Samsung SDI Co Ltd

KRX:006400

Earnings Call Transcript

[Operator]

Good morning and good evening. Thank you very much for joining this earnings conference call. We will now start the Fiscal Year 2023 Fourth Quarter Earnings Conference Call of Samsung SDI.

The conference call will start with a presentation by the company, followed by a Q&A session with the attending analysts. [Operator Instructions] We will now start the presentation of Samsung SDI.

[Yoontae Kim, executive]

[Interpreted] Good morning and thank you for joining us today. I am Yoontae Kim, Vice President of Business Management Office at Samsung SDI.

First joining us are our CFO, Jong Sung Kim; EVP, Jong-Sung Park representing Automotive & ESS Battery; EVP, Hanjae Cho for Small Battery; and VP, Kyongho Yoon for Electronic Materials.

We will now begin the earnings call for the fourth quarter of 2023. First off, our Q4 results and financial highlights. The Q4 revenue was KRW 5.6 trillion, down 6% quarter-over-quarter and 7% over year-over-year. The operating profit stood at KRW 312 billion, down 37% sequentially with 5.6% operating margin.

Comparing on year-to-year basis, the total operating profit declined 37% due to decrease in sales volume in Small Batteries and ESS batteries. Meanwhile, hoisted by high-value P5 products, the EV battery portion of sales went up 20% year-over-year, yielding operating profit growth.

Looking at each business segment, the Battery business posted KRW 5.0 trillion in revenue, down 6% both quarterly and yearly. The operating profit was KRW 226 billion, declining 45% Q-o-Q and 37% Y-o-Y.

The revenue for the Electronic Materials business fell 7% Q-o-Q, 9% Y-o-Y to KRW 567 billion, impacted by the slowing polarizer film demand. The operating profit was KRW 86 billion, 2% Q-o-Q increase, thanks to robust sales of high-value products while 35% decrease year-over-year.

The pre-tax profit was reported at KRW 581 billion with KRW 269 billion non-operating profit such as profit and loss using the equity method.

The net profit was KRW 493 billion.

The quarter-end total assets rose KRW 492 billion from the preceding quarter to KRW 34.4 trillion.

The liabilities decreased KRW 191 billion sequentially to KRW 14.1 trillion while the equity increased KRW 683 billion to KRW 19.9 trillion with a debt-to-equity ratio at 71%.

Next, CFO, Jong Sung Kim will share the company's business highlights in 2023 and business outlooks of 2024.

[Jong-chun Kim, executive]

[Interpreted] Hello. This is Jong Sung Kim, the CFO of Samsung SDI. Although 2023 was marred by market demand slowdown induced by high-interest rates and inflation, along with geopolitical risks instigating global economic recession, for Samsung SDI it was a year of strong execution for the goal of becoming a global top tier company by 2030.

Result-wise, our revenue grew 13% Y-o-Y, but the overall results fell short of the mark with the operating profit decreasing Y-o-Y due to weak performances of Small Battery and Electronic Material divisions.

With the EV Battery business, our key focus area, however, we managed to continue growth in revenue and improvement in profitability as we ramped up new Hungary lines ahead of schedule and expanded sales of P5 cells and small batteries for EV. Through such, the business recorded Y-o-Y growth of 38% in revenue and 93% in operating profit, contributing to its continuous growth. Besides, our preparations for the future went on as planned.

We've solidified our presence in the U.S. market with the new JV MOU with GM and second plant JV with Stellantis. Our supply agreement with Hyundai Motors and our commitment to expand collaboration with Volvo were results of our drive to secure the ground for sustained growth.

As for all-solid-state battery, with the aim of commercialization in 2027, we began producing demo cells after completing the S-line and formed an ASB commercialization team with the Electronic Materials division getting into ASB material business in earnest.

Samsung SDI's global R&D network continued to build on with the new R&D center in Shanghai following those in Europe and the U.S., raising the appeal to top talents around the world. We also boosted patenting to enhance our R&D competence.

Key ESG activities include our joining Global Battery Alliance in March for establishing a sustainable battery value chain and receiving the best rating in supply chain co-prosperity assessment by Korea's Commission for Corporate Partnership, the first time in 12 years of being assessed.

Although we managed to come out of difficult situations in 2023 with meaningful results, we faced yet another challenging year. We expect demand recovery timing to be later than initial expectation in the markets of power tools, semiconductors and display. The EV market, which has been pacing at a high growth rate so far, is set to undergo a temporary stagnated state while crossing the chasm under the shadows of prolonged global economic recession.

