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

We will now start the conference call of Samsung SDI. This conference call will be started by the company's presentation followed by a Q&A session. [Operator Instructions] Now we will hear the presentation from 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 our management team attending today's conference call. Our CFO, Jongsung Kim; Head of the Automotive and ESS Battery Strategy Marketing team, Michael Son; Head of the Small Batteries Strategy Marketing team, Jaeyoung Lee; and Head of the Electronic Materials Strategy Market team, Kwangsung Kim, are with us this afternoon. So we will now start the fourth quarter 2020 earnings call. First, we will announce our fourth quarter 2020 results. Fourth quarter revenue recorded KRW 3.251 trillion, a 5% and 15% increase quarter-on-quarter and year-on-year, respectively. By business division, energy revenue recorded KRW 2.629 trillion, up by 10% quarter-on-quarter, thanks to increased sales of EV batteries. Electronic materials revenue recorded KRW 622 billion, a 12% decrease quarter-on-quarter, as polarizer sales declined due to seasonality. Operating profit in the fourth quarter decreased quarter-on-quarter to KRW 246 billion, a significant increase year-on-year. The energy division's operating profit recorded KRW 117 billion, a 15% decrease quarter-on-quarter. In the fourth quarter, we've made provisions to respond to risks regarding quality issues of our EV client, which resulted in lower operating profit than expected. The issues have been under investigation. Electronic materials division's operating profit recorded KRW 129 billion, the same amount as the last quarter. We saw pretax profit of KRW 429 billion and net profit of KRW 342 billion. Please refer to the table for 2020 earnings. Next, I will move on to our financial status. Assets as of the end of 2020 stood at KRW 21.534 trillion. Current assets increased by KRW 92 billion quarter-on-quarter, and noncurrent assets increased by KRW 633 billion, driven by available-for-sale securities and increased value of stock holdings. Liabilities recorded KRW 8.175 trillion, a KRW 331 billion increase quarter-on-quarter. Current liabilities increased by KRW 55 billion, and long-term liabilities increased by KRW 276 billion. And shareholders' equity recorded KRW 13.359 trillion, a KRW 394 billion increase. Next is the fourth quarter earnings and 2021 outlook. First, large-sized battery business saw a significant increase in revenue quarter-on-quarter and year-on-year, mostly driven by EV battery. EV battery revenue saw a huge increase quarter-on-quarter, driven by environmental policies such as increased EV subsidies in Europe in the second half of last year. For ESS battery, the revenue also increased, thanks to the large projects in the U.S. In the first quarter of 2021, we expect a decrease in sales. EV battery sales are expected to go down due to seasonality. And ESS battery will see increased sales from the U.S. project. But domestic sales will decline, whilst the overall sales will go down. The EV market in 2021 is expected to worth 236 gigawatt hour, a significant increase year-on-year. The European market is to be the largest EV market with its strong environmental policies. And there will be stricter regulations on fuel efficiency and rules to ramp up EV production in the U.S. and in China. ESS market size is expected to grow by 50% with 30 gigawatt hour. The overseas market will see an increase in ESS demand led by environmental policies such as reducing carbon emission and providing renewable energy subsidies. However, the domestic market will see a decrease as the REC weighting scheme ceases. Next, moving on to the small-sized battery business. Fourth quarter revenue saw an increase year-on-year but a decrease quarter-on-quarter. Cylindrical battery revenue slightly declined due to seasonality, and pouch battery revenue also decreased mainly by flagship smartphones. In the first quarter of 2021, the sales were slightly go up quarter-on-quarter. Cylindrical battery sales will go up, thanks to an increased demand of power tools and TWS earphones. And pouch battery will start supplying for new flagship smartphones. In 2021, the small battery market is expected to grow more than 10% year-on-year worth 11.2 billion cells. For the non-IT market, EV and m-mobility demand are to lead the cylindrical market growth. And we also expect that the cylindrical battery for power tools will see the rebound in demand with the recovery of the housing market and more DIY activities. For the IT market, pouch and coin cell batteries are expected to see an increasing demand, as 5G and foldable smartphone markets grow and more TWS earphones and wearable devices are released. Next, we are moving on to electronic materials business. Fourth quarter revenue decreased quarter-on-quarter but saw a steady profitability. Polarizer revenue went down due to seasonality, but OLED materials made the first supply for new flagship smartphones. Semiconductor materials revenue slowly declined as clients made inventory adjustments. In the first quarter of 2021, sales and profitability are to go down. Polarizer and OLED materials sales will go down quarter-on-quarter due to seasonality, while semiconductor materials will have the similar sales of the last quarter. Next is the market outlook of the electronic materials in 2021. The electronic materials market will grow led by semiconductor and OLED materials. For semiconductor materials, the demand of process materials such SOH and SOD will go up as clients' wafer input increases. For display materials, OLED materials will see an increasing demand as more midrange smartphones use OLED panels. And we will see a steady demand of polarizer for IT devices such as large LCD TVs, laptops and monitors with contactless economy due to the COVID-19. This is the end of the presentation, and the Q&A session will begin. All questions and answers will be presented in Korean and interpreted in English. Please follow the operator instructions to ask questions.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by Won Suk Chung from HI Investment & Securities.

