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

[Interpreted] Good morning. I'm Yoontae Kim, Vice President of the Business Management Office of Samsung SDI. First, I'd like to introduce our management team attending today's conference call: Head of the Business Management Office, Jong Sung Kim; Head of the Automotive and ESS Battery Strategic Marketing Team, Michael Son; Head of the Small Battery Strategic Marketing Team, Jae-yong Lee; and Head of Electronic Materials Strategic Marketing team, [ Jong Ho Hyun ], are with us this morning. We will now begin the earnings call of the third quarter 2022. Let us start with the third quarter results. In the third quarter, despite global economic slowdown and tough business environment, both revenue and operating profit went up Q-o-Q sharply, recording the highest quarterly result. The third quarter revenue was KRW 5.368 trillion, up by 13% Q-o-Q and 56% Y-o-Y, which marked again as new record-high quarterly sales. Operating profit also hit a new record-high number of KRW 565.9 billion, up 32% Q-o-Q and 52% Y-o-Y. On our business division, the energy business revenue recorded KRW 4.834 trillion, up 19% Q-o-Q and 76% Y-o-Y. In particular, the [ AEV ] division achieved more than KRW 1 trillion in monthly revenue, for the first time, in September. Meanwhile, the operating profit recorded KRW 484.8 billion, up 98% (sic) [ up 98% Q-o-Q ] and 140% Y-o-Y. As the small battery division remains highly profitable and the [ AEV ] division's profit improved sharply, the profit rate of the overall energy business recorded a double-digit number. Notably, the revenue from EV batteries, including both prismatics and cylindricals, is on the rise on a quarterly basis. And in this quarter, such revenue accounted for more than 50% of the total. Further, backed by stable demand, the energy business is likely to have a positive impact on SDI's mid- and long-term growth prospects. Electronic materials division's revenue stood at KRW 534 billion, down 20% Q-o-Q and 20% -- 24% Y-o-Y due to weak end product demand. Operating profit stood at KRW 81.1 million (sic) [ KRW 81.1 billion ], down 56% Q-o-Q and 53% Y-o-Y. Pretax profit, including equity-method income of KRW 300.5 billion, recorded KRW 866.4 billion. And net profit stood at KRW 638.3 billion. In line with increased tangible assets driven by CapEx and accounts receivable, assets recorded KRW 30.3674 trillion as of the end of the third quarter, up by KRW 1.5255 trillion Q-o-Q. Mainly due to increased accounts [ payable ] in headquarter and overseas subsidiaries, liabilities recorded KRW 13.4603 trillion, up by KRW 666.5 billion Q-o-Q. Next, I'd like to briefly introduce our ESG management activities made during the third quarter. As SDI recognizes ESG management as key strategies for business growth, we are actively engaged in such activities. Last September, SDI joined the RE100 initiative, which aims to replace 100% of used electricity with renewable energy by 2050. Early October, we declared an environmental-friendly management which settled 8 strategic tasks under 2 themes of climate change response and resource circulation. Beyond these 8 strategic tasks, SDI will pursue ESG management further by fostering and developing additional activities. Next is the third quarter results and the first quarter outlook by each business division.

[Interpreted] Good morning. I'm Michael Son, head of the automotive and ESS battery strategic marketing team. In the third quarter, the revenue for our automotive and ESS battery business increased sharply both Q-o-Q and Y-o-Y, hitting the record-high quarterly results with improved profitability. For automotive battery, despite concerns over sluggish EV demand in general, our sales remained strong, mainly driven by relatively stable demand for premium EVs. As a result, revenue and profitability improved considerably around high-value products such as Gen5 batteries. For ESS battery, profitability improved as increased prices of raw materials were reflected in battery prices and sales expanded for utility ESS in Europe. In the fourth quarter, we expect the demand both for EV and ESS to increase due to the effect of high season. Our EV battery sales are expected to grow steadily, with major OEMs increasing vehicle production as chip shortages abate. And new vehicle models equipped with Gen5 batteries are scheduled to be launched. At the same time, we are committed to achieving tangible results based on new platforms for various form factors, including prismatic and 46-pi batteries. We expect the demand for ESS to increase along with highly [ vulnerable ] oil prices and the promotion of environmental-friendly policies. Revenue increase is expected in the fourth quarter as well with sales boost for the utility ESS in the U.S. This is the end of automotive, ESS division's presentation. Thank you.

