LG Energy Solution, Ltd. (A373220) Earnings Call Transcript & Summary

Good morning and good evening. This is Sara Hwang, Head of IR at LG Energy Solution. Thank you for joining our 2026 Q2 earnings conference call. First, I'd like to introduce who are present today. Lee Chang Sil, CFO; Lee Sang Yeon, In-charge of Planning and Management; Ahn Min-gyu, In-charge of Advanced Automotive Battery Planning and Management; Noh In-hak, In-charge of Mobility and IT Battery Planning and Management; Jeong Jae Hyeok, In-charge of ESS Battery Planning and Management; Park Sung-pil, In-charge of Accounting; Kim Young Dae, In-charge of Finance; and Lee Yeon-hee, In-charge of Corporate Strategy. For your reference, the presentation for business performance and strategy will be simultaneously interpreted. The following Q&A session will be consecutively interpreted. The materials are available on the real-time webcast or can be downloaded from the corporate website. In this conference call, I'm going to go over the 2026 Q2 results, and then our CFO will share our key business achievements, recent market trends and key initiatives, which will be followed by a Q&A session. Please note that the forward-looking statements included in the call are subject to change according to amendments in future business environment and corporate strategies. I will first go over the business performance of Q2. Total revenue, supported by an increase of mid- to low-end EV chemistry and cylindrical shipments, on top of the ESS, capacity utilization growth in North America increased by 15% Q-o-Q to KRW 7.6 trillion. The automotive battery division revenue grew despite the continuously weak North American EV demand, thanks to double-digit Q-on-Q volume growth of both high-voltage mid-nickel products to major European customers and high nickel products to Asian customers. The small battery division revenue also grew, while 2170 cylindrical shipment remained robust, driven by strong sales of a new EV model of a strategic customers since the latter half of last year, while the 46-series shipment jumped by more than 60% Q-o-Q. The ESS battery division revenue rose as well by around 30% Q-o-Q as the sequential site expansion in North America enabled higher shipments and the power grid project shipments for European backlog started in earnest. AMPC, which is reflected in revenue and operating income, backed by ESS shipment growth increased by 27% Q-on-Q to KRW 241 billion. In Q2, higher utilization in Europe improved product mix driven by high-margin cylindrical products and an increase of ESS volume in North America. Mitigating fixed cost burden enabled the company to turn to profit in 3 quarters. Operating income stood at KRW 113.3 billion and operating margin at 1%. As for nonoperating items, interest expense and loss from disposal of tangible assets led to a nonoperating loss of KRW 241.2 billion. Net loss before tax was KRW 127.8 billion and net loss was KRW 328.6 billion. Next is financial. Higher cash levels from U.S. dollar bond issuance in April, utilization of the new ESS line at the Honda JV and the increase of tangible assets driven by the cylindrical site preparation in Arizona, increased total assets by about KRW 6.1 trillion Q-on-Q to KRW 77.9 trillion in Q2. Liabilities due to increased borrowings increased by about KRW 5.7 trillion to KRW 47.6 trillion Q-o-Q. Capital rose by about KRW 0.4 trillion to KRW 30.3 trillion, liabilities to equity was 157%, debt to equity, 96% and net debt to equity was 72%. EBITDA was about KRW 1.3 trillion and including more than KRW 3 trillion from the sale of the Honda JV building completed in May. The total net cash inflow this quarter was KRW 4.7 trillion. CapEx was adjusted by almost 40% Q-on-Q, about KRW 1 trillion was executed. As of Q2, cash increased by KRW 3.4 trillion Q-on-Q to KRW 7.2 trillion. This concludes the earnings presentation. The CFO will continue with the first half's major achievements, recent market trends and key initiatives for the second half.

