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Edited Transcript of 051910.KS earnings conference call or presentation 30-Jan-19 7:00am GMT

Q4 2018 LG Chem Ltd Earnings Call

Seoul Feb 6, 2019 (Thomson StreetEvents) -- Edited Transcript of LG Chem Ltd earnings conference call or presentation Wednesday, January 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hak Cheol Shin

LG Chem, Ltd. - Vice Chairman & CEO

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Conference Call Participants

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* Eung-Ju Lee

Shinhan Investment Corp., Research Division - Team Head of Energy and Chemicals

* Rui Hua Ong

JP Morgan Chase & Co, Research Division - Analyst

* Young-chan Baek

KB Securities Co., Ltd., Research Division - Analyst

* Yusik Hwang

NH Investment & Securities Co., Ltd., Research Division - Chemical and Refinery Analyst

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon. I would like to, first, thank you for taking interest in LG Chem's 2018 Q4 Earnings Conference call. I am [Han Jung-Hoon], Head of IR at LG Chem, and we would now start LG Chem's Earnings Conference Call.

We will begin with the introduction of company executives on this call, followed by the 2018 Q4 earnings performance, 2019 business plan and the Q&A session. The earnings -- the presentation will be interpreted simultaneously, while the Q&A will be interpreted consecutively.

Let's begin today's call with the introduction of the management team. We have COO, [Ho-Young Jung]; Treasurer, [Mau-Sung Lee]; [Fung Gong-Swong] from Basic Materials & Chemicals; [Kim-Wan Shung] from Energy Solutions; (inaudible) from I&E Materials; and [Wu-Sung Kim] from Advanced Materials.

We will now present LG Chem's 2018 annual and Q4 earnings performance, followed by our business plan for 2019.

First, 2018 full year earnings performance. In 2018, LG Chem posted record annual sales of KRW 20,183,000,000,000, a 10% increase year-on-year. The battery business grew by 40% on year, driven by volume growth of automotive batteries and new markets for cylindrical batteries. In addition, sales in Basic Materials and I&E business also grew to increase the annual sales by KRW 2.5 trillion compared to the previous year.

Operating income decreased by 23% year-on-year to KRW 2,246.1 billion. Weak demand and market conditions due to uncertainties in the global economy led to the drop in the Basic Materials operating income. However, the battery business grew, posting a meaningful profit.

I&E business posted operating loss as selling prices fell due to slowdown in the LCD panel market and possibility of the decline year-on-year in Life Sciences and Farm Hannong due to greater R&D investments and new product launches.

Next, 2018 Q4 earnings performance. Q4 sales were KRW 7,342.7 billion, a 14.2% increase on year and a 1.5% increase on quarter. Operating profit was KRW 289.6 billion, and operating margin was 3.9%. Q4 EBITDA was KRW 684 billion, and EBITDA to sales was 9.3%. Pretax income was KRW 157.5 billion, and net income was KRW 126.6 billion.

Next, our financial position as of 2018 year-end. As of the end of 2018, our assets stood at KRW 28,944.1 billion, a 15.6% increase from the end of 2017. Liabilities was KRW 11,622,000,000,000, an increase of 33.5% on year. And borrowings was [KRW 5,321 billion]. Capital increased by 6% to [KRW 17,322 billion]. Debt ratio was 67.1%, an increase of 13.8 percentage points on year due to increased borrowings to fund investments. And borrowings to equity was 16%.

Next, divisional results and outlook. First, Basic Materials & Chemicals. 2018 Q4 sales was KRW 4,356.8 billion, and operating profit was KRW 242 billion. Profitability fell due to the slowdown in demand from the prolonged trade disputes and the offpeak season and the lagging effect from raw material prices as well as the scheduled maintenance of the Yeosu NCC. Meanwhile, due to the price of product in PVC and improved customer mix in Acrylate/SAP, these businesses maintained robust profitability. While uncertainties in the demand cycle, [medical] issues persist, inventory in the market is low. And as raw material prices stabilize, 2019 profitability is expected to gradually improve. LG Chem, backed by greater capacity for the high value-added products, comes to further improve its product mix and strengthen its leading position within the high value-added market.

