S-Oil Corporation (A010950) Earnings Call Transcript

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the fiscal year 2020 third quarter earning results by S-OIL. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 third quarter earning results by S-OIL.

Good morning, everyone. Welcome to S-OIL's third quarter earnings conference call. Thank you all for joining us today. I am Cho Yong-kuk, the Treasurer of S-OIL Corporation. I hope that all of you are staying safe and healthy during this extraordinary time. Participating in today's call with me will be IR team leader, Mr. Ko Gwang-cheol and other IR team members. Before Mr. Ko presents our third quarter's financial results, I would like to start with a brief review on business environment and our performance. The company's third quarter results showed that the deep loss from crude price collapse triggered by the COVID-19 pandemic was close to ending. Amid the COVID-19 still racing around the world, third quarter earnings continued to improve on the back of the gradual recovery of oil product demand following the second quarter. But the third quarter earnings was limited due to following factors: first, the company's production facilities were not fully operational due to the planned maintenance and unexpected impact from typhoon during the third quarter; next, the resurgence of COVID-19 most seriously hampered the demand recovery of middle distillates, including jet fuel, to which the company is highly exposed in product mix. The fourth quarter's business would be difficult to escape from the impact of the resurging COVID-19 despite rising demand for heating in the winter season. However, if COVID-19 would become under control any time, we strongly believe that the market conditions will reverse dramatically. The demand for jet fuel is expected to jump up most strongly and first with explosive increase of travel and this will drive a rapid increase of refining margin and significant improvement of the company's earnings. Next, I would like to emphasize that we are doing our best to overcome unprecedented crisis situation caused by the COVID-19 pandemic. We have implemented various countermeasures to respond against the COVID-19 crisis: first, we implemented strong cost control activities such as prevention of nonessential operating expenses and CapEx and voluntary salary cut of officers; second, we set up a company-wide profit increase initiative, including improvement in product yield and energy efficiency in the plants; and last, we strengthened the financial liquidity and credit management. Meanwhile, the company is also making more efforts to further expand into petrochemical business to ensure sustainable growth. In addition, the company is investing in start-ups in various fields to prepare for new business opportunities in the future. Again, thank you all for joining us today and ask for your interest and support for the company's long and challenging journey for a bright future. Closing my presentation here, I would like to hand over to Mr. Ko. Mr. Ko, please go ahead.

