Samsung SDI Co Ltd

KRX:006400

Earnings Call Transcript

[Yoontae Kim, executive]

[Interpreted] Good morning, and thank you for joining us today. I'm Yoontae Kim, Vice President of Business Management Office at Samsung SDI. Joining us are CFO, Jong Sung Kim; EVP, Michael Son, representing Automotive and ESS Battery; EVP, Jae-Young Lee, representing Small Battery; and EVP, Sang-Kyun Kim for Electronic Materials. We will now begin the earnings call for the second quarter of 2023.

First off, our second quarter results and financial highlights. In the second quarter, both the revenue and operating profit increased Q-o-Q and Y-o-Y. The revenue was KRW 5.8 trillion, which increased 9% Q-on-Q and 23% Y-o-Y. The operating profit rose by 20% sequentially and by 5% from a year ago to KRW 450 billion with operating margin of 7.7%. Looking at each business segment, the batteries business generated KRW 5.3 trillion in revenue, increased both quarterly and yearly by 10% and 29%, respectively, as both large- and small-sized battery businesses recorded growth. The operating profit stood at KRW 388 billion, an increase by 23% Q-o-Q and 58% Y-o-Y.

Electronic Materials business reported a revenue of KRW 571 billion with 2% increase Q-o-Q, but 15% decrease Y-o-Y due to slowdown end product demand. The operating profit was KRW 62 billion, a 5% increase from the prior quarter and down 66% Y-o-Y. Pretax profit was KRW 583 billion, including KRW 133 billion of the nonoperating profit, such as profit and loss using the equity method with a net profit of KRW 486 billion. The quarter-end total assets rose by KRW 495 billion sequentially to KRW 33 trillion. Liabilities increased by KRW 42 billion Q-o-Q to KRW 14.5 trillion, and the equity was posted at KRW 18.5 trillion, a KRW 453 billion increase. Debt-to-equity ratio declined slightly to 78%.

Next, let me brief you about our ESG performance during the quarter. Samsung SDI had a full quarter in carrying out the ESG targets. We finished the calculation of the Scope 3 emissions that encompass indirect emissions from our entire value chain and became the first lithium battery player to receive carbon footprint labeled by Carbon Trust, a U.K.-based carbon certification agency. We recently published a sustainability report detailing such feats, along with our other ESG performances and achievements, available on our website.

Before moving on to enumerating the business unit results, our Head of Business Management Office, Jong Sung Kim, will share the company's business highlights in the first half and outlook of the second half.

[Jong-chun Kim, executive]

[Interpreted] Hello. I'm Jong Sung Kim, the Head of Business Management Office. Let me start with business highlights in the first half. Despite sluggish end product demand and global economic downturn, we achieved solid earnings and continued our growth centering on battery business on the back of green policy expansion and accelerated electrification of the automakers.

On top of such, our preparation for future growth engines was seamlessly underway. First of all, as recently reported, we signed an MOU with Stellantis to build the second plant for our joint venture, StarPlus Energy. This means that our planned annual capacity in the U.S. will total about 100 gigawatt hours, combining the StarPlus Energy's 2 plants with the prospective capacity for the joint venture with General Motors.

In tandem, the expansion of the second plant in Malaysia is also making smooth progress to accommodate growing demand for cylindrical batteries in the future. As for the solid-state battery, we completed the pilot line set up and produced R&D demo samples. Good progress as well with the 46-phi battery, our next-gen cylindrical battery form factor, as its production line commenced its sample production recently. To secure our innovative super gap technological competitiveness, we focused on accelerating the R&D by establishing an R&D center in Shanghai, forming a global R&D network along with the ones set up in the U.S. and Europe last year.

Now I would like to share our business outlook in the second half. Amid the lingering uncertainties induced by slowdown of global economy, EV demand is expected to grow by 20% from the first half, while the long-term EV and ESS battery demand is projected to outgrow last year's forecast. Taking this momentum, we expect to expand our growth mainly on EV and ESS batteries.