Next, Energy Solutions. In 2018 Q4, Energy Solutions sales was KRW 2,076.9 billion due to increased shipment of automotive batteries from new EV model launches and robust sales from new business such as small cylindrical batteries. With operating profit from automotive battery business, Energy Solutions' operating profit was KRW 95.8 billion, an increase on quarter. In 2019, sales growth and profitability improvements are likely to continue, driven by the automotive battery market expansion and growth of new markets, core ESS and small-sized cylindrical batteries. However, seasonality factor and capacity expansion due to secure, stable product supply system in the first half will mean that profitability will be low, however, profitability will be higher in the second half.

Next, I&E Materials. In 2018 Q4, I&E Materials sales increased on quarter to KRW 901.6 billion from an increase in sales volume, however, posted an operating loss due to declining prices from the slowdown in the display panel market. In 2019, challenging environment is forecasted due to underperformance in the downstream industry. However, profitability is to gradually improve through product differentiation and cost cuts. In addition, the company will continue to upgrade its business model by increasing sales of specialty products such as OLED products.

Next, Life Sciences and Farm Hannong. In 2018 Q4, Life Sciences sales was KRW 157.8 billion, and operating profit was KRW 13.5 billion. Sales growth continued due to greater sales of core products such as YVOIRE and Eupenta. Farm Hannong sales was KRW 83.1 billion, and operating loss was KRW 22.7 billion. Our sales annual grew from greater exports. Profitability remained flat due to rising fertilizer's raw material prices. In 2019, Life Sciences will try to grow through greater sales of the new product [uses] and will increase R&D investment to fuel future growth as 2 new drugs are entering to the second phase of clinical tests in the United States. And for Farm Hannong, the new product, Terrad'or, and specialty fertilizers, all these things will help to continue to improve the business structure. And this will help to drive greater sales and profitability.

Next, 2019 business plan. The company will continue to grow -- continue its growth trajectory in 2019 by growing around 14% on year with sales outlook of KRW 32 trillion.

In Basic Materials, the company's position in the high value-added business will be strengthened through capacity expansion in purely SAP and ABS. Batteries to continue growing, with growth more than 50% on year to achieve KRW 10 trillion in sales. With robust sales of electric vehicles, customers are placing new orders and requesting greater volume to be supplied for existing projects. In addition, demand is increasing for cylindrical batteries due to wider applications. And consequently, capacity expansion and sales growth acceleration are to continue.

I&E Materials is to grow 15% to KRW 3.8 trillion from business growth in OLED materials and CATL businesses.

Life Sciences and Farm Hannong to achieve early to mid-single-digit growth on year.

In 2019, total CapEx to be KRW 6.2 trillion due to [timing secure] and managed production capacity due to greater business sophistication in Basic Materials and increased orders in the battery business. More than 70% of the net increase in CapEx in the previous year will be invested in the battery business.

Increased borrowings from greater investments will worsen some financial ratios in the short term. However, while maintaining overall financial soundness in the mid to long term, the company plans to increase investments to further upgrade its business structure and improve its profit generation capabilities.

On this note, we'd like to close the company's presentation on its earnings performance, and we like to now start the Q&A session, which will be done consecutively.

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language) So the first question will be by Parsley Ong.

(foreign language) So I think that the connection may be a bit bad, so we will get back to Parsley when the line is available. Maybe we can start with NH Securities and Mr. Yusik Hwang.

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Yusik Hwang, NH Investment & Securities Co., Ltd., Research Division - Chemical and Refinery Analyst [2]

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(foreign language) I would like to ask questions about your Energy Solutions business and also your I&E Materials business. First, if you look at your I&E Materials business, I do believe that during the presentation you have mentioned that there has been a meaningful increase in the OLED-related materials. So if we were to look at the fourth quarter and look at best sales, how much is the actual sales in that area? And in addition to that, for 2019, how do you believe that will grow? And what will your target be for 2019? In addition to that, in terms of the actual sales contribution by the various products, if you could actually break down what the meaningful products are from a sales perspective, that would be appreciated. In terms of the second question about your overall Energy Solutions business, I do believe that for your EV batteries, that there might need to be some guidance from the previous guidance levels that you have provided for this business. So as of the end of 2020, could you give us an update with regards to what you believe your capacity will be and what your revenue forecast for 2020 will be for that time? In addition to that, if you look at the lithium batteries and the growth path going forward, I do believe that there is not any question about how we believe growth will take place within this market space, but I do think that there is some concern about alternative products that may emerge. For example, Toyota recently came out with an announcement that it would be applying solid-state batteries, and it is interested in doing so in their next-generation vehicles. So as a result of that, I would like to ask about what your view is about the solid-state batteries or when do you think it would actually be at a level in which the technology would be upset to the lithium batteries that are out within the market space. And to deal with such a challenging situation, what preparations are you making for that type of dynamic?

