Samsung SDI Co., Ltd. (A006400) Earnings Call Transcript & Summary

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2019 Fourth Quarter Earnings Results by Samsung SDI. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2019 fourth quarter earnings results of Samsung SDI.

Good afternoon. I'm Yoontae Kim, Vice President of the Business Management Office of Samsung SDI. Before we begin, I'd like to introduce our management team attending today's conference call. Our CFO, Young-No Kwon; Head of Battery strategic marketing team, Hong-Gyeong Kim; and Head of Electronic Materials Financial Management Team, Kyunghoon Kim have joined us. We will now start the fourth quarter 2019 earnings call. First of all, we will announce our fourth quarter 2019 results. Fourth quarter revenue was KRW 2.820 trillion, a 10% increase from the third quarter. By Business division, Battery revenue was KRW 2.2084 trillion, a 13% increase quarter-on-quarter, driven by sales increase mainly in automotive batteries. Next is Electronic Materials revenue. Due to a slight decrease in polarizer sales affected by seasonality, Electronic Materials revenue decreased by 0.6% quarter-on-quarter to KRW 610.4 billion. Operating profit was KRW 20.1 billion, a sharp decrease as a result of reflecting one-off costs we spent on ESS. We suffered tax loss of KRW 23.2 billion due to financial costs and others. Net loss was KRW 33.1 billion, please find our annual results on the table. Next, I will walk you through our financial highlights. Assets as of the end of 2019 was KRW 19.85201 trillion. Liabilities stood at KRW 7.19108 trillion, increasing by KRW 210.4 billion from the third quarter. Current liabilities increased by KRW 353.4 billion as a result of an increase in short-term debt and noncurrent liabilities decreased by KRW 143 billion, with a decrease in long-term debt. Shareholders' equity was KRW 12.6603 trillion, a KRW 95.3 billion decrease. Next is our fourth quarter performance and 2020 outlook by business division. First, our mid- to large-sized Battery division showed a record high quarterly revenue, thanks to the growth of our automotive batteries. Our automotive battery revenue recorded the highest ever, significantly improving profitability as supply to European customers surged. While we have carried out the promotion of ESS safety measures, ESS revenue slightly increased, mainly in the U.S. utility market. In the first quarter 2020, which is the offseason, mid- to large-sized Battery sales and profitability is expected to decrease quarter-on-quarter but continue to grow year-on-year. We will thoroughly prepare for the increasing volume of automotive batteries expected from the second quarter and also keep working on the ESS safety measures as planned. To talk about the 2020 market outlook, the global automotive market size will be about 176 gigawatts of 55% year-on-year growth. In Europe, OEMs are planning to produce more EVs to meet the strict regulations on CO2 emission. The U.S. and Chinese markets, which relatively stumbled last year, seems to able to recover its growth according to scheduled launches of new models. We see that ESS demand will grow by 26% year-on-year to about 6 gigawatts. Given the global trend of more adopting new renewable energy, we expect the growth will continue centered in the oversea utility market, while demand has shrunk in the domestic market due to the REC spot price downtrend, we foresee continuous demand from the suppliers, who need to take their duties. Let's move on to our small-sized Battery division. Fourth quarter Battery revenue slightly decreased quarter-on-quarter, mainly in IT applications. We saw an increase in our cylindrical battery revenue, mostly in power tools and vacuum cleaners. However, polymers and prismatic battery revenue decreased as we saw lower demand from smartphones. In the first quarter of 2020, we outlook sales and profitability will decrease considering offseason. Cylindrical battery volume will decrease due to our customers' stock adjustments followed by lower downstream demand in power tools. Polymer battery supply will expand due to upcoming launches of new smartphones by core customers, but existing products volume will shrink, which will possibly affect our sales and profitability. Next is the 2020 market outlook. The battery market size is foreseen to grow by 14% from the previous year to 10.2 billion cells. First, the rapid growth of EVs as well as e-mobility, such as e-bikes and e-scooters, will lead the non-IT application market. The power tool market will also slowly grow as tool will need to keep converting from corded to cordless. In the case of IT market, more launches of 5G smartphones and foldable mobile phones will lead to an increase in demand for high-capacity batteries and fast-charging technology. Moreover, world-wide trend of wireless earbuds will be another growth driver of the battery market. Next is our Electronic Materials business. Quarterly revenue slightly decreased, but we increased the proportion of high-value products. Polarizer revenue decreased because of seasonality, but OLED and semiconductor materials revenue continued its growth, thanks to better downstream demand. Next quarter, our performance in Electronic Materials business is foreseen to be sluggish as it is offseason. We expect semiconductor materials sales will grow as a result of better semiconductor memory market conditions, but at the same time, our display materials will be under the effect of offseason, seeing decreasing sales and profitability. Next, I will talk about the 2020 outlook of the semiconductor and display markets. The semiconductor memory market is foreseen to grow by 10% year-on-year with a size of KRW 134 trillion. Server demand will surge as a result of increasing data centers, and the mobile market will confront expanding demand for DRAM due to the distribution of 5G smartphones. The LCD TV market will see a sluggish growth, but demand for large screen panel in China will continue to grow. For the mobile display market, the wave of conversion from LCD to OLED panel will go on at an accelerating pace. Demand for foldable panels is expected to surge.

