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 2020 second quarter earnings results by Samsung SDI. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 second quarter earnings results by Samsung SDI.

Good afternoon. I am Yoontae Kim, Vice President of the Business Management Office at Samsung SDI. Before we begin, I would like to introduce the management team attending today's conference call. Our CFO, Young-No Kwon; Head of the Electronic Materials Servicing Marketing Team, Kwangsung Kim; and Head of the Battery Marketing Service Group, Heonjoon Kim are with us today. And we will now start the second quarter 2020 earnings call. First, we will announce the second quarter results. Second quarter revenue recorded KRW 2,558.6 billion, increased 7% quarter-on-quarter and 6% year-on-year. By business division, Battery revenue recorded KRW 1,918.7 billion, and Electronic Materials revenue recorded KRW 638.1 billion. Operating profit saw 92% increase quarter-on-quarter with KRW 103.8 billion, a 34% decrease year-on-year. We saw pretax loss of KRW 85.6 billion and a net profit of KRW 47.7 billion. Next, I will move on to the financial statements. As such, as of the end of the quarter was KRW 20,540 billion, up by KRW 653.1 billion quarter-on-quarter. Current assets went up by KRW 227.2 billion quarter-on-quarter, and noncurrent assets also saw an increase by KRW 425.9 billion, driven by CapEx and increased value of stockholding. Liabilities increased to KRW 7,887.9 billion, up by KRW 465.3 billion quarter-on-quarter as a result of an increase of [ dated ] accounts payable. And shareholders' equity recorded KRW 12,652.1 billion and a KRW 187.7 billion increase caused by other comprehensive income and retained earnings. Next is the second quarter performance by business division and the second half outlook. First, Automotive and ES battery -- ESS battery division saw a significant increase in revenue year-on-year and also saw a slight increase quarter-on-quarter. EBIT Battery revenue dropped quarter-on-quarter since clients stopped operating production lines due to the COVID-19 pandemic. And ESS batteries recorded increased domestic and international revenue quarter-on-quarter, thanks to domestic demand recovery and the U.S. utility project. In the second half of 2020, we expect a substantial revenue growth and improved profitability. For Automotive Battery, we expect a significant increase in sales as European countries have further introduced electric vehicle subsidy policies and ESS sales are expected to rise, driven by overseas utility projects. Next, moving on to the Small-sized Battery division. Second quarter Small-sized Battery revenue went down year-on-year caused by the COVID-19 pandemic but went up quarter-on-quarter. The cylindrical battery revenue went up for major applications such as power tools, e-bikes, e-scooters and cleaners, thanks to the base effects of the first quarter. Polymer battery shipments and revenue declined mainly in flagship smartphones as weak demand for smartphone continues. In the second half, the revenue will go up, driven by cylindrical batteries. As the demand for personal mobility device rises, cylindrical battery sales are to increase led by micro-mobility such as e-bikes and e-scooters. Polymer battery sales are expected to increase as major clients release flagship smartphones. Next, we are moving on to Electric Materials business. In the second quarter, we saw 10% and 6% increase year-on-year and quarter-on-quarter, respectively. Semiconductor materials helped to increase the revenue quarter-on-quarter as server DRAM demand went up, and polarizer revenue rose quarter-on-quarter, driven by increased sales for IT devices such as tablet PCs and laptops. Meanwhile, OLED material revenue declined quarter-on-quarter due to low demand for smartphones. And in the second half, the revenue will grow, led by semiconductor and OLED materials, improving profitability. Semiconductor materials are to have solid revenue following the first half of 2020. Polarizer revenue will slightly decline with the low demand for IT devices, but OLED materials revenue will significantly increase as new smartphones and TVs are released. This concludes 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 would presented by Woo-Hyung Cho from HSBC.

[Interpreted] I have one for Small Batteries and another one for Electronic Materials. The first question is the demand for flagship smartphone in the first half was weak. But in the second half, major customers have plans to launch flagship smartphones. And so what is the forecast for the polymer battery performance? What are your plans for supplying coin cell battery for TWS? And my second question is, do you think the demand for OLED materials will pick up in the second half? Although performance was weak in the first half, is there a possibility for Y-o-Y growth on an annualized basis?

[Interpreted] Yes. Let me answer the first question. In the first half, the smartphone market was hit by COVID-19, but with the customers launching flagship smartphones in the second half, our company's sales are expected to go up and profitability to improve. The demand for notebook PC increased as more people worked from home and took online classes. Higher sales of polymer batteries for notebook will lead to improved performance for polymer battery. After getting customer approval, we began supply of coin cell for TWS in the second half. With the new entry in the market this year, we plan to get market acceptance on our technology and increase customer base and expand supply in earnest beginning next year.

