Lotte Chemical Corp

KRX:011170

Earnings Call Transcript 2024-Q1

[Yong Ban Kim, executive]

Good afternoon. I'm Yong Ban Kim, Head of IR at Lotte Chemical. I would like to thank you for taking time out of your busy schedule to attend today's event.We'll now begin our 2024 first quarter earnings call. We'll introduce the senior management present today and discuss the first quarter business results and second quarter business outlook. Afterwards, our CEO will walk you through the strategic direction of Lotte Chemical. Following the CEO's remarks, we will proceed to a Q&A.All presentations will be simultaneously interpreted, while Q&A will be interpreted consecutively. I would like to introduce the senior management who is attending this earnings call.First is Hun-ki Lee, CEO of Lotte Chemicals. Next is CFO, Nak-sun Sung; the CSO, Min-Woo Kim. Also with us today is Giseop Kwak, Head of Strategy Management Division of Basic Chemical; and Kyo Sung Park, Head of Monomer Division; and [ Seong-Ho Yoon ], Head of Polymer Division; Sung Soo Bae, Head of Aromatics Business and also [ Yong-Hyun Kim ], Head of Business Development team of Basic Chemicals.From Advanced Materials, joining us is [ Wu Hyeon Joo ] Head of Corporate Planning Division and also [ Tae Wun Son ], Head of the Battery Materials Business Strategy Division. And Yong-hak Kim, Head of the Hydrogen Energy Division.Let me now start with our Q1 2024 financial result. Revenue for the first quarter was KRW 5,086.1 billion up 3.7% Q-o-Q while operating profit improved by a KRW 180.5 billion Q-o-Q to a loss of KRW 135.3 billion. Amid a slow market recovery, auto feedstock and freight cost pressures increased due to geopolitical risk, spreads of monomer products such as butadiene and benzene widened and sales of copper foil and Advanced Materials products expanded, resulting in improved profitability.In addition, inventory valuation gains were positively reflected into quarter compared to previous quarter due to higher naphtha prices compared to the beginning of the year. Earnings before tax increase due to higher fair valuation gains on financial assets held by consolidated subsidiaries. And the base effect of the impairment loss in the Basic Chemicals business recognized in the fourth quarter of last year and due to the return to profitability based on equity method valuation of affiliates. The earnings before tax improved by KRW 439.7 billion Q-o-Q to post the loss of KRW 87.6 billion.Next is our financial status. Assets at the end of Q1 2024 was KRW 35,130 billion up KRW 1,653.7 billion Q-o-Q. Cash and cash equivalents were KRW 4,391.9 billion, an increase of KRW 478 billion Q-o-Q.Liabilities increased by KRW 1,465.7 billion Q-o-Q to KRW 14,709.5 billion, while borrowing increased by KRW 929.8 billion Q-o-Q to KRW 10,757.5 billion. Debt and assets increased due to borrowings related new products such as LINE Project and acquisition of construction assets. The debt to equity ratio is 72% and net debt ratio is 46%.Next, let me explain the performance and outlook by business segment. First, I would like to inform you that from this quarter in line with the change governance system, Lotte Chemicals, Basic Materials, LC Titan, and LC USA, which were all previously presented separately have been consolidated and classified as Basic Chemicals.In the first quarter, the Basic Chemicals posted sales of KRW 3,548.9 billion and an operating loss of KRW 130.4 billion, narrowing the losses from the previous quarter. Monomer product spreads improved, ethane prices stabilized and inventory valuation losses were reduced as well.Although, there were concerns that feedstock prices may rise in Q2 due to geopolitical risk in Middle East, we expect a recovery as we enter the seasonal peak season and supply pressure eases due to the maintenance season in the region.Next is Advanced Materials business division. Advanced Materials Q1 sales amount posted KRW 1,031.7 billion. Operating income posted KRW 44.4 billion and operating income ratio posted 4.3%. With increase of sales volume on the back of factors including new model launches of customers profitability improved. In Q2, we expect to see improvement in profitability, thanks to sales volume growth from downstream industry demand increase as well as positive FX effects.Next I will cover Lotte Fine Chemicals. Lotte Fine Chemicals already released their earnings on April 29. So I will briefly cover earnings results today. Please refer to Lotte Fine Chemicals business results presentation materials for more details.2024 Q1 Lotte Fine Chemical sales amount posted KRW 399.4 billion, operating income posted KRW 10.8 billion and operating income ratio posted 2.7%. Green material industrial product sales volume increased, but weakened global prices for chlorine related product prices sales amount decreased. In Q2, we expect sales amount decreased due to regular maintenance and repairs of some plants and weaken global prices. But we plan to respond through active sales, expansion of green material industrial products and food and pharmaceutical products.Last is Lotte Energy Material, Lotte Energy Material also have their earnings presentation this morning. So I will just briefly cover the results. 2024 Q1 Lotte Energy Material sales posted KRW 241.7 billion and operating income posted KRW 4.3 billion. In Q1, despite lesson growth expectations for the downstream industry due to customer diversification, we reached the largest quarterly sales volume and sales amount and profit ratio went up Q-o-Q.In Q2, we expect continued sales amount growth following increase in sales volume to North America, but we expect that there will be limitations to profitability improvement due to downstream industry demand decline.With this we will conclude our 2024 Q1 earnings and Q2 outlook presentation and I will invite President and CEO, Hun-ki Lee to elaborate on Lotte Chemical strategic direction going forward. We will then have a Q&A session and the answers will be answered -- given by our head of our business divisions for your reference.