[Foreign Language] Now Q&A session will begin. [Operator Instructions] [Foreign Language] The first questions were presented by Mr. [indiscernible] from [ JB Financial Investment ].

[Foreign Language] I have 2 questions. First of all, it's a question about your overall business outlook for year 2020. Looking back in 2019, I think your results were not as strong as the market had expected. Even though in the fourth quarter, there was a strong increase in the EV battery-related demand. So looking forward in 2020, can you give us your business outlook and business plan for each of the divisions? The second question is about the ESS business. The fact that SDI took preemptive measures to enhance the safety of ESS, we see positive responses from the overall market, but we -- I'm wondering what the impact of these safety measures are in terms of revenue as well as profitability. Also, specific to the ESS market, do you see any signs of recovery in year 2020? Or can you share with us your outlook?

[Foreign Language] To answer your first question of our 2020 business outlook, first of all, we expect to achieve continuous growth on our top line versus last year. And also, we expect to see some significant enhancement in our overall profitability this year. Even though this year, if we divide it into seasons, the first quarter being a relatively weaker season and also given some of the uncertainties, for example, the coronavirus outbreak. Our first quarter will probably be the relatively softer quarter, but we expect that all business divisions will start to show improvement from the second quarter onward. If I divide it by division, first of all, for our EV battery operation. This year, we expect to see not only top line growth, but also significant improvement in our profitability as the share of new projects increased throughout this year. So for EV batteries, this year, we will focus on not only supplying the volume that we promised to our customers without any disruption but also another focus this year would be to prepare thoroughly for the mass production of the new EV battery that will start to be supplied starting from next year. For our ESS battery, we are continuing to implement the safety enhancement measures. So this year, that will be an important focus for us to wrap that up successfully and also leverage that safety enhancement to increase our overseas customer base for ESS so that we are able to normalize our ESS business during this year. For the small-sized batteries, we expect to record similar revenue growth as last year, especially around the increase of sales of the cylindrical small-sized batteries and expect to maintain profitability also at a stable level. For the small size, we are actually seeing -- expecting some demand increases from new applications in addition to EV, new applications such as e-mobility or 5G smartphones or wearable devices, and we will preemptively respond to the changes of the application side of the market to increase our sales. On the Electronics Materials business, we do expect the polarizer film to continue to experience difficult business environment, but we will respond by increasing the share of our large-size polarizer film supply and also continue to improve our profit margin by expanding the sales of our semiconductor and OLED-related materials. So looking back at 2019, even though there were some difficulties due to the ESS issue, I think that gave us a good opportunity to enhance our product competitiveness. This year, we will try -- we will focus on increasing the growth trend that we have started, especially around the EV battery business, and we'll try to satisfy the expectations of the investors and the market by delivering strong performance. [Foreign Language] And to answer your second question about our ESS safety measures and the impact it had on our revenue as well as profitability, we have started the implementation of the safety enhancement measures starting from late last year, and our goal is to continue the smooth implementation that we're seeing now and to complete the measure implementation by around June this year. Because of the enhanced safety, there has been a negative impact somewhat on our profitability. On one side, as you mentioned, there is some increase in the material cost due to the addition of the special fire repellant system and also the fixed cost burden has increased due to the decrease of the sales, but we believe that once we wrap up the safety enhancement measures, we will be able to expand our ESS sales, again, especially to the overseas customers. And also at the same time, focus on further enhancing our manufacturing cost saving and productivity in order to achieve gradual improvement of our profitability overall.

