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

[Interpreted] Good morning, and good evening. First of all, thank you for joining this conference call for the Fiscal Year 2023 Q3 Earnings by Samsung SDI. [Operator Instructions] Now we shall commence the presentation of the earnings call by Samsung SDI.

[Interpreted] Good morning, and thank you for joining us today. I am Yoontae Kim, Vice President of Business Management Office at Samsung SDI. First, joining us are CFO Jong Sung Kim; EVP Michael Son, representing Automotive & ESS Battery; EVP Jae-Young Lee for Small Battery; and EVP Sang-Kyun Kim for Electronic Materials. We'll now begin the earnings call for the Q3 of 2023. First off, our results and financial highlights. Despite a challenging business environment with weakening market demand under a long-lasting global economic downturn, we yielded better results in both revenue and profits versus last quarter. We delivered KRW 5.9 trillion in revenue, up by 2% Q-o-Q and 11% Y-o-Y. The operating profit stood at KRW 496 billion, sequentially rising 10%, with a better operating margin of 8.3%. Compared to last year's figures, the total operating profit went down 12% due to lower small battery demand in power tools while the automotive batteries of prismatic and cylindrical form factors boosted a high profit, which rose over 60% Y-o-Y. Looking at each business segment. Battery business revenue saw a slight growth Q-o-Q and a 10% increase Y-o-Y to KRW 5.3 trillion. The operating profit exceeded last quarter's record by 6% to KRW 412 billion, but declined 15% versus last year. Despite stagnant market demand, Electronic Materials revenue grew, thanks to expanded sales of display materials. The revenue was KRW 608 billion or 7% quarterly increase and 14% yearly. The operating profit was KRW 84.2 billion, up 36% Q-o-Q and 4% Y-o-Y. The pretax profit was of KRW 750 billion with KRW 254 billion nonoperating profit, such as profit and loss using the equity method. The net profit stood at KRW 622 billion. The quarter-end total assets went up KRW 644 billion sequentially to KRW 33.5 trillion. Liabilities decreased KRW 128 billion Q-o-Q to KRW 14.3 trillion while the equity increased KRW 771 billion to KRW 19.2 trillion, with a debt-to-equity ratio at 75%. Now our ESG performance during the quarter. Under the CEO's firm belief that ESG management stands as a core edge of the business, Samsung SDI declared environment-friendly management in October last year. Over the past year, we have been delivering strong execution of our 8 strategic tasks, such as transitioning into renewable energy, expanding carbon-labeled products, increasing battery recycling and reducing water use. We became the first rechargeable battery maker to have 2 of our products carbon footprint-labeled from U.K.-based certifiers, Carbon Trust. And in September, all of our operations in Korea achieved the highest status of Zero Waste to Landfill certification. In addition to these feats in environmental efforts, Samsung SDI recently received the Best rating in an assessment of the supply chain co-prosperity conducted by Korea's Commission for Corporate Partnership. To bolster the supply chain engagement in the ESG practice, we are also providing our key partners with support in calculating their greenhouse gas emissions as well as training on preemptive environmental risk management. As such, Samsung SDI and our partners are making concerted efforts to enhance our ESG competitiveness as a business growing together for the future. Now each business unit will present the details of the Q3 results and the Q4 outlook.

[Interpreted] Good morning. This is Michael Son, Head of the Automotive & ESS Battery Strategy Marketing team. The EV batteries demonstrated a high performance, thanks to the early ramp-up in our Hungary plant's new line, which led to strong P5 sales for the premium segment, producing the highest quarterly profitability. On top of expanding joint ventures in the United States, we signed a supply agreement with Hyundai Motor Company as our new customer and completed mid- to long-term expansion plans through top management meetings with our key customers. The ESS battery revenue declined Q-o-Q due to new product demand held up for Q4. In the fourth quarter, we expect car battery sales to expand, centering on the P5 product. To secure our long-term growth engine, we will continue pressing on with winning new customers and acquiring orders for P6-led next-generation products and all solid-state batteries, the latter is soon starting sample delivery for our customers. For the ESS battery sector, we will focus on expanding the sales of new products, geared with higher energy and density and -- higher energy density and safety so that we can materialize the sales growth pivoting on utility and UPS solutions. This is the end of large-sized battery division's presentation. Thank you.