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Unidentified Company Representative, [3]

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(foreign language) So maybe I can address your first question. From the I&E Materials business, my name is [Hauk Son-Tong]. Maybe I can address the question that you have had. First, to talk about the OLED materials business, because the downstream has seen an increase in demand, we have, as a result of that, seen our revenue grow. So for next year, we do believe that there will be around 20% growth within this area. And as a result of that, we think that our overall sales will reach around KRW 300 billion. In terms of the meaningful products that contribute to the sales, there would be the encapsulants that are used for TVs, also the encapsulation films that are used for mobile products. And also both on the TV side and on the mobile side, there are various OLED materials that we actually produce that have a meaningful contribution.

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Unidentified Company Representative, [4]

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(foreign language) So this is the COO. Maybe I could elaborate a bit and add some comments to the previous answer that was given for the I&E Materials business. If we look at the overall OLED-related business sales, last year, it was around KRW 250 billion. For this year, the estimate is in the low KRW 300 billion range. So as a result of that, that would represent a 25% level growth for this business. We actually do believe that this year will be the reflection point for this business. And therefore, from next year and thereafter, we actually believe that this is a business that can actually take off because we do have various discussions that are ongoing with our client base about their future road map, and we do see a lot of momentum being created behind this business. So as a result of that, we think that going down the road, for next year, there could be around KRW 500 billion; and then thereafter, around KRW 850 billion from this business. So that is the growth that we are expecting.

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Unidentified Company Representative, [5]

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(foreign language) For our Energy Solutions, I think that this is a question that we did address before. But to give you the answer once again, for this year, the overall estimate for sales would be KRW 10 trillion. And in terms of the operating margins, from that KRW 10 trillion sales, we believe it would be in the mid-single digits. So this is the same answer that we had provided in the previous quarter's earnings conference call. Half of that revenue will be coming from our EV battery basis, so that would be half of the KRW 10 trillion that we're talking about. And to talk about the profitability of that business, in the fourth quarter, we have reached a breakeven point with regards to these EV batteries. However, if we look at our forecast for the first half of 2019, as mentioned during the presentation, we will be making some upfront investments into the capacity. So a result of that, there will be some fixed costs that we will be bearing on that side. And in addition to that, there will be some seasonality taking place. So as a result of that, if we look at the first half as a whole in terms of the profitability, we do think it will be hovering around somewhere where the breakeven point is for this business. However, from the second half of the year and thereafter, we do believe that we will be able to enjoy a low single digit in terms of the overall profitability. In addition, in 2020, for the EV battery business, we believe that it will be a mid-single-digit business in terms of the overall margin levels for the full year of 2020, and so this would be in line with the answer that we had provided in the previous quarter. To talk about our capacity, by the end of this year, we do think our capacity in total will reach 70 gigawatt hours. And by 2020 year-end, we do believe that, that will reach 100 gigawatt hours. So there's no big difference in those numbers from what we have previously shared.

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Unidentified Company Representative, [6]

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(foreign language) Maybe I can elaborate a bit more about your question about the lithium-ion alternative technology that is available. My name is [Kim-Wan Shung], and I am from the Energy Solutions business. As you have mentioned, Toyota has mentioned its aspirations to develop an alternative technology and apply this next-generation technology. So whether it be a solid-state battery or a lithium method -- lithium metal battery, I do believe that there are various technologies that are currently being developed. However, if you look at the conductivity of the ions and also the actual state of the electrolytes, I don't think that as of now, there is anything that can match the liquid electrolytes that are available in the lithium-ion batteries as of today. In addition to that, if you look at the third-generation cars, I think that the SOPs are going to come out at around 2020 and 2022. And that means that the ramp-up of that will be coming in the mid-2020s. So as a result, if you look at the state at which solid-state batteries are currently being developed, we only believe that sample products would be available in the mid-2020s. So as a result of that, I don't think that the technology yet is at a level in which you can actually catch up with the lithium-ion batteries that are available right now in terms of the productivity, and there needs to be more research in this area. So as a result of that, if we look into factors, including safety and also the energy density, as of now, I think that there will be an alternative into the market, but I do think that it will take a bit more time. So it would be around the mid-2020s or thereafter.