However dire the situation may be, in 2024, Samsung SDI stands steadfast in preparing for a quantum leap in the regrowth phase to come after crossing that market stagnation by materializing super-gap technology, cost innovation and customer base enlargement.

For super-gap technological competitiveness, we plan to accelerate commercialization and mass production of all-solid-state battery, a game changer for our future EV market. We'll leverage this to bring us leadership in next-generation products and technologies. We'll also continue enhancing our edge in battery materials technology by setting up mass production system of such, including ASB materials.

Also, to strengthen competitiveness in IT use pouch battery, where we lagged behind recently, we plan to increase investment in it such as expansion of dedicated development line.

To drive cost innovation in the face of growing price competition in the EV market and increasing share of low-cost batteries in the ESS market, we will work to ensure that Samsung SDI has the world's best cost competence in those markets. Most of all, the focus will be on improving profit via cost innovation in upcoming battery and material products while expanding clientele and entering new markets.

Last but not least, we will continue expanding new customer base as well as strengthening strategic partnerships with our own existing customers to be well-prepared for the future. The Electronic Materials business will expand its product portfolio by commercializing new products, such as EUV, semiconductor materials and OLED polarizer film.

To add to that end, in 2024, we strive to rise above in terms of both revenue and profitability in all divisions' unified efforts on the 3 core strategies of super-gap technology core competitiveness, cost innovation and customer base enlargement.

Lastly, in a bid to firm up our footing for sustainable growth, we will boost our ESG management by executing the 8 strategic tasks for environment management, aligning our business with EU's battery regulations, calculating Scope 3 emissions and setting a reduction target and expanding the supply chain engagement in the ESG practice for our sustainable growth to be ensured. Thank you.

[Yoontae Kim, executive]

[Interpreted] Now each business unit will present the details of 2023 Q4 results and 2024 Q1 and annual outlook.

[Jong Sun Park, executive]

[Interpreted] Good morning. This is Jong-Sung Park, Head of the Automotive & ESS Battery Strategic Marketing Team.

In Q4, the overall revenue remained on par with the last quarter. EV battery portion reported revenue uptake with expanded sales of P5 for premium EVs, whereas ESS battery revenue fell due to softer sales in utility solutions.

Profitability went down due to decreased raw materials prices causing short-term effect on profit and loss.

In Q1, EV Battery business plans to begin full-fledged production of high-capacity P6 product for a major customer and expand sales and enhance profitability while actively seeking new order wins.

With ESS batteries, we will focus on sales of Samsung Battery Box, our total ESS battery solution built with enhanced energy density and safety.

As for the market outlook for 2024, the EV battery market is projected to reach $185 billion in value, 18% growth year-over-year. Amid the forecast of being muted due to persisting high interest rates and global recession, the market growth will gradually recover from the second half with low interest rate effect kicking in.

We anticipate that green policies such as U.S. IRA and EU's strengthened CO2 regulation in 2025 will propel demand to continue meaningful mid- to long-term growth in the regions.

Drawing on this prospect, we will enhance revenue and profit by increasing sales of high-value products, P5 and P6, with next-generation platform projects and prepare for the start of production in the U.S. with no delay.

Next, the ESS battery market is anticipated to reach $26 billion, up 18% year-over-year. Along with continued growth of North America, Europe and China markets, we expect new booming demand in Korea and South America with strong policy push for ESS industry. We will expand order wins with Samsung Battery Box's new product appeal and prepare an LFP product that can accommodate the market demand for affordable batteries.

This is the end of Automotive & ESS Battery division's presentation. Thank you.

[Hanjae Cho, executive]

[Interpreted] Good morning. I am Hanjae Cho, Head of the Small Battery Strategy Marketing Team. Q4 revenue and profitability went down due to delayed recovery of power tool, micromobility and IT product demand on top of increased market inventory level.

With Q1 being a seasonally weak period, we expect sales to decrease. To tackle this, we'll secure new applications and customers, such as e-scooter demand for -- in Southeast and West Asia regions, where electrification is pushing the demand.

With 46-phi project, we are committed to meeting customer milestones and pursuing new project wins.

We expect pouch sales to increase with the launch of new flagship smartphone models of our major customer.

Next, the market outlook for 2024. This year, the small battery market is expected to grow 3% Y-o-Y to $44 billion in size. By application, we forecast power tool demand to stagnate overall while demand for professional use grows with increased product variation and rising electrification fostered by strengthened environmental regulations.