[Lee Hun-ki, executive]

Greetings everyone, I am Hun-ki Lee, President and CEO of Lotte Chemical. First of all, I would like to thank all investors and those from the capital market who are taking part in our earnings release, despite your busy schedules.I recognize that efficient communication with the capital market is a very important activity in managing a company and I am also very interested in this area. Although, this is my first time participating in an earnings presentation since I took office as President and CEO, I will try to participate in earnings releases whenever I get the opportunity so that I can share our company status to our investors through diverse methods.As you are probably well aware, recently, the petrochemical industry is in a very difficult situation. China's large scale capacity expansions and sluggish demand is continuing and in particular business expansion of companies with cost advantage and increase of China's self-sufficiency rate is causing structural changes in demand and supply.In addition, war in major oil producing regions and increase in global carbon costs is increasing uncertainty in overall business. In this business environment, as the President and CEO of Lotte Chemical, I am realizing that setting clear strategic directions and efficient distribution of limited resources is indeed very important. Accordingly, I will briefly elaborate on what our company is pursuing.First, through Lotte Chemical's business portfolio transformation, we will enhance our company's sustainability. We aim to innovatively reorganize our business structure, which was focused on commodity petrochemicals and concentrate our resources on discovering and fostering and strengthening new growth businesses and expediently advance our portfolio.At the same time, we will solidify our financial soundness through cashflow centered management by generating more surplus cash through actively making our overall business operations more efficient and through managing investment risk. In the short-term, we will increase our financial stability and in the mid-to-long term this will lead to improvement in sustainability and corporate value. We will do our utmost.In order to systematically implement these core key tasks, we plan to reorganize and operate Lotte Chemical's portfolio into 5 businesses; Basic Chemicals, Advanced Materials, Fine Chemical, Battery Materials and Hydrogen Energy. And for each portfolio, we have clearly established strategic directions and performance goals and we also have optimized our operational governance.Through this governance reorganization, we will heighten our operational efficiency and manage the performance entering on strategic business units to increase portfolio transformation execution capability. We will maximize our cash cow business efficiency and boldly divest non-core assets, which are lower in strategic importance and more actively promote future new businesses.For each strategic business unit or SBU, the following is the strategic direction we will take. Since there is continued deepened competition in the Basic Chemical business, Basic Chemical business will strengthen its role as a cash cow through continuous implementation of asset light strategy and maximization of operational efficiency.In case of our Advanced Materials business, based on our core business capabilities of technology, differentiated customer response capability, customized response to customers and global supply network, we will maintain our current stable profit generation structure and gradually expand volume to grow it as our global core business.For our Fine Chemical business, we will foster it as a meaningful portfolio within the Lotte Chemical business by efforts to uncover additional new businesses centering on ammonia and green materials business.The Battery Materials business, which is our core new business will first establish a global leading position centering on anode foil and cathode foil businesses, and then afterwards look for additional expansion opportunities in a similar value chain considering the dynamics in the market.In our Hydrogen Energy business, we will utilize our existing byproduct hydrogen and establish a basis for our hydrogen business. And then through securing clean hydrogen and ammonia prudently expand our business.Likewise by setting clear strategic directions for each strategic business units, we will enhance cash generation power by more solidifying our cash cow business structure and based on this actively promote new growth business, which will drive our corporate value so that a stable and sustainable business model will be established.In addition, regarding our performance goals, we will focus on increasing corporate value and efficiency of our invested assets rather than our quantitative growth to improve our company's sustainability and do our utmost so that we can meet the expectations of our investors and those from the capital market. Thank you very much.

