Good morning. This is project leader, Jae Woo Lee from SKI's IR team. I thank you for participating in SKI's Q1 2021 earnings release session. Please note that the contents presented today have yet to undergo an independent auditors review and could be subject to changes upon such review. The presentation will be delivered by Mr.
Yang Seok Kim, who heads the Finance division. Good morning. This is Yang Seok Kim from SK Innovation. I thank the shareholders and analysts for taking consistent interest in SKI. I will go over Q1 2021 management results in my presentation followed by a Q and A session.
To earnestly address your questions, we have here with us management and staff of SKI and the major subsidiaries. First, on Q1 sales, operating profit and other management results. With rise in oil price, the subsequent petrochemical goods price sales increased KRW 1.5622 1,000,000,000,000 QoQ and recorded KRW 9.238 1,000,000,000. The coal spell in the U. S.
And other supply glitches resulted in margin rise of and that coupled with inventory related gain with higher oil price led to an increase of KRW745.9 billion Q on Q of operating profit resulting in Q1 number of KRW502.5 billion realizing a turnaround. As for non operating profit, FX loss of KRW 71.7 billion and battery related settlement of minus KRW 976.3 billion was reflected, resulting in a decrease of KRW 998.6 billion QoQ at minus KRW1.031 trillion. Now on the company's financials. At the end of Q1 2021, the company's asset increased by KRW4.481 1,000,000,000,000 compared to the end of last year with petrochemical product price increase, inventory assets and receivables increased at KRW42.9872 trillion. As for liability, with increase in payables with higher oil prices, it increased by KRW 4,635,000,000,000 compared to last year end at KRW 27,671,000,000,000.
The debt to equity ratio is at 181 percent and net debt increased by KRW 191.8 billion and recorded KRW8.9172 trillion. Now on Q1 business results and market conditions. First, on the refining market. International oil price in the Q1 was influenced by the coal spell in the U. S.
And voluntary production reduction of Saudi Arabia, With the new U. S. Economy boosting measures amounting to US1.9 trillion dollars and increased expectations for the COVID-nineteen vaccine, oil prices rose with inventory burden eased due to operational glitches in the U. S. And Japan and also with expected demand pickup for oil with more vaccination, Q1 pack was strong.
With gradual demand recovery centering around the U. S. And with the production of disruption of U. S. Companies with the cold weather coupled with rapid decrease in inventory, gasoline crack rose.
Diesel crack was also helped by the cold weather in the U. S. But with the winter demand gone and with tougher lockdown in Europe resulting in dampened demand saw less stronger movement. Carrot crack was also pushed upwards with the U. S.
Coal spell, but the rise was limited with worsened COVID situation in Europe. Let me now brief you on the results of our Q1 refining business. Refining OP was influenced by the big improvement in refining margins with the supply disruption caused by the U. S. Coal spell and increased inventory related gain with higher oil price.
It increased KRW608.6 billion on QoQ at KRW 416.1 billion. Q1 refining business inventory related Q1 refining business inventory related
gain including the lower of cost or market method
is at KRW372.2 billion. With lesser influence from COVID-nineteen in the Q2 and the following demand recovery, the refining margin is expected to improve gradually. Now on to our petchem business. Steady demand from downstream business continued for olefin in Q1. And with North American facility trouble brought on by the cold weather and logistics limitation with container shortages, the quarter end spread rose rapidly.
With demand recovery for aromatics and facility trouble in different regions leading to supply decrease, PX and benzene spread improved over the previous quarter. I will now brief you on the petrochemical business results for Q1. Operating profit for petrochemical business was helped by spread improvement centering on PX, benzene and other aromatics and sales volume recovery with the completion of regular maintenance in the previous quarter and also inventory related gain. It increased KRW 164,500,000,000 over the previous quarter at KRW 118.3 billion. The upcoming regional regular maintenance season and subsequent decrease in supply will result in continued strong spread in the Q2.
But regional new volume will come on board after the planned maintenance and restart of troubled facilities and that will gradually ease the supply situation at the end of the quarter. PX, the representative aromatic product, sees continued tight supply with regional major players regular maintenance. With operation of new PTA and polyester chain demand recovery, the spread is expected to gradually rise. Now on Q1 lubricant business. With tighter supply with the U.
S. Coal spill, sales volume decreased with global supply issues. However, with inventory related gain with oil price increase, the business realized an OP number of KRW 137.1 billion, which is KRW 11.8 billion increase Q on Q. A tight supply and demand situation will continue for some time in the second quarter. With seasonal demand increase, spread is expected to remain strong.
