Lotte Chemical Corporation (A011170) Earnings Call Transcript

[Interpreted] Good afternoon. This is Hwang Young Kyung, , Head of the IR team at LOTTE Chemical. I thank everyone for your time and interest in LOTTE Chemical and your participation in this conference call. We will start with a presentation on the company's 2026 Q3, followed by a briefing by the CFO on our business highlights. Then it will be followed by a Q&A session. Please be informed that the presentation will be conducted in simultaneous interpretation and the Q&A in consecutive interpretation. The presentation slides can be downloaded from the company's website. I will now introduce the executives in attendance. First, from the HQ, Vice President and CFO, Sung Nak-Seon; and Vice President and CSO, Kim Min-Woo; from Basic Chemical, Vice President Kwak Ki-seop, Head of the Strategy Management Division; Vice President Kim Yoon-seok, Head of the Sales Division; from Advanced Materials, we have Vice President Park Kyung-sun from the Corporate Planning Division. Let me now turn to business results of '26 Q3. This is Q3 profit and loss on a consolidated basis. Revenue in Q3 was KRW 5.3951 trillion with operating loss of KRW 281.4 billion. Turning to loss, Q-o-Q. In Q3, the rise in feedstock cost was not fully priced into the products, which narrowed the spread. Korean won's appreciation and rise in the freight cost further served to dampen our profitability Q-o-Q. EBITDA was KRW 51.1 billion. Pre-tax loss and net loss were KRW 398.4 billion and KRW 289.7 billion respectively. Pre-tax income fell Q-o-Q owing to the operating loss, weaker equity method valuation gain due to slower performance by affiliates, as well as the base effect of the derivatives valuation gain that was reflected in Q2. Next is the financial positions. Asset at the end of Q3 was KRW 28.9 trillion. Liabilities were KRW 11.9 trillion. Shareholders' equity was KRW 17.1 trillion. Debt-to-equity ratio stood at 69.5%, lower by 7.3 percentage points Q-o-Q following the transfer of borrowing as part of the Daesan business restructuring. Next, I will cover results and outlook by business division. First is Basic Chemical. 2026 Q3 Basic Chemical sales posted KRW 3,723.5 billion, operating losses posted KRW 216.6 billion and operating income ratio recorded minus 5.8%. In Q3, spread declined as product prices did not increase in line with rising feedstock costs. And along with the unfavorable exchange rate, it turned to a loss Q-o-Q. In Q4, market conditions are expected to remain weak due to continued global oversupply and delayed market recovery. Next is Advanced Materials. 2026 Q3 revenue posted KRW 1,089.3 billion, operating income posted KRW 15.4 billion and operating income ratio recorded minus 1.4%. Profitability declined compared to the previous quarter due to narrower spreads, negative lagging effects and unfavorable exchange rates. In Q4, gradual improvement is expected with the increase of major product sales, but exchange rate decline and elevated freight cost burden is expected to continue. Next is LOTTE Fine Chemical. Since the results were explained in detail during the October 29 earnings disclosure, I will just go over the highlights. Q3 revenue posted KRW 525.3 billion, operating income posted KRW 22 billion and operating income ratio recorded 4.2%. Revenue and operating profit declined Q-o-Q due to lower international prices of key products, unfavorable exchange rate movements and reduced sales volumes. Market conditions are expected to remain slightly weak in Q4 amid seasonal demand softness and unfavorable exchange rates. Last is LOTTE Energy Materials. LOTTE Energy Materials was also explained in details during yesterday's earnings conference call, so I will just touch upon the highlights. Q3 revenue was KRW 289.7 billion and operating loss stood at KRW 21.3 billion. In Q3, revenue increased 49% Q-o-Q and profitability slightly improved, driven by higher sales volumes to North American ESS and global EV customers. In Q4, sales volumes and profitability is expected to gradually improve, driven by North American ESS and EV demand growth and the start-up of new production line in Malaysia. With this, I will finish covering 2026 Q3 performance and invite our CFO, Nak-Seon Sung, to explain about our major highlights.

