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

We will now start the Samsung SDI 2020 First Quarter Earnings Conference Call. This conference call will start with a presentation by Samsung SDI; following, a Q&A session with the analysts. [Operator Instructions] Now we will start the company's presentation.

[Interpreted] Good afternoon. I am Yoontae Kim, Vice President of the Business Management Office. Before we begin, I would like to introduce our management team attending today's conference. Our CFO, Young-No Kwon; Head of the Battery Strategic Marketing Team, Michael Son; and Head of the Electronic Materials Strategic Marketing Team, Kyunghoon Kim, are with us this afternoon. So we will now start the 2020 Q1 earnings call. First, we will announce our first quarter 2020 results. Q1 revenue recorded KRW 2.3975 trillion, a 15% decrease from the last quarter. And by business division, Battery revenue recorded KRW 1.7936 trillion, a 19% decrease Q-on-Q, caused by off-season and COVID-19. And Electronic Materials revenue recorded KRW 602 billion, a 1% decrease Q-on-Q. Operating profit increased Q-on-Q with KRW 54 billion, and we saw a pretax loss of KRW 9.6 billion due to financial costs, loss from equity method earnings and others. And net profit turned to profit with KRW 700 million. And next, I will move on to our financial status on the right-hand side. Assets as of the end of the quarter was KRW 19.8869 trillion, up by KRW 34.8 billion Q-on-Q. While the value of listed securities went down, tangible assets and cash equivalents went up. Liabilities increased to KRW 7.4226 trillion, up by KRW 230.8 billion Q-on-Q as a result of an increase of debt. And shareholders' equity recorded KRW 12.4643 trillion, a KRW 196 billion decrease, caused by dividend and other comprehensive income. Next is our first quarter performance by business division and second quarter outlook. First, mid- to large-sized Battery division saw a decrease in revenue Q-on-Q. Automotive battery sales decreased due to seasonality, and ESS revenue also declined Q-on-Q caused by weak domestic demand. But still, both automotive battery and ESS continued high-growth Y-on-Y. Next quarter, we expect a slight revenue increase Q-on-Q. For automotive batteries, although EUV sales are projected to decrease, we expect that higher sales volume of PHEV will make the total revenue similar to the last quarter. And ESS sales are expected to rise, driven by the U.S. utilities project. Next, moving on to our small-sized battery business. First quarter small-sized battery revenue went down Q-on-Q. Cylindrical battery sales declined due to weak demand caused by off-season and COVID-19. Polymer battery revenue saw the similar level to the last quarter, driven by a new launch of flagship smartphones, though the smartphone market was weak. In second quarter, small-sized battery will recover its sales, thanks to cylindrical battery. As to the cylindrical battery, it is expected that the sales of tools, cleaners and e-scooters and others will go up, driven by seasonality, but it will not be as high as we expected early this year due to COVID-19. Polymer battery will be impacted by the weak smartphone market. And next, we are moving on to Electronic Materials business. In Q1, we saw decreased revenue Q-on-Q. Semiconductor materials had a steady sales as DRAM demand went up. Polarizer film saw a slight increase in revenue, driven by large LCD TV, but OLED materials saw a decreased revenue due to low demand. And in second quarter, the revenue is foreseen to be a similar level to the last quarter. Semiconductor materials sales will go up with the demand increase of server DRAM, but display material sales are likely to go down due to low demand caused by COVID-19. Now this completes the presentation, and we will now begin the Q&A session. All questions and answers will be interpreted in English consecutively. Please follow the operator instructions to ask questions.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by Jay Kwon from JPMorgan.

[Interpreted] I have 2 questions. The first question is about the business impact due to the ongoing COVID-19 situation. Can you describe the business impact for Samsung SDI by dividing the first half and the second half of this year? What kind of key risks do you see? And how are you countering them? Second question that I have is about CapEx plans. Given, once again, the COVID 19 impact, are there any changes to your CapEx plans this year? In particular, are you going to maintain your plans of expanding the Hungarian automotive battery plant?

[Interpreted] To answer your first question about the impact of COVID-19 on our business and how we plan to respond to that short first half and second half, despite the spread of COVID-19 during the first quarter, I think we were able to avoid direct impact on our business. But looking forward to the second quarter where we are, we do expect that there will be a decrease in downstream demand due to COVID-19 during Q2. And so even though there will be some differences between our business divisions, we do think that in Q2, our sales would also decrease versus our original plan. For example, the small-sized batteries, which has a higher dependence on the IT downstream sectors, may actually experience a larger relative impact versus our other business divisions. From the third quarter, we do think that the situation -- the demand may gradually start to improve. But still, I think due to the ongoing COVID-19 situation, all forecasts are still very fluid. So we are preparing plans for each of the different scenarios, preparing measures. We're also, at the same time, carefully monitoring the situation on the customer demand side as well as the market situation so that we will be able to operate our business very flexibly and in a timely manner, depending on these changes. In terms of risk management, we have checked the key risks in our production, sales and purchasing in these areas, and we are managing them so that we do not experience going forward any disruptions in our business operation. And we have also been preparing plans of optimizing our resource operation depending on each of these scenarios. We are undergoing unprecedented challenging business environment, but we will focus all of our capabilities in overcoming the situation so that once we are through this situation, we will be able to take the company to the next level. [Interpreted] To answer your second question about our CapEx plans, given the potential change in the demand due to COVID-19, we do plan to take a flexible approach to our CapEx this year and make adjustments regarding, for example, investment size or schedules, as needed, according to the market situation. That being said, in the case of the automotive batteries, we have been carrying out capacity expansion plans according to the mid- to long-term volume plan which we have already agreed with our customers. And currently, there have been no particular changes to our expansion plan. So in that regard, regarding the Hungary plant that you've mentioned, the Hungary plant expansion is also underway as originally scheduled.

