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

[Audio Gap] Earnings Conference Call of Samsung SDI. [Operator Instructions] Now the company will start its presentation.

[Interpreted] Good afternoon. I am Yoontae Kim, Vice President of the Business Management Office at Samsung SDI. Before we begin, I would like to introduce our management team attending today's conference call. Our CFO, Young-No Kwon; Head of the Battery Strategy Marketing team, Michael Son; and Head of the Electronic Materials Strategy Marketing team, Kwangsung Kim, are with us this afternoon. And we will now start the 2020 third quarter earnings call. [Audio Gap] First, we will announce the third quarter 2020 results. Third quarter revenue recorded KRW 3.0872 trillion, a 20% increase quarter-on-quarter and year-on-year. By business division, battery revenue recorded KRW 2.3818 trillion, and electronic materials revenue recorded KRW 703.7 billion. Operating profit increased quarter-on-quarter to KRW 267.4 billion, a 158% and 61% increase from the last quarter and last year, respectively. We saw pretax profit of KRW 298.2 billion and net profit of KRW 240.7 billion. Next, I will move on to our financial statements. Assets as of the end of the quarter stood at KRW 20.8094 trillion, up by KRW 269.4 billion quarter-on-quarter. Noncurrent assets increased by KRW 318.6 billion, driven by CapEx and increased value of stockholding. Liabilities recorded KRW 7.8447 trillion, down by KRW 43.2 billion quarter-on-quarter as a result of decrease of debt. And shareholders' equity recorded KRW 12.9647 trillion, a KRW 312.6 billion increase driven by retained earnings and other comprehensive income. Next is the third quarter performance by business and the fourth quarter outlook. First, large-sized battery business saw a huge increase in revenue year-on-year and quarter-on-quarter mostly driven by EV batteries. EV batteries revenue saw a huge increase quarter-on-quarter driven by peak seasonality and European countries' electric vehicle subsidy policies. For ESS battery, the revenue slightly declined quarter-on-quarter, while the portion of overseas sales has increased. In the fourth quarter, we expect a huge increase in large-sized battery sales. EV battery sales are expected to grow with a strong demand led by major European clients, and ESS battery sales will go up for the U.S. utility projects. Next, moving on the small-sized battery business. Third quarter revenue saw a huge increase year-on-year and quarter-on-quarter. Cylindrical battery revenue went up quarter-on-quarter, thanks to recovered demand of power tools and expansion of the micromobility market. And pouch battery revenue and profitability saw a huge increase as well with peak seasonality and the launch of new smartphones. In the fourth quarter, the sales of cylindrical battery will slightly decline. Cylindrical battery shipment is expected to go down slightly since our clients makes inventory adjustments, while pouch battery shipment will be similar to last quarter as we continue to supply batteries to mass models and to new flagship smartphones for overseas clients. Next, we are moving on to the electronic materials business. Third quarter revenue increased by 15% year-on-year and 10% quarter-on-quarter. Polarizer revenue went up with LCD TVs, monitors and tablets since people spend longer hours at home due to COVID-19. And OLED materials revenue also expanded with the launch of premium smartphones. Semiconductor materials revenue slightly increased, continuing its growth. In the fourth quarter, we expect increased profitability led by improved product mix since OLED and semiconductor material revenue go up. Polarizer demand will go down due to weak seasonality, but OLED materials will keep rising for TVs and smartphone clients in China. Semiconductor materials will see steady sales and profitability. This is the end of the presentation, and the Q&A session will begin. All questions and matters will be presented in Korean and interpreted in English. Please follow the operator instructions to ask questions.

[Foreign Language] [Operator Instructions] The first question will be presented by Jung Hoon Chang from Samsung Securities.

[Interpreted] I have 2 questions regarding the EV battery business. First question is that, recently when we look at electric vehicle sales, the sales in September as well as for the quarter is reaching historic highs. And also I think that is showing up on your EV battery sales for third quarter, which had significant growth and also saw some meaningful improvement in your profitability. Would it be possible for the company to share its outlook for fourth quarter as well as next year? Second question is about the response to the new announcements in terms of form factors, materials and production processes. Our made -- Tesla's battery day event, this did attract quite a lot of attention from the market. And I think the market is starting to have some expectations regarding possible performance improvements as well as additional cost savings through these new breakthroughs in these areas. Can you share with us your company, Samsung SDI's, view or evaluation of what was announced as well as how you are preparing for future battery business?

