LG Chem Ltd

KRX:051910

Earnings Call Transcript

[Hyun-suk Yoon, executive]

Good afternoon. We will now start LG Chem's First Quarter 2024 Earnings Conference Call. This is Hyun-suk Yoon, Head of IR at LG Chem. Thank you for taking interest in LG Chem and joining this call despite your very busy schedules.

We will begin with a brief update on 2024 Q1 earnings performance followed by the CFO's presentation on the earnings highlight. After that, we will close with a Q&A session.

The presentation will be interpreted simultaneously, while the Q&A will be interpreted consecutively. The materials presented during this conference call can be viewed by those with the web access. It is also available for download from our corporate website.

Let's begin today's call with the introduction of the management team. We have with us our CFO, Dong Seok Cha; [ Junho Lee ], in-charge of company's Business Planning; [ Cheol Ho Young ] from Petrochemicals; Yong Suk Lee from Advanced Materials business and [ Soonshin Cho ] from Life Sciences.

Let's begin with the business performance. On Page 3, consolidated Q1 sales and P&L. First quarter sales was down Q-over-Q, reporting KRW 11.609 trillion. Operating profit was KRW 265 billion with OP margin at 2.3%.

Next on Page 4, consolidated financial status. As of end of Q1 2024, total asset was around KRW 82 trillion, liabilities KRW 38.9 trillion and shareholders' equity at KRW 43.2 trillion. Debt ratio was 90.2%, with the borrowing ratio marginally up year-to-date on increase in debt from new issuance of corporate bonds in March.

Next, earnings by business division. Page 5 is Petrochemical division. Q1 2024 sales for Petrochem business was KRW 4.455 trillion and operating loss continuing at KRW 31 billion, but the size of the loss narrowed Q-over-Q.

Despite raw material cost pressures arising out of geopolitical risks from the Middle East, on positive lagging effects from naphtha and cost cutting efforts, we were able to bring down losses.

Next, Advanced Materials. Q1 '24 Advanced Materials sales was up 20% Q-over-Q, reporting KRW 1.583 trillion, while operating profit was KRW 142 billion.

Battery materials whilst in Q4 saw shipment declines on inventory cuts at customers displayed improvements in both revenue and profit driven by sizable shipment increases in the first quarter. Also, with growing share of value added products from other businesses, top line and bottom line, both improved at the division level.

Next is Life Science. Q1 sales from Life Science division was KRW 285 billion and operating profit came in at KRW 3 billion. On the back of steady sales of flagship products such as diabetes and growth hormone products, sales inched up marginally year-over-year, but an uptrend in R&D spend following global clinical trials, profitability, posted somewhat of a dip.

Next is Farm Hannong. Q1 Farm Hannong sales was KRW 246 billion and operating profit was at KRW 35 billion. On fertilizer, ASP declined, sales fell year-over-year, while growth in overseas sales and ASP increase from crop protection products drove profitability improvements.

Lastly, on Energy Solutions, although details have been shared during separate earnings presentation last week on the 25th, we will nevertheless present on the highlights. In Q1, Energy Solutions sales were KRW 6.129 trillion, operating profit was KRW 157 billion and OP margin reported 2.6%.

Despite increases in cylindrical sales to strategic customers, subdued downstream demand and decline in metal prices led to Q-over-Q decline in sales and profitability.

On this note, we will conclude the earnings update and I will invite CFO Dong Seok Cha to present the company's outlook going forward.

[Dong Seok Cha, executive]

Good afternoon. I am Dong Seok Cha, CFO of LG Chem. Thank you very much for taking interest in the company's earnings and for joining us despite your busy schedules.

First, to begin with a review of the first quarter results, Petrochemical business saw difficult industry backdrop continue with declines in metal prices and sluggish growth from the global EV market. Notwithstanding such headwinds, corporate wide profitability improved versus last quarter, underpinned by the company's crises management capabilities.

Moving on to the outlook going forward, due to the geopolitical risk in the Middle East, higher-for-longer interest rate and concerns around slowing EV demand growth, we project difficult operational backdrop to continue.