[Foreign Language] The next question will be presented by Woo Cho from HSBC.

[Interpreted] I have 2 questions related with the EV and batteries. I think the first question is that, actually, there are some talks that Europe may ease its emission regulations to cope with COVID-19's impact. What are your views? And do you -- in that context, do you think that this may have any impact on future EV demand? Second question is that due to many European automotive OEMs having to go through shutdown of their plants, there is concern that there may be a negative impact on automotive battery demand due to this. Given the fact that, actually, this year, automotive battery business was expected to record high growth, do you think the current situation, especially around European auto OEMs, will have any disruption to your business plans? Also, in connection with that, can you give us an update on your Gen5 development plans? Could there be any delays or changes of customer plans, especially due to the impact of COVID-19?

[Interpreted] To answer your first question, which was about the talk of easing of emission regulations in Europe and the impact this may have in future EV demand, as you mentioned, with the European economy facing challenges due to COVID-19, some automotive-related organizations have asked for easing of carbon emission regulations. But as far as we know, there has been no official EU-level discussion on any easing regulations. On the other hand, major automotive OEMs have already started serious R&D investments for EV adoption. And OEMs such as BMW, Volkswagen and Daimler have recently announced that they will comply with carbon emission regulations as planned. Also, given the fact that many European countries think that promoting the energy transition-related industry could be a way to overcoming the economic difficulties due to COVID-19, we believe that European company -- European countries are expected to maintain their green energy policies. So overall, when we consider all of these factors, even though COVID-19 may have some short-term impact on EV demand and sales, we expect that the EV market will be maintaining the growth trend in the mid- to long term. [Interpreted] To answer your second question about the battery going forward, as you mentioned, major European automotive OEMs -- actually, we're being told that major key European OEMs have restarted some of their planned operations from late April, and we're being told by customers that they expect to go back to normal operation of their production from May. And if that happens, on a full year basis, we do not expect to see any major disruptions on our sales level. Even though there is quite a lot of uncertainty remaining on the -- in terms of automotive demand and also in terms of when our customers will return to normal operation, I think one important -- one interesting fact is that due to COVID-19, while internal combustion engine vehicle sales declined sharply in March on a year-on-year basis, during this period, EV sales actually continued to increase. And this is a good sign, saying that this increasing growth trend of EV market will continue even in the second half. And so given that outlook, we will focus on product development and also preparing for mass production so that we will be able to meet growing automotive battery demand. Regarding Gen5 batteries, according to our plan, Gen5 batteries are scheduled for full-scale supply starting from next year 2021. And we currently remain on schedule with the development as originally planned, through close collaboration with our customers. Currently, actually, the product development has been completed, and we are currently working in parallel on testing the product and also preparing for mass production. And we have not seen any particular changes regarding customer demand either.

[Foreign Language] The next question will be presented by Sang Kim from Crédit Suisse.

[Interpreted] I have 2 questions. The first question is about the polarizer film business. Due to COVID-19, there is weak demand on the LCD TV side. And also, one of your major customers has announced that they will be folding their business gradually until year-end. So what would be the impact to your polarizer film business given these external factors? Second question is about the ESS business, which is also, I'm assuming, impacted by COVID-19. Can you give us some more details of an update on the ESS business? And also, can you give us an update on the additional safety measures that you have been implementing regarding your ESS?