[Interpreted] To answer your first question about the profitability of our EV battery business. In third quarter, the automotive battery business has improved almost close to BE point, BEP. In fourth quarter, we expect to carry on this momentum to further improve our profitability. Regarding outlook for next year, first quarter is usually a slow season, and so revenue and profitability may temporarily decrease due to the -- due to such seasonality. However, after the low point in Q1, we expect revenue to continue to increase throughout next year so that for the full year 2021 our automotive battery business is expected to achieve significant growth in both sales and pass the BEP on a full year basis. To answer your second question about Tesla and its battery day event. Yes, Tesla did manage to attract a lot of attention to the topics of better battery performance as well as cost saving, but Samsung SDI has already been working on better battery performance and cost savings from various angles. First of all, we have been leading the adoption of high-capacity materials such as high-nickel cathode material and silicon-based anode material in cylindrical batteries for better battery performance. And we have been rolling out material technology proven in the cylindrical form factor to the mid- and large-sized prismatic batteries. Also, the high-power technology, which has been the basis for our #1 position in power tool applications for several years, has been applied to automotive batteries, which gives us an edge in terms of charging speed as well as acceleration performance. For cost savings, on top of the material cost savings that naturally comes from higher energy density and better battery performance, we are in the process of developing larger cell sizes for both the cylindrical and prismatic for additional cost savings. Also, we are gaining additional productivity by raising the efficiency in key manufacturing processes such as battery plates assembly and chemical composition and introducing new processes when we develop next-generation platforms such as the Gen5. Thanks to such efforts, we expect that the Gen5 battery, which goes into mass production next year, will have above 20% better energy density versus existing products while costing 20% less. So we plan to continue to achieve a higher performance and lower costs in following generations such as the Gen6 and Gen7, which will further strengthen our competitiveness as a battery maker.

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

[Interpreted] I have 2 questions also about automotive batteries. First of all, recently the automotive OEMs have started to look into internalizing their battery sourcing. This has always been a possibility that's been talked about, but especially as during the battery day event, Tesla mentioned its strategies about producing batteries. This is setting a bit of concern in the market. What do you think will be the impact of -- these changes, internalizing battery sources by auto OEMs, would have in the battery industry? Or what will be the impact to battery companies? The second question is about your cylindrical battery business. It seems [ your ] cylindrical battery supply for EV applications aren't picking up as fast as we have expected. In that context, can you share with us your business outlook for the cylindrical EV battery business for next year? And can you share with us whether you are starting to also win orders from new customers?

[Interpreted] To answer your first question about OEMs, automotive OEMs, talking about internalizing their battery supply. Given that batteries are the most critical part of an EV and also account for a major share of the vehicle cost, OEMs would naturally have a very strong need to internalize their battery sourcing. However, EV battery manufacturing requires a huge initial investment as well as technology development and mass production know-how which needs to be accumulated over some time, which makes it very difficult for anyone to internalize large-size capacities in a short period of time. So even if the OEMs internalize some capacity, a large part of their battery needs would still have to be satisfied through cooperation with the existing battery companies. As the EV market grows rapidly, OEMs may start to internalize their battery sourcing. And also even new players may enter the battery market, but regardless of such changes, we will leverage the capabilities that we have accumulated over an extensive period of time as a battery specialist to continue high-quality growth by offering even more competitive products and expanding the partnership we have with customers. Your second question was about our cylindrical battery business for EV applications and our outlook for next year as well as whether we are adding additional orders from new customers. Some of the projects that were originally scheduled for this year have been delayed. And this has been causing some -- causing the cylindrical battery sales for EV applications to remain sluggish until this year, but we expect sales to significantly increase from next year as these new projects come online. We are currently in discussion also with several customers about new projects for post 2021 for both passenger vehicles and commercial vehicles, which will help us diversify our customer base and also increase our revenue.

[Foreign Language] The next question will be provided by Chuljoong Kim from Mirae Asset Daewoo.

[Interpreted] I have 2 questions. The first question is about the polarizer film business, which achieved a very good performance in the third quarter. This mainly is explained by, I think, very strong demand for the devices, TVs as well as other IT devices. Can you give us your outlook for the polarizer film business for fourth quarter as well as next year? Second question is about the small-sized batteries, the polymer, the pouch batteries that go into smartphones. Smartphone OEMs have sort of shifted their strategy, and it seems that in the overall market the mass tier smartphones may start to account for a larger share, increase its share. What do you think will be the impact to your polymer or pouch battery prices as well as the revenue due to this shift in the composition or the makeup of the overall smartphone market? And in that context, can you give us some color about your pouch, polymer battery business outlook for fourth quarter and next year?

[Interpreted] To answer your question about the polarizer film business. With people spending more time at home, the demand for large-screen TVs, laptop computers, tablets have definitely increased, which has helped the polarizer film business to outperform our original plans. Looking towards the fourth quarter, due to seasonality, sales is likely to decrease versus the third quarter, but still on a full year basis, this year, the revenue growth would likely be double digits for the full year. Even though the overall polarizer market will see slower growth as the LCD panel industry enters a maturing phase, the shift towards larger-screen products will continuously drive up demand for large-size polarizer products, which is one of our strengths. So we will use our differentiated cost and manufacturing competitiveness to deliver good results by actively responding to such market demand.

