Samsung SDI Co., Ltd. (006400.KS) Q4 FY2025 Earnings Call Transcript & Summary

Hello. Thank you for joining Samsung SCI's earnings conference call. Today's schedule will follow the earnings presentation with a Q&A session for participants. [Operator Instructions] We will now begin our Q4 2025 earnings presentation.

Good afternoon. I'm Yoontae Kim, Executive Vice President of the Finance and Accounting team at Samsung SDI. First of all, I'd like to thank everyone for joining today's earnings call. Joining me are EVP, [ Jaekyun OH ] from Business Management Operations; EVP, Jong-Sung Park from Strategic Marketing Office; EVP, Yonghui Cho from ESS Business team and VP, Ik Soo Kim from Strategic Marketing team of Electronic Materials Business. The earnings call presentation will be provided with simultaneous interpretation and Q&A session with consecutive interpretation. We'll now begin Samsung SDI's 2025 4Q Earnings Call. First of all, let me start with financial results for Q4 2025. Q4 revenue was KRW 3.9 trillion, a 26.4% increase Q-o-Q and a 2.8% increase Y-o-Y. Operating profit recorded a loss of KRW 299 billion. Pretax income recorded a loss of KRW 236 billion, which reflects equity income in affiliates and other factors and net income showed a loss of KRW 208 billion. Annual results showed revenue of KRW 13.3 trillion and an operating loss of KRW 1.7 trillion. I will now present the financial status at the end of 2025. Factoring in CapEx and the increased equity value of affiliates asset growth by KRW 1.7 trillion Y-o-Y to KRW 42.3 trillion, with the partial repayment of short-term borrowings, liabilities decreased by KRW 345 billion Y-o-Y to KRW 18.7 trillion. Following a paid-in capital increase through the issuance of new shares, total equity increased by KRW 2 trillion Y-o-Y to KRW 23.6 trillion. R&D expenses for 2025 are about KRW 1.4 trillion, an increase from the previous year and CapEx of KRW 3.3 trillion, a significant decrease year-on-year. For detailed financial status, please refer to the appendix. Next, I will explain the Q4 financial results of each business unit. For the Battery Business in the Q4, ESS margin all-time high quarterly revenue driven by expanded U.S. sales. Due to increased AMPC for local U.S. production and compensations for reduced EV volumes, battery revenue grew 28% Q-o-Q to KRW 3.6 trillion. Operating profit showed a loss of KRW 339 billion, significantly narrowing the loss compared to the previous quarter. Electronic Materials business recorded revenue of KRW 237 billion and operating profit of KRW 39 billion, maintaining a performance level consistent with the previous quarter. We now look at the 2025 annual performance. In the battery business due to factors such as changes in major countries environmental policies, a decline in EV sales from the strategic U.S. customer and the delayed recovery in demand for small batteries. Revenue decreased 21% Y-o-Y to KRW 12.4 trillion, resulting in an operating loss of KRW 1.9 trillion. In the Electronic Materials business, despite improved performance in semiconductor materials, reduced sales of OLED materials led to a slight Y-o-Y decrease in revenue to KRW 883 billion with an operating profit recorded at KRW 130 billion. Moving on to our business highlights in 2025. First, we strengthened our ESS sales foundation. Based on our exclusive non-Chinese prismatic ESS solution, we developed the NCA-based SBB 1.7 and LFP-based SBB 2.0 to expand our product portfolio and solidify our sales foundation. We also expanded ESS capacity by repurposing the U.S. local ex EV line and reached a 50% global BBU market share based on battery cell sales. Technological competitiveness was also consistently strengthened. ESS safety and high-power cylindrical battery technologies gained external recognition. For all solid-state batteries, we signed a joint development agreement with BMW and MOU with Hyundai Motor Company for robot batteries, successfully building our future technology foundation. Regarding Electronic Materials, next-generation G-Host and high-thermal conductivity EMC were first applied in customers' new products. We accomplished project awards on the ground of such strength in technological competitiveness. We completed a project award for NCA-based 46 pie cylindrical cells for an automotive OEM and signed large-scale supply agreements for LFP prismatic batteries for ESS applications. We also won some awards in the initial beat of the domestic ESS central contract market and commenced supply to global power tool customers by launching high-power tabless cylindrical cell. Next, our Head of Business Management Operation, will speak about the 2026 market outlook and business strategies.