[Interpreted] Greetings, everyone. I am Nak-Seon Sung, VP and CFO of LOTTE Chemical. I would like to express my sincere appreciation to all investors and shareholders for taking time out of your busy schedules to attend our 2026 Q3 earnings presentation. First, I will elaborate on business environment and performance. Throughout this year, ongoing geopolitical risks in the Middle East have significantly increased volatility in both feedstock and product prices, while market conditions in the petrochemical industry has remained highly unpredictable. In the first half, supported by higher product prices driven by geopolitical risk in the Middle East and favorable feedstock cost lagging effects, we returned to profitability. But in Q3, feedstock prices rose amid renewed tensions in the Middle East, while weak demand from downstream industries driven in part by inflation, limited our ability to fully pass on higher cost to product prices. These challenges were compounded by the appreciation of the Korean won and rising ocean freight rates, adding further cost pressures and resulting in a return to operating loss in Q3. We regret to report financial results that have fallen short of our investors' expectations. We expect uncertainties stemming from aforementioned external factors to persist as well into Q4. However, we expect a gradual reduction in operating losses compared to Q3 as temporary cost pressures concentrated in Q3 begin to ease and also through our business reorganization. We will flexibly respond to the changing market conditions, maintain our focus on profitability and concentrate our efforts on securing a stable business foundation. Despite these challenging external business environment, conditions, we are internally proceeding with our business reorganization and portfolio optimization initiatives as planned with the aim of building a more resilient business structure that can withstand fluctuations in market conditions. Daesan plant completed the establishment of H&L Advanced Integrated JV in September and is currently focusing its efforts on establishing a stable integrated operating system and in generating synergy. Yeosu business restructuring plan involves the spin-off of Yeosu's plant operations with the goal of launching an integrated entity with Yeochun NCC in the first half of next year, and we are currently in discussion with our partners to finalize the details. After integration, we plan to establish a foundation for structural improvement in the profitability of our Basic Chemicals business by enhancing operational efficiency and increasing the proportion of high value-added products. We will provide updates on the specific time line through disclosures once it has been finalized. Through this reorganization, we aim to strengthen the competitiveness of our Basic Chemicals business while gradually reducing its share in our overall portfolio. At the same time, we plan to expand the high value-added businesses, including Advanced Materials and Specialty Chemicals to build a more balanced business portfolio. Through this, we plan to reduce earnings volatility and lay the foundation for generating stable cash flows. First, in our Advanced Materials business. As mentioned in the previous quarter, our Yulchon compound plant began operating in all 23 production lines in September, establishing Korea's largest compounding production capacity of 500,000 tons per year. In Q1 of next year, we plan to bring an additional production line dedicated to high value-added products online, further increasing the share of specialty products in our portfolio. In our Specialty Chemicals business, we are expanding our Green Materials business, including food and pharmaceutical ingredients. And on the other hand, we are continuing to invest in expanding our TMAC production capacity of key raw material used in semiconductor developers to meet demand for semiconductor materials. We are also focused on strengthening our financial position to ensure that the benefits of our business restructuring portfolio optimization initiatives translate into improved financial soundness. We have completed the transfer of borrowings associated with the restructuring of our Daesan business, improving key financial indicators by reducing our debt levels and debt-to-equity ratio. And going forward, we plan to further strengthen our financial position through the restructuring of our Yeosu business and the optimization of non-core assets, thereby building a more robust financial foundation. In addition, we will maintain our principle of keeping capital expenditures within EBITDA and continue to adopt a cash flow-oriented approach to financial management, placing the highest priority on financial soundness and profitability. Dear investors and shareholders, we take very seriously the fact that our company was included in KRX's list of low PBR companies announced on November 2. While market conditions in the petrochemical industry remain challenging, we are proactively restructuring our business to build a more competitive business structure rather than simply waiting for a market recovery. We are committed to completing our business structuring initiatives as planned, strengthening our financial position and establishing a stable earnings base by shifting our portfolio towards high value-added businesses. Through these efforts, we believe that building on these improvements, we will strive to ensure that our company's intrinsic value will be properly recognized by the market. We will do our utmost to meet the expectations of our shareholders and earn your continued trust. Thank you very much.

[Operator Instructions] The first question will be provided by YeongSu Shin from Shinyoung Securities.

[Interpreted] I have 3. First is that in terms of the financial performance in the third quarter, my question is with regards to the impact from the inventory valuation loss or the exchange rate or the narrowing spread or the rise in logistics cost. So out of these factors, which does the company believe had the biggest impact on the company's performance in Q3, and also to what extent? And then the second question is, with the ongoing petrochemical industry restructuring, what does the company foresee to be the impact on the general market next year and also on the company in particular? And could you also separate the impact between the 2? And the third question is, since in the aftermath of the Middle Eastern war, are there any moves to slow down the new capacity addition globally in the NCC? And if so, then also accounting for such a slower new addition in the NCC, then what does the company expect to be the net NCC new capacity next year?

