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[Interpreted]
Good afternoon. I am Sang Hoon Kim, Head of IR at Lotte Chemical. I'd like to take this opportunity to thank you for your interest in Lotte Chemical and participating in today's earnings presentation.
Now, I'd like to begin our 2023 Q3 earnings presentation. We will introduce our senior management and present our business results for the third quarter of 2023 and the business outlook for the fourth quarter and then proceed to the Q&A session. The earnings release and business outlook will be simultaneously interpreted and the Q&A will be conducted in consecutive interpretation.
Let me now introduce our senior management who are attending the presentation. Firstly, Min-Woo Kim, our CSO; [ Myeong Chao Chung ], Head of the HQ Corporate Planning Division, Jeong-won Kang, our CFO, is with us. Basic Chemical Division [ Ki-Sung Kwak ], Head of Strategy Management Division, [ Jin Yu Kim ], Head of Monomer division. [indiscernible] head of Polymer Division; [ Sang Yong Yi ], Head of Aromatic Division; and [ Lee Han Shin ], Head of Business Development Division is with us. From the Advanced Materials, [ Jin Sookbak ], Head of a Corporate Planning division and from LC Titan, Executive from the Corporate Planning division. From the Battery Materials business division, [indiscernible], from the Hydrogen Energy division, we have [ Yon-ha Kim ].
This is the 2023 Q3 business results. First of all, we'd like to inform you that the sale of LC Jiaxing can the UA production subsidiary in China and the liquidation of the Hefei EP plant were completed in this quarter as part of our business rationalization and that were excluded from the financial statements at the end of the quarter.
The third quarter sales decreased 3.7% Q-o-Q to KRW 4850.7 billion, but operating profit turned a positive increase in KRW 105.1 billion over last quarter's loss of KRW 77 billion, to [ post ] KRW 28.1 billion and operating margin of 0.6%. This quarter's operating profit is an increase of KRW 479.3 billion over the loss of KRW 451.3 billion of Q3 of 2022, while the ongoing global recession limited any meaningful recovery on the demand side, the positive lagging effect of raw materials and higher oil prices led to improved spreads and lower inventory valuation losses, resulting in a significant improvement in profitability Q-o-Q.
Profit before tax improved by KRW 164.8 billion in Q-o-Q due to gains on the disposal of the China business and foreign exchange gains. As such, the net income grew KRW 173 billion Q-o-Q to turn positive.
Next, moving on to financials; assets at the end of Q3 2023 were KRW 32,956.7 billion, an increase of approximately KRW 1.4 trillion Q-on-Q. Cash and cash equivalents were KRW 4,696.4 billion, an increase of approximately KRW 170 billion from the previous quarter. Total liabilities were KRW 12,848.3 billion, up around KRW 1.15 trillion from the previous quarter and borrowings were KRW 9,467.4 billion, up around KRW 900 billion from the previous quarter. Although borrowings increased due to new investments such as the LINE project, the debt to equity ratio remained stable at around 64%.
Next, moving on to our performance and outlook by business segment. In the third quarter of 2023, the basic chemical BU posted sales of KRW 2,582.9 billion, operating loss of KRW 24.2 billion, and operating margin of negative 0.9%, a significant reduction in losses compared to the previous quarter. Sales declined due to weak demand owing to the economic downturn, but profitability improved due to the positive lagging effect of raw materials on the back of higher oil prices and the operational efficiency such as increasing the LPG input ratio, and adjusting the utilization rate of low-margin products.
The fourth quarter is expected to be challenging, with volatile raw materials amid economic recovery uncertainty. The supply pressures are expected to gradually ease, as new capacity volume is significantly reduced from 2024.
Next, Advanced Materials; Advanced Materials posted sales of over KRW 1,068.4 billion, and operating profit of KRW 75.5 billion in the third quarter of 2023, representing operating margin of 7.1%. Profitability improved from the previous quarter due to higher sales volumes and lower fixed costs, including utilities, as we enter the seasonal peak season. Demand is expected to weaken in the fourth quarter due to the seasonal slowdown in all industries and the impact of the United Auto Workers strike.