Good afternoon. I'm EVP, [ Jaekyun OH ] from Business Management Operations. Having been appointed as Head of Business Management Operation at Samsung SDI at the end of the last year, I'm pleased to extend my greetings to our investors and shareholders through this conference call. Amidst challenging business environment, I feel a profound sense of responsibility in taking on this important position. To ensure the company reenter its growth trajectory, I will exert my utmost effort going forward. Now I will address the 2026 market outlook for each business unit and our business strategies. First, the EV market. The global EV battery market is projected to grow about 16% Y-o-Y. However, influenced by the easing of green policies in North America and Europe and adjustments of electrification strategies by major global OEMs, EV battery demand, excluding China is expected to grow only about 6%. On the supply side, weakening EV demand and strengthened regulations against Chinese batteries in North America are expected to intensify competition within Europe as Chinese companies expand their entry into the European market. Next is the ESS market. With the expansion of the AI data center investments, demand for power storage, UPS and BBU will continue to grow and the latest need to long-term demand projection is anticipated to exceed the last quarter's projection. In terms of supply, changes in the policy environment such as the IRA and tariffs are expected to expand supply opportunities for non-China firms through local production in the U.S. For small batteries, demand for cylindrical cells is rebounding led by the professional power tools amid the expansion of U.S. data center construction. Additionally, demand from the new markets like E2Wheeler and robotics is expected to continue growing. For POP cells, demand for high-capacity batteries will increase, centered on premium models like AI phones and foldable phones. Last is the Electronic Materials market. As AI server investments expand, semiconductor materials will continue their robust growth and display materials are projected to grow centered on IT and mobile OLED panels. Let me now share our 2026 business strategies. As previously mentioned, we anticipate another challenging business environment this year. However, we will mark this year as the inaugural year of our turnaround by implementing selection and focus for management efficiency, speeding up our response to customers and markets and preparing future-ready technologies. First, we will maximize ESS sales to achieve 100% production capacity utilization. Specifically, we will execute the seamless U.S. mass production of the LSP equipped SBB 2.0 to minimize the effect of the U.S. EV demand decline and maximize profitability by leveraging AMPC incentives. Furthermore, we will capture a larger market share by scaling the sales of high-performance BBU products powered by the high-power cylindrical batteries featuring tabless technologies. In the EV battery sector, we will maintain a stable sales foundation with existing customers while seamlessly expanding our reach to new customers starting this year to drive performance growth. We also plan to secure mid- to long-term growth drivers by expanding orders for products based on new materials such as LFP and mid-nickel. Furthermore, we will initiate our entry into new hybrid EV projects by leveraging our forementioned high-power tabless cylindrical batteries. We will closely coordinate with our customers to come to an agreement for production volume declines and lower utilization rates, which were the root causes of our performance deterioration. For the small battery business, we will expand sales of high-power tabless cylindrical batteries to meet the recovering demand for our professional power tools. Additionally, we will maximize sales by ensuring seamless mass production and supply aligned with customer schedules to secure first in positions for our key customers' new [indiscernible] flagship smartphones. The Electronic Materials business will accelerate the development of materials focused on emerging markets such as packaging and turning materials for HBM and films for foldable smartphones to strengthen our mid- to long-term growth foundation. At the company-wide level, we plan to meet the growing demand for ESS and LFP batteries, while maintaining an efficient investment approach that prioritizes the utilization of existing lines of our new capacity expansions. Moreover, we will drive productivity innovation by developing integrated solutions for process improvements and equipment retrofits. We will also focus on strengthening cost competitiveness through refined product designs, optimized workforce management at each site and monitoring of cost inefficiencies. Lastly, we will continuously enhance our mid- to long-term technological competitiveness by differentiating our products through the development of ESS integrated systems including real-time BMS control and cloud-based diagnostic solutions alongside investments in material technologies such as binders, conductive agents and electrolyte additives. This concludes our 2026 business strategy. Thank you.

