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 third quarter earnings conference call of Samsung SDI. The conference call will start with a presentation by the company followed by a Q&A session. [Operator Instructions] Now we will start the company's presentation.

[Interpreted] Good afternoon. I am Yoontae Kim, Vice President of the Business 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 third quarter earnings call. First, we'll announce the third quarter results. We achieved the highest quarterly revenue and earnings. The third quarter revenue recorded KRW 3,440 billion and operating profit recorded KRW 374 billion. By business division, Energy revenue recorded KRW 2,741 billion, up 1.1% quarter-on-quarter, and Electronic Materials revenue recorded KRW 699 billion, a 12.3% increase quarter-on-quarter. For the operating profit, Energy business recorded KRW 202 billion, a 19.6% increase quarter-on-quarter, and the Electronic Materials business recorded KRW 172 billion, a 35.7% increase quarter-on-quarter. We saw pretax profit of KRW 551 billion and net profit of KRW 420 billion. Earnings and forecast of each division will be explained in more detail later on. Next, I will move on to our financial status. Assets as of the end of the quarter stood at KRW 24,521 billion, up KRW 1,306 billion quarter-on-quarter. Current assets increased by KRW 472 billion quarter-on-quarter, driven by increased accounts receivable, and long-term assets also increased by KRW 834 billion, driven by CapEx and increased the value of stockholdings. Liabilities recorded KRW 9,647 billion, up KRW 616 billion quarter-on-quarter as a result of increased accounts payable. Shareholders' equity recorded KRW 14,875 billion, up KRW 609 billion, driven by increased retained earnings and other comprehensive income. Next is the third quarter results and the fourth quarter forecast. First, large-sized battery division maintained profitability following last quarter, despite weak demand of EV and ESS. EV battery revenue decreased as automakers cut production caused by chip shortage, but we improved the product mix to maintain profitability. ESS revenue for the third quarter temporarily decreased quarter-on-quarter as supply schedules for major projects are mostly in the second quarter. In the fourth quarter, we expect an increase in sales mostly from new and high value-added models. Although we expect chip shortage to continue, EV battery sales are expected go up with the supply expansion of Gen.5 to our customers' new EV model. ESS battery will see increased revenue and profitability with increased sales of high value-added products such as UPS and residential ESS. Next, moving on to the small size battery division. For cylindrical and pouch battery, the third quarter revenue and profitability went up as the downstream demand increased. Cylindrical battery revenue saw an increase from mobility such as EV and e-bikes. Pouch battery revenue also went up for major customers' new smartphones and wearable devices, thus contributing to the overall profitability of small sized battery division. And we expect sales growth driven by cylindrical battery in the fourth quarter. For cylindrical battery, we will see high sales, thanks to high demand of major applications such as EV power tools and m-mobility. Pouch battery sales will also go up for new smartphones to overseas customers. Next, we are moving on to the Electronic Materials division. Third quarter revenue and profitability increased from high value-added products. Semiconductor materials revenue grew from high value-added products such as SOH. OLED materials revenue also saw an increase for flagship smartphone. Polarizer revenue stood at a similar level to the last quarter, and we expanded high value-added products for large LCD TV. In the fourth quarter, both semiconductor and OLED materials will see an increase in sales. Polarizer sales are expected to go down due to seasonality, while semiconductor and OLED materials sales will go up with steady downstream demand. 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 Ji-San Kim from Kiwoom Securities.

[Foreign Language] [Interpreted] I have 2 questions regarding your EV battery business. First is, as you know, the semiconductor chip shortage is continuing, and that is impacting the EV demand. What is the impact to SDI's EV battery business? Also, do you still think that you'll be able to achieve profitability on a full year basis? Second question is about EV battery quality. How does SDI strengthen its EV battery quality control? And what kind of advantages or strength would SDI's batteries have in terms of safety?

[Foreign Language] [Interpreted] To answer your first question, the chip supply issue is continuing longer than originally expected. And according to some research firms, it appears that the chip supply issue may continue until even next year. Global OEMs have had to stop factory operation due to this, which is disrupting vehicle production and sales. Fortunately, compared to ICEs, the production of EVs appears to be less affected because OEMs are allocating chips to the EV production over ICE production in order to satisfy CO2 regulations and also to claim a leadership in the future EV market. While each OEM has a different strategy between EVs and plug-in hybrids, PHEVs, many companies appear to be focusing on the production of EVs, which have greater CO2 reduction effects and bigger economies of scale because they have exclusive platforms versus the plug-ins. While our battery sales for the running plug-in EV models have been somewhat affected by the chip supply issue and also each OEM sales strategies, we have started supply of batteries for a new EV model in third quarter and plan to expand this to larger scales on the fourth quarter. And regarding our full year targets, we are focusing currently on meeting our original target of full year revenue growth targets as well as recording a profit on a full year basis by closely communicating with the customers regarding the market situation.

