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

[Interpreted] Good morning, and thank you for joining us today. I'm Yoontae Kim, Vice President, Business Management Office at Samsung SDI. Let me introduce our 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, Jae-Young Lee; and Head of Electronic Materials Strategy Marketing team, Sang-Kyun Kim. We will now begin the earnings call of the first quarter. Let us start with the Q1 results and financial results -- highlights. This quarter, both the revenue and the operating profit declined compared to the last quarter due to the slow global economy and seasonality. However, it was a leap from the year-ago quarter. The first quarter revenue was KRW 5,354.8 billion. Operating profit was KRW 375.4 billion, a decline from the past quarter but a 32% and 16% increase year-on-year. The Energy business generated KRW 4,797.8 billion in revenue, down 10% from the prior quarter but 45% from the same period last year. The posted operating profit was KRW 316.3 billion, a 12% quarterly decrease, yet 92% yearly increase. The Electronic Materials business posted KRW 557 billion in revenue, which is down 11% from the previous quarter and 24% from the same quarter a year ago. The operating profit was KRW 59.1 billion, went down 55% quarter-over-quarter and 62% year-over-year. The pretax profit stood at KRW 561.3 billion including KRW 185 billion of the nonoperating profit, such as the equity method applied, gains or losses and the net profit was KRW 464.5 billion. The quarter-end total assets recorded KRW 32,407.4 billion, up KRW 2,149.9 billion from the last quarter, increasing the tangible assets from the full investments. Liabilities recorded KRW 14,408.2 billion, up KRW 1,368.2 billion from the first -- prior quarter. And the shareholders' equity pushed to KRW 17,999.2 billion, up KRW 781.7 billion increase. Next, I'd like to walk you through our ESG management performance during the quarter. Samsung SDI's push for ESG management continues to build upon RE100 commitments last May the last year. In the first quarter, we joined Global Battery Alliance for a sustainable value chain and became a member of the Carbon Disclosure Project Supply Chain Program for better ESG engagements with our partners home and abroad. In order to put ESG into active and preemptive practice, we are assessing the Scope 3 emissions that encompass indirect emissions throughout the value chain. In the second quarter, we plan to disclose the results through the sustainability report and [ devise up pursuant ] objectives and tasks for further reducing the emissions. Before we move on to enumerating the quarter results of business units, our CFO, Jong Sung Kim, will briefly talk about the recent media reports and prospective joint venture with General Motors as well as Samsung SDI's future business strategy in the U.S.

[Interpreted] Hello. I'm Jong Sung Kim, the CFO at Samsung SDI. We recently had a press release regarding the planned joint venture with GM. Samsung SDI and GM both agreed to invest more than $3 billion to establish a battery manufacturing joint venture in the U.S. with an aim to secure the next-generation prismatic and cylindrical battery production from 2026 with more than 30-gigawatt-hour capacity. We will finalize the contract at the earliest possible future to set up smooth pathways for our manufacturing plant in the U.S. In -- this new collaboration and talks marks the very first step to create a long-term industry-leading partnership with GM and yet again signals the market's appreciation of Samsung SDI's unrivaled battery technologies and quality featuring the highest level of safety and energy density as already attested by the partnership with Stellantis underway since last year. We see this as an impetus to expand our market business from the Europe market to the fast growing U.S. market, thereby ensuring our long-term growth momentum in the EV battery business. Under key management strategy of profitable and qualitative growth, Samsung SDI will continue to drive new order acquisitions and investments in order to materialize successful business growth in the U.S. market. We would like to ask for the shareholders' and investors' continued support in our resolve for a solid future. Thank you. Now each business division will present the details of the first quarter results and the outlook for the second quarter.

[Interpreted] Hello. I am Michael Son, Head of the Automotive and ESS Battery Strategy Marketing team. While this quarter's revenue declined slightly affected by the seasonal lull and unfavorable exchange rate, the profitability went up, thanks to the expanded sales of high-value automotive batteries. In terms of EV battery business, although plug-in hybrid battery sales decreased because of the major European countries' [ succeeding cut ], EV batteries saw an increase in sales, thanks to new vehicle model released by our major customer with P5 application, which propelled the revenue and profitability higher than the previous quarter. The ESS battery sales went down quarter-on-quarter due to the seasonality but still witnessed a big jump year-on-year. In the second quarter, revenue increase and profitability enhancement is expected to be continued. Our major customer's new vehicle model launch is forecast to lead the P5 cells for EV, while the expansion of utility and UPS projects is expected to lead a great sales growth after passing the yearly low season. Additionally, we have been making utmost efforts to secure long-term growth by promoting a joint venture with GM within this quarter in succession to Starplus Energy, our joint venture with Stellantis. Samsung SDI will also actively prepare for a lead in next-gen technology with the commencement of 46phi and solid-state batteries in this quarter. This is the end of Automotive and ESS Battery Business division's presentation. Thank you.