[Interpreted] To answer your first question about our polarizer film business, yes, during Q1, due to COVID-19, some LCD panel makers had to suspend their production, which did lead to a decrease in overall LCD production. But on the other hand, the panel companies continued production of large-sized TV panels, and so we were also able to maintain solid sales, especially around large-sized polarizer films. From Q2, panel makers are starting to return to normal production. And even if TV demand overall becomes weak in the remainder of the year, demand for large, premium TVs, we expect, is likely to remain solid. So we are planning to minimize the impact of COVID-19 by especially focusing on expanding our sales around large size and functional products. Regarding our customers' plans of gradually exiting its -- from its LCD business, we currently do not expect that this will have a significant impact on our polarizer film business. I think this has already been proven of how we have coped. As the customer actually has been continuing to downsize its panel business, while that happened, we were able to actually manage to grow our polarizer film revenue by leveraging our technology and also diversifying our customer base. So as of last year already, Chinese customers accounted for more than 70%, 7-0 percent, of our overall business, and that share is expected to grow even more. So the impact of our customers' exit from the LCD business on our polarizer film business is expected to be minimal. [Interpreted] To answer your second question about the ESS business and the impact to the business from COVID-19 and also an update on our ESS safety measure implementation, well, for the ESS business, because a large part of our ESS business is for power facilities and infrastructure that are being installed as part of a long-term power supply plan, actually, impact due to COVID-19 on our ESS business has been very limited. Also because mostly all governments allow travel and installation work related with power infrastructure because that's an essential facility, ESS installation hasn't faced difficulties due to COVID-19 either. On the other hand, many countries are expected to include renewable energy policies as a major pillar to their economic stimulus packages in response to COVID-19. So that is expected to actually help support mid- to long-term ESS demand. Regarding the additional safety measures for ESS that we have been implementing in Korea, currently, the progress of implementation is now at 70%, which is on target. And we plan to complete the implementation within the first half of this year, as originally scheduled, so that once that is finished, in the second half, we'll be able to focus our capabilities in winning new projects to contribute to better business results.

[Foreign Language] The next question will be presented by [ Hyun Soo Kim ] from [ Hana Financial Investments ].

[Interpreted] I have 2 questions. First question is about the polymer battery business. Given the fact that there's quite a lot of concern around smartphone demand and the market globally due to COVID-19, what -- can you give us an update on your polymer business -- polymer battery business outlook this year? Second question is about the OLED materials business. This is also tied into the decrease in smartphone demand globally. Many are saying that, that will also lead to a weak OLED -- mobile OLED market. On the other hand, you are expecting significant growth in the OLED materials business this year. What would be the impact on your business plans?

[Interpreted] To answer your first question about our polymer battery business and the impact from the smartphone market being weak, as you mentioned, there was globally a weak demand for smartphones. But in first quarter, at least, especially thanks to the effects of our major customer launching its flagship model, we were able to record revenue that was in line with our original plans. Q2 will be the period when we have the full impact of COVID-19, and downstream demand is likely to weaken in the second quarter. Also, the effects -- positive effects of flagship launches will decrease in the second quarter. So looking towards second quarter, we do expect polymer battery sales to be quite challenging. But during Q2, we do see the opportunity of getting support in terms of revenue from the battery sales to mass segment handsets. So as the impact of COVID-19 hopefully dissipates as we approach the second half and considering the fact that key customers are planning a launch -- or many new model launches this fall, we hope to see a gradual improvement in our sales. [Interpreted] To answer your second question about our OLED materials, our OLED material demand in the first quarter decreased versus -- or revenue decreased versus fourth quarter of last year due to traditional low seasonality, one factor, and also the impact from COVID-19. We expect this revenue decrease trend to continue in the second quarter. In the second half, with new flagship smartphones lining up for launch and also many Chinese handset makers preparing to introduce new mass segment smartphones featuring OLED displays, we expect demand for OLED material to increase. Therefore, even though revenue is likely to decrease somewhat in the first half, we anticipate a recovery in the second half so that on a full year basis, we are expecting to maintain a growth trend similar to last year.

[Foreign Language] The last question will be presented by Sung Kyu Kim from Daiwa.

[Interpreted] I have 2 questions. First question is about the small-sized battery business. The global weak economy is impacting many application markets for the cylindrical batteries, for example, including power tools. In that context, can you give us an update on your outlook of cylindrical battery sales this year? Second question is about your semiconductor-related materials business. The -- I think despite all of the difficulties brought on by COVID-19, the semiconductor industry is expected to fare relatively better than other industries. And so can you, first of all, share your insight with the semiconductor industry outlook and also share with us your expectations for the semiconductor materials sales this year?

[Interpreted] To answer your question about the cylindrical battery sales outlook, as you mentioned, in first quarter, overall consumption in all areas was weak, and outdoor activities were limited due to COVID-19, which drove down sales of major cylindrical battery applications. This impact, unfortunately, is expected to continue in the second quarter and so we see the need to adjust our full year sales plans for cylindrical batteries. However, second quarter is traditionally the start of the high seasonality for major applications such as power tools, gardening tools, vacuum machines or e-bikes, which will help increase second quarter sales at least versus first quarter. Also, even though market outlook for the second half remains challenging, we will focus on achieving another full year of -- growth on a full year basis by expanding our sales to new -- to applications such as TWS and EVs. [Interpreted] Regarding your last question about semiconductor business and our materials business for semiconductors, as you know, while mobile DRAM demand appeared to decline due to COVID-19, server DRAM demand is growing in connection with people -- more and more people working or learning from home. For example, more people are playing games. Even though we still need to wait and see for the actual impact due to COVID-19, as of now, it seems that overall wafer input may increase, driven especially by the increased demand for server DRAMs despite the decrease in mobile DRAM demand. Because semiconductor material demand is directly tied to wafer input, an increase in wafer input would provide a solid source of demand for our products on a full year basis.

[Interpreted] That completes our conference call. If you have any further questions, please forward them to our IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]