[Interpreted] Well, your second question was about the trend in the smartphone market of increasing the mass tier and the impact that may have on our revenue and profitability. As you mentioned, yes, there has been an increase in the mass-tier side of the smartphone market, but even the mass-tier smartphones today demand large power capacity because of high-end cameras and 5G support being adopted. And so the batteries for the mass-tier smartphones also need close to premium tier-like performance in terms of capacity and high-speed charging. So the expansion of the mass-tier smartphone market, we don't think, would negatively impact our ASP by, for example, lowering our overall battery mix because actually we think that this trend would rather help us improve our top line as well as bottom line by opening up the mass tier segment for our battery business.

[Foreign Language] The next question will be presented by Jay Kwon from JPMorgan.

[Interpreted] I have 2 questions. First question is about the revenue towards new applications such as M mobility and TWS. Can you share with us the revenue contribution of your sales through these new applications and give us some outlook for the future market? Second question is about the ESS market. The ESS market is expected to grow with many countries adopting ecofriendly policies. What is the ESS market outlook that you have as well as your guidance for this business next year?

[Interpreted] Your first question was about the revenue towards new applications such as M Mobility and TWS. With the increase in demand for personal mobility due to COVID-19, micromobility is expected to record over 30% growth on an annual basis this year and continue over 10% growth next year. The contribution of M mobility sales to our overall cylindrical battery business is expected to be around 20% this year. Our TWS-related battery demand is also rapidly increasing, as major smartphone OEMs have introduced new wireless designs and TWS is becoming sort of a basic accessory for smartphone users. Accordingly, the demand for coin cell batteries, which are used for TWS, is expected to double this year versus last year and continue high-growth rates of above 50% even next year. Even though coin cells account for a small portion of our revenue yet, because these are high-value-added products, once sales start to grow at full scale, it will become a strong contributor to our profitability. Your second question, about the ESS market outlook and our growth outlook for next year. The global ESS demand next year is expected to grow by between 30% to 40% or more versus this year, driven by the stronger ecofriendly policies globally and also better economics of renewable energy combined with ESS. By region, we think that the U.S. power utility market would be the major driver behind the overall ESS market globally. Meanwhile, looking at the ESS market in Korea, the Korean ESS market is expected to shift the focus from the renewable energy applications towards applications for stabilizing the power grid, led by KEPCO, as well as other commercial applications. Because the overseas markets are expected to lead ESS demand growth next year, we're also focusing our promotion, order-winning and sales activities towards the overseas markets; and we will also be launching competitive ESS products to drive our growth further.

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

[Interpreted] I have 2 questions. My first question is about the small-sized batteries, the cylindrical batteries for power tools. It seems that the U.S. housing construction market has started to show signs of recovery, including the U.S. housing market index hitting new historic highs. In that context, what is the outlook for the power tool demand and also the cylindrical battery sales? And second question is about the electric -- electronic materials, the semiconductor materials business. If we look towards the downstream, it seems that, as the memory semiconductor inventory normalizes, also utilization rates for the semiconductor makers are going up. And also wafer input seems to be going up, and this seems to also be showing up on better performance of your semiconductor materials business. Can you also share with us whether part of that improved performance is accounted by improvement in your product mix?

[Interpreted] Well, to answer your first question, about the U.S. housing construction market and what we expect to see in terms of power tool demand and cylindrical battery sales. The U.S. housing market, which did suffer from the impact of COVID-19, has been recovering quickly since April. And the increase in demand, such as new residential construction and remodeling, have been driving up professional power tool sales significantly. Also, with people spending more time at home, there has been an increase in DIY home improvement demand, leading to increased sales of even consumer-grade power tools. This has helped our cylindrical battery sales to significantly increase in both the second and third quarter. Even though the fourth quarter is a time when major customers usually go through their year-end inventory adjustments and there will be some impact because of that, we are expecting that this solid growth trend of cylindrical batteries for power tools will continue in next year.

[Interpreted] To answer your question about the semiconductor materials. The -- with the increase in wafer input at our key customers, this has been driving solid growth in our semiconductor materials sales. And at the same time, the revenue contribution from our higher-end products such as SOH or SOD has been increasing, which has helped significant profitability improvement in our semiconductor material business. Especially in the case of SOD, we will be focusing on further diversifying our global customer base to increase the share of revenue.

[Interpreted] And that completes our conference call. Please forward any additional questions 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.]