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Edited Transcript of 010950.KS earnings conference call or presentation 27-Apr-20 7:00am GMT

Q1 2020 S-Oil Corp Earnings Call (English, Korean)

Seoul Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of S-Oil Corp earnings conference call or presentation Monday, April 27, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cho Yong-kuk

S-OIL Corporation - Treasurer

* Min-Ho Lee

S-OIL Corporation - VP & Head of Global Business

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Conference Call Participants

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* Peg Yumcun

KB Securities - Analyst

* Pac Si Yung

Nomura Securities - Analyst

* Oscar Yi

Citigroup - Analyst

* Nikea Van Dyke

Goldman Sachs - Analyst

* J.C. Ho

BNP Paribas Asset Management - Analyst

* Dennis Yu

HSBC - Analyst

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Presentation

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Cho Yong-kuk, S-OIL Corporation - Treasurer [1]

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Good afternoon, everyone. Welcome to our first quarter 2020 earnings conference call. I would like to thank you all for joining us today. I am Cho Yong-kuk, the Treasurer of S-OIL Corporation. I am glad to be here today to communicate with you through the earnings conference call. Your continued support will be highly appreciated.

I (inaudible) Mr. (inaudible) and other (inaudible) members are with me here. Before Mr. [Go] presents our first-quarter financial results, I would like to start with a brief review on business environment and other performance.

The first quarter of 2020 was the worst period of time for the Company due to outbreak of COVID-19. In the first quarter the Company posted a significant operating deficit due to a messy inventory-related [growth] from the [blunt] in crude oil prices and lingering weakness of refining margin.

COVID-19 pandemic [parked] unprecedented collapse of global demand for petroleum and refined product, especially transport fuel such as jet and gasoline. Not only the refining side but also (inaudible) and olefin downstream businesses were affected by the spread of COVID-19.

In spite of the depressed downstream demand most of the petrochemical product spread improved thanks to falling feedstock prices. Similarly, (inaudible) business spread benefited from price drops in [normal periods] amid plunging crude oil prices.

The business environment is expected to show gradual improvement from the second quarter upon the reopening of global economies. Although volatility in the market has sharply escalated and it is hard to predict how long this will last. Various efforts against COVID-19, including aggressive stimulus measures of major countries will bring global economy back on track.

The final margin and [peer] spread would bottom out on the back of the supply/demand balance as the ease in COVID-19 lockdown restrictions encourages recovery of the global way of consumption and [non-cuts] and maintenance shutdowns of refiners in the region limit supply.

Most importantly, we have already secured enough liquidity to pursue the Company's cable operation. To win through current adverse market situation we are prepared and we put our best effort on our financial soundness. As a countermeasure against uncertain financial markets, the Company issued KRW680 billion of corporate bond in early March and thus already secured funds for the payment of all long-term debt maturing in the rest of this year.

Moreover, the Company increased trade financing for stable operations and plans to reduce investment in operating expenses as much as possible by putting off non-urgent investment and inhibiting non-essential expenditures. Looking back, (inaudible) have always provided us with opportunities to strengthen our competitiveness and we believe that the current down-cycle will be another chance to us.

Again, thank you all for joining us today and keeping interest in our Company. I would like to conclude my presentation here. From now on Mr. [Ho] will take you through a presentation on the first-quarter financial results and second-quarter (inaudible) outlook. Mr. Ho, please.

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [2]

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Thank you, Mr. Cho, and welcome all of you to today's conference call. Before I get started I want to draw your attention to our cautionary statement. The Company's 2021 first-quarter financial results (inaudible) and thus, the results are subject to change according to independent auditor's review.

Also, during the course of this conference call we will make forward-looking statements that are based on our current expectations, assumptions, estimates and projections. We caution you not to place undue reliance on any forward-looking statement which may involve risks and uncertainties.