[Foreign Language] The next questions were presented by Mr. Cho Woo-Hyung from HSBC.

[Foreign Language] I have 2 questions regarding the EV battery business, given the fact that EV vehicle sales are expected to increase this year, especially around Europe. I think there are many that are expecting your EV battery business performance to also improve this year. Do you think that it's safe for us to expect your EV battery business to pass the breakeven point this year? Also, can you share with us what you expect to happen on a quarter-by-quarter basis as we pass year 2020? Second question relates with the battery capacity as there's brighter prospects for the overall EV battery market. Competitors are also adding on their battery capacity. So in that context, can you share with us your current EV battery capacity and plans you have in terms of capacity expansion? I'm imagining that your Hungary operation plant would be an important supply base, given the fact that many -- much of the EV battery demand will be in Europe. Do you have any issues, for example, in terms of yields or utilization in the Hungary plant or other overseas operations?

[Foreign Language] To answer your first question about our EV battery results and this year's outlook, as you know, starting from this year, the European countries will adopt stronger emission -- CO2 emission regulations. Before, it used to be 130 grams of CO2 per kilometer, the new regulation would lower that to 95 grams. Also, many of the key countries are adopting policies that promote adoption of EV, and also, many of the OEMs are launching new EV models. All of that is driving growth in the overall market, and we are also expecting to supply our batteries to a larger number of models compared to last year. So when we look at full year '20 -- for example, if we look at the full year results last year, our EV battery revenue grew by about 70%. We think that this year, our revenue growth trend would be also at a similar level. In terms of bottom line, that's profitability with the increase of revenue and the increase in share of new projects our profitability is also showing clear signs of improvement, and we will try to satisfy the market expectations in terms of our earnings. However, if we just look at the first quarter, there is the seasonality effect. And also, we expect, therefore, our first quarter sales to decrease on a quarter-on-quarter basis versus fourth quarter of last year. We're also seeing some increase of fixed costs. So immediately in the first quarter, our profitability will probably decline somewhat, but starting from the second quarter as our overall sales start to increase, we expect our EV battery performance to gradually improve throughout the year. [Foreign Language] Regarding your second question of our EV battery capacity, our current capacity as of the mid- to large-sized batteries overall. As of end of 2019, our capacity was around 20 gigawatt-hours -- low or mid-20 gigawatt-hours. We are planning to increase capacity, especially focused around the Hungary plant in order to respond to the expected increase in demand. The Hungary lines, we started operating them from the first half of last year. Unfortunately, we have not seen any particular issues in terms of yield or utilization since, and we're currently continuing the process to raise the yield of the Hungary lines to the level that we see here in Ulsan. We think that the know-how that we have accumulated over the long period in terms of operation will help us stabilize our overseas production lines also earlier on, so that we will continue to meet our customers' demands without any disruption.

[Foreign Language] The next questions will be presented by Mr. Shin Yoonsik from CLSA.