But we plan to enhance core competitiveness of our business through portfolio rebalancing, pivoting on 3 main new engines for growth which we've worked on over the years, whilst continuing on with optimization of operational activities. Driven by these efforts, we expect to see gradual improvement of business performance as we move from one quarter to the next.

For the Petrochem business, with the production ramp up of POE, IPA and other high margin products and commencement of North America's ABS compound plant operation in the second quarter, we will be able to broaden regional diversification and achieve a turnaround in profit in the second quarter.

For the sustainability business, mass production will start this quarter for PBAT, which is a biodegradable plastic and we have decided to enter the eco-friendly bio-nylon business in collaboration together with CJ, nurturing our business one step at a time.

On the battery materials business, we accept that there are quite a bit of concern around recent slowdown in EV demand growth. However, in North America, which is the company's core market, demand growth for electronic vehicles is quite steep as our customers are launching new models and increasing their shipment, sustaining a solid growth trajectory.

We are keeping a close watch over market volatility from many different aspects and will respond accordingly through a disciplined control over inventory and capacity expansion schedules.

Lastly, for Life Science, we will be booking portions of advance payment as sales and revenue in the second quarter results for orphan drug for obesity which we licensed out early this year. We will continue to explore strategic partnership opportunities in the domain of metabolic diseases and revamp pipeline strategy that include new anti-cancer drugs so as to place a bigger momentum behind global clinical trial development.

Esteemed shareholders and investors, as uncertainties deepen against the macro backdrop, we will have to endure through periods of difficulties. But even in the midst of such hardship, if we can work on developing new growth engine, LG Chem will most certainly be a company that will continue to grow and generate better earnings.

We ask for your support and encouragement. Thank you.

[Hyun-suk Yoon, executive]

Next we will move on to the Q&A. [Operator Instructions].

[Operator]

The first question is from the line of Hyunryul Cho from Samsung Securities.

[Hyunryul Cho, analyst]

Yes, this is Hyunryul Cho from Samsung, and maybe I can ask you 2 questions. I have 2 questions. One about the Advanced Materials business and one about Petrochemicals business.

First ask the question that I have about the overall Advanced Materials business. If you look at the cathodes that you have shipped out in the first quarter, it does seem to be that there has been a significant increase. So the question that I would like to ask is that, for the year-over-year guidance that you provided of 40%, would there be any change in that?

In addition, if we talk about Q2 and also the second half of the year, what would be your expectations in terms of the ASP, sales volume and overall profitability?

The second question that I would like to ask is about your Petrochemicals business. Right now we do see that in China there is a new policy in place to replace old with new.

So for the Petrochemicals business, when do you think that there will be a turnaround in this business? In addition to that, we also see that in the demand side, are there any specific product types in which you would actually see a change in demand taking place?

And added to that, the CFO did mention during his opening remarks that there are going to be new high premium products in which you will have capacity additions. So how would that actually contribute to your profits?

[Unknown Executive]

So maybe I can address your question about the cathodes guidance. So first of all, if we talk about the guidance, of course, at the beginning of the year, we did share with you an expectation that we would be able to have a Y-over-Y increase of around 40% versus last year, and on that point there are no changes.

It is true that we actually see a slowdown coming in, in the overall EV market in terms of the growth levels. However, if you look at our biggest market, which will be the U.S. market, we do have a strong portfolio of customers in that area. And in addition to that, we have a portfolio that represents a wide variety of OEM customers.

So in actuality, a specific change in the overall demand at a single point would not be -- or in terms of possibility, we don't believe would lead to a significant decrease in our overall demand volume.

To talk about the second half of the year, we do believe that we would have to monitor the trends in the second half of the year in terms of the trends within the overall EV market and also in light of the customer or client stock levels that we have. So we do think that there could be some changes in the shipment according to that situation and again, we are monitoring the situation closely.

In the first quarter, we did see a significant increase in terms of volume versus the fourth quarter of last year, during which a lot of our clients went through an inventory adjustment period. So as a result, volume grew by around 60%.

