SOLCF - SOL Global Investments Corp. (SOLCF) Q2 2023 Earnings Call Transcript
2023-07-28 09:29:05 ET
SOL Global Investments Corp. (SOLCF)
Q2 2023 Earnings Conference Call
July 28, 2023, 03:00 AM ET
Company Participants
Conference Call Participants
Lee Jin Myung - Shinhan Investment Securities
Parsley Ong - JP Morgan
Yoon Jae Sung - Hana Securities
Lee Jinho - Mirae Asset securities
Presentation
Unidentified Company Representative
Good morning, everyone. This is [indiscernible] the Treasurer of SOL. I’d like to extend my gratitude to investors and analysts, home and abroad for joining the conference call for SOL’s Q2 Earnings Release. Here with me are, Executive Vice President and the CFO Ju-Wan Bang, IR team [leader indiscernible] and team members.
Before we go through performance highlights, let me brief you on the company’s shareholder return policy. Believing that returning profits of the company to shareholder is based on consistent shareholder return policy, while maintaining sustainable growth and competitiveness is the best way to maximize the shareholder returns. We are implementing a consistent dividend policy of paying out dividend in consideration of annual net income, stable capital structure and funding needed for investment aimed at future growth. We also disclosed Pacific Dividend guideline on a regular basis to improve investors outlook on the probability of dividend payment.
Yesterday, the company disclosed dividend guideline that maintains dividend payout ratio at around a 20% of net income or higher during fiscal year 2023 and 2024 to protect shareholder value even with the large scale investment in Shaheen project. This is a conservative approach given that we are at the initial stage of the Shaheen project which requires huge CapEx.
Once the investment funding for the project is a secured above a certain level dividend payout ratio may go up again even during the project period as we did during RAC [ph] and ODC [ph] project which was completed in 2018.
Now, let me move on to performance highlights of Q2. In Q2 2023, the company recorded won36.4 billion in operating income due to larger scale regular T&I. Despite the decline in refining margin, the company's complex margin remained healthy, thanks to stable petrochemical and LVL [indiscernible] margin. But in Q2 large scale T&I across the refinery from refining to petrochemical and lube based oil units including Number two RFCC in April and the number three CDU CFU hydrocracker and the number two PX in June resulted in a big opportunity loss.
Also Dubai benchmark price, which inches down from the previous quarter cost inventory related loss. Overall negative impact of regular T&I and inventory impact on income in Q2 amounts to over won320 billion. In the second half, the company's income however, will improve rapidly by fully capitalizing on healthy complex refining margin as there is no scheduled T&I.
Next is the progress of the Shaheen project [ph]. In response to energy transition, the company is implementing Shaheen project [ph] to enhance our corporate value in the long-term. Site preparation and EPC works are on the full-fledged execution with actual progress going smoothly according to the plan. Also, financing of the project is ongoing as planned. Shareholder loan and standby credit line from major shareholder and borrowings from domestic financial institutions are at the final stages of signing a loan agreement at competitive interest terms and conditions.
Next is the company's ESG management. Recognizing deeply that non-financial values represented by environment, society and governance or ESG eventually influenced corporate value. We are putting efforts to contribute to a sustainable growth of both the country and society through well structured ESG that reflects the need of stakeholders.
We established an organization to steer ESG management from BOD and the top management with accountability and reflect it in all business activities. Under such a structured framework, the company is continuously implementing and improving ESG management. Thanks to these efforts, SOL’s ESG management is recognized in and out of the country.
We were selected as a member of Dow Jones Sustainable Index Growth Companies which is one of the most prestigious indicators in ESG management for 13 consecutive years and received the highest ESG rating from Korea Institute of Corporate Governance and sustainability. Even with these achievements we won’t settle. Instead we will keep innovating ourselves advance ESG management and fulfil social responsibilities thereby live up to the trust and expectations of the stakeholders.
With that, let me turn the call over to team leader [indiscernible] for financial performance and other details.
Unidentified Company Representative
Good morning. This is SOL’s IR team leader [indiscernible]. Please be noted that 2023 Q2 financial results are provisional and thus subject to change according to independent external auditors review.
Let me start with the Q2 2023 performance and outlook for the next quarter. Please refer to Page 5, for Q2, 2023 Financial Results. In Q2, the company's revenue stood at won78196 trillion, down by 13.9% from the previous quarter as sales volume reduced on the back of major T&I and average oil price edged down from the previous quarter.