[Interpreted] [indiscernible] I'm Jae-yong Lee, head of the small batteries strategic marketing team. Let me start with the business performance of small-sized battery division. In the third quarter, sales of high-value products such as high-power batteries for power tools and high-energy batteries for EV increased, bringing up revenue, Q-o-Q and Y-o-Y, and operating profit at the same time. The overall demand for power tool batteries turned sluggish, but the revenue and profit improved, mainly around SDI's competitive edge in power -- high-power battery. Increased revenue and profit of EV battery greatly contributed to profit of small-sized battery business. In the fourth quarter, we expect sales increase mainly around EV batteries. To be specific, we expect battery sales for commercial vehicles to increase and the customer portfolio to be diversified. Meanwhile, based on long-term agreement with our strategic partners, the impact of weak demand is expected to be minimized. In terms of batteries for IT applications, we are preparing to start battery supply for new flagship smartphones of our major customers. [indiscernible].

[Interpreted] [ Good morning ]. I'm [ Jong Ho Hyun ], head of electronic materials strategic marketing team. Business performance of electronic materials division is as follows. In the third quarter, due to weak demand, we saw a decline in revenue and profit. The OLED revenue increased as we started sales for new platforms. The semiconductor revenue was on par with the previous quarter. Revenue for polarizer film declined Q-o-Q due to weak demand, but we have been pursuing diversification of customer portfolio in order to minimize such impact. In the fourth quarter, sales expansion is expected mainly for display materials. For OLED materials, sales are expected to grow, with mass production initiated for new platform. In terms of semiconductor materials, we expect stable revenue, with capacity increase of major customers. Finally, polarizer films revenue is expected to recover amid elevation of inventory overload and diversification of customer portfolio and applications. This is the end of my presentation. Thank you. [Audio Gap] English interpretation will be provided consecutively.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by Sung-ryul Kwon from DB Financial Investment.

[Interpreted] First of all, I would like to congratulate on your excellent earnings. I have 2 questions. The first question relates your earnings. Following the second quarter, and the third quarter as well, earnings have exceeded market expectations. So from the company's point of view, what was the key background or the key factors leading to such an uptrend in profitability? And do you believe such an uptrend is sustainable going forward? And my second question has to do with the U.S. IRA. So there are certain projections about how the IRA will be impacting the domestic companies. Does the SDI share such views? And also, there are several conditions to be met in order to receive the tax credits under the IRA. Does the SDI believe that you'll be able to meet such conditions.