[Yong Ban Kim, executive]

Now Q&A session will begin. [Operator Instructions] The first question will be presented by Jae Sung Yoon from Hana Securities.

[Jae Sung Yoon, analyst]

I have 2 questions. First of all, with regards to the green market and also in the Middle Eastern region, the uses of COTC technology is expanding and so competition in this regard is intensifying. With regards to procurement of the raw materials and the feedstock in the mid-long term, what is your strategy going forward?My second question has to do with your hydrogen and ammonia business. So seeing from the overall Lotte Group perspective, what exactly is the vision, role and responsibility between Lotte Chemical and Lotte Fine Chemical?

[Kyo Sung Park, executive]

My name is Kyo Sung Park. I'm the Head of the Monomer Division. Yes, so with regards to our strategy regarding enhancing the competitiveness of our raw materials and also with regards to our uplift for the prices of naphtha and also oil prices, let me answer your question.Given the present state of the geopolitical tensions in Middle East, we do believe that there is little possibility of tensions escalating in the region. However, if indeed the geopolitical conflict in the Middle East is aggravated and the risk is heightened then this will lead to short-term increases in naphtha prices also increases in freight rates as well as increases in the raw material prices.Our strategy for procuring raw materials in responding to any volatility in the market situation disruptions in the logistic situation is as follows. So in the short-term, we intend to respond to the situations by taking the following measures. We intend to procure more of our naphtha supplies from domestically and also regions that are in close proximity to home and also increase the input of LPG usage.So we intend to make the following preparation. So first of all, the domestically produced naphtha takes up 35% of the overall raw materials supply coming into us, and we intend to secure the maximum amount of domestically produced naphtha going forward. And also LPG is mostly imported from North America, and so we intend to also increase the maximum input of LPG in our processes.However, if the logistics related disruptions are protracted, then we intend to secure more diversified suppliers of naphtha that are in close proximity to homes such as India and diversify the sourcing of naphtha going forward. Thank you.

[Kim Yong-hak, executive]

My name is Yong-hak Kim. I'm the Head of the Hydrogen Energy Division, and I'd like to take the question about the hydrogen and ammonia business.First, I want to explain about the hydrogen business and then move on to the ammonia business. In the case of the hydrogen business, for the time being, we will focus our business efforts in the gray hydrogen area and for the clean or green hydrogen area, I think it will take some more time.In the case of the Lotte Group perspective, with regards to gray hydrogen area, it's going to be largely focused in the byproduct hydrogen and 3 of our subsidiaries namely Lotte Chemical, or the Fine Chemical and one other affiliate is going to be involved. However, the overall quantity is not so sufficient at the moment. And so this initiative is going to be largely led by Lotte Chemical.And in the case of the ammonia business, in the case of the gray ammonia business, this is a business that is led by the Lotte Fine Chemical and this will remain so going forward. In the case of the clean ammonia business, as of yet, there is no market to speak of. However, starting from this year, clean ammonia market bidding system has been initiated by the government and the government is trying to generate demand for the clean ammonia.With regards to the bidding of the clean hydrogen business, the different approaches will be taken by Lotte Fine Chemical and Lotte Chemical respectively. So in the case of Lotte Fine Chemical, it's going to focus on the off taking business while Lotte Chemical will be largely focused on overseas investment. That is all, thank you.

