an increase in trade payables driven by crude prices and an increase in debt, liability versus last year-end increased KRW 12,177.3 billion to KRW 42,101.5 billion, and the debt equity ratio is 189%. In addition, net debt increased KRW 1,871 billion to KRW 10,283.9 billion as net working capital increased in line with crude prices and facilities investments grew for battery capacity additions.
Now let me dive into the second quarter performance of each business line. Refining margins have improved due to concerns about supply disruptions from the continuing war and expectations on a recovery and demand in a post-COVID environment. Against this backdrop, operating profit increased KRW 722.4 billion versus the first quarter to KRW 2,229.1 billion. In particular, the number two VRDS we built in 2020, which is the largest FO desulfurization capacity in Korea, has enabled the company to achieve competitive margins in a market where the high-to-low sulfur FO spread is the widest in history. Moreover, in the trading area, we have been able to capture high-margin power generation demand overseas and leverage the economics of blending low-cost crude in a high-volatility market to realize strong trading gains.
Second quarter inventory related gains, including LCM, was KRW 766.9 billion. To discuss the outlook for refining margins in the third quarter, a structural supply shortage will continue as the war continues, and gas supply in Europe is an issue which is expected to lead to strong refining margins. At the same time, demand may weaken if there is an economic recession. We expect margins to show some fluctuation for the time being. Next, let me move over to the petrochemical business. Operating profit for the petrochemical business increased KRW 44.8 billion QoQ to KRW 76 billion.
Though there was an inventory-related impact due to weaker naphtha prices and an increase in fixed costs such as power, our operating profit still rose QoQ as spread improved significantly, driven by aromatics, including tight PX supply. Let me go over the outlook by product. First, for PE, we expect spreads to improve as regional crackers come back on production. In addition, PP spreads may face some downward pressure due to new capacity in China, but weaker feasibility will lead to less supply, which is expected to let spreads gradually recover in the second half. For PX, spreads are expected to remain flat due to less gasoline demand in the second half and new capacity emerging in the region. Next, let me go over the lubricants business.
EO sales volume decreased slightly versus the previous quarter, but higher crude drove lubricant prices and inventory-related gains higher, resulting in operating profit to rise KRW 43.6 billion to KRW 255.2 billion. Looking at the second half, EO spreads are expected to gradually stabilize as costs fall due to lower crude prices and ASP weakens as supply shortages ease. However, if an unexpected recession were to happen, it is possible that prices will fall a bit more seriously due to weaker demand. Now let me go over to the E&P business. EMP operating profit in the second quarter declined KRW 32 billion QoQ to KRW 166.2 billion, largely due to a decrease in sales volume and an increase in certain SG&A items. On the following slide, I will now discuss the battery business.
In the second quarter, battery sales increased KRW 28.1 billion because of new factory and an increase in sales prices, even though sales volume decreased on the back of semiconductor chip shortages. Operating losses increased slightly to KRW 326.6 billion due to less sales volume and higher utility costs in Europe. Across the third quarter and the second half as a whole, we expect to grow both the top line and in our margins and profitability, driven by new capacity ramp-ups, like the number one factory. By the end of the year, in addition to the U.S. number one factory, the new capacity of the Hungary number two and ramp up in the China Yancheng factory will bring our capacity to 77 GWh, which is double that of last year.
The Hungary number two factory is currently in the initial stabilization phases. We have applied the know-how and of other main factories and provided full support from HQ, resulting in a quick normalization. In the second half, we expect productivity to be at stable levels equal to that of the other sites. Please refer to the appendix for more details on our capacity expansion plans by region. Next, let me move over to the E&M business, materials business. For the consolidated loss of the E&M materials business, though we did see a slight increase in sales volume, operating costs such as utilities increased, leading to a QoQ increase of KRW 9.9 billion to KRW 13 billion. For the third quarter, we expect profitability to improve with gradual increases in separator demand. Next, let me discuss our new business initiatives.
SK Innovation is committed to enhancing our corporate value by creating a differentiated green business portfolio in the energy and materials space. In light of the long-term mega trends, we are exploring business and portfolio options in the net zero and circular economy-related sectors. Zero carbon, clean energy, hydrogen and ammonia related business areas, CCUS and recycling are areas that we are interested in building our portfolio out in from an energy and environment solution angle. For new business initiatives in progress, please refer to the presentation material. Now let me walk you through our ESG management strategy and carbon reduction targets. As our business becomes more global with more business areas, the employees, shareholders, business partners, customers and other stakeholders of the company are also growing.