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Operator [7]

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(foreign language) (Operator Instructions) And if we could give the next question to Parsley Ong from JPMorgan.

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Rui Hua Ong, JP Morgan Chase & Co, Research Division - Analyst [8]

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Congrats on EV battery breakeven. I have a question on your batteries division. I believe LG Chem started supplying 21700 cylindrical batteries on a trial basis to some OEMs like Lucent Motors. Can we get an update on how LG Chem's cylindrical batteries division is doing and plans for future expansion? And if demand is very strong, what are the lead-time and costs for LG Chem to expand capacity? Is it easy to convert NCM touch-type battery capacity to cylindrical capacity? Second question is on the Chemicals division. Could you just share some of your details on the one-off losses in fourth quarter, so how much negative impact on inventory loss, feedstock [rise] and maintenance, et cetera?

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Unidentified Company Representative, [9]

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(foreign language) I am (inaudible) from the Energy Solutions business, and maybe I can address the first part of your question about the 21700 batteries. The cylinder-type batteries are something that we are preparing in light of the light EV market, which we do believe will be a new market for us. So there are some customers that do prefer the 18650 batteries. However, there are other customers that actually prefer the larger-capacity 21700 batteries. So according to the request of the consumer, we are trying to ensure that we have the right investment in place so that we can provide the type of battery that the customer requires. Of course, we cannot share you the breakdown by customer and how much sales we have with our business with our customer. However, as mentioned before on the OEM side, whatever type battery they prefer, we are prepared to try to satisfy that need. You asked about what the lead-time would be for a capacity expansion. For the cylinder-type batteries, it would be similar. It's around a year or so that would be required for the lead-time. So this is something that we are looking into in line also with the pouch-type capacity expansions that are ongoing. In addition to that, for the cylinder-type batteries in itself, of course, this is a new market. It's -- it would be more focused on the non-IT side. So as a result of that, we are looking at the pouch-type batteries for the OEM EV manufacturers. However, for the [light] EV manufacturers that prefer a cylinder type, we also are preparing to ensure that we can satisfy that demand if it is required. So we are in a process right now to build up the references that would be needed.

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Hak Cheol Shin, LG Chem, Ltd. - Vice Chairman & CEO [10]

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(foreign language) So this is the CEO. Maybe I can add on a few comments. With regards to the cylinder-type battery business, of course, we are in discussions with some of our customers. However, as a result, if you look at the overall landscape, I think that there is a distinct difference in terms of the customer segmentation and also the application of pouch-type batteries versus cylinder-type batteries. So as a result of that, we do think that it's not one or the other, but it's rather a complementary type of business. And therefore, we do believe that the cylinder batteries should be regarded as an additional business to our current operations. As a result of that, the question about whether we would be interested in converting our pouch-type production into a cylinder battery production situation would be something that would be very difficult to think about. So though it is a hypothetical question, it's not something that we realistically think will take place. (foreign language) And to address your second question about the one-off events that took place in the fourth quarter, if we look at the fourth quarter, we do think that the one event that may stick out a bit would be in the Basic Materials & Chemicals business, and it would be related to the Yeosu facility turnaround that took place. So as result of that, on the operating profit line, there was a difference of around KRW 100 billion due to that turnaround. If we look at the Energy Solutions business, there were some one-off costs and also one-off profit for that business, and so there was a netted effect or an offset effect that took place. There is slightly more costs that were incurred for the Energy Solutions business, but it's not to a level in which it would actually have a meaningful impact on the margins of that business. (foreign language) And maybe just to add on, in the first quarter of this year, again, there will be another turnaround for our [Daesan] capacity. This is a turnaround that we do or an overhaul that we do once every 4 years. So it will start within the first quarter and may be long and last until the beginning of the second quarter. And the effect of that would probably be around KRW 120 billion to KRW 130 billion, so that would be a nonrecurring type of event.

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Operator [11]

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(foreign language) So the next question will be by Lee Eung-Ju from Shinhan Investment.

