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

Good afternoon. Thank you very much for joining today's conference call. We will now start the 2021 First Quarter Earnings Conference Call of Samsung SDI. The conference call will start by a presentation from the company followed by a Q&A session. [Operator Instructions] Now the company presentation will start.

Good afternoon. I'm 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, Jong Sung Kim; Head of the Automotive and ESS Battery Strategy Marketing Team, Michael Son; Head of the Small Battery Marketing team, [ Yu Jin Song ]; and Head of the Electronic Material Strategy Marketing team, Kwangsung Kim, are with us this afternoon. And we will now start our first quarter 2021 earnings call. First, we'll announce the results of the first quarter. Our first quarter revenue recorded KRW 2.963 trillion. Our business division energy revenue recorded KRW 2.387 trillion, down 9% quarter-on-quarter and electronic materials revenue recorded KRW 576 billion, down 7% quarter-on-quarter. Operating profit in the first quarter stood at KRW 133 billion. The energy division's operating profit recorded KRW 47 billion, down 60% quarter-on-quarter and the electronic materials division recorded KRW 86 billion, down 33% quarter-on-quarter. And we saw pretax profit of KRW 205 billion and net profit of KRW 150 billion. The first quarter earnings dropped quarter-on-quarter due to seasonality. But year-on-year, both revenue and operating profit saw significant increases by 24% and 147%, respectively. The results and outlook of each division will be explained in more detail later on. Next, I will move on to our financial statement. Assets as of the end of the quarter stood at KRW 21.923 trillion, up KRW 389 billion quarter-on-quarter. Current assets increased by KRW 113 billion quarter-on-quarter, driven by increased accounts receivable and noncurrent assets also increased by KRW 275 billion with increased value of stockholdings with intangible assets. Liabilities increased to KRW 8.281 trillion, up KRW 105 billion quarter-on-quarter, and shareholders' equity recorded KRW 13.642 trillion, up KRW 283 billion, caused by retained earnings and other comprehensive income. Next is the first quarter results and the second quarter outlook. First, large-sized battery business, a huge increase in revenue year-on-year, also a decline quarter-on-quarter. EV battery had an impact of off seasonality and ESS battery revenue decreased due to weak domestic demand as the renewable energy certificate scheme ceases in Korea. From the second quarter, EV battery sales are expected to increase mostly for European OEMs and ESS battery will also see increased sales from the U.S. utility projects. Thus, the overall business revenue and profitability will go up. Next, moving on to the small-sized battery business. First quarter revenue saw a slight decline quarter-on-quarter, but a huge increase year-on-year. Lender competitor revenue maintained a similar level to the last quarter with the increased sales of power tools despite off seasonality. And pouch battery revenue decreased quarter-on-quarter due to weak sales from the overseas market, though we began supplying pouch batteries for new flagship smartphones. In the second quarter, the sales will increase with seasonality. Cylindrical battery is expected to see an increase in sales, mostly from micromobility and vacuum cleaners and to start supplying for the new EV project, and pouch battery sales are also expected to go up as the demand recovers for midrange smartphones. Next, we are moving on to the electronic materials business. In the first quarter, we saw a decline in revenue quarter-on-quarter and year-on-year as OLED materials revenue went down caused by seasonality. However, polarizer maintained a similar level of revenue quarter-on-quarter as the demand for large LCD TVs went up, and semiconductor materials revenue saw a slight increase quarter-on-quarter, thanks to the high demand. In the second quarter, the sales will see a steady growth. Polarizer sales will see an increase with the strong demand of LCD panels for IT devices, such as laptops and monitors and OLED material sales will also see an increase as more OLED panels are used for mid-range smartphones. Semiconductor materials sales will continue to grow as client wafer input increases. 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] The first question will be provided by Yoonsik Shin from CLSA Securities.

[Interpreted ] I have 2 questions regarding the EV battery business. First question is about how Volkswagen on their Power Day event announced plans of internalizing their battery sourcing. This has caused some concern in the market about the future of battery companies. Can you share your SDI view regarding this? Second question is about the concerns currently about the shortage of automotive semiconductors and also increasing metal prices. What do you think that the impact of this would be on the profitability of your automotive battery business? And would this have any change in the company's plans to pass BEP point for its automotive battery business this year?

[Interpreted ] Last year, Tesla announced plans to internalize battery supply and Volkswagen is also talking about this. I think this shows that from the OEM's perspective, they consider stable battery supply to be crucial for their EV business and also that they are seeing their battery demand increasing quite rapidly. That said, EV battery production requires long periods of technology development and also a lot of mass production capabilities and know-how. So the OEMs would need to go through quite a lot of trial and error and also take quite a lot of time to internalize battery capacity in a large scale. In particular, the OEMs with large EV capacities will have difficulty in internalizing their entire battery demand. And so we think that it will be inevitable for them to still maintain relationships with battery suppliers, especially in order to source all of the different variety of batteries needed for all of their models. Samsung SDI has specialized in battery production and has built a track record of over 20 years with diverse customers and projects. We pride the best R&D capabilities and mass production experience in the industry and expect OEMs to continue to need our products. We will continue to lead the market as the top-tier EV battery supplier by developing the best product and delivering good quality.

