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

[Interpreted] [Operator Instructions] Now we shall commence the presentation, good morning. I am Yoontae Kim, Vice President of the Business Management Office at Samsung SDI. First of all, I'd like to introduce our management team attending today's conference call. Today our CFO, Jongsung Kim; Head of the Automotive and ESS Battery Strategic Marketing team, Michael Son; Head of the Small Batteries Strategic Marketing team, Jaeyoung Lee; and Head of Electronic Materials Strategic Marketing, Chijin Kim are with us this morning. We will now start the 2022 first quarter earnings call. First, we will announce the first quarter results. In the first quarter, the business environment was tough due to many incidents, including the Russia-Ukraine war, price hike of raw materials and production cost of some automakers. However, the revenue and operating profit went up both year-on-year and quarter-on-quarter. The first quarter's revenue recorded the highest sales on a quarterly basis. Revenue was KRW 4,049.4 billion, up 6% quarter-on-quarter and 37% year-on-year. Operating profit recorded KRW 322.3 billion, up 20% quarter-on-quarter and 142% year-on-year and operating profit margin was 8%. By business division, Energy business revenue recorded KRW 3,319 billion, up 7% quarter-on-quarter and 39% year-on-year. Operating profit recorded KRW 165 billion, up 37% quarter-on-quarter and 252% year-on-year. Electronic Material business revenue recorded KRW 730.4 billion, up 3% quarter-on-quarter and 27% year-on-year. Operating profit recorded KRW 157.3 billion, up 8% quarter-on-quarter and 82% year-on-year. Nonoperating income, equity method applied recorded KRW 131.6 billion. We saw pre-tax profit of KRW 453.9 billion and net profit of KRW 362.7 billion. Assets as of the end of the fourth quarter at KRW 27,005.0 billion, increased by KRW 1,171.8 billion quarter-on-quarter due to the increase of tangible assets driven by CapEx and increase accounts receivable. Liabilities recorded KRW 11 trillion, up KRW 700 billion quarter-on-quarter due to the increased accounts payable like, et cetera. Capital recorded KRW 15,660.3 billion, up KRW 463.6 billion quarter-on-quarter. Before we introduce business performance by each division, I'd like to briefly mention our company's sustainable management activities. Samsung SDI believes sustainable management is the key element for growth and significantly strengthening sustainable management activities. At the beginning of this year, Samsung SDI organized Sustainability Management Committee and Sustainability Management Executive office led by CFO. In the previous quarter, Samsung SDI set Vision strategy's key focus areas and mid- to long-term strategies of sustainability management. Samsung SDI organized environment management task force to choose and promote key matters related to environment management such as 100% transition to renewable energy, greenhouse gas reduction, conversion of all business cars to zero emission cars and expansion of recycling. We will continuously update you with our sustainable management activities in the following earnings calls. Next, is the first quarter business performance results and the second quarter outlook by its business division.

Good morning. I am Michael Son, Head of the Automotive and ESS Strategic Marketing team. Despite difficult business environment in the first quarter, large-sized batteries revenue increased quarter-on-quarter and year-on-year, and profitability also improved. EV battery sales increased mainly due to Gen.5 batteries, with minimal impact from raw materials price increase by pass-through contracts with the OEMs. ESS revenue decreased due to seasonality, but we increased the sales portion of high-value products such as residential and UPS. In the second quarter, we expect sales grow especially for EV batteries. EV battery sales are expected to grow with increased allocation of production for EV models. At the same time, we will continue to drive mid- to long-term growth with additional contracts for future generations such as Gen.6. Also, we will closely manage the possible risk of prolonged Russia-Ukraine war and supply chains to minimize the impact. In the second quarter, ESS sales, which was down due to seasonality, is expected to grow with increased supply for utility products in the U.S. This is the end of automotive and ESS division's presentation. Thank you.

