Ecopro Hn. Co., Ltd. (A383310) Earnings Call Transcript

Good morning and good evening. Thank you all for joining the conference call for the EcoPro earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on EcoPro's Second Quarter of Fiscal Year 2026 Earnings Results.

[Interpreted] Good morning and good afternoon. Thank you for taking the time out of your busy schedules to join our earnings conference call. Joining us today's earnings conference call are [ Janghwon Jo ], Head of Business Management; and [ Kyung-Hwan Oh ], Head of Finance and IR at EcoPro; and also [ Hyungshin Go ], Head of R&D; and [ Sungjun Lee ], Head of Business Management at EcoPro Materials; and Soon-Joo Kim, Director of Management Support; and Seung-Wook Kim, Team Leader of R&D Planning at EcoPro HN. Please note that the presented earnings results are subject to change based on the outcome of the upcoming audit by independent external auditors. We will now begin EcoPro's Q2 2026 earnings presentation.

[Interpreted] Good morning, good afternoon. I am [ Kyung-Hwan Oh ], Head of Finance and IR at EcoPro. In today's earnings call, I will briefly touch upon the portfolio optimization of the EcoPro Group, followed by a detailed explanation of the business performance of EcoPro's 3 listed subsidiaries. And afterwards, we will have a Q&A session. If you refer to Page 4 of the distributed earnings presentation, we are pursuing portfolio optimization along 3 key pillars: securing raw materials, expanding recycled resources and strengthening future businesses. Regarding raw material sourcing centered on nickel and lithium, we are proceeding with various investments and collaboration, and we expect these investments to significantly contribute to EcoPro Group's mid- to long-term profitability and cost competitiveness. The recently announced investment in the BNSI smelter led by BM is also being pursued beyond the simple purpose of nickel procurement and is aimed at portfolio optimization. EcoPro Group is also carrying out meaningful investments and securing technology to preempt leadership in the urban mining business, where explosive growth is expected going forward. To secure pretreatment technology and free procurement capabilities, which are core to the urban mining business, we have recently made an equity investment into a competitive partner company. And based on the trust built over many years, we are also actively pursuing technical cooperation with China's GEM, which has years of experience in the urban mining industry. In addition, with EcoPro BM focused on next-generation battery materials and EcoPro HN on semiconductor materials, we seek to continuously discover new growth drivers. And as a result, we will build a foundation for cost competitiveness and sustainable growth through resource sourcing and recycling businesses. And building on the foundation of such competitiveness, we intend to pursue a portfolio optimization strategy aimed at securing a continuous competitive advantage in the future battery and semiconductor material sectors. Next, on Page 6, I will explain the business performance of EcoPro HN. In Q2 of 2026, EcoPro HN's revenue reached KRW 51.5 billion, up 48% Q-o-Q and 32% Y-o-Y, and operating profit also reached KRW 5.8 billion, continuing the upward trend in quarterly operating profit. Centered on the chemical filter and greenhouse gas sectors, favorable semiconductor market conditions are being fully reflected into our performance and the expansion of sales for overseas LNG power plants is also contributing to stable earnings. With the acquisition of new clients and large-scale orders in the semiconductor sector, a key downstream industry for us, we expect EcoPro HN's business performance to continue to grow solidly in the future. Next, on Page 7, I will explain the financial position of EcoPro HN. As of end of first half of 2026, total assets reached KRW 455.8 billion, up 1.1% Q-o-Q. Total liabilities remained unchanged from the previous quarter at KRW 145.6 billion, and total equity recorded KRW 310.2 billion, up 1.7% Q-o-Q. During Q2 of 2026, there were no significant changes on the financial statement, and we continue to maintain a sound financial structure. Next, on Page 8, I will explain the business performance of EcoPro Materials. In Q2 of 2026, EcoPro Materials revenue recorded KRW 178.8 billion, an increase of 7% Q-o-Q and 129% Y-o-Y, while operating profit turned into loss with an operating loss of KRW 10.6 billion. Revenue continued its upward trend as precursor sales volume expanded, driven mainly by external customers. However, profitability improvement showed limited progress due to a temporary decline in Green Eco Nickel utilization rate caused by heavy rainfall in Indonesia. In the second half of the year, we expect product shipments for new North Korean -- North American customers, and we anticipate a favorable competitive environment for EcoPro Materials, driven by easing of competition following the repeal of China's metal discount policy and the gradual increase in Green Eco Nickel utilization rate. Next on Page 9, I will explain the financial position of EcoPro Materials. As of end of first half 2026, total assets reached KRW 2,926.8 billion, up 2.5% Q-o-Q. Total liabilities reached KRW 1,441.8 billion, up 5.4% Q-o-Q and total equity recorded KRW 1,485 billion, down 0.1% Q-o-Q, showing overall no significant changes compared to the previous quarter. As of the end of first half of 2026, the debt-to-equity ratio stands at around 97%. And although the leverage ratio increased slightly due to Green Eco Nickel's working capital borrowings, it remains at a stable level. Cash holdings recorded approximately KRW 88.2 billion, up 34% Q-o-Q. Next, on Page 10, I will explain the consolidated business performance of the holding company, EcoPro. In Q2 of 2026, EcoPro's consolidated revenue recorded KRW 820.8 billion, increasing slightly Q-o-Q, while operating profit recorded KRW 32.9 billion, down 42% Q-o-Q, but still maintaining a quarterly operating profit trend. Operating profit for catalytic materials and precursors contracted compared to the previous quarter and a temporary drop in the utilization rate of the Indonesian nickel smelter acted as a burden on the consolidated performance. On the other hand, operating profit in the lithium business showed strong performance due to the effect of ASP increase. In the second half of the year, we expect a recovery in the utilization rate of the Indonesian smelter and along with the continued strong performance of EcoPro agent's environmental business mentioned earlier, the lithium business is expected to maintain solid profitability. On Page 11, I will briefly explain the performance of EcoPro's in-house business and unlisted subsidiaries by segment. Revenue for the holding company's in-house smelter-related business shown in the blue on the left graph, continued a downward trend due to the lower utilization rate caused by natural disaster. However, we expect a gradual increase in the utilization rate in the second half of the year. In the case of the recycling business, revenue recorded an increase of 32% Q-o-Q, driven by the effect of metal prices, payable rates, the Korean won's depreciation, continuing the revenue growth trend following the previous quarter. For the lithium business, which accounts for the largest portion among unlisted subsidiaries, revenue decreased by approximately 11% Q-o-Q. However, its contribution to the operating profit increased as lithium price increase were fully reflected into the selling prices. The lithium business is expected to achieve stable revenue and profit in the second half of the year as well. Next on Page 12, I will explain the consolidated financial position. As of the end of first half of 2026, total assets recorded KRW 11,374.5 billion, up 2.7% Q-o-Q. Total liabilities recorded KRW 6,269.2 billion, up 3.8% Q-o-Q. And total equity recorded KRW 5,105.3 billion, up 1.4% Q-o-Q. There were no significant changes in the financial structure on the consolidated financial statements as the leverage ratios of the individual companies are being maintained at a solid level of around 100%. As mentioned in the previous earnings call, the PRS contract which took place in the fourth quarter of last year has now mostly been settled as EcoPro's BM stock price in Q2. And as a result, cash and cash equivalents on a consolidated basis reached KRW 1.3 trillion, up about 44% compared to Q1. This concludes our earnings presentation, and please refer to the presentation materials for details in the appendix. This concludes the earnings presentation, and we will now cover our business outlook for Q3 and the second half of 2026.