[Interpreted] I have 2 questions. The first question is, can you share with us some business outlook for each of the divisions? The second question regards to the provisioning related with the EV battery quality issue that you mentioned during the presentation. Can you give us an update on the investigation into the cause of that quality issue at the customer's end? And also, I think we were expecting the EV battery business to hit BEP in the fourth quarter. Was it the provisioning that kept it from hitting BEP? And if so, can we expect the EV battery business to break even during this quarter?

[Interpreted] This is CFO, Jongsung Kim, and Head of Business Support. Before sharing our business outlook for year 2021, I would like to say that it is a great pleasure to speak to our shareholders and analysts through today's call. Placed in the path of a dynamic industrial change from drivers such as eco-friendliness, automotive -- autonomous driving, AI and 5G, Samsung SDI is well positioned to capture huge growth opportunities. And as a CFO, I will remain committed putting Samsung SDI in the right track to capture this growth and to deliver solid performance. Now with that, I would like to go over the business outlook by division for this year. Even though uncertainties related with COVID-19 appears likely to continue throughout this year, we are focusing on achieving another year of volume growth, especially around automotive batteries and continuing to improve our profitability at the same time. By division, the EV battery is expected to continue significant revenue growth this year as EV demand expands. And so we are looking forward to reaching BEP on a full year basis with increased shipments and improved product mix. And we're also preparing for a stable supply of the Gen5 batteries, which are scheduled for mass production in the second half of this year. To continue with the other division outlook, for ESS, our overseas utility demand is showing rapid growth, and we will focus on increasing revenue and profitability by preparing specialized cells with optimal performance characteristics based on safety and also cost competitiveness. For the small batteries, we plan to achieve better profitability with high-power, high-capacity products targeting the power tool and micromobility markets, where we are maintaining high market share while, at the same time, preparing products with optimized performance characteristics specific to key application areas such as EV, ESS and wearable devices. So we aim this year to achieve double-digit revenue growth while also improving profitability. For the electronic materials business, we plan to maintain high utilization of polarizer films again this year and to expand sales of OLED and semiconductor materials, which are likely to benefit from the growth of the downstream demand. We will also secure new materials to capture growth opportunities related with EUV and foldable displays. Looking back on year 2020, despite the challenges brought on by COVID-19, we were able to achieve meaningful growth. And this year, our focus will be on achieving top line growth while also improving the profit structure of all of our business divisions to strengthen our fundamentals for sustained growth. Thank you.

[Interpreted] To answer your second question about the provisioning with the EV battery, you've asked for the update on the quality issue investigation. Regarding the cause of the quality issue of the customer, the cause has not yet been clearly identified, and we are participating in the process of trying to identify the cause together with the customer. On the other hand, currently, our products are being supplied without disruption under a stronger quality verification process that has been since put into place. You've also asked about the profitability of the EV battery business fourth quarter as well as what we expect this quarter if we take out the provisioning. As we mentioned, yes, originally, we had expected that our EV battery business would reach BEP during the fourth quarter. However, we were not able to meet that target due to the quality cost-related provisioning. Without the provisioning, our EV battery business, however, showed significant profitability improvement. The first quarter of the year is usually seasonally a weak quarter. So while we do expect revenue growth on a year-on-year basis, we expect that first quarter EV battery profitability will be close to BEP.