[Foreign Language] [Interpreted] To answer your second question about our EV battery quality control and safety-related advantages, the EV battery industry itself does not have a very long history. And because various unanticipated issues may arise related with quality, SDI have been practicing stronger quality control measures across the entire process chain from development, manufacturing and shipment. For example, during the development stage, we use deep learning-based AI-driven inspection to continuously upgrade our defect detection algorithm. And during the manufacturing stage, strict quality inspections are carried out at over 500 quality gates throughout the entire process, including for full plate assembly and formation. Also in terms of form factors, SDI's prismatic batteries have various safety devices such as overcharge blockers and vents, which are recognized as effectively increasing our cell level safety. The overcharge blockers cut off outside current when overcharge is detected and prevent additional events such as internal shorting, vents are used to release gas in a certain direction when the battery is overheated, and this helps prevent thermal runaway spreading to nearby batteries. We have always believed that especially from a long-term perspective, quality and safety are the most fundamental competitiveness of the EV battery business, and we'll continue to focus on supplying the best quality products.

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

[Foreign Language] [Interpreted] I have also 2 questions about the EV battery business. First is, can you give us an update on the supply and production of the Gen.5? And also, can you give us some direction as to the chemistry you're working on for the post Gen.5 batteries? Second question is about the cylindrical batteries for EV applications. We noticed that the growth of cylindrical batteries for EVs are increasing quite rapidly. What is SDI's outlook for cylindrical EV batteries? And can you share with us the contribution of EV batteries within your overall cylindrical battery? And how much do you think that that will grow in the future?

[Foreign Language] [Interpreted] First to answer your question about our Gen.5 production update and future plans for the batteries. We started, as we mentioned, mass production of the Gen.5 battery in the new Hungary line from third quarter. The Gen.5 is currently being supplied to the new BMW model. And next year, a significant revenue increase is expected from the Gen.5, as we plan to supply to other customers from next year. Looking towards the entire EV market, the EV market itself is trying to focus on satisfying the diverse needs from customers for EVs on different levels of performance and price. And so we expect the EV battery market is also going to become more segmented and develop beyond the current focus on the premium market and see growth of other segments such as volume markets. In the premium market, demand for battery performance, such as high energy density and rapid charging, will grow in order to design vehicles with larger interior space and higher performance. While in the volume market, greater weight would probably be placed on cost competitiveness. As the market becomes more segmented, we're also developing different battery technologies that address each market's needs. First, in the case of premium markets, we will focus on delivering maximum energy density by using high nickel cathode material and silicon anode material and enhance our rapid charging performance by adopting new processes in the pole-plate process. Also in order to improve the cost competitiveness for the volume market, we plan to adopt cobalt-free cathode material that replaces cobalt with manganese to reduce material cost and also adopt a dry type pole-plate technology, which would give us additional cost savings in the manufacturing process.

[Foreign Language] [Interpreted] Your second question was the cylindrical battery for EVs, the market outlook as well as an update on the share of EV batteries within our entire cylindrical battery business. Cylindrical batteries have various advantages such as standardized sizes. Also, therefore, it has relatively lower prices versus other form factors. And because of the small cell size, they're good for implementing various battery pack designs, including stacking. Due to these advantages, we're seeing an increasing demand for cylindricals from not only the usual start-ups, but also conventional OEMs. Our outlook is that the EV cylindrical battery market will grow from around 75 gigawatt hours this year to around 170 to 180 gigawatt hours in 2026, which will be around 2% CAGR growth rate. Our EV cylindrical battery sales is also -- has also increased significantly year-over-year, especially around the 21700 size, which now takes up -- and our cylindrical batteries for EVs currently takes up around 10% of our total cylindrical batteries. And next year, we expect the share to increase to above 20% with increased supply to existing customer projects and also the addition of new projects. We're currently also developing a variety of different cylindrical sizes other than the 21700 to capture the rapidly growing EV cylindrical battery market.

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

[Foreign Language] [Interpreted] I have 2 questions about the cylindrical batteries. Recently, the U.S. housing outlook is soft, and there are concerns that this may be a negative factor on power tool demand. Can the company share its outlook on the cylindrical batteries for power tools and also the company's sales plans regarding that application? Second question is about m-mobility, such as e-bikes or e-scooters. That is also a very rapidly growing market. Can you share with us the company's market outlook for m-mobility and your sales strategy?