Going into the second quarter, there will be positive factors that would come into play. So for example, that would be the number 2, on the OPM side, and also because of the low metal price, we do think that some of our customers will take use of the opportunity and try to restock so that will lead to also demand. So on a Q-o-Q basis, we do believe that the growth will be around 20% as a result of that in terms of volume.

However, that have been said, in terms of prices, again, we do think that the overall moderation in prices is something that we will see continue into the second quarter. So as a result, ASP, if we look at the overall situation, is probably going to be affected by around 15%.

However, we do think that as a result of that in -- versus the first quarter in terms of the overall revenue, the second quarter in growth would probably -- or increase would be limited. However, if we talk about the situation in terms of profitability, again, the negative effect that we see from the inventory side will be limited or decreased.

And in addition to that, we do think that there will be a better second half as a result of that. So versus the first -- sorry, not second quarter than that. So as a result, we do think that the second quarter will present a slightly better profitability level than the first quarter.

So maybe to address your second question with regards to our expectations for the Petrochemical business. Going into the second quarter, it will actually be a seasonally high season for the Petrochemical business as a whole. And added to that specifically for China, there will be a transfer or transition from old to new in terms of electronic goods and also cars. So as a result of that, we do think that, that will have a positive influence or effect on the ABS market.

For PVCs, we do think that because of the sluggish overall or recession that is taking place in the construction economy in China and added to that on the PV side of the general oversupply situation, that overall demand expectations are not high. However, because the real estate market is going into a deregulation and there are other factors that are taking place, as a positive momentum, we do think that there could be a recovery that could be enjoyed.

For the new premium products that we have, for example, for specifically the solar panel POEs or the C3, IPA products that are used for semiconductors, we do think that -- for that point and added to that and also the North American area and also in India, there is the ABS compounds that will go into full production or full ramp up. We do think that at all will expand our overall premium product business. And we do think that, that leads to expectations that we may turn into the [ black ] for the Q2.

In addition to that, we do think that the contribution from these premium products is something that will continue and become stronger in the second half of the year and also next year.

[Operator]

The next question is from the line of Sonny Lee from Macquarie.

[Sunwoo Lee, analyst]

There are 2 questions that I would like to ask you. As the overall demand in the EV market is becoming slower, if you look at some companies in terms of cell and also overall parts that are necessary, investment has become a bit more conservative in terms of the general stance.

So the question that I would like to ask you is that, for your cathodes business is there any change in the CapEx plans that you have or investment plans?

The second question that I actually would like to ask you is about your overall company level CapEx and also funding plans. So for the CapEx for this year, is there any change there? And in terms of the priority for areas that you would invest in, would there be changes that are taking place there?

In addition, in the way that you would fund your CapEx between raising debt, maybe selling some of your non-core assets and also utilizing the LGES stake that you have, what type of options would you be actually looking at to utilize?

And specifically about the LGES share that you have or ownership, is there any change in the strategic approach that you have towards that stake?

[Unknown Executive]

So to address your first question, if we look at the CapEx plans that we have and have established, of course, it is based upon the overall volume and the contracts that we have outstanding with our customers. So as a result of that, we do believe that it is reflecting a very conservative stance. And as a result of that, over the mid-to-long term, we don't have any plans that we believe require changes.

However, that has been said, we do think that there can be some adjustments taking place on the demand side related to PHEV, also hybrid and also because of the current market chasms that we see taking place. So as a result of that, if we look at the customer level in terms of the per year demand that they have, we actually believe that there could be some adjustments there.

So in terms of new capacity additions and for the timing of executing those plans, we do think that there will be some flexibility that we will have to exercise.

[Unknown Executive]

So maybe I can take the second question about our CapEx plans and also the way that we would fund that CapEx going forward. So first of all, let's talk about our CapEx plans for the year. In the beginning of the year, we did share with you that for this year, our overall CapEx plan would be around KRW 4 trillion.

