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

Good afternoon. Thank you very much for joining today's earnings conference call. We will now start the 2021 fourth quarter earnings conference call of Samsung SDI. The conference call will start with a presentation by the company followed by a Q&A session with the analysts. [Operator Instructions] We will start to see the company's presentation.

Good afternoon. I am Yoontae Kim, Vice President of the Business Management Office of 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 Strategic Marketing team, Michael Son; Head of the Small Battery Strategic Marketing team, Jaeyoung Lee; and Head of the Electronic Material Strategic Marketing team, Chijin Kim, are with us this afternoon. We will now start the 2021st fourth quarter earnings call. First, we will announce our fourth quarter results. The fourth quarter revenue record is KRW 3,816 billion, up 11% quarter-on-quarter and 17% year-on-year. By business division, energy business revenue recorded KRW 3,107 billion, up 13% quarter-on-quarter, with sales increased for large-sized batteries. Electronic materials business revenue recorded KRW 709 billion. Our fourth quarter operating profit declined quarter-on-quarter, recording KRW 266 billion, but slightly increased year-on-year. Both revenue and operating profit recorded lower than expected due to special bonus for our employees and continued chip shortage and logistics issues from the previous quarter. We saw pretax profit of KRW 511 billion and net profit of KRW 392 billion. For the annual results of 2021, all businesses, including battery and electrical materials achieved an all-time high record high with a positive turnaround made by the large-sized battery division recording KRW 13,553 billion of revenue and KRW 1,068 billion of operating profit. Next, I will move on to our financial status. Assets as of the end of 2021 stood at KRW 25,833 billion. Current assets increased by KRW 532 billion quarter-on-quarter with increased accounts receivable and non current assets increased by KRW 780 billion with increased tangible assets driven by CapEx. Liabilities recorded KRW 10,637 billion, up KRW 990 billion quarter-on-quarter due to increased CapEx and accounts payable. Shareholders' equity recorded KRW 15,197 billion, up KRW 322 billion. Next is the fourth quarter results and 2022 outlook.

Good afternoon. This is Michael Son, head of the automotive and ESS battery strategic marketing team. In the fourth quarter, large-sized battery maintained profitability as revenue increased significantly compared to the previous year and quarter. EV battery supply decreased for pre-existing projects due to the chip shortage issue, but revenue increased as supply for new models, mostly for Gen 5, went up. ESS revenue went up for all applications and saw improved product mix. Thanks to increased sales of RES and UPS, thus improving profitability. In the first quarter of 2022, we expect that both sales and profitability will be similar to the previous quarter, but will be significantly increased compared to the first quarter of last year. EV battery sales will rise both quarter-on-quarter and year-on-year with increased supply to major customers' new models. ESS sales are expected to go down quarter-on-quarter due to seasonality, but we will witness considerable growth year-on-year with better profitability as product mix is improved. The EV battery market will grow by 40% year-on-year, reaching about $80 billion in 2022. Governments will continue to implement environmental policies such as stricter fuel efficiency regulation and EV subsidy, and automakers will accelerate their electrification strategies to take the lead in the EV market. Consumers are expected to prefer EVs, thanks to longer mileage, faster charging speed and also charging infrastructure that are becoming more accessible. So we expect such to drive the expansion of the EV market and thus a rapid growth of the EV battery market. We will achieve higher growth than the market growth and improve profitability by increasing sales of premium products with high energy density this year, and we will try to win more profitable EV projects. In 2022, the ESS market growth is expected to be $7.5 billion, up 30% year-on-year. Utility market will grow further as major countries such as the U.S., Europe and China are implementing stricter renewable energy policies and the demand for UPS and RES will increase to respond to natural disasters and unstable electric power supply. We will respond to market demand increase and expand the sales of UPS and RES in order to improve revenue and profitability. Thank you.