[Interpreted] Hello, I'm Michael Son. I'm the Vice President. Let me take the first question. As is well noted, we view our industry as essentially a long-term acquisition business and a technology-driven business. And in keeping with such characteristics, we are developing and driving strategies under the 3 key management policies of namely, super gap technological competitiveness, superior quality and qualitative growth that prioritizes profitability. In particular, under the policy of qualitative growth that prioritizes profitability, we have expanded the sales of high value-added products such as Gen 5 batteries, high-power battery cells for power tools, UPS and residential use ESS and polarizers for the premium TV sector. We're also engaged in preemptive sales and marketing activities to secure profitability on the one hand and also to allow our customers to adopt better products by offering upgraded products to customers using older generation batteries. In addition, the fluctuations in the raw materials prices have been fully reflected in the sales price so as to minimize any risk arising from changes in the raw materials price in the future. Going forward, based on the business strategy outlined just now, the company's management and employees will work towards securing sustained competitiveness against changes in the external environment and will ensure that we continue to deliver strong and stable performance. The second question was on the SDI on the U.S. IRA, and also whether we will be able to meet the conditions related to the tax credits under the IRA. So let me get this question as well. I am, as has been introduced, a Vice President, Michael Son, in charge of AEB strategies. So our view is that as the IRA represents an acceleration of the U.S. eco-friendly policies. We expect the IRA to have significant positive impact. Among the conditions imposed for the EV tax credit to be offered to customers buying clean vehicles, we expect to fulfill the critical requirement through using metals-producing countries within FDA with the U.S. starting from 2023. And starting from 2025 onward, with the use of minerals that are sourced from foreign entities of concern being banned, we're making preparations so that we can qualify through diversifying our supplier space. Although the conditions for tax credits related to electronic materials is a challenge to us at present, starting from 2025 when we begin local production through cooperation with key partners, we expect to be able to fulfill this requirement as well. Meanwhile, for the tax credits to be made available to local battery producers, it appears we'll qualify for the tax credits at the point of local production. But as of yet, there is some remaining ambiguity in terms of the legal interpretation of the text, and we need to see when things become more concrete. Going forward, we will be making thorough preparations to turn this into a good opportunity for driving further growth of the U.S. business.

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

[Interpreted] I have 2 questions as well. My first question has to do with the small batteries for power tools. Because of the cooling housing market, there are concerns that the slowdown in demand for power tools will continue into the next year. So what is SDI's sales strategies for the power tools? That is my first question. And my second question has to do with the U.S. IRA. Because in relation to the U.S. IRA, has there been any changes in your consultations with the OEM companies? And as a result, is there any changes in SDI's plans to enter into the U.S.?

[Interpreted] The first question was on the concerns about the slowdown in demand for power tools owing to the economic recession, and whether this will continue into next year, and what is SDI's sales strategy? In this regard, I am Lee Jae-yong, Vice President in charge of the small size battery division. Let me take this question. Because of the global interest rate hikes, the housing market is starting to fall, and demand in the second half for power tools is also impacted. As the global economic growth continues stalling, inventory stock of the power tools is also growing. And we expect that until early next year, the overall market situation will be quite tough. However, our company's flagship product is high-power battery cells, which are technologically differentiated. And thus, in Q3 as well, we were less impacted, and it was possible for us to further improve sales growth and profitability over the previous quarter. In Q4 as well, based on the long-term supply agreement that we have with major power tool makers, we intend to minimize the impact of declining demand, and we are, at present, actively pursuing new product entry of high-power OPEs such as corded power tools for professionals and lawn mowers to prepare for expanded sales next year.

The second question was in relation to the U.S. IRA, whether there's been any change in our consultations with the OEMs. And as a result, whether this has brought any changes in the SDI's plans to enter the U.S. region, I'll take this question. I'm Vice President, Michael Son. Even before the IRA, due to the government policies such as USMCA that calls for local production in the U.S., we have continued to engage in discussions with major OEMs regarding local production projects. But after the IRA announcement, such discussions are being pursued more proactively for more diverse and larger projects. Especially, our company's strength in high energy density battery cells is well aligned with the preference of U.S. customers for longer driving range, and we believe this will work greatly to our advantage in the course of winning orders. We will do our best to produce full results from our ongoing conversations with the customers. As for plans to enter the U.S., aside from the Stellantis joint venture, nothing has been finalized yet. And after confirming the concrete details of the IRA, we will make the relevant decisions in consideration of the company's global hub operation strategy.

[Foreign Language] The next question will be presented by Won Suk Chung from HI Investments & Securities.

