SK Innovation Reports 400 Billion KRW Loss in Q3... SK On Achieves First Profit (Comprehensive)

Performance Announcement on the 4th... Impact of Oil Price Decline and Spread Reduction

The merged entity of SK Innovation and SK E&S, with assets totaling 105 trillion won (as of the first half of this year), has officially launched. After about three months of preparation following the merger announcement in July, the largest private energy company in the Asia-Pacific region has been established. The photo shows the SK Seorin Building in Jongno-gu, Seoul, where SK Innovation's headquarters is located. Photo by Kang Jin-hyung

SK Innovation recorded a loss of approximately 400 billion KRW in the third quarter despite its battery subsidiary SK On achieving its first-ever profit.

SK Innovation Turns to Deficit Due to Oil Price Decline

On the 4th, SK Innovation announced its third-quarter results, reporting sales of 17.657 trillion KRW and an operating loss of 423.3 billion KRW. Compared to the previous quarter, sales decreased by 1.1422 trillion KRW and operating profit dropped by 377.5 billion KRW. SK Innovation explained, "Operating profit declined quarter-on-quarter due to inventory-related losses caused by the drop in oil prices and the narrowing spread (margin) of key chemical products." It added, "In the fourth quarter, refining margins are expected to recover amid easing concerns over a global economic downturn, and the battery business is also anticipated to see increased shipments due to the operation of customers' North American plants and new car launch plans."

Despite improved profitability in the battery business, overall performance worsened quarter-on-quarter due to inventory-related losses from falling oil prices and reduced spreads in key chemical products. SK Innovation forecasted, "In the fourth quarter, refining margins will recover as concerns over a global economic recession ease, and the battery business will see increased shipments driven by customers' North American plant operations and new vehicle launches."

By business segment, the petroleum business posted an operating loss of 616.6 billion KRW in the third quarter due to falling oil prices and refining margins amid global economic slowdown concerns and reduced oil demand in China. The chemical business turned to a loss with an operating loss of 14.4 billion KRW, impacted by inventory effects from declining spreads of major products.

The lubricants business achieved an operating profit of 174.4 billion KRW, up 22 billion KRW from the previous quarter, thanks to increased sales volume and margin improvements in the U.S. and European markets. The oil development business recorded an operating profit of 131.1 billion KRW, down 11 billion KRW quarter-on-quarter due to a slight decrease in sales volume and lower composite selling prices caused by falling oil prices.

The battery segment posted a profit, but the materials business saw an expanded deficit due to decreased sales volume from major customers, resulting in an operating loss of 74 billion KRW.

SK On Records First Quarterly Profit Since Establishment

SK On, SK Innovation's battery subsidiary, posted its first quarterly profit since its establishment, thanks to continuous cost-cutting efforts. With the launch of the merged entity, financial stability and profitability are expected to strengthen further. SK On recorded sales of 1.4308 trillion KRW and an operating profit of 24 billion KRW in the third quarter of this year. This marks the first quarterly profit since SK On became an independent corporation in October 2021. Compared to last year, sales decreased by 54.9%, but operating profit turned positive from a loss of 86.1 billion KRW. The company stated, "The third-quarter operating profit was largely influenced by the depletion of high-cost inventory and reduced initial costs at the new plant in Hungary, as well as company-wide cost reduction activities."

[Image source=Yonhap News]

SK On pursued expansion management by consecutively building large-scale plants in the U.S. and Europe but recorded losses for ten consecutive quarters until the second quarter of this year. As a latecomer in the battery industry and with aggressive investments aligned with the electric vehicle market's emergence, this led to group-level rebalancing (restructuring).

With capital expenditures for plant expansions peaking this year and expected to decline, the third-quarter profit turnaround is seen as a signal of substantial profitability improvement. SK On completed its merger with SK Trading International on the 1st and plans to merge with SK Entum in February next year. Upon finalizing the scheduled mergers, the company is expected to generate an additional annual EBITDA of approximately 500 billion KRW compared to pre-merger levels, significantly improving its profit structure.

Starting next year, the easing of the electric vehicle chasm (temporary demand stagnation in a growth industry) and the full-scale operation of new plants are anticipated. SK On currently operates Plants 1 and 2 in Georgia, USA. From next year, battery plants in Tennessee and Kentucky, USA, jointly operated with Ford, will begin operations sequentially. Once these production lines are completed and fully operational, local battery production capacity will increase to 184 GWh, enough for over 2.2 million electric vehicles.

Kim Kyung-hoon, SK On's Chief Financial Officer (CFO), explained during the third-quarter earnings conference call, "We are flexibly adjusting the planned capital expenditure (CAPEX) amounts and timing by monitoring market conditions and customer demand."

Kim added, "With major investments for the BlueOvalSK (BOSK) and Hyundai Motor joint venture (JV) projects scheduled to be executed within this year, capital expenditures are expected to decrease significantly after 2025."

Regarding the BOSK project with Ford, the start of mass production (SOP) at Kentucky Plant 2 will be postponed considering market conditions. Kentucky Plant 1 and the Tennessee plant are planned to start operations within 2025 as scheduled. The Hyundai Motor JV plant also aims to be operational by the end of 2025 as planned, but Kim noted there might be delays due to Hyundai Motor Group's electric vehicle production plans and line operation optimization.

SK On expects sales volume to increase in the fourth quarter as well. Kim said, "Although the recovery in demand for 2024 is delayed compared to initial expectations, sales volume is expected to slightly increase in the fourth quarter due to the operation of customers' new North American vehicle plants and preparations for new car launches in the first half of 2025."