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Edited Transcript of 096770.KS earnings conference call or presentation 26-Jul-19 8:00am GMT

Q2 2019 SK Innovation Co Ltd Earnings Call

Seoul Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of SK Innovation Co Ltd earnings conference call or presentation Friday, July 26, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dong-soo Kang

SK Energy Co., Ltd. - Former Head of Corporate Planning Office

* Jang-Woo Kim

SK Innovation Co., Ltd. - Chief of 2nd Finance Office

* Myung-Young Lee

SK Innovation Co., Ltd. - Head of Finance Division

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Conference Call Participants

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* Anna Park

Macquarie Research - Analyst

* Dong Jin Kang

HMC Investment Securities Co., Ltd., Research Division - Analyst

* H.C. Yoo

HSBC, Research Division - Oil, Gas and Chemical Analyst, Asia-Pacific

* Hyunryul Cho

Samsung Securities Co. Ltd., Research Division - Analyst

* Jae Sung Yoon

Hana Financial Investment Co., Ltd., Research Division - Research Analyst

* Rui Hua Ong

JP Morgan Chase & Co, Research Division - Analyst

* Young-chan Baek

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

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Presentation

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Unidentified Company Representative, [1]

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[Interpreted] Good afternoon. I am [Wu-Han Lee], Head of the IR Team at SK Innovation. Thank you for taking time to join SK Innovation's Second Quarter 2019 Earnings Call. Please understand that we had to have the call this late because of our BOD meeting today.

Today's call is being broadcasted live on our website with Korean-English simultaneous interpretation for our overseas investors. Today's presentation has yet to be reviewed by our external auditor. So the results are subject to change based on such review.

Now I will turn it over to the CFO, Mr. Myung-Young Lee, for the presentation.

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Myung-Young Lee, SK Innovation Co., Ltd. - Head of Finance Division [2]

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[Interpreted] Good afternoon. This is Myung-Young Lee, the CFO at SK Innovation. I would like to thank our shareholders and investors for your continuous interest in SK Innovation.

Today, I will present our second quarter 2019 performance, after which, we will have a question-and-answer session. On the call with me today are executives from SK Innovation and its major subsidiaries to answer your questions today.

First, let me go over the overall second quarter performance, including sales and operating profit. On the top line, an increase in our petroleum products and lubricant sales volume led to revenues increasing KRW 255 billion quarter-on-quarter to KRW 13.1036 trillion. Despite weaker margins on key petroleum and petrochemical products, an improvement in the inventory effect resulted in operating profit increasing KRW 166.4 billion quarter-on-quarter to KRW 497.5 billion.

On the nonoperating side: FX-related losses of KRW 50.4 billion; interest expenses of KRW 57.5 billion; derivative-related losses, KRW 90.8 billion; and the impairment losses on exploration risks rose KRW 19.2 billion; and equity method gains of KRW 19.5 billion ended in nonoperating losses of KRW 239.5 billion.

For your information, to defend profit deteriorating due to changes in oil prices, the company engages in hedges to fix a certain portion of its profit. Due to such hedges, the company recorded KRW 90.8 billion in derivative-related losses in the second quarter.

Next, let me go over the balance sheet. As of the end of the second quarter 2019, assets totaled KRW 38.9082 trillion, up by KRW 2.8228 trillion versus the end of 2018 due to a temporary cash increase after issuing corporate debentures and an increased intangible assets due to more investments.

Total liabilities was KRW 19.2281 trillion, representing an increase of KRW 2.471 trillion versus the end of 2018 as corporate debentures were issued and these liabilities were recognized due to a change in accounting standards.

The debt equity ratio was 11 percentage points higher than the end of 2018 at 97.7%. In addition, gross debt as of the second quarter stood at KRW 9.754 trillion, an increase of KRW 1.7307 trillion versus the 2018, while net debt increased KRW 817.4 billion to KRW 4.3128 trillion during the same period.

Now let me move on to the market environment and second quarter performance of each of our businesses. First, let me start with the refining market backdrop. During the second quarter, crude prices continued to rise on the back of stronger sanctions against Iran and higher geopolitical risks in the Middle East. However, towards the end of the quarter, oil prices weakened as trade conflicts increased and U.S. inventory levels rose.

The second quarter gasoline crack was strong due to an increase in seasonal demand and low stock levels. In addition, if we look at diesel crack, it showed weaker levels because of demand stemming from a slowing economy in Europe and oversupply within the region.