[Interpreted] I have 2 questions. So due to a decline in the sales of polarizers on the back of falling downstream demand, there is much concern over the earnings of the Electronic Materials division. And also, there are concerns about the sales of the polarizers going into the fourth quarter as well. You have noted during your presentation that the inventory adjustment is almost complete. And so, can you share your outlook of whether you believe that recovery in the earnings of the polarizers in sales can be possible in the fourth quarter? That is my first question. And my second question is on the European energy price surges. There are concerns of sluggish demand on the back of sharp increases in Europe's energy prices and rising inflation as well, and the impact it will have on the demand for EVs in Europe. What is the company's outlook for EV demand in Europe and the sales of SDI batteries going forward, especially the AEB sector?

[Interpreted] I am [ Hyun Jong Ho ] from the Electronic Materials division. Let me take the first question on how due to the decline in the sales of polarizers on the back of falling downstream demand, there's concern about the earnings of the electronic material decision, and that -- and whether we believe it will be possible to stage a recovery of earnings during the fourth quarter. So in the first half of the year, because of concerns over the supply chain risk, TV makers have secured for themselves safety stock. Since then, due to the slowdown in demand for TV, panel stock adjustment had taken place. And our company's Q3 sales of polarizers also experienced reverse growth over the previous quarter. However, the stock adjustment of the TV makers have progressed to a certain extent, and in Q4, advanced demand for the 2023 new premium model is to be launched, and the supply to new customers will enable a recovery of both sales and profitability from the previous quarter. Also next year, we intend to enter the OLED polarizer market and complete the approval process for the new polarizer for premium TV as well to drive sales expansion. Meanwhile, the OLED materials is expected to see a substantial jump in sales growth due to the Q4 high season effect. And for the semiconductor material, we foresee solid sales for Q4 as well. So the Electronic Materials division overall is expected to realize improved sales and profit over the previous quarter. Going forward, we at Samsung SDI will continue to make the necessary efforts to maintain sustained growth and high profitability.

[Interpreted] The second question was on concerns over sluggish demand in Europe on the back of sharp increases in energy prices and rising inflation and the company's outlook for EV demand in Europe and sales of our batteries. I am Michael Son, Vice President, and let me get this question. So owing to supply chain issues such as semiconductor chip shortage and disruptions of wire harness supply caused by the war in Ukraine, slowdown of demand in the overall European automotive market is underway, but the growth in EV market remains strong. In particular, premium EVs, which take up a substantial share of SDI sales, is witnessing robust sales, which allow the company to expand EV battery sales led by high-value products such as Gen 5. In Q4, we expect supply chain pressures faced by the OEMs to get better and coupled with the surge in demand as we enter the industry's traditional high season, we expect the EV battery demand to continue to increase. Against such a backdrop, our outlook is that the sales to key customers will grow, and we expect Gen 5 to see expanded sales due to the launch of new models. However, as the global economic recession is still underway, we will continue to closely monitor the economic situation through careful sensing of the downstream conditions as well as customer demand.

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

[Interpreted] So I have 2 questions. It seems that within the small-sized battery segment, the share of EV batteries have grown significantly. And do you believe such a trend will continue into next year as well? And what kind of impact do you expect that this growing share of EV batteries will have on the profitability of the small battery business? That is my first question. And my second question has to do with the rising electricity costs in Europe. As you have noted, due to the protracted war in Ukraine, natural gas prices have really surged and this is leading to higher electricity prices across Europe. And I believe this will have an impact on your utility cost in the Hungarian plant as well. So what is the impact on the P&L of the automotive battery business due to the recent rise in the electricity cost in Europe? And what is your outlook going forward? And how do you intend to respond to this situation? That is my second question.

[Interpreted] The first question was on how the growing share of EV batteries within the small-sized battery segment, whether this trend will continue into next year, and what kind of impact we expect that this will have on the profitability of the small battery business. I will take this question. I am Vice President Lee Jae-yong from the small-sized battery division. So the EV batteries have high growth potential, and our outlook is that its share in the small battery business will gradually expand. A key advantage is that compared to existing application, the demand volatility is relatively lower. You may think that generally, the EV batteries have low profitability and that this will have an adverse impact on the overall performance of small-sized battery business. However, in the case of EV batteries, large number of cells are installed per vehicle. But the model that our company is producing is few in number, which allows for efficient operation of the production capacity. And as such, stable profitability can be gained. Meanwhile, power tool batteries have seen a slowdown in demand due to recent inventory adjustment. But owing to the release of a range of diverse products based on high-power batteries, we are expecting a rebound in demand. Thus, by running an optimal product sales portfolio, we will ensure that both growth potential of the business and profitability can be achieved.