We expect mobility market to meet tailwind with increase in cylindrical adoption to EVs and widening e-scooter demand in Southeast and West Asia.

Under the base effect, key IT product demand is likely to increase year-over-year with widening demand for smartphone batteries, mainly on flagship models. We will make efforts to discover new business opportunities in growing sectors of new applications and micromobility and gain the edge in the market by timely developing new cylindrical and pouch battery products.

This is the end of Small Battery division's presentation. Thank you.

[Kyongho Yoon, executive]

[Interpreted] Good morning. I am Kyongho Yoon, Head of Electronic Materials Strategy Marketing Team. We closed Q4 with lower revenue versus the prior quarter, but with profits slightly bettered by the increased sales of high-value OLED and semiconductor materials.

OLED material sales expanded with mass production of new platforms for Chinese customers. And semiconductor materials reported better revenue and profit, thanks to recovering demand and new product applications.

Polarizer film revenue, however, declined due to panel production cuts under sluggish demand.

In Q1, weak seasonality is set to negatively affect sales of OLED materials and polarizer films, whereas the semiconductor materials will likely see sales growth, thanks to recovering market demand and expanding product sales.

Now let me go over 2024 market outlook. We expect to see optimistic demand mainly from high-value materials such as big screen LCD TV panels, mobile OLED panels and semiconductor materials.

In display market, we expect LCD TV panel demand to be similar to the last year's level while over 65-inch big panels enjoy surging demand. Mobile panel demand is forecast to keep growing, centering on OLED.

In semiconductor market, DRAM market is normalizing and foundry demand is increasing due to AI demand growth raising wafer inputs of our customer.

We will stay committed to improving both revenue and profit by expanding supply of high-value products like big-sized polarizer film and G-Host, diversifying customer portfolio and timely putting forward materials for new products with high functionality such as EUV inorganic photoresist. Thank you.

[Yoontae Kim, executive]

[Interpreted] Before going into the Q&A session, I would like to address our shareholder return policy. In January 2022, Samsung SDI disclosed the shareholder return policy for the 3-year term that pays a base dividend of KRW 1,000 with additional 5% to 10% of the annual free cash flows.

In 2023, we posted a loss in free cash flows due to large-scale CapEx. In light of this, our 2023 annual payout consists only of base dividend. Total payouts will be KRW 66.9 billion with KRW 1,000 common dividend and KRW 1,050 preferred dividend per share. The payout will be made upon final approval of the shareholder's meeting.

Now we will 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]

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Woo-Hyung Cho from HSBC Securities.

[Woo-Hyung Cho, analyst]

[Interpreted] I have 2 questions regarding your EV battery business. Number one is, as you would know, there is increasing concern in the market about the slowdown of EV demand. In that context, can you give us your outlook for EV demand this year in 2024 and your strategy in response?

Second question is about your new order, new contract plans this year. Last year, you had some significant wins such as orders from GM and the Hyundai Motor Group. What kind of order plans you have this year? And what kind of size do you expect?

[Unknown Executive]

[Interpreted] We are aware of recent concerns in the market over the leveling off of the EV growth rate driven by global economic slowdown and the so-called chasm phenomenon. Now according to the chasm phenomenon, after reaching a certain level of market penetration, EV growth rate is expected to temporarily decrease, at least until the market enters the next mainstream growth phase.

Now despite this theory, demand growth is unlikely to slow down across all global markets. According to third-party market research firms, North America, which has a relatively low EV penetration rate, is expected to show an annual growth rate of over 50%, which is much higher than that of last year, thanks to the benefit of IRA.

In Europe, where EV penetration is relatively higher, growth rates may decrease near term. But then stricter CO2 regulations are scheduled to be introduced from 2025 and OEMs have accelerated their electrification strategy in preparation of these new regulations, which is expected to turn around growth rates from at least second half of this year.

In the mid- to long term, the EV market is expected to continue strong growth supported by environment-friendly policies maintained by key countries in both North America and Europe.

Despite the near-term demand slowdown this year, we are aiming to increase revenue and improve profitability by focusing on batteries from -- for the premium EV models where demand is expected to be relatively more solid. Specifically, for the premium EV models, in addition to the existing P5, we will start the supply of P6 to increase the share of the high-value products.