Now let me move on to the second quarter refinery business performance. Operating profit increased despite lower refining crack levels, such as diesel crack, thanks to an increase on trading profit and inventory-related gains. Since the company uses the weighted average accounting method for its inventory, impact from the first quarter crude prices lower than the second quarter was reflected in the operating profit.

As a result, operating profits rose KRW 285.6 billion quarter-on-quarter to KRW 279.3 billion. For your reference, second quarter inventory-related gains with refining was KRW 198.1 billion, including losses of approximately KRW 30 billion from LCM valuation. This is an improvement of KRW 221 billion versus the previous quarter.

Looking at the market for the second half, the continued seasonal demand for gasoline and increase in diesel demand spurred by the implementation of IMO 2020 is expected to result in a moderate improvement in refining margins.

Next, let me move on to the petrochemical market environment. Though, regional cracks had turnarounds during the second quarter, olefin spreads weakened because of a weaker downstream stemming from PE supply coming from U.S. ethane crackers. In addition, PE spreads remained weak due to a slow demand on the back of uncertainties over U.S.-China trade tension.

For aromatics, though, regional PX capacity had some trouble, PX spread expands a quarter-to-quarter decline coming from concerns about an increase of supply from new Chinese plant operations. Benzene spreads improved slightly versus the first quarter as demand from the U.S. increased.

To talk about the petrochemical business' overall operating profit. Despite an increase in inventory-related gains from higher naphtha prices, weaker key product spreads, such as PX, led to petrochemical operating profit decreases, KRW 135.8 billion quarter-on-quarter to post KRW 184.5 billion.

Second quarter -- second half rather, PE and other olefin products spreads are expected to continue to be weak because of PE volumes coming from U.S. DCCs and a focused Chinese economy. For PX spreads, the market is expecting to remain weak on the back of concerns from additional supply coming from new Chinese PX capacity.

Let me move on to the second quarter Lubricant business performance. The Lubricant business posted an operating profit of KRW 78.2 billion, an increase of KRW 31.1 billion from the previous quarter due to an increase in Group III sales volume and less inventory losses as crude prices decreased -- or increased. In the second half, the business is expected to continue to be impacted by the global economic slowdown and new and additional capacity coming online from Group II. However, the company is planning to continue efforts to improve profitability through cost savings and sales volume increasing efforts.

Let me move on to the second quarter E&P business. The E&P business, despite a decrease in operating costs, posted revenues of KRW 163.9 billion, KRW 11.7 billion less than the previous quarter; and operating profit of KRW 51 billion, down KRW 4.4 billion from the previous quarter, due to the regular maintenance of Peru 56 that took place during the quarter and the fall in gas prices. In addition, as the exploration of Vietnam 123 block ended, we recognized an impairment loss of KRW 19.2 billion, which was included in the second quarter non-operating expenses line item.

Next, let me discuss the performance of the Battery business. The operating losses of the Battery business was KRW 67.1 billion, an improvement of KRW 19.8 billion versus the first quarter, due to less inventory-related losses and savings on certain operating costs, such as product sample costs. To respond to increasing order volumes, the company has been making CapEx investments in projects in China and Hungary. Construction is scheduled to be completed in the fourth quarter of 2019 and commercial production is slated to begin in 2020. In March of this year, the company broke ground on a second factory for Europe in Hungary and a new production facility in Georgia in the U.S.

Next, let me discuss the I/E Materials second quarter performance. Operating profit posted 70 -- KRW 27.3 billion, down KRW 3.2 billion from the previous quarter, driven by a decrease in LiBS sales volume due to temporary changes in our clients' production schedule. The company continues to add LiBS capacity. In the fourth quarter, 2 lines in Jeungpyeong will be completed, which will increase annual production capacity from 360 million to 530 million square meters. The plant construction in China and Poland, which will be global production hubs, is also moving ahead according to schedule.

Lastly, let me discuss interim dividends for 2019. 2019 interim dividends were set at the BOD meeting today at KRW 1,600 per share. The interim dividend reflect the active commitment of the company on shareholder return amid an unfavorable business environment and increasing CapEx requirements for new businesses. Going forward, the company will remain committed in its efforts to strengthen shareholder value.

This is the end of our presentation. We will now start the Q&A session. Before asking your questions, please state your name and affiliation. Also, please note that the Q&A session will be conducted with consecutive interpretation.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions)

Interpreted The first question will be provided by Hyunryul Cho from Samsung Securities.