In order to continue to gain the confidence and support of these many different stakeholders, and to strengthen our firm value, ESG management is not an option, but a must. To create a framework for our ESG management initiatives, we have established a growth strategy. G stands for green innovation, R road to net zero, O outstanding SHE management, W winning the trust, T together with society, and H stands for happiness for all. This growth strategy divides our ESG management initiative into six key areas in which we have identified 16 key corporate projects. For each project, we have established a midterm target for 2025 and annual milestones that need to be achieved to reach the midterm target.
In addition, using the online data platform that we have developed, we are not only going to transparently disclose our ESG platform to the outside, but also enhance the BOD-led management to check the progress of the growth strategy and to ensure consistent implementation of our ESG management. For your information, more detailed information on our ESG growth strategy will be available in the ESG report to be issued. SK Innovation has-
Zero target that covers all of Scope 1, 2, and 3, and we track the progress each year to ensure we move forward. In the energy and chemicals area, the target is to achieve a 50% reduction by 2030 in Scope 1 and 2, and to achieve net zero before 2050. In 2022, the target is to cut emissions in energy and chemicals by 1.12 million tons in comparison to 2019 levels. Based on our recent reduction simulations, we expect to reach a reduction of 1.42 million tons, satisfying this year's target. The company is planning to actively share the details of our net zero efforts in a net zero special report to be issued in August. We look forward to your interest and support. Thank you.
This is the end of our presentation, and we will now start the Q&A session. Before asking your questions, we ask that you state your name and affiliation. In addition, please remember that the Q&A will be conducted with consecutive interpretation.
Now Q&A session will begin. Please press star one, that is star and one if you have any questions. Questions will be taken according to the order you have pressed star and number one. For cancellation, please press star two, that is star and two on your phone. The first question will be presented by Jo Hyun-Yul from Samsung Securities. Please go ahead with your question.
Thank you. I am Jo Hyun-Yul from Samsung Securities. I would like to ask you two battery business-related questions. Your second quarter losses have widened, and you've also mentioned during the presentation. However, you expect profitability improvement in the third and the fourth quarter. I would like to understand to what extent we can expect that margin of improvement, and when can we also expect quarterly break-even point? Second question, I understand that previously you communicated that you will probably complete pre-IPO process and within the first half of the year. I would like to get some update, as I believe there's been some delay. Can you provide some more details regarding how this is currently ongoing?
Hello, this is Jin Hyun-mi. I'm the Head of Battery Strategy and Planning Office. I will respond to your first question.
In the first half of the year, due to the shortages of semiconductor supply in the first half for the automobiles as well as on the back of rise in the commodity prices, it's true that we've seen some increases in our losses. Now, as we enter into the second half of the year, we expect the overall business and operational environment will start to turn positive compared to the first half of the year. In particular, with respect to the newly operating capacity that came online in the beginning of 2022, we believe that the ramp-up is going to go quite smoothly, and we will see initial stabilization. We are also seeing a more stable trend when it comes to commodity prices.
Now, also in particular, we are talking and negotiating with the OEMs with regards to adjusting the sales prices or the ASP on the back of the rise in the commodity prices. As a result, we expect in the second half of the year we will be able to see improvements in profitability. Due to the reasons that I have just mentioned, we are sticking to our initial objective of meeting operating profit break even in the fourth quarter.
하반기 예상치 못한 경영환경의 변화가 발생하는 경우에도 적극적인 대응을 통해서 수익성 및 손익 개선 목표에 차질이 없도록 노력하도록 하겠습니다.
In the second half of the year, even if we are faced with some unexpected difficulties, the company will do our utmost to make sure that we improve our margin as well as our profitability, as per our plans.
예, SK Innovation 재무분야 김양섭입니다. 두 번째 질문 주신 SK On IPO에 대해서 답변드리겠습니다.
Hello, this is CFO, Yang-seob Kim. I will respond to your question relating to SK On pre-IPO update.
네, 저희가 pre-IPO 당초 생각했던, 그 계획했던 일정 대비해서 다소 지연이 있는 것은 사실입니다. 그렇지만, 현재 협상이 진행 중에 있고요. 성격상 그 구체적인 어떤 시기나 규모 등에 대해서 아직 확정되지 않은 상태에서 말씀드리기 어렵다는 것을 양해 부탁드리고요. 저희가 하여튼 의사결정이 되고, 그 결정이 되면, 공시 등을 통해서 communication 하도록 하겠습니다. 이상입니다.