[Interpreted] Hello, I am [ Janghwon Jo ], Head of Business Management at EcoPro. I will first briefly review the Q2 performance at EcoPro Holding Company and discuss the business outlook for Q3. Consolidated revenue in Q2 increased slightly Q-o-Q, but the scale of the operating profit slightly declined. The primary factor behind this profit decline was an unexpected natural disaster at our Indonesian smelter, which significantly contributes to our profitability. Due to torrential rain, an accident occurred where soil collapsed into the tailings dam, the disposal site for the smelting byproducts, leading to a temporary shutdown of the plant operation. This inevitably caused a short-term drop in the company-wide profit margins. Currently, accident cleanup and corrective measures have been completed, and we are in the process of recovering the utilization rate. Meanwhile, the Lithium business division showed strong performance. Although sales volume decreased Q-o-Q, we are achieving significant profit growth as the lithium price increase was fully reflected in the selling price starting from Q2. Regarding future outlook, as mentioned earlier, as the Indonesian smelter enters full-scale ramp-up and facility operations normalize, we expect company-wide performance to enter a gradual recovery trajectory starting from Q3. From Q4, as the remaining IMIP Smelters, including Green Eco Nickel, are expected to reach full operation, we also project additional performance upside. In the case of secondary battery material market, a somewhat challenging external environment is expected to persist in the short term. However, we plan to gradually improve performance by acquiring new clients and securing new projects. In addition, the Environmental business division has also entered a phase of full-scale earnings recovery, keeping in pace with the semiconductor company's CapEx investments. Lastly, I will discuss the rights offering decision by our core subsidiary, EcoPro BM and the holding company subscription participation. This capital raising by BM is not simply aimed at securing working capital or repayment of debt. The majority of BM's use of proceeds will be utilized to acquire equity in the BNSI Nickel Smelter in Indonesia and for mass production investment in the Hungarian entity. This is a strategic investment aimed at completing the upstream value chain that the group has continuously pursued and preemptively responding to the regional supply chain regulations in Europe. We are confident that this investment will serve as a key driver to dramatically boost the profitability of the group as a whole. Accordingly, we not only plan to participate 100% in our shareholders' allocation, but also intend to oversubscribe by up to 120% in the event of forfeited shares. In summary, all EcoPro affiliates, including the holding company, will achieve qualitative growth starting from Q3 as a key turning point and secure medium- to long-term business viability through new investment into smelters. Thank you.