I'll now close the presentation and move to the Q&A session. The Q&A will be held in Korean followed by consecutive English interpretation for each response. [Operator Instructions]

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

[Interpreted] My name is Hyun-Soo Kim from Hana Securities. I have two questions. The first question is that during the presentation, you've discussed the '26 business environment and the company's strategic direction. Could you provide your guidance for full year performance? . And the second question is that following the start of operations at our U.S. ESS line in Q4, could you update us on order momentum? In addition, as industry players, especially Korean players expand ESS capacity, how is the company assessing the risk of potential oversupply?

[Interpreted] This is Jaekyun OH, EVP for Business Management Operation, and I'll be providing the answer to the first question. As I previously noted, the market environment this year is improving compared to last year. Excluding seasonal softness in Q1, we expect sequential quarterly improvement with performance weighted towards the second half. We also expect to turn to quarterly profit in the second half of the year. Meanwhile, heightened global geopolitical tensions and policy uncertainties continue to drive elevated demand volatility among customers. In response to demand softness, we are working closely with our JV partners for operational efficiency. These factors are expected to remain key variables that could impact our full year profitability. By business segment, profitability in ESS, where demand remains strong, is expected to improve significantly as U.S. local production ramps up driving higher AMPC benefits and reducing tariff burdens. In small battery, following customers' tight inventory adjustments last year, we expect a gradual recovery in sales this year. In the Electronic Materials, we expect to maintain solid growth momentum amid robust semiconductor demand. For EV batteries, policy changes, including relaxed fuel economy standards and the elimination of subsidies and leading OEMs to recalibrate their electrification strategy. And as a result, our near-term recovery in demand is unlikely. Nevertheless, with several new mass production projects scheduled this year, we are preparing to ensure timely supply ramp up utilization rates without disruption and optimize line operations across sites in order to narrow operating losses. Despite a very challenging domestic and global operating environment, we are focused on responding to market demand in a timely manner, improving performance and continuing to invest in future technology readiness with the objective of laying the brand work for earnings turnaround. Thank you.

[Interpreted] This is EVP Yonghui Cho from ESS business team. And I'll be providing your second question related to the orders of the ESS as well as a potential oversupply. In the U.S. ESS market, rising power demand driven by the growth of AI data centers, together with customer preferences for non-China battery supply is creating expanding opportunities for locally based battery manufacturers, including Samsung SDI. Leveraging our highly safe prismatic form factor products and SBB solutions, we are securing orders in line with our production ramp-up plans. In addition to our existing high nickel products, the expansion of our LFP product lineup is supporting increased order wins from new customers with respect to concerns about oversupply. While we and other local battery manufacturers are increasing ESS capacity by utilizing existing EV production line, this requires time for product qualification and supply chain setup. In particular, capacity expansion for LFP products in prismatic form factors, where customer demand is strong, also requires advanced technical capabilities. As a result, we believe the pace of such capacity additions will be more constrained. From a demand perspective, recent ESS order patterns indicate a transition from onetime project award to a growing share of multiyear contracts, typically spanning 2 to 3 years or more as customers seek to lock in medium- to long-term supply. Taking into account these demand and supply dynamics, we do not believe there is a high likelihood of an oversupply situation in the near term. We will continue to closely monitor market conditions and manage our production line plans accordingly.

[Interpreted] The following question will be presented by Sonny Lee from JPMorgan Securities.

[Interpreted] I also have two questions to pose. The first question is that with the U.S. ESS capacity increasing this year and AMPC benefits being reflected, profitability in the ESS business is expected to improve. So could you share your outlook on this? And the second question is that given the expansion of AI data centers, how do you see BBU demand evolving? And what is your outlook for your BBU sales?