Now, regarding the pre-IPO process for SK On, it is true that there has been a bit of a delay compared to the original plans and schedule. I can tell you that currently the negotiation is ongoing. However, because we do not yet have a finalized timing or the size, I will not be able to, at this point in time, share with you the details. Once we arrive at the decision, we will make sure we make the appropriate disclosures and communicate with the market.
다음으로 질문해 주실 분은 J.P. Morgan의 Parsley Ong입니다. The next question will be presented by Parsley Ong from J.P. Morgan. Please go ahead with your question.
Hi. Thank you for the presentation and a chance to ask questions. My first question is on your battery revenue. Second quarter was only up very slightly, and I think you mentioned volumes were actually down quarter-on-quarter. Could you give us some updates on your full year revenue expectations, second half volume growth and 2023 volume growth? In first half versus your expectations based on your order backlog, which region has been causing the underperformance? Would it be mostly Europe or some other regions as well? The second question is there has been some news flow that Ford has been thinking about starting to do LFP batteries, potential partnership with CATL, et cetera. What do you think the impact? Do you see this as a risk for your business?
What are your plans for LFP batteries for EV applications? Thank you.
네, 발표 감사합니다. 그리고 또 질문 기회 주셔서 감사합니다. 제 질문은 배터리 매출에 대한 질문이 첫 번째 질문인데요. 이 2분기를 보게 되면 매출 같은 경우에는 아주 조금 상승을 했다라고 말씀해 주셨고, 판매량 같은 경우에는 전분기 대비해서 하락했다라고 설명을 해주셨습니다. 올해 그러면 연말 기준으로 매출 전망 full year로 어떻게 보시는지 설명 부탁드리고, 그리고 하반기 2023년 판매량에 대한 전망은 어떻게 하시는지요? 그리고 상반기 데이터를 기준으로 봤을 때 지금 수주 잔고 기준으로 현재 실적이 그러면 저조했었던 주요 원인이 되는 지역은 어디인가요? 유럽이 거기에 포함이 되는지 또는 기타 다른 지역이 있는지 궁금합니다. 그리고 두 번째는 언론지상에서 보면 Ford가 LFP Battery와 관련해서 CATL과 partnership을 체결할 수 있다라는 얘기를 저희가 듣고 있습니다. 이것이 본사에게는 리스크 요인으로 작용을 할지 어떻게 생각하시는지 말씀을 부탁드리고 LFP 관련해서는 EV용 차량에 채택이 되는 것과 관련된 여러 LFP Battery 개발 관련된 계획이랄지 진행 상황이랄지 설명 부탁드립니다. 네, SK On 기획담당 진선미입니다. 첫 번째 말씀 주셨던 매출 관련해서 답변드리도록 하겠습니다.
Yes. Once again, this is Jin Sun-mi, the Head of Battery Strategy and Planning Office. I will respond to your first question.
말씀 주셨던 것처럼, 상반기에는 메탈 가 상승에 따라 배터리의 판가가 일부 상승하였음에도 불구하고, 판매량 감소에 따라서 매출은 소폭 증가하는 데 그친 것이 사실입니다.
In the first half of the year, due to the rise in the metal prices, although the battery price, the ASP actually went up due to a slight decline in the sales volume. Our revenue, the top line revenue, did slightly decline.
이 판매량 감소는 당사의 내부적인 이슈라기보다는 반도체 수급과 관련된 이슈에 따른 OEM의 생산 판매량 감소에 따른 영향으로 보시면 될 것 같습니다.
Now this decline in sales volume from our company was not attributable to any internal causes. It was actually triggered by the semiconductor shortages that led to a lower level of production, and sales on the OEM side.
2017년 이후 매년 두 배 이상의 매출 성장세를 보여주고 있는데요. 2022년에도 매출 규모로는 약 두 배 이상이 되는 7조 원 중반대, 그리고 또는 그 이상의 매출을 예상하고 있습니다.
Now, since year 2017, we've seen revenue grow twofold on a per year basis. For year 2022 as well, we're expecting our revenue to report a twofold growth. We will be no less than KRW 7 trillion level in terms of the full year revenue.
지역별로 봤을 때 특정 지역이 특별히 매출 감소에 영향을 미쳤다고 보기는 힘들 것 같습니다.
Regarding your question of whether any specific geography had an impact on the performance. I do not think that was the case.