[Interpreted] Good morning. I am Jae-Young Lee, Head of the Small Battery Strategy Marketing team. We exited the first quarter with a lower revenue than the past quarter as it was a low season for key applications, yet the year-over-year figure indicated of growth. Despite slow power tool demand triggered by the weak housing demand, we managed to minimize the cylindrical battery sales drop by maintaining sales towards our strategic partners. For pouch batteries, the sales grew thanks to the customer's release of new smartphone model. In the second quarter, we expect revenue increase and profitability enhancement with gradual recovery of the demand. We plan on expanding the cylindrical battery sales through existing partnerships with key power tool customers along with sales expansion of new applications such as other power equipment. The sales of pouch batteries is expected to continue to expand in line with the application to new model releases scheduled in the second half. This is the end of small-sized battery division's presentation. Thank you.

[Interpreted] Hello, everyone. I'm Sang-Kyun Kim, Head of Electronic Materials Strategy Marketing team. The first quarter's revenue and profits were both down due to slowdown in IT demand and the seasonal demand -- seasonal low. The OLED and semiconductor process materials saw the sales drop due to the low market demand. The polarizer film cells posted a similar number to the past quarter despite being the low season as a result of easement in customers' inventory adjustments and customer portfolio diversification. Amid the prospects of continued sluggish demand going into the second quarter, we are resolved to expand the sales, focusing on the polarizer film. After hitting the yearly low in this first quarter, the polarizer film sales expected to gradually recover in the second quarter and beyond. As for the materials for OLED and semiconductor processing, concerns linger due to the IT demand weak and inventory adjustments. But we expect to see a turnaround in the second half due to high season and new product release effects, and we will usually prepare for the new product applications and mass production thereof to materialize the sales expansion in the second half. This is the end of Electronic Materials division's presentation. Thank you.

[Interpreted] Now we will close the presentation and move on to the Q&A session. Questions and answers will be provided in Korean and consecutive interpreting will be provided in English. If you have any questions, please follow the operator's guidance.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Woo-Hyung Cho from HSBC.

[Interpreted] This is Cho Woo-Hyung from HSBC. Two questions regarding EV batteries. So at the end of last month, the detailed guideline to the IRA have been announced. So as a battery maker, what kind of impact do you expect this to have on your North American investment strategy in terms of SCM requirements and also cost competitiveness? And the second question is, following on last year, I think this year, you have seen increased sales from P5, your Gen 5 product line which is having a positive contribution to sales and earnings. Now going forward, in terms of your next-generation P6 product, which I expect once operational will further accelerate your performance improvement, what kind of technological spec or mass production plans do you have in mind?

[Interpreted] Yes. This is the CFO. Let me take your first question. Well, according to the newly released IRA guidelines, cathode and anode electrodes, which are a core material in battery production, were classified under constituent materials subject to the same classification criteria as critical minerals. This means that they can be sourced from countries that have a free trade agreement with the U.S., including Korea. So as a result, this means less pressure on our cathode, anode partners to move into the U.S. market and is also expected to be a big help to us in terms of stable sourcing materials as well as cost competitiveness. That being said, however, because the formula for calculating value-added content, which are used to determine country of origin, may change at some later point, we are continuing to review possible establishment of a local supply chain as an option for the longer term. Also, there are some uncertainties that still remain as the guidelines do not provide a concrete definition of what they mean by foreign entity of concern, for example, or detailed provisions on the proposed AMPC tax credit program. However, we do expect that there will be no change to the overall policy direction, which is intended to promote local battery production. Recently, the U.S. EPA also announced new emission standards, so that 67% of new car sales will be from EVs by 2032. And we believe that these eco-friendly policies will continue to accelerate growth in EV demand. As you can see from our JV with GM, strategic partnerships are very important for both OEMs and battery makers alike, and we're committed to strengthening cooperation with our customers to expand our business further in the U.S. market.

[Interpreted] This is Michael Son from the Automotive and ESS Battery division. Let me take your question where you asked about technology differentiation and our mass production ramp-up plan. Our P5 battery cells, which are comprised of innovative, high-nickel NCA cathodes and our proprietary SCN anodes are manufactured using a new stacking method, which enables maximum energy density at lower cost. With timely ramp-up of mass production, we have been providing seamless supply to our customers with the P5 making a large contribution to our automotive battery performance. Also, our next-gen P6 platform, which is currently under development, will also apply the latest in material and manufacturing technology. We'll be applying cathodes with more than 90% nickel content, which will enhance energy density by more than 10% versus the previous lineup while lowering material costs significantly. We are working on the P6 platform with the goal of starting mass production in 2024. And as high value-added products like P5 and P6 make a bigger share of our product portfolio, we expect profitability to improve going forward.