Q2 operating income recorded won36.4 billion. Refining business turned to too bad due to larger scale regular maintenance, reduced the refining margin and inventor related loss. By comparsion, contribution of Petrochemical and LVL business to income creation improved widely thanks to strong PX and lube based oils margin. For your information, impact of regular maintenance on Q2 income is minus won255.6 billion and inventory impact is minus won67.5.
In finance and other gain and loss the company recorded a negative won33.8 billion of income before tax in Q2 due to won50.8 billion of FX related loss caused by $1 rate increase. The company operates at FX risk management policy that affects FX loss on the non-operating side with FX impact from operating income throughout the year. Operating income and income before tax in the first half recorded won552.1 billion won321.1 billion respectively.
Next, financial status. Despite increased CapEx execution and the payment of corporate tax and dividend for 2022, cash balance in Q2 and recorded won1.956 trillion building enough reserves that took into account Shaheen project [ph]. Net debt to equity ratio stood at 45.8%, which is similar to the previous year end, keeping the company's financial structure stable. As for profitability indicators, temporary slump in performance due to regular maintenance led to 5.8% of ROE and 5.9% of ROCE respectably in the first half. EBITDA during the same period. recorded won627 billion.
From this page, I will take you through market dynamics and I'll look for each business segment. First is refining business. In Q2, refining business posted operating loss of won292.1 billion. As was mentioned, one off events such as opportunity loss caused by major regular maintenance and inventory related loss and the bulk of oil price drop had a big impact on the refining business in addition to Asian refining margin, which adjusted downward during Q2.
In particular, China's manufacturing sector, real estate, construction business and industrial activities in general did not recover as we expected. And refining products for industrial use were also slow. As a result, the price of diesel used in industrial equipment and transportation and nafta which is petrochemical [indiscernible] were adjusted down significantly. Dubai benchmark price averaged at $79 per barrel in June, slightly inched down from March average of $78.50. This oil price trend was mainly affected by the mixture of various factors led by worries over global recession and bullish factors led by output cut of OPEC plus.
As for Q3 outlook, Asian refining margin is forecasted to be supported by demand growth in mobility and travel, driven by the first summer peak season after the lifting of moving restrictions in China late last year. Especially, refining margin is recovering rapidly into July. In the week of 24th of July, Singapore refining margin improved by more than $3 per barrel, compared to Q22 average.
As for the outlook for each product, gasoline's spread is expected to remain healthy during summer driving season in the northern hemisphere. According to major institutions, global gasoline demand in Q3 will be around the 27 million BD up by over 800,000 BD, year-on-year, and 80% of which is analyzed to come from China and the U.S. In particular, gasoline inventories in the U.S., which is maintained at the level lower than past year's average as a bullish momentum that is anticipated to support gasoline spread of other regions.
Jet fuel spread is expected to be supported by air travel demand, which is recovering continuously after the pandemic and summer peak season. According to aviation industry, global air passenger demand for domestic flights is hovering over pre-pandemic level as of May this year. For international flights, it recovered to over 90% of May, 2019 level before the pandemic hit the world. Seasonality added to such post COVID recovery is forecast to raise global demand for jet fuel and kerosene in Q3 by 1 million BD year-on-year and by 440,000 BD from the previous quarter according to the outlook of major institutions.
As for diesel, global economy activities and the speed of recovery in manufacturing sector led by China are likely to affect the market. Demand fueled by driving season in EU and subsequent inventory reduction and demand pickup in the region other than China, which includes Japan, Southeast Asia and Middle East are also anticipated to support the market.
Next is petrochemical business segment. Despite regular maintenance of number 2 PX unit operating income of our petrochemical business soared by 180% from the previous quarter to won82 billion. First for aromatics, PX and benzene spread in Q2 widened from the previous quarter recording $428 and $271 per ton respectably. Supply was tight due to concentrated regular maintenance of regional factories facilities while demand picked up as gasoline blending demand went up in summer peak season. This contributed to the significant improvement in the spread compared to Q1.
In Q3, regardless of added supply from the start up of new facilities in China and Middle East, consistent demand for gasoline blending and new downstream capacity expansion are forecast to support the market. As for olefin downstream, market fundamentals for PP and the PO in Q2 improved as regular maintenance and operation glitch of several plants in the region reduced the supply, but demand recovery in China, which was lower than expected and new capacity addition, limited further improvement.
In Q3, PP and PO market is anticipated to recover gradually in connection with the pace of manufacturing activities, mainly in China. Expectations for China's economy stimulus package in the second half and demand improvement in consumer durables may work as a catalyst for recovery. However, increase of supply due to regional suppliers at start up following regular T&I and operation of new capacities are expected to affect the speed of recovery.