Good afternoon. This is Jaeyoung Lee, head of the small batteries strategic marketing team. Small-sized battery division's revenue in the fourth quarter increased both year-on-year and quarter-on-quarter. Cylindrical battery revenue went up mostly for EVs and power tools, and pouch battery revenue decreased for flagship smartphones due to seasonality. The sales are expected to go up in the first quarter of 2022 quarter-on-quarter and year-on-year with improved profitability. Cylindrical battery sales for power tools are to go down due to seasonality, but will go up for EVs and micromobility. Pouch battery sales are to go up with the launch of new flagship smartphones. In 2022, the small-sized battery market will be $41 billion, up 12% year-on-year. In the non-IT market, EV battery will achieve high growth as more automakers will use cylindrical batteries. Power tool battery will also achieve growth as it expands its demand from DIY to construction usage with high power and also because of large outdoor power equipment such as lawnmowers, chainsaws are becoming cordless. We will strengthen our market leadership by launching new high-capacity, high-power products for each market. In the IT market, we expect that the demand for pouch batteries and coin cells will grow as foldable smartphones and wearable device markets, including TWS earphones and smartwatches grow. So we will launch new products in a timely manner to be the first supplier of our major customers' projects. Thank you.

Good afternoon. This is Chijin Kim, head of the electronic materials strategic marketing team. Electronic materials business revenue in the fourth quarter went up quarter-on-quarter and year-on-year, mostly from high-value display materials, maintaining high profitability. For polarizer, we expected our revenue to go down due to weak demand, but revenue slightly increased and profitability maintained with sales increase of large TVs. OLED materials revenue went up, thanks to increased demand for both smartphones and TVs. Semiconductor materials revenue slightly went down due to customers' inventory adjustment at the end of the year. In the first quarter of 2022, the sales are expected to be similar to the last quarter despite seasonality, but to go up year-on-year with improved profitability. Display materials such as polarizer and OLED materials sales will be similar to the last quarter due to seasonality and semiconductor materials sales will be similar to the previous quarter and will be increased than the first quarter of the last year. Next is the electronic materials outlook for 2022. The demand for high-value materials will grow in the electronic materials market. In the display materials market, the demand for OLED materials will rise with higher penetration rate of OLED panels for smartphones, the launch of OLED TVs and laptops. The demand for polarizer by panel size will continue to rise with the demand increase in large LCD TVs that are 65 inches or larger. We plan to maintain our competitiveness by strengthening technological competitiveness of high-value products such as long-lifetime OLED materials and large high-function polarizers. For semiconductor materials, as customers' wafer input goes up and patterns get narrow, fabrication material consumption will grow. We will lead the future market by maximizing our product quality and developing new models in a timely manner. This will be all for electronic materials business.

Before we begin the Q&A session, CFO, Jong Sung Kim, will explain the dividend plan for the year 2021 and the shareholder return policy for the year 2022 to 2024, which has been decided at the Board of Directors today.

Good afternoon. I am CFO, Jong Sung Kim of Samsung SDI. I'd like to express my gratitude to our shareholders for their continued support toward Samsung SDI and would also like to wish you a new year with good health and over happiness. The Board of Directors and executives have thought about how to balance between company's investments for long-term growth and shareholder returns. So today, I would like to explain the dividend plan for the year 2021 and our shareholder return policy for 3 years from 2022 to 2024 in order to help you better predict shareholder return in the future. First, dividends in 2021 were decided to be KRW 1,000 for common shares, just is the same as the previous year. Last year, though we achieved a considerable operating profit despite some challenges, we saw a decrease in free cash flow year-on-year due to increase in CapEx and working capital and large-scale CapEx planned in 2022. Secondly, for the next 3 years, from 2022 to 2024, we are planning to implement a new shareholder return policy to help you better predict shareholder return. In detail, regular dividends are to be set at KRW 1,000 with additional payout of 5% to 10% of free cash flow in order to allow increasing dividend as free cash flow improves. With this policy, we can maintain the minimum shareholder return, even if we experience poor cash flow due to large investments, and we can also increase dividends in the future with improved cash flow. Today's presentation about dividend for 2021 and shareholder return policy may fall short of your expectations, but the Board of Directors and executives believe the continuous growth of the company is the most effective and surest way to enhance shareholder value. To do so, we will increase each and every business division's competitiveness and thoroughly prepare for the future. In addition, we will do our utmost effort to improve both companies and shareholders' value by ensuring compliance and proactively carrying our sustainable management, including ESG. Though unprecedented situation of COVID-19 still prevails, we hope you and your family stay safe. Thank you.