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Hyunryul Cho, Samsung Securities Co. Ltd., Research Division - Analyst [2]

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[Interpreted] From Samsung Securities, I would like to ask 3 questions. The first question, with the rise in the refining margin, I think that there are expectations building on the positive impact from IMO 2020. But we have not yet seen any practical impact as of yet. My first question, therefore, relates to the timing. When do you foresee that there would be an actual impact from the IMO regime?

Second question regards your Battery business. There has been certain regulations -- a certain move towards regulation by Japan, and there are talks that this could actually have an impact on your battery pouch film. Do you foresee any problems with regards to this component? And are you reviewing possibly sourcing from domestic suppliers?

My third question relates to a rumor that's in the market, where people are saying that the joint venture initiative with Volkswagen could actually fail. Could you confirm, either one way or the other, whether that rumor is correct or else any validity?

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Unidentified Company Representative, [3]

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[Interpreted] I am from SK Energy responding to your question about the potential impact from IMO. With the implementation of IMO slated for 2020, we believe there will be a certain impact, especially in the fourth quarter. With respect to the gas oil, we could predict an increase in the demand as the shippers will start to stock up on this inventory. Hence, we do expect that the refining margin could start to creep up, mostly around the gas oil crack.

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Unidentified Company Representative, [4]

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[Interpreted] I am from the Battery business management team. My name is [Pang Han Min], responding to your question about the regulations from the Japan. There is currently certain restrictions on the semiconductor-related parts and components, and there is concern that this could actually expand to battery components and parts. But having said that, we do not feel that there is a significant possibility of that actually materializing. However, we are open to possibility that the regulation could actually expand, so we are very closely monitoring the overall situation.

We are not reviewing just simply domestic-based sourcing options. We are open to various different scenarios. We are reviewing many scenarios, even outside of the domestic market.

Responding to your third question about the possibility of the attempt to create a joint venture with Volkswagen actually failing. At this point, we are constantly in the process of talking about cooperation with Volkswagen at a quite fundamental level. Once we have the specifics and details, then we will come back to you and share that with you.

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Operator [5]

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[Interpreted] The following question will be presented by Young-chan Baek from KB Securities.

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Young-chan Baek, KB Securities Co., Ltd., Research Division - Analyst [6]

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[Interpreted] I am from KB Securities. I'm Baek Young-chan. I just have several very simple questions. The first question relates to your trading business. It has seen an operating profit increase in the second quarter. Would like to understand the size of that as well as the driver behind that increase.

Second question. Because in Q2, there's been an increase in the FX rate, there was loss on your nonoperating side. But I do expect that there would have been certain FX-related gains on your operating profit line. Could you elaborate on the size of that impact?

And my third question is -- I apologize, I bring this up again, but we've recently seen a press interview where a Volkswagen individual has said that Volkswagen is considering to enter into the EV battery market on their own, together with -- in collaboration with other OEM companies. Do you see that there is a possibility and potential for this? And if so, what would be the impact?

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Jang-Woo Kim, SK Innovation Co., Ltd. - Chief of 2nd Finance Office [7]

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[Interpreted] I am Kim Jang-Woo. I'm the Head of Finance 3 Office responding to your question on the trading-related gains. In our Refining business, it includes KRW 62 billion of trading-related gain impact. And this increase, actually, in Q2 is, first of all, driven by increase in sales of fuel oil, which led to a higher level of income on the JV side. Second is, increase in sales of gas oil bound for China.

Responding to your second question on the FX-related impact on our operating profit line item, in Q2, the amount is KRW 70 billion, and mostly, this had to do with our Refining business.

Responding to your third question of Volkswagen, whether it will enter into the EV battery market or not. This is an issue that deals with a certain company. So from our perspective, it would be difficult to make any certain judgment one way or the other. Our company is very much focused on delivering without any problem or interruptions with respect to the order volume that we had won and which we are obligated to supply after 2022.

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Operator [8]

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[Interpreted] The following question will be presented by Jae Sung Yoon from Hana Financial Investment.

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Jae Sung Yoon, Hana Financial Investment Co., Ltd., Research Division - Research Analyst [9]

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[Interpreted] There are 3 questions that I would like to ask you about. First is, if you look at Slide 7, there is the others item that you can see on that page, which represents around KRW 137.7 billion. I do believe, though, trading gains that you mentioned before are probably included in that number, but could you provide a breakdown of that KRW 137.7 billion?

The second question that I would like to ask you is about China. If you look at the situation there, there is talk about CDO, new capacity being added on. In addition to that, it does seem to be that their export quota has been increasing. So all in all, how do you look at the net export volume coming out of China? In addition to that, what impact do you believe that, that will have on refining margins?