Moving on to lube based oil business segment, Q2 operating income of LU based oil business stood at won246.5 billion, up by 26% from the previous quarter despite regular maintenance. As for market dynamics in Q2 spread remained healthy due to seasonality driven demand and market fundamentals, which was affected by regular T&I of our major suppliers, in particular, demand to pick up during spring oil change and summer driving season was led by China and India.
In Q3 LBO’s spread is forecast to be adjusted downwards slightly with the increase of supply after the completion of a concentrated maintenance by major suppliers. However, spread is expected to be maintained at a sound level above historical average as tight supply continues due to the lack of new capacity addition this year. In addition, lube to shift from lube based oil product to refining product growing demand in summer high season may additionally support the market.
Next, let me cover key business updates. First, the progress of Shaheem project [ph]. After final investment decision in November last year the company put its best effort over the past six months to execute the CHIME [ph] project, allowing us to share with investors meaningful progress of the project. Currently, site preparation and EPC work are ongoing, site preparation, which is scheduled for 18 months from January this year, is showing the progress rate of 17% as of late June.
The progress of EPC work is at 5.4% as of second quarter end with the progress going smoothly according to the plan. As detailed engineering design is concentrated in the current stage of EPC, the company is mustering up all our energies to raise the value of this project at this stage. As for procurement, vendor selection and purchasing order for key long lease items were completed in June, financing for the project is in progress too.
After completing discussion on the outline of a shareholder loan and standby credit line with major shareholder, we are preparing for detailed agreements. We have also either closed or are at the final stage of a closing loan agreement with the domestic final institutions at a competitive interest rate.
When final investment decision was made in last November, the company set financing plans for the project, assuming very conservative business income scenario during project period, reflecting all uncertainties with the goal to secure all the funding needed for investing into the project. Even though our Q2 performance is temporarily bearish, the company's external financing size and plan will remain the same.
Slide 12 is about ESG management. As SOL is committed to sustainable growth of the society through well-structured ESG management that satisfies the need of various stakeholders. Let me briefly touch on organizational structure, framework to support ESG management and what we have achieved so far. The company established the ESG management that consists of outside and non-standing directors as a subcommittee of BOD. After getting approval from ordinary general meeting of our shareholders in March, the company convinced the committee every six months.
ESG committee oversees the company's overall strategy, policy and achievements related to various ESG issues, including climate change. In 2021, ESG steering committee was established to push forward ESG management from company-wide perspective. The committee is comprised of officers responsible for ESG measures in operation, marketing, finance, corporate planning, HR and the legal compliance division.
Also dedicated organization plan checks the status and communicates with related stakeholders on ESG management throughout the year. SOL executes and improves the ESG management based on its structured framework where ESG roadmap is established based on the analysis of a trend, global standard and stakeholders need for ESG. Under the roadmap, there are action plans on environment, society and governance. ESG’s steering committee reviews the progress of a roadmap every quarter and shares quantitative measurement of final results through ESG performance indicator with external parties.
Let me provide you specific examples for ESG roadmap for your better understanding. The company prioritized a reduction in greenhouse gas emission aligning with the global trend under the long-term decarbonization roadmap that we prepared with top global concerning firm. We aim to improve energy efficiency of existing business in the short term through investment and actively utilize solutions such as carbon capture usage and storage, or CCUS, biofuel and plastic recycling in the mid to long-term driven by technological advances.
Other than this, various action plans, which were set up under the initiative such as reducing emissions of a pollutant, reinforcing safety and health policies, corporate citizenship activities, governance, compliance and ethics management are in good progress as well. We also strongly support contractors who are our external stakeholders to enhance their ESG competencies. Going forward, we'll try to share details of the progress in ESG management in detail with investors on a regular basis. This is the end of our presentation. Thank you.
[Foreign Language]
Question-and-Answer Session
Operator
Now, Q&A session will begin. [Operator Instructions]
[Foreign Language]
Operator
The first question will be given by Lee Jin Myung from Shinhan Investment Securities. Please go ahead.
Lee Jin Myung
[Foreign Language]
I have three questions. First is with regard to the investment of CapEx for SHINE [ph] project, could you break it down between financing from the outside and also the internal [ph] cash generation? Second is about the interim dividend. Is there any chance for SOL to raise its dividend payout ratio in the future if the company's performance improves? And third is, these breakdown, the inventory valuation and the opportunity loss cost price and regular turnaround high businesses?
