Samsung SDI Co Ltd

KRX:006400

Q2-2025 Earnings Call

[Operator]

Good afternoon, everyone. Thank you for joining Samsung SDI 2025 Second Quarter Earnings Call. [Operator Instructions] Now we'll begin 2025 second quarter earnings results.

[Yoontae Kim, executive]

Good afternoon. I'm Yoontae Kim, Executive Vice President of the Business Management Office at Samsung SDI. First, thank you for joining today's earnings call. And joining me are CFO, Jong Sung Kim; VP Soo Han Kim, for Automotive and ESS Battery, EVP Hanjae Cho, for Small Battery; and VP Ik Soo Kim for Electronic Materials.

We'll provide simultaneous interpretation for the earnings presentation and consecutive interpretation for the Q&A session. Now we'll begin Samsung SDI's 2025 Second Quarter Earnings Call.

First off, please note that starting with the 2024 3Q results, the profit or loss from discontinued operations is separately stated due to the decision to discontinue the Polarizer Film business. Today's presentation will also be based on the same reporting standards.

We'll start with our 2025 Q2 financial results. Q2 revenue was KRW 3.2 trillion, up by 0.1% Q-o-Q and down by 22% Y-o-Y. Operating income recorded a loss of KRW 398 billion. Pretax income recorded a loss of KRW 341 billion, and net income posted a loss of KRW 167 billion.

Next is our financial status at the end of 2Q. Assets increased to KRW 41.4 trillion, up by KRW 721 billion from the end of 1Q due to capital increase. Equity rose to KRW 22.7 trillion, up by KRW 1.1 trillion Q-o-Q due to capital increase. 2Q CapEx was KRW 1.1 trillion, bringing the cumulative total for the first half to KRW 1.8 trillion. For detailed financial status, please refer to the appendix.

Now I will present the 2Q financial results of each business unit. First off, 2Q revenue for the battery business was KRW 2.96 trillion, down 1% Q-o-Q and 24% Y-o-Y. Operating profit recorded a loss of KRW 431 billion. Inventory adjustments by major customers eased and sales of power tools and ESS/BBUs grew on AI growth. However, revenue remained flattish Q-o-Q due to sluggish demand of major EV customers.

While fixed cost burden from delayed sales recovery persist, profitability for North Korean ESS declined and volume compensation from a major EV customer was delayed. However, operating deficit in the battery business slightly reduced Q-o-Q as losses in the small battery business decreased quite significantly.

For the Electronic Materials business, revenue and profitability improved as sales of OLED materials for major customers' new smartphones as well as semiconductor wafer production increased.

Next, CFO, Jong Sung Kim, will share our first half business highlights and market outlook and core strategies for the second half.

[Jong-chun Kim, executive]

Good afternoon. I am CFO, Jong Sung Kim. First, we apologize for our earnings falling short of market expectations. We expected a meaningful recovery in 2Q earnings compared to 1Q. However, due to increased uncertainties such as the IRA revision and tariffs, we were unable to reduce losses as much as originally planned.

We expect gradual earnings improvement in the second half alongside sales growth, although macroeconomic uncertainties are likely to persist. To overcome these challenges and solidify our foundation for mid- to long-term growth, we have continued our efforts and achieved the following results.

First, we strengthened our battery order efforts to secure future growth in the battery business. For EV batteries, we secured an order for 46-phi cylindrical batteries for a European global EV and its premium EV lineup and are currently in discussions with a U.S. start-up to supply 46-phi batteries for commercial EVs.

Discussions with another European global OEM are progressing well for prismatic LFP batteries for volume and entry-level EVs as well as prismatic NCA batteries for commercial EVs. We expect to achieve tangible outcomes in the near future.

For the ESS business, we won multiple products by participating in domestic government-led ESS project bidding. We also signed a contract for utility ESS project in the U.S. with local production scheduled to begin in 4Q. Several products, including LFP, are also expected to be finalized in the second half.

For small batteries, we'll begin supplying our newly developed tabless ultra-high-power battery to major customers in 3Q. Alongside these efforts, we are continuing to diversify our applications and customer base. For batteries beyond existing applications, we're in discussions to expand applications not only to BBU, which accounts for a meaningful share of sales in the first half, but also to HEVs, humanoids and UAM.

For semiconductor materials, we are securing new customers in the U.S., Greater China and Japan and began sales to a new customer in Greater China during the first half.