Next is LC Titan's business results; in Q3 2023, LC Titan posted revenue of KRW 556.4 billion, and operating loss of KRW 7.7 billion, significantly narrowing the loss Q-o-Q. Revenue grew slightly on the back of higher sales volume. Profitability improved, thanks to the positive lagging effect on the feedstock coming from higher oil prices, as was the case with Basic Materials. In Q4, market is expected to be soft due to uncertainty in feedstock and delayed demand recovery affected by geopolitical risks, we will respond by optimizing operations, including utilization adjustment.
Moving on to LC USA; in Q3, LC USA posted revenue of KRW 121.3 billion and operating loss of KRW 16 billion with an operating margin of minus 5.2%. Revenue fell due to lower sales volume and profitability declined due to higher price of the feedstock ethane, as a result of strong demand for natural gas, Profitability is expected to improve in Q4 as ethane price trend stabilizes downward.
Next is Lotte Fine Chemicals; Lotte Fine Chemicals announced its Q3 preliminary results on October 30. Thus, I will only briefly go through the highlights. For more details, please refer to Lotte Fine Chemicals earnings release. In Q3 2023, the company recorded revenue of KRW 401.2 billion, operating profit of KRW 35.1 billion, with operating profit margin of 8.7%. There was a general decline in revenue and profitability following the fall in international prices of key products of Chemicals business and green materials business. Looking ahead to Q4, profitability is expected to improve as international prices of some of the products start rising and as the green materials business implements active sales strategy.
Last is Lotte Energy Materials; as Lotte Energy Materials also had its earnings call on November 7, I will just go through the highlights. In Q3, the company posted revenue of KRW 217.7 billion and operating profit of KRW 3 billion. Revenue grew in Q3, thanks to higher sales volume of copper foil. Profitability improved slightly, as fixed cost burden was also eased. In Q4, sales volume and profitability are expected to gradually expand through customer diversification, along with stable demand from major customers.
I will now provide an update on our major investment plans. First of all, I would like to explain our new business initiatives. The company established Lotte SK ENEROOT last year, in a joint venture with SK Gas and Air Liquide Korea to develop hydrogen fuel cell power generation and charging business. The JV obtained a hydrogen business status by winning the right for 20 megawatts in general hydrogen generation bid for the first half of 2023 by the Ministry of Trade Industry and Energy. It plans to build an eco-friendly hydrogen fuel cell generator in our Ulsan plants by the first half of '25 to supply eco-friendly electricity.
As for the previously explained electrolyte organic solvent business for EV batteries, the EC-DMC line is scheduled for mechanical completion in Q4 of this year and the EMC-DEC in the first half of '24. The EOA build-out at Daesan plant and the Yeosu plant will also be completed in Q4 this year. Other major ongoing projects are also underway as scheduled.
This concludes our Q3 2023 earnings report and Q4 outlook. And now I would like to turn over to CSO, Min-Woo Kim, to go through the key issues and outlook.
[Interpreted]
Good afternoon. This is CSO Min-Woo Kim, Head of Strategy and Planning at Lotte Chemicals. Let me thank our investors for taking the time out of your busy schedule to attend our earnings call. As explained in the results presentation, we narrowed the loss in our Basic Chemical business in the third quarter, and operating income turned to profit.
The chemical business is gradually stabilizing, albeit not dramatically, while product prices fluctuate as feedstock price remains volatile. The positive lagging effect from feedstock prices has contributed to this quarter's results. While the size of the profit is not as large as we would have liked, it is meaningful that we put an end to the trend of operating loss that has persisted since Q2 of last year.
As mentioned a number of times from the mid- to long-term cycle perspective, the industry is believed to have bottomed out in Q3 and Q4 of last year, but capacity additions continued this year and the demand recovery was delayed along with the global economic slowdown. But in 2024, ethylene capacity addition will be around 4.7 million tonnes, only about half of the 9.7 million tonnes in 2023, while even conservative outlook sees demand growth to be above that volume. Easing of the year's long burden of capacity addition, coupled with gradual recovery in demand, could provide the basis for a speedy rebound.
Having said that, the recent environment around the petrochemicals industry with geopolitical risks in the Middle East continuing to compound oil price volatility and global economic uncertainty, makes it difficult to predict with certainty, a rebound in the near term.
Despite the challenging environment, the company continues to drive operational optimization and portfolio enhancement to enhance profitability. It has resulted in a series of plant completion within the year. The EC plant, which is electrolyte organic solvent for batteries, DMC plant, EOA plant, which is high value-add construction material, and this year, we'll see the completion of the EC and DMC plan for electrolyte solvents for batteries, the EOA plant for high value-added materials for construction and HECELLOSE plant for high-value add green materials. These new plants are all part of our strategy to diversify our EO derivatives and expand their specialties.