[Foreign Language] [Operator Instructions] The first question will be provided by Ji-San Kim from Kiwoom Securities.

[Interpreted] Yes. I have 2 questions. The first question is, given that this is the first earnings conference call for year 2022, can you give us briefly your outlook for your main businesses? Second question is about the EV semiconductor issue. You mentioned during your presentation that the semiconductor shortage for the vehicles continued through the fourth quarter of this year. What is your outlook on the semiconductor supply situation for the automotive industry? And would that have any impact on your revenue?

[Interpreted] Yes. This is Jong Sung Kim, the CFO. Before answering your question about the business outlook for this year, looking back last year in 2021, despite various issues, including COVID-19, the logistics shortage and component shortage, we were able to deliver the best -- the highest performance results in history, especially the mid- to large-sized battery business was able to pass the breakeven point on a full year basis for the first time. Also our small-sized battery and electronics materials businesses also delivered results that were beyond our original business plan. So despite a very challenging business environment, meaningful was that we were able to grow evenly across all of our business lines and also improved our profitability. This year, we will continue to execute our strategy and deliver improvements and growth in both size as well as profitability. Now to look at the business outlook that we have for our major businesses. First, for the EV battery business, this year, we will continue to scale up the supply of our high value-add Gen5 battery, which will drive further improvements in both revenue and profitability. Also, we will continue to enhance our manufacturing competitiveness with top priority placed on safety. Also, while doing this, we will continue to make the investments and the development effort to secure future competitiveness, including the development of our next-generation Gen6 platform, the expansion of our Hungary #2 plant and also securing a new base for us in the U.S. For the ESS business, we plan to further improve our profitability by expanding the sales of UPS as well as residential ESS systems that maximizes the advantage of our high-energy density solutions. Also, we are preparing a cost competitive ESS product line that can actually compete against the lower priced cells. For our small battery business, the key items on our business plan this year is, number one, to maintain the profitability of our power tool batteries to drive revenue growth around the EV cylindrical batteries and also to execute the expansion of our overseas production lines to meet the increasing demand of cylindrical batteries. Also, we will be focusing on quickly stabilizing the new production process of our pouch battery to continue to achieve both growth in revenue and profitability this year. For the electronics materials business for the OLED as well as semiconductor materials, we will focus on further expanding the technology gap by strengthening our performance and quality. For the polarizer film business, we will focus on increasing the share of high-end products in order to drive continued trend of growth of revenue and profitability this year as well. Also, we will continue to prepare the supply of new materials for the new emerging applications such as QD displays, foldable displays and EUV materials. This year, uncertainties continue to remain, including the ongoing COVID-19 situation and supply chain-related issues. But I think, actually, for companies that are competitive, such a situation could offer even more opportunities. This year, we will continue to remain focused on achieving qualitative growth based on quality and also a differentiating technology edge, which are the fundamentals to remaining competitive. At the same time, we will continue to meet the efforts and investments necessary to ensure future growth. To answer your second question about the vehicle semiconductor supply shortage and a possible impact to our revenue. As we mentioned during fourth quarter of last year, there was a continued shortage of semiconductor supply and this did disrupt the production of automobiles by the OEM customers. On our level, because we started the supply of Gen5 products, our sales actually grew on a quarter-on-quarter basis. However, our existing projects did come in lower than originally planned. And this was due to the impact of the chip supply issue. Looking forward to this year, in 2022, according to third-party market research, overall, there is expected continued shortage of chips during the first half of this year, but many people are expecting the semiconductor supply issue to gradually ease from the second half as chip producers increase their production volume. Also last year, the semiconductor issue was much more serious than most people were expecting, and this caused issues for the EV-related companies. But now everyone in the industry is fully aware of the situation and have already built this into this year's supply and demand plans. And so this year's sales plan that have been established by the OEMs is not going to show the high amount of volatility that we saw last year. Also, even though we're very early in the year, some of our customers are actually ordering more than the original plan. These are good signs that EV sales will continue to grow and our EV battery revenue target is to generate higher revenue growth that will outpace last year's growth. [Foreign Language].