하반기에는 신규 가동되는 프로그램들이 본격적으로 매출이 발생할 것으로 보이고, 반도체 관련된 이슈도 다소 완화될 것으로 전망하고 있어서 상반기 대비로는 굉장히 큰 폭으로 매출 볼륨도 증가할 것으로 전망하고 있습니다.
In the second half of the year, we are going to be able to see some revenue being generated from the new programs that are going to come online. Also we expect the semiconductor supply related interruptions will also ease. Hence, compared to the first half of the year, we expect there to be a significant or a quite large margin of revenue improvement.
네, 두 번째 질문에 대해 답변드리겠습니다. SK온 전략 담당 유진숙입니다.
Hello, this is Yoo Jin-sook. I'm the Head of Battery Business Strategy Office. I will respond to your second question.
이미 인지하고 계시겠지만 차량별 Entry Level, Volume Level, Premium Level 별로 배터리의 다양화가 진행 중에 있습니다.
Well, as you may be well aware, the battery forms or battery types also are becoming more diversified depending on the type of the vehicles. Is it entry-level, volume or premium.
금번 Ford와 CATL의 협력은 이러한 관점에서 저가형 그 Seg의 LFP를 채택하는 것으로 저희는 추정하고 있고, 이런 측면에서 저희 Seg상 당사 공급 모델과 겹치지 않기 때문에 당사에 미치는 영향은 굉장히 제한적일 것으로 생각을 하고 있습니다.
Now regarding the partnership between Ford and CATL, we believe that this will relate to the lower end of the segment or the low end or the entry level for these LFP applications. This segment does not overlap with the segment that we serve as a company. We believe that there will be a limited impact.
지난 1분기 실적 발표에서도 말씀드렸다시피 저희는 금년 내 LFP 셀 개발 완료를 목표로 하고 있으며, 현재 고객과 제품 개발 및 공급 관련 논의를 진행 중에 있습니다. 구체적인 양산 계획이 확정되는 대로 추후 공유드리도록 하겠습니다.
As mentioned during the first quarter earnings release, our objective is to complete the development of the LFP cells by the end of this year. At this point we are under discussions and talks with our customers and clients in regards to the development and supply of such LFP cells. Once we make or gain more visibility on when we start the mass production, we will be also able to share with you some more details.
다음으로 질문해 주실 분은 하나증권의 윤재성님입니다.
The next question will be presented by Yoon Jae-seong from Hana Securities. Please go ahead with your question.
네, 하나증권 윤재성입니다. 질문 기회 감사합니다. 지금 SK 이노베이션이 정유 사업, 기존 사업에서 굉장히 많은 돈을 벌어들이고 있는데요. 시장에서의 의문은 이 벌어들인 이익으로 어떤 비즈니스를 향후에 할 것이냐에 대한 부분들이 좀 의문인 것 같습니다. 그래서 15페이지에 여러 가지 이야기를 써놓으시긴 하셨는데, 그 관련해서 가장 포커싱하고 있는 비즈니스가 어느 쪽인지 궁금하고요. 향후에 배터리 소재 사업에 대한 AI 비율 확대에 대한 고민도 혹시 있으신지에 대해서 말씀 좀 부탁드립니다.
Yes. Thank you for the opportunity to ask questions. I think that if we look at the overall situation of SK Innovation right now from the refinery business that you have, you are generating significant profits and a lot of cash from that business. I think that from the market's perspective, one of the questions that we would have is that for these resources that you have acquired, what and what type of business are you going to engage in going forward? On page 15 of your presentation, you do have a lot of initiatives that you have laid out here. But of these initiatives, what would be the main focus area that you are looking at for the future?
In terms of your battery materials internalization, do you have any targets in terms of what type of, and what level of internalization you want to achieve in the future?
예, SK 이노베이션 사업개발담당 김윤재입니다. 첫 번째 질문 주신 것에 대해서 답변드리도록 하겠습니다.
This is Yoon Jae Kim, the Head of Corporate Development Office at SK Innovation. Maybe I can address your first question.
최초 브리핑할 때 말씀을 드렸듯이 현재 미래 비즈니스 포트폴리오 옵션을 지속적으로 탐색을 하고 있고, 상당히 다양한 영역에 대해서 탐색을 하고 있고요. 현재는 전반적으로 검토를 하고 있고 모든 가능성을 열어둔 상태로 그 검토에 좀 더 치중을 하고 있고요. 현재 제시된 암모니아나 Waste-to-Energy, Energy Solution 같은 건 현재 초기 시딩 단계 투자로 볼 수 있을 것 같습니다. 어느 정도의 투자 포커스가 이루어지고 내부적인 검토가 완료되는 대로 상세 내용은 추가로 공유드릴 수 있도록 하겠습니다.