Next, on the results of our E and P business. Q1 E and P operating profit improved with more sales and sales price increase and recorded KRW 11,300,000,000, which is an improvement over the previous quarter. Now on our Q1 factory business results. Q1 sales recorded KRW526.3 billion, which is an increase of KRW 29.1 billion Q on Q. This was due to sales volume increase with Hyundai Motor KRW,000,000,000 in the Q1.
Initial cost increased for our overseas sites that have begun commercial production or is slated to commence commercial production next year. With that, operating loss for this business increased KRW67.8 billion Q on Q at minus KRW176.7 billion. The Hungary number 1 in China Changzhou plant have begun commercial production in 2020. Plants 23 in Europe and Plants 12 in Georgia, U. S.
A. Are under construction. China's Yancheng and Huizhu plants have started commercial production in Q1. Please refer to the appendix for detailed regional facility expansion plans. Now on our IE Materials business results for Q1.
Productivity gain in the Chinese plant and reduction in raw material costs led to an OP increase of KRW 6,400,000,000 over the previous quarter at KRW 31,700,000,000. The company continues to add new LIDS capacity. The output, which stood at KRW 860,000,000 square meters per year at the end of last year, will increase to KRW 1,370,000,000 square meters by the end of this year. The new line that will be completed in China at the Q2 of this year is expected to begin commercial production as soon as it is completed. The other global manufacturing site in Poland is well under construction on schedule and is expected to commence commercial production at the Q3.
For details, please refer to the appendix in the presentation deck. This concludes our prepared presentation. Now we will entertain your questions. Before posing your questions, please state your affiliation and your name first. And please note that the Q and A session will be translated by consecutively.
Now Q and A session will begin. The first question will be presented by Yong Chan Baek from KB Securities. Please go ahead with your question. Yes. I have two questions.
First is on the settlement amount that you have reached with your counterpart. Could you please give us more detail on the settlement? And do you believe that there will be additional cost out in the second half related to this settlement? And my second question is for the battery business backlog. Could you please give us an update of the backlog?
Yes. I will brief you on how we are going to account for the settlement amount that we have reached with our counterpart. As was agreed by the 2 companies and as was disclosed, well, the settlement amount stands at KRW 2,000,000,000,000,000 And KRW 1,000,000,000,000 would be given out during year 2021 2022, both in equal KRW 550,000,000,000 tranches. And that amount would be calculated at this present value. And the present value calculation stands at KRW97.63 billion.
And the remaining KRW1 trillion that will be paid after year 2023 that will be linked to our sales numbers and that would also be calculated to that present value. And it would be accounted for as cost of sales. So with that, we do not foresee any cost out for the later half of this year. Yes. This is Mr.
Hyung Jo Yoon, who heads the battery strategy and planning office. He will be providing you with the answer for your battery related question. Currently, we have an outstanding relationship with our existing OEM clients, including Daimler, Hyundai and Kia. And we are on a continuous search for a better relationship improvement with global OEM players such as Ford and Volkswagen to win their new programs. So our backlog as of today stands at 600 gigawatt hours and translating into money wise terms that would amount to KRW 80,000,000,000,000.
And now with the
uncertainty gone with the settlement, we believe that we are in a much
more favorable condition to win new orders from with the settlement, we believe that we are
in a
much more favorable condition to win new orders from the global OEMs.
Yes. If I make a correction on the translated amount, well, I told you that it's JPY 50,000,000,000, it's actually JPY 500,000,000,000 paid out in 2021 2022. The next question will be presented by Jaesung Yoon from Hana Financial Investments. Please go ahead with your question. Yes, I have two questions.
First, I've heard that you have plans for divesting some of the businesses of SK Lubricant and your petchem business and also your E and P business. I would like to hear on the schedule and how much cash in you expect from such divestment and also as to when it would be reflected in your results? And now on to my second question, you talked about the settlement. And with the settlement being paid to your counterpart, do you think there will be a change in the timing where the battery business will reach a breakeven point? Yes, this is the Head of Finance division, Mr.
Yang Suk Kim addressing your question. Now on the sales of SK lubricant shares, It has been disclosed. A 40% share will be divested and or sold and it amounts to KRW 1,100,000,000,000. And we could look into other
And we could look into other options with
SKU Global Chemical and the E and P business, but nothing has been finalized. Should there be any conclusion to such reviews, we will be making sure to disclose the information to you. So I will be now addressing your battery business settlement related question. Well, I've mentioned to you in my previous answer that the JPY 500,000,000,000 bond amount will be paid out this year and next year, and it has already been reflected as our non operating numbers. And starting from year 2023, a royalty payment will be made.