[Interpreted] Thank you very much. This is the CFO responding to the first part of your question. Now, the biggest impact that we had on our operating income was the narrowing spread in the amount of about KRW 490 billion. And in terms of the inventory valuation loss, following the increase in the ASP, there was also the reversal in the inventory valuation loss in the amount of KRW 280 billion. And there was also an impact of around KRW 80 billion coming from the change in the exchange rate and also the freight cost.

[Interpreted] And this is the CSO, Kim Min-woo, responding to the second part of your question. First of all, even with the consolidation of the Daesan complex as well as the Yeosu complex where the company is taking part, and even with the resulting reduction in the NCC capacity coming from such consolidations, the fact is we also have the Shaheen project that is conducted by S-Oil in Ulsan complex. So overall, the net impact on the market is going to be neutral. So we do not believe that there is a significant pickup in the market expected. Having said that, there has been continuous capacity slowdown from last year into this year and also expected into next year. And also the restructuring is underway not only in Korea but also in Japan as well. So overall, we believe that we could expect some pickup in the utilization rate. And for the company, in terms of the impact, now the restructuring that is taking place at each complex, in the end, it is to improve the efficiency with consolidated operations. So as a result of this, the company is looking forward to about KRW 300 billion improvement in cash flow coming from each consolidation at the complex. And the end goal of these consolidation initiatives is to make sure that each JV that is going to be created out of each complex is going to be independent in its operations. Meaning that even when the market remains unfavorable, they will be able to maintain and continue to improve on their performance so as to be ready when the time comes that the market does improve. Now, in terms of the direct impact on the company's consolidated financial statements, it is true that the Daesan plant and the Yeosu plant would be deconsolidated from our financial statements. So in terms of our profit and income statements, that means that our profitability is going to improve even if the market remains unfavorable. And in terms of the breakdown by product, then it seems as if the basic oils that would be produced out of the naphtha from the NCC there, in terms of the basic oils, we believe that the export out of this complex could be reduced. So that has the potential of improving the market for the ethylene and propylene compared to 2 or 3 years ago. And we do believe that this kind of benefit could also potentially spread to the downstream as well.

[Interpreted] And this is VP of the Sales Marketing Division, Kim Yoon-Seok, responding to your third question. In the early 2026, the expected new capacity addition globally was 170 million tons -- sorry, 17 million tons. But at this time, globally, the net new capacity appears to be between 10 million to 11 million tons. So then, also including the capacity that has already been added, then it seems as if in 2027, the total shipment globally is going to be 11 million tons.

[Interpreted] The following question will be presented by Yu-Jin Jeon from iM Securities.

[Interpreted] I have 1, and that is about the utilization of the crackers in Indonesia and Malaysia. And also, after the consolidation is completed in Korea, then will there be any plans to also consolidate the crackers in Indonesia or Malaysia to improve the efficiency?

[Interpreted] Thank you for the question. This is VP of the Corporate Planning Division, Kwak Ki-seop. For the company, we tend to utilize our facilities flexibly depending on the market situation and the profitability. And this year, including our plant in Yeosu, our utilization rate on average was about 70%. In Malaysia, the utilization rate was 75%, Indonesia 70%. The utilization rate in Southeast Asia was more flexible because of the slower demand compared to the Northeast Asian market. So we will continue to think about how we can improve the efficiency overall, not just in Korea but also outside. And we will also make sure that we maintain and also adjust our operations flexibly in line with the market conditions.

[Interpreted] The following question will be presented by Jin Ho Lee from Mirae Asset Securities.

[Interpreted] I have 2. First is about the overall chemical industry. So in the IR slide, it says that the reflection of the increasing feedstock cost into the product price had been delayed, and that was one of the factors of the loss. And also, it was pointed out that the narrowing spread had the biggest impact. So then looking ahead to the fourth quarter, what are the developments in terms of the ASP? So what is the likelihood of the ASP increasing? And what is the company's expectation in terms of the recovery in the company's financial performance in the fourth quarter? And also, what would be the most important indicator or indicators that could also give us some signs about the likelihood of the financial performance improvement? And the second question is about Advanced Materials. And we see that the profitability has fallen sharply, and obviously the lagging effect or the exchange rate would have had some impact. But aside from such one-off events, what is also the likelihood of the improvement in the profitability for Advanced Materials in the fourth quarter as well as in 2027?