Samsung SDI Co., Ltd. ($A006400)

Good morning. Thank you for joining Samsung SDI's Earnings Call. Today's schedule will follow Samsung SDI's presentation. With a Q&A session for participants afterward. [Operator Instructions]. We'll now begin Samsung SDI's 2026 First Quarter Earnings Call.

Good morning. I'm Yoontae Kim, Executive Vice President of the finance and accounting team at Samsung SDI [Operator Instructions] To begin with, I'd like to thank everyone for joining today's earnings call Joining me are EVP, Jae Kyun Oh from Business Management Operation; EVP Yonghui Cho from ESS Business Team; VP Hoon Choi from Sales Team and VP Ik Soo Kim from Strategic Marketing Team of Electronic Materials business. The earnings call presentation will be provided with simultaneous interpretation and Q&A session with consecutive interpretation. We'll now begin Samsung SDI's 2026 First Quarter Earnings Call. I will start with financial results for the first quarter of 2026. Q1 revenue was KRW 3.6 trillion, a 7.3% decrease from the previous quarter, but a 12.6% increase year-on-year. Operating income was a loss of KRW 156 billion with the loss narrowing in both the previous quarter and the same period last year. Pretax income, reflecting equity income in affiliates and other factors, recorded a loss of KRW 43 billion due to a decrease in corporate tax, net income was a profit of KRW 56 billion. I will now present the financial status as of the end of Q1 2026. Factoring in CapEx and the increased equity value of affiliates, assets grew by KRW 2.3 trillion Y-o-Y to KRW 44.5 trillion and liabilities increased by KRW 911 billion Q-o-Q to KRW 19.6 trillion. Total equity rose by KRW 1.3 trillion Q-o-Q to KRW to 24.9 trillion. CapEx for Q1 was executed at KRW 589 billion. For detailed financial status, please refer to the appendix. Now I will explain the Q1 financial results of each business unit. First of all, revenue in the battery business was impacted by seasonality, resulting in a 7% decrease Q-o-Q. However, driven by a significant recovery in demand from front-end market, including utility ESS, UPS and BBU for AI data centers and power tools, revenue increased by 13% Y-o-Y to KRW 3.4 trillion. For operating income, factors such as increased AMPC benefits from rising sales of locally produced ESS in the U.S. and expanded sales of high value-added cylindrical batteries used in BBUs and professional power tools led to an improvement over both the previous quarter and the same period last year, narrowing the loss. Moving on to the Electronic Materials business. Benefiting from the semiconductor market boom, sales of semiconductor materials remained robust with the increase in sales of flagship smartphones by major customers, sales of display materials also rebounded, leading to a Y-o-Y increase of 13% in revenue and 15% in operating income, respectively. However, due to the impact of seasonality, the performance slightly decreased compared to the previous quarter. I will move on to our business highlights for the Q1. First, in the ESS market, where demand is growing rapidly with expanded customer orders and built on our supply chain, strengthening the foundation for future business outcomes. We secured prismatic LFP project awards for utility ESS solutions from major U.S. customers and signed high-power battery supply agreement for BDUs in data centers. And at the same time, to meet the non-PFE procurement requirements of the U.S. OBBBA, we proactively established an LFP material supply chain. We also expanded customer base and product portfolio. On this 20th, we signed a supply agreement with Mercedes-Benz for our prismatic batteries, securing all 3 of Germany's top premium automotive brands as our customers. And we entered into a relationship with a new global memory manufacturer, leveraging our semiconductor packaging materials. Moreover by winning a tab-less cylindrical battery project for hybrid EVs, we're able to diversify product portfolio. Lastly, at the InterBattery exhibition held last March, we unveiled an all-solid-state battery for physical AI, which currently garner significant market interest. Beyond this, we have developed solutions to improve the lifespan and safety of next-generation lithium metal batteries, continuously strengthening our future technological competitiveness. Next, I will address the market outlook and our business strategies. First, the EV market is expected to see a gradual demand recovery, particularly in Europe. As subsidy policies in key countries such as Germany and France are expanded, the growth momentum centered on volume models is strengthening. And with the total cost of ownership or TCO for the ICE vehicles rising recently, expectations for recovery in EV demand are growing. We plan to proceed smoothly with the mass production of projects for new customers scheduled for the second quarter and the second half of the year and continue our trend of restoring profitability by increasing utilization rates. Along with this, to strengthen our growth momentum, we will continue to pursue additional project orders focused on volume models. In the ESS market, growing power demand driven by expansion of U.S. AI data centers and steadily increasing demand for renewable energy linked ESS and UPS and domestically, rising share of renewable energy is also boosting the need for grid stabilization. Accordingly, we will expand local ESS mass production and sales of high-power UPS for data centers to address the U.S. power market while actively participating in the domestic government-led ESS project bidding and next-generation grid-connected ESS projects to expand our business. Small battery business is also seeing sustained growth in demand for BBUs and professional power tools, driven by increasing AI data center construction and the micro mobility segment is showing signs of demand recovery centered on high-end leisure models following inventory adjustments. Therefore, we plan to expand sales by focusing on tab-less and high-power products tailored to specific application and improve profitability. Next is the Electronic Materials business. Regarding semiconductor materials amid favorable conditions in the front-end market, the demand is expected to grow centered on high value-added semiconductor materials for AI applications while for display models. Demand driven by foldable smartphones and gaming modules is projected to continue. We'll expand sales of new semiconductor patterning materials and OLED materials such as TH, TFE and FOCA to sustain revenue growth. As described [front end ] demand is recovering across both the batteries and Electronic Materials business units, and we will execute our response strategies effectively to continue improving our performance. We now close the presentation and move to the Q&A session. The Q&A will be held in Korean followed by consecutive English interpretation for its response.

