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

[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, Jong Sung Kim; Head of the Automotive and ESS Battery Strategy Marketing Team, Michael Son; Head of the Small Battery Strategy Marketing Team, Jaeyoung Lee; and Head of the Electronic Material Strategy Marketing Team, Kwangsung Kim, are with us this afternoon. We will now start the 2021 second quarter earnings call. First, we'll announce the results of the second quarter. The second quarter revenue recorded KRW 3.334 trillion. By business division, Energy division revenue recorded KRW 2.712 trillion, up 14% quarter-on-quarter. And Electronic Materials division revenue recorded KRW 623 billion, up 8% quarter-on-quarter. Operating profit in the second quarter stood at KRW 295 billion. The Energy division recorded KRW 169 billion, up 260% and the Electronic Materials division recorded KRW 127 billion, up 47% quarter-on-quarter. And we saw a pretax profit of KRW 396 billion and net profit of KRW 208 billion. The results and outlook of each division will be explained in detail later on. Next, I will move on to our financial status. Assets as of the end of the quarter stood at KRW 23.215 trillion, up 1.293 trillion quarter-on-quarter. Current assets went up by KRW 670 billion quarter-on-quarter with increased cash equivalents as well as increased accounts receivable and inventories driven by revenue growth. And noncurrent assets also went up by KRW 623 billion, driven by increased value of stock holdings. Liabilities recorded KRW 9.031 trillion, up KRW 750 billion quarter-on-quarter caused by increased accounts payable. Shareholders' equity recorded KRW 14.185 trillion, up KRW 542 billion quarter-on-quarter with retained earnings and other comprehensive income. Next is the earnings of this quarter and the outlook of the second half. First, large-sized battery business saw an increase in revenue year-on-year and quarter-on-quarter. EV battery revenue went up with increased sales to major European clients increasing profitability and turning of profit. For ESS battery, the revenue increased from the U.S. utility project. In the second half of this year, we expect growth both in sales and profitability. As new Gen5 battery started supply and other model sales will grow, EV battery will see higher profitability compared to the first half. ESS battery will expand sales to Europe and Asia. Next, moving on to the small-sized battery business. Second quarter revenue increased year-on-year and quarter-on-quarter. Lender competitor revenue went up as we saw strong sales for power tools and vacuum cleaners, and as the supply to the new EV project begins. And pouch battery revenue went up, thanks to flagship smartphones. And we expect sales growth driven by EV battery in the second half of 2020. For Cylindrical battery, we will see a larger volume in EV sales and the sales for major applications such as power tools, vacuum cleaners and e-bikes continued solid growth. Pouch battery sales will also go up with the launch of new smartphones. Next, we are moving on to Electronic Materials business. Second quarter revenue slightly declined year-on-year after pulling out of the PV paste business, but increased quarter-on-quarter. All major products recorded higher revenue. By product type, semiconductor materials saw increased wafer input, OLED materials saw increased demand for smartphones and polarizer saw increased sales for large LCD TVs. In the second half, we expect sales growth in semiconductor and OLED materials. Semiconductor materials will see an increase in sales as the customer ramp up production and wafer input goes up. OLED materials will increase it's supply as more OLED panels are used in new smartphones. Polarizer sales are expected to be similar to the one in the first half. 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] The first question will be presented by Sung Kyu Kim from Daiwa Capital Markets.

[Foreign Language] [Interpreted] I have 2 questions regarding the EV battery business. First is you have passed the breakeven point for your EV battery business in the second quarter. You said that during the presentation, you're expecting the profitability to continue to improve in the second half. But I think there are some concerns in the market given the expected continued supply shortage of semiconductors for the auto industry and also all of the uncertainties surrounding COVID-19. Does the company believe that it will be possible to maintain the profitability above breakeven point throughout the remainder of the year? And does the company see any risks related with the profitability of its EV battery business. Second question is about the Gen5 battery that the company is preparing to start mass production during the second half. Can you give us some time lines regarding Gen5? Any updates regarding the mass production preparation situation? And how much revenue or how much volume do you expect to sell for Gen5 during this year?

[Foreign Language] [Interpreted] This is CFO, Kim. Let us answer your first question. As you mentioned, our EV battery business recorded a profit in the second quarter and also recorded a profit even though small for the first half on a cumulative basis. Even though the recent semiconductor supply issue appears to affect some EV production with certain customers adjusting their vehicle production schedules, we expect the chip supply issue to improve as we move through the second half. Also, we are noticing that the OEMs are placing priority on the production of their EV models in order to satisfy CO2 regulations. So overall, the impact of the chip shortage on our business results is expected to be limited. And as we mentioned, actually, we expect our profitability in the second half to improve versus the first half of this year, thanks to top line growth, combined with improved product mix. As the share of our Gen3 and above projects, which have a relatively better margin increase within our overall EV battery business. In addition to the mid- to large-sized battery, including EV batteries, the performance of small-sized battery and electronic material business is also expected to improve in the second half. And so as we go through the second half of this year, we will focus on effectively responding to various business variables, including the COVID-19 situation to achieve our business targets as planned.