Next is the market outlook and our core business strategies in the second half. For the EV battery market, U.S. demand for EVs is slowing due to relaxed CO2 regulations, reduced subsidy and tariffs. EU demand is concentrated in affordable volume and entry segment as subsidies resume.

To cope with this, we are minimizing the impact of market changes by enhancing the operational efficiency of the StarPlus Energy line. Leveraging No-Thermal Propagation technology of prismatic form factors and new chemistries such as LFP, we aim to expand orders in the fast-growing volume in Energy segment.

For the ESS market, demand for utility and UPS is steadily growing due to the rising share of renewables and increased power needs from AI data centers. In contrast, pressure on cost and profitability on ESS produced outside the U.S. due to tariffs is mounting.

To address this, we'll boost sales in the second half by initiating local mass production in the U.S. and revitalizing domestic electric grid stabilization projects. Also we will secure more orders centering on LFP cells for utility and ultra-high power or UPS.

Next is the small battery market. Demand is recovering for high-power products, such as powertools and E2Wheeler. With the expansion of the AI and big data markets, BBU adoption for server is expected to grow. We will increase sales of powertools with new tabless batteries and E2Wheeler and BBU with high-power batteries. Additionally, for IT batteries, we plan to become the first-in to supply batteries for flagship smartphones of major customers in 4Q.

Last is the Electronic Materials. OLED panel market is expected to grow around new premium smartphones. With the expansion of AI, the semiconductor market is also expected to gain strong momentum based on rising demand for high value-added DRAM products, including HBM. Accordingly, we'll ensure timely supply of OLED materials to major customers' new platforms while increasing our market share in semiconductor materials by penetrating into customers' new products.

With continued market challenges in the second half, significant short-term earnings improvement will be difficult. However, we'll execute the strategies outlined above to gradually recover our performance and achieve mid- to long-term growth. Thank you.

[Operator]

[Foreign Language] Now Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be provided by William Cho from HSBC Securities.

[Woo-Hyung Cho, analyst]

[Foreign Language] This is William Cho from HSBC. I have one question. Samsung SDI recorded a significant loss in the first half of the year. Could you provide a more detailed outlook for the second half and indicate when a turnaround to profit is expected?

[Jong-chun Kim, executive]

[Foreign Language] This is CFO, Jong Sung Kim, and I'll be providing you the answer to your question. In the first half of the year, significant policy changes in major countries such as the revision of the U.S. IRA and the imposition of tariffs led to reduced customer demand and lower utilization rates. This resulted in increased fixed cost pressure and weak performance. However, in the second half, sales are expected to improve, particularly in the smart battery and Electronic Materials businesses, leading to a gradual recovery in performance. We anticipate to turn to profit in Q4.

Let me provide additional update by business segment. In the mid- to large-sized battery business, we expect the operating loss to narrow in the second half. This will be driven by increased shipments to major European OEMs, compensation for reduced EV battery orders that was delayed from Q2 and continued strong demand in ESS. However, we do also expect some pressure on profitability from external factors such as the recently imposed U.S. tariffs.

For small batteries, solid sales for BBU applications continue while revenues from other applications such as powertools, EVs and micro-mobility are expected to grow significantly compared to the first half. As a result, we anticipate a meaningful improvement in performance with the goal of turning up profit in Q4.

In the Electronic Materials business, strong end market demand is driving continued growth in both OLED and semiconductor process materials, and we expect both sales and profits to increase compared to the first half. However, macro level uncertainties are expected to persist in the second half, contributing to continued earnings volatility. We will closely monitor market developments and work in close coordination with our customers to minimize any potential disruptions.

In addition, to support mid- to long-term growth, we are working to secure several key orders currently under negotiation. We will continue to drive product differentiation through advanced technologies such as prismatic batteries, utilizing multiple chemistries including LFP and cylindrical batteries featuring tabless technology to further expand our order pipeline.

[Operator]

[Foreign Language] The following question will be presented by Sang Uk Kim from UBS Securities.

[Sang Uk Kim, analyst]

[Foreign Language] I actually have two questions. My first question is that you mentioned in your presentation about improving the operational efficiency of the StarPlus Energy lines and setting up a local ESS production system. Does this mean that the StarPlus Energy lines will be converted to ESS production? Please explain the future operational plan for the StarPlus Energy lines in more detail.