This year, we will also focus on preparing for the operation of our new U.S. production site in time to capture the demand growth expected from 2025 and after. At the same time, we will also focus on winning new orders in the low-cost platform products that can meet market needs to drive our continuous growth.

Your second question was about our outlook for new orders this year. Looking back in 2023, by acquiring new customers, including GM and Hyundai; and diversifying our customer base, which had been more European-focused, Samsung SDI was last year able to create a foundation for stable growth over the mid- to long term.

Now this year, in 2024, we are planning to add on, of course, new customers and also win orders across various segments and form factors. We will focus on winning new contracts, not only with our premium products, which has been our traditional strength, but also for the volume and entry segment vehicles through cost innovation and enhanced cost competitiveness.

In terms of form factor, we are currently pursuing contract opportunities in both the prismatic P6 and cylindrical 46-phi. While it is difficult to disclose specific size of opportunities at this point, we will communicate with the market once details have been worked out with our customers.

[Operator]

[Interpreted] The following question will be presented by Sonny Lee from Macquarie Securities.

[Sunwoo Lee, analyst]

[Interpreted] I have 2 questions. The first question is about your all-solid-state battery business, I've heard that you have newly established the all-solid-state battery commercialization team.

First of all, in order to successfully achieve commercialization of all-solid-state on time, what are some of the key tasks that you need to work on and succeed this year?

Also, what kind of market size do you expect to see from all-solid-state batteries? And what kind of revenue are you expecting to record?

Second question is about your Electronic Materials business. I know that the Electronics Materials division is also developing battery-related material. What kind of development is it engaged in? Can you give us some updates? And also what kind of revenue we can expect from your battery materials development?

[Jong Sun Park, executive]

[Interpreted] This is Jong-Sung Park of the Automotive & ESS Battery Marketing. If I answer your first question, now in order to achieve mass production capabilities of all-solid-state batteries on time, the most critical tasks for us this year will be: number one, to secure the mass production performance for key materials; and number two, to develop the electrode technology for higher battery capacity.

Also samples that were produced at our S-Line during the fourth quarter of last year have already been delivered to our customers. Customers will be coming back to us with results of the basic performance and life cycle tests they are currently running in a sequential manner. And through this process, we will be able to upgrade the performance of our all-solid-state batteries at an earlier stage.

While it is difficult to exactly focus the size of the all-solid-state battery market until, for example, 2030, we will focus on using our unique technology leadership to create and lead the market.

[Kyongho Yoon, executive]

[Interpreted] This is Kyongho Yoon of the Electronics Material Marketing and I'll take the second question you had about our development of battery materials. In addition to the separator, which is already in mass production, SDI has been developing a high-conductivity CNT dispersion liquid for cathode that can increase battery capacity and also power performance. Our target is to build the M-Line during the first half of this year.

We're also working on black boxing and stabilizing the SEM of the all-solid-state battery's core technologies scheduled to be mass produced in 2027. Now for this purpose, we have already completed deployment of the pilot line for the key materials in the second half of last year and we're currently preparing for mass production.

So the development of the battery materials will diversify our product portfolio and also create new synergies with the Battery division.

[Operator]

[Interpreted] The following question will be presented by YongJin Jung from Shinhan Securities.

[YongJin Jung, analyst]

[Interpreted] I have 2 questions. The first question is about your mid- to large-sized battery, the new product, P6, that you've mentioned. This year, what kind of contribution do you think the P6 will have on your top and bottom line? I'm asking this question because I recall when your P5 was launched, that had actually a very positive impact on the profitability of your auto and mid- to large-sized battery business. Can we expect something similar from the P6 launch this year?

Second question is about the small-sized cylindrical. During the presentation, you mentioned you're expecting that market to somewhat improve this year. But because of the declining market situation, the performance of the small-sized cylindrical has continued to decline. So what kind of market do you expect? When do you think the market will improve? And what do you think will be the trigger for that improvement?

[Jong Sun Park, executive]

[Interpreted] This is Jong-Sung Park of the Automotive & ESS Battery Marketing. I'll take your first question, which was about the P6. P6 has an energy density that is about 10% higher compared to the P5 and is scheduled to start mass production from January for supply to U.S. and European customers.

P6 revenue is not expected to be large in Q1 this year, but from Q2 onwards P6 is expected to make meaningful contribution to revenue reaching double-digit share within our prismatic batteries revenue on a full year basis.

In terms of profitability, once P6 starts meaningful mass production of scale from second quarter, it is expected to deliver similar profitability as P5 and positively contribute to the overall EV battery profitability.