[Foreign Language] [Interpreted] Your second question was about an update of Gen5 and the volume we're expecting this year. The Gen 5 is being prepared on schedule at the new line in Hungary, according to the plan to supply Gen5 to BMW from the third quarter. So Gen5 is expected to visibly contribute to our EV battery revenue growth from the fourth quarter of this year. Also, from next year, the Gen5 is expected to see a more diversified customer base and also increase significantly in terms of its supply volume so that next year, Gen5 will significantly increase its revenue contribution to the EV battery business.

[Foreign Language] The next question will be presented by Dong-je Woo from Bank of America.

[Foreign Language] [Interpreted] I also have 2 questions regarding the EV battery business. First question is we do notice that many of the competitors are building local presence in the U.S. market in the form of joint venture. So in that context, can you share with us any updates on SDI's consideration or review of building its own local capacity in the U.S. market? Second question is about EV batteries, but cylindrical EV batteries. It seems that with Rivian adopting a cylindrical battery for its EV business, there is an increase of cylindrical battery demand from EV OEMs. Does the company have any update, additional customers other than Rivian that have placed orders regarding cylindrical batteries that you can share with us? Also, in that context, can you share whether the company or any updates of the company considering building local cylindrical battery capacity either in Europe or the U.S. to meet the customers' demand.

[Foreign Language] [Interpreted] To answer your first question about presence in the U.S. as one of the main 3 major EV markets, the U.S. is indeed an important market. And the Biden administration has been introducing stronger ecofriendly policies as well as expanded infrastructure investment plans. And the major OEMs have also accelerated their EV strategy, suggesting that the EV battery demand is likely to record higher or higher growth rates than originally projected. Also, with the USMCA taking effect, local production of EVs and the key components will become essential from 2025. So even though we are not able to share details yet, SDI is planning to enter the U.S. within a necessary time frame, time frame that is not too late and we'll communicate our plans with the market when ready.

[Foreign Language] [Interpreted] Regarding the cylindrical EV batteries, the cylindrical EV batteries that are currently in mass production have standardized form factors, which makes them easy to mass-produce and relatively attractive in terms of price. So naturally, start-up OEMs tend to prefer these cylindrical EV batteries. In addition to Rivian, SDI is preparing new projects with several other customers and expect to see visible volume contributions from next year. We're also adding cylindrical battery capacity around existing production sites, including Korea, in time for each of the customers' projects and plan to consider new production sites for local supply purposes by taking into account future order situations and customer needs.

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

[Foreign Language] [Interpreted] My first question is about EV battery business. I'm just wondering what is the EV battery market growth rate that is assumed in SDI's EV battery business strategy? So what is the size of the total market that is assumed in your EV battery business? And how much of that potential market does the company target to gain? So what is your target market share in that given market? Second question is about your electronic materials business, the new businesses that are being prepared. I've heard that the company is working on, for example, photoresist for semiconductors as well as new materials for QD display. But in addition to this, can you share with us a bit more detail of the new materials businesses that the company has in its pipeline regarding either semiconductors and OLED? Can you give us some update on the development front?

[Foreign Language] [Interpreted] The EV battery market is being driven by several factors, including the longer ecofriendly regulations being adopted by various countries, the ban on the sales of ICE vehicles approaching and also the acceleration of EV strategy is being adopted by the global automotive OEMs. These are all driving rapid growth of the EV market. The EV battery market is expected to grow by more than 30% CAGR on a capacity basis and exceed 1 terawatt hour by 2025. Our focus will be on diversifying our customer base, which is currently more European focused and also launching next-generation batteries to follow the Gen5 to offer higher energy density and rapid charging performance with the goal of maintaining our leadership in the rapidly growing EV battery market.

[Foreign Language] [Interpreted] Regarding an update on our new material businesses, some of the new items that are in our pipeline to be launched in the market in the next 1- to 2-year time frame would include the [ QD Inc. ] polarizer film for OLED as well as G-Hosts for new platforms. The photoresist for semiconductors that you mentioned is still in its initial development phase and would take longer until commercialization. We also have many new items in the development that we're developing in collaboration with customers, including EUV materials for semiconductors as well as new materials for OLED. We plan to develop new materials to diversify our product portfolio and create the foundation for mid- to long-term growth of our electronic materials business.

[Foreign Language] The next question will be presented by Dong-wan Kim from Macquarie.

[Foreign Language] [Interpreted] I'll ask 2 questions. The first question is about ESS market, which is expected to grow as strong as the EV battery market. In that context, can you share your -- the company's outlook for ESS market growth? What kind of competitive landscape the company is expecting? And how the company plans to gain a competitive edge within the ESS market? Second question is about the 4680 cell that Tesla seems to be at the end of its development. It seems to be completing its development of the 4680. Can you give us an update on where SDI stands in terms of 4680 development?

