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

Thank you for joining Samsung SDI's earnings call. Following the presentation, we will hold a Q&A session with attendees. [Operator Instructions] Now we'll begin Samsung SDI's Q2 2026 earnings call.

Good afternoon. I'm Yoontae Kim, Executive Vice President of the Finance and Accounting Team at Samsung SDI. First of all, I would like to thank everyone for joining today's earnings call. Joining me are EVP Jae-kyun Oh from Business Management Operation; EVP Hanjae Cho from Strategic Marketing Office; EVP Yonghui Cho from ESS Business 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. Now let us begin Samsung SDI's 2026 Second Quarter Earnings Call. I'll start with financial results for Q2 2026. The Q2 revenue reached KRW 3.8 trillion, up 5% Q-o-Q and 19% Y-o-Y. Operating income, including the impact of U.S. reciprocal tariff refunds, reached KRW 204 billion, returning to profitability in 7 quarters. Excluding the impact of tariffs, a small profit was recorded. Reflecting equity income in affiliates and other factors, pretax income was KRW 479 billion, and net profit was KRW 472 billion. I will now present the financial status as of the end of Q2 2026. With an increase in the equity value of affiliates, total assets rose by KRW 3.1 trillion Q-o-Q to KRW 47.6 trillion. Liabilities increased by KRW 1.2 trillion Q-o-Q to KRW 20.8 trillion. And the total equity increased by KRW 1.9 trillion Q-on-Q to KRW 26.8 trillion. Second quarter CapEx executed was KRW 503 billion. For detailed financial figures, please refer to the appendix. Next, I will share the Q2 financial results of each business unit. First, the Battery business revenue grew both Q-o-Q and Y-o-Y, driven by expanded sales of high-power products such as batteries for UPS, BBU and power tools as well as EV batteries for the European market. The operating income returned to a surplus due to expanded sales of high-value products, AMPC benefits from increased local production in the U.S. and the aforementioned tariff impact. Moving on to the Electronic Materials business. Sales of semiconductor materials remain solid, while revenue and profitability improved, primarily driven by film materials for foldable smartphones. Next are the business highlights for the first half of the year. We continue to achieve sustained quarterly performance improvements posting a profit in Q2, as mentioned earlier, as well as on a cumulative H1 basis with revenue of KRW 7.3 trillion and operating profit of KRW 48 billion. We had initially anticipated a turnaround in the second half, but thanks to rapid revenue growth and improved profitability across the business units, coupled with favorable exchange rates and tariff refunds, we were able to return to profitability sooner than expected. Here are the key contributors for each business. By leveraging the strength of our non-PFE product lineups, including utility ESS, UPS and BBU alongside a diverse portfolio of high-power technologies, we actively addressed AI data center demand and drove profitability. The small battery business expanded sales across high-power battery applications, including power tools, and the automotive battery business launched industry highest energy density prismatic cells driving higher utilization. Furthermore, the Electronics Materials business maintained solid profit margins contributing to overall corporate earnings. We expect these drivers of improvement to continue into the second half. Beyond short-term earnings improvements, we also secured additional orders for ESS and EV applications across our production hubs in the U.S., Europe and Korea. In the U.S., we have signed long-term supply agreements with major ESS customers and are having discussions for additional supply contracts. We also secured a new project order for Mercedes-Benz in April, bringing all of the top 3 premium automotive brands in Germany into our customer base. Recently, we made significant progress by winning orders for a next-generation distribution grid ESS project in Korea, laying a crucial foundation to lead the Korean ESS market. These winning results are largely attributable to the competitiveness of our differentiated prismatic batteries backed by our local production capabilities. Lastly, to secure future growth engines, we diversified into new applications and customers. In the humanoid and aero sectors, where high growth potential is anticipated, we have expanded cooperation with major customers such as signing a joint development agreement, and we have also won a project to apply cylindrical batteries to HEV for the first time. In the semiconductor materials business, we supplied packaging materials, such as high thermal conductivity EMC to a new global customer, expanding our customer portfolio. Now our Senior Executive of Business Management Operation will address the market outlook and business strategies for the second half of the year.

Hello. I'm Jae-kyun Oh, EVP of Business Management Operations. Since taking office at the end of last year, I promised during the early year earnings call that we would achieve a turnaround within the year, and I'm deeply gratified to have returned to profit faster than expected. Moving this achievement into sustainable growth is even more important, so we will continue to respond proactively and flexibly to market changes while strengthening our competitiveness. Now I would like to share the market outlook for the second half by business unit and our business strategies. First is the ESS market. In the U.S., driven by the expansion of renewable energy and increasing investment in AI data centers, demand for utility ESS and UPS is showing sharp growth. Additionally, policy shifts are accelerating the realignment of the supply chain towards non-PFE components. In Korea as well, we anticipate expanding business opportunities centered around ESS initiatives such as the third central contract market. Therefore, in the U.S., we plan to establish a non-PFE supply chain and ensure the smooth preparations for the mass production of prismatic LFP batteries, while expanding UPS production capacity to meet the fast-growing demand. Furthermore, by leveraging our strength in Korean SCM and products in-house, we will actively pursue domestic projects to expand business opportunities. Also, with advantages in lifespan output and safety, sodium-ion batteries are poised for mid- to long-term growth. Integrating our proprietary technologies, we're currently developing UPS solutions for AI data centers and utility ESS. Moving forward, we will prepare our sodium-ion battery mass production plans. Moving on to the EV battery market. In Europe, subsidies in major countries such as Germany and France, combined with persistently high oil prices, are boosting demand in the volume segment. At the same time, the impact of the IAA, or Industrial Accelerator Act, is also driving a trend to establish domestic supply chains within Europe. We will expand supply for volume models that entered mass production in the second quarter and drawing on our local prismatic cell production capabilities in Europe, we will also seek to secure orders for various projects, including LFP batteries. Meanwhile, in the U.S. market, consumer EV incentives have been eliminated and major OEMs are recalibrating their EV strategies. As a result, we project that the demand slowdown will continue in the near term. With this, we will strengthen our collaboration with main customers and secure future project orders, ensuring we are positioned to move proactively when the market recovers. Regarding the small battery business. Driven by the expansion of AI data centers, demand growth continues to center on BBUs and high-power batteries for power tools. Also, emerging markets for cylindrical batteries such as humanoid robots, aerospace and HEV are expanding. To meet growing market demand, we plan to expand our high-power cylindrical battery capacity as current production lines are running at full capacity. Next is the Electronic Materials business. Amid favorable conditions in the semiconductor downstream sector, wafer input is increasing and continued process miniaturization is expected to drive growth in demand for materials. And demand for display materials will also expected to rise due to new product launches such as smartphones and laptops. In addition to our existing materials, we will expand sales focusing on new semiconductor packaging materials and high-value film materials for foldable displays. As such, we anticipate robust growth in downstream demand across both the Battery and Electronic Materials business in the second half of the year. Building on the turnaround in the first half, we will secure sustainable revenue growth and profitability. Thank you.