And that at that time of payment, it will be reflected in our numbers. And with that, we do not foresee any changes in our expected BEP point. And if I may add to my previous answer, we do expect to see a mid single digit profit numbers in 2023 and by the year 2025 that could rise to high single digit. The next question will be presented by Park Lee Young from JPMorgan. Please go ahead with your question.
Hi, this is Parsley from JPMorgan. Thank you for the opportunity to ask the question. The first question I have is, if I look at Page 18 of your presentation, you have 2025 EV battery capacity of 125 gigawatt hours and this looks a bit higher than your existing capacity expansion plan outlined on Page 12, which would imply closer to 100 gigawatt hours or so. So could you tell us which region do you see more potential for capacity growth? And is
this likely to be in
JV format or will it be fully owned by SK? My second question is, could you give us your thoughts on the impact from battery raw material price inflation as well as an update as in the impact on your business? And then give us an update on your battery recycling business? Thank you.
So this is Mr. Yoon, who heads the battery business, who will be addressing your question. While you see the number 125 gigawatts after year 2025, Well, we have made our investment decisions for capacity expansion, but the battery market itself is in such a rapid growth stage. That is why we are looking into additional opportunities for capacity expansion. And with that, we've given you a number of 125 gigawatt
hours.
And in the process of increasing our global footprint, we're not focusing on a specific region. We keep an even lookout for all the regions that see a rapid growth in the EUV sector, including U. S. A, Europe and China. And as for the approach, whether it would be 100% ownership or whether it be a joint venture type of approach, we are looking into various options.
Yes. This is once again Mr. Hyung Jo Yoon, Head of Battery Strategy and Planning Officer, who will be addressing the second part of your question. You've asked the impact of raw material on our battery business and on our recycling business. It's true with the global economic recovery and with the rapid growth of the EUV market that the raw materials or materials have seen a price rise.
Well, the raw material prices, it saw an increase for lithium and cobalt and also nickel. But with the big project in Indonesia now commencing production, we have seen the prices somewhat become more stabilized. And while there have been some logistic wise issues when it comes to supply and demand situation, there have been bottlenecks from time to time. But we do expect to see some improvement with this bottleneck situation. And we entered into a long term agreement with the suppliers, and we do get a supply stable supply of what we require.
And we also link the raw material prices to our final sales prices. So the raw material price increase poses no risk to our business. And now to address the recycling question, Well, we have entered into an agreement with Kia and began a project together. We started this in March last year. And we are looking into or studying the efficiency when it comes to recovered metals from our used batteries.
So we have studied the recovery of lithium and other metal materials that go into our battery packs, and we have created an ecosystem that is very environmental friendly. So we have developed ourselves the recovery method for lithium and we hope to use this once again in our anode as well as those. But that goes into our battery packs. With that, we will be creating an eco friendly EV ecosystem and it would also help in our ESG initiatives. The next question will be presented by Sungwon Han from Daesung Securities.
Please go ahead with your question. Yes. I have three questions. First is on your battery business. I see that the loss is widening in Q1.
So could you give us the most updated guidance when it comes to your sales numbers and your profit numbers? The thing goes the same question goes to SK IET's business. Please provide us with the guidance on your sales number and your profit numbers. And my other question goes to the battery business. Many global OEMs have announced that they will be bringing the battery business in house and there has been press releases or press reports on force activity.
So could you please provide the company's opinion on the global OEMs trend? And what is your countermeasure to this trend? And my third question goes to the refining business. Even excluding the inventory related gains, I believe that your refining business has seen a profit number and the margin is expected to be stronger going further into this year. So do you think you will be seeing an upward movement in your refining margin?
Yes. This is Mr. Yoon once again from the Battery Strategy and Planning Office. Well, we've seen the initial cost rise with the new plants that have initially begun production and also with the plants that are slated to produce starting next year. But as was mentioned, the sales this year is expected to be double the size that we have witnessed last year at mid-three trillion KRW level.
Yes. The new sites, they have, of course, incurred initial costs, but we have our expertise in early stabilization of our plants with our existing plants. And we will be seeing new volume being created from our new facilities. So with that, compared to last year, we will see loss decrease by 30%. So if I may give you our guidance, we hope to see our EBITDA numbers turn black this year, and we hope to see a number greater than our breakeven point.
And you asked the company's opinion on the global OEMs move towards bringing the battery business
in house?
Yes. Well, last September in 2020, Tesla had their Battery Day. And this March, Volkswagen had their Power Day. And they have made their announcements, and they've also talked about their ideas on how to cut cost. Yes.