And my second question is that you've also mentioned that discussions are underway for first LFP project. Does this mean you are now more actively entering the volume entry market? And since the entry is relatively late, what is the catch-up strategy?

[Soo Han Kim, executive]

[Foreign Language] Thank you for your questions. This is VP, Soo Han Kim. I will be providing you the answers to your question. As for your question related to the operational plan for the StarPlus Energy line, well, due to lower-than-expected customer demand, it has become necessary to adjust the operation plan for the StarPlus Energy production line.

At present, it is difficult to operate the line solely with EV battery production. So until customer demand recovers, we plan to utilize part of the lines for ESS battery production. After completing the line set up, mass production is expected to begin around October. We have already secured a significant portion of orders for this line throughout next year.

To prepare for the possibility of prolonged weakness in customer demand, we are discussing various measures with customers to improve line utilization, such as supplying battery for European EV models in addition to using the lines for ESS production. Starting with mass production of ESS cells, we plan to gradually ramp up line operations.

[Foreign Language] Once again, this is VP, Soo Han Kim, and I'll be answering your second question related to the LFP product with which we are going to be entering into the volume entry market. As the EV market grows, the volume and entry-level segments are expanding at a faster pace.

To align with this trend, we plan to actively target these segments and expand our business by introducing new products based on multiple chemistries, including LFP. Recent OEM requirements show that as battery energy density and capacity increase, safety standards, including thermal management are becoming significantly more stringent. Additionally, for volume and entry segments, which tend to have shorter driving ranges, fast charging performance is becoming increasingly important.

In our case, the proprietary thermal propagation prevention technology, based on prismatic form factors developed through our experience in the high-performance premium market has become a major selling point in recent bidding processes for the volume and entry segment market. We also plan to enhance a fast charging performance by applying lower resistance technology and strengthen cost competitiveness by utilizing low-cost cathode materials.

In fact, customer needs are expanding due to the prismatic form factor-based LFP solution, and we are making significant progress in collaboration with multiple customers and projects using multiple chemistry products. By around 2028, when full-scale mass production begins in Europe and the U.S., we aim to be well positioned to compete on equal footing with leading players in the industry.

[Operator]

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

[Hyun-So Kim, analyst]

[Foreign Language] This is Hyun-Soo Kim from Hana Securities. I have two questions related to small batteries. My first question is that you've mentioned that small battery performance improved in Q2 and is expected to improve further in the second half. So could you please provide a bit more detail by application? And my second question is this one. Regarding the new automotive orders for 46-phi cylindrical batteries, could you please provide additional details within the scope of what can be disclosed?

[Hanjae Cho, executive]

[Foreign Language] This is EVP, Hanjae Cho, and I'll be answering your question related to the performance of small battery in Q2. In the case of cylindrical batteries, the market conditions are expected to gradually improve with demand showing signs of recovery, particularly for high-power products across key applications.

For powertools, as major customers inventory levels have generally decreased, demand has been gradually recovering since Q1, particularly for ultra high-power battery packs. In the second half of the year, we plan to expand sales by launching 1865 and 2170 tabless products.

Given its product characteristics, BBU requires high-speed charging and discharging. We plan to expand supply by further enhancing our high power performance. Sales of E2Wheelers, including off-road e-motorcycles, are also expected to grow, driven by strong consumer demand for high-power and high-capacity products.

In line with the market conditions and characteristics of each application, we will actively respond to the recovery in demand by launching new application-specific products based on the competitiveness of our cylindrical batteries.

For pouch batteries, we plan to achieve our first-in for all flagship models of major domestic customers in Q4 while also increasing our market share in mass market models to improve both sales and profitability. Through such seamless responses tailored to each application, we will strive to ensure that the small battery business turns profitable as planned in Q4.

[Soo Han Kim, executive]

[Foreign Language] Again, this is VP, Soo Han Kim, and I'll be answering your second question regarding the new automotive orders for 46-phi cylindrical batteries. We ask for your understanding as we are unable to disclose specific details due to contractual obligation. This project is being prepared with a target of mass production in 2028 through investment in a new production line at our manufacturing site in Hungary.

Through this order, we expect to strengthen our partnership with the customer and gradually increase our supply share over the mid- to long term. Moreover, this also marks a meaningful expansion of our EV battery product portfolio from prismatic cells to 46-phi cylindrical cells.