[Interpreted] Hello. I am [ Sungjun Lee ], Head of Business Management at EcoPro Materials. I will discuss the business outlook for EcoPro Materials for the second half of 2026. Unlike our outlook at the beginning of this year, challenging conditions persist due to changes in the external environment, including the Strait of Hormuz and unfavorable downstream market conditions. At EcoPro Materials, we are making every effort to improve our performance and are currently establishing a solid foundation to anticipate future performance recovery. First, I will discuss the precursor business. Although we expect to face a challenging environment in the second half, we expect to secure new clients in response to the demand for non-Chinese sourcing driven by PSE regulations. For some customers, we have entered the final stages for mass production and expect to initiate sales in the near future. In particular, downstream industries in the ternary secondary battery market are diversifying recently, expanding beyond EVs to ESS, UPS, BBU, robotics, autonomous taxis and aerospace. Notably, we are actively responding to battery demand related to autonomous taxis, aerospace and robotics, and we expect precursor sales for these new growth industries to commence soon. Based on this, we anticipate that our future customer portfolio will become even more robust. In addition, the intensity of competition within the precursor industry is easing. Chinese precursor companies have been receiving a 9% VAT rebate when exporting Chinese-made precursors. However, the abolition of the VAT rebate starting from April this year has caused increased cost burden on the Chinese companies. As a result, competitive intensity within the precursor industry is easing, and we expect mid- to long-term profitability improvements. These changes in the competitive environment are creating an opportunity to expand our sales structure. Previously, it was focused on the North American market, and we're looking to expand into the European market. The European EV market is a relatively steadily growing market, which we project will significantly expand our TAM, the total addressable market. We are currently conducting discussions with the partners regarding supply volumes for Europe and aim to finalize sales in the near future. Next, I will cover the smelting business. Green Eco Nickel, a subsidiary of EcoPro Materials experienced operational disruptions due to a tailings dam incident in February of this year. However, its utilization rate has been gradually increasing since Q2. We expect to recover a significant portion of the utilization rate in Q3, and the target goal is to transition to full operation starting from Q4. This year, despite the challenging environment, EcoPro Material is moving forward focused on 2 main pillars: securing new clients and structural profitability improvement. We will strive to demonstrate positive results in the near future. Thank you.