Now I'll start with financial result on slide 4. We delivered KRW5.2 trillion in revenue in first quarter representing around a 20% quarter-over-quarter reduction. Sales prices declined 13.4% quarter-on-quarter with [included] price drop while sales volume decreased 7.3%. Operating income was minus KRW1.7 trillion, decreased by KRW1.16 trillion from the previous quarter.

The (inaudible) prices collapsed by more than $30 per barrel, which brought us raw inventory-related loss of KRW721 billion. Also, Singapore refining complex margin seasonality [covered] to [approximate] level remaining around zero.

On the finance market side concerns over COVID-19 impact drove down our strengths which caused an FX loss of KRW141 billion below operating income line. As a result the Company registered for pretax income of minus KRW1.209 trillion in the quarter.

Moving on to the next slide to our financial status. Cash holdings increased to about KRW1.6 trillion from KRW0.6 trillion a quarter ago despite first quarter being low. To prepare again for financial market uncertainty under the caronavirus crisis, the Company only issued corporate debenture of KRW680 billion and increased trade financing to more than user level in the first quarter.

As a result the Company has secured enough liquidity to repay all long-term debt maturing this year and to keep stable operations, although, net of increase to KRW6.8 million with net debt to equity ratio rising to 122%. Meanwhile (inaudible) sent a quarterly profitability and cash flow both into deeply negative territory. ROE and ROCE recorded minus 58% and minus 35% respectively. EBITDA was minus KRW1.65 trillion.

Now turning to the first-quarter performance by business segment on slide 6. Sales revenue in the refining business declined 22% quarter-on-quarter while operating income was minus KRW1.190 trillion. (Inaudible) refining margin market, the Seaport included prices was the main culprit for the huge loss.

Inventory [level] loss in the refining business is estimated at KRW670 billion. On the other hand, non-refining operating income increased due to a price decline of feedstocks such as naphtha and high sulfur fuel oil.

Petrochemical sector's operating income expanded to [KRW60 billion] from KRW21 billion in the previous quarter because the spread of petrochemical products improved (inaudible) quarter-on-quarter. The business posted KRW116 billion of operating income, increased by KRW20 billion from the previous quarter while operating margin ratio improved to 27% from 24% a quarter ago.

Turning to the capital expenditure (inaudible) operation. Recently the Company decided to cut annual CapEx budget for this year by KRW163 billion as a way to reduce cash outflow. The (inaudible) CapEx is about KRW490 billion. Non-(inaudible) items, including minor construction and marketing rate expenditure, were postponed or put on hold. For the first quarter a total of KRW75 billion was spent and most of it was used for upgrade and maintenance of our plants.

Looking at maintenance plan, the Company will carry out (inaudible) in second quarter and third quarter. Number 2 RFCC and PP/PO (inaudible) will be off-line from June to July [PRS]. Number 1 CDU and Group 2 base oil plant be shut down for over one month (inaudible).

During the first quarter, the Company's major plants were stable and ultimately operated near capacity with the exception of CDU. CDU run rate was inevitably lowered for a couple of weeks in February when SPM, an offshore facility (inaudible) of crude oil was repaired. All the operating plants' utilization rates increased quarter-on-quarter, especially PP/PO plants were operating at heightened (inaudible), 94% for the combined to capture the improved economics.

Let me explain first-quarter market environment and second-quarter outlook by each business on slide 8. To begin with the refining business in the first quarter, Singapore refining [complex] margin (inaudible) quarter-on-quarter moving at around zero due to (inaudible) demand destruction from the global wide coronavirus outbreak. In the second quarter we think refining margin will gradually bottom out.

Many countries are expected to cautiously start to leave the lockdown and reopen businesses whereas supply will be restrained due to continued (inaudible) cut and shut down for turnaround divided planning.

Moving on to aromatics in the petro chemical sectors. In the first quarter, demand side worsened due to spread of the coronavirus, but the decline in the price of naphtha, (inaudible) for aromatics supported the spreads of aromatic products. PX spread moved around the previous quarter (inaudible) forcing $249 per ton on average while benzene spread became wider quarter-on-quarter to $174 per ton due to distant import demand from the US.

