SK Innovation Stock

Good afternoon. I am Chung Soyoung, Head of the IR Communications Team at SK Innovation. Thank you for joining the company's Second Quarter 2026 Earnings Presentation. On today's call, we have with me SK Innovation's CFO, Seogeon Ki, Head of the Corporate Finance Planning Office, Bae Gilak, and management from each of the businesses.

For the call today, the CFO, Seogeon Ki, will first run through the company-wide business results for the second quarter, followed by presentations from each of the business divisions, and then we will have a Q&A session. Please note that the numbers we are presenting today have yet to be audited by the external auditor and thus, are subject to change upon review.

With that, let me invite CFO, Seogeon Ki to present the second quarter highlights and earnings results.

Good afternoon. This is Seogeon Ki, CFO of SK Innovation. Allow me by starting by thanking our shareholders, investors and analysts for your continued interest in the company. So I will begin with the highlights of the second quarter of 2026. So first, SK Enmove was able to post solid performance on the back of its product competitiveness in the high-end Group III lubricant base oil market and its global production and sales network. Amid continuing geopolitical risk, SK Enmove using its global #1 Group III production capabilities and multiple production hubs was able to address supply chain uncertainties.

In addition, it has been able to use its sales subsidiary in each of the key hubs to quickly and flexibly adjust to changes in customer demand. So going forward, SK Enmove with its Group III production competitiveness and global business foundation will strengthen its stable business structure while also further strengthening its competitiveness as a lubricant base oil provider trusted by the market and customers. In the case of SK On, in the second quarter of 2026, we have completed the unwinding of the BlueOval SK, which was the JV with Ford. The former BlueOval SK Tennessee factory is now fully owned by SK On under the name SK On Tennessee.

Moreover, as part of this restructuring, the former Kentucky factory is now fully owned by Ford. And SK On will be able to save on approximately KRW 300 billion in depreciation and KRW 200 billion in interest expenses per year, which should ease the financial burden on the company. In addition, in November, we have signed an equity swap with EVE Energy to swap SKOJ and SKEUE shares, and this is expected to close within the quarter. SK On will acquire 100% of SKOJ and fully divest its interest in EUE. As a result, SK On has gained a more flexible and proactive business framework.

So based upon this, it will respond to the EVE and E&S customer demand in a more agile manner and strengthen profitability. In addition, portfolio rebalancing efforts will continue. And based upon the market environment and strategic needs, SK On will be able to review strategic alliances and cooperate possibilities in many forms in a more flexible manner. So this was the highlights.

Next, let me talk about the overall performance. In the second quarter, revenue was up by KRW 4,866.2 billion quarter-over-quarter at KRW 29,157.2 billion, driven by stronger revenue across all energy businesses, including refining and lubricants. On the operating profit side, due to the stronger profits on the lubricants and battery business, it increased by KRW 1,325.1 billion quarter-over-quarter to KRW 3,487.3 billion.

On the nonoperating side, the recognition of SK On and SKIET-related PRS derivative valuation losses, of around KRW 1.2 trillion and SKIET-related impairment losses of approximately KRW 1.4 trillion resulted in higher nonoperating losses. To provide the breakdown in more detail, FX-related losses were KRW 73 billion; product derivative losses, KRW 1.2 trillion; net interest expenses, KRW 251.9 billion; equity method gains, KRW 37.2 billion and other losses, KRW 1.4 trillion. Next, let me discuss our financial structure.

As of the second quarter 2026, total assets stood at KRW 102 trillion, and this was due to a decrease in cash as net working capital increased and less assets following the closing of BOSK JV unwinding. So it represents a decrease of KRW 3.6 trillion versus 2025 end. Liabilities were KRW 64.2 trillion, which is a decrease of KRW 5 trillion due to less borrowings and the closing of the BOSK JV. The debt equity ratio was down by 20% points at 170%. Net debt was KRW 23 trillion -- KRW 23.7 trillion. And as cash balances decreased, it has been up by KRW 1.1 trillion versus the end of 2025. Next, we will go over the second quarter performance by company. We will have a look back on key companies and provide an outlook for the future.

So for each of the results of each company, please refer to Page 6. And on Page 7, we will go over the look back and also outlook. So let us start with SK Energy.

Good afternoon. This is Chuan Gu, Head of Corporate Planning from SK Energy. Let me discuss the second quarter performance. SK Energy's second quarter operating profit was KRW 651.2 billion, down by KRW 632 billion quarter-over-quarter. Dubai crude, which surged on an average $128 in March dropped to $79 in June, but the valuation of inventory on book is reflected on a cumulative basis. So inventory-related gains in the second quarter was still around KRW 560 billion. When excluding this effect, though the market was strong, profitability has declined due to the government's cap on crude prices and turnaround in May and June. Crude prices and refining margins are expected to show a lot of volatility based on the changes in shipments in the Strait of Hormuz in Red Sea, a degree of damages on Russian refineries and flow changes in the oil and refinery products.

So therefore, as uncertainty continues rather than forecast the future, we will closely monitor the market and try to be flexible and quick to maintain optimal operations. Thank you. Next, we will move on to SK geo centric.

Good afternoon. This is Kim Yong-soo, Head of the Management and Planning Office of SK geo centric. For the second quarter, so -- with regards to our overall utilization, we actually saw a decrease in the overall products. And in the third quarter, if we look at the aromatics because of the stocking there, and also on a seasonal basis, we do believe that there will be some recovery. However, uncertainties on the external side will continue and feedstocks that also will be volatile. So we do think that in terms of the overall performance versus the second quarter, it will be flat.

Yes, next on SK Enmove, we will discuss the performance there.

Good afternoon on the lubricants business from SK Enmove CIC, I am Kim, Head of Corporate Planning and Development Office. For SK Enmove's operating profit, it was KRW 503.4 billion quarter-over-quarter to KRW 691.9 billion due to the inventory effect and higher margins stemming from supply issues by peers due to the Middle East situation. In the third quarter, there could be some volatility based on the Strait opens, but spreads are expected to gradually moderate if our competitor supply issues are solved. The recent geopolitical risks have pinned the market's attention to our stable supply capabilities based upon multiple production hubs, and the company is able to provide optimal operations using these multiple sites.

In addition, we are able to supply in a timely manner to regional sales hubs and increase fleet resourcing, which results in a framework for stable supply. Going forward, we will leverage the supply chain capability, and we will continue to provide a differentiated value to customers and further solidify our leadership in the Group III market. Next is SK Earthon.

Good afternoon. I am Kim Kyoung-jun, I am Head of Planning and Business Support at SK Earthon. SK Earthon's Q2 operating profit due to a decrease in sales volume driven by the shipment schedule of the crude in China decreased KRW 34.8 billion Q-o-Q to record KRW 29.9 billion. For reference, the aforementioned figures exclude the performance of the Peru block, which driven by higher oil and gas prices amid the war, recorded operating profit of KRW 79.6 billion, up KRW 16.9 billion Q-o-Q.

Accordingly, both SK Earthon's own assets and the Peru block delivered solid performance.

For Q3, geopolitical uncertainty persists, but we are continuing efforts to sustain daily output and improve profitability, including drilling additional production wells at our own blocks in China, Vietnam and elsewhere. Next is an update on our key operations. First, at China Block 17/03, the 3 additional production wells drilled to sustain output are being brought online sequentially with completion expected within August. At Vietnam Block 15-1, we're proceeding as planned with the drilling of 4 additional production wells and the construction of production facilities at the SGG field.

In addition, at Vietnam Block 15-105, development of the LDV structure is currently underway, encompassing production well drilling and facility fabrication. We're targeting first production in Q4 2026 upon completion of the related development activities. Finally, at Vietnam Block 15-217, drilling of all appraisal wells have now been completed. Based on the drilling results, we'll work with our partners on a detailed analysis of resource volumes and discuss the development plan. Next is SK On.

Good afternoon. I am Kim Yong Guang, Head of Financial Support at SK On. I will address battery business performance in Q2 2026 and share our outlook for Q3. Before presenting our Q2 results, I would like to note that starting this quarter, we have changed the financial statement presentation method for tax credit amounts arising under the U.S. IRA tax credit for battery products made and sold in North America.

Previously presented separately from sales as other operating revenue, these amounts are now judged to be substantively reflected in customer price negotiations and transaction terms given the expansion of our North American business and changes in transaction structures. Accordingly, the company determined that presenting these amounts together with sales as sales plus other revenue more appropriately reflects the actual operating performance and revenue structure of our North American business.

This change constitutes a reclassification of presentation items and has no impact on operating profit, net income or net assets. Q2 revenue driven by expanded sales volume in Asia, customer compensation payment and higher A&P Q-o-Q came in at KRW 2.94 trillion, a substantial increase from the previous quarter. As for Q2 operating profit, while there were onetime factors at play, I would like to emphasize that thanks to the increasingly visible effects of our cost reduction efforts, a genuine improvement in profitability was evident. As a result, we swung to an operating profit of KRW 821.8 billion.

Turning now to our business outlook. First in Europe, local production incentive policies and EV-related support policies remain in place. We will leverage our strength in European production basis to enhance operational stability and strengthen our negotiating power with customers. In North America, we're staying actively engaged with our existing OEM customers as EV demand gradually recovers, and we'll do our best to win and deliver additional orders in the currently robust ESS market.

In particular, we're working quickly -- or rather, we're moving quickly to expand orders with customers such as hyperscalers and power utilities, building momentum for SK On's mid- to long-term profitability improvement. We continue to pursue portfolio rebalancing, including the conclusion of the BOSK joint venture structure and the launch of SK On's stand-alone plan. As a result of fixed cost reduction effects, approximately KRW 300 billion in annual depreciation and KRW 200 billion in interest expense will be reflected on a full year basis.

Together with our continuously pursued operational efficiency initiatives, these are expected to translate into profitability improvements over the second half of the year. In the second half, we aim to enhance our responsiveness to market volatility and customer requirements, thereby securing EV sales expansion and ESS order visibility.

Next is SK Innovation, E&S business.

I'm Kangyung Kwon, Head of Management Planning and SKI E&S, and I will present on SK Innovation's E&S business. SK Innovation E&S posted Q2 operating profit of KRW 105.9 billion, down Q-o-Q as city gas demand softened heading into the off-peak season and as we carried out plant maintenance to keep power supply stable through the peak summer demand months. In Q3, we expect SMP to rise as power demand enters into seasonal peak and oil prices climb. However, with geopolitical instability heightening again, LNG spot market price volatility is expected to be a variable affecting earnings.