Thank you, Mr. Cho, and I add my welcome to all of you joining today. Before starting, I'd like to draw your attention to our cautionary statement. Third quarter financial result are provisional, and thus, the results are subject to change after external auditor's review. Also, during the course of this conference call, we will be making forward-looking statements that is based on our current expectations, assumptions, estimates and projections. We caution you not to place undue reliance on any forward-looking statements, which may involve risks and uncertainties. Now I will start today's presentation with financial results on Slide 4. We delivered KRW 3.9 trillion in revenue, 13% quarter-over-quarter increase as the heightened sales prices more than offset decrease in sales volume. So sales prices rose 25% quarter-on-quarter on higher crude price while sales volume reduced around 10% due to turnaround of one crude distillate unit for a period of less than 1 month. Operating income was minus KRW 9.3 billion, still in red. But the loss amount consecutively diminished quarter-on-quarter. Sales were slow but continuous demand recovery despite the company's [ planned ] maintenance in the refinery in third quarter. Inventory-related gains of KRW 133 billion accrued on higher crude price, while refinery margin remained as [ poor ] as the second quarter since demand recovery was not strong enough to absorb huge product inventory. Opportunity loss from maintenance in the third quarter was estimated at more than KRW 90 billion in total. Below operating income line, the company posted KRW 36 billion, including FX gain of KRW 35 billion from won appreciation against the U.S. dollar. As a result, the bottom line, third quarter pretax income amounted to profit for the first time this year, posting KRW 28 billion. Moving on to the next slide, financial status. Quarter-end cash balance was around KRW 1.5 trillion. It reduced by KRW 1 trillion from second quarter, mainly due to reduction of short-term borrowings and increase of working capital from higher crude price. But the cash balance is far more than that of last year-end, which we believe is enough to financially ensure the stable and smooth operation of the company. Cash balance slightly increased by less than KRW 0.3 trillion with net debt-to-equity ratio rising to 110%. Meanwhile, profitability and cash flow improved. ROE and ROCE bottomed out, recording minus 20% and minus 13%, respectively, while EBITDA registered KRW 163 billion, turning positive in 3 quarters. Now turning to third quarter performance by business segment on Slide 6. In refining business, sales revenue expanded 15% quarter-on-quarter while its operating income improved by KRW 301 billion from the previous quarter, posting minus KRW 58 billion. [ Amid ] sustained demand recovery, the operating loss reduced for 2 quarters in a row. Inventory-related gain was KRW 90 billion. Petrochemical sector supported operating loss of KRW 48 billion in third quarter while posting increase in sales revenue by 9% quarter-on-quarter due to higher [ realized ] price. PX and benzene spreads decreased in the quarter pressured by continued poor demand. In addition, internally, the company's PP&PO plant run rate dropped below 50% due to planned maintenance in July and on planned shutdown of #2 RFCC impacted by typhoon in September. Lube business posted KRW 97 billion of operating income, slightly decreased by about KRW 13 billion due partially to increase of previous stock prices while steadily maintaining high OP margin ratio of over 35%. Turning to the capital expenditure and refinery operation. Through to third quarter, capital expenditure was KRW 305 billion, increasing KRW 165 billion in the third quarter. Given the uncertainties in the business environment, the company has minimized CapEx by strictly controlling the expenditure on any items than those for enhancing operational availability and safety and environmental management. Looking at maintenance. There were more turnarounds across the refinery than second quarter. Following June, we continued to do maintenance of #2 RFCC and PP&PO plants until the end of July and from late August to #1 CDU and Group II base oil plant maintenance were carried out over 1 month. Also planned maintenance for #2 RFCC impacted by typhoon was done in September in order to mechanically clean pipelines and equipment in some units. With the third quarter maintenance, all the planned turnaround for this year was completed and all plants will be fully operational throughout fourth quarter. The wide maintenance affected the major unit run rate across the refinery directly or indirectly. CDU operation rate dropped to 90% while PP&PO unit and lube plant's operation rate dropped to 48% and 82%, respectively. These plants were purposely operated below full capacity at 76% on average, considering low PX spread and weak gas demand. Next, let me explain third quarter market environment and fourth quarter outlook by each business at Slide 8. Looking at refining business first. Singapore refining compressed margin remained low due to slow demand recovery by resurgence of coronavirus, posting minus $2 per barrel on average. Demand for refined products continued to recover. However, the spread of corona 19 in the third quarter again impeded global connectivities and decelerated the pace of demand recovery, in particular, demand for middle distillates, including jet fuel. According to estimate via Global Energy Research firm, in the third quarter, global gasoline demand recovered to 94% compared to the same period last year while demand for middle distillate, including jet fuel, reached to 86%, especially jet fuel demand, which stood to mere 55% of last year. Fourth quarter market will see some advance in refining margin on the back of seasonal demand increase for middle distillate. But rebound would be limited by the second wave of COVID-19 and reinforced lockdowns across the globe. In the next few years, if the COVID-19 is controlled as market expects, market conditions would improve significantly. Strong bounce of jet fuel consumption would drive demand recovery, while [indiscernible] increase would be restricted by the increase in the close of these refineries. Moving on to aromatics and petrochemical sectors. PX and benzene spreads declined for 2 quarters in a row. Poor demand continued while inventory remained high in spite of the sustained operation rate cut in the region. PX spread dipped to $131 per ton on average, while benzene spread tumbled to $30 per ton. Looking forward in the fourth quarter, PX spread is expected to improve but slightly. Although start-up new PTA plants in China and slow recovery in downstream would increase demand, high inventory and oversupply in current market will limit the expansion of the spread whereas benzene spread would bottom out as the downstream margins are improving, while supply would be decreased by aromatic plant operation cut in the region. Turning to olefin market on next slide. PP spread over naphtha was decent, moving around by $1,020 per ton, similarly like the second quarter as stable demand in the packaging and fiber sectors offset increased supply, restart of regional plants after maintenance. PO spread expanded remarkably on strong demand from automotive and mattress industry amid supply tightness by scheduled maintenance. In the fourth quarter, PP spread is focused to be underpinned at third quarter level by sustained demand from automotive, consumers electronics and packaging sector with Chinese economy recovery path. While PO spread will stay strong on robust polyol demand amid continued tight supply due to maintenance of major plants -- PO plants in the region. Lastly, turning to lube base market on Slide 11. Lube base oil spread narrowed quarter-on-quarter due to rise of feedstock prices, although market demand recovery -- recovered gradually. In the fourth quarter, the current healthy spread would be supported by continuously increasing demand in high-quality products in the region and tightened the supply by maintenance of major plants. With that, I'd like to conclude my prepared presentation. Thank you for listening. Now we would be happy to take your questions.

[Operator Instructions] The first question will be given by Baek Young-chan from KB Securities.

[Interpreted ] This is Young-chan Baek from KB Securities, and thank you for giving me an opportunity to ask questions. I have 3 questions. And first question is about inventory impact during the third quarter. So for each business segment, please give us details of the inventory impact during the third quarter? And second question is about the expense, onetime expenses, spent for -- spent due to typhoons and also T&I during the third quarter. And third question is about your new petrochemical project. So I would like to know the schedule and also the size of the project and the expected -- the spending on the project.