Looking ahead, second-quarter PX spread will improve. As many of these plants will be shut down for maintenance in the region, whereas benzene spread will be pressured by high inventory in China.

Turning to olefin market in the next slide. In the first quarter PP spread over naphtha was flat quarter-on-quarter since the cheap naphtha price in spite of worsening downstream demand. Whereas the PO spread (inaudible) as supply was heightened by major plant maintenance and naphtha price plunges. Second-quarter PP spread is forecast to improve as demand for anti-coronavirus materials will be stronger while PO spread to be pressured by downstream weakness from coronavirus.

Lastly, turning to lube base oil market on slide 11. First-quarter lube base oil spread continued to expand as (inaudible) for fuel oil price has declined further while product prices were relatively flat quarter-on-quarter. Second quarter the spread is expected to decline since product prices will move down to reflect the lower feedstock price amid weak demand.

With that I would like to conclude my prepared presentation. Thank you for listening. Now we would be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). [Peg Yumcun], KB Securities.

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Peg Yumcun, KB Securities - Analyst [2]

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(Spoken in foreign language).

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [3]

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(Spoken in foreign language).

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Peg Yumcun, KB Securities - Analyst [4]

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(Interpreted) I have three questions and the first question is about the inventory loss which is about KRW721 billion and it is calculated by the lower of cost method. I would like to have more explanation about this.

And the second question is about the FX impact on the operating income. So, I would like to have more detailed explanation about the operating income loss caused by the FX.

And the last question would be about the run rate of CDU and RFCC. In the second quarter I believe that there will be a T&I for these upgraded facilities. And however, as demand decreases the sale will be decreased. So, therefore I would like to know the run rate of CDU and RFCC.

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [5]

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(Interpreted) To answer your first question, for the inventory impact, the lower cost method and also FICO method are both applied to the inventory impact. However, for the inventory impact the crude oil price crunch impact will be effectively applied.

And for your second question, we showed that our operating income was positively impacted by the FX changes. We have about like plus KRW55 billion of FX impact.

And the third question is -- in order to answer your first question, I believe you said that there will be a decrease in demand and it will cause a decrease in sales. However, we believe that there has been decrease in demand. However, our oil plants are now being operated at a full percentage.

So, at the moment we have no plans to decrease our run rate of our plants. And also there will be T&I for some of the plants that we have. So, therefore there can be some adjustment in the operating rate due to T&I. However, we have no specific plan to adjust our run rate due to margin and demand decrease.

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Unidentified Company Representative [6]

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(Interpreted) We would like to add some more explanation for number three question. At the moment we are operating our CDU 100%, and also we are planning to operate the CDU for 100% for the second quarter. And however, there will be some T&I at the end of August. It will be less than a month and it will not impact -- it will not have a huge impact on our operation.

And for number 2, RFCC, we will have two months of T&I from June to July. And for during the time we will have about two months of (inaudible) for number 2 RFCC. And for number 2 RFCC we produce about 76,000 barrels per day and for number 1 RFCC there will be no T&I planned at the moment.

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Operator [7]

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[Pac Si Yung], Nomura Securities.

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Pac Si Yung, Nomura Securities - Analyst [8]

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(Interpreted) I have two questions and for the first question is the loss generated by the refining business in the first quarter. It is equivalent to KRW1.2 trillion. However, from my memory, in 2014 in the fourth quarter the operating loss was about KRW240 billion.

I'm not sure about the inventory impact at the time, but was there any big difference in the inventory impact or inventory valuation? And also, I believe that the oil prices have been dropped by a similar portion. It dropped about $35 this time and that time that was about $30. And compared to that period the margin seems very similar. However, I would like to know why this time the loss was bigger than those times.

And number two question, I believe there has been a T&I shut down for RFCC last year. And now you're conducting another T&I for RFCC. Is that for a commercial reason or is that because of a mechanical switch?