Electrolyte solvents are the third battery material business to be added following separator and copper foil. Once the U.S. cathode foil plant is completed next year, we will have a full portfolio of the 4 major battery materials, which will help the business take off in full.
In the hydrogen business, we won the bid for 20 megawatts in the general hydrogen generation markets related to SK ENEROOT in August, for which we are planning to build an eco-friendly hydrogen fuel cell power plant in our Ulsan plant, to go into operation in '25. Our clean hydrogen and ammonia projects are also making progress in line with the government's policy schedule.
While executing these key investments as planned, we are also steadily rationalizing our business structure, disposing off domestic and overseas businesses that are less profitable and not in line with our strategic direction. Following the sale of our PTA production plant in Pakistan in January, we completed the liquidation and sale of our EO and EOA plants in Jiaxing, China and the EP plant in Hefei in the second and third quarters.
Despite this year's large-scale investment and difficult business environment, we are maintaining a stable financial position with a debt-to-equity ratio in the low 60s. On average, we generate approximately KRW 250 billion in cash each quarter. Aside from essential ordinary investment in key investments like Indonesian Line project and Lotte Energy Materials offshore production base, we are revisiting and rescheduling from a conservative perspective to maintain financial soundness. We will continue to monitor the recovery of the industry to ensure that we can execute investment within EBITDA.
Last, I would like to discuss our shareholder return policy. Last year, we announced our medium-term shareholder return policy, which includes a KRW 300 billion share buyback plan across 3 years to enhance shareholder value. Since the announcement, the company bought back KRW 50 billion of its shares in 2022 and paid out year-end dividend even in the face of a loss. But since the announcement of the policy, the petrochemical market has deteriorated at an unexpectedly rapid pace since Q2 last year, and the company is experiencing harsher times than ever before with record losses, making it difficult to fulfill the policy until next year.
At the same time, given the importance of keeping trust with our shareholders and expected improvement in the market from next year, we have extended the period of our shareholder return policy for an additional 2 years and will faithfully implement our shareholder return policy, including the KRW 300 billion share buyback per our disclosure on October 26.
Despite the challenging environment, we will keep striving to boost business competitiveness and investing as planned to fulfill our vision. We will also do our best to meet the expectations of our investors by faithfully implementing our shareholder return policy. We look forward to your continued support. Thank you.
[Interpreted]
[Operator Instructions] The first question will be presented by Hyunryul Cho from Samsung Securities.
[Interpreted]
Thank you for this opportunity to ask questions. So I have probably 3 questions. 2 is related to the chemical side, and one is related to the secondary battery. So with regards to the liquidation and sales of some of your production facilities, not only in Korea but also in the case of Europe, it seems that there is a significant movement to withdraw from the ethylene downstream factories. Is this kind of movement being witnessed in the Asian regions as well?
And secondly, in the third quarter, it has been possible to reduce the losses in the olefin and aromatics in the Basic Chemical business. However, the pace of reduction of the losses seem to be slower compared to what has been achieved by LC Titan. So aside from the naphtha's positive effect, is there any other reason why the pace of reducing the losses has been more faster for LC Titan?
And my third question has to do with the secondary battery materials. So not only for the cathode plant, but also for other aspects of the U.S. business, it seems that there hasn't been as of yet any significant increases in the planned CapEx. But is there any possibility of the CapEx going up significantly for the cathode investment going forward? So with your customers, has there been any discussions about the volume related to the cathode facilities going forward?
[Interpreted]
So my name is [ Jin Yu Kim ]. I'm the Head of the Monomer Division. Let me take your first question. So in the case of Europe, as we have mentioned recently, because of the higher energy costs, their competitiveness has declined significantly. And centering around the small-scale ethylene plants and the SM plants, scraps have been increasing.
In terms of Asia as well, for the small-scale ethylene plants and the SM and the EC plants, there are a lot of discussions going on about rationalizing the facilities. And also in keeping with the energy rationalization policy of China, it is anticipated that the small-scale crackers and petrochemical plants will also be subject to these rationalization policies. [Interpreted]
Hello. My name is [ Myeong Chao Chung ]. I am the Head of the HQ Corporate Planning Division. Let me take the second question.