[Foreign Language] I have 2 questions. The first question is about the Battery business. Last November, BMW announced that it would use Samsung SDI for the supply of its Gen5 battery. I think that triggered quite a lot of interest in the market regarding, for example, the performance of the Gen5 battery that SDI would be supplying. How much of a performance improvement would the Gen5 battery have versus the previous batteries? Have you used any new materials or new manufacturing techniques to deliver that performance improvement? And would there be any dramatic improved enhancements or increases in terms of the drivable distance or in terms of price that may actually push the adoption of EV vehicles itself? My second question is about the LCD materials, so polarizer film, in particular. Given the fact that the LCD TV demand is weak, there's quite a lot of competition in that part of the market. Now if we assume a case where the Korean LCD panel companies will start to cut down their operation, would this possibly lead to a drop in your utilization of your polarizer film production? And would that actually then open up the risk of your polarizer film operation turning to red?

[Foreign Language] To answer your first question about our Battery for the EVs. Even though the name of the next-generation battery, it changes or it's slightly different from customer project to project, what we refer to usually as a Gen5 battery would be the next-gen battery that will start mass production from around 2021. So this Gen5 battery, you will be using a high-nickel NCA cathode that has a nickel content of more than 80%. Also, we will be using new techniques that will maximize the battery's efficiency. Thanks to these new materials and techniques, the Gen5 battery will have more than 20% more energy density than the batteries that are currently in mass production. And this helps also to lower the material cost from the enhanced energy density so that we think that with the Gen5, we'll be able to reduce the battery cost per kilowatt-hour by about 20% or more. So by using this next-generation Gen5 battery at the finished car level, it's possible to extend the drivable distance on a single charge to above 600 kilometers. It also will provide additional cost competitiveness or price competitiveness at the finished car level, and we hope that this will provide a further push in adoption of EVs. [Foreign Language] To answer your second question about the polarizer film. Actually, as of last year already, more than half of our polarizer film cells are going to the Chinese customers. We have continuously, as you know, been trying to diversify our customer base. And thanks to that, we don't expect there to be any negative impact on our profitability even if the domestic LCD companies start cutting down their operation. Also, our Chinese customers have already started to operate their 10.5 generation large panel lines, and this is driving up demand for the ultra-large size polarizer films of 65-inch plus as well as the high functionality specialty films for the premium products, and that is actually giving us a significant push in terms of our profitability. And so because we have the industry's top product competitiveness in terms of polarizing film, we believe that we will be able to maintain utilization similar to what we saw last year, and we will continue to focus on doing that.

[Foreign Language] The next questions were presented by Mr. Kwon Jay Hyun from JPMorgan.

[Foreign Language] I have 2 questions. First question is about the cylindrical batteries for EVs. We're noticing that many of the OEMs are actually using cylindrical batteries for their EVs. In that context, can you share with us your outlook on the growth of cylindrical batteries for EV applications? And also, how much of your cylindrical battery business can become a supply to EVs to the OEMs? And if there's a change in the product mix of your cylindrical batteries, for example, a larger share being accounted for, for EVs, what kind of impact do you expect that to have on your profitability overall? My second question is related with the Electronics Material business, specifically the materials that go into semiconductors and OLED displays, which as a downstream are expected to have some stronger performance than last year. So in that context, can you share with us your outlook on your material businesses, specifically semiconductor and the OLED display?

