SK Innovation Battery Business, Record High Sales and Minimal Losses (Comprehensive)

Battery Business Quarterly Record High Sales of 3.6 Trillion
Operating Loss Rate Lowest Ever at -3.5%

"Expect Additional Profit Improvement in Second Half with AMPC"

Oil Business Operating Loss of 411.2 Billion
Chemical Business Operating Profit of 170.2 Billion, etc.

"Gradual Improvement After Refining Margin Bottom
Full Recovery Expected in Second Half"

SK Innovation Vice Chairman Kim Jun is presiding over the "16th Regular General Meeting of Shareholders of SK Innovation" held on March 30 this year at the SUPEX Hall in the SK Seorin Building, Seorin-dong, Jongno-gu, Seoul. From the left in the photo, Kim Yang-seop, Head of Finance at SK Innovation, Kim Jun, Vice Chairman of SK Innovation, Ji Dong-seop, President of SK On, and Na Kyung-su, President of SK Geocentric, are answering shareholders' questions during the "Dialogue with Shareholders" session. Photo by SK Innovation [Image source=Yonhap News]

SK Innovation expects additional profit improvement in the second half of this year under the Advanced Manufacturing Production Credit (AMPC) within the U.S. Inflation Reduction Act (IRA).

Kim Yang-seop, Chief Financial Officer (CFO) of SK Innovation, said during the Q2 earnings conference call on the 28th, "The effect of AMPC was reflected as 167 billion KRW in operating profit in the first half of this year," adding, "With a significant increase in sales volume in the second half, the amount of benefit compared to the first half will increase substantially." SK Innovation also explained that there is no plan to share AMPC benefits with customers.

An SK Innovation official stated, "Since the SK On standalone plant was directly invested by the company, there is no plan to share AMPC with original equipment manufacturers (OEMs)," and added, "For joint venture plants, the joint venture company receives the entire AMPC, not shared with customers."

On the day, SK Innovation announced its Q2 results with sales of 18.7272 trillion KRW and an operating loss of 106.8 billion KRW. Compared to the same period last year, sales dropped by 5.9%, and operating profit turned into a loss from 2.3292 trillion KRW. Compared to the previous quarter, sales and operating profit decreased by 415.7 billion KRW and 481.8 billion KRW, respectively. Last year, oil companies recorded exceptional performance due to the surge in international oil prices and high refining margins amid the Russia-Ukraine war.

SK Innovation stated, "The oil business was affected by the decline in oil prices and refining margins due to concerns about economic slowdown in Q2," but added, "The chemical business maintained a solid aromatic market centered on paraxylene (PX), and the battery business minimized losses thanks to improved yield at new plants and the reflection of AMPC benefits under the U.S. Inflation Reduction Act (IRA)."

Record Low Operating Loss Rate of -3.5%... Battery Business Nears Profitability

The battery business showed remarkable progress. Since its spin-off in Q4 2021, SK On achieved its highest quarterly sales ever at 3.6961 trillion KRW. Operating loss was 131.5 billion KRW, reduced by about 210 billion KRW compared to the previous quarter. The operating loss rate gradually decreased from -29.4% at launch to about -3.5% in Q2 this year. EBITDA (earnings before interest, taxes, depreciation, and amortization) turned positive again at 72.5 billion KRW, up from 9.4 billion KRW in Q3 last year.

SK Innovation said, "The battery business achieved sales growth of 12% compared to the previous quarter (3.3053 trillion KRW) and 187% compared to the same period last year (1.288 trillion KRW) due to productivity improvements and increased customer demand," adding, "Sales in the first half of this year reached 7 trillion KRW, a significant increase from 2.5 trillion KRW in the first half of last year." The AMPC benefit reflected in the first half (167 billion KRW) improved operating profit and loss, and additional profit improvement is expected in the second half with expanded AMPC benefits from increased sales volume. SK On is sequentially operating overseas base plants, mainly in North America. Since last year, it has been stabilizing process yields by sequentially operating plants 1 and 2 in Georgia, USA.

Regarding the oil business, SK Innovation said, "With the expected easing of U.S. monetary tightening and a strong peak driving season, a favorable business environment from the demand and supply side is expected to lead to improvement throughout the second half."

Looking at performance by business segment, the oil business recorded an operating loss of 411.2 billion KRW, down 686 billion KRW from the previous quarter due to a decline in refining margins amid concerns about economic slowdown. The chemical business achieved an operating profit of 170.2 billion KRW, up 61.3 billion KRW from the previous quarter, thanks to a solid market centered on PX despite inventory-related losses from naphtha price declines and reduced byproduct sales such as hydrogen. The lubricants business improved margins due to cost reductions from falling oil prices, posting an operating profit of 259.9 billion KRW, up 700 million KRW from the previous quarter. The oil development business recorded an operating profit of 68.2 billion KRW, down 45.3 billion KRW from the previous quarter due to falling oil and gas prices despite increased sales. The materials business posted an operating loss of 100 million KRW, narrowing the deficit by 3.9 billion KRW from the previous quarter due to sales volume increases from major customers.

U.S. Monetary Tightening Easing and New Battery Plant Stabilization... SK Innovation Expects Profitability Improvement in Second Half

The outlook for the oil business in the second half anticipates a gradual rise in refining margins due to the expected easing of U.S. monetary tightening, the arrival of the driving season, recovery in travel demand boosting demand for petroleum products such as gasoline and jet fuel, and improved supply and demand from the Asian region's regular maintenance season.

In the chemical business, polyethylene (PE) and polypropylene (PP) are expected to gradually improve despite ongoing supply-side burdens and delayed demand recovery, influenced by demand during China's National Day holiday (October). PX is expected to maintain a stable spread (margin) due to increased supply from the restart of large PX facilities in China. The lubricants business expects price declines due to eased base oil supply following maintenance completion in Asia, but strong spreads are expected to be maintained due to the driving season and increased demand from China's reopening.

The battery business is expected to continue sales growth and profitability improvement trends due to early stabilization of new plants and increased customer sales. In particular, AMPC benefits are expected to increase significantly in the second half compared to the first half, leading to further profit improvement. The materials business is also expected to see gradual profit improvement due to increased sales of separators.

Continued Investment in Future Energy such as Ammonia and Bioenergy

SK Innovation also disclosed the background and market outlook for commercialization in new business areas related to future energy investments. In its recently released ESG report, SK Innovation announced a mid-term strategy to invest 1.079 trillion KRW in future energy technologies and businesses by 2026.

SK Innovation is investing in companies with promising future energy technologies, including Amoji (ammonia-based hydrogen fuel cells), Fulcrum BioEnergy (synthetic crude oil production through waste gasification), and Airrain (specializing in gas separation membranes). Additionally, it plans to continue further investments and joint research and development in the future energy sector using funds raised through a recent rights offering.

SK Innovation stated, "We will continue efforts to enhance corporate value through strengthening the green portfolio, including batteries, and transforming existing petrochemical businesses into eco-friendly business models."

This content was produced with the assistance of AI translation services.