However, if we look at the current market backdrop, also the overall changes that we see and how the demand is growing, and also the uncertainties that continue to persist on the macroeconomic side, we do think that we need to be a bit more cautious in the way that we execute our investments going forward. So as much as possible, the overall stance for this year is to manage CapEx, so that it does not exceed the KRW 4 trillion level that we have budgeted for the year.

In terms of priority of where to invest, I think that what we have continued to communicate and what we have always said is that, we would focus on in terms of priority the 3 main growth areas that we have identified. So on that stance, there is no change. However, from an overall perspective or a big picture perspective, I do think that for the investments that are going to take place and the timing of investments for the battery materials business, we do think that on the OEM side and on our battery producer side, there can be some changes in their CapEx plans.

So as those timings are adjusted, then I do think that there may be some areas in which we would have to adjust accordingly to how the developments take place.

To talk about funding, I think that the basic principle here is that if you look at our operating cash flow generation capabilities versus what we had in the past, it is true that right now it represents a much lower level. So we will be raising some debt to finance our overall needs.

In March, we did do a KRW 1 trillion bond issuance and that led -- that preemptively secured some of the funding that we required. In addition to that, as like we had sold our IT film business and also our diagnosis business, if there are non-core assets that we have identified, we will continue to sell those assets accordingly.

In terms of our internal cash flow generation capabilities to maximize that as much as possible, we will continue to cut and try to achieve cost savings and also optimize our working capital, so that we can secure a sound financial position.

I think that the last point that you asked about was with our intentions if we have any change in stance towards how we use LGES and the stake that we have. I think that there we have always said that the LGES ownership is an asset that we do believe that we can utilize. However, in terms of any detailed plans or in terms of the strategy, as of now, there is no change there.

[Operator]

The next question is from the line of Jin-Myung Lee from Shinhan Securities.

[Jin-Myung Lee, analyst]

There are 2 questions that I would like to ask you. First is with regards to your rare obesity treatment, there was some advanced payments that you recognized in the second quarter. How much would that be? And in terms of your pipeline strategy going forward, if you could elaborate a bit about that, that would be appreciated.

Secondly, with regards to revamping your Petrochemical business, for the NCC asset that you have, would there be a possible sale or maybe JV that you would be reviewing? And if there is anything that is in process right now or in terms of the overall future operating direction that you can share with us, that would be appreciated.

[Unknown Executive]

So yes, maybe I can address the first question from the Life Sciences business, which was with regards to the overall advance payment that took place as we licensed out our rare obesity drug and also what the pipeline strategy going forward would be.

First of all, if we look at the license out agreement that we had for the rare obesity drug that was actually signed in January of this year. If we look at the overall advance payment plus milestone payment in total, that would represent USD 305 million. So in addition to that, as sales is generated, of course, there will be a separate royalty that we will be able to enjoy.

Of the overall advance payment, KRW 100 million, which is the advance payment of the total amount, according to our overall accounting policy, part of that KRW 100 million advance payment, so specifically KRW 60 million is what was recognized as profits during the second quarter and that has a positive overall effect on our second quarter performance.

For the remaining KRW 40 million in advance payment that is left over, that will be reflected into next year's performance. And in addition to that, for the development and also commercialization milestone payments, this is something that we will be receiving consecutively as the various projects make more progress.

So for the Life Sciences businesses, we are going to continue build out our pipeline based upon our own developments and also introducing various treatments in the core areas that we are looking at. So as a result of the characteristics of the projects that we have ongoing, we will decide whether it would be better to develop in-house or have partnerships in terms of the investment efficiency and also increasing the possibility of success and have a flexible manner in terms of how we operate the overall situation.

So to talk about your second question, which was revamping our overall Petrochemicals business. Right now nothing has been determined yet. However, right now the way that we're looking at the situation is that, rather than an outright disposal, we do think that in order to strengthen our overall downstream competitiveness, we would like to explore different opportunities that we have such as having a JV to be able to cut our costs and also secure more competitiveness in sourcing the overall material that we need.

[Operator]

The next question is from the line of Parsley RH Ong from JPMorgan.