Good morning. I am Jaeyoung Lee, head of the Small Batteries Strategic Marketing team. Let me start with the business performance of small-sized batteries division. Despite the slow season, but the revenue and operating profit increased quarter-on-quarter, year-on-year due to the increased sales for EV and smartphone cylindrical batteries revenue continued to increase and revenue power tools also increased against seasonality. Pouch battery sales also went up with the launch of flagship smartphones. As the sales increased, profitability improved significantly also. In the second quarter, continued expansion of sales expected, mainly due to those cylindrical battery sales. In addition to the steady demand increase for the existing power tools, adoption of high-power batteries and various applications such as sit on lawnmower demand for EV and micro-mobility are expected to drive the increase of cylindrical battery sales. Also, in order to meet the increasing demand for cylindrical batteries, additional, cylindrical production lines are installed in domestic and overseas sites. For pouch batteries, we're expecting supply for early volume of new foldable phones. This is the end of the small-sized battery division's presentation. Thank you.

Good morning. I am Chijin Kim, Head of the Electronic Material Strategic Marketing team. I will tell you about the business performance of Electronic Materials division. In the first quarter, Electronic Materials revenue recorded highest quarterly sales, mainly due to the increased sales of large-sized high-value polarizer. Polarizer decreased demand for LCD TVs but increased sales portion of premium products brought up both revenue and profitability. In the second quarter, we will promote increase in sales mainly from LED and semiconductor materials. Semiconductor revenue maintained quarter-on-quarter and OLED sales decreased due to seasonality. The sales of OLED is expected to grow by providing new platform to major customers and the sales of semiconductor is also expected to grow by expanding the market share. We will continue to maintain high profitability by selling high-value products like polarizer by improving new angles and low reflection properties. This is the end of the presentation. Thank you. Questions and answers will be provided in Korean and English interpretation will be provided consecutively. If you have questions, please follow the operator's guidance.

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

[Interpreted] Yes, congratulations on delivering very solid performance in the first quarter. Actually, I have 2 questions for you. First of all, regarding rising raw material prices, I do understand that you have pass-through clauses in most of your contracts for upstream metals and also battery components. But has the trend of rising prices affected your underlying profitability? And also, likewise, not only for EV batteries, but for small-sized batteries as well. And the second question has to do with your JV plan with Stellantis. There are lots of expectations on the market about the prospective JV. So if you could provide us with a status update, I would appreciate it. And do you have plans for additional JVs with other OEMs other than Stellantis?

[Interpreted] Yes. So regarding the first question, this is Jongsung Kim, the CFO. As you know, driven by rapid growth in the EV market as well as the Russia and Ukraine situation, we have been seeing a surge in the price of key upstream materials, including metals in particular, used in batteries. However, the impact of rising metal prices on our profitability has been limited as we apply a cost pass-through mechanism for most of our EV projects, which means that we're able to pass on an increase in the price of metals like lithium, nickel and cobalt onto our battery pricing. We also apply cost pass-through for major small battery projects as well for power tool or xEV applications. In the case of projects where there is a mismatch between our procurement and sales cycle, we have been working out improvements through discussions with our customers. For certain battery components such as some anode or electrolytes where pass-through terms do not apply, we have been consistently engaging our key partners to negotiate long-term offtake contracts or otherwise lower-cost sourcing in order to minimize negative pressure on our margins. Yes. And let me also take the second question regarding our JV with Stellantis. We are currently in the ramp-up phase of discussions with Stellantis on the final details such as location, expect to complete the contracting phase in the near future. In the meanwhile, we have also been preparing in advance so that we can set up the joint venture right away as soon as the contract is finalized. We're also in discussions with other OEMs in addition to Stellantis to explore different collaboration ideas which, of course, will then be subject to prudent review in the context of our mid- to long-term business strategy. We should be able to communicate the outcome to you at a later point once the discussions have become more concrete.

[Foreign Language] [Interpreted] The following question will be presented by Sang Ryul Kwon from DB Financial Investment.