In response to such market growth, Samsung SDI has set out the following key tasks. First, we will speed up the development of solid-state batteries in order to preoccupy the next-gen battery market as well as secure production capability for 46-phi batteries to expand our pool of major electric vehicle customers. Also, we will continue to drive manufacturing innovation to gain cost advantage and to prepare platforms for wide spectrum markets such as high-nickel batteries for premium markets and new materials for volume and entry markets. In line with growing importance of global supply chain management, we will not only secure the supply of key metals through long-term supply agreement to [ Acreek ] Investments [indiscernible] endeavor to establish local supply ecosystems that connect globally.

Regarding electronic materials, we will solidify our foundation for future growth by rolling out new products such as tungsten slurry, EUV photoresist, polarizer film for OLED to our customers. Also central to our future strategy is to expand the R&D of battery materials such as one for solid-state battery. Last but not least, we will further fortify our ESG management as we see it as our future business edge. We will work with our partners through win-win partnerships, thereby rising together as global leaders for co-prosperous future. We would like to ask for your continued support. Thank you.

[Unknown Executive]

[Interpreted] Now each business unit will present the details of the second quarter results and the second half outlook.

[Michael SON, executive]

[Interpreted] Good morning. This is Michael Son, Head of the Automotive and ESS Battery Strategy Marketing team. Exiting the second quarter, large-sized battery business saw an increase in both the revenue and profit, thanks to the solid sales of customers' premium vehicles geared with our P5 batteries. After passing the low season, ESS sales have also expanded mainly in utility and UPS solutions.

In the second half, we will actively engage to meet the demand for automotive batteries through new lines in Hungary, which will lead the P5 sales to take up over 50% of our total prismatic battery sales for electromotive vehicles and propel the earnings growth down the line. Our efforts to diversify customer portfolio continue as we seek to materialize project acquisitions from new customers as well as gain additional orders from the existing ones. Also, the solid-state battery project will start sample production for customers in earnest at the S line, our pilot line. With the ESS batteries, we will roll out a new product featuring higher energy density and better safety that will bring us the sales growth centered on utility solutions.

Concerns over global economic slowdown persists in the second half. However, we will make the utmost efforts to create revenue growth and profit improvement in keeping up with the fast-growing markets of automotive and ESS batteries. This is the end of large size battery division's presentation.

[Jae-Young Lee, executive]

[Interpreted] Good morning. I am Jae-Young Lee out of the small-sized battery strategy marketing team. In the second quarter, small-sized battery business produced improved results in both revenue and profit, thanks to this expanded sales of high-power cylindrical batteries. Despite the recovery of the demand for power tool batteries, we managed to expand the sales for major customers backed by long-term supply agreements. Pouch batteries, however, recorded a declined revenue due to sluggish IT demand. In addition to our earnings growth, we have been diligent in making results for next-generation form factor 46-phi batteries as we achieved the customer's target performance earlier than planned and started the preparation for sample production for customers, which is scheduled in the second half.

Going into the second half, we expect the revenue and profit to grow, driven by the sales expansion of EV and micro mobility that includes e-bikes and e-scooters. EV and e-bike battery sales is likely to expand, stemming from increasing demand, while we seek business opportunity for e-scooters in new rising markets such as India. The market demand for power tool batteries is recovering rather slowly, but we will press ahead with first sales expansion by confirming the second half volume as early as possible in close consultation with the customers and by promoting sales for new applications. Last but not least, the supply of pouch batteries for our major customers' new flagship models has commenced. This is the end of small-sized battery division's presentation. Thank you.

[Sang-Kyun Kim, executive]

[Interpreted] Good morning. I am Sang-Kyun Kim, Head of Electronic Materials Strategy and Marketing team. In the second quarter, Electronic Materials business reported marginally better results with increased polarizer film revenue owing to the demand recovery that followed the normalization of the major customers' inventory level. However, the revenue for semiconductor process materials declined as the market demand remained muted during the quarter.

In the second half, we expect both the revenue and profit to improve as the contracted demand is slated to recover and fare better in the first half. Polarizer film is likely to sustain a good flow in sales with a higher utilization rate and enhanced product mix, whereas OLED materials are set to see the sales expansion with the supply starting for major customers' new platform. As for the semiconductor materials meet the greater demand recovery, we will push forward with expanding the sales by penetrating into new products such as tungsten slurry, SOH and EMC with a high level of heat dissipation. Thank you.

[Unknown Executive]

[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.