In the third quarter compared to the second quarter for the basic chemical, there has been an improvement of KRW 20.5 billion, and for the Titan, there has been improvement of KRW 103.9 billion.
And the reasons why the pace of reducing the losses for LC Titan has been greater or as follows; so for the basic chemicals, the spread has come down and the sales volume has actually declined. And in the case of the Basic Chemical business unit, the valuation losses for the inventory was KRW 58.9 billion for Lotto Chemical and for Titan, it was KRW 90.8 billion.
Another difference is the difference in the spread. So for LC Titan, because of the spread effect, we had an additional gain of KRW 34.8 billion, but basic chemical moved in a different direction compared to LC Titan in this respect. And also, there was an additional KRW 71 billion of positive impact from the inventory valuation for the raw materials.
[Interpreted]
Hello, my name is Min-Woo Kim. I'm the CSO. I'm going to talk about the question on the cathode and the U.S. investment.
As you have noted, because of the impact of the inflation in the United States, it is true that the CapEx for the U.S. investment is growing. And for the cathode project as well compared to our initial plans, investment is increasing. In the case of cathode and organic solvent, there is a strong need by customers to obtain the supplies from non-Chinese sources. And so in order to secure greater volume, it is necessary to have the supply base in the United States.
With regards to this increasing pressure of growth in CapEx, we are engaged in discussions with various customers of securing the sufficient supply and also we're engaged in negotiations for the pricing as well. And also, we are making efforts to obtain the necessary incentives that are being provided by the state government. And through these initiatives, we are trying to secure the necessary profitability.
With regards to the slowing of the growth in demand for EVs, previously, based on the optimistic outlook provided by the auto OEM, there has been production that has been undertaken in advance, and this is leading to greater inventory pressure, and we are also recognizing the fact that because there are limited options for choosing different EV models, there has been a slowdown in terms of the sales of the EV business being recognized.
However, we do believe that the right view to take going forward is that the demand growth of EV will continue going forward, and we are making the necessary preparations to respond to such development. With regards to the cathode and organic solvent, we are engaging discussions with various local suppliers. And concerning the ramp-up of the utilization rate, rather than the binding of the customers, we believe it will take more time to obtain the necessary approval after providing the samples to the customers.
[Interpreted]
The next question will be presented by Sung Hyun Hwang Eugene Investment & Securities.
[Interpreted]
So with regards to the energy efficiency cracker, the 30%, what is the level that we are identifying regarding this cracker? And also concerning the naphtha feedstock, including the Russian naphtha, what is the share per country regarding the naphtha supply -- the introduction of Russian naphtha?
[Interpreted]
My name is [ Jin Yu Kim ], I'm the Head of the Monomer division. Let me take the first question. With regards to the ethylene cracker issues, by 2025, as part of its energy efficiency policy, it is very likely that China will shut down a number of small-scale crackers. And also only those crackers that have a capacity of more than 800,000 tonnes, will likely be subjected to investment approval.
In the case of the Russian naphtha, in the second quarter of 2023, on a monthly average basis, 1.5 million tonnes of Russian naphtha was exported. But during the third quarter, because of the Russian refineries G&A, the monthly average dropped to 1 million tonnes.
And in the case of the Russian naphtha exports, they are mostly being exported to China, Taiwan, Indonesia and India at an export price that is -- they are being directly exported than at a price that is lower than the margin level. In the case of the low-priced exports of Russian naphtha, compared to the overall demand, the amount is less than 10%. So the impact from the Russian naphtha is expected to be limited.
For your reference, in our case, we do not directly use the Russian naphtha.
[Interpreted]
Next question will be presented by Parsley Ong from JPMorgan.
I have 3 questions. The first question is on your feedstock lag impact. I think you mentioned KRW 70 billion positive impact just now for Titan, but could you just clarify -- maybe give us the feedstock lag impact for the whole company in third quarter and then by division, how much was it? The second question is on your China asset rationalization, I think earlier at the start of the presentation, you said that you sold that asset and booked a disposal gain. Could you let us know how much that was, and if your OP was a positive number and your equity method income was positive, your pretax was negative. So could you give us your non-operating loss breakdown?
And then the third question is on CapEx. Could you let us know your 2024 CapEx guidance, please?
