'Lotte Chemical Faces 2Q Deficit, Plans to Cut Investments and Sell Assets (Comprehensive)'

Q2 Earnings Conference Call on the 8th
Operating Loss of 111.2 Billion Won Sustains Deficit
Facility Investment Reduced from 3 Trillion to 1.7 Trillion Won
Investment Plans Deferred, Tightening Belt

Lotte Chemical, struggling due to the petrochemical downturn, saw its second-quarter deficit widen compared to the previous year. The company plans to proceed with asset-light strategies to reduce the proportion of its basic chemical business as planned and aims to enhance financial soundness by deferring existing investment plans.

Panorama of Lotte Chemical Ulsan Plant. [Photo by Lotte Chemical]

On the 8th, Lotte Chemical announced that it recorded consolidated sales of 5.248 trillion KRW and an operating loss of 111.2 billion KRW in the second quarter. Sales increased by 3.4% year-on-year, but the operating loss grew by 60.8%. In particular, the basic chemical segment, which holds the largest business share, posted sales of 3.6069 trillion KRW and an operating loss of 139.2 billion KRW.

Seong Nak-seon, Chief Financial Officer (CFO) of Lotte Chemical’s Financial Innovation Headquarters, said during the earnings conference call held that day, "Although the deficit narrowed compared to the previous quarter due to improved demand in downstream sectors such as home appliances and mobility and positive foreign exchange effects, the improvement was limited due to expanded inventory valuation losses caused by the lag effect from the drop in naphtha prices and increased one-time costs from simple maintenance."

While a gradual supply-demand improvement is expected due to reduced new capacity additions, profitability improvement is also forecasted to be limited. Lotte Chemical stated, "Considering the current spread and sales status, the demand for basic chemicals in the second and third quarters is expected to be similar. However, from the third quarter, a full-scale recovery in product sales is anticipated, so we see potential for performance improvement in the second half compared to the second quarter."

Last month, at the 'CEO Investor Day,' Lotte Chemical announced plans to strengthen the role of basic chemicals as a cash cow through asset-light strategies and maximizing operational efficiency, aiming to reduce its portfolio share to below 30% by 2030.

Lee Hoon-ki, CEO of Lotte Chemical, is presenting the company's strategy at the 'CEO Investor Day' held on the 4th of last month.
[Photo by Lotte Chemical]

Lotte Chemical stated that it has largely completed organizing the list of businesses subject to asset-light strategies. Based on priorities, it is currently in contact with several investors, and some projects have made significant progress, but no projects have been definitively concluded yet.

The company added, "Although some assets are attracting considerable interest from certain investors, the current environment, including high interest rates and delayed industry recovery, makes it difficult for basic chemical business transactions to occur immediately. There are no confirmed details to the extent of mentioning the progress of specific asset or facility sales, so it is not yet the stage to communicate with the market."

Within basic chemicals, Lotte Chemical Titan (LC Titan) recorded an operating loss of 81.1 billion KRW, becoming the main cause of the expanded deficit. LC Titan is a large-scale production base in Malaysia producing petrochemical raw materials such as ethylene, polyethylene (PE), and polypropylene (PP), and is a subsidiary frequently mentioned as a potential sale target recently.

Regarding the cause of the deteriorated performance, Lotte Chemical explained, "LC Titan has a higher proportion of polymer product production compared to other companies, and polymers performed particularly poorly in the second quarter. The impact of about 47 days of scheduled maintenance from April to June was also significant."

Meanwhile, given the ongoing management uncertainties from a short-term perspective, Lotte Chemical plans to enhance financial soundness in several controllable areas. First, it will improve cash flow by deferring existing investment plans. Although it announced at Investor Day that it would improve cash flow by 1.9 trillion KRW by 2025, it plans to adjust an additional approximately 150 billion KRW based on this year.

Capital expenditures (CAPEX) will also be reduced. While about 3 trillion KRW in CAPEX is planned for this year, it is expected to be cut by about half to 1.7 trillion KRW next year.

Lotte Chemical stated, "We are rapidly advancing portfolio sophistication in five strategic business units: basic chemicals, advanced materials, fine chemicals, battery materials, and hydrogen energy. We will enhance financial soundness through measures such as accounts payable securitization and working capital improvement."