[Operator Instructions]. The first question will be provided by Sung Kyu Kim from Daiwa Securities.

[Interpreted]. I have 2 questions. First is about your business outlook in the second quarter, during the presentation. You've shared with us your market outlook and strategic direction for Q2. Can you also give us then your guidance on business performance? And also, when do you think you'll be able to return to black in terms of your business performance? Second question is about ESS. Currently, the U.S. ESS market is growing very strong, particularly tied to the AI data center-related demand. So I'm wondering how large does the company estimate the data center-related ESS demand to be? And can you give us some updates on your order winning situations?

[Interpreted] I am CFO, [ Jae Kyun Oh ]. I will be answering your first question, which was about second quarter guidance and when we expect to return to black. Despite continuing uncertainty in the business environment and also the impact related with the Iranian war, fortunately, we see limited impact on the demand side of our major businesses. And as mentioned before, downstream demand continues to show signs of improvement. With demand improving, we believe the company's business results has turned around after bottoming out Q3 of last year and expect our loss to further narrow in Q2 as it did in Q1. Regarding the timing of returning to profit, increasing local U.S. ESS production, winning EV volume model production, projects and increasing supply of cylindrical tab-less batteries and diversifying the customer base for electronic materials are some of the key initiatives that the company has been preparing to turn around our business performance. These efforts have started to deliver tangible results, and we hope to turn black on a quarterly basis during the second half of this year. We will seize this improving downstream demand as an opportunity to accelerate our turnaround and focus on faithfully executing this year's key business strategies shared earlier this year, such as focusing and prioritizing for better business efficiency, improving customer and market responsiveness and preparing future-ready technology.

[Interpreted] This is the ESS Business Team Leader, Yonghui Cho, and I will answer your second question, which was about U.S. ESS market, particularly tied to AI data centers and our order booking situation. U.S. total ESS demand is expected to grow from 90 gigawatt hours in 2025 to 160 gigawatt hour in 2030, which is a pace of 12% CAGR. Of that data center ESS demand is estimated to be 9 gigawatt hours in 2025 and 40 gigawatt hours or more in 2030, which is a growth of 30% plus CAGR. In addition to the existing utility ESS tied to the renewable energy projects and blackout preventing UPS, recently, we're seeing demand for microgrid ESS, which are installed on site in data centers for independent power supply. And such demand has been rapidly growing, estimated to grow by more than 60% CAGR until 2030. Accordingly, not only the existing TD and SI companies, but even data center companies are seeking to directly secure long-term battery supply. In terms of our order book, taking advantage of the growing data center-driven ESS demand momentum, we have been booking new orders by working with new customers in addition to the existing customer base, and we have booked orders to cover a significant portion of the next 2, 3 years of local U.S. ESS production capacity, which is a strong foundation for stable business performance going forward.

[Interpreted] The following question will b presented by Sonny Lee from JPMorgan Securities.

[Interpreted]. I have 2 questions. First question is related with the BBU demand, which is expected to grow tied to data centers in addition to the ESS demand. What is your sales plan for BBU this year? How much battery sales do you think will increase on a year-on-year basis related with BBU. Second question is about your plans of producing LFP batteries for ESS local in the U.S. second half of this year? Can you give us some update on whether your supply chain is being prepared on time, including materials and components? And do you see any issues in satisfying the non-PFE regulations under OBBBA?

[Interpreted] This is Choi, Head of Battery Sales team under Battery Strategic Marketing. I'll answer your first question about the BBU outlook. The BBU battery market size projections are being revised upward, driven by the aggressive infra investments by cloud service providers. This year, it is expected to be USD 800 million as a market size, which is over 70% Y-o-Y growth. Recently, not only the existing BBU packers, but key cloud service providers are seeking to directly source battery supply to ensure stable supply of BBUs, and this may drive the market further up. Leveraging our high-power output and non-China supply chain, we significantly increased BBU battery sales in Q1, and we expect to outgrow the market in terms of sales volume on a full year basis this year. We will also focus on enhancing the high-power output and safety features, which are important key features in the BBU market to develop BBU into a core pillar of the cylindrical battery business in the mid- to long term.