[Interpreted] The following question will be presented by Hyun-Soo Kim from Hana Financial Investment.

[Interpreted] I have 2 questions. The first question is about the EV battery business. As we all know, the cost of raw materials such as lithium is continuing to increase. Is this having an impact on the profitability of your EV battery business? And what is your outlook? Second question is about the polarizer film business. The LCD TV, the downstream market growth rate itself is slowing down and many of the Korean panel producers are announcing that they will scale down their production. Despite this, do you expect you'll be able to defend the profitability mark and the revenue of your polarizer film business this year?

[Interpreted] So I think your first question about the raw material increases, especially with the increased demand for EV batteries, raw material prices are going up. Unfortunately, most of the projects, the raw material prices of the key metal materials such as cobalt, nickel, lithium, copper and aluminum are to be passed through to the customers. So the impact from these cost increases, price increases are limited on our profitability. That said, there are still some materials or components that are not passed through to the customer and the increase of these other materials is a risk that we are exposed to. We are continuing that risk by various ways, including signing long-term contracts with the vendors or actually diversifying our sources so that we're able to find the raw materials at the best price. Well, to answer your question about the polarizer film business. As you know, we've already been diversifying our customer base to overseas panel customers for some time. And so currently, the Korean panel companies account for a very small portion of our polarizer film business. And so downsizing of their production scale will have a negligible impact on the revenue as well as profitability of our polarizer film business. Looking towards the market outlook, as you mentioned, even though the entire LCD TV market growth is expected to be stagnant within the LCD TV segment, the large TV segment is expected to continue to grow, given the fact that consumers who are consuming various types of content, including movies and games, do prefer larger and higher picture quality TVs. Given that market outlook, we plan to continue to increase the share of the large-sized and high-performance polarizer film within our overall sales. We are aiming to maintain our revenue similar to last year and also defend our profitability. [Foreign Language]

[Interpreted] The following question will be presented by Yoonsik Shin from CLSA Securities.

[Interpreted] I have 2 questions. First question is about the joint venture plans with Stellantis. The company last year announced plans of establishing a joint venture with Stellantis and establishing an operation in the U.S. Can you give us an update on how that joint venture is moving forward? Second question is about your Gen5 battery. Even though overall EV batteries had a difficult time fourth quarter due to the chip shortage, your Gen5 battery successfully was installed in the new vehicles. The new vehicle running on Gen5, we see very positive responses from the market overall, so we're expecting your Gen5 supply volume to increase this year. Can you give us some more color in terms of the revenue and profitability you're expecting from the Gen5?

[Interpreted] To answer your first question, the joint venture talks with Stellantis is going on, is continuing. The basic understanding is that mass production to start before the USMCA takes effect in 2025. We are not able to disclose the details, but I can say that the preparation for signing the main agreement is currently ongoing smoothly. We will definitely share more details of this once the contract is signed, and we're able to disclose details. In addition to the talks with Stellantis, we are talking with other customers about cooperation even though we are not able to share details. To answer your second question about the Gen5 battery, Gen5 started being supplied from the late part of third quarter last year. The customer's vehicle with Gen5 was launched into the market, received very positive responses, and we are seeing an increase of Gen5 demand. Also Gen5 is scheduled to be supplied to new projects from the second half of this year. So overall, this year, we expect Gen5 battery sales to significantly increase year-on-year and to see the Gen5 battery account for 20% or more of our overall EV battery business. Even though we cannot disclose profitability of a specific project, as you know, the Gen5 has advantages in terms of both material and production process, and we are expecting Gen5 to significantly contribute to the profitability of our EV battery business this year. [Foreign Language]

[Interpreted] The following question will be presented by Soonhak Lee from Hanwha Investment & Securities.

