Samsung SDI Co Ltd

KRX:006400

Earnings Call Transcript

[Operator]

Good morning and good evening. Thank you all for joining the conference call of the earnings results of Samsung SDI. [Operator Instructions]

Now we will begin the presentation on Samsung SDI's first quarter 2024 earnings results.

[Yoontae Kim, executive]

[Interpreted] Good morning and good evening. Thanks for joining us today. I'm Yoontae Kim, Vice President of Business Management Office at Samsung SDI. First, on the call with me is CFO, Jongsung Kim; EVP, Michael Son, for Automotive and ESS Battery; EVP, Hanjae Cho, representing Small Battery; and VP, Kyongho Yoon for Electronic Materials.

We will now begin the earnings call for the first quarter of 2024. Let me start with our quarterly results and financial highlights. In Q1, under the effect of a slowed market demand incited by prolonged global recession as well as low seasonality, the revenue generated was KRW 5.1 trillion, down 8% Q-o-Q and 4% Y-o-Y. The operating profit was KRW 267 billion, which decreased 14% Q-o-Q and 29% Y-o-Y. The operating margin came in at 5.2%, a modest decline Q-o-Q.

In terms of performance by each business, the battery business reported KRW 4.6 trillion in revenue, which went down 8% Q-o-Q and 5% Y-o-Y, while the operating profit stood at KRW 215 billion, falling 5% Q-o-Q and 32% from a year ago. That said, prismatic batteries for EV have increased on year revenue and higher operating profit both quarterly and yearly thanks to expanded sales of high-value products such as P6 that began supply in the United States. The Electronic Materials business saw revenue decline to KRW 549 billion, 3% Q-o-Q and 1% Y-o-Y, with KRW 53 billion of the operating profit, which is down 38% Q-o-Q and 10% Y-o-Y. The pretax profit was KRW 293 billion, including KRW 26 billion nonoperating profit, such as profit and loss using the equity method. The net profit was KRW 287 billion.

The core and total assets grew by JPY 1.4 trillion to record KRW 35.5 trillion due to expenditures capitalized to raise tangible assets mainly for the EV battery business. The liabilities rose KRW 714 billion sequentially to KRW 14.8 trillion, with the equity at KRW 20.6 trillion, which went up by KRW 698 billion. The debt-to-equity ratio was 72%.

Lastly, I would like to go over Samsung SDI's commitment to ESG principles. While seamlessly executing a strategic task for environment management, we are in the process of establishing processes and systems for disclosure of data management that will enable us to comply with requirements for sustainability disclosures, such as European Sustainability Reporting Standards and IFRS Climate-related Disclosures. To enhance our supply chain sustainability, we are currently working with RBA to assess ESG aspects of our global supply chains in Europe, China and the U.S. We are also making sure that we provide due assistance where needed in order to boost ESG capabilities of our supply chain members.

Now I'd like to hand over the call to the representatives of each business unit for details of Q1 results and Q2 outlook.

[Michael SON, executive]

[Interpreted] Hello. I'm Michael Son, Head of Automotive and ESS Battery Business Strategy Marketing Office. In Q1, as the market demand slowdown extended, EV battery revenue declined Q-o-Q. However, it went up Y-o-Y backed by sales expansion of high-value products as P5 showed solid sales and P6 began supply for a premium model in the U.S. on top of AMPC profit recognition. The profit grew over quarter as well as over year.

The ESS Battery saw both revenue and profit fall due to the off-season effects and delays in some projects. In the second quarter, we anticipate the results to improve gradually with EV batteries. Though the demand may not recover in earnest soon, we will strive to secure solid profitability with stable sales volume raised from our current ongoing products while we press ahead with P6 battery sales expansion.

For ESS Battery business, we expect both revenue and profit rebound as Samsung Battery Box sales expand in utility sector and also demand for the data center UPS grows. Thank you.