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [9]

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(Interpreted) So, for your first question, in 2014 during the fourth quarter there had been a price plunge of the crude. However, your question was why do we have bigger loss than those time. In 2014, unfortunately, we don't have the accurate documents -- accurate data from 2014 at the moment. However, from my knowledge, I believe that the spread in 2014 was way better than this time. So, if you give us a separate question we will get back to you with the detailed information.

To answer your second question, your question was about the RFCC T&I and is it for commercial or mechanical reasons. However, we have commented about this question last year and also during the previous conference call. And when we are initially operating the RFCC plant, in order to have smooth operation of the new plant we had a plan to conduct the T&I divided into two.

So, first will be conducted in 2019 and then later we will conduct the remaining T&I during the 2020. So, it is not because of the economics of the plant. It is previously planned and it is to have better technical and also we will have (inaudible) better opportunities by having this T&I within this year in the second term. So, this is the end of our answer. So, we would like to take the next question.

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Operator [10]

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[Oscar Yi], Citigroup.

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Oscar Yi, Citigroup - Analyst [11]

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Thank you for the presentation. My first question is -- given the recent plunge in the jet crack, is S-OIL able to adjust your product slate a little bit by increasing the diesel yield and reducing the jet? And if so, how much are you able to do that?

The second question is -- given you're still running your refinery at 100% CDU, and I've noticed that in the past few weeks the cash discount for diesel and jet was very wide, could I just consult with you roughly how much of your volume for these two products is sold by contract versus the spot -- I mean term contract versus spot?

A final question is could I check with you roughly -- what is the latest inventory that you have both on the crude and product side? Is it currently at a very high level? Thank you.

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [12]

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(Interpreted) I would like to answer your first question. And the first question was about the adjustment of yield. So, we are now trying to optimize our production by adjusting the yield of diesel and naphtha. However, the portion of the adjustment is not significant. So therefore, even though we make an adjustment, the portion is not that meaningful.

So, in order to answer your second question we would like to get back to you later after checking our detailed document.

To answer your third question, our inventory level as of the end of first quarter, it is up to KRW1.5 million. So, it is not because we could not sell our product, it's because of the shipment was carried over to the next month because of the shipment and lodging facilities -- concentration of the shipment and loading. This is the end of our answers, so we would like to take the next question.

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Operator [13]

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[Nikea Van Dyke], Goldman Sachs.

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Nikea Van Dyke, Goldman Sachs - Analyst [14]

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Yes, thank you. I have two questions. Firstly, you mentioned the refinery runs will be close to 100% in the second quarter. Given margins are down, and I know (inaudible) crude discounts are down -- or have increased as well. On balance is S-OIL currently making cash profit in the month of April? And is that the expectation even in this lead demand environment to make a cash profit in the second quarter of the year?

My second question is around the [FID] of the new refinery upgrade program which was supposed to happen early next year. Considering the gearing which has gone up further, and also likely the cash flow generation in 2020, are you still looking to go ahead with a new project in terms of FID next year or will you look to delay the expansion project? Thank you.

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [15]

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(Interpreted) To answer your first question, as you have mentioned, currently the market situation is not very favorable to the Company. The margin in April is not that good, so therefore it is hard for us to make profitable results from this month's margin. However, as the market announced, the OSP was down for the shipment of April and May. So therefore, I believe that our margin will be improving in May and June.

So therefore, we hope that our performance in the second quarter will be much better than the first quarter. And I do believe that we can reach to the breakeven point or even a little bit higher. That is how we are expecting for the near future.

And in order to answer your second question you are questioning about the deferment of the next project. Currently we are conducting the feasibility study for this project, so therefore, according to the results, our final decision will be made during next year. However, we need to reflect our financial capability when making a decision on this project.

So therefore, it's too early to say that we can delay this project or not, so the decision will be made during next year. And also when we are considering to implementing this project, we have to consider the performance of 2020 and the financial status of the Company and the possibility of improvement. And also therefore we would like to make a decision early or later next year. So, this is the end of our answers, so we would like to take the next question.