[Interpreted]
This is [ Ki-Sung Kwak ] Head of the Strategy Management division. Let me take the first question about the lagging effect. So the feedstock lagging effect for the basic chemical in the third quarter, the impact was KRW 109.2 billion and for Titan, it was KRW 26.3 billion.
[Interpreted]
So my name is Jeong-won Kang. I'm the CFO. With regards to the Chinese asset rationalization, the amount that was reflected in our operating profit was KRW 30 billion.
In the case of 2024, including KRW 1 trillion for investment into the LINE project in Indonesia, a total of KRW 3 trillion in CapEx has been planned. So there was also a question about the breakdown for non-operating profit and losses. So in the case of the non-operating profit and losses, most of it is composed of interest income, interest expense and also gain the losses on equity method valuation.
The next question will be presented from Oscar Yee from Citi.
My first question is during the earlier comment, you talked about this nonstrategic sort of disposal for some of your light assets. Could you tell us some idea about what specific products or areas that you consider as a bit more of a non-strategic, which probably you will look to potentially sell in the future? Second question is, you also talked a bit more about the capital discipline, given this current tough environment, is there any particular sort of projects that you will look to delay the start up? For example, given this current very tough BPA environment, do you plan to delay the GS JV start-up or any other projects that you'll be looking for? And finally, could you provide a bit of an update sort of CapEx for your hydrogen business? I remember you used to guide like KRW 2 trillion by '25 and KRW 4-point-something trillion by 2030. Is there any sort of revised sort of target given you don't seem to be spending as much recently.
[Interpreted]
My name is Min-Woo Kim. I am the CSO, let me take the first question.
Recently with regards to the rationalization initiatives that have been undertaken. So this concerns the EO JV and the EO derivatives business in China. These projects were not integrated into the ethylene plant that was one of the problems. And also, there was another problem of serious increase in supply of EOA within the Chinese market, leading to a significant deterioration of our profitability.
We came to a conclusion that it will be difficult to address this issue in the long run, and so we made a strategic decision to exit these business areas. If you look closely into the key business portfolio that is being held by Lotte Chemical, most of them are integrated very closely to the cracker business. So in that respect, we do not have any additional rationalization plans going forward by region nor by product.
In the case of the EV project business which we are conducting in the United States as well. In the case of the EV business within Korea, yes it is determined that it is difficult to maintain competitiveness in the domestic market for this product line, than within the [ EV-derivative ] assets that we have by specific product. We may engage in further rationalization initiatives going forward.
[Interpreted]
My name is Jeong-won Kang. I'm the CFO. With regards to new investment in consideration of their contribution to achieving our vision and given their strategic importance, we have adjusted the timing of these new investments by their priorities. So those with low priority, we have adjusted the timing.
So with regards to the investment plans that we have already announced, we will proceed with those plans as has been announced. Let me take up the question about the BPA. Currently, the rate of progress is 44%. There is no special issues regarding that project. So if we analyze the supply curve, so in the case of the BPA, it is determined that it has a cost competitiveness of the top 10%.
Given our business structure, our main shareholder company, they are providing a very stable manner the feedstock necessary and also engage in product offtake. So we have a very strong competitiveness compared to our peers. And also with regards to the feedstock BPA, it is being supplied by our JV. And so in the case of the PC business, we are engaged in vertical integration. And so compared to our other companies, we believe that we can go forward with a very competitive PC business.
[Interpreted]
My name is [ Yon-ha Kim ]. I'm the Head of the Hydrogen Energy division. Let me discuss the matter about the hydrogen CapEx. Going forward, the new demand for hydrogen will mostly come from the clean hydrogen business, and this is very closely linked to the government policy.
So the CapEx of our company for the hydrogen business up until 2030 will be closely connected to the government policies. So if you look at the government policy, they're engaged in a much more specific review of this hydrogen industry. And so up until 2030, most of the efforts will focus on making hydrogen business a reality. And going from 2030 and onwards, our efforts will be focused on really making this business take off in earnest.
And so in consideration of this government policy this year, let me give you an update of the hydrogen CapEx. So by 2030, on a cumulative basis, KRW 3 trillion of investments will be made and we aim to achieve KRW 3 trillion in sales.
With this, we'd like to conclude the earnings presentation for the third quarter of 2023 for Lotto Chemical. If you have any inquiries, please contact the IR team. We'll meet you again at the next quarter's conference call. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]