Good morning, and good evening. I am Lee Chang Sil, CFO. First half revenue amounted KRW 14.1 trillion, which is more than a 10% increase Y-o-Y. The growth of the ESS business is especially noteworthy. The stable growth of ESS is a key priority for this year. By converting EV capacity into ESS, we've been responding to demand changes with agility, creating meaningful progress every quarter. In result, ESS revenue more than quadrupled Y-o-Y, taking up high 20% in the revenue mix. An AI data center project for a hyperscaler end user is included in the more than KRW 3 trillion new orders we secured in the first half. In May and June, the GM JV Phase 2 and Honda JV sequentially kickstarted the ESS line. By year-end, we are securing more than 50 gigawatt hours of ESS production capacity in North America. In EV business, we are responding in full scale with mid- to low-end solutions in Europe, where demand is relatively robust. In results, more than 30% of EV pouch sales volume was mid-nickel and LSPs in the first half, diversifying our product portfolio. Meanwhile, the 46-series continues to grow by winning large contracts from new customers, increasing its contribution to the division's revenue. The 2170 is also proactively responding to a strategic customer. EV cylindrical shipment jumped by 50% Y-o-Y. Although U.S. EV demand is weaker than expected, in Asia and Europe, new products have been steadily driving both EV battery revenue growth and utilization enhancements since Q4 last year. I will now move on to recent market trends. In ESS, on top of the existing power demand growth, as the scope of AI technology and application widens, related investment in infrastructure and data centers is continuously expanding. Also the need to address regional power grid overload and secure stable power supply is rising quickly. In results, on top of the existing ESS demand related to grid scale renewable energy development, there is a growing need for stand-alone ESS to address hourly and regional imbalance of power supply and demand and for stable and flexible power grid operations, ESS capacity per generation site is showing an increasing trend. Moreover, as the rise in power demand intensifies grid bottlenecks, big tech companies with urgent AI investment needs are preferring to establish on-site power infrastructure over relying on grid connection. The so-called BTM, behind the meter demand is growing. Especially in AI BTM projects, ESS installation is essential to reduce severe power load volatility. And even inside data centers, high-power UPS and BBU are required for emergency power supply during blackouts. The use cases of ESS batteries are expanding and customer requests per application is diversifying at the same time. LG Energy Solutions will meet the rapid power demand growth in North America by stably expanding capacity centered on pouch LFP this year and securing prismatic lines next year to become the largest regional ESS supplier that can help customers maximize ITC benefits and also cement our leadership. Also by leveraging SI strength that can enhance operational efficiency of ESS, we will work to continuously provide differentiated end-to-end value from cell supply to software. The pouch and cylindrical-based high-power UPS and BBU lineup will be strengthened to enhance our capabilities to meet customer needs across different power grid and data center applications. In the EV market, EV penetration is surpassing 35% in Europe, where we are seeing changes in customer needs. According to the thermal stability regulations that were strengthened last year, EVs that are launched from the second half of 2027 must ensure that in case of fire, thermal propagation across cell cannot occur for a minimum of 5 minutes. Structurally, going beyond cell-to-pack to cell-to-vehicle, the structural integration of vehicle and batteries being enhanced to achieve higher performance and design. You are seeing launch plans for such next-generation EV models. Consequently, battery solutions that can respond to such changes are garnering interest from the OEMs. The 46-series on top of its structurally robust design strength can deliver high energy density and is easy to meet fast charging specs. Also, the use of rigid steel can material and tabless structure are favorable for securing thermal stability. All of these factors are driving adoption by major OEMs. The 46-series of LG Energy Solutions has a diverse lineup from 4680 to 46120. We also have regional production capacity in Ochang, U.S. and eventually in Europe as well, which enables flexible response to each OEM. In terms of chemistry, silicon content will be increased to enable fast charging within just 10 minutes. And our proprietary pack design that can maximize cooling efficiency offers a differentiated next-generation EV solution. We'll continue growth by rapidly and proactively responding to changes in market trends and customer needs. First, in the ESS division, on top of the stable ramp-up of the 5 North American cell production sites, capacity expansion of PAC and Link will also be accelerated to achieve our top priorities of accelerated growth and profitability improvement. Also, following a successful string of new orders in the first half, we'll continue to actively pursue new orders in the large-scale renewable power generation, such as solar PV projects in North America and data center power infrastructure projects. For the EV business, we will make utmost effort to prepare the cylindrical production site in Asia and in the U.S. The 46-series line currently being prepared in Arizona when compared to Utah, will boost 50% higher equipment production efficiency. Scheduled to start production in Q4 this year, the new line should facilitate additional orders with diverse customers to produce tangible outcomes. Meanwhile, the pouch business went through challenging times due to weak EV demand in North America. However, in the second half, we will restart the GM JV Phase 1 site. The JV with Hyundai Motors in the U.S. should gradually increase utilization in line with demand and customer situations. In Poland, mid- to low-end solutions should drive revenue growth. The trend should continue to the U.S. and Europe as we believe that we can improve EV utilization. As for new pouch orders, compared to currently produced products, the second-generation mid-nickel solution will -- with improved driving range and fast charging specs to drive order pipeline, especially in Europe. Lastly, for next-generation batteries, we intend to address market needs with optimal products and technologies, backed by an accurate assessment and analysis of high-growth downstream demand. First, markets where small but high-power products are required like BBU and robots, will be served by mass producing the tabless 2170 in Ochang to expedite market entry this year. For sodium batteries, as market needs expand, we are working in a steady manner to achieve our goal of completing the sample production line in Ochang this year and shipping test volume for ESS and EVs next year. Lastly, for solid-state batteries, given its technological maturity and scalability, it should take some time to take off. Nevertheless, we are preparing to set up a pilot line using dry electrode process technology this year to test price competitive solid-state products. Investors, analysts, and shareholders, amid various uncertainties, the pace of change in the market and the products is accelerating and competition is intensifying. It may take slightly longer than expected to bear fruit. However, we believe that the business foundation and confidence we are accumulating will deliver differentiated competitiveness, creating greater value and rewards over time. We will continue to show action over haste and results of our expectations to deliver on your trust. Thank you.

