Speaker #1: Good afternoon. This is Hwang Yeon-kyung, head of the IR team at Lotte Chemical. I thank everyone for your time and interest in Lotte Chemical and your participation in this conference call.
Speaker #1: We will start with the presentation on the company's 2026 Q3, followed by a briefing by the CFO on our business highlights. Then it will be followed by a Q&A session.
Speaker #1: Please be informed that the presentation will be conducted in simultaneous interpretation and the Q&A in consecutive interpretation. The presentation slides can be downloaded from the company's website.
Speaker #1: I will now introduce the executives in attendance. First, from the HQ, Vice President and CFO Song Nak-soon and Vice President and CSO Kim Min-woo, from Basic Chemical, Vice President Kwak Yu-seop, head of the Strategy Management Division, Vice President Shim Hyung-seop, head of the Sales Division, from Advanced Materials, we have Vice President Park Jin-seok from the Corporate Planning Division.
Speaker #1: Let me now turn to business results of 2026 Q3. This is Q3 profit and loss on the consolidated basis. Revenue in Q3 was 5.3951 trillion won, with operating loss of 281.4 billion won.
Speaker #1: Turning to loss, QOQ. In Q3, the rise in feedstock cost was not fully priced in to the products, which narrowed the spread. Korean Won's 's appreciation and rise in the freight cost further served to dampen our profitability, QOQ, EBITDA was 51.1 billion won, pre-tax loss and net loss were 398.4 billion won and 289.7 billion won, respectively.
Speaker #1: Pre-tax income fell, QOQ, owing to the operating loss, weaker equity method valuation gained due to slower performance by affiliates, as well as the base effect of the derivatives valuation gain that was reflected in Q2.
Speaker #1: Next is the financial positions. Asset at the end of Q3 was 28.9 trillion won, liabilities were 11.9 trillion won. Shareholders' equity was 17.1 trillion won.
Speaker #1: Debt-to-equity ratio stood at 69.5%, lowered by 7.3 percent points, QOQ, following the transfer of borrowing as part of the Tesla business restructuring. Next, I will cover results and outlook by business division.
Speaker #1: First is Basic Chemical. 2026 Q3 Basic Chemical sales posted 3 trillion 723.5 billion won, operating losses posted 216.6 billion won, and operating income ratio recorded minus 5.8%.
Speaker #1: In Q3, spread declined as product prices did not increase in line with rising feedstock cost, and along with the unfavorable exchange rate, it turned to a loss, QOQ.
Speaker #1: In Q4, market conditions are expected to remain weak due to continued global oversupply and delayed market recovery. Next is Advanced Materials. 2026 Q3 revenue posted 1 trillion 89.3 billion won, operating income posted 15.4 billion won, and operating income ratio recorded minus 1.4%.
Speaker #1: Profitability declined compared to the previous quarter due to narrower spreads, negative lagging effects, and unfavorable exchange rate. In Q4, gradual improvement is expected with the increase of major product sales, but exchange rate declined and elevated freight costs burden is expected to continue.
Speaker #1: Next is Lotte Fine Chemical. Since the results were explained in detail during the October 29 earnings disclosure, I will just go over the highlights.
Speaker #1: Q3 revenue posted 525.3 billion won, operating income posted 22 billion won, and operating income ratio recorded 4.2%. Revenue and operating profit declined, QOQ, due to lower international prices of key products, unfavorable exchange rate movements, and reduced sale volumes.
Speaker #1: Market conditions are expected to remain slightly weak in Q4 amid seasonal demand softness and unfavorable exchange rates. Last is Lotte Energy Materials. Lotte Energy Materials was also explained in detail during yesterday's earnings conference call, so I will just touch upon the highlights.
Speaker #1: Q3 revenue was 289.7 billion won, and operating loss stood at 21.3 billion won. In Q3 revenue increased 49%, QOQ, and profitability slightly increased driven by higher sales volumes to North American ESS and global EV customers.
Speaker #1: In Q4, sales volumes and profitability is expected to gradually improve driven by North American ESS and EV demand growth and the startup of new production line in Malaysia.
Speaker #1: With this, I will finish covering 2026 Q3 performance and invite our CFO, Nak-soon Song, to explain about our major highlights. Greetings, everyone. I am Nak-soon Song, VP and CFO of Lotte Chemical.