The global EV OEMs, in order to ensure stable supply of the required battery packs, they are trying to be in the battery business themselves. They also believe that this would add to their competitive edge. And some say that this could pose a threat to the battery business players. But we believe that this could be an opportunity for our business. And rather than the OEM companies involving directly in technology development and manufacturing themselves, I think it's highly likely that they form a good firm partnership with the battery makers.
And
should we see such cooperative cooperative plans to be more concrete, then it will ensure us a more stable sales source and it would also possibly lessen our investment burden. And we could, in various ways, cooperate in building a good battery ecosystem together. And we did get various offers from many global OEMs and we're reviewing them positively, but at the same time very prudently. Yes. This is CFO from SKIET who will be providing you with the SKIET answers.
Well, we do not give a number wise guidance as was briefed to you during our deal roadshow IPO deal roadshow. But however, having said that, our sales volume and revenue numbers and OP numbers are closely aligned. So I would like to talk about our volume. So we have begun Phase I operation in China in November, and it takes usually about 9 to 10 months to go to 100 percent operational rate. So it will take a 9 to 10 month period for a full ramp up.
And this period also includes getting the green light from our customers. And the mentioned Phase I operation in China, it's running at 80% utilization rate. And at the half of the later half of this year, when we do get the final sign off for our merchant customers, we believe the number could go up to 100%. And well, we believe that the sales volume will start to see an earnest increase in the second quarter. And our sales volume on a Y o Y basis could grow as high as 50 percent.
And as was mentioned, our volume is tightly aligned with our revenue numbers and OP numbers. Yes. This is Mr. Lee from SK Energy who will be answering your refining margin related question. Despite COVID, with the vaccination currently ramping up in U.
S. And Europe, we do see a demand pickup. And with the driving season in May, we do expect to see a real good fundamental demand increase, especially centering around gasoline. We believe the refining margins could see an improvement. And when vaccination rate in the U.
S. Reaches over 50% in the later half of this year, we do expect to see crack improve significantly for jet oil and diesel. The next question will be presented by Hyun Yeo Zhou from Samsung Securities. Please go ahead with your question. Yes.
I have questions largely for your refining business and your petrochemical business. First, on capacity increase of your refining facilities, how much capacity increase do you expand do you foresee for year 2021 year 2022? And on the other hand, how much facility will be closing down? This is my first question that goes to the refining business. And the second question is for your chemical business to SKGC.
I've read an article about your potential joint venture concerning bioplastic. So but nothing has been confirmed after the article. Are you currently engaged in this project? I would like to hear your confirmation. And then now on the recycling business, where would these sites be located?
And the pyrolysis facility establishment, which region would that be? And when will it commence actual operation? Yes. This is Ms. Lee from SKU Energy, who will be addressing your first question.
So we do not have information full enough information to address your question for year 2022. So I will be talking about the outlook for year 2021. On a global basis, the new volume to come on board is expected at 1,800,000 barrels per day. And the scraped amount would be somewhere around 1,752,000,000 barrels per day. And that would be a change by 1,000,000.
So this is Mr. Zhou from SKGC. He will be addressing your bioplastic joint venture question and also your recycling question. So SKGC is currently engaged in our own technology development activities and also we have joined hands with various partners to look into various opportunities. But as of today, bioplastic joint venture is not being considered as a most viable option.
It's not being considered. Now on to your pyrolysis or Brightmoorlysis recycling question. So to make full use of waste plastic, we are currently studying the later processes for the pyrolysis of plastic. And also, we are thinking of how we could advance this technology on a global basis. So for the immediate future, we are looking domestically for our EPC.
And beyond year 2025, we could go to other countries as well. The next question will be presented by Yuji Kwon from NH Investments and Securities. Please go ahead with your question. Yes. My question is for your battery business.
Well, what is the operation rate for your plants in Hungary and Hangzhou? And I've seen that your initial cost record of minus JPY 82,700,000,000 number. And was the initial cost increase associated with your Yancheng and Heju plants? And now my second question is related to the raw material price increase. What is your the company's expectation for oil prices after the
Q2?
Yes. This is Mr. Yoon once again, Head of Battery Strategy and Planning Office, who will be addressing your battery related question. For our Hungry Plant 1 and Changzhou plant, they have begun commercial production in Q1 last year. And these two sites, they have achieved what they have set out to achieve and is running very stably.
And as for new facilities, well, we do have a new facility being set up in Yancheng SKDJ and most of the initial cost increase was incurred by this site. And also the SKBA site in U. S. And SKBM in Hungary, they would begin commercial production starting next year. And these two sites also added to the increase in our initial costs.