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

[Interpreted] I have 2 questions regarding the EV battery business. First question is about capacity and investment plans. Even in 2021, it seems the downstream EV market itself will accelerate in its growth pace. Do you see any possibilities of your capacity not being able to meet all of the increasing battery demand? And in that context, does the company, for example, have plans of building new EV battery production sites, for example, in the North American region? Second question is about the Gen5 battery, which is scheduled to go into mass production during the second half of this year. With that new mass production, do you have any concerns of, for example, initial yield issues? And once the Gen5 battery comes into mass production, how much of a upside would it have on your profitability?

[Interpreted] To answer your first question about EV battery capacity for this year, looking back at last year, despite the economic weakness brought on by COVID-19, one of the markets that continued to grow despite that was the EV market. And this year, the EV market growth is expected to even accelerate more as many countries introduce stronger environment standards and requirements and the automotive OEMs are pushing forward with their major EV projects. We are continuing to secure battery capacity in line with customers' mass production schedules. And this year, we're expecting to increase capacity similar to what we had added last year. Regarding your question about possible new production sites for EV batteries, given that the projects from European customers account for a large share of our volume, our Hungarian plant will remain the center of our production for some time being. But we will also -- we plan to carefully look into new production sites on a mid- to long-term perspective. Your second question was about the Gen5 battery, any concerns of initial yield issues or its contribution expected on our profitability, we are planning to start the supply of Gen5 during the second half of this year. And to give you an update, currently, we are on schedule with product testing and preparing for mass production. The Gen5 will be using a high-nickel NCA cathode material and also new processes for the first time. And so our plan is to complete all of the validation of the materials as well as the manufacturing process on our pilot line here in Korea and then transferring that same process over to the new Hungarian line in order to ensure early stabilization by avoiding any initial yield issues. Regarding profitability, the Gen5 delivers a higher energy density and is expected to require about 20% less material cost versus previous products. And so as the Gen5 accounts for a larger volume and is adopted in more projects, it will have a positive contribution to our profitability.

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

[Interpreted] I have 2 questions on the small battery business. First of all, it's about the capacity expansion plan. There seems to be strong demand coming from, for example, micromobility and also power tool applications. So in that context, does the company have plans of adding new capacity for small batteries? Second question is the TWS, the wireless earphones, seems to be a major driver for demand this year for coin cells. And so can you give us an update on how much diversification you have had on the customer base, especially any overseas customers? And how much growth do you expect on the coin cell business this year?

[Interpreted] To answer your first question about cylindrical battery capacity, despite COVID-19, cylindrical battery market last year grew by more than 10% versus 2019. And even this year, it is expected to grow by around 20% on a full year basis from 6 billion cells last year to about 7.2 billion cells this year around meter applications such as EV, micromobility, power tools and vacuum cleaners. Last year, we didn't add any additional capacity for cylindrical batteries. But this year, we are planning some expansions to meet the demand, especially from mobility and power tool applications. Your second question was about coin cell battery businesses. Yes, as you mentioned, major smartphone OEMs have been adopting wireless designs and have launched their wireless earphone products, which is driving rapid demand growth for coin cell batteries. This year, the wireless earphone or TWS market is expected to grow significantly by about 60% versus the previous year. Having already successfully entered the market by starting mass production of coin cells for TWS from second half of last year, we are expecting to add new customers for coin cells this year. Our focus will be on adding more customers to scale up our supply, and we're aiming to achieve above-market growth rates.

[Foreign Language] The next question will be presented by Bo Young Choi from Kyobo Securities.

[Interpreted] I have 2 questions. First of all is an outlook on your Semiconductor Material business, given the fact that the market is expecting the semiconductor market, the downstream market, to recover this year. Second question is about your pouch battery business outlook, given the fact that the smartphone shipments this year overall is expected to increase versus the previous year? So given that, what are your expectations on your pouch battery business?