That said, the Australia Barossa gas field in which we hold an equity stake is in the final stage of commissioning, and we expect it to move into full commercial operation within the second half of the year. We'll keep working to sharpen our cost competitiveness while doing our part to strengthen nations and energy security. Thank you.

This concludes the presentation we prepared today, and now we will move on to the Q&A session.

Before taking questions from the floor, we would like to first address precollected questions. Investors and analysts shared with us many questions, and we've selected some of the questions where a lot of interest was shown. I will introduce the questions in order and invite the relevant business representatives to answer.

First question concerns our battery business -- many questions from our investors. I would like to invite SK On to address.

Head of Financial Support Office at SK On. I will address our battery business turnaround strategy. First, our battery business turnaround is showing visible results driven by structural cost reduction. In Q2, even excluding onetime factors, our earnings improved Q-o-Q through our cost reduction activities. We're focused on cost reduction as the path to fundamental competitiveness, cutting material costs through supplier diversification, value engineering yield and other loss improvements and stronger inventory management while also lowering processing costs and SG&A through automation and AI-driven operational optimization.

We continue to identify and execute cost-cutting initiatives across the board and drive profitability improvement, and we expect even more visible results in the second half. On EVs, in North America, we expect volume recovery in the second half, driven by the reintroduction of California EV subsidies and the recent recovery in demand. In Europe, we are also in discussions with major OEMs on volume stabilization and pricing, and our portfolio is improving as we shift focus towards higher profitability programs.

In sum, cost cuts and recovering volumes are putting us on track for gradual quarterly profit improvement in the near term. Over the mid- to long term, we will drive a qualitative shift in our business portfolio through ESS order growth, moving fast on both order taking and production.

The second question concerns SK Energy's response to the Hormuz Strait situation following the Middle East conflict and its plans going forward. Investors have also shown strong interest in crude procurement security and sourcing diversification. I would like to ask SK Energy to address this question.

Yes. This is Head of Corporate Planning of SK Energy. In Q2, we responded to the disruptions in Hormuz Strait transit by purchasing crude at Yanbu and Fujairah and dry on swaps with government held strategic resources or reserves. We cover the remaining volumes held through non-Middle East imports. The situation in the Hormuz Strait and the Red Sea is shifting rapidly. And if current conditions persist, some cargoes could be affected. That said, by drawing on cargoes we've already secured and sourcing alternative cargoes and using reserve swaps, we don't expect any issues maintaining normal utilization levels for the time being.

Reducing our dependence on the Middle East won't be easy in the near term, but over the long term, in step with government's crude sourcing diversification policy, we'll look at investing in facility upgrades and in expanding our diversification ratio.

That concludes our pre-submitted questions. We'll now move on to the live Q&A session. Please note that consecutive interpretation will be provided for this Q&A session. [Operator Instructions]

The first question will be provided by Jin-Myung Lee from Shinhan Investment & Securities.

I have 2 questions that I would like to ask. The first question is that across all of the businesses, for the company as a whole, if you could break down the inventory-related gains or losses, that would be appreciated. And the second question that I have is that recently, there have been news reports that for Hynix's Yongin cluster that E&S will actually provide the power source for that. So if you could actually discuss E&S' mid- to long-term overall plans and the target timing for this type of operation.

Yes. This Chung Soyoung is from the IR Communications team. Thank you for your question. And maybe I can address the first question that you have had with relation to the inventory-related gains and losses across each of the business lines.

So if we first talk about the second quarter in terms of the pro company inventory related gains, including the overall effect of the lower cost of market, that would be KRW 1,194.9 billion, which on a Q-o-Q basis was up by KRW 169.7 billion. So to break it down by company, it would be for SK Energy, KRW 562.3 billion SK geo centric, KRW 92.2 billion; SK IPC, KRW 446.9 billion; and SK Enmove around KRW 39 billion -- KRW 93 billion rather.

However, that have been said, please understand that this is an accounting item and inventory-related gains and losses will fluctuate according to the market conditions.

So this is Kang, Head of the Management Planning Office at SK E&S, and maybe I can address the second question. So in the Yongin Semiconductor cluster in which SK Hynix's semiconductor fab will actually be located. Right now, there is a consortium that we have formulated between kumico and SK Innovation E&S to actually build a LNG cogeneration power plant that would be 1,050 megawatts in size. So this community energy facility will actually provide the steam that is necessary within the cluster for Fab #1 to 4. And by providing a stable energy supply, we do believe that it will contribute to increasing the overall production competitiveness of the semiconductor facility.

So with regards to the timing and the schedule going forward from December of last year, we have actually started the overall construction, which is ongoing for the LNG pipeline and also the heat source facilities. And if the overall schedule does not have any issues, then we do believe that from the second quarter of 2030 in a gradual manner that the overall cogeneration facilities will be able to start the commercial operations. So that have been said, going forward, needless to say, we will continuously focus to do our best to pursue this project and ensure that we can provide a stable energy supply.

The following question will be presented by Jin Ho Lee from Mirae Asset Securities.

This is Jin Ho from Mirae Asset Securities. I have 2 questions. First concerns your refinery business. I understand that following the stabilization of the U.S. Iran conflict, could you comment on the potential for further diversification of crude sourcing as well as the possibility of adjusting refining facilities toward a lighter crude configuration.

And my second question concerns SK Enmove. You talked about how Group 3 lubricant base oil is performing really well. So given that current base oil market conditions, how much upside do you see for earnings. And are there any additional levers like raising utilization rates to fully capture the favorable environment and drive further earnings improvement.

This is Ji yung hoo from SK Energy. Prior to the war, the Middle East crude took up about 70% of our sourcing. But after the war that came down to less than 50% and the alternative sources came from the U.S., Canada and Africa. So in the midst of all these uncertainties and also conditions that was unavoidable, you can understand it as our flexibility in addressing the concerns.

Given the prices and also the facility configurations that we have, we still prefer the Middle Eastern crude. However, that said, it is very difficult to drastically and swiftly change our dependence on Middle Eastern crude. That said, we are also trying to secure the sourcing stability. So in the mid- to long term, in line with the government's crude diversification policy, we will come up with measures.

This is Kim miguel from SKMOCIC. I will address your second question. As you mentioned, the current Group III base oil environment could work in our favor. However, that said, how long it's going to last and how much it actually moves the needle will depend on a range of external factors, geopolitical variables, market supply and demand, whether competitors normalize operations. So it's hard to put a specific number on it at this point. We're optimizing operations based on a full picture, including market conditions, profitability, customer demand, feedstock and logistics, and we continue to run a stable, efficient supply and sales operation on the back of our global production and sales network. Going forward, we will flexibly respond to the market volatilities and work on improving further profitability.

The following question will be presented by Han Shin from Shinyang Securities.

Yes, this is Shin. There are 2 questions that I would like to ask you. First, since the outbreak of the war, I do think that for a lot of refineries to enjoy the high-margin situation, they have pushed back their turnarounds to the second half of the year. For the company in the second half, do we have any turnaround scheduled? And if so, if you could share that with us, that would be appreciated.

The second question that I would like to ask you is about your battery business. After the JV with Ford was unwinded, there was a lot of human resource restructuring that took place in North America. In addition to that, in the global production sites that you have or for Europe specifically, do you foresee any further capacity adjustments?

This is Chu Yong-ho, the Head of the Strategy Operation Division at SK Energy, and maybe I can address your first question. For us during the second half of the year in terms of turnarounds, we do have the #3 CDU that is planning to go in maintenance across October to November. And for the remaining upgraded facilities that we have, we do not have any plans for further turnarounds.

So yes, this is Kwong Li, Head of the Planning Office at SK On, and maybe I can address the second question that you have. Because the overall recovery in the battery market has been slower than expected, as you are aware, in the first quarter at the HQ level and for our overseas subsidiaries, we did conduct some restructuring of our human resources.

So that have been said at the company level, we continue to be very committed to engaging in very strong cost-saving measures to ensure that our operations remain efficient and also to make sure that we can utilize the assets to the maximum level. So this would be our overall priority. However, that have been said, in light of the Middle East uncertainties that are currently taking place and as crude prices remain at a very high level, we do understand that there is a renewed interest on the consumer side for EV vehicles due to the fact that they actually will provide a lower fuel cost burden for each of the consumers. So we do think that this renewed interest is a positive factor.

In addition to that, in light of the overall global AIDC-related demand and also the demand for more greener forms of energy, we do expect that the overall ESS market will grow at a very high rate. So therefore, to convert some of our existing EV lines for ESS purposes, that will continue. And at the same time, we will also try to increase our ESS order book so that we can utilize our existing capacity and assets in a more efficient manner and also operate as such. So right now, we're looking into the various ways on how we can do that and executing these plans. And any additional initiatives that we have in terms of our assets and overall operational efficiencies, of course, we will make sure to share that with the market and also communicate to the market about this when they are available.

The following question will be presented by Parsley Ong from JPMorgan.

Parsley, I'm very sorry, but the line that you have right now is breaking up a lot. So maybe could you speak a bit slower and start from the first question again because we were not able to hear what the question was on our side.

Sure. So for the first question, could you give us an update on your target for securing more ESS orders by the end of this year? Second, given the low utilization rate at SK On's battery plants in U.S. and Europe, are you considering any strategic options besides ESS? For example, will it be feasible to sell or repurpose the facilities for AI data centers, semiconductor manufacturing or some other applications? And the third question is on lubricants. Can you give us an update on your thermal management solutions business, including refrigerants and HVAC systems?

This is from Kim Yong, and I will address the first question. Domestically, the long duration ESS project we won in February 2026 is a 1.8 gigawatt order, and we are targeting Q3 2027 delivery using our Seosan line. For the upcoming third round ESS tender, we plan to build on the success factors from the second round of central contract market to maintain momentum, and we're targeting a meaningful award level. Separately, we recently won some volume in this year's first round of grid-connected ESS bidding. And alongside the long-duration ESS project, we'll keep working hard to secure further orders.

Overseas, we are building out our ESS base primarily around U.S. customers like Flatiron. We are in discussions on the remaining volume with Flatiron building on a strong customer relationship. We're also continuing to work toward a previously announced global 20 gigawatt per hour order target. We'll disclose specific volumes and customers once orders are finalized and confirmed with customers.

I will continue and address the second question as well. We are reviewing a range of options as part of our broader asset efficiency efforts, but nothing has been decided on repurposing at this point. We'll share details if and when there is something concrete to report.