Yes. This is Mr. Lee from SK Energy who will be addressing the oil price outlook question. So as was mentioned in my previous answer, with more vaccination in Europe and U. S, we see real demand pickup.
And we do, with that, foresee oil price increase going forward. But the OPEC plus plans for the production, of course, could limit or influence the rise. And well, in taking into consideration the external organization's outlook, we believe that for year 20 21, if I may talk about the Dubai oil price, it could move somewhere between mid-sixty dollars level to $70,000,000 level. The next question will be presented by Tim Busch from UBS. Please go ahead with your question.
Thank you. This is Tim Busch with UBS. I guess recently we've seen some Japanese automakers show interest to take potentially Korean battery cells for example. I think Honda talked about taking the Ultium cell from General Motors. And then today, we had a report from Reuters that Nissan wanted to look more closely to partner with Renault on taking a same technology battery cell.
So I guess my question is do you see Japanese OEMs as potentially becoming larger customers in the next, let's say, 24 months?
Yes. Your question was on the Japanese auto OEMs potential use of more Korean batteries. Well, as of today, we are not reviewing any concrete projects with the Japanese companies. This was an answer provided by Head of Finance 3 Office, Mr. Li Dong hun.
Due to time limitations, we would entertain one last question. The last question will be presented by Mikhail Bandari from Goldman Sachs. Please go ahead with your question.
Yes. Thank you so much for the opportunity. Just firstly on the battery business. You mentioned about the order book number at more around 600 gigawatt hour. I believe the last quarter you mentioned it was 550.
So does this upgrade already reflects now the contract you win from Hyundai? And also can you give us an update on the technology for future battery from SK Innovation perspective? What is SK Innovation doing in terms of more innovations around cathode or silicon in the anode and the work around solid state battery? And also is SK Innovation also planning to do cell to pack technology as well as some of your competitors are planning to do and cut costs? So yes, just broader update around technology work that SK Innovation is doing on battery would also be appreciated.
And my last question is just around petrochemical. Recently, the benzene margins have been extremely strong in the last 2 or 3 weeks. Can you comment on that and sustainability of that given that's important product in your petrochemical business? Thank you.
So this is Mr. Yoo once again from the Battery Strategy and Planning Office. Now on to your first question regarding our backlog. Well, with our contract with the OEMs, we are not in a position to disclose the actual numbers. It's a contractual obligation.
So please understand, we cannot give you the numbers here. And you had many questions related to our technology development. Our focus is on safety, fast charging and long life. Yes. The company's focus is on high nickel content anode, and we are focusing on our technology development activities in this area.
So as you're well aware, the nickel content in our batteries, it went to 80% in year 2018. And in year 2020, it went as high as 83%. And the company had also developed an NCM 9.5.5 technology, and this technology will be used for our commercial supply to 4 starting next year. And our continuous effort is to decrease the use of cobalt in our battery and also to increase the content for our NCM batteries. We are working on our anode technology for more higher added efficiency.
So by year 2023, with a single charge, we hope to cover 700 kilometers. And now on to solid state batteries. Well, some may think this as a potential risk or threat, but we could also view this as a future opportunity. So we are engaged in various activities to research into the possibility of this technology. So we have a technology roadmap ready within the company to realize higher energy density and more performance and safety for our next generation lithium ion batteries.
So in our road map, we look into electrolytes of solid state batteries and also we look into better performing lithium batteries with lesser dendrite formation issues. And now your question regards to Cell 2 Pack technology. Well, it has been announced that the Cell 2 Pack technology would realize a direct link between Cell and Pack. And with that, there would be more space within the packs for more cells leading to better energy density. So while we are doing our work in order to increase our energy density and our energy packs and to also eliminate any unnecessary So we have since the past been working on long body technology, long body cells and we've also worked heavily on our modules.
And with this background, we are actively collaborating in joint development activities with the OEMs. So this is Mr. Zhu from SKGC. I will now entertain your brands and related question. So the spread continues to be very strong.
It was at $195 in the Q1. And in April, the number recorded $3.64 In May, the number reached $4.24 And as of yesterday, it went high as $4.63 The reason behind this strength is the very strong demand from the downstream industries and also the regular maintenance and with that tighter supply. And in the long run, we do foresee that the stronger margin could continue with the fundamental improvements for global downstream industries. But however, with the newer facilities coming on stream from China and with the restart of their facilities, well, this trend could see a little adjustment. This concludes our Q and A session.
Thank you for participating