[Interpreted] Good morning. I am Jae-Young Lee, Head of the Small Battery Strategy Marketing team. Sluggish market demand lingered down in Q3, but we've managed to achieve flattish revenue. Cylindrical battery revenue decreased on the power tool front, yet increased for EV sector, which helped inch up the revenue overall. Weaker front-end demand caused the pouch battery sales to decline. Going forward, although it is unlikely that the market demand will recover in the fourth quarter, we will pursue cylindrical sales expansion directed at the mobility market encompassing electric bikes and electric vehicles. At the same time, we will roll out new products in a timely manner and continue seeking new business opportunities in Southeast and West Asia with our new sales bases established recently in India and Vietnam. As for 46-phi batteries, our preparation for future business growth is well underway as we went into full-fledged line operation in Q3, and we'll start sample supply for our customer in the fourth quarter. With the pouch batteries, we aim to meet the demand by -- actively engaged to meet the demand by supplying for new flagship models of our customers. This is the end of the small-sized battery division's presentation. Thank you.

[Interpreted] Good morning. I am Sang-Kyun Kim, Head of Electronic Materials Strategic Marketing team. Despite market being slow, we closed out Q3 with better results versus Q2, propelled by display material sales. the materials enabled such encouraging results for the entire electronic materials business with high demand in mobile devices. Polarizer film revenue also rose, thanks to the demand uptick in the big screen TV markets. For semiconductor materials, however, soft demand on our major customers and cost of revenue decline. In Q4, we will intensify our efforts in accommodating promising demand with our forecast of recovering market sentiment. While material sales will likely sustain growth into the next quarter, thanks to the mass production of a new platform. Anticipating the low season coming up, we plan to focus our polarizer film sales on Chinese and new customers to prevent revenue drop. With semiconductor materials, we will strive to expand sales by penetrating into new product applications like SGSH and premium EMC. Thank you.

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

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

[Interpreted] I have 2 questions related to vehicle batteries. My first question is this, what is SDI's view and response to the ongoing concerns regarding the demand for electric vehicles in the market? And my second question is that the UAW in the U.S. has started a strike against the big 3 automakers for the first time. They're asking for a substantial pay rate. How will this impact Samsung SDI?

[Interpreted] This is Jong Sung Kim, the CEO of the company. I will provide you the answer for the first question. With the recent global economic slowdown, we are well aware that there are concerns about the slowdown in EV growth due to policy changes in major European countries as well as potential changes in the U.S. IRA legislation. However, the consensus for multiple sources, including major research firms, is that there is no change in the mid- to long-term demand growth for EVs. Specifically on recent changes in green policies in major European countries, the consensus is that the fundamental direction or policy has not changed. In other words, the U.K.'s adjustment of the ICE vehicle ban to 2035 is simply an adjustment of an already-aggressive target to align with the EU's time frame. Germany's reduction in purchasing subsidies suggests that EVs are already competitive enough in the marketplace, prompting the country to shift its support towards promoting the electric vehicle market through expanded charging infrastructure rather than purchasing subsidies. In addition, industry consensus suggests that a change in the direction of the U.S. IRA would be difficult, given the established ecosystem with active investment by the OEMs and battery companies since the loss implementation and the change in the direction at this point would not be conducive to strengthening the competitiveness of the U.S. electric vehicle industry in the years ahead. At the same time, the EU's tightening of CO2 emission regulations and the expansion of EV lineups by major OEMs from 2025 are expected to drive further mid- to long-term growth for EVs. Though a sustained economic downturn could impact near-term demand, we expect solid sales growth, thanks to new model launches of major customers. While carefully monitoring the market, we will sustain our management approach of profitable and qualitative growth by capacity expansion in a timely manner, ensuring efficient operations in line with customer demand and continuously striving to gain new customers for the future growth.

