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Edited Transcript of 010060.KS earnings conference call or presentation 24-Jul-19 7:30am GMT

Q2 2019 OCI Co Ltd Earnings Call

Seoul Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of OCI Co Ltd earnings conference call or presentation Wednesday, July 24, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Taekjoong Kim

OCI Company Ltd - President, CEO & Representative Director

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Conference Call Participants

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* Scott Chui

Citigroup Inc, Research Division - Analyst

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Presentation

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Operator [1]

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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 2019 Second Quarter Earnings Results by OCI. (Operator Instructions)

Now we shall commence the presentation on the Fiscal Year 2019 Second Quarter Earnings Results by OCI.

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [2]

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Good afternoon. This is T.J. Kim, CEO of OCI. Thank you for joining our earnings for second quarter 2019. Let me start with the operating results. First, I will go over the consolidated results on Page 4.

Consolidated sales revenue in the second quarter was stable, generating KRW 654 billion compared with KRW 642 billion of the previous quarter. Polysilicon sales volume increased than the first quarter, but sales revenue in Petro Chemicals and Chemical Materials and Energy Solutions was lower. Consolidated operating growth narrowed from KRW 40 billion to KRW 20 billion this quarter. The operating income of the Energy Solution division decreased but the production cost decrease of polysilicon supported the profitability. EBITDA also improved by 59% quarter-over-quarter to KRW 59 billion from KRW 37 billion of the first quarter. For nonoperating items, DCRE -- the KRW 8.5 billion of provision over estimated liability related to the land reclamation for this city development project. Pre-tax loss and the net loss were KRW 42 billion and KRW 39 billion respectively, but the loss amount narrowed from the first quarter.

Let me explain each division -- business divisions' operating results, with more detail on next pages.

Please refer to the Page 5 for Basic Chemical division. Second quarter division of Basic Chemical improved by 15% to KRW 310 billion, and the operating loss narrowed to KRW 35 billion. EBITDA also returned back to KRW 21 billion. The selling price of Poly-Si compared by 11% quarter-over-quarter, mainly due to the uncertainty of Chinese policy. However, sales volume rose by 35%, increase -- increasing the business division sales revenue by 15% from the previous quarter. The depreciation of Korean won against the U.S. dollar also contributed in part to sales revenue increase. In addition, both Poly-Si compares showed the higher operating rate compared with the first quarter, which we did this to the first cost per unit.

We also completed the ramp-up of Malaysian PS1 plant earlier than expected, which also contributed the cost to reduction of operating plant. As a result, operating loss was reduced to KRW 35 billion from KRW 72 billion. In the third quarter, Korea plan to -- plans a regular maintenance during summer when electricity price normally rise.

Let's move on to Petro Chemicals & Carbon Materials on Page 6. Sales revenue for second quarter was KRW 291 billion, down 8%, while operating income was KRW 21 billion, up 26% from the previous quarter. Regular maintenance at Pohang and Gwangyang plant has led to a slight drop in the sales volume of key products. Especially for Pitch, some of these shipments will carry over to early Q3, resulting in the decline in the sales revenue of the division. After regular maintenance in the second quarter, production volume of our major products is expected to be normalized in the third quarter. Carbon Black selling price is likely to rise in the third quarter, reflecting the rising oil price increase in the second quarter. For your reference, Carbon Black price reflects changes in the oil price, with a record 2 or 3 months.

Please refer to Page 7, Energy Solution. Sales revenue and operating income of Energy Solution fell to KRW 93 billion and KRW 2 billion, respectively. OCI SE performed some maintenance, which resulted in reduced electricity sales. SMP also fell quarter-over-quarter, reflecting a drop in the oil price at the end of 2018. The decline in the -- in earning of OCI SE, which contribute a significant chunk portion of dividends negatively impacted the overall performance of the division. MSE's mobile business has improved on the favorable Solar PV market in the U.S. However, we showed a decreased operating income since there was no one-time income such as the anti-dumping tariff refund of KRW 5.9 billion in the first quarter. OCI power improved its earnings quarter-over-quarter, thanks to the increasing inverter sales volume of Kaco New -- Kaco Energy Korea business, which we acquired in the first quarter. In the third quarter, operating income of OCI SE is expected to be normalized after maintenance of the second quarter, which will reach restore the electricity sales. Also, MSE and OCI Power are expected to continue to show stable performance with favorite Solar PV market environments.