This is the end of our presentation, and let us move on to the Q&A session. [Operator Instructions]

[Operator Instructions] [Interpreted] The first question will be presented by Kim Hyun-Soo from Hana Securities.

[Interpreted] The first question that I would like to ask you is about your outlook going forward. If you could talk about the directions that you see with regards to the overall performance of the third quarter and second half of the year, that would be appreciated. And also in terms of the possibility of achieving the guidance that you had provided for the year, whether you see that as a possibility is also thing that we would like to hear about. The second question that I would like to ask is about your ESS business in North America. We are always concerned that there can be some competition risk related to the ESS market. So in the existing market for the Chinese players that already have a large market share, do you believe that there could be heightened competition in the ESS area? And if so, what is your strategy to deal with such a situation?

[Interpreted] So thank you for your question. This is the CFO, Lee Chang Sil, and maybe I can take your third -- the first question that you have. As we have mentioned during the presentation, if we look at the third quarter, we do expect that in North America, there will be new capacity that will be running. And therefore, versus the previous quarter, we expect at a minimum around 50% increase in the overall shipments on the ESS side. In addition to our strategic customers, there will continue to be a supply of very stably the cylindrical volume. So as a result, in addition to that, if we look at the automotive pouch demand and the overall trends, we do think that it is robust, especially towards the European high-voltage mid-nickel products. So we do think that there will be volume growth there. Added to that, with our strategic customers on the JV side, we will restart production. And therefore, we do expect that overall, the volume on the North American EV side will also increase. So taking all of these factors into consideration, if we look at the full company revenue for the third quarter, we do think on a Q-o-Q basis that we will be able to achieve 20% or more growth in this area. If we look at the overall profitability, in order to deal with the growing ESS demand in a very short period of time, we have been building out various sites. So not only sales, but also packs and link capacity has been in preparation all simultaneously. So there has been some burden from that and also some additional ramp-up costs for these facilities. So for the time being, we do think that, that will have an impact. However, not only will we focus on trying to stabilize the ESS production in a very quick manner, but we will also continue our efforts on a full company basis for cost savings and also to achieve better operational efficiency. At the same time, as mentioned before, in North America, we will restart the JV production and we do believe that the Poland production volume will also increase. So through this, we will try to achieve an improvement in our margins. To talk about the overall outlook for the second half of the year, on the ESS side in which we do see very clear signs of growth taking place. As we continue to expand the utilization of our North American sites, we do think that the overall production in the second half of the year versus the first half of the year will double. And in addition, if we look at the automotive pouches and cylindrical batteries, towards the second half of the year, we do think that there will be a stable increase in volume there also. So for the full company revenue, we do think that the 20% level of growth that we have guided at the beginning of the year is something that we will very comfortably be able to achieve. As mentioned before, because for the ESS business, not only do we need to set up capacity for cells but also for packs and links. In stabilizing the overall production system in itself, we do think that there will be some time and also costs that will be necessary for this. However, as we have done, the company will continue to focus on stabilizing the overall production framework and also securing the quality needed so that all of the 5 sites that we have in new operations can be stabilized and that we can maximize the overall volume that we can generate. So with the fourth quarter, even on an ex IRA basis, we will try to secure the profitability of the ESS business that we will be aiming to achieve.