[Foreign Language]
Unidentified Company Representative
So, this is CFO JW Bang [ph]. With regard to the investment funding required for Shaheen [ph] project during the FID in November board last year we have made the eight - the board made the resolution that 30% of the CapEx required for Shaheen project [ph], which is equivalent won 2.65 trillion will be financed from the-- from outside. Out of this, won 780 billion is shareholder loan, won 1 trillion is banks and facility loan, and won 870 billion is the company's and corporate bonds, and the remaining 70% will be generated internally through our operating activities, which include [indiscernible] and the credit period extension.
We have made this financial plan of assuming a very conservative income scenario, which means that we will be able to afford a project with our internal cash generation even when the business environment and institution get worse. And for your information, with regards to the external financing, the shareholder loan and the credit -- standby credit line with our majority shareholder, we have concluded of the agreement roughly speaking, and now the details of the terms and conditions are being ironed out as for the won 1trillion is a loan from the financial institutions.
We've also arrived at a conclusion and signed a deal with a very competitive rate and terms and conditions for the company. Part of them has been agreed and part of the other part of them will be [indiscernible].
[Foreign Language]
As to answer your second question about the dividend, as was disclosed to the market yesterday about the dividend guidelines please be noted that we are at the beginning stage of the project and we have looked at this from a very conservative point of view, the fact that there are many uncertainties in the future. However, if the company's potential in performance improves, then there is a -- we cannot overrule the fact that we may raise the dividend payout ratio, of course subject to our financial performance for 2024.
With regard to our dividend after 2024 and onwards, it will be disclosed to the market once the timing is right. And with regard to the dividend amount itself, we are looking into a number of factors before we make a decision. They include the company's net income, the company's growth strategies, and our financial structure, and those will all be consistent with the company's dividend guidelines and will be subject to resolution by the board of directors and the ordinary general meeting of shareholders.
[Foreign Language]
So to answer your question about the inventory impact and the T&I impact in Q2 for the inventory valuation the total loss amounts to minus won 67.5 billion in Q2. And if we split this by segment, it is minus won77 billion for the refining business, minus won 32 billion for the petrochemicals and plus won 41 billion for the lube based oil business. About the T&I's impact on the company's in income in Q2, it totals roughly minus won256 billion out of which minus won117 billion is in the refining business, minus won58 billion in the petrochemicals and minus won81 billion in lube based oil.
[Foreign Language]
The following question is by Parsley Ong from JP Morgan. Please go ahead.
Parsley Ong
Hi, this is Parsley from JP Morgan. Thank you for the chance to ask questions. So, I know, I’m not sure if you can comment, but of course the market is paying a lot of attention to your dividend PR ratio. Maybe could you give us a sense of, you mentioned hiking the PR ratio in future when your fundings are met, could you share with us some kind of for effort to hike the PR ratio in 2024 or 2025 to let's say 40%, what kind of minimum EBITDA or net profit or operating cash flow do we need to see the company achieve before management might consider that?
Second question is on your lubricants outlook. We have seen a pretty strong lubricant spread for a longer than expected amount of time. Could you share your guidance or your expectation on how long this strength will last and do you see potential for the margins to decline to below 20% OP margin over the next few years?
And third question is on your utilization rate, you have finished all your maintenance in first half, I see that you have no maintenance plan for second half. Could you share your CDU, PX, PP, PO and lubricant utilizations in second half? Can I assume all of them are a 100% or some other number? Thank you.
[Foreign Language]
So, with regard to your first question, well we cannot give you a concrete number that could support with exactly when and what it mean or when we will be able to fully secure the investment funding for the project. However, we are going to make a decision based on how far we have come in securing the funding and the financing for the project and we'll also look into business environment at that particular time.
But even when the business environment significantly [indiscernible] in the future, if there is a strong level of confidence that we have no difficulty in securing the funding and the financing for the project, that will be the timing when we can make a new decision, another decision in the future. But the exact timing will be very subject to our financial performance in the future.
[Foreign Language]
However, please be noted that when the business environment improves and when the company's income size is much better than our business plan, then the company's dividend policy could become more friendly to the shareholders in the future. But also please be understood that we cannot give you a concrete or a precise numbers with regards to the dividend payout ratio or the EBITDA.
[Foreign Language]
So to answer your second question about the outlook for the lube based oil market in the mid to long-term, we are expecting a demand growth particularly in the premium group two and group three lube based oil, and about 40% of that demand growth will come from Asia out of the total demand growth across the world. And also our outlook suggests that new capacity, conditions, or expansions will come in 2024 and onwards, which means this market will go through structurally tight market fundamentals.