This is Kim. I will first address your question. With regard to the technology, we are taking steps for certifications with global institutions and prepping for the full opening of the market. With regard to ESS, the thermal solutions that we have developed is already commercialized in the areas of defense and also shipbuilding, and we are currently building our customer base.

When it comes to EV batteries with regard to -- together with global OEMs, we are currently studying the immersive cooling battery packs. With regard to HVAC, we are currently working with in close partnerships with global OEMs including Hyundai Motor Company. We are currently testing the performance of the refrigerant and also we're in compliance with all different regulations and also to register substances. And we are currently building upon the business foundation.

When it comes to commercial vehicles, we are currently planning to do real-world road testing. And for commercial vehicles, we have completed performance testing for EV buses. And based on the confirmation of the performance, we are currently in the real-world road testing. With regard to the further progress, we will provide you with an update in the future. Thank you.

So we will now take the next question, which unfortunately will be the last question. The last question will be presented by Woo-Jae Jeon from KB Securities.

There are 3 questions that I would like to ask you. First is about your lubricants business. If you look at the overall lubricants feedstock in actuality, if you look at the April numbers for bunker C and other feedstock, there was a rise, and it seemed to be that in June, it hit its highest level. And thereafter, after June, in actuality, it should have declined. However, if you look at the overall performance for lubricants and base oil, it continued to rise regardless. So is this because the overall spot prices have remained at a high level even in the July months? Or is it because the overall contract prices that we had were taking at a longer term and that affected the overall performance?

The second question that I would like to ask is about your battery business. Towards the second half of the year, with regards to U.S. on-the-ground ESS production, have there been any issues that the company has been experiencing? And added to that in the U.S. market, if ESS demand does continue to grow, is it possible for further ESS lines or capacity to be created within the U.S. So for example, for the idle EV lines that you have as of now, would it be possible to convert further to ESS?

The third question that I also have is related to the battery business again. Right now, there have been reports that at the SK Group level, there will be a data center created with the scope of around 5 gigawatts. So if that is the situation, is -- how much for that data center, how many gigawatts of ESS is actually required to build the facilities? And are there any discussions with the SK Group in actually supplying or delivering the ESS that is needed for these data centers?

So this is Kim. Maybe I can address the first question. With regards to base oil, it is true that there is somewhat of a lagging effect that we see. However, I think that if you look at the current situation, because of the facilities that have been at or damaged in the Middle East situation and also the variant supply issues that we see, structurally speaking, there is somewhat of an imbalance between supply and demand in the current situation. So therefore, I think that, that is the bigger driver that we see that has led to the strong sales index numbers that we see on prices.

This is ann, the Head of Planning Office at SK On and maybe I can address the second question that you have. So first, you asked about -- for U.S. ESS production in the second half, whether there are any issues that we have faced. In our view, we don't have any issues as of now. And in actuality, we are in preparation to enter into the ESS business market. Secondly, you also asked about building out new ESS lines. And I think that for the line conversion CapEx that is required, I think that according to what method we actually use for conversion, there can be some differences in the numbers.

However, that have been said, for the current overall method that the company is adopting, which is to not change the form factor of the battery in itself, the overall scope of facilities that need to be changed are limited, so it does not require a large CapEx. So as of now, with regards to the ESS line conversion, please understand that it's a bit difficult for us to share more details about this matter. However, the company overall is trying to strengthen its ESS competitiveness in light of the CapEx efficiency that is needed to back this overall initiative. So maybe just broadly speaking, right now, we are looking into converting the lines that we have in North America and also in the Seosan, Korea facility. And according to how the order book does build up, I think that we could look into further conversion possibilities if necessary.

So this is Kimynguan from SK On, and maybe I can address the third question. So together with other SK Group companies, we do engage in various cooperation and also collaboration to look into the electricity demand patterns that data centers have so that we can actually build out an AI data center more suitable ESS solution and package.

So therefore, at a group level, there is various collaboration that is taking place with regards to ESS, and we do want to strengthen our business through these initiatives. That have been said, for the project that you had mentioned specifically, there is nothing specific that we can say as of this time or share with you. And once we do have more information, we will make sure to share when possible.

With this, we would like to wrap up the Q&A session and also the second quarter earnings conference call for SK Innovation. So we would like to thank everyone on this call, all of the investors and analysts who have taken time out of your busy schedule to participate. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

[Interpreted] Good afternoon. We would now like to begin the earnings release by SK Innovation. Good afternoon. I am Chung Soyoung from the IR Communications at SK Innovation. Thank you for joining the company's Q1 2026 earnings presentation. With me today are SK Innovation's CFO, Seo Kun Ki; Head of Corporate Finance Planning Office, Peh Giram; and the management team from respective businesses.

We will begin with CFO, Seo Geon-Gi, presenting on the company-wide Q1 2026 business results, followed by executives reporting on their respective businesses, after which we will take your questions.

Also, do note that the numbers we are presenting today are yet to be audited by the external auditor and thus are subject to change upon such review.

With that said, let me invite CFO, Seo Geon-Gi, to present on the first quarter highlights and business results.

[Interpreted] Good afternoon. This is Seo Geon-Gi, CFO of SK Innovation. Allow me to start by thanking our shareholders, investors and analysts for your continued interest in the company. I will begin with the first quarter 2026 business highlights.

As per the news report on 24th of February, the first LNG production cargo from Australia's Barossa gas field, where we hold equity interest made its successful delivery to LNG terminal at Boryeong Chungnam province. Since partaking in the project in 2012, our overseas exploration efforts over the past 14 years have now come to fruition, and it was the first time for a Korean private company to have completed the entire process independently from exploration to development, production and delivery.

Natural gas produced at Australia's Northwest offshore Barossa gas field is liquefied at the Darwin LNG terminal, and we plan to have stable supply of around 1.3 million tonnes of LNG for 20 years. Amid extreme gas price volatilities due to global geopolitical risk, us having a direct equity ownership in overseas gas field and securing long-term offtake will also contribute to strengthening national energy security.

Second, the consortium that we are part of made the final selection as the project operator for Vietnam's Quynh Lap LNG power project. The project is massive USD 2.3 billion or KRW 3.3 trillion infrastructure project, concurrently building 1,500 megawatt combined cycle gas power plant and 250,000 cubic meter LNG terminal and a dedicated port. Groundbreaking will be in 2027 and the completion of the power plant and the terminal will both be in 2030.

And by using our global LNG portfolio, including the gas fields in North America and Australia, we have put in place an independent LNG value chain business model where LNG will be transported to Vietnam terminal and used by the power plant. The project win is meaningful as the first such case where Korea's private company replicated its successful LNG value chain model overseas. This will thus be an important springboard for the company to make the LAP as a major global LNG player, expanding our LNG portfolio to 10 million tonnes by year 2030.

Last but not least, SK On, in February, secured more than half of the total volume, which is around KRW 1 trillion in size and the second government ESS procurement tender program. ESS will be built at 7 locations, including 6 at Chungcheong Province and 1 in Huizhou Island. And through the bid, we won 3 projects in the Chungcheong province. Out of 565 megawatts program, we were awarded 284 megawatts, which accounts for 50.3%.

We will supply LFP pouches and leveraging advanced battery technology and local production capabilities, we plan to participate in the subsequent tender bid as well. This has been a brief highlight on SK Innovation.

Now moving on to details of first quarter earnings results. On the back of revenue expansion seen across the entire energy business, Q1 2026 revenue was up KRW 4.54 trillion Q-over-Q, reporting KRW 24.21 trillion. On rising crude and petroleum product prices leading to inventory-related gains, operating profit increased KRW 1.86 trillion, reporting KRW 2.16 trillion.

For nonoperating items on the back of base effect from last quarter's impairment, loss narrowed Q-over-Q, reporting KRW 767.3 billion. There were FX-related loss of KRW 159.8 billion, derivative loss of KRW 461.5 billion, net interest expense of KRW 327.7 billion, equity method loss of KRW 23.8 billion and KRW 205.5 billion of other income.

In terms of the financial position, company's assets totaled KRW 110.1 trillion as of end of Q1 2026, driven by increases in receivables on higher crude prices versus end of last year, reporting an increase of KRW 4.5 trillion. Total liabilities stood at KRW KRW 72 trillion, up KRW 2.8 trillion on rise in trade payables from refinery and petrochem business, while debt-to-equity ratio dipped 1 percentage point year-to-date to 189%. Net debt came in at KRW 24.6 trillion, increasing around KRW 2 trillion year-to-date due to decline in cash following increases in net working capital.

Next, we will go through a business breakdown of Q1 results, and we will present on the details of the look back and outlook of major companies. Please refer to Page 6, business performance of each innovation affiliate companies, which has been disclosed.

Moving on to Page 7. We are moving on to look back and outlook of key businesses. We will begin with SK Energy and will invite Choo Yong-gyu, Head of Strategy, Operations Division.

[Interpreted] Good afternoon. I am Choo Yong-gyu, Head of Strategy Operations Division of SK Energy. I will begin with the first quarter business results. SK Energy's operating profit for Q1 was KRW 1,283.2 billion, up KRW 1,000.5 billion Q-over-Q. Improvement in earnings was driven by surge in crude price following the closure of Strait of Hormuz on the back of the Middle Eastern conflict, leading to inventory-related gains of KRW 780 billion and lagging effect from the oil price.

Since future oil price and refining margin will depend on how the Middle East conflict unfolds and on whether transit through Hormuz trait becomes possible and the degree thereof, volatility seem inevitable. Rather than rushing into any judgment, we will navigate the changing situation nimbly through optimized operations.

Next, I will invite Kim Yong-soo, Head of Planning Office at SK Geocentric.

[Interpreted] Yes, to talk about our Q1 results. Now market in Q1 saw tight supply with regional PX facilities undergoing scheduled turnaround, which was heavily concentrated during the period. And thus, we saw the spread widen. And with some resumption of offshore sales of benzene, the trend improved, while naphtha price drove positive inventory effect and rollover effect across primary and byproducts, which drove sizable Q-over-Q improvement in profitability for the first quarter.

While uncertainties run high in sourcing raw materials based on vertical integration with SK Energy, we have stable sourcing in place and are focusing on maximizing company's earnings via operational optimization. In the second quarter, we expect upside momentum from the lagging effect seen on primary products, but there's also possibility of variability in profit due to inventory and rollover effect when and if crude price starts to fall.