[Operator]

[Foreign language] [Operator Instructions] [Foreign language] The first question will be provided by Ji-San Kim from Kiwoom Securities.

[Ji-San Kim, analyst]

[Interpreted] My name is Ji-San Kim from Kiwoom Securities. I have 2 questions. Let me first ask you, it seems that SDI appears to be investing more aggressively than before as can be seen with GM JV and the second Stellantis JV plant. So can we expect further acceleration of orders and investments in the future? That would be the first question. As for the second question, JVs with Stellantis and GM are expected to begin production in the U.S. after '25. And so I was wondering if Samsung SDI is preparing its supply chain management in accordance with the accelerated capacity expansion as well as the IRA subsidy condition.

[Michael SON, executive]

[Interpreted] I am Michael Son from the Automotive and ESS battery business unit. I will provide you the answer for the first question, which was related to the -- how -- what we expect in terms of the orders and investments in the future. Under a firm management vision of a super gap technological competitiveness, the best quality, profitable and qualitative growth, Samsung SDI has continuously executed project acquisitions and investments in line with the market growth based upon its mid- to long-term business strategy.

At sub factors, as IRA have boosted the North American market, we have responded effectively and thus attained many treatments such as the Atlantis (sic) [ Stellantis ] JV, GM JV and the recent Stellantis JV second plant or MOU. We will take into account our strategic direction and resources and respond appropriately to the continuously growing market demand. Thank you.

[Yoontae Kim, executive]

[Interpreted] I am Yoontae Kim, VP of the Business Management Office, and I will be providing you the answer to your second question relating to how we are preparing our supply chain management in accordance with the IRA's subsidy conditions. To meet the critical mineral requirement for tax benefit given to consumers of eco-friendly vehicles, the proportion of minerals extracted processed in North America and U.S. FTA countries or recycled in North America must be at least 40% this year and increased by 10% every year until 2027. Our plan is to meet the requirements by using minerals from U.S. FTA countries such as Australia, mainly lithium, which accounts for the largest proportion of critical minerals in '23 and '24.

From 2025, when the use of minerals from foreign entities of concern is prohibited, we aim to cooperate with major partner companies that have SCM in regions other than VOC to meet the requirements. Starting from 2025, when we begin production in the U.S., we must achieve at least 60% of the North American share for the battery component production requirement and raise that share by 10% every year. To this end, we are localizing our electrode cell module processes and collaborating with partner companies to enter the local market for key components such as cell module component separators and electrolytes on schedule. Specific definition of foreign entities of concern is not clear yet, but we will plan carefully with various scenarios. We want nothing to disrupt the accelerated growth of our North American business. Thank you.

[Operator]

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

[H. Kwon, analyst]

[Interpreted] I have 2 questions. And my first question is related to solid-state batteries. As was explained, the preparation for the prototype production of all solid-state batteries is on track for the second half of the year. So what are the technical differentiation points of SDI and the status of consultation with customers? And my second question is that can you please elaborate on the status of new electronic materials development and whether there is any material development plan for synergy with the batteries business unit?

[Michael SON, executive]

[Interpreted] Let me provide you with the first answer to your first question. Once again, I am Michael Son from the Automotive and ESS Battery. And you asked a question about the technical differentiation points of SDI and the status of consultation with our customers. As mentioned earlier, the schedule for solid-state development is going as well as planned. And starting with the production of development prototypes in June, we are working closely with our OEM customers to produce samples for them in the second half of the year and install them on their demo vehicles. Our solid-state battery is based on a fully solid electrolyte, not a gel-type semi-solid of electrolyte, pursuing the highest level of safety.

At the same time, it adopts the sulfide-based technology with the highest ionic conductivity and applies the NCA cathode material with a nickel content of up to 94% and our unique server carbon anode technology aiming for an industry-leading energy density of more than 900-watt hours per liter. I cannot reveal the names here, but I can tell you that we have secured new customer projects for mass production in 2027, and we are in talks with several other OEMs. We will continue to work diligently for our 2027 production target in order to lead the innovation of automotive battery technology. Thank you.