[Hanjae Cho, executive]

[Interpreted] Good morning. I am Hanjae Cho, Head of Small Battery Strategy Marketing team. The Q1 revenue was adversely affected by seasonality trends, whereas profitability improved anchored by pouch battery cells. For cylindrical cells, the revenue fell, which is attributable to inventory buildups at our customers mainly in mobility sector, while power tool batteries sustained similar results Q-o-Q thanks to long-term agreements.

We had big revenue growth for pouch batteries versus last quarter pushed by major customers' launch of new flagship smartphones and robust sales. For yearly figures, both revenue and profit went up hoisting the small battery results overall.

In Q2, we will continue leveraging ongoing long-term agreements to ensure our profitability while seeking [ CLCA ] renewals to secure stable volume supply for the longer term. Also, we will preemptively penetrate new fast-growing markets of outdoor power equipment in the U.S. as well as electric 2-wheelers in India and Southeast Asia. For 46phi project, our plan is to acquire new customers while keeping our mass production preparation on track. For pouch cells, we will try to ensure the first in supply for our major customers' upcoming models in the second half. Thank you.

[Kyongho Yoon, executive]

[Interpreted] Good morning. I'm Kyongho Yoon, Head of Electronic Materials Strategy Marketing team. The Q1 revenue and profit went down on quarter as we hit low season for LED materials market along with temporary inventory adjustments at our semiconductor materials customers. However, polarizer film saw revenue growth in magnitude as well as profitability improving as sales expanded centering on large panels of our 75-inch.

In Q2, we expect the revenue to expand with the market recovery. The polarizer film sales will increase as we actively engage with peak season demand for TV products coming up in the third quarter. We anticipate that the semiconductor materials will have better performance, capitalizing on the recovery in the memory chip market. However, on OLED materials side, the revenue is likely to decline due to sluggish demand under the off-season effect. Thank you.

[Yoontae Kim, executive]

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

[Operator]

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

[Woo-Hyung Cho, analyst]

[Foreign Language] [Interpreted] I have 2 questions. The first question is about your CapEx plans this year. When we look at your major competitors, they're either maintaining their CapEx similar to last year or actually reducing their CapEx spending versus their plan. On the other hand, SDI has planned to significantly increase its CapEx this year. Can the market expect SDI to change its stance in CapEx to a more aggressive stance? Also, can you give us a detailed breakdown of where you're planning to make your investments this year?

Second question is about the cathode materials. Last year, you made the investment in STM. Can we expect the company to continue to increase the share of its internalized cathode materials? And if so, how much does it plan to expand?

[Jong-chun Kim, executive]

[Foreign Language] [Interpreted] This is CFO, Jongsung Kim, and I'll take your first question. You've asked about CapEx. And this year, automotive batteries will be the key focus of investment, and our investments are based on market and already secured customer demand with a long-term point of view to reflect the characteristics of the automotive battery business. The recent high interest rates and delays in global economic recovery has dampened EV market growth rates in the near term. However, growth rates are still expected to be high in the mid to long term, and our investments are being carried out as originally planned based on this long-term approach.

Key investment projects currently underway this year include the expansion of our Hungary and Malaysia plants to supply demand that's already secured as well as the construction of a new JV plant in the U.S. We are also actively planning new product-related investments such as the 46phi, all-solid-state battery and LFP to secure the mid to long-term growth momentum.

So overall, our investments this year were significantly increased versus last year. This year and going forward, we will continue to thoroughly execute our investment plans to ensure the timely response to customer demand and also the continued growth in the mid to long term.

[Yoontae Kim, executive]

[Foreign Language] [Interpreted] This is Yoontae Kim of the Business Management Office, and I answered your second question about our investments into STM and cathode material. The company does see the need to internalize a certain portion of its total cathode material needs for the sake of ensuring stable supply and also for gaining cost competitiveness. This has been the rationale behind our investment in cathode material. So going forward, the company plans to maintain a certain level of internalized ratio on a mid to long-term basis through STM as a way of optimizing our sourcing structure.