Basically, earnings at this point are subject to variability depending on the movement of oil price. To preemptively navigate oil price fluctuation risk, we will focus our efforts on strategic inventory operations and marketing optimization so as to defend our margin.

Next, Ms. Kim Mi Gyeong, Head of Corporate Planning and Development Office of SK Enmove will present on SK Enmove.

[Interpreted] I'm Kim Mi Gyeong, Head of Strategic Planning at SK Enmove, ACIC within SK On. I will explain the business. Despite margin compression resulting from rising crude oil prices in Q1, SK Enmove delivered operating profit of KRW 188.5 billion, up KRW 7.4 billion Q-o-Q, driven by favorable inventory effects. Looking ahead to Q2, uncertainty from the Middle East conflict is expected to continue. That said, competitor supply disruptions and raw material shortages are keeping the market tight, which could support spread improvement.

With geopolitical risk driving heightened focus on supply security, our multisite production footprint positions us as a dependable supplier, a meaningful differentiator in the current market environment. We will leverage this advantage to maintain solid sales and profitability and to further strengthen our leadership in the Group II base oil market.

Next, Mr. Kim Kyoung-jun, Head of Planning and Business Support Office of SK Earthon, will present on SK Earthon.

[Interpreted] Good afternoon. I am Kim Kyoung-jun, Head of Planning and Business Support. SK Earthon recorded Q1 operating profit of KRW 64.7 billion, up KRW 39 billion Q-o-Q, driven by the improvement in composite ASP on the back of higher oil and gas prices. For reference, the above figures exclude the performance of our Peru block, which recorded operating profit of KRW 62.7 billion, up KRW 7.3 billion Q-o-Q, also benefiting from higher composite ASP.

Looking ahead to Q2, while geopolitical uncertainty stemming from the ongoing conflict remains elevated, we expect to sustain solid profitability should the current ASP levels hold.

I will now provide an update on our key operations. At China 17/03, we plan to drill 3 additional production wells to sustain output with further development remaining potential to follow. At Vietnam Block 15-1, we're working to ramp up gas production at the White Lion field through the drilling of 4 additional production wells and construction of production facilities within the year. At Vietnam 15-1/05 development of the LDP structure is currently underway, encompassing production well drilling and facility fabrication. We're targeting first production in Q4 2026 upon completion of the development activities.

Finally, at Vietnam Block 15-2/17, the third appraisal well is currently being drilled, and we plan to drill additional appraisal wells within the year to more precisely delineate potential resource volumes.

That concludes my presentation. Next, Mr. Chun Hyeon-uk, Head of Financial Support Office at SK On will present the Battery business.

[Interpreted] Hello. I am Chun Hyeon-uk, Head of Financial Support at SK On. I will address our battery business performance in Q1 2026 and share our outlook going forward.

Starting with Q1 results. In Q1, a modest increase in North American volumes alongside a broader recovery in Europe and Asia improved our overall regional sales mix, driving revenue up 23% Q-o-Q to KRW 1,791.2 billion. Operating loss narrowed modestly Q-o-Q to KRW 349.2 billion as regional sales recovery and company-wide cost reduction initiatives helped mitigate the ongoing drag from low utilization rates in North America.

Despite ongoing market volatility, we remain committed to company-wide profitability improvement through operational optimization, fixed cost reduction and procurement and logistics efficiencies. In parallel, we are advancing portfolio rebalancing initiatives to strengthen our medium- to long-term competitive position.

Turning now to our business outlook. In Europe, local production incentives and EV support policies are gradually strengthening across member states with benefits expected to accrue primarily to manufacturers with an established regional production footprint. In line with the shifting market dynamics, we plan to enhance the operational stability of our European facilities and sharpen our customer responsiveness, laying the groundwork for improved utilization and earnings recovery.

In North America, while near-term EV demand uncertainty may persist, new growth opportunities are emerging in the ESS market. In particular, rising demand tied to AI data centers and renewable energy integration is expected to drive structural growth in North American ESS demand. We are actively expanding our order pipeline in this space to build mid- to long-term earnings momentum.

By diversifying our portfolio beyond EVs to include ESS, we aim to build greater resilience to market volatility and establish a more stable earnings base. Alongside this, we will continue to improve site level operational efficiency, restructure our fixed cost base and harness AI and digital technologies across our supply chain and manufacturing processes to drive fundamental cost competitiveness.

Thank you, Next, Mr. Kang Minkyung, Head of Management Planning at SK E&S will present on the SK Innovation's E&S business.

[Interpreted] Hello. I am Head of Management Planning at SK Innovation E&S. My name is Kang Minkyung. Q1 operating profit stood at KRW 283.2 billion Q-o-Q, driven by higher city gas sales volumes on the back of increased winter heating demand as well as rise in the S&P. In Q2, City Gas demand is expected to soften as we enter the seasonal offpeak period. In preparation for peak summer power demand, we will secure long-term inventory positions and carry out inter-seasonal plant maintenance to ensure stable power supply through the summer months.

This ends the presentation. And now we move on to the Q&A session.

[Interpreted] We want to first address several questions that we received in advance on our website. For this earnings call, we received questions from the investors and analysts ahead of time and preselected the ones that were of high interest. For those frequently asked questions, we will provide the answers through simultaneous interpretation.

The first question concerns the battery business. The outlook for EV sales in light of rising oil prices driven by the Middle East conflict is the question. For this, I ask Mr. Chun Hyeon-uk, Head of Financial Support Office at SK On to address this question.

[Interpreted] Yes, I am Chun Hyeon-uk, Head of Financial Support at SK On. I will address the impact of rising oil prices driven by geopolitical developments in the Middle East and other factors on EV sales. The recent rise in oil prices is broadly supportive of EV demand as it underscores the running cost advantages of electric vehicles. That said, the trajectory of EV demand will be shaped less by oil prices alone and more by a combination of regional policy environment, consumer incentives and OEM sales strategies, and we expect trends to diverge meaningfully across markets.

In Q1 2026, the global EV and battery industry showed divergent trends across regions, reflecting differences in policy environments and the pace of demand recovery. In the U.S., demand recovery following the expiration of the CTC has been more gradual than anticipated. While the recent rise in oil prices does highlight the cost of ownership advantages of EVs, near-term sentiment remains rather cautious given the current headwinds from interest rate pressures, consumer confidence and policy uncertainty.

Should these external factors ease gradually, however, EV economics could once again become an important catalyst for demand recovery. In contrast, Europe continues to show more positive momentum. EV sales are growing at a double-digit pace year-on-year, supported by the reintroduction of EV incentives in Germany, expanded support measures in the U.K. and tightening CO2 emissions regulations.

The visibility of this recovery is relatively high, underpinned by regulation-driven demand dynamics with the recent rise in oil prices providing an additional tailwind to the broader shift toward clean mobility. Within Europe, the Industrial Accelerator Act, or IAA is progressively taking shape as a policy framework that favors regional production and supply chains. It is expected to create a more favorable operating environment for manufacturers within established local production footprint and supply chain presence, a position we believe SK On is well placed to benefit from.

In parallel, we are managing near-term EV market volatility while broadening our portfolio into ESS to build a more stable and balanced growth platform. To capture the high-growth opportunity in ESS, we are converting select EV battery lines to ESS production and continuing to build out our ESS order book, most recently through flat iron in the U.S. and awards under Korean government's ESS procurement program. By spanning both EV and ESS in our portfolio, we aim to reduce our exposure to any single market or demand cycle and deliver more sustainable profitability over the mid- to long term.

[Interpreted] Let's move on to the second question. The second question concerns crude oil procurement plans, utilization rate outlook and mitigation strategies. I will ask Mr. Kang Minkyung, Head of Management Planning at SK Energy to address this question.

I'm Kang Minkyung, Head of Management Planning at SK Energy. I will address SK Energy's crude procurement plan. We have in Q2 TA planned. And so the utilization outlook is rather low. Because of the closure of the Strait of Hormuz, we will continue to source a portion of our Middle Eastern crude through shipments via other terminals.

Well, thank you very much for your answers. Now we will take questions from the floor.

[Operator Instructions] [Interpreted] The first question will be provided by Woo-Jae Jeon from KB Securities.

[Interpreted] I am Jeon Woo-Jae from KB Securities. I would like to ask you 3 questions. First question relates to, would like to get your take on whether there's been any changes with regards to your new capacity addition plan since the outbreak of the war in the Middle East? And also any color on global supply as well as the utilization outlook?

Second question, I would like to understand, would there be any impact in terms of your yield and your margin in line with the changes in the sources based upon which you are sourcing your crude oil? Third question is, can you share with us at the company level, what is the inventory-related gain that you've reported? And also, can you share with us the breakdown by different companies?

[Interpreted] Responding to your question, with regards to the exact and accurate utilization information of the global refineries, at this point, there are numbers that are coming out. But in terms of the credibility, there are certain questions.

Now having said that, based upon such information sourced within Asia and Middle East, we are estimating at about 8 million barrel per day impact disruption.

In terms of the scheduled turnaround, there is a certain number that is out there, but because there is certain room that each of the nations could actually adjust, it will be quite hard to say what the concrete numbers are.

Now in terms of our -- in terms of the plan regarding capacity addition before the outbreak of the war in the Middle East, the overall projection was about 1 million barrel per day net addition, but there has been certain delays in the operation by certain refineries. So we believe that, that level may not be met.

And second, in terms of the impact regarding the import of the crude oil that we used to get, especially the heavy crude that we used to get from the Middle Eastern countries, basically, we are continuing on with importing and being supplied with -- through the Yanbu and Fraser port. And also, we are importing the FOs as well as other crude from sources like Canada, U.S., Ecuador and Brazil.

So through such diversified sources, we've been trying to minimize the impact from the war. And also, there is some negative impact because of the higher freight in terms of importing the crude oil, but we are making full use of our own vessels as well as the support and subsidies that we can get from the government for diversifying the crude oil sources so that we may minimize our bottom line impact as much as possible.

[Interpreted] Responding to your question about the corporate-wide inventory gains as well as the breakdown by each of the companies, I am Chung Soyoung from IR Communications. Including the impact from the valuation at cost method as of Q1 of 2026, corporate-wide inventory-related gain stands at KRW 1,024.9 billion, which is an increase on a Q-on-Q basis of KRW 1,119.8 billion.

Looking at the corporate breakdown, for SK Energy, the inventory gains stand at KRW 776 billion; SK Enterm, meaning IPC, KRW 92.1 billion; SK Geocentric, KRW 90.7 billion; and SK Enmove, KRW 66.1 billion. And also do note that the inventory gain is a line item that will be impacted by changing market backdrop and its impact on the accounting treatment.