The second question was on the impact on the P&L of the automotive battery business due to the rise in electricity cost in Europe and what our outlook is concerning utility cost and our response regarding the situation. So let me take this question, I am Michael Son, in charge of the AEB division. As we brace for a protracted war in Ukraine, and with Russia either reducing or cutting off gas supplies to Europe, electricity prices in Europe has continued to rise until the month of August, weighing down on our cost burden. Despite this being so, however, every quarter, we've been able to achieve substantial growth in sales, expansion of high-value products, and the favorable exchange rate effect had offset the cost burden from rising electricity prices, and profitability has been greatly improved. Recently, electricity prices have been showing a gradual downward trend, resulting in reduced cost burden. SDI, for its part, is also making efforts to minimize the impact of such costs through various activities, both at home and abroad.

[Foreign Language]. The last question will be presented by Ji-San Kim from Kiwoom Securities.

[Interpreted] Once again, let me also congratulate you on your very robust results for this quarter. I have 2 questions. My first question relates to the recent trends that are being shown by the global OEMs, which are appearing to be moving to diversify their supplier base and adopt batteries of various form factor. So what do you see as the reason for this trend? And what is SDI's strategy to respond to this? My second question has to do with Samsung SDI's ESG activities recently. Samsung SDI appears to be very proactive in its ESG activities such as becoming a member of RE100 and green business management declaration. So what are -- in this regard, what are your future plans for the recycling business, which is of great interest for the market?

[Interpreted] I will answer the first question. I'm Michael Son, Vice President of the AEB division. So the first question concerned that recent trend of global OEMs moving to diversify their supplier base and adopt batteries of various form factors, and what we see as a reason for this trend and our strategy to respond to this. In the initial stages of the EV market, the need for OEMs to review different form factors and different suppliers was not that great. But recently, as the range of diverse EV platforms were developed and volumes ramped up under a proactive automation strategy, there is a clear trend in the market to look for the most optimal form factor for each platform. At the same time, it appears a diversification strategy is being employed so that stable supply of automotive battery can be assured, without having your choices being restricted to a specific supplier or a specific form factor. Faced with such needs of the OEMs and changes in the business environment, our company has developed a battery cell portfolio that offers various form factors from our flagship prismatic cells, the cylindrical-shaped batteries, backed by our long experience and technological capabilities to the 46 size, which embodies all of our key strengths. So in terms of battery materials, we have established a range of platforms such as high nickel for the premium applications, and next to target, the volume market, as well as the solid state for the next generation. We will continue to offer the most optimized solutions for our customers.

[Interpreted] The second question was on our ESG activities and our plans for battery recycling business. I'm Kim Yoontae from the Business Management Office. Let me take this question. As we have announced earlier this month through our green business management declaration, we will not only practice ESG business management, we will respond to the tighter environmental regulations globally, and we will expand recycling to secure stable supplies of critical raw materials. Through such efforts, our expectation is that we'll be able to reduce our dependency on the market for critical materials and also cut costs. The recycling business is carried out by making equity investments into recycling business partners centering around nickel, lithium and cobalt for now. Starting from domestic plants, this year, spanning the Malaysia and Hungary plant as well, we have completed industry-leading closed loop systems. Going forward, our plan is to have the same systems established in China and United States as well. In the long term, we are planning on building a recycling value chain where we will collect the end-of-life EV batteries for recycling. And towards this end, we are engaged in active discussions with the OEMs and the suppliers. [Foreign Language] [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]