[Interpreted] This is Michael Son of the Automotive & ESS Battery Marketing, and I'll be answering your second question regarding UAW. As operation suspensions at the major big 3 factories are mostly aimed at plants that produce internal combustion engine vehicles, the effect on EV production will be minimal. In our case, there has been no visible impact from the UAW strike so far, such as changes in customer demand. The preparation for the U.S. joint venture are also on track as scheduled. Meanwhile, the UAW is calling for the extension of the standard wage agreement for internal combustion engine vehicle factories to EV battery factories. Though we do not anticipate any direct impact on us as we are still at a preparation stage of the local plant, we will still closely monitor its progress.

[Interpreted] The following question will be presented by Ji-San Kim from Kiwoom Securities.

[Interpreted] I also have 2 questions. The first question is this. With the prolonged slowdown in demand for power tools, when do you expect to see a recovery? And my second question is related to your new announcement related to the contract with the Hyundai Motor Company. I would like to ask you to please provide us with an explanation of SDI's recent contract win with Hyundai Motor Company in more detail. And also, will the recent increase in orders, including this one, have any impact on future CapEx of Samsung SDI?

[Interpreted] This is Jae-Young Lee of small battery marketing. I'll be providing you the answer to your first question. With higher mortgage rates and a sluggish U.S. housing market index, both of which have a strong correlation with power tool demand, we anticipate continued weak demand for power tools in the foreseeable future. However, with the recent anticipation of monetary easing in the U.S. in 2024, including a reduction in mortgage interest rates, there is a current view that the macroeconomic situation will gradually improve. We are hoping that this will lead to steady improvement for the demand of power tool set. In the meantime, demand recovery in power tool batteries is expected to be delayed due to inventory pressures faced by power tool customers. Therefore, we will minimize the impact of the slowdown in demand for power tools by securing new customers for outdoor power equipment, or OPE, in addition to conventional power tools, and also by developing new business opportunities for cylindrical applications, such as EVs and e-scooters in Southeast and West Asia.

This is Michael Son of the Automotive & ESS Battery Marketing. And I'll be answering your second question in regards to this new contract with Hyundai Motor Company. We consider our agreement with Hyundai, a major global OEM, to be a significant acknowledgment of our high-energy density prismatic battery technology's competitiveness in the market. As Hyundai is a global leader in the electric vehicle market, the supply agreement has its significance in that we gained additional momentum for mid- to long-term growth. Moving forward, we are planning to expand our partnership with Hyundai Motor Company through super-gap technological competitiveness and the best quality.

[Interpreted] This is Yoontae Kim of Finance and Accounting team. I will try to provide you the answer to the second part of your second question, which is related to CapEx. Our CapEx is expected to rise due to the awarded projects and the recent new wins, and they were maybe concerned about the funding. However, our principle of prioritizing the use of internal reserves and engaging in external funding only when necessary remains unchanged. In cases of investment in the U.S., which is quite large, we will utilize the advanced technology vehicle manufacturing loan to maintain a strong financial structure even if our debt increases.

[Interpreted] The following question will be presented by Sunwoo Lee from Macquarie.

[Interpreted] I have 2 questions related to the Chinese companies that are supplying the LFP batteries. The first question is that with the oversupply of batteries in the Chinese market, the exports of Chinese batteries to Europe are likely to increase. So what is the impact on Samsung SDI, that business, which has a very high proportion of European supply? And my second question is really also related to the LFP battery. How ready is SDI to use LFP in ESS application, given the rapidly growing market share of LFP-based batteries in the ESS industry?

[Interpreted] Again, this is Michael Son of Automotive & ESS Battery Marketing. I'll be providing you the answer to both of your questions. Your first question is related to the oversupply of batteries in the Chinese market and its impact on Samsung SDI's business. Due to the nature of the automotive battery industry, it takes 2 or 3 years of development and qualification after signing our supply contract with an automaker to commence full-scale mass production. Most of the volume and price within the supply period are predetermined. Therefore, it would be inappropriate to assume that Chinese batteries will immediately flood into Europe due to oversupply in the Chinese market. In addition, our current policy trends in Europe have increased the need for the OEMs to localize the production of batteries and supply chain. We believe that the capacity to create local production system with scale and supply chain will eventually determine competitive edge of battery companies. Our plant in Hungary has established a reliable local operator that consistently produces the highest quality batteries and we plan to solidify and expand our position in Europe by pursuing fully localized supply chain continuously. And as for your second question related to how ready SDI is to use LFP in ESS. As LFP batteries are rapidly growing share in the ESS market, it is crucial for us to respond to the growing LFP market in order to expand our ESS business. Our goal is to develop LFP batteries with a mass production target of 2026, and we are currently looking into plans to establish a production line. We may have entered the LFP market later than our peers, but we will make sure we have a successful launch of LFP business by securing cost competitiveness and highest quality through optimization of our own product design, processes and equipment innovation.