[Foreign Language] [Interpreted] So starting with your first question about the power tool outlook. The U.S. housing industry, as you mentioned, has been slowing down slightly versus the start of the year. But on the other hand, the sales of power tool sets continue to remain solid in terms of growth. And our power to battery sales this year overall is expected to grow by more than 20% versus last year. In terms of market outlook, as batteries with greater power capacity become available, the LIB power tool market is likely to rapidly expand from the current small tool segment to the large and professional tool -- power tools. And this is expected to drive growth at around 10% average until 2025. Our SDI, as you know, has always been strong in the small-sized power tool market with our high power output technology. And we plan to maintain that leadership by launching new high-power products ahead of our peers.

[Foreign Language] [Interpreted] Regarding your second question about the m-mobility market outlook and our strategy. To encourage the use of eco-friendly mobility, many countries in Europe and the U.S. have been continuing to grant subsidies and tax benefits for e-bikes. And also, consumers have had a lot of opportunity to experience the convenience of m-mobility during the pandemic. And this has been driving the m-mobility battery market also to grow. It is expected to grow by more than 10% on average from around 1.2 billion sales this year to around 2.4 billion sales by year 2026. A noticeable trend in the m-mobility battery market is that, as in the case for EVs, we're also seeing demand for high-capacity batteries rapidly increasing in order to increase the range of the mobility device itself. And so we are planning to launch our high-capacity product for m-mobility applications in time to expand our market share in the rapidly growing high capacity segment.

[Foreign Language] The following question will be presented by Chuljoong Kim from Mirae Asset Securities.

[Foreign Language] [Interpreted] I have 2 questions regarding the electronic materials business. First is regarding the display materials, your major customer in Korea appears to be working on or starting the QD display line. Can you share with us some of the new products or new materials that you can supply to QD display or specific items that you expect to see a lot of growth in on the mid- to long-term perspective? Second question is about the semiconductor material. There is a lot of boundary investments, CapEx plans being announced. Are there any specific material in your R&D process that you think would be supplied to foundries and record high revenue growth in the future?

[Foreign Language] [Interpreted] To answer your first question, our major customer, Samsung Display, has announced plans of producing QD display. And if you look at some of our existing OLED material, we expect that the p-dopant could be used also for the production of QD displays. And there's other some new material opportunities, including QD ink. Currently, we're preparing these relevant materials in line with the customers' mass production schedule, and we expect to see an increase in the share of premium applications within our overall material revenue.

[Foreign Language] [Interpreted] Regarding foundry-related semiconductor material, among our existing portfolio, the SOH, which is a patterning material, is being supplied also to the foundry process, as well as the DRAM side. And we're also developing various new materials, including photo resist used for the EUV process and plan to start supply of these new materials one by one starting from next year. The major customer has announced plans of expanding its foundry capacity. And as the number of wafer layers that use semiconductor material increases with semiconductor process migration, the usage of our material is expected to continue to increase. We will focus on developing and starting mass production of the relevant materials on time to capture the customers' demand.

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

[Foreign Language] [Interpreted] I have 2 questions. First is about the coin cell demand, which has been increasing quite rapidly with the increase of these wireless earphones. Can you give us your market outlook for coin cells and also your sales strategy? Second question is about the polarizer film. With the panel prices continuing to decline, what is your outlook in terms of the polarizer film profitability and ASP?

[Foreign Language] [Interpreted] To answer your first question about the coin cell, with major smartphone OEMs launching true wireless earphones with various designs and performance, this year's true wireless earphone market is expected to grow by more than 70% year-over-year and then grow another 30% plus next year. Accordingly, the coin cell battery market also grew from around 220 million sales last year to around 440 million this year and is expected to jump to around 600 million sales or more next year. This year, we also started supply of coin cell batteries to the new model of a key customer, which has driven rapid increase of our coin cell sales. And from next year, our focus will be on delivering -- developing a more diversified customer base to contribute to the revenue and profitability of the overall small-sized battery business.

[Foreign Language] [Interpreted] To answer your questions about our polarizer film business. While TV demand was strong when people were spending more time at home during the pandemic, recently, outdoor activity time has started to increase and people are expecting TV demand to decrease. And because of this outlook, the panel companies have also started to cut their production and panel prices have also been falling. Due to these changes, our set fourth quarter polarizer film revenue is expected to slightly decrease. However, we plan to minimize the revenue decrease by focusing on increasing the supply for the large-sized LCD TVs, which is the TV segment with relatively more resilient demand. Next year's TV market is also expected to record low levels of growth, which will be a downward pressure factor on polarizer film ASP. But we will focus on increasing sales, especially around the large area films and the high-functional films with improved viewing angle and brightness in order to minimize ASP decline and to maintain margins.

[Foreign Language] [Interpreted] And 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.]