[Interpreted] To answer your second question, which was about concerns of the automotive battery -- automotive semiconductor shortage and increasing metal prices and the implication that has on our profitability of the EV battery business, even though the situation does call for further monitoring because most of the OEMs are now placing higher priority on producing EVs rather than the internal combustion engine vehicles in order to meet their CO2 regulation requirements, our EV battery business has not yet seen any effects. Regarding the metal price increases, most of our EV project contracts have now built-in pass-through mechanisms for key raw material prices. And therefore, increase in metal prices would have limited impact we expect on our bottom line. Even though the first quarter revenue decreased versus last quarter due to seasonality, we will be supplying to more major models from second quarter and expect revenue to grow significantly in the second half versus first half with improved product mix. So we remain comfortable of our goal of passing BEP this year on a full year basis.

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

[Interpreted] I also have 2 questions about the battery. First question is about the prismatic battery. Traditionally, there has been emphasis more of the advantages of the pouch battery due to its flexibility, but especially with the recent announcement by Volkswagen of its platform based on a unified sell, the market has been showing more interest in the prismatic battery shapes. So what are the advantages of the prismatic batteries? And what kind of differentiating strengths the Samsung SDI offer in prismatic batteries? Second question, also, we have references back to the announcements made at Volkswagen's Power Day. They mentioned their interest of developing or using high manganese LSP (sic) [ LSB ] batteries. And some of the Korean battery companies are also working on not just high nickel but also high manganese cathode material. So in that context, I'm interested on what plans, for example, Samsung SDI or what they're working on in terms of high manganese LSB cathode material?

[Interpreted] To answer your first question about the advantages of prismatic batteries and the strengths that SDI brings to that. The key focus on EV battery development recently has been not only on safety, but also higher sale capacity, simplified components and also space efficiency using, for example, concepts like cell to pack. Prismatic batteries do offer many advantages in such aspects. In terms of safety, prismatic batteries have many safety devices at the cell level, such as vents and fuses and is completely sealed with an aluminum can wielding for better resistance to electrolyte solution leaks or outside impact. Also by nature, the rectangular prism shape has a larger area of contact with a cooling plate, offering better cooling efficiency and relatively lower risk of thermal runaway. In terms of capacity, the rectangular prism can structure is better in withstanding internal pressure and has the advantage of being able to fit in more active substances. Also cell capacity can be increased by increasing the thickness which has advantages in terms of space utilization of both the module and the pack compared to other cell types that increase capacity by increasing the area or length. The drawback of prismatic batteries has been that the -- it has a higher sale cost because of the larger number of components involved, including the can and the safety device at the cell level. But by using the stronger prismatic cell, less components can be used at the module or the pack level and higher energy density is achieved, which fits very well with the OEMs now trying to simplify their module impacts, including cell to pack.

[Interpreted] To answer your second question about recent talks of high manganese LSB cathode material, our development status on that -- and our development status. The reason that OEMs are talking about high manganese and LSB is mainly because of the cost advantage that's offered compared to ternary cathode material. However, due to the limited energy density improvement, high manganese or LSB are likely to be used mainly in entry or mass vehicle models. In order to flexibly respond to the diverse needs of our customers for different battery materials, our material research is being carried out in 2 main directions. One is to utilize the high nickel NCA cathode material and silicon-based anode material technology to increase energy density and lower the cost per unit capacity to target the performance-sensitive premium market through differentiated technologies, such as rapid charging. The second direction of our development is to also research cobalt-free cathode material, including high manganese and low-cost anode material to also develop products that deliver sufficient performance and are price competitive in order to drive market expansion.

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

[Interpreted] First question is about the ESS business. With the REC multiplier, subsidy policy in Korea sunsetting. It seems that a negative impact on your domestic ESS sales is inevitable. So can you share with us whether your sales plan for this year for ESS is still on track. Also Samsung C&T, an affiliate of the Samsung Group, had announced plans, for example, building a [Foreign Language], a solar generation plant in Texas. Some have speculated that this may have some positive impact on your business. Can you comment on that project and its implications? Second question is about the pouch battery, the small battery pouches for smartphones. This also comes from the semiconductor shortage issue that some are concerning -- some are concerned will have -- bring production disruptions for smartphones, starting from the second quarter. Do you see any impact now or going forward on your pouch battery business due to this?