[Sang-Kyun Kim, executive]

[Interpreted] I am Kim Sang-Kyun, EVP for Electronic Materials business unit. I'll be providing you the answer to your second question. In the second half of this year, green host, our new platform product that has started mass production from June, will be produced in earnest. And following the blue product for CIS color resist that entered mass production at the end of last year, green and red products, polarizer films for OLED, tungsten slurry, et cetera, are preparing to enter mass production. The new products that are being prepared to enter the market within next 1 to 2 years, are QD ink with improved efficiency, FOCA material for foldable display with enhanced adhesion and high temperature and humidity, green [ time ] host for next-generation platform and EUV photoresist.

Regarding the battery materials, besides the separators currently under mass production, we are also in development of key materials for solid-state batteries and C&T dispersion solutions to blackbox core technology and to stabilize SCM for next-generation battery. By discovering new materials continuously, we aim to expand our product portfolio and establish a solid foundation for the long-term growth of our Electronic Materials business. Thank you.

[Operator]

[Foreign language] The following question will be presented by Woo-Hyung Cho from HSBC Securities.

[Woo-Hyung Cho, analyst]

[Interpreted] My name is Woo-Hyung Cho from HSBC. I have 2 questions, 1 is related to LFP and the other is related to your customers. The first question, regarding SDI's entry into the EV LFP battery market, this is the question, what is SDI's position on the market concerns by dilution of its premium strategy? And -- or what is its differentiation strategy as a late comer? And my second question is related to Rivian. Rivian's sales were good in Q2. And what is the outlook for the second half? And there's news of Rivian adopting LFP. So is there a risk of SDI volume reduction?

[Michael SON, executive]

[Interpreted] Thank you. Once again, Michael Son from the Automotive and ESS Battery Business Unit. And I'll be answering your question related to our entry into the EV LFP battery market and the market concerns about dilution of our premium strategy as well as our differentiation strategy as a late comer. Unlike before, when automakers had only a limited number of premium EV models, they are now launching various EV models for each segment, from entry to volume to premium, mirroring their existing range of cars with internal combustion engines.

So with such, a different segment of electric vehicles require different platforms for their automotive batteries. To meet the growing demand for volume and entry segments, we're actively developing NMX and LFP platforms. Despite the concerns of some, our product portfolio reflects our premium strategy, not our departure from it. We are endeavoring to secure a wide portfolio of automotive batteries from the top premium solid-state battery based on NCA technology to the NMX and LFP technologies that target the volume entry segment. By doing this, we can create more business opportunities and meet the varied needs of our customers.

We may have entered the LFP market later than Chinese companies, but we have various advantages that set us apart from our competitors. Our manufacturing process and material technology, which we have developed from the existing ternary system, enable us to offer high energy density, quality, uniformity and local operation experience in the LFP market. Thank you.

[Jae-Young Lee, executive]

[Interpreted] I'm Lee Jae-Young, EVP from the Small Battery, and I'll be answering your question related to Rivian. Rivian delivered more vehicles than expected in Q2 and is on track with its production plan. We are confident that our sales will keep growing as planned in the rest of the year. We are currently supplying batteries for premium models with long driving range among Rivian models, and we are also developing new products, with a focus on increasing energy density for driving range improvement. On the other hand, LFP is being considered for mounting on vehicles with short driving range. So we think that the impact of our sales will be limited.

[Operator]

[Foreign language] The following question will be presented by Chanwoo Kim from Shinhan Investment & Securities.

[Chanwoo Kim, analyst]

[Interpreted] My name is Chanwoo Kim from Shinhan Securities. I also have 2 questions, 1 question is a follow-up question related to LFP. And the second question is related to power tool business. Related for ESS, the sense that the penetration rate of LFP in the utility market has increased quite significantly. And I hope that if -- I wonder if you can provide us with the update related to this situation. And I would also like to ask what SDI's ESS business strategy is. And my second question, as I said, is related to power tool. You have made improvements in your small battery-related businesses. However, it seems that power tool demand did not really, noticeably, rebound in the first half of the year. So I wonder what's your outlook is for the power tool business in the second half?

[Michael SON, executive]

[Interpreted] Once again, this is Michael Son from Automotive and ESS battery. I believe your question is related to the penetration rate of LFP in the utility market and SDI's ESS business strategy. It is true that LFP's penetration rate in the ESS market is rising, but we are actively responding to the market where we can utilize high-power and high-energy density advantages of the ternary system in pursuing sales and profit growth, especially in the utility market, there is still a high demand for higher energy density, quality and performance, such as in commercial use. We will actively respond by launching new products in the second half of the year.