[Interpreted] Yes. First of all, I would like to congratulate you on delivering very strong performance KRW 4 trillion in sales and KRW 300 billion in operating profit, congratulations. And also, I have 2 questions for you, one on mid-to-large size batteries and then second on small-sized batteries. Just now, we heard about your plans to do a JV with an OEM partner. In the U.S., though, there has been some talk about potentially setting up your own production base on a stand-alone basis without a JV partner. So can you give us a status update if that is, in fact, true? Apart from the JV with Stellantis, do you have plans to set up your own production base? And regarding the small-sized batteries, in the presentation, you did mention capacity expansion plans. And given the good performance of our business division recently, we also have a very positive view. So if you could outline your outlook regarding future demand for small-sized batteries, I would appreciate it.

[Interpreted] Yes. So regarding this question about media reports that we might be setting up our own production base in the U.S., let me cover that question as well. In terms of setting up base in the U.S. At the moment, we are focusing on our JV with Stellantis as our first priority with no concrete plans at the moment in terms of building a production site on our own on a stand-alone basis. We're right now in the process of putting together a mid- to long-term business strategy for the entire company and have been reviewing our global production base strategy, including the Americas as part of this process.

[Interpreted] Yes. I'm head of the small battery marketing team. Let me take that next question regarding our capacity expansion plans for the cylindrical type batteries. This year, we are seeing tight supply-and-demand dynamics in the cylindrical battery market driven by a sharp rise in EV demand as well as steady demand growth for power tool and M-Mobility applications. We expect the size of the overall cylindrical battery market to grow by more than 20% year-on-year to reach 10.9 billion cells. In order to respond to this expected increase in market demand, we are in the process of installing new production lines at our Cheonan site in Korea as well as our overseas operations in Malaysia. Once complete, this will boost our production capacity by more than 20% compared to last year. Also, to better respond to increasing demand in the mid- to longer term, we're in the process of setting up our #2 production plant in Malaysia. As we expect this demand growth to continue for cylindrical batteries going forward, we will continue to expand capacity to prepare ourselves to capture the rising demand. At the same time, we will work to quickly normalize the newly installed lines and also to boost productivity in order to maintain high levels of profitability.

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

[Interpreted] I would also like to ask two questions. Given the situation in Russia and the Ukraine, there has been an auto parts shortage. And many of the OEMs have actually had to shut down production as a consequence. So what kind of impact, if any, has that had on our business? And the auto chip shortage issue has actually continued from 2021. When do you think it may be likely to be resolved? And the second question has to do with the Gen.5 batteries. You started mass production in the second half of last year. So what is the current status in terms of sales trends for Gen.5? And then what about your next-generation Gen.6 products? If you could give me a status on current orders, also your best production plans, I would appreciate it.

[Interpreted] Yes. This is Michael Son, Head of the large-sized LIB marketing business. Let me take your next question. So you asked whether there was any impact on SDI from the shutdown of OEMs due to the shortfall in auto parts. And you asked about our outlook in terms of when we think the auto chip shortage issue will likely be resolved. So as you mentioned, certain OEM automakers operating in Europe suffered a part shortage as a consequence of the Russia-Ukraine situation, forcing some to shut down or cut back production starting in March this year. OEMs, however, remain strongly committed to their electrification strategies with EV models less impacted in relative terms versus internal combustion engine or ICE models We've been increasing our volume mainly of Gen.5 batteries for EV applications as we seek to deliver strong quarter-on-quarter growth this year as well. Regarding the auto chip shortage issue, we believe that the increase in production capacity among chip makers will start to kick in and produce visible results starting in the second half of this year. Notably, Chinese OEMs have been aggressively expanding their sourcing from local chip makers. So overall, we expect the global supply issue to gradually improve. So on balance, although the situation may be challenging for some time due to the component and supply shortfall, we will work to minimize our risk exposure through close discussions with our customers and preemptive strengthening of our supply chain. Yes. And then regarding your next question about the effect of Gen.5 battery supply on our performance. And also regarding next-generation, Gen.6, you asked about current update on order wins and also mass production plans. So as you mentioned, OEMs have started marketing their new EV model lineups using our Gen.5 batteries, which has been a big boost to our business performance. We expect Gen.5 battery sales to increase even further from here since we will start initiating supply to many new projects lined up for the second half of the year. The next-generation Gen.6 battery cell that we are currently working on has more than 91% cathode nickel content, and will be designed to achieve 10% greater energy density over Gen.5 while delivering faster charging capabilities by adopting improved processes and improved anode materials. We are in talks with several OEMs on the start of mass production for some of their high-performance next-gen EV projects with mass production likely to start around 2024.