[Interpreted] To answer your first question, which was about the outlook for Korean domestic ESS market and also the outlook of our ESS business overall in overseas markets, we do expect that domestic ESS sales this year will decrease sharply even compared to our original expectations. But this has been, in some part, already anticipated. And so we have already received orders mainly from overseas markets to cover most of our ESS supply volume this year. So we expect our overall ESS business to deliver stable performance improvements this year. In terms of region, the U.S. market is expected to double compared to last year and lead global ESS growth. We are expecting to grow above-market growth rates in the U.S. And so U.S. sales will account for a larger share of our overall revenue. Sales in overseas markets other than the U.S. is also expected to grow compared to last year. In terms of application, the power utility market is expected to remain the large share, but we are also seeing strong pickup in sales of batteries for large capacity UPS units for data centers, which has been rapidly growing since the start of COVID-19.

[Interpreted] To answer your second question, which was about the battery, the pouch battery business. As you mentioned, some have voiced concerns that the semiconductor shortage may spill over to a shortage of key components such as mobile AP and disrupt mobile production. But as of yet, our pouch battery sales has not been affected. In the second quarter, we expect our pouch battery sales to grow, especially around the mass-tier smartphone models. And our Korean and overseas customers are preparing to launch new products in the second half, which is good news for our pouch battery business performance. That said, if the semiconductor shortage does become prolonged. Customer production plans may be disrupted. So we are closely monitoring the situation and preparing to respond appropriately.

[Foreign Language] The following question will be presented by Kamu Park from Daishin Securities.

[Interpreted] I have 2 questions, both about the cylindrical battery business. First question actually references a media report recently about Rivian adopting your cylindrical batteries for its EV models. Is it possible, can you, for example, share with us the size of the cylindrical battery supply that you're expecting to Rivian? Also, we -- according to our information, the company will start to record revenue of supplying a cylindrical battery for EV being produced by a European customer. So given that context, can you share with us how much of EV application -- EVs would account for in your overall cylindrical battery cells? Can you break that down, for example, year-by-year going forward? Also in that context, can you share with us your overall strategy for your cylindrical battery business? Second question is about cylindrical batteries for power tools and m-mobility will -- which, for some time, will remain the mainstay application for cylindrical battery business for Samsung SDI. In that context, we've been hearing that battery supply is quite tight. Especially for these applications in the cylindrical battery side. From the company's perspective, do you think that these cylindrical battery supply has gotten even more tighter compared to the start of this year? And what is Samsung SDI strategy in this area?

[Interpreted] To answer your first question about Rivian. There were media announcements that Rivian will be adopting our batteries, but we are not at liberty to disclose any details about that project. Our cylindrical battery business continues to prepare EV projects with many customers, including Rivian. And we expect to see some meaningful expansion starting from mass production this year and continuing to next year. The EV project contribution within our cylindrical battery revenue is expected to be single-digit this year, but to grow to double digits next year and add a significant drive behind our cylindrical battery business. Your second question was about the current supply, the tight supply of cylindrical batteries and market outlook. Last year, customers expected weak demand due to COVID-19. And that actually decreased their battery inventory for products such as power tools and e-bikes. But as you know, what turned out was that actually demand for these products grew due to social distancing. On top of that, EVs are also driving additional demand for cylindrical batteries. And this appears that the cylindrical battery supply for non-EV markets, such as power tools and e-bikes has become considerably tight overall. Cylindrical battery demand this year is expected to grow by 30% or more on a year-on-year basis, and we will be focusing on increasing production volume but also concentrate on responding to especially the high-power and high-capacity markets, and we are aiming to outpace market growth this year.

[Foreign Language] The following question will be presented by Giuni Lee from Goldman Sachs.

[Interpreted] I have 2 questions regarding the electronic materials business. First question is about the semiconductor materials business. Can you share with us your growth forecast for that business, given the fact that many are forecasting that the memory semiconductors will be entering the big cycle starting from this year. Second question is about the polarizer film and OLED material business. On one hand, there are some positive factors, such as strong TV demand and also higher panel prices. But on the other hand, there are some concerns regarding the semiconductor shortage such as DDI. So given all of that, can you share with us your business forecast for polarizer and OLED material for this year?

[Interpreted] Your first question was about the semiconductor material business outlook. With the global memory semiconductor market size growing significantly this year, customers are also undergoing capacity increases and wafer input is expected to grow by around 7% versus last year. So our semiconductor material revenue is also expected to continue growth. Given the growth cycle expected in the downstream market, we will be focusing on preparing the right products in order to capture market demand at the right time to deliver strong performance improvement.

[Interpreted] Your second question was about the polarizer film and OLED Materials business. The performance improvement of the polarizer film business is expected to continue in second quarter with the TV polarizer film sales remaining strong with more time being spent at home, especially with the strong sales of high-end films tied to the popularity of large-sized TVs. But if the shortage of semiconductors or panels continue, customers may be forced to cut production, which may also then slow down the LCD TV market growth. If so, on a full year basis, considering all of these factors, polarizer performance may be similar to what we saw last year. The OLED material business is expected to deliver significant performance improvement this year as well, given that more flagship smartphones are adopting flexible OLED panels, including foldable phones and more master smartphones are adopting OLED instead of LCD.

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