[Interpreted] This is Yoontae Kim, Head of Finance and Accounting team. I'll answer your question about our ESS SCM situation. Under the US OBBBA, PFE raw material or component dealing will be gradually lowered each year from 40% this year to 15% in 2030. So as a battery company, we can use this as a transition period to gradually switch our supply chain, and we have plans in place accordingly. Critical to satisfying the non-PFE requirement is building a non-China supply chain for LFP cathode active materials, which account for a large portion of the LFP battery cost. We plan to gradually switch to Korean sources to meet the requirements and have already secured supply from a key Korean supplier and will further diversify supply in the mid- to long term to strengthen our supply stability. For material or components other than the cathode active materials, we do not expect any issues in meeting the non-PFE requirements under the current rules. But of course, we will continue to monitor changes in policy or changes in supplier competitiveness and technology to update our supply chain.

[Interpreted] The following question will be presented by Minwoo Ju from NH Investment & Securities.

[Interpreted] I have 2 questions. First question is about the new project that will go into mass production from your Hungary plant this year. With that project mass production, how much utilization improvement do you expect? And when do you expect your EV business as a business line to breakeven point? Second question is about your semiconductor materials, the AI-related industry is rapidly growing. What kind of impact do you see on your semiconductor material? And also, can you give us any update of whether you have started any new semiconductor material or have diversified your customer base?

[Interpreted] This is Hoon Choi, VP of Battery Sales. I'll answer your first question about our Hungary new project. Even though easing of CO2 regulations last year had some negative impact on the European EV market, key European countries are reintroducing and increasing subsidies and the recent oil price increase has helped increase consumer interest in EV, improving EV demand, especially around the volume segment. And so EV battery demand is expected to increase by more than 10% on a Y-o-Y basis. Amid such market demand improvements, we are also planning to start mass production for a new battery project for a European volume model from Q2 and expect to see meaningful contribution to Hungary plant utilization and business performance once the OEM's new model is launched and sales ramp up. This year, in addition to sales increases, we're planning to switch some of our lines to LFP and refit our lines with latest manufacturing processes. Reflecting such capacity efficiency effects, utilization is expected to improve to about 70% in the second half. While we are targeting BEP during the second half with improved Hungary utilization and increased sales from the new products, we will have to wait and see a bit more given the possibility of customer demand changes, and we will keep you updated.

[Interpreted]. This is Ik Soo Kim, VP Strategic Marketing of Electronic Materials, and I'll answer your question about our semiconductor material business. Semiconductor companies have recently been continuing to invest in new capacity, and they are focusing on quickly building out mass production capacity. This is expected to bring strong growth in the long term, but for this year, the impact of new capacity increase is limited and wafer input is expected to grow in mid-single digits on a Y-o-Y basis this year. Semiconductor downstream demand is increasing, but mainly around the high-end products such as HBM or GDDR7 for AI data centers, and we are aiming to outgrow market demand by focusing on related products such as metal slurry and high thermal conductivity packaging material. To drive continued revenue growth and profitability, we are focusing on increasing sales of not only EUV material for DRAM advanced node production and patterning material for foundries, but also focusing on diversifying to overseas customers by starting supply of packaging materials to a global semiconductor manufacturer.

[Interpreted] The last question will be presented by Chuljoong Kim from Mira Asset Securities.

[Interpreted] I have 2 questions. The first question is about the cylindrical batteries. During the presentation, you've emphasized tab-less cylindrical batteries for power tools, the professional power tools. Can you give us a bit more detail of the share of tab-less cylindrical within your overall cylindrical business? And in terms of profitability, what kind of level of higher profitability does tab-less batteries have versus your other products? Second question is about the plans of selling your stake in SBC, which you publicly disclosed as of February. I'm wondering whether there's been any progress on that deal since? And when do you expect to close the deal? Do you think it will be possible within the year?

[Interpreted] This is VP Hoon Choi of Battery Sales. I will answer your question about the tab-less cylindrical batteries. This year, demand for power tool batteries is growing driven by increased AI data center construction, and we are targeting over 30% increase in sales Y-o-Y. Among the power tool batteries, demand is particularly high for high-power batteries for professional power tools, and we expect the share of tab-less batteries in our sales to increase from 3% to 4% last year to over 20% this year. Tab-less batteries are high-performance products that enhance energy density, output and charging performance by improving the tab design. They are high-end products mainly used in high-end premium professional power tools. And therefore, increased share of tab-less sales will improve overall cylindrical battery business profitability. Also, we plan to start supply of tab-less products for not only power tool applications, but also BBUs from Q2 and for hybrid EVs from the second half, which is likely to drive an even clearer improvement trajectory for our cylindrical battery business.

[Interpreted]. This is EVP Yoontae Kim of Finance and Accounting, and I'll answer your last question about the SDC sales. Currently, we are making relevant preparations, and we're reviewing details related with that sale. A committee comprised of only independent directors are considering the deal from various angles, not only from the company growth strategy perspective but also from a shareholder interest protection perspective, even though details, including the sales time line have not yet been decided. We are working towards the goal of completing the deal within the year.

[Interpreted]. Thank you very much for all of your questions. Your opinions are always well heeded in our business decision. This completes our conference call for Q1 2026. If you have any further questions, please forward them to our IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]