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

[Interpreted] I also have 2 questions related to batteries. With the power tool demand slow to recover, you've mentioned that in your answer previously, has there been any changes in plans for the construction of the second plant in Malaysia, which, I understand, is expect -- was supposedly to have -- to be completed by 2025?

[Interpreted] This is Jae-Young Lee of the Small Battery Marketing, and I'll provide you the answer related to the power tools. Although the demand for power tools has been slowing down recently, the overall cylindrical battery market is expected to grow about 10% CAGR until 2030, with various applications centering on EVs and micro mobility, such as e-bikes and e-scooters growing to 2.3 billion cells by then, which is double at the current level. At the same time, we are continuing to explore new applications and are continuing our activities for mid- to long-term sales growth by seeking new business opportunities in Southeast and West Asia, utilizing new sales spaces such as India and Vietnam. The second plant in Malaysia is being constructed to meet the rising demand -- rising mid- to long-term demand for cylindrical batteries and our expected sales expansion. The plant progress is well on track.

And the second question by -- question was related to the 4680 batteries. It seems that -- it appears that many companies are postponing their mass production date for 4680 battery. So I was wondering how SDI's progress is with its 46-phi development?

[Interpreted] As to your second question related to 4680 cylindrical batteries and also the development progress of 46-phi battery development, I -- and also, I would like to mention briefly about additional orders besides the one from GM. As recently communicated, our 46-phi development is well on track for full-scale mass production in 2026 as we have completed the setup of the mass production line in China in the first half of the year, commenced a sample production and secured a significant level of yield rates. We are currently in talks with several major OEMs, apart from GM, to acquire more customers. We will release updates to the market as those discussions are materialized.

[Interpreted] The last question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] I will be asking 2 questions. And the first question is related to the Electronic Materials business. As you've mentioned before, it seems that the market is rebounding slightly. So will the Electronic Materials business recover in Q4 of this year? And what is the outlook for the year 2024? And my second question is related to all solid-state batteries. You've been providing updates on this development progress on a quarterly basis. So I was wondering if you could also, at this point, provide more information, and if you have faced any challenges in the process of the development.

[Interpreted] This is Sang-Kyun Kim of the Electronic Materials marketing. I will be giving you the answer to your first question. The performance of the Electronic Materials business is gradually improving from the low point in the first quarter of the year. But with the current recovery in downstream demand still slow, it is expected to be to achieve profitability that's comparable to last year. It is too early to comment on the outlook for 2024, but big sports events such as the Euro Cup and World Cup are expected to increase demand for large screen TVs, and semiconductor materials are also expected to see a meaningful improvement as DRAM demand is expected to recover. We will continue to improve our performance by responding to growing downstream demand and introducing new materials such as tungsten slurry, SOC, SOH, EUV photoresistor and polarizer for OLED.

[Interpreted] Let me ask -- provide you the answer to your question related to all solid-state battery development progress. Once again, this is Michael Son of the Automotive & ESS battery marketing. There are many differences between all solid-state batteries and conventional batteries in terms of materials and processes. And developing products with highest energy density and safety has posed many challenges. However, we are making a steady progress. Performance validation will begin in earnest in Q4 with the start of sample deliveries for our customers. And we are also in discussion with a number of OEMs for projects of mass production. For full-scale mass production, we are preparing for larger-sized batteries fit for vehicles, development of solid electrolytes and establishment of SCM. As all solid-state batteries are the core product that will help us secure super-gap technology, we will make sure that everything is ready for mass production in 2027.

[Interpreted] Now with this, we will close the second quarter earnings call. If you have further inquiries, please contact our IR team separately. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]