[Interpreted] So this is Lee Yeon-hee from Business Strategy and maybe I can address your second question. So in the U.S. market, of course, because of the investments that have been taking place for AI data centers, the overall electricity demand has been surging. And in addition to that, there continues to be tax credit that is provided in the form of ITC and other such benefits. So as a result of the overall growth that we see for ESS demand continues to accelerate. For the Chinese competitors in this area, of course, there are various efforts or options that they are trying to use to enter into the U.S. market. So for example, building factories in the U.S. trying to go through third-party countries or utilizing LRS. However, because of the PFE regulations, it is very challenging for them to secure any AMPC or ITC subsidies. So as a result, we do think that the possibility of Chinese players expanding their market presence would be limited. In addition to that, on our side to grow our ESS business, I think that there are 3 main strategies that we are currently focusing on. The first and top priority would be to expand our overall production capacity. So as the CFO has mentioned, we are in the process of converting existing EV lines to ESS lines, and we want to complete that within the year. So in addition to that, with the larger cell capacity that we have in terms of production, we are also trying to prepare the capacity on the pack side and on the container side also. Secondly, the focus would be to try to strengthen our overall product competitiveness. So for the LFP prismatic mass production, which is actually something that we are planning and trying to supply from next year, the overall preparations are going ahead according to the schedule. And in addition, for the sodium battery technology that is more suitable for long-duration ESS markets. We are currently -- we have completed the overall product technology verification that is necessary with customers at the level of various hundreds of megawatt hours. And therefore, we are in the process of pursuing the commercialization of such. Lastly, to differentiate ourselves versus Chinese peers, I think that the biggest point of differentiation that we would have is our SI and O&M capabilities. So not only that, but we are also going to develop various software for power transaction or power exchange support purposes and try to maximize our energy use so that we can convert not only from a hardware supplier, but to a higher-margin, software-based supplier to secure a more structural competitive edge.

[Interpreted] The next question will be presented by [indiscernible] from Power Investment & Securities.

[Interpreted] I have one question that I would like to ask about your mobility and IT battery business. And secondly, for the advanced automotive battery business. To ask the first question on the mobility and IT battery business first, if you look at your first half performance, it does seem to be that on the cylindrical side, there was a large growth that we have seen. And in terms of the overall revenue, I think that this is something that is very noticeable. Towards the second half of the year for the overall trends that you see as of now, do you think that this is a momentum that will continue? And if so, what type of upside do you think we could look forward to? In addition to that, you talked about the 46-series production across Ochang, in the U.S. and also maybe Europe. So if you could talk about the strategy there, that is also something that would be appreciated. On the automotive -- advanced automotive battery side, I think the question that I would like to ask you is that if you look at the production under the GM JV, this is something that was something that was a bit lackluster during the first half of the year. However, towards the second half, we have entered into the second half of the year. So I would like to know what the production plans are for the third quarter. In addition to that, if we look at the batteries that you are shipping to your European customers, I do understand that on a Y-o-Y basis, there have been improvements here. So what is the overall volume that you see for the customers in this area?

So this is [indiscernible] from the mobility and IT battery planning and management. So maybe I can address the first question that you have. As you are already aware, if you look at the overall volume for our cylindrical batteries, towards the second half of last year, I think that from that point of time, we have continuously see a quarter to -- quarter-over-quarter growth within this area. So in addition to that, if you look at the overall shipment volumes that we have had to our strategic customers, because of the EV demand recovery in Europe and also focusing on long-range models in Asia, there has been very solid sales that have been continuing. So as a result, that has driven the overall growth trend. On the customer side also, they are planning -- we understand that they are planning to increase their overall production volume to meet the demand growth. Added to that in the second half of the year, for the overall demand that we see for the 46-series in which we started mass production in the second half of last year, we do think that this is an area in which we will be able to see very continuous increases in the future. So as a result, for our cylindrical batteries because of this overall very solid volume growth that we see, not only towards the second half of the year, but we think that the momentum is something that will continue into next year. So that have been said, towards the second half of the year in China for our Nanjing factory for cylindrical batteries, we are planning to fully operate the capacity so that we can actively address the demand that our customers have. And also for the 46-series volumes that we are producing in Ochang, of course, that is something that will be in place. But not only that, we will also have the Arizona factory that is going to be started within the year. So the mass production preparations on that side. Added to that, also other order or that we can continue to try to pursue on an active basis is something that we will continue so that we can maximize the demand momentum that we see.