[Interpreted] Yes, this is Kim Kwangsung, Head of the Electronic Materials Strategic Marketing team. The OLED material revenue in the first half was partially affected by the slowdown in the flagship smartphone demand but continued to grow Y-o-Y. In the second half, major customers will be releasing new smartphone, and the demand for TV OLED panels is expected to increase. As a result, the demand for our company's green host, TFE and p-dopant, will increase, leading to improvement in both top line and bottom line on an annual basis.

[Foreign Language] The next question will be presented by S. K. Kim from Daiwa.

[Interpreted] Congratulations on a good quarter. I have two questions. One is on Large Battery and the second one is on Electronic Materials. The first question is, expectations are high for mid- to long-term growth in the EV market. So could you comment on the mid- to long-term capacity and growth plan? The second question is, starting from last year, the localization of materials, components and equipment was the buzzword in the IT industry, and there are companies who have made quite a progress. And I believe Samsung SDI has the competencies and the conditions to achieve good results amidst this trend. So are there any new materials that you're currently working on?

[Interpreted] Thank you for the question. I'm the CFO, and I'll answer the first question. Despite concerns over COVID-19 dampening the demand for EVs and temporary difficulties, during which many OEM manufacturers had suspended production, the EV market is quickly normalizing. Our company achieved more than 60% revenue growth in the Automotive Battery business last year, and despite the pandemic, we expect a 50% higher growth Y-o-Y and huge improvement in profitability. Next year, through uninterrupted supply of new battery type, we hope to record a similar level of revenue as this year, and it is our goal to turn to profit in the Automotive Battery business. We will use this as a springboard to further our mid- to long-term growth. We will continue to make investment next year, focusing on the plant in Hungary, as we did this year, and we're complying with the delivery schedule agreed with the customer. In order to preempt future technologies in the long term, we are concentrating on differentiated battery technology and material development. We are also exerting effort to improve our operational excellence so that we can expand global supply in a timely manner. The EV market growth is taking off, and the competition is getting fiercer, but we will be equipped with the right competitive edge to meet the market's expectations.

[Interpreted] Let me answer the second question. Even if it weren't for the material localization effort, the nature of the electronic materials business has it that in order to enable mid- to long-term growth, it is vital to develop new materials that are aligned with the technology development of the downstream industry and the customers' changing technology. With this in mind, our company is keeping up with the customer strategies and technology trend and is developing many new materials. To pick out the key strategic technological trends, in the semiconductor business, it is non-memory and EUV. And in display, QD display and foldable OLED expansion are important. Our company has selected and is developing the new materials, reflective of the technology trend in each market segment. Depending on the materials, some may be commercialized within a year and others may take up more than 3 years for preparation. We will do our best to closely cooperate with the customers, develop and roll out new materials in a timely manner so that the electronic materials business can achieve sound growth over the mid- to long-term horizon.

[Foreign Language] The next question will be presented by Jeongu Ko from NH Securities.

[Interpreted] This Ko Jeongu of NH Securities. I have 2 questions on batteries. The first question is the European regions are increasing EV subsidies as a COVID-19 rescue measure for the automotive industry. And how much impact do you think it will have on the EV demand in the second half of the year? And how much improvement in Samsung SDI's automotive battery sales? And the second question is about next-gen batteries. The market is keen on next-generation batteries. And could you share with us the future direction going forward for battery developments and the current status of solid-state battery development at SDI?

[Interpreted] Thank you for the questions. I am Kim Heonjoon, Head of Battery Strategic Marketing. As to your first question, with the EV incentives raised in major European countries starting in June, battery EVs are sold at a maximum 51% discount price from the original shipping price, and plug-in hybrid EVs prices are 10% to 20% lower than the comparable internal combustion engine models, making them price-competitive. Therefore, in the second half, along with the new model launches, last year's models will enjoy higher sales, and we expect the EV demand to go up significantly compared to the first half. We expect our company's sales in the second half to grow by more than 50% compared to the first half, and hopefully, profitability will greatly improve along with higher revenues. Let me continue with the answer to your second question. The EV market is in need of batteries that have high energy density, longer cycle life, fast-charging function and price competitiveness. Higher energy density batteries give EVs more mileage. Our company plans to increase the energy density by applying high-nickel cathode material and silicon-added anode material. To extend the total battery life, we're using conductive agents and additives to improve the cycle life. With higher penetration of EVs, demand for fast charging is expected to go up. Our company is conducting research on how the lithium ion can move faster and more easily in the anode. Based on the results, we plan to drastically cut down on the charging time. We plan to bring down the total material cost by applying price-competitive materials and going with lighter modules and packs with simplified structure. As for solid-state battery technology, it can improve energy density and safety significantly over LIB. We have proven material technology from LIB and by combining with the new proprietary material developed, including solid-state electrolyte, we have confirmation that it is possible to develop batteries with high energy density and high safety. Currently, we are developing the mass production technology and making necessary preparations to apply it to the actual automotive battery.