Also, in the UPS market where we have a high market share, the needs of customers who require higher output performance in a limited space are getting stronger. So we are preparing new products with enhanced output to strengthen our market dominance. Meanwhile, we are actively developing the LFP platform. To respond to the continuously expanding LFP demand, we will strengthen our mid- and long-term ESS business by developing large-cell products based on our unique technology that we mentioned earlier. Thank you.

[Jae-Young Lee, executive]

[Interpreted] I am Lee Jae-Young, EVP from small battery business unit, and I'll be answering your question related to power tools. Although the U.S. housing market index, which perceives the power tool demand, is rebounding, the recovery of the housing market is expected to be somewhat delayed due to high mortgage rates. Therefore, it seems difficult to see a meaningful rebound in power tool demand in the second half of the year. Although the market environment is sluggish compared to previous years, we have readily secured the supply volume for the second half of the year based on long-term supply contracts with our major customers. And we plan to minimize the impact of market demand slowdown by expanding sales to new applications such as OPE. Also, we will try to achieve continuous sales growth for the cylindrical battery as a whole by securing new business opportunities for e-scooter as well as by expanding sales for mobility products such as EV and e-bike, which will see demand hike in the second half of the year.

[Operator]

[Foreign language] The last question will be presented by Anna Lee from Yuanta Securities.

[Anna Lee, analyst]

[Interpreted] Thank you for giving me this opportunity. My name is Lee Anna from Yuanta Securities. I also have 2 questions. My first question is this. The Electronic Materials business' performance in the first half of the year was weaker than last year. So how much recovery do you anticipate in the second half of the year? And my second question is related to micromobility. So what is SDI's sales strategy as the demand for micromobility is expected to increase significantly in the future?

[Sang-Kyun Kim, executive]

[Interpreted] I'm Kim Sang-Kyun, EVP for Electronic Materials business, and I'll be providing you the answer to your first question. In the first half of the year, the Electronic Materials business faced difficulties due to the slowdown in demand for various industries, such as semiconductors and displays caused by the economic downturn. But from the second half of the year, the performance of Electronic Materials is expected to improve, thanks to the normalization of inventory levels of customers and to the effect of launch of new products and et cetera.

For each material, polarizer film is expected to continue to witness improvement both in sales and profitability every quarter after having hit bottom in Q1, thanks to normalization of inventory of major customers and the recovery of large area TV demand from North America, Western Europe and China. For OLED materials, we plan to expand the sales of green host, our product for the flagship smartphone panel of our major customers, which will be launched soon. And for semiconductor material, we'll introduce new products such as [ W Slurry, ] [indiscernible] and high-heat dissipation EMC. With these plans, the Electronic Materials business will endeavor to enhance both revenue and profitability Y-o-Y as well as compared to the first half of the year.

[Jae-Young Lee, executive]

[Interpreted] This is EVP Jae-Young Lee representing Small Battery business, and I'll be providing you the answer related to your question on micromobility. According to market research agencies, the micromobility LIB market is expected to grow an annual rate of about 20% until 2030, mainly focusing on e-bike and e-scooter. Currently, the e-bike market size is bigger, but the e-scooter market is showing a high growth rate of 30% CAGR at the global level, driven by the subsidy policies of East and Southwest Asian countries such as India and Indonesia. It is expected that the market size of e-scooter will surpass that of e-bike within 2 or 3 years.

The characteristics of the battery required for each application are different. For e-bike, energy density performance is important to secure a compact design. And ARPU performance is also required, as it is expanding the applications that need to carry heavy loads such as delivery and logistics. For e-scooter, there is relatively more space for mounting and stronger cost competitiveness is required to observe the existing combustion engine-based scooter demand. We have developed dedicated cells that suit the characteristics of each application, and we will continue to expand sales for e-bike. Moreover, we will have local sales basis and organization set for e-scooter in East and Southwest Asia to secure mid- to long-term growth through active business opportunity exploration activities from the second half of the year. Thank you.

[Foreign Language]

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