[Interpreted] To answer your first question about our semiconductor material business, yes, with the semiconductor market cycle improving this year, the market outlook is that major customers will be increasing their wafer input by about 7%, which will have an increased demand for our semiconductor product -- semiconductor materials. Also, with the semiconductor process migration, the number of layers that need and use our material is increasing, which is a positive factor. And also, our customers' expansion of its foundry business is likely to be a positive factor for demand of our products. In the mid- to long term, the semiconductor material demand is to maintain solid growth. And so we will be focusing on securing new materials in time to achieve continuous growth. Your second question was about the pouch battery business outlook. Last year, the smartphone market contracted by more than 10% versus 2019 due to COVID-19. This year, the smartphone market is expected to record high single-digit growth with the launch of new models featuring new technologies such as 5G and foldable displays and the return of some replacement demand that was postponed from last year. So with the rebound of the smartphone market, pouch batteries are expected to see better performance this year. And we are focusing on preparing batteries with higher capacity and also better high-speed charging performance to meet the trends that we're seeing, for example, in the increase of data usage and also higher specifications being adopted on the new smartphones.

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

[Interpreted] I have 2 questions for the large battery business. First of all is for the EV batteries. It seems that especially around the Chinese markets, the LSB-type batteries are taking a larger -- taking up larger share. How do you see the future of the LSB batteries within EV batteries? Can you share with us your view of that? Second question is about ESS markets. I think you've shared your outlook that ESS will report solid growth -- high growth rates this year. Within the ESS, where do you think would be the highest growth potential? And in that segment, can you highlight the differentiating advantages that SDI offers?

[Interpreted] Your first question was about the LSB batteries. And LSB batteries have been taking up some part of the EV market, especially leveraging its price competitiveness, including some OEMs recently adopting Chinese LSB batteries for their EVs. However, if you look into the details due to the nature of the material, LSB batteries have a lower energy density compared to trivalent batteries such as NCA- or NCM-based batteries. And so these LSB batteries are mainly used in limited situations such as entry-level EV models that have a relatively short range or large commercial vehicles such as buses that have more space to load more batteries. The energy density of trivalent batteries is increasing with technology advances such as high-nickel cathodes or silicon-based anode materials. Also, the price difference with the LSB is narrowing with improvement of material cost for the trivalent batteries. So given all of that, we think that even in the long run, trivalent batteries will remain the mainstream for EVs and that the market share of LSB batteries will remain limited. Your second question was about ESS, where we see the most growth and how we are going to differentiate ourselves in that. Even though overall, global ESS market is growing rapidly, we are noticing the demand growth to be particularly strong from the U.S. utility power-related sectors. This is in part thanks to the renewable energy policies that are being adopted by each local state government in the U.S. and also because the power generation cost of renewable energy is becoming economically attractive by combining it with ESS. So this is driving ESS demand from the U.S. utility sector. So we will be focusing on strengthening our partnership with major renewable energy gencos in the U.S. and also offer battery cells that combine our long lifetime characteristics with higher energy density and cost competitiveness to capture this market opportunity.

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

[Interpreted] I have 2 questions. The first question is about the polarizer film business with the SDC, Samsung Display, deciding to extend its LCD production. What kind of impact do you think this will have? And as part of that, can you just share with us your overall outlook and views regarding the polarizer film business for this year? Second question is about CapEx. Can you share with us your overall full year CapEx plan? And also, how specifically you are planning to fund the CapEx needs this year?

[Interpreted] To answer your first question about the polarizer film business, our polarizer film business has already diversified mainly due to the Chinese customers' demand, which has been sufficient enough to keep us -- keep our production at full utilization. So the impact of the Korean customer extending its LCD production is not expected to be significant on our business. Overall, the growth rate of the LCD panel market is expected to level off somewhat this year. And the LCD prices outlook is that it's expected to see some downside pressure. So given this outlook of the downstream panel market, it is difficult to expect the same level of growth in the polarizer film business as we saw last year. Our focus this year in the polarizer film business is to maintain our market share-based on manufacturing capabilities and differentiated product offerings and to expand the sales of the higher-priced products such as the polarizers for large-sized TVs to overcome the market environment.

[Interpreted] Your second question was about our CapEx plans this year. As we've already mentioned, we do plan some capacity increases, especially around the automotive battery capacity in Hungary and also adding capacity for our cylindrical batteries. So that will be the focus of our CapEx spending. This year, we are expecting our CapEx to increase versus last year. Currently, we're expecting that -- to fund our CapEx needs from our operational cash flow. And so we do not have currently plans of, for example, increasing capital or selling some of the securities that we're holding to fund the CapEx.

[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.]