[Yong Ban Kim, executive]

The next question will be presented by Woo-Je Chun from KB Securities.

[Woo Jae Chun, analyst]

I have 2 questions. So during your presentation you talked about the improvement in the business results of subsidiaries. Which subsidiary specifically are you referring to? And is this improvement in business performance sustainable? My second question has to do with your overhauling or reshuffling of all the strategic business. So I believe this transformation has been undertaken in order to put on more weight toward your secondary battery and the hydrogen business. So among these 2 areas, secondary battery and the hydrogen business, in which area are you going to focus more of your investments and who will be having the decision-making power related to each business unit?

[Sung Nak-Sun, executive]

So my name is Nak-sun Sung, I'm the CFO. I'm going to first take up your question about the business performance improvement of subsidiaries. Because of the equity-based method valuations of the business performance of Lotte E&C and Hyundai Chemical has been improved and this is the reason why we are seeing improvement of business performance compared to previous year.In the case of Hyundai Chemical, we do expect some further volatility or fluctuations in its business performance going forward depending on the market situation. And with regards to Lotte E&C as concerns related to PFF largely been diffused, we believe going forward there is going to be sustained improvement in its profitability.

[Min-Woo Kim, executive]

I'm going to take up your second question. I am Min-Woo Kim. I'm the CSO. As you have mentioned in your questions, the new business areas that we will be focusing on going forward of Lotte Chemical is first of all the secondary battery material business and the hydrogen and ammonia business. So although there has been some reorganizations related to the strategic business units, the overall directions related to the new business remains largely the same.So ask you a question about into which area of the 2 that we're going to focus our investment in? I don't think this is a matter of which has priority over. However, I think this is a question that relates to the level of maturity of the industry as it relates to the secondary battery.And as has been asked by the previous questionnaire, there is some level of difference in terms of the market maturity of hydrogen and ammonia. So although this is not a matter of which takes priority strategically over the other, because of this difference in the level of maturity of the different industries, and in terms of timing, I think for the near future, we will be focusing more of our investment in the secondary battery business.With regards to hydrogen and ammonia business, given the efforts exerted by the government to generate demand and also taking into consideration various market conditions, I think we will be putting more time into considering investment into this area.With regards to who has actually the decision-making powers regarding these business, so we have the strategic business units in place, but with regards to the actual decisions regarding operations and raising efficiency, this is not going to be an enterprise wide decision-making process. Rather, this decision I think should be owned by the individual business division level.However, when it comes to really critical business decisions such as new investment and also adjustment of the business portfolio, individual business divisions and also the entire company will be in consultation with each other. Yes.

[Yong Ban Kim, executive]

The next question will be presented by Hyunryul Cho from Samsung Securities.

[Hyunryul Cho, analyst]

So I do agree that compared to 2 or 3 years ago, you have announced strategies and directions and compared to that point in time at present not much has changed in terms of the general directions. And I do also agree that it will take some more time to really fully develop the markets for hydrogen and ammonia.But given your strategy that is focused on business transformation. So last year, you first announced the strategy and now compare to the present, do you believe that you indeed have a strategy to accelerate the execution of this transformation of the business that you have announced last year?And also with regards to your existing business line, I think the focus is on asset light, and this is something that is being pursued by many companies, both in Korea as well as in Japan. However, as is a case with Japanese companies compared to their plans, I think execution has been somewhat lacking. And so in order to sort of raise up our execution of these strategies, what kind of measures do you have in mind? Can you be more specific in sharing these directions going forward?