Let me explain the financial position on Page 8. The consolidated total assets were around -- above KRW 5.6 trillion as of the end of the second quarter of 2019, down about KRW 24 billion from the previous quarter. Cash and short-term financial asset fell by about KRW 42 billion quarter-over-quarter, mainly due to EBITDA to 3 months and the capital expenditure, including land purchase of DCRE. Inventories increased by KRW 25 billion. As we secured the inventory of polysilicon to maintain sales quantity during the third quarter in preparation for the Korean production due to -- or regular maintenance at Gunsan polysilicon plant. However, we keep maintaining our inventory at traditional level of 2 to 6 weeks. Decline in cash and weak performance relatively affected the indicator regarding financial soundness and profitability. Net debt to equity rose slightly to 22%, and the leverage ratio was 63%, but it still remains solid.

We are making efforts further to improve related indicators with the improved performance.

This is end of operating results section and the next page, Business Strategy and Update. We'll continuously manage our financial structure in preparation for any change in the business environment. Accordingly, KRW 150 billion worth of corporate bond were issued in June at a favorable interest rate, refinancing the existing KRW 100 billion of corporate bonds.

Total borrowing remains at KRW 1.5 trillion, up slightly from the end of 2018, but the ratio of total borrowings to capital has remain risen at a stable level of 45%. The current total debt is significantly lower than KRW 2.5 trillion in 2015, and the solar market was down cycle. We continue to monitor and manage our finances on the net and prepare for a business environment that may change any time.

The next page, Page 11, is the first step of Solar Demand for 2019. The solar market for this year is expected to show a typical downward in the first half and upward trend in the second half. We recently announced the PV subsidy program in China, the strong existing market, including Europe, the U.S. and the Japan, and the growing of new emerging markets, which is Vietnam and the UAE. The second half of the 2019 is expected to reach 75 gigawatts compared with about 50 gigawatts in the first half, as China completed its bid for the subsidized project as well as Grid parity dispense. This year's install, we really expected it to remain similar to that of last year. Chinese's solar policy trend will be explained in the more detail on the next page.

In Europe, the cost competitiveness due to abolition of Minimum Import Price has strengthened existing markets such as Germany and Spain's demand is largely increasing due to the abolition of sun tax. The United States also expect demand to be concentrated before pacing out this Investment Tax Credit late. Moreover, with a recent exemption of 25% of tariffs on bifacial models, the U.S. market for high efficiency products is expected to be stronger.

In other unfamiliar markets such as Vietnam, the UAE and the Egypt, there will be at least 1 gigawatt install this year. Therefore, as shown in the left graph, demand for polysilicon is expected to strengthen in the second half. And the polysilicon industry utilization is projected to grow price from about 50% in the first half to around 80% in the second half. We look forward to reducing the oversupply not only in polysilicon but also, across the solar value chain.

On Page 12, I will explain the recently compounded Chinese solar policy. As the recent Solar PV Policy, China's solar demand over this year is expected to be about 40 gigawatt, beating market expectations. Already come from the Grid Parity projects, expects about 5 gigawatts within this year. About 26 gigawatt from subsidy policy and around 8 gigawatts from other programs. In particular, among the announced subsidy policy, utilities and commercial and industrial projects, this subsidy for 23 gigawatts through the bidding process. These contracts must be completed within 2019 to receive the contracted subsidy. And if delayed, subsidy will be reduced by the RMB 0.01/kWh for each quarter] and can be postponed up 2 quarters, since subsidies will not be able after 2 quarters. The demand in China is expected to be strong in the second half of 2019. The foreign is relatively weak, part of existing portion of the business.

In the late April, we signed the MoU with POSCO Chemical. They extend our value-added products with competitive cost. We appreciate synergy between two companies as OCI process the technology to produce products and POSCO Chemical is able to provide the cost-competitive raw materials that is light there by products. At this present stage, we are conducting a feasibility study on Hydrogen Peroxide project. Near future, we plan to expand into the Soft Pitch business, used as refractory binders. And the Para-Dichloro Benzene business, used as an intermediate materials for the interest prospects.