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Eung-Ju Lee, Shinhan Investment Corp., Research Division - Team Head of Energy and Chemicals [12]

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(foreign language) I have 2 questions that I would like to ask you. The first question is about your fourth quarter Energy Solutions business. You did say that the overall revenue for this business was KRW 2 trillion. If you could break that down between the small batteries, the EV batteries and also ESS, I would appreciate a breakdown of that. And In addition to that, on the operating profit level, you did say that the EV battery business reached the breakeven point. However, what was the situation for the small-sized batteries and the ESS? If you could give us some color about what the margin levels there are, then that would also be appreciated. The second question that I have is about your ESS business. At the end of last year, one of the biggest topics and events that gained a lot of attention in Korea was the fires that took place for our ESS battery locations. And I do believe that because of those events, there was some contraction that we saw within the marketplace and that there are some that expect that this will continue into 2019. So for LG Chem and your ESS forecast for the future, if you say that 2018 was X number in terms of your overall sales, what do you believe that sales number would be for 2019 and 2020?

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Unidentified Company Representative, [13]

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(foreign language) So maybe I can address the first question that you have had. The first question is about our breakdown for the fourth quarter and the KRW 2 trillion in the revenue. If we look at that breakdown, around 50% -- certainly above that amount actually comes from our EV batteries. And the small battery business continues to be a cash cow for our overall Energy Solutions business. So that represents around roughly 40%. And then ESS, though the growth in itself is very high, in terms of the breakdown of the overall [climb], it would be slightly above 10%. So that would be the breakdown there. And if we look at the margins for the small batteries and the ESS business, for the small batteries business, it is true that the fourth quarter is seasonally a high season for this battery business. However, there were some changes in the overall revenue mix that we saw for our products in this area. So as a result, if we look at the Q-on-Q levels, it was slightly weaker than the previous quarter but still in the high single-digit area. And for the ESS, we would have to say that it is a mid-single-digit number for the level of profitability there.

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Unidentified Company Representative, [14]

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(foreign language) And this is the COO. Maybe I can elaborate a bit about the ESS question that you have mentioned. For the full year ESS performance that we have seen are -- in terms of the revenue numbers, it is in the mid to high KRW 800 billion level. So the actual target for this business last year was around KRW 1.5 trillion, so it was around double the amount that we actually saw. However, as you have mentioned, in the second half of last year, due to the fires that took place and also the market concern, which we fully recognize in terms of what elements are of concern, the overall market situation did change. With regards to the cause behind the fires that took place, for all of the domestic sites in which we do have ESS in operation, they have been put on temporary suspension until we can further investigate into the situation. So right now, there is a combined team to investigate these issues, which is composed of the customers, also the construction companies, also ourselves and the related government ministries to look into the reason behind the fires. Whether it lies with the batteries themselves or whether it is with the system that supports the battery in terms of the system design, the manufacturing, the installment or the actual operation of the overall ESS system. So right now, we're in a phase in which we're trying to get and drill down to the reason behind the events that have taken place. And until we have found what the reason is, all of the customer sites right now that were in operation have been suspended. (foreign language) In addition to that, I do believe that you might be concerned about what the implications may be about this event and what the impact would be on our ESS business. So maybe to address that question, if you look at the ESS business overall and the contribution that Korea plays within that business, on a full year basis, it acts -- for around 30% -- or represents 30% of the overall sales. And due to the overall seasonality that this business does have, if we were to look at the first half alone, then Korea would represent around 20% within the first half overall sales. As of now, we do believe that the main focus of our attention should be on getting the quality and also the safety features right. So as a result of that, all of our sites have been put on hold. Right now, there are no shipments that are being made of any of the products until we are able to dig down and find what the reasons are behind these events that have taken place. Once that issue has been investigated and once we are able to address it, then, of course, we will continue to focus in ensuring that this is a business and an industry in which we can continue to support for future growth.

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Operator [15]

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(foreign language) Next, from KB Securities, we will have Baek Young-chan.