[Min-Woo Kim, executive]

So I am Min-Woo Kim, the CSO, let me take those questions. As you have mentioned, there is no change in the strategies regarding the new growth areas. But as has been included in the presentation made by our CEO, in terms of accelerating this change in our business portfolio and also putting on more weight on corporate value rather than on sales itself, I think with regards to these changes, I think further explanation is indeed required.The biggest dilemma that is facing Lotte Chemical is that the share in our portfolio taken up by the commoditized petrochemical products is rather high. And so the business performance is highly reliant on the really volatile market conditions. So in the past, the efforts that we have made to address this situation is to include in our business portfolio all those products that have a different business cycle compared to the commoditized petrochemical products that are more stable.But even in the midst of making those efforts, what we have realized in the process is that the share taken up by the commoditized petrochemical product is still too high within our business portfolio. And so with regards to changes that we are trying to initiate at present is related to the asset light concept that you have mentioned in your second question. So we intend to accelerate our efforts to reduce the share that is taken up by commoditized petrochemical products in our portfolio. That is the main change that we need to pursue.In relation to the asset like our concept, so various assets that we hold within our company is quite different from what is attempted in Japan, within the same region, within the same sphere. And so in that regard, with regards to the various downstream assets that we hold in Korea, in Southeast Asian region and in the North America, we are concerned several different options.So with regards to some of these options, there has been some progress made. However, at this stage, there is nothing really specific that we can share with our investors. So when we do produce outcomes or results are with regards to our execution ability that can be shared with the market and the investors, we will be very prompt in doing so. That is all.

[Yong Ban Kim, executive]

The next question will be presented by Sung Hyun Hwan from Eugene Investment & Securities.

[Sung Hyun Hwang, analyst]

So I have 2 questions. With regards to CCS business, what is the level of progress that you are making with regards to this business area? And secondly, it is expected that the Korea Exchange is going to introduce the emission trading system starting from next year. So what kind of impact do you foresee this having on the petrochemical industry?

[Unknown Executive]

So my name is Yong-Hyun Kim. I'm the Head of the Business Development team at the Basic Chemicals business. Let me take off your first question about the CCS Petronas progress. It is called Shepherd Project. So what this project is about is that for those carbon dioxide that is emitted in the industrial complexes in Korea, they are captured, concentrated in a certain hub in Korea and then they are transported and stored in Malaysia.This project, including chemical, a total of 10 Korean companies are participating in this project. At the end of 2021, together with our business partners, we have completed the preliminary feasibility study of this project. So the result of preliminary feasibility study showed that the business case of this project was actually lower than our initial expectations, and that it was necessary for the government to provide incentives in order to raise the economics of this project.And also because there is transportation of CO2 between 2 different countries there is a treaty that needs to be entered into related to the transportation of the substance. So in order to induce the government incentives for this project together with our partner, business partners, we have drawn up a business plan of the Shepherd Project and we are engaging in various promotion activities for this.So let me take up the question about the fourth emission trading system. So with regards to system at this present moment there is nothing decided regarding the auctioning for the petrochemical industry. Given the current trends and developments, what we do foresee is that ultimately there is a possibility of the free allocation completely being phased out and the share of the auctioning being increased substantially.Assuming that the free allocation share will be reduced to the same level as EU and also in consideration of the future carbon credit anticipated price, then starting for 2026 up until 2030, the expected payment that we should pay at the company is estimated to be around KRW 64.9 billion. So in order to prepare for the situation where this assumption or possibility becomes a reality, in order to minimize the risk, we will transfer the surplus emission credit that we generate and also look into options of purchasing credit from externally.

[Min-Woo Kim, executive]

So I'm the CSO and my name is Min-Woo Kim. I think the question about the Battery Materials that have been left out. So let me take off that question. At Lotte Chemical, we also realize that with regards to the secondary battery materials and the EV market, the growth of the demand is actually at least slower than what we have anticipated initially.Initially we have announced our strategy as being that we intend to become a global leader with regards to copper foil and the aluminum foil, but for materials, other than that it is true that we are taking a more conservative approach. When it comes to the cathode and the anode materials, it is our determination that there is unique competitiveness to be found in our subsidiaries, namely Lotte Energy Material and Lotte Aluminum.For example, in the case of Lotte Energy Materials, the competitiveness the company has with regards to high-end copper foil, the level of binding relationship that they enjoy with their customer base and also the cost competitiveness in Malaysia, those are the key source of competitiveness.In the case of Lotte Aluminum, we have a majority stake in the U.S. plant. So let me answer your question. Focusing on the U.S. market. So among the suppliers that supply this material to the key battery companies, we are the only supplier that has an overseas plant. So there can be factors that affect the actual timing on when critical investment decisions will be made, such as the outcome of the U.S. presidential race. However, as has been already announced, there is no change in our overall direction and strategy that we intend to become a global leader in these 2 areas that I have just mentioned.