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

[Interpreted] Yes. This is Kim Sang Uk from Credit Suisse. First of all, recently, there's been a significant fall in metal prices, including for lithium as well. Understand that your automotive battery prices are also indexed to metal pricing. So this trend may have weighed on your ASP. So what is the impact in terms of your sales price, also impact to your earnings? Second question is with recent inflationary pressure, I understand or I would imagine that CapEx for your capacity expansion project in the U.S. may have increased. And so increased investments may push up your cost burden. So how will this potentially impact your profitability?

[Interpreted] Yes, this is VP Kim Yoontae. Let me take your first question. Well, as you know, lithium accounts for a significant portion of battery material costs. With lithium prices now showing more stable trends after peaking in Q4 of last year, for most of our automotive battery projects, ASP is indexed to metal prices. But because we also apply indexation clauses in our material procurement contracts, we can offset most of the volatility in metal pricing. So of course, there may be a temporary impact to our P&L from a time lag between ASP and procurement price indexation. But overall, on a quarterly or annual basis, there is very minimal impact to our profitability. On the demand side, while it is true that falling metal prices can result in a drop in our battery ASP, but actually, this may ultimately have a positive impact on EV market growth by expanding EV demand as EV prices decline as well.

[Interpreted] Yes. This is Michael Son. Let me take your next question regarding the impact of inflation on our U.S. project, how potentially an increase in CapEx requirements may affect our cost structure and profitability. While it is true that recent inflation and the rise in FX rates have resulted in an increase in investment costs for our U.S. operations while weighing on our operating costs, so we have been working together with our JV partner for further cost savings. And we also believe the IRA tax credit scheme will also benefit us when the U.S. line becomes operational in the near future. Moreover, because the product that will be produced from our U.S. site will have bigger per cell capacity, this will also help us reduce investment per gigawatt hour. And we'll continue to drive further productivity gains to mitigate pressure from rising costs.

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

[Interpreted] This is Kim Hyun-Soo from Hana Securities. First of all, I'd like to know more about LFP batteries. So as global OEMs engage in further cost-saving initiatives, there is now growing interest toward LFP batteries. So it's not just China, but other set makers in other countries are also starting up their own LFP development projects as well. So I'm wondering if Samsung SDI also has any plans regarding LFP, if you could take us through the development status and also your mass production plans if any. And the second question has to do with power tool batteries. So last year, the global residential property market actually was very weak, lessening demand for power tool and power tool applications. So when do you think a recovery in the power tool end market is likely?

[Interpreted] Yes. This is Michael Son. Let me answer your question regarding possible LFP development plans, also mass production plans. The EV market to date has been centered around the premium segment, but as OEMs strategically expand their electrification lineup, we expect that the volume and entry-level segments of the EV market will also grow very quickly. The ESS market is also expected to grow, driven mostly by utility applications, which tend to have less spatial restrictions but higher price sensitivity, which means that cost competitiveness is particularly key. So consequently, our strategy is to maintain competitiveness in our existing premium platforms such as P5 and P6 while also expanding our product portfolio to also include the volume segment to drive mid- to longer-term growth. We will be leveraging a cobalt-free concept, including NMx and LFP chemistry to target the EV volume market as well as the utility ESS market. The volume segment platform is currently under development with commercial mass production in mind. We are working to maintain cost competitiveness while applying our proprietary technology including stacking, prismatic form factor with strengthened safety profile to continue to differentiate ourselves from other players.

[Interpreted] Yes, this is Lee Jae-Young, Head of Small Battery Strategic Marketing. Let me take your question regarding power tools. Well, if you look at the U.S. housing market and certain metrics, which are a leading indicator for power tool demand, first of all, there's a U.S. mortgage rate, which has continued to fall from the 7% range last October to 6.4% as of last month, while the broad housing market index has been showing recovery back up from a low of 31 points last year to 45 points as of April this year. The retail channel inventory of key power tool customers also appears to have moved past the peak recorded last year, and overall, we expect a gradual recovery in battery demand. Consequently, we will be focusing on maintaining stable supply volumes based on long-term supply contracts with our key accounts, while continuing to expand sales in new application areas such as outdoor power equipment. We'll also be running our production lines on a flexible basis in line with changing market demand across diverse application end markets, including m-mobility, EV, et cetera, to respond to changing demand dynamics in the cylindrical battery market.