The third question that I would like to ask you is about CapEx. If you look at 2019 to 2020 to 2021, what would be the general CapEx trends that you would have for those years? In addition to that, if you look at the net debt level, right now it seems to sit at around KRW 4 trillion. So taking this into consideration, do you believe that you would be able to maintain your overall stance on dividends that you currently have?

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Jang-Woo Kim, SK Innovation Co., Ltd. - Chief of 2nd Finance Office [10]

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[Interpreted] Maybe I can address your first question. I am Jang-Woo Kim, the Head of the Finance 3 Office. If you look at the item that you were pointing out, which is the refinery other items which represents around KRW 137.7 billion, of that amount, as I have explained before, on the operating profit line from trading gains, there was around KRW 62 billion that we have seen. In addition to that, for inventory, there are unrealized gains of around KRW 25 billion. And in addition to that, the other balance of that item would be various savings that we have seen in our fixed costs.

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Dong-soo Kang, SK Energy Co., Ltd. - Former Head of Corporate Planning Office [11]

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[Interpreted] So maybe I can address your second question. I am Head of the Corporate Planning Office from SK Energy. You asked a question about the Chinese export volume increasing and also the impact on refining margins. If we look at the second session 2019 as per quota volume, that would be in total about 28.5 million tons, which would represent around 6.5 million tons increase on a Y-o-Y basis. However, if we look at the overall progress rate of that or utilization of that as of April 2019, it currently is at 47%. So all in all, we do not believe that the actual increase will be very significant.

In addition to that, in light of the fact that in the U.S., in Philadelphia, there were some capacity that faced troubles. And also because of the driving season that we have seen in all -- in the U.S., we think that the overall impact will be limited on refining margins.

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Myung-Young Lee, SK Innovation Co., Ltd. - Head of Finance Division [12]

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[Interpreted] So this is Myung-Young Lee, and maybe I can address your question about the CapEx and our dividend. If we look across the first and second quarter for the overall CapEx spending that we have executed, it reaches around KRW 1.5 trillion in total. And towards the end of the year, for the full year, we do expect that CapEx will be, all in all, at around KRW 3.5 trillion. For 2020 CapEx and 2021 CapEx, we do think it's a bit too early to be talking about those CapEx numbers or giving you estimates. So I would like to refrain from commenting about those numbers.

To talk about dividends. For the end of the year of dividends, as you are aware, we have decided to provide interim dividend of KRW 1,600 per share. And towards the second half of the year, because of the overall market backdrop and the overall business environment is something that is still uncertain, what we will be doing is look at -- have a review of our overall full year business performance at a time at which the BOD would finalize the year-end dividend. However, one thing that remains true is that as we have been communicating continuously with regards to the overall policy for dividends, that is still valid and the same.

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Operator [13]

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[Interpreted] The following question will be presented by Parsley RH from JPMorgan

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Rui Hua Ong, JP Morgan Chase & Co, Research Division - Analyst [14]

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This is Parsley from JPMorgan. I have 2 questions. Firstly, on your Refining division, I believe SK Innovation has started offering small amounts of blended VLSFO in the market. Could you tell us a bit more about the process you're using to make that? For example, what percentage of VGO share of fuel oil or LCO you're using? And the kind of margin you have been making, has there been any feedback from customers regarding any problems like viscosity? And when your VRDS unit comes online in 2020, should I expect it -- should I expect the output to price similarly to the VLSFO that you are currently selling?

Secondly is with regards to your Battery division. So could you tell us a bit more about the profit situation and your EV battery plant now? Given your previous expectations for potentially breakeven in 2021, in 2020, do you expect your EV battery losses to widen or narrow versus 2019? So what are some of the key catalysts you need to achieve to get breakeven? For example, are you expecting an increase in utilization rate or a full rollout of NCM 811 or a full depreciation of your EV battery plants? What do we need to see for profit to improve?

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Unidentified Company Representative, [15]

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[Interpreted] I'm from SK Energy responding to your first question. As you know, at this point in time, our company is not independently manufacturing or producing LSFO as we speak. In time for IMO 2020, therefore, we are making preparations by actually building the VRDS facility. So it is at this point ongoing. And once the VRDS plant is complete, we expected there to be about KRW 200 billion, KRW 300 billion of profit on a per annum basis. As of end of June, the construction progress for VRDS plant is currently at about 75% and it is slated to go under commercial production by May of 2020.