[Interpreted] This is EVP, Yonghui Cho from ESS business, and I'll be answering your first question related to ESS business profitability. Since the last fourth quarter, we have been expanding local ESS capacity in the U.S. through capacity conversion. And based on this, we expect ESS revenue this year to increase by close to 50% year-over-year. . From a profitability perspective, margins on products manufactured in Korea are expected to remain relatively lower due to their still significant exposure to U.S. exports and associated tariff costs. However, for locally produced U.S. products, the benefits from AMPC and reduced tariff exposure are expected to drive a meaningful improvement in overall ESS business profitability. Starting in the fourth quarter with the ramp-up of new U.S. LFP production lines, tariff excludes exports from Korea are expected to gradually phase out. In addition, as the initial fixed cost burden at the new U.S. lines alleviate, we expect profitability to show a more feasible improvement. We plan to ramp up our U.S. ESS production lines as schedule, increase utilization and continue to enhance cost competitiveness with objective of improving profitability over time.

[Interpreted] This is EVP, Jong-Sung Park from Battery Strategic Marketing Office. I'll be answering your question related to BBU demand and BBU sales outlook. The BBU sale market is expected to sustain strong growth at a CAGR of approximately 14% from 2025 to 2030, supported by aggressive data center expansion by cloud service providers such as Amazon, Meta and Google. In addition, a server power per rack increases to support AI workload, BBUs are required to deliver high power, faster charge and discharge rates and related performance specifications, which is driving stronger customer preference for high power cells. We plan to launch BBU dedicated cells incorporating tabless technology to further enhance high-power performance within this year, thereby expanding our product portfolio. Given that end demand for BBU is concentrated in the U.S. market, where non-China sourcing requirements are strong, we plan to leverage our Malaysia manufacturing base to drive more than 20% year-over-year sales growth and to continue strengthening our market presence.

The following question will be presented by Chuljoong Kim from Mirae Asset Securities.

[Interpreted] I also have two questions to ask. I am Chuljoong Kim from Mirae Asset Securities. Last year results in cylindrical batteries for power tools were significantly impacted by customer inventory adjustments. So could you provide an update on current customer inventory levels? And also in addition, how is the demand for tabless-based products? And what is your sales outlook? And the second question is that the Electronic Materials business delivered solid results last year. Could you share your outlook for the market and your sales expectations for 2026?

[Interpreted] Once again, this is EVP, Jong-Sung Park from Battery Strategic Marketing Office. I'll be answering your question related to the cylindrical battery inventory and the demand and sales outlook for tabless-based products. While U.S. housing market index appears to have passed their trough following recent interest rate cuts, the recovery in housing market remains sluggish. In contrast, increased investment in AI-related infrastructure and data center construction and supporting growth in professional-grade power tool sales. In addition, after large inventory reductions last year, customer inventory levels are now approaching normalized levels. In particular, as demand improves in the professional segment, where higher battery power performance is required, demand for tabless-based products is increasing. We entered major customers' new projects with our tabless products last year, and we plan to scale up sales more meaningfully this year. In addition, demand for tabless-based products is expanding beyond power tools into BBUs and hybrid EVs. We plan to supply these products to new projects within the year and will increase tabless capacity to support higher sales. As a result, we expect tabless products to account for more than 10% of cylindrical battery revenue this year, contributing to overall performance improvement.

[Interpreted] This is VP, Ik Soo Kim for Electronic Materials Strategic marketing team, and I'll be answering your question related to the Electronic Materials businesses, market and sales expectations and outlook. In the Electronic Materials business, we expect solid growth to continue in '26, supported by positive growth outlook in the semiconductor and OLED market. With respect to market conditions and the semiconductor front end market, wafer input is projected to increase by more than 5%. This growth is driven by expanded production centered on high value-added products fueled by AI and data centers, alongside the efforts to secure volumes of commodity DRAM. In the OLED panel market, despite product price increases driven by higher component costs, panel shipments are expected to remain solid, supported by premium products such as foldable devices. In terms of sales outlook, for semiconductor materials, we expect revenue growth driven by mass production ramp-up with key customers for high thermal conductivity EMC and metal slurry products. We also plan to expand our portfolio with packaging materials for next-generation processes. For OLED materials, we expect sales to increase supported by customer diversification for high-efficiency green host materials and foldable display optical bonding films. We also plan to focus on development of OLED materials and organic panel materials for high color gamut applications going forward. Based on these initiatives, we will continue to drive the expansion of our Electronic Materials business.