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

[Interpreted] I have three questions. The first has to do with ESS. I understand that the ESS safety reinforcement measures has been complete. And so will it be possible for profitability to recover from the second half? And how has the market changed since COVID-19? The second question has to do with Polarizer. It seems as if COVID-19 and Korean customers' decision to discontinue its LCD production have had limited impact on Samsung SDI's polarizer business. So what is the reason? And can we expect the segment to grow compared to the previous year? And my last question has to do with semi material. There is concern in the market about the DRAM price falling in the second half. But apart from the price fall, what is your outlook on the demand and performance of semiconductor materials?

[Interpreted] Thank you for the questions. I am Kim Heonjoon, Head of Battery Strategic Marketing team. As to your first question, safety reinforcement measures for ESS were implemented in 1,000 sites in Korea, except for the 10-or-so sites experiencing delay due to the customer circumstances, the safety measures have been completed. In the second half, a large-scale U.S. utility project will be carried out which is expected to improve both top and bottom line for ESS. Looking at the market situation since the outbreak, many countries have included new and renewable energy promotion policies in their stimulus packages, so the environment for the ESS industry is growing more favorable. The U.S. is continuing with its plans to achieve 0 carbon emission by 2050, and Europe adjusted the existing eco-friendly targets upward and announced its EUR 1 trillion investment plan. Korea also has plans to invest KRW 73 trillion by 2025 in the eco-friendly, low-carbon industries through the Green New Deal policy. The green trend in the market is expected to increase the portion of new and renewable energy in the mix and lead to higher ESS demand.

[Interpreted] Let me take over and answer the rest of the questions. In the first half, although we had some negative market situations, with the customer's LCD business shut down and COVID-19, we were able to record a sound revenue by increasing supply for large screen TVs for the Chinese market as well as tablet and notebook PCs. In the second half, we expect the IT demand to slow down compared to the first half, but the demand for the TV product is expected to remain resilient. Despite the pandemic, we overachieved our original revenue target in the first half. In the second half, we will do our best to increase sales of our high value-add large screen products that we are competitive in so that we can achieve a Y-o-Y growth. As to your last question, our company's demand for semiconductor materials is affected not so much by the semiconductor price, but more by the customers' wafer volume and process miniaturization. In the second half, looking at the wafer inventory status of the customer, we expect the customer's wafer volume to slightly increase over the first half. Major customers DRAM process miniaturization is ongoing, so we expect the sales of our company's semiconductor materials to remain robust as well.

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

[Interpreted] I have two questions. They are both about cylindrical batteries, one for mobility and the other one for EV. My first question is could you share with us the demand forecast in the second half and next year for cylindrical batteries, and that by different applications such as power tools, micro-mobility, et cetera? And my second question is Tesla's EV sales numbers are going up, and it has plans to build new gigafactories in Germany and the U.S., and so battery demand is expected to grow. And is there a possibility you may be supplying to Tesla? And what is the business forecast for Samsung SDI's cylindrical batteries for EV?

[Interpreted] Thank you for the questions. This is Kim Heonjoon, Head of Battery strategic Marketing team. As to your first question, the demand for cylindrical batteries began to show recovery signs in Q2, and the trend is likely to continue in the second half. By application, due to COVID-19, people avoid public transportation and prefer personal mobility such as e-bike and e-scooters, so the demand for micro-mobility is greatly increasing. And because of social distancing and working from home, people spend more hours at home and pay more attention to cleanliness and sanitation, thus, the demand for cordless vacuum cleaners is increasing. The power tools and gardening tools hit bottom in the first quarter and are expected to grow quarter-on-quarter. With this trend, the demand for cylindricals is expected to grow 30% compared to the first half and show clear signs of recovery in the second half. There is too much uncertainty to provide a forecast for 2021, but we believe the mobility market will continue to grow significantly next year and the power tool market to grow at a more moderate pace. Against this backdrop, our company will reinforce the medium output product lines to respond to the growing demand in the mobility market and lead the high-output product market with our excellent technology. As to your second question, recently, in the cylindrical batteries, the demand for EV is going up, and our company is discussing potential cooperation with many OEMs, but I am afraid I am unable to comment on specific customers. This year's sales figures for EV cylindrical batteries are expected to be still minimal, but starting next year, we will see bigger contribution to revenue as we begin supplying to new projects, and we expect steady growth in the mid- to long term.

[Foreign Language]