[Interpreted] The following question will be presented by [indiscernible] from JPMorgan.

[Interpreted] I have 2 questions. The first one is on SK On. Ford recently reiterated that it plans to start producing U.S. ESS from fourth quarter 2027. Could you share with us what is the impact on SK On's North America ESS pipeline and price competitiveness? What are SK On's differentiation strategies? And also, you mentioned the Korea order win just now. What kind of margins do you expect for your Korean ESS?

The second question is on lubricants or SK Enmove. I see that your first quarter earnings are pretty strong and Middle East conflict has caused significant damage to quite a lot of Group III capacity and media reports say some of those Group III capacities might take 1 year to fix. Could you share with us why SK's base oil utilization is only in the 50% range? And could SK ramp up your production volume to help offset some of this market deficit? Maybe share with us your outlook on this.

[Interpreted] Yes, I would like to take your first question on SK On. This is Chun Hyeon-uk, Head of Financial Support Office of SK On. I would like to first talk about the Ford Energy entry into the market. Now it is difficult to quantify the specific impact of Ford Energy's market entry on our North American ESS order pipeline or pricing competitiveness at this stage.

That said, given the strong medium- to long-term growth outlook for the North American ESS market, the entry of new players and an evolving competitive landscape are something that we see as natural.

The ESS market is ultimately one on quality, safety, supply reliability and also project execution and not price alone. And these are the areas that we are building our competitive edge.

We will stay nimble as the North American market evolves while expanding our ESS footprint and also solidify our position.

And with regard to your question about the recent ESS award margins, please do note that we are not in a position to disclose the figures at this moment. Thank you.

[Interpreted] This is Kim, Head of Corporate Planning and Development Office at SK Enmove, and I will take your second question. Now the number, 50% utilization rate that you cited appears to be calculated against the maximum nameplate capacity.

Now this includes the Group II HBO unit taken offline in 2021. Therefore, it is somewhat -- it is not an accurate reflection of the actual operating utilization at the moment and the actual utilization today is higher than the numbers cited.

Now we understand that there are shortages in the market, and we are trying our best in order to enhance our utilization rates. However, to note that we are not in a position to provide specific guidance on the potential for further utilization improvement at this time.

[Interpreted] The following question will be presented by Yong-Wook Lee from Hanwha Investment & Securities.

[Interpreted] I am from Yong-Wook from Hanwha Investment Securities. I would like to ask you 3 questions. First, what was your CapEx as of Q1 of 2026? And what is your annual plan? And also in connection with that, I would like to understand whether you would see any need for additional financing or any asset rationalization efforts that you will be implementing? Or as of end of 2026, what is your estimate for your net debt or net liability?

Second question, in the EU market, we've seen EV sales actually take off and report a steep growth. I would think that, that would have had a meaningful impact on your utilization. So can you provide us with an update on your utilization figure?

My third question has to do with your ESS business. What are your plans for further ESS order wins and also line conversion plan? And also I would like to understand as to the extent of the contribution that your domestic ESS long-duration business is going to have on your bottom line? And when would the timing be? And also, you did mention you're planning on participating in the third round of the government bidding or the tender program for ESS. So can you provide a little more color on that?

[Interpreted] Let me respond to your first question. I am Seo Geon-Gi, the CFO. Now if you look at our cumulative first quarter CapEx, it was around KRW 0.8 trillion. In detail, the CapEx spend for the battery business was KRW 300 billion, E&S, KRW 200 billion. And combining the ordinary and strategic investment, it amounted to KRW 300 billion.

So this actually represents 23% of our 2026 annual CapEx guidance of KRW 3.5 trillion. And thus, as you can see, our CapEx spend is stable within the planned scope.

Now in terms of the net debt as of end of Q1 of 2026, as mentioned at the very beginning, it now stands at KRW 24,555.4 trillion, which is around KRW 2 trillion year-to-date increase following the decline in cash from the rise in net working capital.

As we've done in the previous year, we will continue on with a follow-on portfolio rebalancing effort, including dealing with and selling noncore and inefficient assets so that we may do our best to stabilize financial position and downsize the size of our net debt.

[Interpreted] Responding to your second question, I am from SK On, and I am Anh Gon, Head of Planning Office.

Now responding to your first question in the European Union, with the adoption of the EV-related subsidies that we have seen resume in the U.K. and major countries in Europe as well as on the back of rising crude price stemming from the Middle Eastern conflict, basically, we've seen a supportive tailwind for EV sales with Q1 2026 EV sales at around 1.2 million units, which is about year-over-year 28% increase.

And such tailwind has supported the higher new car sales, especially for low-cost and small-sized EVs. And going forward, we expect such sales to actually expand specifically around mid- to lower-end lineup.

Now in addition to the Hyundai IONIQ 5 and EV 6, which are the current models that we ship to, we are also serving the Ford Puma Gen-E and Volkswagen E freshly shipped for 2025, which are smaller models with great need in Europe whose sales are up trending compared to last year.

So naturally, we are seeing our battery sales go up in the European market and also quite naturally, that's driving up our utilization on a year-over-year basis.

[Interpreted] Responding to your third question, I am Kim Kyoung-jun, Head of Financial Management Office from SK on ESS order pipeline.

So in terms of our ESS-related endeavors, we are really focusing on maintaining steady customer relationship with our current and existing customers, while also exerting efforts to acquire new customers. Hence, we are bolstering our sales and marketing efforts, and we have in place various different solutions that satisfy different customer needs.

So we are very proactively engaging in various different order pipeline-related activities against our current list of customers, including flat iron. And once we carry on those discussions and there are more concrete details that we can share with you, we will come back to you with more information.

Now responding to your question about our line migration -- production line migration plan. At this point, it will be difficult for us to share with you any concrete details. Having said that, we will be fully mindful of our CapEx efficiencies and also to strengthen our competitive edge in the ESS business, also especially mindful of our, I guess, endeavors in the North American ESS market, we will review potential line migration plans going forward.

So regarding how the ESS long-duration business is going to contribute to our bottom line since most of the delivery will start to take place in year 2027. After that point in time, we are expecting profit contribution.

Now also for the government, the tender bid, which will be -- the size of which will be quite similar to what we've seen during the second round of the ESS government program. So the third round will take place in June. And basically, our target is to achieve about the similar level as we've won for the second round at around 50%.

[Interpreted] The last question will be presented by Han Shin from Shinhan Securities.

[Interpreted] Some technical issues at the moment. So we will take questions in writing and then provide you with the answers. Please bear with us.

Yes, we received a question in writing, and I will read the first question. The question is from Shinhan Securities. And the question is, in light of the chemical sector's response to the Middle East conflict and the currently favorable market conditions, has the time line for completing the Ulsan Petrochemical restructuring been delayed? Or have there been any changes to the restructuring plan?

[Interpreted] This is Kim, Head of Planning Office at SK Geo Centric, and I will take your question on the Chemical business. Now SK Geo Centric is structurally better positioned than its peers on raw material procurement risks. Approximately 80% of our feedstock requirements are reliably met through vertical integration with SK Energy.

Based on this feedstock benefits, we were able to make strong earnings in Q1. Now post war in response to the fall in the crude oil prices and in order to defend the inventory effect, we are trying to optimize our feedstocks and also marketing activities.

Next, I would like to also discuss the Ulsan complex restructuring. Now discussions on the Ulsan complex restructuring are progressing among participating companies under an MOU framework, targeting a final plan by year-end.

However, some divergence in stakeholder positions and also compounded by heightened cost and supply uncertainties from the Middle East situation is tempering the pace of negotiations. Because of the war, while market conditions have improved in the near term, we do not view this as a structural recovery and with the potential start-up of significant new capacity in the Ulsan region also on the horizon, mid- to long-term supply side pressures warrant continued vigilance.

Against this backdrop, our conviction in the need for restructuring, therefore, remains firm and the final plan in terms of both scope and timing will be determined in consideration of stakeholder discussions and market conditions.

[Interpreted] There was a follow-up question, and it has to do with city gas field. Could you provide an update on the city gas field?

[Interpreted] I am Kang, Head of Management and Planning at SK E&S, and I will take your question. Now if you look at the city gas field, we have FPSO, which is basically the drilling facility and LNG terminal in Darwin, where liquefaction is taking place.

Now the city gas field remains in the commissioning production phase, and we are looking for any problems in the facilities and also we are also working on the integration.

Especially if you look at the new FPSO facility, we are currently working on facility stabilization and also optimization tuning is currently underway. And we -- as we go along, we are making some maintenance and also replacement. And because of that, there are some intermittent production interruptions, and we are suspending and also resuming the commissioning production at this moment. And therefore, this led to some delays.

That said, we believe that this is an asset, a massive infrastructure asset that is going to be used for the next 20 years. So instead of ramping up the production in the short period of time, we are going to focus on stable operations and then progressively ramp up the production.

We are the second shareholder of this gas field. And with regard to the full rate production timing, we're going to work closely with the operator, Santos.

[Interpreted] We would now like to close our earnings conference call. But before that, I would like to also extend our apologies for the technical issue that we experienced. Thank you very much for joining SK Innovation's earnings presentation of first quarter of 2026.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

[Interpreted] Good morning. I am [ Chung Soyoung ] from the IR team at SK Innovation. Thank you for joining the company's third quarter 2025 earnings presentation.

On the call today, I have with me SK Innovation, Seogeon Ki; Head of Corporate Finance Planning Office, [ Peh Giram ]; and the management from each of the business areas.

For the call today, CFO, Seogeon Ki will first run through the company-wide business results for the third quarter of 2025, followed by presentations from each business division. After which, we will have a Q&A session.

Please note that the numbers that we are presenting today have yet to be audited by the external auditor and thus, are subject to change upon review.

With that, let me invite CFO Seogeon Ki to present the third quarter performance.

[Interpreted] Good morning. This is Seogeon Ki, CFO of SK Innovation. Allow me to start by thanking the shareholders, investors and analysts on this call for your continued interest in the company, and I will begin with the highlights of the third quarter.

First, last September, SK On signed a 1 gigawatt hour ESS supply agreement with U.S. renewable energy company, Flatiron Energy Development. Under this agreement, SK On will supply ESS units with LFP batteries to Flatiron's Massachusetts project in 2026. Moreover, until 2030, SK On has secured the right of first refusal for 6.2 gigawatt hours of projects in the U.S. that Flatiron is pursuing.