[Interpreted] The last question will be presented by Minwoo Ju from NH Investment & Securities.

[Interpreted] This is Minwoo Ju from NH Securities. I have two questions. And the first question is that following weaker sales to European customers last year, which led to lower utilization at the Hungary plant. Could you outline your plans to improve utilization this year? In addition, how is progress on new order wins with European customers? And the second question is related to capital expenditures. It actually declined year-over-year last year. How do you expect capital spending to trend this year? In addition, how are you planning to fund your capital investments?

[Interpreted] This is EVP, Jong-Sung Park from Battery strategic marketing. I will be answering the question related to the plans to improve utilization rate at Hungary plant as well as the progress on new order wins with European customers. Due to a combination of factors, including relaxed European emissions regulation, a shift in consumer demand towards the mid- to low segment and increased penetration of Chinese EVs, demand for our key products declined, which led to lower utilization at our Hungary plants last year. However, with several improvement drivers in place this year, we expect utilization to improve year-over-year. First, with the 3-year average-based carbon emissions regulations remaining in effect, we plan to expand supply for existing projects. In addition, for new supply projects scheduled for both the first and second half of this year, we intend to proceed with mass production on schedule without disruption in order to gradually increase utilization rate. We are also taking steps to prepare for the future by constructing new 46-phi production line. At the same time, we plan to convert certain lines to LFP and implement manufacturing modifications, which we expect will further enhance operational efficiency. With respect to new orders, we are pursuing entry into high-growth volume and entry-level segments and actively working to secure new customers. We are advancing discussions with multiple customers on a range of mass production projects, including high nickel, mid-nickel and LFP chemistries, and we expect to see more tangible progress in the first half of the year.

[Interpreted] This is EVP, Yoontae Kim from Finance and Accounting. I will be answering the question related to CapEx outlook and funding method. This year, our capital expenditures were focused on essential investments for future growth, including the construction of 46-phi lines in Hungary, modifications to U.S. LFP, ESS lines and the application of cylindrical tabless technology at our Malaysia site. At the same time, we are pursuing investment efficiency initiatives. And as a result, we expect overall capital spending to decline slightly year-over-year. With respect to funding, even with a reduced level of investment, it remains difficult to fully cover capital expenditures with operating cash flow alone. Accordingly, we plan to review a range of funding options including the utilization of existing assets, taking into account the size and timing of our investments. Lastly, we will close the call by answering one of the questions that we collected online in advance. Many investors have inquired about all solid-state battery advanced production plans and latest development status. And Jong-Sung Park, Head of Battery Strategic Marketing Office will provide the reply to this line of question.

[Interpreted] In line with our original plan, we are advancing the development of all solid-state factories with the goal of starting mass production in 2027. Last October, we also signed an MOU with BMW to develop test vehicles, marking tangible progress in our collaboration. While there has been some delay in OEM electrification plans, the robotics market is growing rapidly with the adoption of physical AI technologies. Even the limited installation space and the need for high safety and high-power in such devices, demand for all solid-state batteries is increasing. In this context, we are exploring collaboration opportunities with multiple robotics companies utilizing all solid-state batteries. In addition, we are expanding business opportunities in new applications that require highest levels of safety and energy density, including urban air mobility, which enables the rapid transport of people and cargo in urban areas using small electric aircraft as well as high altitude platform stations, which provide communications and observation services through long endurance flights. With the goal of starting mass production next year, we will continue to expand business opportunities in line with market demand. We also plan to proceed with capacity expansion investments for our all solid-state battery lines this year and prepare for commercialization in accordance with our planned time line.

[Interpreted] And I would also like to thank our investors for their opinions, and we will reflect them in our management decision-making goal going forward. And if you have further questions, please contact our IR team. And this concludes the earnings call for Q4 2025 of Samsung SDI. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]