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

[Interpreted] Yes. This is Kwon Jay Hyun from JPMorgan. I have 2 questions. First of all, it seems that due to the sluggish IT downstream market, both sales and earnings for your Electronics Materials business actually has fallen year-on-year. So what is your outlook for the second half of the year, if you could provide that guidance? And do you expect a recovery sometime in the second half? Second question is certain OEM companies actually have been starting up a bit of a price competition while marking down prices. There are broad market expectations that mid- to low-end EV models will increase significantly going forward. So how do these OEM developments impact your business -- your battery business? And what are your plans in response?

[Interpreted] Yes. This is Kim Sang-Kyun, Head of the Electronic Materials Marketing team. Let me take your question regarding our outlook for the business in the second half of the year. Well, first, in the first half, the economic slowdown did lead to weak IT demand across many verticals, including LCD TVs, OLED displays and semiconductor chips, which has been challenging for our Electronics Material business. However, we expect IT demand to start recovery in the second half, driven by inventory drawdowns by customers, slowdown in the rate hike cycle by central banks and also improved demand from China, which will likely result in improved performance from our Electronics Materials business. By product, for polarizer films, we expect a pickup in demand as inventory adjustments by key accounts start easing from the second quarter and also from increased buying from Chinese set makers ahead of the Chinese Labor Day holidays, also the June 18 shopping festival for promotional application. Also starting in the second half, we expect high value-added products such as large-screen high-spec TVs to start driving up sales, which will result in improved sales and earnings performance for our business. We'll look to boost sales of OLED process materials for application in new panel models while also introducing new semiconductor process materials to further expand sales for our business.

[Interpreted] Yes. This is Michael Son. I will be answering your question regarding the pricing movements by the OEMs, how this may impact our battery business and how we intend to respond. Well, it is true that recently some OEMs have been marking down their pricing to boost sales volume. But this is largely due to the recent drop in metal prices also because many OEMs are now benefiting from economy of scale as they're able to apply their electrification platforms to more multiple models. If price competition between the EV makers intensified further, this could potentially impact battery ASP. But on the other hand, there could be positive upside since a drop in EV prices could actually accelerate expansion of the overall market. As EV penetration increases, we expect the mid- to low-end market to see significant growth, which is why we tend to expand our portfolio to cover not only the premium segment but also the volume segment as well to more actively capture growing market needs.

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

[Interpreted] Yes. This is Chung Won Suk from HI Investment Securities. I will also ask 2 questions. First, for cylindrical batteries, with the slowdown in the real estate market overall, the demand for power tool cylindricals is weak. However, on the other hand, the demand is quite strong for EV or m-mobility-type applications. And we have heard through the press that, apparently, GM is also planning a capacity expansion for its cylindrical line as well. So in the mid- to longer term, what is your outlook for the EV, m-mobility end markets? What are your sales plans toward those downstream markets as well? And my second question has to do with Samsung Display's new OLED investment that they have announced. So this will likely push up demand for OLED materials. So what kind of opportunity do you think this presents to your business? If you are developing certain new products, could you introduce the current status of those developments, please?

[Interpreted] This is Lee Jae-Young, Head of the Small Battery Marketing team. Let me take your first question regarding demand for cylindrical batteries, also our sales plans. According to findings from a market research organization, the cylindrical battery market for EV and micro-mobility applications is expected to grow by 21% and 10% year-on-year, respectively. We expect our sales to grow by a much higher margin versus the broad market growth. In order to tap this continuous upside in market demand, we have already launched a new m-mobility product in the first quarter with a better safety profile versus our existing product. And we'll also be ramping up mass production of another new product for EV applications in the second quarter with improved capacity and safety features as another driver of continuous growth.

[Interpreted] Yes. This is the Head of the Electronic Materials division. Let me answer your question regarding Samsung Display's investment into its next-generation OLED line, how that can impact our OLED material business. Well, Samsung Display, as announced, will be investing in its next-generation mid-sized OLED production line for note PC applications as an upgrade to its existing Gen 6 OLED lines for mobile and tablet applications. And this is expected to be a major driver of growth in the mid-sized OLED market for IT applications going forward. Once the next-gen mid-sized OLED line starts up, production volume per glass will increase by more than double that of the existing Gen 6 line, which will mean a significant increase in demand for core OLED material products that, of course, we provide. This includes G-Host, p-dopant, TFEs, process films, et cetera.

[Interpreted] Thank you very much. With that, we'll conclude the earnings call for the first quarter for Samsung SDI. 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.]