As we have mentioned in the presentation, I think that, for the future, as of the current time, the overall approach that we have is that for our future business po
We are looking at a wide variety of options that would be available to us and the best way going forward. As a result of that, I do think that the areas that we are interested in would be clean energy, hydrogen and ammonia related businesses, CCUS and also recycling. As of the current time, we are leaving all of the options that we have open. I think that right now what we're trying to do is explore and also review the possibilities that we have for us. With regards to the ammonia side and also the Waste-to-Energy area, I think that what we can say is that we're in the seeding phase as of the current time. But what.
Once we have a more specific focused area that we are going to concentrate on, I do think and once we have, you know, more definitive plans for the future, we will make sure to share that with you. With regards to battery materials, specifically, again, I think it's on the same note. We are looking at a wide variety of options. Of course, within the SK Group as a whole, there are a lot of different companies that are within the group. Right now on the battery materials area, we do have different investments and also discussions that are in place. We do want to be able to cooperate across the group as a whole.
With regards to the internalization and also commercialization of these various opportunities, I think that as of now, we are reviewing the options that are available to us. In the same note, once we have more definitive plans, we will make sure to share that with you.
The next question will be presented by Nikhil Bhandari from Goldman Sachs. Please go ahead with your question.
Hi, thank you so much for the opportunity. My first question is on the balance sheet. If I look at the gearing that has gone up this year versus end of last year, even with pretty strong profitability of the refining business, can you talk about where do you see gearing heading into the second half of the year, assuming you know no transaction on the battery private investment side? Also, if you can just talk about your CapEx in the first half this year and the updated guidance for this year and next year.
Even in the newer areas, the green businesses that you're getting into, have you allocated any kind of CapEx in those green areas that you will be investing in the next three to five years? It'll be helpful to understand. The other question I have is on the battery business profitability. So you mentioned you're planning to get to OP breakeven still by 4Q this year from negative 25% right now. Can we understand a bit more about where we stand right now on the gross margin and the EBITDA margin for the battery business in the second quarter? My last question is on the refining side, if oil prices stay at a current level, would you would...
For the rest of the quarter, would you expect still any more inventory gain in third quarter, or will there be inventory loss? Thank you.
This is the CFO. I will respond to your question about the gearing ratio.
Over the first quarter, the crude prices have increased by around $17.3 per barrel. Even during the quarter, there's been a sustained uptrend in crude prices, which led to an increase in the working capital, really offsetting a lion's portion of the pre-tax income. Continuous CapEx spend also had an impact on the debt and equity ratio as well as debt and borrowings. Coming into the second quarter and as we move into the third quarter, we are seeing an easing of the rise in the crude oil prices, which also mitigated the impact from the working capital increase. Excuse me.
In the second half of the year, we will be able to see generation of OCF and possibly a decline in the working capital or at least an easing of that increase in working capital. I believe there is a great possibility that we will not be able to see a tick up in the gearing ratio. Also on the SK On side, if we consider for that pre-IPO process and that coming to a conclusion, believe that the, you know, debt ratio will not actually be coming down. Responding to your second question on CapEx.
For this year, as we previously communicated based on our order book, the front and back, we expect the CapEx for this year will amount to around KRW 6 trillion-KRW 6.5 trillion, in light of the investment that we will need to make in batteries, materials, and INE. Now, in terms of further out into the future after next year, we do not yet have the concrete figures for CapEx yet because we have yet to develop a plan for that. Once we have that in place, we will come back to you and share that information. I will continue to respond to your question on the inventory gains. The amount of inventory related impact that is going to be reflected based on the time lag will amount to about 170 billion Korean won.
Of course, having said that, the caveat is, you know, it will fluctuate or change depending on the crude oil price changes. Moving on to your third question on battery. Once again, this is Sun-mi Jung. I'm the Head of Battery Strategy. Yes. Let me once again walk through what are the key drivers behind our expectations that there will be improvement in the margin for SK On in the second half versus the first half. End of year 2021, the U.S. Georgia plant started its operation and beginning of year 2022, the number two Hungary plant started its operation as well. At this point, these two sites are currently undergoing stabilization phase, and we believe that by the second half of the year, the productivities from these factories will become on par with our other existing sites.