[Operator]

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

[Won Suk Chung, analyst]

[Foreign Language] [Interpreted] I have 2 questions regarding next-generation batteries. First of all, this is the all-solid-state battery. The company has announced, it's planning to mass-produce it from year 2027. But when we calculate back, it appears that at least by this year, you need to make some detailed decisions, including winning orders or planning out new production line buildout. Can you give us some update and outlook about your solid-state battery development? And also, can you compare what kind of pricing you're expecting on the all-solid-state battery versus the existing lithium-ion batteries?

Second question is about the 46phi development. 46 is a form factor that the market is very interested in. Can you give us some updates on your mass production preparations and what kind of schedules and time line you're expecting? Also, have you been able to win any new customers other than the existing GM order?

[Michael SON, executive]

[Foreign Language] [Interpreted] This is Michael Son of our Automotive and ESS Battery division, and I'll take your first question about the all-solid-state battery development update. SDI set up the all-solid-state battery pilot line last year in June, and since then, samples have been supplied to several auto OEMs as evaluation is currently undergoing. With the all-solid-state battery attracting growing interest in the market, we have been actually receiving sample requests from additional companies other than those that we are already working with. But we are currently examining details to finalize the production method and production line investment plans this year. We will also conduct technology verification and lay out SCM securement plans in order to secure mass production capabilities of the key materials to prepare for mass production targeted in 2027.

Now regarding the pricing and future market growth, all-solid-state batteries would initially be used mainly in the super premium vehicle segment, but over time and as overall demand increases, cost would come down, which would help expand the addressable market.

[Hanjae Cho, executive]

[Foreign Language] [Interpreted] This is Hanjae Cho of the Small Battery division, and I'll answer your second question about the 46phi batteries. During the first half of last year, SDI set up production lines capable of producing 46phi batteries of various heights and is currently supplying samples to various customers. Based on our edge in cylindrical battery technology that we have accumulated over a long time, SDI is currently developing 46phi products that are differentiated in terms of high power outage, long cycle life and fast charging in addition to the highest energy density in the industry. We plan to complete preparations for mass production within this year.

Regarding the customer contracts, we're talking not only with OEMs but also with customers in other applications, such as mobility that are currently using the 21700 existing standard-sized cylindrical batteries. We're talking with them about mass production projects to start from 2025.

[Operator]

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

[Hyun-So Kim, analyst]

[Foreign Language] [Interpreted] The question was that this was the first time the AMPC was reflected in SDI's operating profit. There was a question asking for a detailed breakdown of what was reflected and whether the company is expecting to recognize a similar size going forward? And how much of AMPC can we expect once the Stellantis joint venture goes into mass production next year?

[Yoontae Kim, executive]

[Foreign Language] [Interpreted] This is Yoontae Kim of the Business Support Office. I'll answer that question about the AMPC. As you know, on December 14 of last year, the U.S. Treasury Department announced the proposed regulations on the products that will be eligible for the AMPC application. With the help of outside experts, we confirmed that the products we currently produce in the U.S. are eligible for AMPC application. That is why KRW 46.7 billion was recognized this time in a lump sum for the products that had been produced from last year, that's 2023, until first quarter of this year. Going forward from second quarter, the amount accrued will be recognized on a quarterly basis. And once the Stellantis joint venture line operation ramps up next year, the AMPC benefit is expected to significantly increase.

[Operator]

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

[Minwoo Ju, analyst]

[Foreign Language] [Interpreted] My first question is about the development of low-cost batteries. In addition to the premium NCA-based products, you're also or said should be preparing low-cost products. Can you give us an update on that development? And also, you see sales of these low-cost products increase. Wouldn't that relatively negatively affect your profitability?

Second question is about the decrease in growth rate of European EV sales and the impact that would have on your business. The decrease in the growth rate of EV sales appears to be more notable in the European side. You have a higher dependence on European sales. What kind of impact are you feeling? And do you think that that would have any implications for the operation of your Hungary plant?