As the company is planning to locally produce 46-phi cells in the Hungary plant, we will leverage our localization experience and technology competitiveness to ensure smooth execution and further strengthen our presence in the European market.

[Operator]

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

[Won Suk Chung, analyst]

[Foreign Language] This is Won Suk Chung from iM Securities, and I have two questions. And my first question is that the U.S. tariff policy is putting pressure on performance. So how significantly is it affecting our profitability? And what measures are you planning to take in response?

And my second question is related to Electronic Materials. The Electronic Materials business has been delivering solid performance. So what is the future outlook for the business? And what is the company's strategic direction?

[Soo Han Kim, executive]

[Foreign Language] This is again VP, Soo Han Kim. I'll be answering your question related to the impact of tariff on ESS performance. Currently, more than 70% of our ESS sales are directed to the U.S. and with all shipments exported from Korea and also as the tariff rate is expected to be set at 15% starting in August, it will have a mid-single-digit percentage impact on our operating margin in the second half of the year.

To mitigate the impact of tariffs, we plan to begin local production within this year by utilizing the StarPlus Energy lines. Additionally, we aim to start local mass production of LFP ESS by 2026.

While some materials will still need to be imported from outside the U.S. and, therefore, remain subject to tariffs, we expect to offset part of the impact through AMPC subsidies. Given that the U.S. ESS market is the fastest growing, we anticipate not only continued sales growth but also a gradual improvement in profit margins.

[Ik Soo Kim, executive]

[Foreign Language] I will be providing the answer to your second question related to Electronic Materials business and I'm VP, Ik Soo Kim. The key products of the Electronic Materials business, semiconductor and OLED materials are expected to continue their steady growth going forward.

The semiconductor and OLED material market relevant to our portfolio are expected to grow at average annual rates of 7% and 5%, respectively, through 2030. Aligned with this market growth, our business division aims to achieve sustained sales expansion while maintaining stable profitability.

In the short term, we plan to diversify our customer base by increasing the market share of existing products and acquiring new clients. Over the midterm, we are also actively advancing the development of new products to support future growth.

If I may elaborate on our new product development, in semiconductor materials, we are focusing on packaging materials, which are expected to demonstrate sustained growth. Leveraging our core technologies, we are developing high thermal conductivity molding compounds for HBM applications as well as copper slurry materials.

Additionally, in that process packing materials, we're expanding our product portfolio by developing materials required for next-generation semiconductor processes, including EUV materials.

For OLED materials, we are developing a range of new products, including G-Host materials to be applied in major customers' new products as well as RGB materials and low refractive index materials for new applications. We will ensure the timely launch of these new semiconductor and OLED materials to contribute to the future expansion of our Electronic Materials business.

[Operator]

[Foreign Language] Lastly, we will close the call by answering to one of the questions that we collected online in advance. And the question is this. EV sales grew in the first half of the year compared to last year, and other battery companies are also seeing improved performance. However, SDI's recovery appears to be relatively slower. What are the reasons for this? And what measures are being taken in response? And the answer will be provided by VP, Soo Han Kim.

[Soo Han Kim, executive]

[Foreign Language] Our company has focused on the premium market based on high-nickel batteries achieving both strong profitability and top line growth. However, over the past one to two years, due to economic slowdowns in major countries and reductions in EV subsidies, consumer demand has shifted faster than expected towards the volume and entry segments, creating challenges.

Additionally, our relatively late entry into the U.S. market limited our ability to secure a diverse range of customers and projects which impacted our sales growth and the expansion of AMPC.

To address these challenges, we are actively pursuing orders for volume and entry-level products by leveraging our accumulated expertise in prismatic battery technology. Utilizing a range of battery chemistries, including LFP, we are advancing discussions with multiple customers and expect several projects to be finalized in the second half of the year.

In the U.S., we plan to minimize the impact on our performance in the short term through the efficient operation of StarPlus Energy while proceeding as planned with our joint venture with GM. We also intend to expand discussions on project collaborations with other OEMs in the U.S. market.

While some of the initiatives that we have outlined are expected to deliver short-term performance improvements, many are geared towards generating results over the mid- to long term. We remain committed to executing these measures diligently to enhance our performance and drive sustainable growth.

[Unknown Executive]

[Foreign Language] We appreciate your valuable questions and opinions and we'll refer to them in our management decision-making. Now we will end the earnings conference call for Q2 2025. Should you have further inquiries, please contact the IR team. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]