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Unidentified Company Representative, [16]

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[Interpreted] I'm [Pang Han Min] from the Battery business responding to your second question. As we communicated previously for the Battery business, yes, we are still shooting for BEP by 2021.

Going forward, in order for us to further enhance our profitability at our Seosan plant, we're currently trying out many different programs through job change modes, and we are building experience in terms of mass production. So by the end of the year, we will have Hungary and China plants also come online, and we're very quickly taking measures to very quickly apply different initiatives.

Also, on top of that, in light of the amount of production volume that will come out of that process, we will also look at our purchasing, the supply chain aspect. We will manage a very smart process, and we'll also think about diversifying the sources of suppliers, via which we will be able to achieve cost savings. We will continuously focus in improving productivity as well as enhancing yield as well.

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Operator [17]

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[Interpreted] The following question will be presented by Anna Park from Macquarie.

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Anna Park, Macquarie Research - Analyst [18]

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[Interpreted] There are 2 questions that I would like to ask you about your Refining business. The first question is that if you look at your trading-related gains, you had mentioned that in this quarter, that represented around KRW 62 billion. What was that number in the first quarter? And what would that represent?

The second question that I would like to ask you is about your inventory-related gains. You have mentioned that because you use the weighted average method that as a result of that, if there are changes in the oil price, then there would be a lagging effect that you would see from that. So due to the overall changes in the crude price in the first quarter, what impact did that have on the second quarter overall inventory?

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Jang-Woo Kim, SK Innovation Co., Ltd. - Chief of 2nd Finance Office [19]

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[Interpreted] So this is Jang-Woo Kim, the Head of the Finance 3 Office. You had actually asked what the trading gains were in the first quarter and second quarter. So if we look at the operating profit contribution that we saw from trading gains, that was actually KRW 62 billion in this quarter. So that means that in the first quarter, it went from KRW 37 billion to KRW 99 billion in the second quarter, representing an increase or a contribution to the operating profit of KRW 62 billion.

And to move on to the second question, which was the impact from the rise in the crude prices and what the overall liking effect of that would be. We estimate that overall, it represents around KRW 150 billion.

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Operator [20]

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[Interpreted] The following question will be presented by Hyunchul Yoo from HSBC.

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H.C. Yoo, HSBC, Research Division - Oil, Gas and Chemical Analyst, Asia-Pacific [21]

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[Interpreted] I'm from HSBC. My name is Hyunchul. I would like to ask couple of questions. First, if we look at your utilization number, it seems like in the second quarter in your Refining business, there seems to have been some turnaround. Could you provide some color as to which plant it relates to and what the impact was on your performance?

Second question is on the PX market. Some of the Chinese companies seem to have actually added or have been increasing their PX capacity. And there is saying that this capacity will be -- was ramped up in the month of February. What sales volume-related impact will we have -- would you have in terms of the volume that actually goes to China?

Third question relates to I/E Materials. The sales volume seems to have decreased. What is the main driver behind that?

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Jang-Woo Kim, SK Innovation Co., Ltd. - Chief of 2nd Finance Office [22]

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[Interpreted] I am Kim Jang-Woo, the Head of the Finance 3 Office. You've asked about the opportunity losses relating to the scheduled maintenance to turnaround. In Q3 -- Q2, excuse me, that was scheduled CA for #2 CDU and #1 RHDS, and the impact amounted to KRW 17 billion.

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Unidentified Company Representative, [23]

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[Interpreted] I'm from SK Global Chemicals. I am [Park Chan-Jin] responding to your question. You are correct that there's been capacity additions in China. But considering the fact that China's self-sufficiency rate is very low, in 2019, they've actually imported 16 million tons, which is about the same level as 2018. So from the addition of PX capacity, there has not been any impact on our side in terms of the size of the export.

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Unidentified Company Representative, [24]

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[Interpreted] I am from SK IET. My name is [Chung Insook] responding to your third question. Due to the high level of demand for batteries, the demand for the materials is also quite robust and it had increased. But the figure that you see is actually a temporary one-off decline due to the changes in the production schedule on the customer side.

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Operator [25]

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[Interpreted] The following question will be presented by Dong Jin Kang from Hyundai Motors Company Investment Securities.

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Dong Jin Kang, HMC Investment Securities Co., Ltd., Research Division - Analyst [26]

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[Interpreted] There are 2 questions that I would like to ask you. First is that with regards to the amount of crude that you import from the U.S., would you be able to share out of your overall sourcing, how much that represents in terms of the percentage? In addition to that, if you look at the first half, U.S. crude versus Dubai was at a much lower level. So as a result of that, what was the overall benefit that you saw in terms of your profitability? If you would be able to attach a number to that, that would be appreciated.