[Michael SON, executive]

[Foreign Language] [Interpreted] This is EVP, Son Michael, and I'll take your first question, which was about the development of low-cost platforms and the impact that may have on our profitability. The company strategy of pursuing profitable and qualitative growth remains unchanged. That said, for the sake of increasing our mid to long-term growth potential, we are currently developing the NMX or LFP plus platforms, which target the volume and entry segment EVs where demand has been recently growing. Our mass production target of these platforms is 2026. Even though the volume and entry segments are more price-sensitive than the premium segment, we are planning to secure an appropriate level of margin through differentiation in various aspects. For example, in terms of performance, we aim to have a competitive edge within the same segments in key metrics, such as energy density, charging speed and product life.

In terms of cost competitiveness, we are focusing on optimizing material and form factor and also gaining differentiation in technology and manufacturing process. Therefore, while maintaining our leadership in the premium segment of the existing high nickel batteries, we will also focus on developing and winning contracts for NMX and LFP plus for stable growth in order to achieve both profitability and quantitative growth.

This is EVP, Michael Son, continuing to answer your second question about the European impact on our battery operation. The EV market demand continues to remain dampened due to delays in global economic recovery. And as you mentioned, Europe is showing a relatively weaker growth rate. However, global demand, including in Europe, is expected to gradually improve starting from the second half. Now when we look at a mid to long-term perspective, the EV market is expected to continue a fast pace of growth supported by various factors, including environment policies.

SDI does have a high share of European customers, but the vehicles that use our batteries are sold evenly across global markets, including Europe and the U.S. So in terms of battery capacity, Europe does not account for an absolutely high share as our end market. This is why a slowdown in European demand has not particularly affected our Hungary plant more. And we will try to minimize the impact of the near-term EV growth rate slowdown by increasing supply of the existing P5 and newly launched P6 into U.S. market.

[Operator]

[Foreign Language] The last question will be presented by Chuljoong Kim from Mirae Asset Securities.

[Chuljoong Kim, analyst]

[Foreign Language] [Interpreted] I have 2 questions regarding the electronic materials, especially the semiconductor materials. First question is related with AI. A lot of attention is building up in the market regarding AI. What kind of implications do you think that would have in your semiconductor material business?

Second question is, aside from AI, the overall industry situation of the semiconductor industry is improving quarter-over-quarter. Given that, what kind of business outlook or guidance can you give us for the business performance of your battery material -- excuse me, the semiconductor material business?

[Michael SON, executive]

[Foreign Language] [Interpreted] This is Michael Son, and I'll answer your first question because even though you've asked about the implications of AI for the semiconductor material business, actually, from SDI's perspective, it would have positive impact on our other businesses as well. The growth of the AI market is expected to bring positive effects to many aspects of SDI's business, including ESS Battery, Electronic Material, Semiconductor Material business and also the small-size pouch battery business.

First of all, the AI market growth leads to increase in data center power demand, which is expected to more than double from the current levels by 2030. Increased demand for power is expected to drive significant demand increase for not only utility ESS but also UPS, which is used as data center backup power. Increase in data centers and AI-enabled devices will drive rapid increase in high-end semiconductors for AI applications, which would be positive to the business performance of our semiconductor material business. Also, the demand for on-device AI-enabled mobile IT devices requiring high-density batteries is expected to increase. And given that our key customers are leading the market, this would be another tailwind for our business.

[Kyongho Yoon, executive]

[Foreign Language] [Interpreted] This is VP Kyongho Yoon of the Electronic Materials business, and I'll answer your second question, which was asking about the impact from the improving semiconductor industry situation. This year, the semiconductor market is expected to report significant growth versus last year as the semiconductor market situation starts to meaningfully improve following the semiconductor production cuts last year and also the positive impact from the increase in AI-related demand. This year, our semiconductor materials business is expected to record more than 20% year-over-year revenue growth and meaningful profitability improvement, particularly around key products such as the SOH, premium EMC and EUV material. We also expect additional growth opportunities from the rapid increase in demand for high-end semiconductors.

[Yoontae Kim, executive]

[Foreign Language] That completes our conference call for the first quarter 2024 earnings results. If you have any further questions, please forward them to the IR team. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]