Also in the first half, there was a sudden surge in the commodity and materials prices, which led to widened volatility, and that worked as a risk factor on our bottom line profitability. In order to respond to such surge in commodity prices, we've been negotiating and talking with our OEMs, and we were able to gain some good achievements from those endeavors. Also there were some internal efforts as well for us to improve our cost effectiveness and also identify some items where we could bring about cost savings. There's been a continuous effort to improve our profitability. These are the bases based on which we expect the margin will start to improve as we enter into Q3 and Q4. Hence, we expect we will be able to achieve the BEP level by the fourth quarter of this year.
In terms of the gross profit margin and EBITDA margin, at this point, we are receiving the outside auditors audit review, and we do not yet have the audited numbers. Please understand that we won't be able to share with you the specific numbers.
Oscar Yee from Citi. Please go ahead with your question.
Good morning. Thank you for the chance to ask question. I've got two questions. One is, today there was some news saying that SK On has secured EUR 2 billion sort of funding already, I think based on some local news. Could you confirm if that is the case? Because obviously the worry is, with the delay in the pre-IPO funding, you know, there has been some market concern about, you know, the funding gap and how you will be able to meet that. Second question is, you comment about, you know, the utility costs increase in Europe, impacting your margin.
Would it be possible if you could share, you know, roughly in terms of percentage, you know, what percentage is utility cost as a percentage of total cost? You know, and if possible, roughly how much of that utility costs have gone up versus, say, last year? Because of this, higher utility costs, do you think your sort of OP target breakeven can still be achievable under such sort of higher fixed costs? Just finally, also on this, could you share with us, are you using a renewable or are you using just gas-fired or just you buy from the grid with any sort of like PPA agreement? Thanks.
Yes. This is the CFO, Yang-seob Kim, and maybe I can take your first question about the euro funding and the news report that you mentioned. For the amount in euro that you just mentioned, this is related to the funding activities that we have for the number three plant that we are building and planning to build in Hungary. The nature of these funds would be ECA financing and also green financing. As far as I understand within the battery industry, it is the largest ECA financing to date. It is true that this process is underway, and I do believe that we can say that we are in the almost final stages of this process. This financing in nature is not related in any way to the pre-IPO process.
The reason for that is because, initially when we had, the funding plan for the Hungary number three factory, from the beginning, we were planning to fund some of it in equity and some of it in debt. Therefore this amount related to the ECA financing should be regarded as, a portion of the overall debt financing that we are trying to achieve related to this factory. This is Jin Sun-mi, the Head of the Battery Strategy and Planning Office, and maybe I can address your second question. From the beginning of 2020, due to the Russia-Ukraine conflict in the European area, if we look at prices, for electricity and also LNG, there has been a significant increase taking place.
However, going into the second quarter, if you look at the overall situation, the overall increase rate in itself has been moderating out. Therefore, at the Hungary factory, with regards to the overall suppliers that we have in that area for utilities and also due to the support from the HQ, we have been able to come up with a plan to counter the situation and have been executing that accordingly. In particular, if we look at the second half of 2022, in the case of the Hungary, for the suppliers that we have for electricity and LNG, we have forged a strategic alliance with these partners.
As a result, we have come up with a supply overall target price that we have and also are pursuing long-term fixed price agreements with these parties to ensure that the overall profitability of these sites and also the uncertainties that would be related to the overall feasibility for the future can be minimized as much as possible. Though inflation and overall, excuse me, utility price increases are something that we are seeing taking place across the board around the globe. If we look at it specifically by region compared to Europe, we do believe that for the U.S. and also China, the overall increase in utility costs is not working as such. It doesn't have as large an impact as we see in Europe.
In addition to that, in terms of the overall targets that we have achieved and achieving the profitability that we want going forward and for the targets that we have shared with you, the rise in the utility and also power prices is fully reflected into those plans. So when we talk about our second half expectations, this is something that has already been included. Maybe to talk about our environmentally friendly energy sourcing initiatives, in line with SK Innovation's overall ESG strategy as a whole, of course, SK On in line with that strategy also has its own ESG initiatives.
With the target of reaching net zero in 2035 in terms of Scope 1 and 2, we are trying to decrease the overall energy usage, try to source from renewable fuel sources, and also leverage various more green energy sources. In particular as a preemptive measure to achieve net zero earlier than our target by 2030 for all of the production sites that we have, we do have a roadmap that we are currently establishing to adopt more environmentally friendly power sources. For 2022 in Hungary and for some of the U.S. factories that we have, that would be the beginning, and we are going to expand this initiative to our global sites in the future on a gradual basis.