[Foreign Language] Regarding your first question about the cylindrical batteries for the EV application, if we look at overall market outlook and forecast, according to forecast, this year, the cylindrical battery market as a whole is expected to be around 6 billion cells, and within that cylindrical battery, EV demand is expected to be around 3 billion cells, which will be above 30% growth year-on-year. And so being 3 billion out of 6 billion, the EV battery demand in the overall cylindrical battery was expected -- is expected to be close to 50% and be a major driver in the cylindrical battery growth. Looking at our business towards the EV cylindrical supply, we are planning to start full-scale supply of our cylindrical batteries to EV customers, mainly in Europe and China. And so even though this year, because we're starting, the share of EV sales in our overall cylindrical battery will be relatively small, perhaps in the single digits. Going forward, we expect our supply to existing customers to continue to increase and also win some new orders so that in the mid- to long term, we expect the share of EV batteries in our overall cylindrical batteries to increase quite significantly. So looking immediately this year because EV will still be a limited part of our overall cylindrical battery supply, the contribution to the profitability from EV through cylindrical battery would be limited, but we expect that going forward, the contribution will continue to increase, and our profitability will be -- will improve as we increase not only the volume of cylindrical EV batteries but also internally enhance our manufacturing efficiency. [Foreign Language] To answer your second question about our outlook on the semiconductor and OLED materials business. First, on the semiconductor side. Actually, we've been seeing a gradual increase of our semiconductor material revenue starting from the third quarter of last year, especially around patterning materials. This year, as you mentioned, there is expectations that semiconductor demand will be increasing compared to this -- compared to last year. And also, customers are expected to increase their way for input. And so we are also expecting somewhat of an increase versus last year in our patterning materials, especially such as SOH or SOD. Also, on the OLED materials side, as more and more smartphones actually use OLED panels, this year, we're expecting our OLED material sales to also increase in terms of revenue by more than 20%. Another source of revenue growth for us would be the adoption of the foldable smartphone. This year, the foldable smartphone demand is expected to grow significantly versus last year, and the foldable smartphone, first of all, has a larger display area, so that would require more OLED materials to be used. Also, regarding the foldable smartphone, we supply the FOCA, which is the adhesive that goes between the layers of the foldable display. And we have the core technologies for that, and we expect with the wider sales and adoption of foldable smartphones, there will be greater demand for that material, which will help improve our earnings. [Foreign Language] We'll take one last question.

[Foreign Language] The last questions were presented by Mr. Chang Jung Hoon from Samsung Securities.

[Foreign Language] I have 2 questions regarding the small-sized battery business, I think we've already covered the outlook for these small-sized batteries for EVs through the previous question. I have a question regarding the power tools, which has been actually the traditional driver of sales and demand growth for the cylindrical small-sized batteries. Unfortunately, the power tools demand growth has been weaker than expected recently. In that context, can you share with us your outlook on power tool demand and overall small-sized battery business going forward? Second question is also about small-sized batteries as a new application, I think wireless earphones received a lot of excitement from the market last year 2019. I'm wondering if SDI is preparing anything for that application. Is there anything that you can share with us?

[Foreign Language] To answer your first question about the power tool market. It is true that the power tool growth rate has been slowing down a bit. That's explained by a couple of factors. One is that on the smaller power tool -- the small-sized power tool market, actually, the conversion to lithium-ion batteries from nickel-cadmium has already taken pace quite a lot. Whereas on the larger power tools side, the pace of wireless adoption is slower than what we had originally expected. And so given these 2, the outlook for the overall power tool market LIB demand this year is around 1.2 billion cells globally. That would be about a 6% growth versus last year. So even though the pace of growth has been slowing down, we are looking at opportunities such as the larger power tools or gardening tools, where there is actually growth. These tools actually require batteries that can deliver the high-power output, which is the advantage of our differentiated products. And therefore, we will be focusing on leveraging the advantage that we have on that specific segment in order to maintain our market share in our key customers and also increase our sales versus last year. [Foreign Language] To answer your second question about the wireless earphone application. If we look at the market research, the forecasted battery cell demand from wireless earphones was 300 million cells in 2019, that is expected to grow to around 1.2 billion cells by year 2025, so that's a high rate of growth at around average 26% per year. Currently, if we look at the batteries that are being used in the earphones out in the market, some use queen cell batteries, others pin, some others ultra small-size polymers. So there are different types of cells that are being used. We think that among these different alternatives, the queen cell will become the mainstream given the fact that it has the advantage of the ease of increasing the energy density. And that's why we are focusing on developing queen cells for the wireless earphone application. In terms of our business, we are planning to start to supply sales of queen cells to major IT customers starting from this year and also leverage that to expand to Chinese IT companies and major audio companies going forward so that we are able to record increase of revenue that outpaces overall market growth.

[Foreign Language] That completes our conference call. If you have any further questions, please forward them to our IR team. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]