Based on this agreement, for 4 years from 2026, SK will be supplying a maximum 7.2 gigawatt hours of ESS products. This agreement is symbolic because it represents an expansion of SK On's battery chemistry and business portfolio. And going forward, leveraging its advanced battery technology and local production capabilities, the company will secure additional customers to further solidify its position in the North American ESS market.

Second, on November 1, the combined entity of SK On and SK Enmove will officially launch. Through this merger, we expect SK On to enjoy a stronger financial position and generate synergies to create a foundation on which it will be able to survive independently. In particular, it is planning to enter into new markets such as the immersion cooling system and battery package business and expand into related business areas to actively strengthen business synergies.

This will wrap up the highlight portion of the presentation. Now let me go over the third quarter business performance in more detail.

First, on the top line in the third quarter, SK E&S, the refinery and petrochemical business, increased their revenue, leading to sales rising KRW 1,226.6 billion quarter-over-quarter to KRW 20,533.2 billion. On operating profit, higher crude prices and stronger refining margins turned the refining business into the black, and the LNG power generators enjoyed a high season. Thus, OP was up KRW 991.1 billion quarter-over-quarter to a positive KRW 573.5 billion.

On the nonoperating side, the low base effect from factors, including FX-related losses and product derivatives in the second quarter, resulted in the Q-o-Q losses narrowing by KRW 338.7 billion to record a nonoperating loss of KRW 504.5 billion. In detail, FX-related losses were KRW 88.8 billion; product derivative losses, KRW 38 billion; net interest expenses, KRW 296.4 billion; equity method gains, KRW 41.5 billion; and other expenses, KRW 39.8 billion.

Next, let me discuss our financials. As of the third quarter 2025 end, total assets stood at KRW 107.9 trillion. A decrease in cash and trade receivables in the battery IET business and decline in tangible and intangible assets triggered by the stronger won led to an approximately KRW 2.6 trillion decline versus the end of last year.

On liabilities, it was KRW 96.1 trillion (sic) [ KRW 69.1 trillion ]. As trade receivables for the batteries materials business declined, liabilities decreased by KRW 1.8 trillion versus last year, and while the debt equity ratio was down 1 percent points at 178%.

Now we will go into the performance of each business line for the third quarter. For the performance and outlook for each area, it will be presented by management from the respective business.

First, for the refinery business, [ Choo Young-gyu ], Head of Corporate Planning from SK Energy, will give the presentation.

[Interpreted] Good morning. This is Choo Young-gyu, Head of Corporate Planning from SK Energy, and let me go over our refinery business in the third quarter.

So for the third quarter, our operating profit for the refining business was KRW 304.2 billion, up by KRW 770.5 billion quarter-over-quarter. The performance improvement was driven by stronger refining margins on the back of lower OSP from oil-producing countries and an improved market backdrop for refinery products.

In addition, inventory losses recognized in the second quarter reversed. Refining margins improved quarter-over-quarter on the back of higher concerns about possible supply issues for petroleum products, such as diesel since Russian refineries showed lower utilization as Ukraine struck Russian refineries.

Next, let me discuss the market outlook for the fourth quarter. As the OPEC+ decided to increase production, many institutions are forecasting a decline in crude prices. But if this happens, the U.S. and China will continue to build up SPR, while geopolitical uncertainties surrounding key oil-producing companies like Russia, Iran and Venezuela continue. Thus, we believe crude will continue to be range-bound.

In addition, there are also shutdowns and closedowns in the U.S. So we do believe that there will be a tightness in petroleum products. And also, there will also be some seasonality that we will be able to see leading to a sounder market backdrop.

[Interpreted] Yes. Next, on the petrochemical business, Kim Yong-soo, Head of Management and Planning Office of SK Geo Centric, will present the presentation.

[Interpreted] This is Kim Yong-soo, Head of Management and Planning Office of SK Geo Centric. Let me discuss the petrochemical business.

In the third quarter, PX spread improved slightly, but naphtha prices increased, resulting in PE and PP products spreads in weaker spreads. In addition, U.S. tariffs led to a lower regional benzene spread. And thus, the petrochemical business recorded an operating loss of KRW 36.8 billion.

Next, in addition to talk about the outlook for PX, reform or troubles in the region will lessen supply, which is expected to support the lower band of PX spreads, but the market is expected to remain weak due to U.S.-China trade conflict.

In addition, on olefin side, the U.S.-China trade conflict is resulting in a delayed recovery in product demand, which is expected to result in a slightly weakening in product spreads. Amid an unfavorable business environment, the company will continue to improve profitability by optimizing capacity utilizations and operations.

[Interpreted] Yes. Next, for the lubricants business, [ Kim Mi Gyeong ], Head of Corporate Planning and Development Office, will present the business.

[Interpreted] Yes. I am Kim Mi Gyeong, Head of Corporate Planning and Development Office at SK Enmove. Let me discuss the lubricant business. Higher crude prices in the third quarter led to weaker margins. However, we were able to grow sales volume quarter-over-quarter as we entered into the high season and by actively addressing the market.

In addition, higher feed prices led to inventory-related gains. And operating profit quarter-over-quarter increased KRW 36 billion to reach KRW 170.6 billion. In the fourth quarter, we expect demand to soften as we enter the low season, which should lead to a flat to moderately weaker market.

[Interpreted] Yes. Next, for the third quarter business, SK Earthon, Head of Planning and Support Office, Kim Kyoung-jun, will present the E&P business.

[Interpreted] Good morning. This is Kim Kyoung-jun. I am Head of Planning and Support at SK Earthon. I will present on the E&P business.

Q3 operating profit was down KRW 19.7 billion Q-over-Q to KRW 89.3 billion, which is due to declines in export gas price from the Peruvian block versus Q2 and lower complex selling price and higher proportion of gas. For the E&P business, China 17-03 block is currently under production. And based on good productivity that we see from 2 wells drilled in Q1, we plan to complete drilling of 2 additional production wells in Q4 to commence production.

Also, development of LDV structure for Block 15-1/05 in Vietnam is ongoing smoothly with production well drilling starting in Q4 and production commencement slated for Q4 of '26. For Vietnam Block 15-2/17 at the HSV structure, where we made successful find back in January, we are drilling 1 evaluation well at this point, including which, we will drill a total of 3 wells back-to-back, assessing overall feasibility of the entire structure.

For Malaysia's SK427 exploration block where we hold the operatorship from January '26, we are planning on drilling 2 exploratory wells on 2 prospective sites inside the block.

[Interpreted] Next, on the Battery business, I will invite [ Chun Hyeon-uk ], Head of Financial Support Office at SK On.

[Interpreted] Good morning. This is Chun Hyeon-uk, Head of Financial Support Office at SK On. Let me run through Q3 results and Q4 outlook for our business.

Despite higher sales volume driven by good EV sales at key customers in Europe due to base effect following the removal of the EV subsidies around last quarter and conservative inventory stance taken by customers which pushed down U.S. sales volume, Q3 revenue fell 14% Q-on-Q, reporting KRW 1,807.9 billion. A decline in sales volume which constrained the run rate and AMPC in Q3, we reported operating loss of KRW 124.8 billion. Nevertheless, on a consolidated entity basis, we sustained the profit trend following last quarter's trajectory driven by all around cost efficiency efforts.

We expect sales to the European market will continue to uptrend. But in the U.S., with subsidy removed and tariffs impacting consumption sentiments on EVs and unfavorable environment, including the year-end holiday scheduled at OEM plants, there is concern that decline in sales volume may be inevitable.

Under this backdrop, we are strengthening fundamental resilience through operational improvement activities discussing with our partners to share the tariff burden and minimizing upfront expense for BOSK Kentucky #1 plant, whose operation just commenced, endeavoring to defend bottom line to the extent possible. We are also actively finding ways to further strengthen profitability by expanding the ESS business in the rapidly growing U.S. market.

In Q3, we had 1 gigawatt hour order win from U.S.-based ESS project developer and operator, Flatiron, followed by capacity expansion for LFP batteries for ESS use as we place momentum behind growing the order backlog and the pipeline.

As of November 1, we will complete the merger process with SK Enmove based upon stronger financial stability and earnings capacity and development of coolant solutions for EV and ESS using liquid immersion cooling technology, we will drive synergies to solidify competitiveness. Thank you.

[Interpreted] Next is on the results of SK IE Technology. Material business saw its operating loss narrow Q-over-Q on company-wide cost saving efforts. We plan to further drive improvement in losses through cost enhancements and ESS wins amid rising policy uncertainties coming out of North America.

Next, presenting on the third quarter's SK Innovation E&S results, I invite [ Kang Minkyung ], Head of Management Planning Office.

[Interpreted] This is Kang Minkyung, Head of Business Planning at SKI E&S. I will run through the update on our business. Driven by higher plant run rate underpinned by stronger competitiveness in cargo delivery during the summer season, SKI E&S' Q3 operating profit was up KRW 140.4 billion Q-on-Q, coming in at KRW 255.4 billion. In Q4, with crude price decline coming under full swing and typically lower seasonal demand in autumn, we expect SMP to trend downwards. But with the commencement of Caldita Barossa gas flow production and higher city gas sales in the winter season, we intend to sustain stable earnings capacity.

[Interpreted] This ends the presentation and now we move on to Q&A session.

[Interpreted] We want to first address several questions that we received in advance through our website. With this earnings call, we've received questions from the investors and analysts ahead of time and preselected the ones that were of most interest. For those frequently asked questions, we will provide the answers through simultaneous interpretation.

The first question is on China's supply side reform and impact that will bring on the company's refining business performance. I will ask the Head of Strategy Operations Division [ Choo Yong-gyu ] of SK Energy to take this question.

[Interpreted] This is Choo Yong-gyu. The objective of their reform is to resolve the issues regarding low efficiency. And China's refinery business actually forms part of that. And some of the products has become export items. And many teapot operations are stimulating circumventing different laws. Basically, COTC-focused capacity expansion will take place, but small-scale teapots will be phased out.

In upcoming March, there's going to be a general people's plenary. And after that session is ended, there will be more detailed plan. The facility is going to be phased out. So it may look positive for us, but we -- there's not going to be any increase in the demand for LNGs and others.

It impacts China's economy, so it's quite difficult to say whether this is positive or negative. Depending on the speed at which these facilities will be shut down, the impact will be different.