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Young-chan Baek, KB Securities Co., Ltd., Research Division - Analyst [16]

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(foreign language)

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Unidentified Company Representative, [17]

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(foreign language)

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Young-chan Baek, KB Securities Co., Ltd., Research Division - Analyst [18]

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(foreign language) So there are 2 questions that I would like to ask you. I do understand that for your naphtha cracker capacity, you do have plans for future capacity expansion going forward. However, if you look at your competition, I do believe that because of the feedstock-related concerns, that they are trying to diversify where they source their feedstock from and also take other measures to deal with this type of situation. So we do believe that for naphtha going forward, there could be a situation in which the prices would rise. And as a result, there may be some shortage in the actual supply in this area. So I do know that you're taking measures to deal with such a challenging situation, but I would like to know, how are you dealing with this? For example, in terms of the different geographies that you are sourcing from, how are you trying to differentiate that? And also by feedstock type, if there are some diversification that you are trying to do there also, that would be appreciated. The second question that I would like to ask you is about your R&D for the Energy Solutions business. If we were to look at 2019 and 2020 R&D across the board, how would that break down between the EV battery business and the small battery business in terms of the overall R&D spend? And also, I do believe that for solid-state batteries and lithium-ion batteries, so this is something that you have as a common overhead. But if you could elaborate a bit about that, that would also be appreciated.

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Unidentified Company Representative, [19]

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(foreign language) So maybe I can address your first question. I am from the Basic Materials & Chemicals business. I am [Fung Gong-Dud]. I do remember that this was an issue also that was raised during our previous quarter's conference call. But for the naphtha cracking units and centers that we're trying to build out in terms of the capacity in Yeosu, right now, the purpose behind this is that for some of the basic feedstock that is required, rather than being self-sufficient in that area, we are sourcing it from outside. So as a result, while making this investment, what we actually want to do is -- let's say, it's a debottleneck investment for us. So it's easing off some of where the constraint is within the overall flow. So as a result, if we look at it versus the other stand-alone investments that we have made, it is of a smaller scale. (foreign language) In addition to that, if we currently look at how we are sourcing our naphtha, around 50% is imported from outside, and then 50% is purchased from the refineries that are in Korea. So as of now, there is no issue in terms of sourcing the naphtha in itself. But we do believe that in the late 2021, when the refineries are up and running, there could be some issues at that point of time. So that is why we are trying to increase the amount of direct purchase that we have from the refineries. Right now, we've had around 8%, and this is something that we do want to increase going forward. In addition to that, if we talk about our feedstock competitiveness, right now, for the facilities that we have, around 20% is actually facilities that can crack C3 LPG if necessary. And for the expanded capacity that we will be building out, it will be able to support up to 50% of LPG -- C3 LPG cracking. So the situation will be, once we have that capacity in place, according to the overall landscape of the competitive nature of feedstock, whether naphtha or LPG, on a relative basis, whatever looks more attractive is what we will be able to use. So from a cost competitiveness issue -- cost competitiveness standpoint, we don't believe there will be any issues.

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Unidentified Company Representative, [20]

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(foreign language) To address your second question about R&D spend, I am [Enon Fonk], and I am the VP of Business Planning. Maybe I can address that issue. For the company as a whole, if you look at the R&D budget, it is around 4% of revenue. And if we look at the Energy Solutions business, it's a bit higher. So it would be in the early 5% or the low 5% range of revenue. And if we look within that business division and look at where the spend of that is taking place, for the EV business, it's at around 6%; and between ESS and the smaller batteries, there is actually no big difference between the 2. Of course, within this R&D budget, we do have earmarked money that goes into future technology, which does include solid-state batteries, and this is something that we will continue going forward. (foreign language) And in addition to that, if you refer to Page 13 of our presentation, we do have a breakdown of the R&D by business line. So please use that as a reference.

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Operator [21]

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(foreign language) Next will be [Yeung Jay Fung] from Hanwha Financial Investment.

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Unidentified Analyst, [22]

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(foreign language) So there are 2 questions that I would like to ask you. One is about your petrochemical business. If you look at the different products in terms of the overall supply and demand dynamics for 2019, what product types do you actually believe will be more attractive in 2019 and what product types do you believe there is room to improve in? And the second part of that question is also about the feedstock for naphtha. It's something that you did touch upon. And if you look at the overall market dynamics for gasoline, it does seem to be that there is a oversupply situation in the gasoline market. So with this, naphtha does seem to be trading at a discount. But over the longer term, what is your overall view about the naphtha trends going forward? That's the first question. And the second question that I would like to ask is about your I&E Materials business. This is a business that has been a bit sluggish. Do you have any path to maybe more efficiently use designs that you have or maybe improve your profitability of this business? And if so, what would be the future direction in terms of the level of profitability that we should expect from this business?