This concludes the presentation, and we'll now begin the Q&A session. The Q&A will be held in Korean followed by the same content interpreted into English. [Operator Instructions].

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Sonny Lee from JPMorgan Securities.

[Foreign Language] I have 2 questions. In your presentation, you mentioned that there is earnings improvement, so can you tell us whether the earnings improvement trend would continue into the second half and also provide a more detailed breakdown by business? And the second question relates to the U.S. LFP, ESS mass production. So what is the status of the planned second half start of the LFP, ESS battery production? Also, please explain progress in establishing a supply chain that meets non-PFE requirements.

[Foreign Language] I'm CFO, Oh, Jae-kyun, and I will provide the answer to your first question. As noted earlier, we expect the improvement -- improving trend in our first half performance to continue into the second half. Let me provide a little more detail by business. For ESS, given the growing U.S. demand for utility ESS and UPS applications, we expect sales to expand significantly in the second half. Profitability is also expected to remain on a solid trajectory, supported by higher sales from the ramp-up of new LFP lines and AMPC benefits. In the small battery business, we plan to meet growing demand for high-power products, including BBUs and power tools by fully utilizing available capacity. Higher utilization and increased sales of high value-added products are expected to drive a clear improvement in profitability in the second half. For EV batteries, losses are expected to narrow as new projects ramp up. However, potential volume declines in existing projects remain a risk, and we will continue to monitor the situation closely. In Electronic Materials, sales are expected to increase in the second half, led by materials for foldable displays, while profitability is expected to remain stable. The second half will be important, not only for improving performance, but also for preparing for medium- to long-term growth. We will build a foundation for sustainable growth by launching new projects, including LFP batteries on schedule, securing additional project orders and expanding capacity.

[Foreign Language] I am EVP Cho, Yonghui, and I will be providing the answer to your second question. Our U.S. prismatic LFP line for ESS applications is currently undergoing mass production quality validation. As planned, cell production will begin in October, with customer deliveries of the SBB 2.0 solution starting within the year. With respect to preparation for a non-PFE supply chain, the key priority is establishing a supply chain for LFP materials, which account for a significant share of product costs. Through a range of partnerships, primarily with Korean and U.S. suppliers, we have secured in advance the necessary volumes of LFP cathode materials. For other key components, we have also established a non-PFE compliant supply chain through localization of our partners.

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

[Foreign Language] My name is Kim, Hyun-Soo, from Hana Securities. I have 2 questions related to ESS. The first question, I understand that your order intake for ESS in the U.S. is increasing, so can you provide an update on U.S. ESS orders and plans for additional capacity? And my second question is how would a potential slowdown in AI data center expansion effect Samsung SDI's ESS business?

[Foreign Language] I am EVP, Cho, Yonghui, and I will be answering both of your questions. As for your first question about the U.S. ESS orders and our plans for additional capacity. In the U.S. market, prismatic LFP batteries that combine superior safety with compliance with non-PFE supply chain requirements are strongly preferred by customers. Accordingly, we are seeing strong momentum in order intake. The orders we have secured to date cover a substantial portion of our capacity through 2029, including projects with a high likelihood of being awarded in the second half, demand is expected to exceed our production capacity from 2028 and onward. Against this backdrop, we are currently reviewing options to secure additional capacity and will update the market once our plans become more concrete. As for your second question on how the slowdown in the AI data center expansion could impact our ESS business. Well, with respect to the potential impact of a slowdown in the U.S. AI data center expansion, well, we believe the structural growth trend in the U.S. ESS market will remain intact even if the pace of data center construction moderates. In the U.S., renewable power generation, particularly solar and wind continues to expand amid rising electricity demand and improving economics. This is driving steady growth in ESS demand to manage intermittency and support grid stability. A growing number of states are also setting ESS deployment targets and raising their planned installation capacity. Beyond renewable energy applications, ESS is increasingly being used as critical infrastructure to stabilize aging power grids and facilitate smooth grid interconnection. Against this backdrop, ESS is expected to play an increasingly critical role in the U.S. power market. We, therefore, expect any slowdown in AI data center investments to have only a limited impact on our ESS business. In particular, our recent customer discussions and ongoing order negotiations indicate a strong preference for prismatic LFP batteries that meet non-PFE requirements while offering a superior safety. We will continue to strengthen our product competitiveness and expand our supply capabilities to effectively meet market demand and sustain our growth momentum.