Finally, I will explain the main business update on Page 14. OCIMSB invested in Chlor-Alkali facility in Malaysia plant site and there to start the commercial production in the third quarter of this year. Through this investment, we expected to provide a stable raw material as well as to reduce manufacturing cost for polysilicon by internalizing Chlorine and sodium hydroxide future need for the production of polysilicon. DCRE is currently in the process of negotiating a park scenario shift, with the preferred bidders. The negotiators -- negotiations are underway to be completed within the first quarter of 2019, and we plan to proceed Phase 1 as soon as the contract is signed. Price of the TDI and Benzene, which has been weakened until the first quarter, has stabilized with a slight increase.

Page 15, describes our basic business strategy that we have always pursued. By making reasonable investment to help existing business, such as the construction of machining facilities, by strategic alliance with POSCO Chemical for business growing, growth and added value by optimizing production scale in accordance with the market conditions and via financial stability in management, we will try to secure stable profit and cash flow in the future, and to best to become a growing company.

This concludes our presentation. Now we will move on the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will be given by Scott Chui from Citibank.

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Scott Chui, Citigroup Inc, Research Division - Analyst [2]

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I have some question on the polysilicon, Basic Chemical segment. It's mainly due -- mainly regarding the positive trend on production. So I see that on the margin for the Basic Chemical segment has improved quite a lot. And even during on the time line, cost and prices decline. So I just want to know how much cost reduction OCI has achieved from Q1 to Q2? And then is it mainly due to utilization of recovery? Or are there any other reasons for that? This is my first question.

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [3]

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Thank you for your question. I think your question about polysilicon cost reduction value, I think around 20% cost reduction previous quarter is the current occasion. Our utilization rate around 90%, Q2. Normally, I think Q3 or Q4 in Malaysia plant will be increased around up to 90% over. Okay?

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Scott Chui, Citigroup Inc, Research Division - Analyst [4]

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So you mean, the Malaysian plant will also ramp up to 90% in Q3?

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [5]

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Yes.

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Scott Chui, Citigroup Inc, Research Division - Analyst [6]

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All right. Okay. So -- okay. So what was the utilization for Malaysian plant in Q2?

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [7]

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Malaysian plant Q2 now also 90% of -- we already finished record condition end of Q1. So the -- at a -- and probably increase our operation running around Q2 really to the 90%. Okay?

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Scott Chui, Citigroup Inc, Research Division - Analyst [8]

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Okay. So now, Malaysian plant capacity is around 27,000 metric tons, and we can expect around 90% utilization.

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [9]

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Exactly, correct.

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Scott Chui, Citigroup Inc, Research Division - Analyst [10]

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Okay. All right. And can I also ask the polysilicon -- I mean, the revenue inside Basic Chemical segment, how much there is from polysilicon in Q2?

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [11]

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You mean the revenue base?

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Scott Chui, Citigroup Inc, Research Division - Analyst [12]

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Yes.

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [13]

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Our revenue base polysilicon percent is around the 60%. So you know the...

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Scott Chui, Citigroup Inc, Research Division - Analyst [14]

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6%?

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [15]

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Yes, 6% due to the polysilicon price day-by-day price down. So the recent percentage is going down also. Okay?

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Scott Chui, Citigroup Inc, Research Division - Analyst [16]

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Okay. And also about the margin of polysilicon. In Q2 is it -- for the EBITDA margin and operating margin, is it in -- still in negative? Or it's already positive?

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [17]

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Yes. Yes. Absolutely. Now currency change. The whole polysilicon maker -- now make money. So we -- our focus is to -- how to reduce operating income gap. But we still -- our EBITDA condition, it is better, it is legit to the almost BEP portion. Okay?

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Scott Chui, Citigroup Inc, Research Division - Analyst [18]

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Okay, sure. And my last question is around the mono rate percentage, you mentioned in the presentation background, the mono rate around 70% previously and that. So what is the target mono rate or of percentage in Q3 or beyond? And what is the maximum that we can achieve maybe in the future?

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Taekjoong Kim, OCI Company Ltd - President, CEO & Representative Director [19]

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You know now is mono price is better than merge size. So our target is over 70%. But currently, we maintain around 70% mono market. So fortunately, our quality is better than the other Chinese suppliers. So this is the key factor for the maintenance in mono market, over 70% market share of holdings. Okay?

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Scott Chui, Citigroup Inc, Research Division - Analyst [20]

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Okay.

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Operator [21]

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Currently, there are no participants with question. (Operator Instructions) As there are no further questions, we'll now end the Q&A session. For any additional inquiries, please contact our IR department.

This completes the fiscal year 2019 second quarter results by OCI. Thank you for your participation.