[Interpreted] Hello. I am Soon-joo Kim, Head of Management Support at EcoPro HN. I will discuss the business outlook for EcoPro HN for the second half of 2026. In Q2, our Environmental Solutions business achieved stable performance across all business divisions. Notably, sales to the semiconductor downstream market gained full momentum and backed by solid performance in the clean room Chemical filter division, revenue growth in greenhouse gas reduction solutions expanded significantly. Also in the second half, by maintaining the expanding sales trend in the semiconductor downstream market and centering around the Environmental Plant division, we project that solid earnings growth will continue. In terms of order backlog, greenhouse gas reduction solutions account for approximately 60% of the order backlog at the end of Q2. Furthermore, starting with the RCS supply contract worth approximately KRW 33 billion disclosed at the end of July, the scope of the greenhouse gas reduction solutions business, which had previously centered around domestic semiconductor companies is expected to expand globally, driving future revenue growth. Additionally, the particulate matter reduction Solutions division will focus further on expanding into downstream industries such as combined cycle power generation, cement, waste processing, accelerating earnings growth in the second half. Regarding the large-scale orders previously announced during the prior earnings releases, the time line is experiencing slight delays compared to our initial expectations. This is merely a short-term adjustment arising from the process of fine-tuning specific details and does not impact the direction of our annual business plan. We will make every effort to finalize the contract as fast as possible so that it serves as a key driver of a steep increase in order backlog, aligned with the recovery trend of the downstream market. Looking at the performance by the business division, the clean room filter Chemical division is expected to achieve its target for the second half based on stable supply volumes as the upward trend in semiconductor production volume is maintained. In terms of technical achievements, our ESG-linked product, the MCS Media replaceable filter was exclusively adopted across all processes at a client semiconductor manufacturing facility, proving our product competitiveness. The greenhouse gas reduction division is expected to play a pivotal role in driving earnings growth in the second half by adding new clients and large-scale orders while maintaining continuous order wins based on trust with major clients. In the particulate matter reduction division, while continuously expanding sales activities for SCR NOx systems targeting LNG power generation, we will pursue full-scale expansion and market entry based on the foundation prepared so far in line with the tightened air pollutant emission regulations in the cement manufacturing industry. Lastly, I will discuss the status of our new businesses. The [ Chungcheong campus ] is currently investing in the honeycomb catalyst facility for next-generation catalyst production, aiming to begin equipment installation within this month and achieve mass production by the end of the year. The Ochang campus plans to complete the pilot scale production expansion for semiconductor back-end process materials within Q3 with sample submissions for homogeneity evaluation scheduled for Q4. Regarding the new secondary battery business, we are preparing for mass production of select electrolyte additive models targeting the North American market in Q4. In addition, we will communicate the progress on the other new business initiatives to the market and shareholders as they materialize. Thank you.

[Interpreted] This concludes our explanation on the business outlook, and we will now move on to the Q&A session. Before taking questions live, we will first address the pre-submitted questions and then proceed with the live Q&A. We will first start with the first pre-submitted question. You asked about the holding company's financial capacity to participate in EcoPro BM's rights offering and the possibility of additional capital raising by the holding company. EcoPro will address this question.

[Interpreted] I am [ Kyung-Hwan Oh ], Head of Finance and IR at EcoPro. I will address your pre-submitted question regarding the holding company's participation in BM's rights offering. We understand that there are concerns recently raised in part of the market regarding the holding company's financial burden following the subsidiary's rights offering and large-scale investment announcements. However, to state the conclusion first, we are fully capable of covering this with at the current company's holding company's current liquidity position, and there are no plans for additional capital raising at the holding company level. To clarify this, I will once again summarize the future capital requirement breakdown for our major investment projects. First, regarding the investment in the BNSI Smelter in Indonesia, the total amount to be invested by the holding company in this project is approximately USD 490 million, which is approximately KRW 735 billion based on the current exchange rate levels. Of this amount, we have already completed payments of approximately [KRW 277.5] billion to date, and the previously paid amount is scheduled to be contributed in kind after the establishment of an SPV in the future. The key point to note is that the participation by financial investors is planned for a remaining investment amount. Therefore, the actual remaining balance to be borne by the holding company going forward will be significantly lower than the total investment amount and deducting the previously paid amount of KRW 277.5 billion. Next, I will explain the funds required for participating in EcoPro BM's rights offering. As disclosed, our subscription participation amount was announced at approximately KRW 520 billion based on the estimated issue price of KRW 121,000. However, this is maximum figure calculated under the most conservative assumption in the event of forfeited shares, we would receive a full allocation of up to 120% over subscription. Therefore, considering fluctuations in the final issue price to determine later, the actual subscription allocation ratio and the actual size of our capital injection is highly likely to fall below the disclosed KRW 520 billion level. Lastly, I will speak on the holding company's overall liquidity position and additional financing plans. While the apparent financial burden may seem significant due to a series of investment plans, the holding company holds approximately KRW 600 billion in cash and cash equivalents on a separate basis as of Q2. Future investment capital requirements can be executed smoothly by flexibly utilizing our cash on hand, internally generated cash flows and the appropriate external borrowings. As there are no issues regarding our cash balance, I would like to clearly clarify that we are not considering any additional capital raising plans at the moment, such as rights offering that involve shareholder dilution at the holding company level. Thank you.