Refined Margin and Paraxylene Spread Improvement Effect
"Q2 China Reopening in Full Swing... Profitability Improvement Expected"
SK Innovation, which posted a deficit of 600 billion KRW due to the sharp drop in oil prices in the fourth quarter of last year, succeeded in turning a profit in just one quarter.
On the 4th, SK Innovation announced that it recorded sales of 19.1429 trillion KRW, operating profit of 375 billion KRW, and a net loss of 52 billion KRW in the first quarter of this year. Compared to the same period last year, operating profit decreased by 77.3%, but the operating loss of 683.3 billion KRW in the fourth quarter of last year turned into a profit. Sales increased by 17.7% compared to the same period last year (16.2615 trillion KRW) and slightly increased compared to the previous quarter (19.1368 trillion KRW).
The main factors for the recovery in performance were improvements in refining margins and paraxylene (PX) spreads. The spread refers to the value obtained by subtracting raw material costs from product prices. Although the price of naphtha, the raw material for PX, also rose, demand increased due to expectations of China's reopening, and as a result, product prices rose more, improving margins. Pre-tax profit was 156.3 billion KRW due to non-operating losses of 218.7 billion KRW caused by foreign exchange losses from the rise in exchange rates at the end of the quarter and a reduction in gains from commodity derivatives. Net borrowings increased by 1.0362 trillion KRW compared to the end of last year, reaching 15.551 trillion KRW due to expanded investment expenditures in the battery business.
Looking at the performance by business segment, the battery business achieved its highest quarterly sales. Thanks to the ramp-up of factories newly started last year, sales increased by 427.9 billion KRW from the previous quarter to 3.3053 trillion KRW. Operating loss was 344.7 billion KRW. The deficit slightly increased due to a rise in one-time costs. Operating profit margin improved due to increased battery sales volume and yield improvement at new factories.
The petroleum business turned to profit with an operating profit of 274.8 billion KRW in the first quarter of this year, compared to a loss of 661.2 billion KRW in the previous quarter. Operating profit increased as refining margins improved due to the decline in OSP (Official Selling Price of crude oil from Middle Eastern oil-producing countries such as Saudi Arabia) and inventory-related losses decreased due to the easing of the oil price decline. The chemical business posted an operating profit of 108.9 billion KRW, up 197.3 billion KRW from the previous quarter, due to the rise in PX margins, inventory-related profit and loss effects, and a decrease in fixed costs.
The lubricants business recorded an operating profit of 259.2 billion KRW, down 9.2 billion KRW from the previous quarter due to intensified sales competition and a decline in the average exchange rate compared to the previous quarter. The petroleum development business recorded an operating profit of 113.5 billion KRW, down 3.1 billion KRW from the previous quarter due to increased cost of sales despite increased sales and decreased selling and administrative expenses. The materials business recorded an operating loss of 4 billion KRW, reducing the deficit by 0.9 billion KRW compared to the previous quarter thanks to the elimination of one-time costs, increased production, and cost improvements.
The battery business is expected to continue improving sales and profitability in the second quarter of this year with additional ramp-up of new overseas factories. With the implementation of the US Inflation Reduction Act (IRA), the benefit of the Advanced Manufacturing Production Tax Credit (AMPC) is expected to be reflected in accounting, leading to further profit improvement. The materials business is also expected to see gradual sales growth due to increased demand from major customers.
Kim Yang-seop, head of finance at SK Innovation, said, “Although domestic and international market volatility is increasing this year, we will maintain a stable financial structure by improving profitability through operational optimization.”
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