[Foreign Language] [Interpreted] The following question will be presented by Sang Kim from Credit Suisse.

[Interpreted] Yes. I will also ask 2 questions. First, recently, we've been seeing a slowdown in growth in the LCD TV market and yet, your polarizer business continues to deliver very strong results quarter-on-quarter. So what is the company's view in terms of the drivers of that kind of solid performance? And do you think that you will be able to maintain that kind of competitiveness going forward on a sustainable basis? And then second question, with the increase spread of COVID-19 in China, several major cities have been subject to lockdown, including Shanghai, fueling great concerns about the impact. And so has there been any impact on SDI's production or part supply due to the lockdown in Shanghai?

[Interpreted] Yes. This is Chijin Kim, Head of the Electronic Materials Strategy Marketing team. Let me take your next question regarding the drivers of strong performance for our Polarizer business, and whether we believe that we'll be able to maintain this kind of competitive edge. Although the overall LCD TV market has been largely flat, demand for large screen TVs has nonetheless been on a steady rise. According to projections by a market research organization, the 65-inch plus large screen TV segment, which is our main focus, is expected to continue growing at more than 20% this year. The bigger the TV screen sets get, the more important polarizer technology becomes. Our super wide with stretching technology and also proprietary PET film together with the highest productivity level in the world, represent a major source of product differentiation for our polarizer products. We're also highly competitive in the premium TV segment, in particular, with a lineup of high-value product offerings, providing improved viewing angles and better reflection properties. So based on this underlying product competitiveness, we will continue to expand the share of high-value products as a percentage of our total revenue mix, mainly in the premium TV market to continue solid performance.

[Interpreted] Yes, this is Yoontae Kim, VP of the Business Management Office. Let me take your question on any impact from the Shanghai lockdown on our Chinese operations. So to date, we have not had any direct impact on our production sites due to the lockdown in Shanghai. But we have had some disruption in parts supply from certain partner vendors. So in response, we're putting together a set of countermeasures, mostly looking to source from areas outside of Shanghai to minimize impact on our production. Our production sites in China are in Tianjin, Xi'an and Wuxi, and those cities have not yet seen a big pickup in COVID-19 cases, but we are preparing ourselves just in case against possible lockdown following another potential wave of infections. We have been's securing safety stock by sites and preparing designated accommodations for employees and executives so that they can continue to work stably even in the event of a potential lockdown.

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

[Interpreted] Yes. The first question has to do with your plans to develop cobalt-free battery. Last year, I think you mentioned those plans to shift from the premium market more towards the volume market. So can you provide us with the progress update on that? And how do you think that technology compares relative to LFP battery chemistries? And then the next question is there has been some media report about you're starting to build up a pilot line for solid-state battery development. So if you could provide us with a progress update there and also compare yourselves versus other solid-state battery developers. What do you think would be your unique competitive advantage?