[Interpreted] We move on to the second question. Second question is on SK Innovation and affiliates net debt status and any additional financing plan being considered. I will ask Head of Finance Division, Seogeon Ki, to take this question.

[Interpreted] Yes. This is Seogeon Ki. Now our company considers solidifying the financial stability as our foremost priority. As per corporate value enhancement plan, we are cutting down our net debt moving from net debt in Q2 of KRW 33 trillion to Q3 end figure of KRW 28.8 trillion, a decline of around KRW 4 trillion. Considering KRW 9.5 trillion financing plan for 2025, as previously announced, we are not considering more add-on funding other than for refinancing purposes.

Also for SK On, large-scale CapEx is nearing its completion. So we expect CapEx to only gradually -- we expect CapEx to gradually decline as well. We will be carrying out, in parallel, portfolio rebalancing and securitization and monetization of assets to ensure financial stability and to have clear focus on enhancing corporate value.

[Interpreted] Thank you very much for these answers. This ends the session on entertaining your preselected questions. We will now switch to live Q&A. And please note that this session will be conducted through consecutive interpretation. And please state your name and affiliation when asking your question.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be provided by [indiscernible] from Shinhan Securities.

[Interpreted] Yes. Thank you for the opportunity to ask questions. This is [indiscernible] from Shinhan Securities. And I would like to ask you 3 questions.

The first question that I would like to ask is about the refinery business. If you look at next year, for the global refinery business market as a whole, what is the outlook that you have with regards to new additions? And also, what would be the outlook for demand for various petroleum products?

In addition to that, in China and also India, there are some restrictions that are going to be in place for the import of Russia crude. So how do you think that, that would have a business impact, if at all, on your business? And what would be the outlook related to that?

The second question that I would like to ask is about your battery business. It does seem to be in North America that there is an increasing demand for electricity that is taking place. And people are trying to decrease their dependency on China with regards to the overall supply chain.

So I do believe that this is relating to more interest on the ESS side. So for the company's ESS business, what are your plans there? And in terms of capacity, what capacity are you planning to utilize in the U.S. to service this business.

The third question that I would like to ask is that in the case that you are planning to use some of your EV capacity and convert that for ESS purposes, then with regards to the line conversion, what would be the cost and also time that would be required for the conversion to take place?

[Interpreted] So this is Choo Yong-gyu, Head of Strategy and Operation Division at SK Energy, and maybe I can take your first question about the overall expectations that we would have for our global net additions that will be taking place on the refinery side.

So if you just look at mechanically, the announcements that have been made, in total, the size would represent around 1 million barrels per day. In terms of the overall amount, it's slightly above that. However, if we were to look at the net additions, because we do expect that there would be a lot of shutdown in capacity that is also going to take place, at the end of the day, we think that the net amount will be around 700,000 to 800,000.

In addition, if you look at the outlook for petroleum products in terms of demand for next year, if you look at the likes of institutions like the IAE, I think that the level that they are looking at would be at around 700,000. However, we actually believe that the economic recovery will be a bit stronger to support. So our view would be slightly higher than that.

So if you look at the amount of Russian crude that is being imported by both the likes of China and India, in China, it's about 1.3 million. In the case of India, it would be around 1.8 million barrels per day. So that is the overall volume. However, in the fourth quarter, because of the various regulations that EU and the U.S. is putting into place against Russia, we do think that the overall import volume will decline.

However, as we saw in news reports before, there are some cases in which there are sales, asset sales taking place to the likes of Lukoil. So I think that there are ways that the Russians are trying to avoid the sanctions that they would be subject to. So whether this situation and the overall market will lead to a structural difference or a structural change is something that we will have to wait and see.

And with regards to the outlook about refining margins as a whole, for the Russian crude or the Russian products, because of the supply issues that we have mentioned during the presentation, there is a possibility that it won't come into the market. And as a result of that, when we take this into consideration for 2026, we do think that the refining margins will be stronger than what we have seen for this year.

And in addition to that, in the fourth quarter, as mentioned, for the U.S., for some of the refinery facilities, there are some closures that are expected, and this is a trend that we see also taking place into next year. So as a result of that, for U.S. outlets, we do think that there will be some business opportunities for us to expand our presence. Thank you.

[Interpreted] So yes, this is Chun Hyeon-uk, the Head of the Financial Support Office from SK On. So maybe I can take your second and third questions together.

So as you have mentioned, in the U.S. market right now, we do believe that the overall outlook for ESS demand continues to be upgraded to higher levels and adjusted higher level. So we do think that for the overall market opportunities, there will be a lot of opportunities available.

So from the company side at SK On, of course, we're actively trying to utilize these opportunities, and there are various ongoing discussions that we have with our customers about orders. So as we mentioned during the presentation, first, with Flatiron, we have already secured a project that would represent 1 gigawatt hour. And up to 2030, we also have -- we have secured the right of first refusal for up to 6.2 gigawatt hours.

In addition to that, outside of Flatiron, with multiple other customers right now, there are discussions that are ongoing to supply ESS. So the maximum amount that we're looking at right now would be 10 gigawatt hours. So with this discussion and the evolutions that are taking place, we do think that this will overall expand the pipeline that we have for this product.

With regards to where we would actually produce the ESS batteries, I think that this is still a discussion that is ongoing. So internally, it is being discussed. So what we're looking at as of now is the orders that we're already supplying to, the orders that we have recently won and also the expected pipeline going forward.

So I think that we want to have a comprehensive view about all the schedules that would be required and then be able to look at how we would allocate capacity and look at what sites we would utilize.

However, rather than building out new capacity, we want to utilize the existing capacity as much as possible to expand our ESS production. So therefore, in the case of Flatiron, right now, the target time line that we're looking at is to supply in the second half of 2026. We're expecting to use the existing facilities that we have so that we can provide the ESS units that are supporting LFP battery pouches.

So with regards to the battery chemistry, it will change to LFP based. However, the form factor itself remains the same as a pouch tech battery. So in terms of the time that is required and also other factors, we don't think that there will be any meaningful increase. So as mentioned, we are planning to supply in the second half of 2026, and we don't believe that there will be any issues in satisfying this time line.

And at the end of the day, once we make our determination about which production sites will be utilized, we will make sure to convey this to the market. Thank you.

[Interpreted] The following question will be presented by Hyun-hee Jung from Daiwa Capital Markets.

[Interpreted] I'm from Daiwa Securities. I would like to ask you two questions. This question may overlap with the previous question that was just posed, but we see that your competitors, the JVs that have been set up, are in the process of converting their lines to produce ESSs. So I would like to understand what your capacity breakdown is.

If you were to look at own capacity versus the joint venture-based capacity, if you could provide me with that split? And how much of that JV capacity are you planning for a conversion for ESS use? Companies, OEMs like Hyundai Kia Motors is also projecting that the EV market is going to slow down as we go forward. So I would like to understand as to what the production line planning is for the Hyundai Motor company joint venture.

Second question is there will also be some tariff-related impact on the materials used for batteries. And I understand that the burden sharing with your customers for EV versus ESS is quite different. So I would like to understand and gain some insight on how are you discussing this topic with your customers. So could you provide us with an update on this?

[Interpreted] Responding to your question, I am Chun Hyeon-uk, Head of Finance Support Office from SK On. For our U.S. capacity, we have, in Georgia, 20 gigawatt hours of SKBA, that is our own capacity. And through the joint venture, we have joint venture with Ford and Hyundai Motor Company. With Ford, we have one in Kentucky and Tennessee, and -- which is 37 gigawatts and 45 gigawatts in their respective capacity. And with Hyundai Motors, there's 35 gigawatt hour that is currently being planned.

In terms of the production site for ESS, as I've mentioned before, because we are in the process of talking to our JV partners, nothing has yet been confirmed, but we are talking about the production -- or the line conversions and the production sites with respect to the projects that we have already owned and the projects that are upcoming and prospective. So at this point, it's quite difficult to give you a definitive answer on how the capacity will be split.

Now having said that, if we look at the amount of the ESS orders that we've been -- we have already won. So 1 gigawatt hour that has already been won in terms of the project and the 6.2 gigawatt hour where we have the right of first refusal. And there is about 10 gigawatt hour capacity that is in the pipeline. So consideration of all of these orders and projects, we have the capacity that we could support through a consecutive line conversion of the existing production lines that we have.

And as you have mentioned, other competitors are planning to make use of their joint venture capacity for the production -- for ESS business. And same applies to us as well. We will also be able to consider the use of the joint venture-based capacity, and we will not preclude that possibility of using our joint venture capacity.

And so we would be mindful of driving an optimal production, and that is incorporated into our plan. And once we decide on the specific site, we will come back to you and communicate that information when that time comes.

[Interpreted] I am [ Anh Gon ], I'm Head of Planning Office of SK On. With regards to the impact from the U.S. tariff, it does, yes, have impact, not just on the EV, but ESS business as well. On the EV automobile side, with the increase in the prices that will have impact on curbing down on the demand from the consumers, and they would also have an implication in terms of the demand coming out of the OEMs.

For the EV side, from a short-term perspective, there will obviously be a cost item impact with regards to the overall supply chain operations. And also, we are in the process of talking to the OEMs so that we could actually share the risk that may arise from the tariff's impact by way of asking for assignment or allocation of the credits that is -- that the OEMs are to take.

On the ESS side, we are looking at what the short-term impact would be at this point. And once we gain that information, we will update you.

And I would also like to highlight the fact that we, at this point, are very -- operating our battery plants in the United States quite stably. And also for the batteries and for the ESS business, there is a significant amount of U.S. production capacity that is, at this point, installed, and that will be added going forward. And our customers are very much focused on U.S.-based production and manufacturing. And we are in the process of setting up a North American regional headquarters so that we can very nimbly respond to their needs.

[Interpreted] The following question will be presented by Woo-Jae Jeon from KB Securities.

[Interpreted] The first question that I would like to ask is about your petrochemical business. We do understand that under the leadership of the government, there is a restructuring that is being planned that will be completed by the end of the year.

So of course, I do understand that it would be difficult to share the details with us. But what type of options does the company have at hand with regards to this restructuring? In addition to that, if we look at the scope of restructuring that is being considered, would the benzene and PX business be part of that?

The second question that I would like to ask is about your lubricants business. If we were to look at the market outlook for 2026, 2027 and also the supply outlook, would we actually see an increase in such a situation? Or do you actually believe that the market dynamics will be similar to this year?

In addition to that, in the case of the battery-related coolants that will be -- that you are looking at right now, when do you think revenue will be start to be derived for this business? And when do you think it will be at the peak?