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Operator [16]

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[J. C. Ho], BNP Paribas Asset Management.

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J.C. Ho, BNP Paribas Asset Management - Analyst [17]

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(Interpreted) I have two questions. In order to go for the first question I will please refer to page 8 on your presentation. So, it is showing about the capacity expansion -- global capacity expansion during this year. However, it shows that as the refining margin is going down there will be a delay in capacity expansion. So, please give us more details about the delays of the capacity expansion globally.

And the second question is about the demand and markets growth in 2021, it's on the same page. And it shows that in 2021 there will be growth and there will be improvement in the market. So, when the demand increases I believe that there will be certain products that can be benefitting from the increasing demand. So, could you tell us what are the specific products that you have in mind that can benefit from increasing demand?

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [18]

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(Interpreted) In order to answer your first question, we have been expecting there will be capacity expansion of 1.1 million barrels per day. However, and up to now there have been no official announcement of the shutdown or lowering the capacity of the production.

And as we have mentioned, there will be 1.1 billion barrels per day of capacity expansion. You have mentioned about the delay in the capacity expansion. However, there will be no delay in the capacity expansion because most of them already completed the construction.

However, there will be some deferment in ramping up process because -- ramping up process. And also, if you look at our chart on the page, there will be less capacity expansion during next year. It will be about 300,000 barrels per day. So, because the market is not very favorable for refiners there will be deferment in those expansion capacity during next year.

You have questions about the products that will be impacted by the COVID-19 -- after the COVID-19. So, in order to answer your question I would like to talk about this first. In the case of the product, the products that are mostly hit will benefit the most when the COVID-19 pandemic is over. So, in the case of the product I can say that jet and gasoline Bunker-C and diesel, they will be benefiting the most from the end of the COVID-19 situation.

However, we have to consider the inventory level of those products when we talk about the products -- which product will benefit the most. So, in the case of the middle distillate product such as diesel, it will benefit the most because we have not much inventory compared to last year or two years ago. However, in the case of gasoline and fuel we have higher inventory compared to the inventory level of last year and also two years ago.

So, by looking at the spread of the products we believe that middle distillate product such as diesel will benefit the most. And also until we use up all the inventory of gasoline and Bunker-C, I believe that the recovery will not affect -- will not affect for those products. So, this is the end of our answers, we would like to take another question.

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Operator [19]

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Currently there are no participant questions. (Operator Instructions). [Dennis Yu], HSBC.

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Dennis Yu, HSBC - Analyst [20]

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(Interpreted) I have a minor question. This is about the destination of your importing product. According to your documents the importing product -- import -- export volume heading to Taiwan has been significantly decreased. Are there any specific reasons for this?

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [21]

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(Interpreted) During the fourth quarter of last year there has been a lot of increase in exports -- export volume to Taiwan. It's because of the shutdown of the plants in Taiwan. We took the opportunity to improve our export volume heading to Taiwan. And I believe that their plants have been normalized in the first quarter of this year. So, this is the end of our questions, we would like to take the next question.

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Operator [22]

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Currently there are no participants. (Operator Instructions).

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Min-Ho Lee, S-OIL Corporation - VP & Head of Global Business [23]

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(Interpreted) Since we did not have further questions we would like to wrap up today's conference. However, before we end I would like to add one comment. During the first quarter we have recorded the KRW1 trillion of operating loss. However, it is because of the inventory lost due to the plunging crude prices and also FIFO and lagging effect were the main reasons of the operating losses that were created.

However, at the moment our contribution margin is in the positive territory. Even though the market margin is at zero we are still in the positive margin area. And therefore we do not have any plans for adjustment of running rate of our plants or we have no issues of sales. So therefore, we would like to have our operation rate at 100% or above in order to maximize our profit.

And I believe that the players who have no competitiveness will reduce their production in order to deal with the market situation. In that case we believe that our spread of refining margin will be improving in the second quarter. So, we hope that we will have better performance in the coming quarter. Thank you.

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Editor [24]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.