[Interpreted] I have 2 questions. First of all is about LFP batteries. Just as the EV battery market is adopting LFP, the share of LFP batteries within the ESS market is also increasing faster than people expected. And according to some news even your competitor is considering the adoption of LFP chemistry. In that context, can you share with us SDI strategy regarding LFP chemistry? Second question is about Rivian, which is known to have some problems in producing its EVs. We would assume that, that would have some implications for SDI to supply. So can you share with us your current status of supply of batteries? And also, overall, in that context, what is your outlook for cylindrical EV battery sales this year?

[Interpreted] Regarding your first question about our strategies of LFP batteries for ESS applications, as you know, the LFP battery does have a cost advantage, and that seems to be the reason it's increasing its share even in the ESS market. But still, LFP batteries have a disvantage of having low energy density. In terms of our ESS batteries, we use the same high nickel cathode material that we use for EVs in our ESS. This is how we improve our energy density and also gain cost advantages. On top of that, we are planning to provide ESS batteries that are cost competitive even with LFP by using cobalt-free or cobalt-less battery technology. Now having said that, because the battery market and technology is continuously evolving in various directions, we will continue to carefully monitor technology changes that happen in the LFP cathode material space. Your second question was about Rivian and our cylindrical EV batteries. We are not able to disclose details about a customer situation. But at least what we're seeing from our end is that we started supply of the cylindrical batteries from second quarter last year. Our sales have continued to increase quarter-over-quarter. And this year, the customer's order size is continuing to increase. In addition to Rivian, this year, we're planning to supply cylindrical batteries to other OEMs. And so we're expecting our EV cylindrical battery sales to continue to grow this year and account for 20% or more of our overall cylindrical battery revenue. [Foreign Language]

[Interpreted] The last question will be presented by Jay Hyun Kwon from JPMorgan.

[Interpreted] My first question is about the small cylindrical batteries. Power tool applications was a major source of growth last year, do you think you'll be able to maintain the same level of revenue as well as profitability for the small-sized cylindrical batteries this year? Second question is about the OLED materials. When we look at the downstream, there is an increased penetration of foldables with OLED displays -- foldable handsets with OLED displays and your related company is planning to launch QD displays this year. This is all very favorable for your OLED materials. How much growth are you expecting this year?

[Interpreted] For the power tool related cylindrical battery business, last year, power tool markets, demand growth was very strong as more people spent more time at home this year, the DIY-related power tool demand we level off a bit. But on the other hand, batteries have been developed to even produce higher power output. And this has enabled the adoption of these batteries and other applications such as professional-grade power tools or landscaping and other outdoor tools and machines. And so we expect there to be an increase of demand for high output batteries in these applications. On the other hand, if you look at the supply side, because major battery companies are focused on increasing their capacity around the EV batteries, which have a mid-power output profile, there's actually a tight supply in the high-power output batteries that are necessary for power tools. Having -- now seeing that we will lead -- continue to lead the market by launching a high-power output batteries for power tool applications ahead of our competition and continue to maintain both revenue and profitability. [Interpreted] About our OLED materials business, looking on the demand side, we're expecting growth in demand, given the fact that there will be greater penetration of foldable phones. Also, Chinese smartphone OEMs are expected to adopt OLED panels on a larger array, a larger -- a wider array of their handsets. Also, in addition to smartphones, there will be other applications that will be adopting OLED, such as an OLED TV, tablets or laptops. And so overall, we expect there to be an increase of OLED panel adoption, which will drive up the usage of the OLED materials that we supply, including the G-host or TFE. In addition to this, we have started the supply of 2D materials since late last year. And with our customer planning mass production this year, we're expecting our 2D related material revenue to significantly increase this year. Based on all of that, we are expecting our OLED material sales to increase by around close to 20% year-over-year. And that completes our 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.]