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Unidentified Company Representative, [23]

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(foreign language) This is [Fung Gong-Dud] from the Basic Materials & Chemicals business, and maybe I can address your first question. As you have mentioned, because of the trade conflict between the U.S. and China, during the second half of last year, there was some contraction in the overall demand for various products, and this is something that impacted our fourth quarter overall operations also. However, if we look at the market situation in the first quarter of this year, I do believe that a lot of the customers feel that their inventory levels are at a range in which they think there is a marginal line. So as a result of that, they do believe that they can't just wait and see continuously in the current situation. So we will have to look at what the trends are going forward, but we do think that across the board, it will be a situation in which the demand should have been at the bottom in the second half of last year, and it will be in a gradual rebound within the overall trends for this year. If we look at it by product line and for the more attractive product types, of course, we do believe that PVC and also the plasticizers are an area that would be attractive. And also in the areas in which you are building out capacity for acryl and also SAP, we think that the markets there also should be in a okay situation. In addition to that, for ABS, it is also a situation in which we think that the second half of last year was the bottom-out situation and that we do -- we'll see a gradual recovery in the demand there. And over the mid- to long term, we should NCC/PO approve -- improve. For the mid- to long-term view for NCC/PO, there are capacity additions that are taking place. So as a result of that, there will be supply that will be forthcoming in that area. So as a result, we do see that the run rate will be somewhat impacted as a result of that. However, as the downstream does pick up, we think that, over time, the run rate will improve. (foreign language) And to address your second question about the overall naphtha situation. For the Refinery business, for oil refining, we do think that there could be some fluctuation in terms of the overall margin levels because for industrial purpose, naphtha, of course, it could be an issue in which the level of application in the EV area will be a determining factor of how this plays out going forward. However, if you look at it on the oil refinery side, I do believe that there is some room in which the oil refinery -- oil -- the naphtha that is used for oil refinery could be converted or could be diverted, should we say, to be flowed into the naphtha that is used for more industrial purposes. So as a result of that type of change that is taking place in the overall dynamics, we do think that this could become an issue from 2021. However, monitoring the industry trends as of now, we still do not believe that there will be an overall [turning] situation in terms of the sourcing of naphtha.

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Unidentified Company Representative, [24]

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(foreign language) So this is the CEO -- COO, and maybe I can address the I&E Materials question that you have had. I do believe that is fair to say that for this business, we have been in a cycle in which the downturn in the display industry that took place 3 years before has been an overall situation in which the market deteriorated there. So as a result of that, our overall performance started to weaken also. And we have been in somewhat of a rut in which we have not been able to escape from. So 3 years before, we were at a loss. A year after that, it was -- we were able to make up for it somewhat. However, last year again, we have losses again. So again, I think that for this business, it would be fair to say that we're somewhat in a rut situation in which we do need to try to address and try to solve. So that have been said, for the existing business that we have on an as-is situation, I do think that there are still areas in which we could continue to a focus and improve upon to improve the margins and the profitability of this business. For example, we could enhance the overall productivity. And also, revamp some of the production that we have and also try to have a larger portion of revenue contribution from segments in which the margins would be higher. However, I do think that from a bigger standpoint and from a big picture point of view, for this business as a whole, I think that we're at a time in which we want to go back to basics and maybe rethink about this business in terms of what areas we can actually be very good in, what type of customers we want to serve and what type of products we need to have in this area to be successful. So I think that going back to a zero base for this business and then thinking about the right strategy going forward and actually executing that strategy is something that we need to do as of this time. And so I do think that 2019 will be the year in which that will take place. So that have been said, for the margins of this business, I think that it would be difficult because of that type of exercise that will be required for us to give you a meaningful guidance number. Maybe an operating margin as breakeven or a low single digit would be something that we can achieve. But for the -- to have a true parts and materials business, I think we really need to think about what areas we want to focus on in terms of having our competitiveness and also think about what type of strategy we want to execute going forward. This is actually right in line with capabilities and the competencies that our current new CEO has. It's an area that he is very good at. So I think that this year will be a year in which we will readdress and review this business and think about how we can actually recalibrate it so that for 2019 and thereafter, we can have it go to the next stage.

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Unidentified Company Representative, [25]

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(foreign language) So due to the time constraint, we will have to end our conference call here. We are very sorry that we have not been able to address all of the questions that you may have had. But once again, thank you for all of you who have participated in today's call. And for those of you who did not get an opportunity to ask your questions or for those of you that may have further questions, please do not hesitate to contact our IR team. Thank you very much.