[Interpreted] So this is the Head of the Planning Office at SK Geo Centric, and maybe I can take the first question. First, to address the second part of your question, in terms of scope that is being looked at for the restructuring right now, the aromatic products, including benzene and PX are not part of the scope that is currently being considered.

In addition to that, for the overall restructuring scheme right now, if you look at the regions that are subject to the restructuring, it would be the complexes that are located in Ulsan, Yeosu and Daesan.

And the overall principles under which the government is conducting the restructuring is to curb down on the oversupply situation or overproduction situation as much as possible, ensure that the portfolio is more geared to the high value-added products; ensure that the companies can secure their financial soundness; and also to ensure that the overall efforts are conducted in a way in which the impact on the local economies and also employment situation in the region is minimized as much as possible.

So if you look at Ulsan specifically, including ourselves, there are 3 companies that are located there. So we are in a discussion as of now. However, in terms of any detailed options, they have not been formulated yet. So it would be difficult to share with you any information.

[Interpreted] So this is [ Wone-kee Kim ] from SK Enmove. Maybe I can address the second question that you have on the outlook for the lubricants business.

So for 2026 and 2027, for the base oil market, in general, we do think that it will be very flat to the current condition. In terms of the overall demand, we do think that it will be similar to this year. And for the key markets in terms of supply, we do think that the current supply volume will be maintained. In addition to that, we don't foresee any changes on the production side or with regards to logistics.

In terms of supply, some of the companies are planning to expand their capacity. However, in the group, the product area, due to the characteristics of the market, we don't think that the impact would be very large.

In addition to that, if we look at the second quarter of 2026, our competitor is planning a turnaround. So we do think that this will provide a favorable backdrop for our operations. And over the mid- to long term focused on the automobile market, we do think that there will be an increasing demand for higher fuel efficiency, more greener vehicles and also more regulations in terms of environment-related policies, which should lead to more demand for higher quality base oil.

And maybe to move on to the second part of your question, which was with regards to the immersion cooling systems for batteries, when would the actual revenue start to be derived with regards to lubricants business. I think that the view that we currently have is that for the revenue contribution to come in, in a full-fledged manner, the timing that we're currently looking at would be at around 2030 to 2031.

So even before the 2030 time line, we do think that in a small scale, there will be revenue that we will be able to generate. However, we do think that there will be more pack level verification that is required, also step-by-step testing and also more preparations for mass production.

So in terms of the full commercialization or full mass production of this product, we do think that 2030 would probably be the right time line. In addition to that, for the immersion cooling technology in itself, we do think that as time passes, that the application of this will expand to larger -- to a broader scope.

And in terms of the last part of your question, which was about when we expect peak -- the revenue to actually peak, as of now, I think that, that's a difficult question to answer. So please understand. Thank you very much.

[Interpreted] The following question will be presented by Vicky Hsia from JPMorgan.

I'm from JPMorgan. Sorry about that. I messed up in the registration. But firstly, congratulations on your U.S. ESS order win. I think it's very encouraging. Just to clarify your -- the order backlog you mentioned earlier, which is 7.2 gigawatt hours plus potential 10 additional, so total 17.2, is that for just the U.S. market? Or is it global, including Korea?

And could you just elaborate on what you think are your competitive advantages versus LG and SDI? Because all 3 battery makers are increasingly aggressive on ESS. So just wondering what type of margin profile you think you can secure. For example, are you going to make use of your E&P in the U.S., whereas SDI doesn't have a fully fledged -- fully owned plant? Or do you have other cost advantages?

And for the Flatiron contract, is it just ESS cell or cell plus module? Or does it include systems? What kind of margins do you expect?

The second question is on EV. So GM has been rightsizing its EV business and Ultium plant. So if does SK see any risk from your U.S. EV customers? Maybe just give us a rough sense of your expectation on demand in the fourth quarter and 2026 or your shipment trend? And if you decide to rightsize BlueOval, what do you think will be the impact on your P&L and balance sheet, please?

[Interpreted] So this is Chun Hyeon-uk. I'm Head of Financial Support Office at SK On. Just to first quickly respond to your first question and the third point together, the order volume that -- although the backlog that you mentioned, that is specifically for the U.S. market.

And also the arrangement with Flatiron is cell based. It actually includes the module, but it does not include system integration, SI.

Now in terms of the competitive edge that we have against our peers, it's not that our competitors do not do this. That is not what I'm saying, but what I can tell you that is that we have a very clear focus based upon the BMS system, we provide early fire detection, fire prediction system as well. And in terms of making our operational cost more efficient, we basically have an approach where we do a design based upon an integrated module design based on which we build a solution package.

Also, we use liquid immersion cooling technology to prevent against a fire dissipation. And by using the SK Group AI data center, we will be leveraging that capabilities and expanding our business so that we can solidify our bottom line.

Another key differentiator in terms of the strategy is that our competitors have their system integration division in-house, and they utilize that as a way for them to provide the package solution. For us, we have a clear focus on cell and module-based packaging.

So the ESS market is growing very rapidly. And out in the market, there are many system integrators and already quite big in size. So to -- we've decided that in order not to be in head-to-head competition with these SI providers and to have a structure where we focus on the supply of our products to our customers, we've decided to, for the time being, focus on manufacturing the cells.

So if we take on this approach that gives us the benefit of lowering other ancillary expenses and the investment that is required, so as I've mentioned before, we will be able to develop a ESS unit using the LFP technology. Now this is a form factor where we have a very strong capabilities which will enable us to push down on additional CapEx spending.

Because the ESS market is only at its infant stage in terms of the growth trajectory, up until the time the market becomes much more stabilized, we will, for the time being, focus on efficiency and minimizing the investment that is required so that we could maximize ROIC, return on invested capital. That is our strategy at this point.

Moving to your second question, you're asking whether -- you've mentioned GMs. But with the change in the EV-related strategies at the OEMs and customers, I think you were asking whether there would also be rightsizing taking place in BOSK and whether that will have an impact on the fair value of that asset.

If you look at our joint venture partner and our customer, Ford, also, if we think about that, yes, there has been new spikes and mentions of changes in the strategies for these companies in terms of their EV business, but this is not new news. Starting last year, when CASM started to really play out in full swing, it was from that point on time where -- when we started to hear of such movements.

So for Ford, in the phase of changes in the regulation of the exhaust gas requirement in the United States and change in the overall market backdrop, there has been cancellation of certain EV model launches or delays in the new launches, and they have shifted -- started to shift their focus on IC engines and hybrid vehicles. So there were signs that there were certain adjustments and changes made to the short-term electrification strategies of these OEM companies.

So upon this change or the shift in the strategy that both companies have been engaging in discussions and have rescheduled or push backed the time line for the commencement of new production lines. And in alignment with needs at our customer Ford, we have also made adjustments to our launching plans and have set up the plans accordingly.

So I can tell you that our partnership is sound and solid, and there continues to be very close discussion and collaboration with Ford in regards to the development and the relationship.

And if compared to the current capacity or the capacity that is currently planned, if there is a significant fall in the use of that capacity, because it is a joint venture structure, we don't necessarily have to fill everything with Ford requirement. We could use it for the purposes of supplying to third party for ESS purposes. So for customers other than Ford, that is possible if that needs to happen.

In the spirit of continuous collaboration, we will, of course, carry on with our partnership. But if there is any significant change in the strategy, if there needs to be a change to the plan -- the new plan, and for any reason, if the installed capacity and the feasibility of it, if there are any factors that will impact the use of that capacity and create a certain impairment, we cannot rule out that possibility 100%. However, to the -- when that would happen and to what extent, it's hard to say at this point.

So going forward, if there are any significant changes to the strategy going forward after we discussed with -- that we are able to identify as we discuss with our customers, we will, of course, come back to you and share that with you.

[Interpreted] The last question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] Yes. The first question that I would like to ask about is your CapEx. From next year, we do understand that because SK On will be requiring less, that the CapEx requirement for the company as a whole will be trending down. So what would be the expected CapEx size or budget that you are looking at?

And my second question is related to the ESS business. A lot has been mentioned today. And I think that one of the things that you have mentioned is that the focus will be on the cell and pack business. So can we interpret that to mean that for the company, you're not interested in providing ESS container finished goods?

And on the SI side, if you have not made a determination on whether or not you would engage in this business yet? For just producing cells only, what is the type of margin does -- what type of margin does the company believe you can enjoy?

[Interpreted] So to answer your question first about CapEx, I think that from the perspective of business planning right now, we're actually in the process of formulating the business plan for next year. So in actuality, we will not be able to share with you any specifics. But I think that what we can say is that based upon the actual CapEx that we have executed for this year, next year looks like it will be around 50% of what we have had for this year.

So I think that there will be approximately around 50% savings that we will see. The reason for that is that for the key investments that are required, again, we do have a lot of investments that we have completed in 2025. So for 2026, it cannot help but be a year in which the CapEx would significantly decrease. So in terms of the overall CapEx requirement, we do think that, again, next year will represent a year in which the overall required CapEx will be much lower.

So to move on to the second question. As we have mentioned before, I think that the priority that we have right now for ESS is our time to market. So therefore, right now, the focus for us would be the development and mass production of the cells, modules and packs. So for that reason, within the short-term horizon, I don't think that we have any intention to enter into the system integration side.

So I think that for -- if we focus on cell production alone, I think that what you're assuming is that the margins that we would be able to enjoy would be limited. However, not only will it be the cell, but there are auxiliary other basic systems that we would actually be adding on, but -- such as the DC block. So that is also part of the production scope that we would be providing.

And I think that if you look at our customers who we are facing which would be the system integrators, there is a value that we are presenting that they are recognizing for what we are doing. So that is why for high-quality names like Flatiron, we have been able to win contracts.

And securing the system integration capabilities, we don't believe that this is a very challenging capability to acquire if we wanted to do so. So I think that the approach that we believe would be right would be to, first, try to position ourselves well and very effectively within the current market, build up our capabilities in facing customers and also doing the customization that is needed.

So strengthening there, and then create the customized solutions that are required so that if we do deem necessary later down the road that we would be able to expand into the system integration area. So I do think that this could be an option that we would consider.

[Interpreted] So with this, we would like to wrap up the Q&A session and also the overall earnings conference call for the third quarter of 2025 for SK Innovation. Once again, for those of you who have taken time out of your busy schedule and who have stayed with us for this long call, thank you once again, and we would like to thank all of the investors and analysts that were present today. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]