[Foreign Language] [Interpreted] To answer your first question about ESS growth outlook and our strategy. The ESS market is expected to grow by more than 25% CAGR to over 100-gigawatt hours by year 2026 driven by main factors such as stronger environment policies being introduced by each country, the greater penetration of renewable energy generation that is becoming more economical than, for example, coal or gas-based generation. The utility or power or Genco market, which is the largest segment within ESS is expected to record rapid growth with increased renewable energy generation combined with infrastructure investments and tax benefits. The utility market is expected to grow by more than 30% CAGR from 19-gigawatt hours in 2021 to 72-gigawatt hours in 2026. The other segment, the household ESS market is also expected to grow at around 30% CAGR as there is greater demand to save electricity costs by using solar energy and also a greater desire to have backup power to prepare against increasing natural disasters. Also, there is the demand in the UPS market, which offers a relatively higher profitability. Demand for UPS is also expected to grow as there is an expansion of data center infrastructure. Since the end of 2019, SDI has greatly improved product safety by adopting fire prevention sheets and insulation material in its ESS batteries. Also, we have released new ESS batteries with better cost competitiveness in the second quarter. So we will continue to focus on developing new ESS batteries with higher energy density and capacity by using better materials and processes to drive sales across all segments with a strong price competitiveness.

[Foreign Language] [Interpreted] Well, the second question was about the new form factors for the cylindrical batteries. Well, since Tesla's battery day event, Tesla as well as many other OEMs are showing interest in large-sized cylindrical form factors. Our SDI is closely working with key customers and developing cylindrical large form factor batteries that adopt the size and material optimized for the customers' vehicle characteristics. While the OEMs are showing actually diverse needs for battery form factors as they are preparing various EV platforms to drive the EV market growth, SDI's focus will remain on gaining a competitive edge regardless of form factor based on its differentiated technology and quality.

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

[Foreign Language] [Interpreted] I have 2 questions. First question is about your polarizer film business, which recorded better-than-expected results in the first half. Do you think that this positive momentum will continue in the second half of this year? Second question is about your pouch battery business. Given that smartphone market growth or demand is expected to be weaker than expected, do you think that, that would have a negative impact either on your pouch battery utilization or profitability? Can you give us some outlook on the profitability of your pouch battery business?

[Foreign Language] [Interpreted] The first question about our polarizer film business. In the first half, there was solid demand for LCD TVs, which has also led to strong results of our polarizer film business Market research firms have projected that LCD TVs demand in the second half will continue to grow even though slightly from the first half. And so even though there is a risk of ASP decline given the limited scale of market growth, we will focus on continuing to deliver strong performance by expanding our film sales, especially around the large-sized products where SDI has an edge.

[Foreign Language] [Interpreted] Regarding the pouch batteries, as you know, smartphones by nature tend to have a shorter, relatively shorter life cycle as a product. And a large portion of its total sales tends to occur during the initial period following the launch of the new model. Therefore, it's important to be the first in supplier for the customers' new smartphones. With the overall smartphone market, growth remaining sluggish, we have been focusing our development resources on working with key customers from the beginning of their new model development cycle. And we expect our profitability to improve as our batteries are supplied to the new flagships that are being launched by major customers throughout the second half. Also, we will focus on adopting new materials and new processes to offer more competitive smartphone batteries that respond to the smartphone trends asking for slimmer form factors and higher capacity.

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

[Foreign Language] [Interpreted] My question is about the raw materials that go into these rechargeable batteries. With battery itself expected to grow quite rapidly, I think there is a bit of concern of securing the sourcing or the supply of the raw materials that go into the batteries. In that context, can you share with us the company's plans of securing stable supply of the raw materials as well as the supply chain management, the SCM plans that are to support your overseas and Korean production?

[Foreign Language] [Interpreted] Securing stable supply of the key battery materials is essential to long-term competitiveness of our battery business. SDI is also, therefore, working on various sourcing plans for the 4 major battery materials and the key metals. In the case of cathode material, we have been significantly increasing our internalization ratio through subsidiaries and joint ventures. And we have also been strengthening cooperation on anode material separators and electrolytes by either co-development or equity investments with key suppliers. We are also using equity investment in long-term purchasing agreements to secure supply of key metals, including lithium and cobalt. Regarding the local SCM initiative, our local SCM initiative is currently being led out of Hungary, which started with electrolytes and can, but has been expanding to other areas to create an overall value chain, including cathode material and copper foil. Also, for the sake of material cost saving and also compliance with environmental regulation, we are also carrying out a joint project with a recycling specialists for the recycling of scrap batteries generated from the Korea plant and also plan to roll out the recycling program to overseas in the future. [Foreign Language] [Interpreted] This completes our earnings 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.]