[Foreign Language]
And as for the company's process throughput rate for the CDU and the CFU, which is our core processing units the turnarounds have been completed in June and the beginning of July. And our upgrading facilities namely Hydro [ph] and number 2PX we've also had the T&I for them. The T&Is for these facilities were also ramped up at the beginning of July and the middle of June. So we can say that the T&I for this year is now complete.
[Foreign Language]
As you know, we had intensive T&I in Q2 where the refining margin was quite bare, which allowed us to minimize the opportunity a lot. But in the second half of the year, there's no plan for T&I, which means we'll be able to capture the robust margin and hopefully maximize the company's profitability.
[Foreign Language]
Hope that answers your question.
Operator
[Foreign Language]
The following question is by Yoon Jae Sung from Hana Securities. Please go ahead.
Yoon Jae Sung
[Foreign Language]
Thank you for giving me the opportunity to pose questions. I have two questions. Could you tell us if you have any data, could you please tell us the global net capacity expansions from 2023 to 2025? The second question is about the gasoline margin, which is bullish these days. And if this keeps going, is there any chance for SOL to adjust the yield of PX and BTX?
Unidentified Company Representative
[Foreign Language]
So to answer your first question about the global refining capacity net edition well, there are the data on the outlook by major institutions around the world, but there's also a variation in their outlook. But if you look at the long-term from 2023 to 2030 the estimate or the outlook is 4 million BD of net refining capacity additions. Whereas the demand growth during that same period is 7 million BDs, which means the net capacity additions will not be able to catch up with the growth in the demand which will put the market in over a -- in surplus demand situation.
[Foreign Language]
So if I may give you the estimate by year, for 2023, it is roughly 1.3 million BD to 1.7 million BD. But there is still a difference, there's a range in this because there will be some timing issue about as to when the new facilities will start up, and there will also be some facilities that will shut down at the same time, so there's a range in that. If we find the data for 2024 and 2025 the net capacity additions will be roughly 1.7 million BD to 2 million BD. And after that, from 2026 and onwards the net additions will slowly moderate.
[Foreign Language]
So with regard to your second question, we optimize our process operation with the goal to maximize the company-wide business performance. And we do still by monitoring the business environment and the business conditions throughout the year. So when we make a decision on, on how to maximize the company's income, we look at the relative price of aromatics, NAFA, and gasoline. And in doing so, we make decisions on how we are going to adjust and optimize our process operations. For now, the margin for PX and aromatics are quite bullish, so we're running at max, but depending on the situation, when the gasoline margin outperforms that of aromatics, then we can -- we do make decisions to blend the aromatics for a gasoline in order to capture the strong gasoline margin.
[Foreign Language]
That answers -- that hopefully answers your question.
[Foreign Language]
Operator
The following question is by Lee Jinho from Mirae Asset securities. Please go ahead.
Lee Jin Ho
[Foreign Language]
So I have a question about the lube based oil. I read a news article about the government's possible regulations on the lube based oil sales, of the Korean lube based oil sales to Russia. Could you tell me if this could have an impact on SOL’s lube oil sales? Second is could you please update SOL’s group one, two, and three capacity?
Unidentified Company Representative
[Foreign Language]
So about the possibility of selling lube based oil to Russia, my understanding is that the government's policy on this is not firm yet, so I don't think it is appropriate for me to make any comments on this. However, we know that the lube based oil market is very strong fundamentally these days. So we are trying to take full advantage of it, and we're also taking advantage of the fact that we have a very strong marketing network in Europe, the United States and elsewhere. So we're trying to capture the bullish margin at the moment. As for the capacity for group one, two, and three lube based oil. We have shared that through our disclosure, but we will also try to update you separately.
[Foreign Language]
Let me pick on what Mr. [indiscernible] just said about the sales to Russia. Please be noted that we have no export record of lubricants to Russia. So even if -- even when the government comes up with a regulation on lubricants sales to Russia, we will not be affected from that because we're not selling it to Russia.
[Foreign Language]
Hope that answers your question.
Operator
[Foreign Language]
Currently, there are no participants with question. [Operator Instructions]
[Foreign Language]
Unidentified Company Representative
So I think our time is up, but I would like to thank all the analysts and investors for always showing your interest and attention to SOL. We'll always try to communicate with the market with an open mind. So if you have any further questions about the company's performance or business please feel free to contact SOL’s IR team anytime and we will try to come up with the answers. So this concludes the Q2 Earnings Release Conference Call. Thank you very much.
[Foreign Language]
Operator
This concludes the fiscal year 2023 Second Quarter Earnings Returns by SOL. Thank you for your participation.
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SOL Global Investments Corp. (SOLCF) Q2 2023 Earnings Call Transcript