Speaker #1: I would like to express my sincere appreciation to all investors and shareholders for taking time out of your busy schedules to attend our 2026 Q3 earnings presentation.
Speaker #1: First, I will elaborate on business environment and performance. Throughout this year, ongoing geopolitical risk in the Middle East has significantly increased volatility in both feedstock and product prices, while market conditions in the petrochemical industry have remained highly unpredictable.
Speaker #1: In the first half, supported by higher product prices driven by geopolitical risk in the Middle East and favorable feedstock cost lagging effects, we returned to profitability but in Q3, feedstock prices rose amid renewed tensions in the Middle East, while weak demand from downstream industries driven in part by inflation limited our ability to fully pass on higher costs to product prices.
Speaker #1: These challenges were compounded by the appreciation of the Korean Won and rising ocean freight rates, adding further cost pressures and resulting in a return to operating loss in Q3.
Speaker #1: We regret to report financial results that have fallen short of our investors' expectations. We expect uncertainty stemming from aforementioned external factors to persist as well into Q4.
Speaker #1: However, we expect a gradual reduction in operating losses compared to Q3 as temporary cost pressures concentrated in Q3 begin to ease and also through our business reorganization.
Speaker #1: We will flexibly respond to the changing market conditions, maintain our focus on profitability, and concentrate our efforts on securing a stable business foundation. Despite these challenging external business environment conditions, we are internally proceeding with our business reorganization and portfolio optimization in initiatives as planned, with the aim of building a more resilient business structure that can withstand fluctuations in market conditions.
Speaker #1: Tesla planned completed the establishment of H&L Advanced Integrated JV in September and is currently focusing its efforts on establishing a stable integrated operating system and in generating synergy.
Speaker #1: Yazu Business Restructuring Plan involves a spin-off of Yazu Plan Operations with the goal of launching an integrated entity with Yazhan NCC in the first half of next year, and we are currently in discussion with our partners to finalize the details.
Speaker #1: After integration, we plan to establish a foundation for structural improvements in the profitability of our Basic Chemicals business by enhancing operational efficiency and increasing the proportion of high-value-added products.
Speaker #1: We will provide updates on the specific timeline through disclosures once it has been finalized. Through this reorganization, we aim to strengthen the competitiveness of our Basic Chemicals business while gradually reducing its share in our overall portfolio.
Speaker #1: At the same time, we plan to expand our high-value-added businesses, including Advanced Materials and Specialty Chemicals, to build a more balanced business portfolio. Through this, we plan to reduce earnings volatility and lay the foundation for generating stable cash flows.
Speaker #1: First, in our Advanced Materials business, as mentioned in the previous quarter, our year-turn compound planned began operating in all 23 production lines in September, establishing Korea's largest compounding production capacity of 500,000 tons per year.
Speaker #1: In Q1 of next year, we plan to bring an additional production line dedicated to high-value-added products online, further increasing the share of specialty products in our portfolio.
Speaker #1: In our Specialty Chemicals business, we are expanding our green materials business, including food and pharmaceutical ingredients, and on the other hand, we are continuing to invest in expanding our TMAC production capacity of key raw material using semiconductor developers to meet demand for semiconductor materials.
Speaker #1: We are also focused on strengthening our financial position to ensure that the benefits of our business restructuring portfolio optimization initiatives translate into improved financial soundness.
Speaker #1: We have completed the transfer of borrowings associated with the restructuring of our Tesla business, improving key financial indicators by reducing our debt levels and debt-to-equity ratio, and going forward, we plan to further strengthen our financial position through the restructuring of our Yazu business and the optimization of non-core assets, thereby building a more robust financial foundation.
Speaker #1: In addition, we will maintain our principle of keeping capital expenditures within EBITDA and continue to adopt the cash flow-oriented approach to financial management, placing the highest priority on financial soundness and profitability.
Speaker #1: Dear investors and shareholders, we take very seriously the fact that our company was included in KRX's list of low PBR companies announced on November 2nd.
Speaker #1: While market conditions in the petrochemical industry remain challenging, we are proactively restructuring our business to build a more competitive business structure rather than simply waiting for a market recovery.
Speaker #1: We are committed to completing our business structuring initiatives as planned, strengthening our financial position, and establishing a stable earnings base by shifting our portfolio toward high-value-added businesses.
Speaker #1: Through these efforts, we believe that building on these improvements, we will strive to ensure that our company's intrinsic value will be properly recognized by the market.