[Interpreted] Yes. This is Michael Son again. Let me take that question. You asked about a progress update on our cobalt-free battery and how it compares in terms of competitiveness versus LFP. So recently, LFP batteries have been increasing market share in the short-range entry market, mainly thanks to the low cost structure. However, we believe that demand for LFPs will be constrained in the volume market due to low energy density. We intend to focus on cobalt-free NMx battery cells instead of the existing nickel-rich chemistry, by eliminating cobalt, which is very costly and increasing the manganese content. We expect to benefit from significant cost savings, while achieving driving distance that is comparable with premium models currently in mass production. We are working with customers to book new projects and have received positive feedback so far on our NMx as a viable cost-competitive alternative to LFP, which is not viable in the higher spec or higher tier markets due to limited performance. Going forward, we will leverage our nickel-rich solution-based mass production capabilities that have been built up over many years to develop and launch products that satisfy the performance and price requirements of our customers so that we can grow and scale this market. And then the next question you asked about the current status of our solid-state battery development work and how it stacks up versus our peers. So we have been -- we have actually developed a proprietary solid sulfide-based electrolyte formulation as we are working to develop a solid-state battery with an anode-free structure at its core. So this means that we would replace the anode in an existing lithium-ion battery with lithium metal instead. The pilot line that we started constructing in the first quarter will be ready to start up production in the first half of next year. And once operational, we will focus on validating the technology while securing technology to produce at mass scale. And we want to speed things up so that we can push up the mass production time line earlier than market expectations. So solid-state batteries are still very much in the early R&D phase among all battery makers. So it is hard to say at this point which is necessarily better or worse. But the design that we are seeking to apply is pure all solid, not semi solid-state battery as we seek to maximize energy density while achieving the strong stability of solid-state batteries. In order to achieve our goal of developing our solid-state battery technology, we have been working steadily to increase our pool of outstanding tech professionals, also working together with outside organizations such as the Samsung Advanced Institute of Technology and other overseas research institutions to overcome any technological limitations together.

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

[Interpreted] Yes. First, I would like to congratulate you on your very strong results in the first quarter. I have one question each. First, regarding OLED, electronic materials -- excuse me, and then also ESS as well. First, there is increasing OLED panel adoption for smartphones. So what is your outlook in terms of OLED material sales for this year? And second, I think previously, you had mentioned that your UPS or residential ESS solutions have better margins versus ESS for utility purpose. So what is the reason for that better margin profile? I'd like to know. And if you could highlight some of SDI's unique strengths in both the UPS and residential ESS market, I would appreciate it.

[Interpreted] Yes. This is Chijin Kim from the Electronic Materials Strategic Marketing team. So as smartphones become more sophisticated with higher specifications, OLED panels are increasingly being applied with Chinese panel makers who are our customers also ramping up production of OLED panels. That being the case, we expect sales of our GhosT, TFE and other OLED materials to also grow in line with these trends. Also, as more foldable smartphones are launched, this will increase demand for foldable materials from SDI. And so we're preparing to supply new materials for application in our customers' next-generation models. The OLED TV market is also seeing continued growth, and we expect an increase in sales of our p-dopant products and also QD display materials as well. Driven by the growth in the smartphone and OLED TV market, we expect OLED material sales to increase by more than 20% versus last year.

[Interpreted] Yes. This is Michael Son, again, from the large-sized battery division. You asked why UPS and residential, ESS have better margin profile versus utility ESS. And also what are our strengths in those particular markets are. Well, because UPS and residential ESS solutions are installed inside buildings, they are subject to more spatial limitations compared to ESS for utility purpose and must have higher energy density. So as performance requirements for higher output and power become increasingly strong, safety has become a key priority and concern. And because of UPS and residential ESS must comply with more rigorous requirements for energy density and safety, they're considered higher-value products compared to ESS for utility applications. So if you look at the different products, first, UPS solutions, they are increasingly becoming smaller in scale, which is why higher energy density and high power discharge functions in the case of disruption of power have become key points of differentiation. Also, residential ESS used to mostly be used to store power for self-consumption in the past but now the range of application has become more diverse with ESS being used for trading purpose or to charge electric vehicles, for instance. This increase in use cases has led to increased demand for ESS offerings with greater power capacity and higher energy density. We are able to offer differentiated product functionality and safety by leveraging our existing key strengths and the power of our technology, such as the high-density, high-power properties of our 3 components, cell chemistry, the solid safety profile of our prismatic battery technology, while also offering a specialized fire suppression system inside the battery module. Based on these key strengths, we have been increasing our market share in the UPS and residential ESS markets, and we'll continue to focus on upgrading the competitiveness of our products further going forward.

[Interpreted] Yes, with that, we will conclude the first quarter 2022 conference call for Samsung SDI. If you have further inquiries, please contact us at the IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]