SK innovation reports Q2 losses as battery sector struggles

[Courtesy of SK On Co.]

SK innovation reported an operating loss for the second quarter of 2024 thanks to declining refining margins in its petroleum business and struggles in its battery sector. Although its battery subsidiary SK On marked its 11th consecutive quarter of losses, there are expectations for improvement in the second half of the year.

SK innovation announced a consolidated revenue of 18.79 trillion won ($13.76 billion) and an operating loss of 45.8 billion won for the quarter on Thursday. The company’s revenue saw a 0.4 percent increase from a year ago, with the operating loss greatly narrowed from 106.8 billion won. However, revenue fell by 0.3 percent, and the operating profit of 624.8 billion won turned into a loss compared to the previous quarter.

The company attributed the decline in operating profit to weaker refining margins in the petroleum business and the high fixed costs associated with lower operational rates in the battery business. “Despite solid production performance in our oil development projects, weaker refining margins in the petroleum business and high fixed costs in the battery business due to lower operational rates led to a decrease in second-quarter operating profit compared to the previous quarter,” a company official said.

Breaking down the results by business sector, the petroleum segment’s operating profit fell by 446.9 billion won from the previous quarter, settling at 144.2 billion won. The drop was due to concerns over prolonged high interest rates and weak economic conditions in China, which led to lower refining margins - a burden currently affecting the entire refining industry.

The chemicals business posted an operating profit of 99.4 billion won, down 25.1 billion won from the previous quarter, due to lower sales volume despite higher prices for key products such as paraxylene (PX) and benzene. The lubricants business also suffered, with operating profit down by 68 billion won to 152.4 billion won due to weak demand in China.

The company was significantly impacted by temporary stagnation in electric vehicle (EV) market demand, recorded an operating loss of 460.1 billion won for the 2024 April to June period. The losses still widened even after the company received111.9 billion won in support through the U.S. Advanced Manufacturing Production Credit (AMPC) under the Inflation Reduction Act, a threefold increase from the previous quarter’s 38.5 billion won.

SK On is also committed to improving its mediocre performance and aims to achieve an operating profit breakeven point (BEP). The company plans to simultaneously cut costs and increase new production. The Hungary Ivancsa plant, which began operations in the first half of 2024, will ramp up production in the second half of the year with SK On already hiring and training local staff. Additionally, the Yancheng Plant 2 in China will adjust its operation schedule based on the volume trend in the second half of 2024. SK On plans to ensure a steady supply of batteries as major customers like Ford and Hyundai Motor are expected to launch and sell new EV models in the latter half of the year. The company will also accelerate the diversification of its sales form factor portfolio by ramping up its production of both pouch-type and prismatic batteries.

SK On CFO Kim Kyung-hoon said, “We plan to focus more on strengthening our fundamental competitiveness through company-wide cost reductions,” adding, “We expect to see better performance in the second half of 2024 compared to the first half of the year.”

The issue with global private equity firm Kohlberg Kravis Roberts (KKR), considered the biggest hurdle in the merger between SK innovation and SK E&S, is also being resolved smoothly. SK E&S recently renewed the guaranteed yield of the 3 trillion won redeemable convertible preferred shares (RCPS) held by KKR, raising it by 2.4 percentage points to 9.9 percent.

SK innovation announced in a conference call that the SK E&S board approved the establishment of a new entity to handle the physical asset repayment under the contract. The move is viewed as minimizing KKR’s involvement in the merger process, which was a precondition for the merger of the core energy subsidiaries.

“Raising the guaranteed yield to 9.9 percent in the merger process does not imply a plan for cash repayment,” according to Kim ji-won of SK innovation’s finance division. “The decision does affect SK E&S or our shareholders’ value.”