[Yong Ban Kim, executive]

The next question will be presented by Parsley Ong from JPMorgan.

[Rui Hua Ong, analyst]

I have 2 questions. Earlier on, you mentioned that your focus on your strategic business units and maybe exit some of your non-core businesses. And I see that you have broken down your Basic Chemical division into more categories. Could you just give us some color on what you think are your non-core businesses?For example, is it the whole Basic Chemicals division or is it may be just the parent company assets or maybe Titan? And also would the LINE Project be considered a core business? Because if, let's say we sell a stake in Titan, what happens to Lotte Chemical's effective ownership of the LINE Project?The second question is on the recent IRA guidance. Do you see any impact on your Battery Material business? And you mentioned earlier that you're still aiming to be a global leader in aluminum foil and copper foil, but maybe a more conservative approach for the rest. By the rest, do you mean electrolyte and ultra-high molecular weight PE or are there like could you maybe give us more color on potential changes in your strategy?

[Min-Woo Kim, executive]

I'm the CSO. Let me take up your first question. At the current stage, I think this is a very difficult question for us to answer. But as has been already explained previously, under the general direction of moving toward asset light and also reducing the share of the commoditized petrochemical products within a portfolio, we are looking into several different options. And when the time is ripe and when we have something concrete to share with the market, you can be best assured that we will be very timely and prompt in providing these communication to the market.

[Unknown Executive]

Let me take on the second question. I am Tae Wun Son. I'm the Head of the Battery Material Business Strategy Division. Let me take up your second question. So recently the IRA guidance has been announced and what has changed from last year is that there has been a 2-year grace period that has been granted for [ FBOC ] application. So there actually is really no change related to the business that we undertake with regards to the cathode, anode and the aluminum foil business.Once again, let me explain further. So in the case of the aluminum foil, it is already classified as a core mineral. And so at this point, the Chinese products cannot enter into the U.S. market. And additionally in United States, there is an [ AMP ], so this is another advantage that is working to our benefit. In the case of the anode materials, although it's not classified as a core mineral, in the case of Chinese products, if they are to enter into the U.S. market, they would have to be imposed with tariffs. So because of this tariff issue compared to Chinese products, the Lotte Chemical products has a competitive advantage in the market. That is all.

[Min-Woo Kim, executive]

I would also like to provide additional information about the battery material portfolio. I am the CSO. So recently as we have reorganized our company structure into SVUs, we have redefined what business portfolio means to us. So in the case of the separator, it is now classified as polymer grid under the Basic Chemicals. And for the electrolyte, it is classified as monomer products, so it is no longer classified as Battery Materials. And this change is in part related to our overall efforts to further advance and create more high end products in our Basic Chemical business portfolio.Additionally, we do have sufficient capacity to produce additional separator upgrades and depending upon the approval from the customers and we will be able to expand ourselves. We have that strategy in place. So I think we have sufficient potential to become a top tier separator material supplier in the market. So with regards to electrolyte, it has only been recently that we have completed the construction of our plant and we are currently reviewing commercial production possibilities.So with regards to the electrolyte or organic solvent our focus now is to stabilize the business and stabilize the utilization of the plant that has just been constructed. And so depending on future market conditions, we may consider further capacity expansion. But at the present moment, we are focused on stabilizing what we have just built.

[Yong Ban Kim, executive]

So with this, we'd like to conclude the 2024 first quarter Lotte Chemical earnings presentation. And if you have any further questions, please contact the IR team at the company. So we'll meet you next time in the second quarter. Thank you very much.