[Rui Hua Ong, analyst]

Congratulations on the good result. Very encouraging to see improvements in Advanced Materials and chemical earnings. So I have 2 questions. First question is on Korea Value-up. LG Chem's holdco discount has widened a lot. Could you share what are LG Chem's plans to increase shareholder value related to the Value-up program recently announced by the government?

Second question is, the FEOC clause will be applied to critical minerals starting from 1st of January, 2025. So what is LG Chem's preparation status and where do you think are the major bottlenecks for the industry? What benefits do you think LG Chem can get if you meet the requirements? And if you have any examples of IRA compliant versus non-compliant battery component or critical minerals pricing that will be appreciated as well.

[Unknown Executive]

So to address your first question about our intentions about under the Value-up Program, I think that we have also always said as a basic stance that we have is that, we do believe that fundamentally the best way to enhance our overall value would be through growth. So we actually believe that over the longer term that, that is the best way and the best approach to having sustainable growth and continuous enhancement in shareholder value.

So for the company, for the time being, we do think that the focus of how we will use our resources in terms of human resources and also in terms of the financial capabilities that we have to try to grow and invest into are our top 3 growth drivers for the future. And in addition to that, we have already announced what our plans are for the next 3 years in terms of dividend payout.

So for the time being, as we do concentrate and focus on this period of time in which investments will be needed, we do think that, that will be the focus for now. But as time passes we do think that there is growth that we will be able to achieve in this area and that will enable us to be a company that has a overall firm value that would be one step higher than what we have as of the current time and that at the end of the day, we do think, I believe -- we believe that, that actually contributes to enhancing the overall shareholder value.

However, that have been said, we do understand that within the first half of this year, the financial authorities will be coming out with more detailed guidelines around the Corporate Value-up Program that they are looking at. So, in light with that announcement, if there are initiatives that we can also take on, then we will try to review that as much as possible.

So to address your second question about the overall materials that we are requiring and what the overall processes in terms of having qualified materials and parts that we need. So I think that first to talk about precursors. With regards to the JV that we have with KEMCO, that is going ahead according to schedule, so we do think that we will be in a position to go into production as of the end of the year. And in addition to that, we are also discussing with other parties in trying to secure the overall supply that we need in terms of qualifiable precursors for the overall needs that we want to satisfy.

However, that having said, we do think that because 50% of the nickel that would be regarded as qualifiable nickel is actually located in Indonesia, we would have to see how the overall developments between the Indonesia and U.S. take place with regards to negotiation about the minerals agreement. So if that does come into play, we do think that, that would be something that would be very important. So we will continue to monitor that situation on the precursor side.

And then if we talk about the lithium side, for lithium, of course, in order to source lithium that is qualified under the IRA, we are right now in the process of signing purchase agreements with various parties. In addition to that, we are trying to use lithium concentrate that is produced by U.S. FTA partner countries and also reviewing the possibility of investing into conversion plans accordingly that would utilize this type of concentrate.

However, in terms of the actual timing of when we would make the investment, we do think that a critical point there is with regards to when we actually see the demand. And once we do see that, we think that shortening the overall licensing time that is required for the plan is something that would be very important.

So for the IRA metal pricing levels, of course for the purchase price for qualified metal, there is like a sulfate premium that is also required. And in addition to that, prices are determined upon how negotiations go with the suppliers.

So the benefits that we're able to reap would depend upon the overall increase in demand that we see in terms of overall cathodes. But that's not only driven by the overall metals, but also in terms of whether there can be other qualified parts such as separators that would be secured, because that determines the overall level of tax credits that one can receive at the end of the day.

So these all are different factors all need to be taken into consideration. So what we are trying to do is to make sure that there is not a shortage of qualifiable metal that we can utilize to be prepared for such a situation, so that we can maximize the benefits as much as possible.

[Hyun-suk Yoon, executive]

So with this, we would like to wrap up the conference call for the Q1 2024 earnings performance of LG Chem.

If you do have any follow-up questions or additional questions, please do not hesitate to contact the IR team. We would like to once again thank everyone who has been on this call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]