[Interpreted] I would like to answer the first question. For the inventory impact, in total, we have KRW 130 billion of inventory impact. For refining, we have KRW 90 billion. For lube, we have KRW 40 billion of inventory impact. For the second question, the opportunity loss was caused by the typhoons and T&I during the third quarter. In order to answer the question for the opportunity loss for T&I, in total, we have about KRW 70 billion of opportunity loss caused by planned turnaround. We had turnaround for #1 CDU #2 RFCC and #1 lube. And for typhoon, we had to shut down #2 RFCC. Because of the shutdown, we -- the opportunity loss was about KRW 20 billion. The maintenance costs are divided by the cost, which will be spent by phase and also it will be categorized as capital expenditure. And onetime spending will be about KRW 30 billion -- KRW 13 billion. And for your third question about the new petrochemical project, we do not have new news for this project yet. We have the same answer we have given for the second quarter. Due to the coronavirus, there is a restriction in the movement of engineers. Therefore, we have delayed the work of engineering. So therefore, we believe that the final decision will be made at the end of next year or at the beginning of 2022. However, we would like to utilize this delayed period as a time to come up with some ideas to reduce investment expenses. So now we are gathering many ideas on how we can reduce investment expenses on the project.

The following question is by Nikhil Bhandari from Goldman Sachs.

I got 2 questions. Firstly, how should we think about the refining and petrochemical operating rates in the fourth quarter? Now given the margins are still weak for refining and products like para-xylene and benzene, wouldn't it make sense to keep operating rates low? As it seems like without inventory gain, these businesses are not generating much positive earnings even in the third quarter. And probably looking at the run rate of October, it may still be a challenging environment. So again, how should we think about the operating rates going ahead? And would you cut runs to -- in this environment. The second question is, you've clearly cut CapEx this year quite significantly even below the depreciation. How should we think about the CapEx next year in a scenario that your refining margins recovery remains slow? Do you think you will again run your CapEx bill depreciation into next year if the refining margin recovery is more muted?

[Interpreted] So thank you for your question. I would like to answer your first question. For run rate plan for the fourth quarter, because refining margin is now recovering at a full speed, so therefore -- however, the refining margins contribution -- margin contribution for the company has been positive. So therefore, we would like to maintain the maximum level of run rate for refining sector. However, for petrochemical spread, we have -- since the spread is not recovering yet, so therefore, we would like to make -- we had the run rate of the petrochemical sector at 70% -- or mid-70% during the third quarter. However, the -- also, we expect that the trend will be continued for the fourth quarter. So therefore, we don't expect the run rate of petrochemical will not go to the maximum level. We would like to maintain at about 80% level of run rate for petrochemical. I would like to give more details of our petrochemical sector. So our business is divided into aromatics and olefin operations. And for olefin, we have PP&PO. And as you have heard, PX spread is not recovering and it's not on the positive side. So therefore, the operation rate for PX will be about 80%. However, we are witnessing the upward trend of PP&PO. Especially PO market is very positive at this moment, so therefore, now we are overrunning the PO part of our company. So we are -- we initially produced 300,000 tons. However, now we have increased the production of PO to 340,000 tons. And during the fourth quarter, we believe that we are going to enjoy some of the increasing spread of PP&PO. For the second question about CapEx plan for next year, I believe that uncertainties are abound for next year as well and we are not seeing great earnings this year. Therefore, we have reduced our planned CapEx this year. And next year as well, we'll just focus on committing our CapEx on only safety and environment and maintenance-related items. And for other items, we still have a plan to curb down the spending.

The following question is by Jae Song Kyoung from Hanwha Financial Investments.

[Interpreted] Thank you for giving me an opportunity to ask questions. My name is Jae Song Kyoung from Hanwha Financial Investments. My first question is, again, about the capacity expansion of petrochemical business. However, when I heard news about Saudi Aramco, the mother company of S-OIL, I see that Saudi Aramco is delaying or canceling their capacity expansion plans. And also, in addition, I have seen that you have net borrowings, which is equivalent to KRW 6 trillion. So given the fact, I would like to know if your plan can be implemented as you have planned. And if you are doing so, what will be your financial plan? My second question is about PO. I see that PO prices and spreads are increasing. I would like to know the background, what's behind the increase of PO price increase? Is it because of the increasing demand or is it about like supply issues?

[Interpreted] I would like to answer your first question about the second petrochemical project. I know that Saudi Aramco has delayed and postponed their projects, which have been planned for this year and for next year. However, our project is closely related to the strategy of Saudi Aramco and also the investment will be committed from 2023. So because we are actually starting the project from 2023, our project was not a subject of delaying or canceling. So I believe that our project can be implemented as planned. And for financing strategies, as you have mentioned, we are now -- we have negative financial status. We have increasing borrowings and also we are witnessing losses from our business. However, I believe that we can move forward to have better coming years for the next 2 years and we would like to utilize many -- a variety of project financing methodologies. And also, we would like to utilize some borrowings from banks as well. And as we mentioned, we are now making utmost efforts to reduce the project cost. So therefore, we see that we can reduce the investment for this project dramatically in the future. And also, we would like to emphasize that our company has sound financial capacity. And -- however, we will be impacted by the earnings of our businesses, but we see that within 1 or 2 years, we will be able to deal with the financing for this project without any issues. And for your second question regarding PO, the spread is widening because the demand and supply are -- supply factors are intertwining at the same time. In terms of demand, the derivative PO, which is polyol, there is high demand for polyol because demand for polyol is used for auto parts and of the home appliances and mattresses. And as you know, the demand is significantly increasing in the market. And in terms of supply, there are some supply glitches in the Asian region because of the T&Is are now being implemented by major refineries in Asia.