The second question that I would like to ask you is about your Battery business. If you look at your Chinese battery operations, right now, it is something that is recognized as an equity method gain. The question that I would like to ask you is that going forward, do you have any plans to maybe increase your equity investment or make other changes so that this operation is something that you would recognize on a consolidated basis?

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Dong-soo Kang, SK Energy Co., Ltd. - Former Head of Corporate Planning Office [27]

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[Interpreted] I am from the Planning Office of SK Energy, and maybe I can address your first question. Because of the fact that the OPEC and [past ethylene] level, there has been impacts in production and also because of the various uncertainties that have been playing out within the Middle East.

If you look at the Middle East OSP levels, it is true that it has been on the rise. However, we have been able to deal with this challenge by increasing the amount that we import from the U.S. to deal with the overall situation.

If you look at the current percentage that U.S. crude would represent, it is around 20%. However, please understand that we are not able to share what the impact on our profitability from that would be.

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Jang-Woo Kim, SK Innovation Co., Ltd. - Chief of 2nd Finance Office [28]

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[Interpreted] So this is Jang-Woo Kim, the Head of Finance 3 Office, and maybe I can address your second question. For the overall Chinese subsidiaries that we have currently, it is that we look at the overall equity stake and also the composition of the BOD in terms of our representation to make an overall determination of the level of control that we have on each of the operations. And as a result of that, there will be a determination, whether it should be an entity that is subject to consolidation, in which it would be consolidated into our overall financial performance. And if not, then it is recognized as an equity method valuation entity. As of the current time, it would be difficult to talk about the future, but the overall accounting principle which would be applied is something that will be consistently so.

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Operator [29]

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[Interpreted] The following question will be presented by [Hu-Je Chan] from [Hankook Securities].

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Unidentified Analyst, [30]

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[Interpreted] I am [Chan Hu-Je] from [Hankook Securities]. My question first relates to the current oversupply in Group II base oil. Would that have impact on your Group III? And can you share with us an outlook for Group II and Group III as well?

Second question is on your Refining business. In terms of the middle distillates and bunker C oil as well as after 2020, in terms of the raw feedstock that goes into the process, in terms of HSF and LSF, what is the split or mix between the production?

And you've mentioned that the CapEx is going to be KRW 3.5 trillion. Can you at least share with us some more specifics regarding the Battery business? What the CapEx for Battery business will be for 2019 and 2020?

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Unidentified Company Representative, [31]

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[Interpreted] You asked about the new capacities in Group II, and that oversupplied, would that have an impact on Group III. The effect -- because where it used to is very limited, the effect itself is also very limited.

You've also asked about the outlook for Group II and Group III. If you look at Group II, there has been a significant amount of new capacity additions this year as well as slated for next year. So on Group II, the outlook is not all that bright. It is quite weak.

On Group III, by 2021 and 2022, the new supplies that will come in online will be quite limited. And also, in light of the various environmental regulations as well as trend towards low-viscosity products, we do expect the overall market backdrop to improve for Group III as we go forward.

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Dong-soo Kang, SK Energy Co., Ltd. - Former Head of Corporate Planning Office [32]

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[Interpreted] I'm the Head of Corporate Planning Office at SK Energy responding to your second question, the mix between the type of different -- different types of oils. Basically, that mix and split is going to be dependent upon the changes in the market and also is considered our trade secret. So I apologize, I won't be able to divulge any more specifics or details.

But after the implementation of the IMO regime, as I've previously mentioned, currently, we're in the process of newly building the VRDS plant. And once that plant is complete, we are looking towards -- we're looking at about 40,000 barrels per day of LSFO, low sulfur fuel oil, to be produced.

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Myung-Young Lee, SK Innovation Co., Ltd. - Head of Finance Division [33]

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[Interpreted] I'm the CFO responding to your CapEx question. This year, we are looking at KRW 3.5 trillion of CapEx, of which Battery is going to account for around 30% at KRW 1 trillion. And next year, we will see a bit of more new capacity additions. So for the Battery business, the amount will be slightly above KRW 1 trillion.

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Unidentified Company Representative, [34]

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[Interpreted] So with this, we would like to wrap up our Q&A session and also end the earnings conference call for the second quarter 2019.

Thank you very much.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]