[Hanjae Cho, executive]

[Interpreted] This is Hanjae Cho of the Small Battery Marketing and I'll take your second question, which was about our cylindrical batteries. Power tools were the main driver for the high profitability of the cylindrical batteries. As power tool sales jumped during the pandemic, power tool companies were eager to secure battery inventory, leading to a boom in batteries for power tool applications. However, the pandemic was followed by high interest rates and weak housing market, which has delayed recovery of power tool demand and has increased inventory levels at key power tool customers. This is posing a challenge in achieving profitability as high as before.

Now while the market environment remains challenging, we will focus on cost innovation activities for existing products and also acquire new business opportunities for new applications, including e-scooters. We will also launch new cylindrical battery products targeting power tools and EV applications that meet market needs to become a dominant player in these new markets. Also going forward, we will focus on winning new orders for the 42 -- 46-phi battery, the demand of which is expected to increase sharply, and this will also contribute to revenue growth and profitability.

[Operator]

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

[Hyun-So Kim, analyst]

[Interpreted] I have 2 questions. The first question is about the IRA. Last December, the FEOC guidelines were announced as part of the IRA. Does this have any impact on the supply chain management, the SCM, strategy of SDI? Do you need to change your SCM strategy? Would there be any challenges in making these changes, if necessary?

Second question is about the overall EV demand growth leveling off, slowing down. There is concern that this may lead to an oversupply of battery. In that context, can you share with us your line utilization levels last year and whether you have additional capacity expansion plans this year?

[Yoontae Kim, executive]

[Interpreted] This is Yoontae Kim of the Finance and Accounting team. I'll take your first question about the IRA. As you mentioned, last December, the U.S. Department of Energy announced the detailed guidance on the IRA FEOC to present comprehensive standards for determining an FEOC. It also announced so-called transition rules, under which certain low-value add critical minerals that are difficult to trace would qualify for a 2-year grace period.

That said, even with the newly announced standard, some areas of FEOC determination still remains unclear and the critical minerals that were qualified for the transition rule are not yet finalized. Therefore, additional information needs to be verified before we are able to conclude whether major changes are necessary to our SCM strategy.

Working closely with the Korean Ministry of Trade, Industry and Energy, we have already submitted our opinion and inquiries to U.S. authorities, including a request for FEOC grace period for graphite. It appears that major auto OEMs have also submitted relevant request letters.

So regarding all the specific strategy direction, we hope to communicate that to the market after the relevant facts have been determined.

[Jong Sun Park, executive]

[Interpreted] This is Jong-Sung Park, again, Automotive & ESS Battery Marketing, I'll take your second question about our EV battery line utilization last year and capacity plans this year. Given that many battery makers are currently in the process of adding new lines in anticipation of mid- to long-term EV demand growth forecast, a near-term demand weakness, if it happens, may lead to oversupply.

However, SDI has always maintained a policy of profitable and qualitative growth and has insisted on timely capacity increase backed by firm customer demand, BD ramp-up and optimized line operation resulting in high utilization rates.

For example, Hungary, our main plant, has been maintaining utilization at around low- to mid-90s. This year, the focus will be on the on-track preparation of the new plant's capacity increase for the full scale EV growth expected from 2025 and after as well as maximizing the production efficiency of existing lines and maintaining high utilization rates, including the new lines in Hungary that started operation in the second half of last year in order to maximize revenue growth and profitability.

[Operator]

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

[Chuljoong Kim, analyst]

[Interpreted] I have 2 questions. First question is about your small-sized battery. You've mentioned that your -- in terms of EV batteries, your Hungary lines are maintaining a high level of utilization, but your small-sized batteries are facing difficulties and challenges. I recall that during the last conference call, you mentioned that the company will be focusing on opportunities in M or micromobility. Can you give us some updates on what kind of business opportunities you're seeing this year, and what kind of demand you're expecting from m-mobility in the mid to short -- near- to midterm?

Second question is about the Electronic Materials business. Up till now, traditionally, the polarizer film has been the main contributor to your revenue. That product has been facing challenges recently. So in that context, what kind of new business opportunities are in the works in OLED or semiconductor materials? What kind of new products are you trying out this year? And when do you expect to put them into mass production?

[Hanjae Cho, executive]

[Interpreted] This is Hanjae Cho of the Small Battery Marketing. I'll take your first question about our m-, the micromobility business. As of 2024, the micromobility market is expected to be around USD 3.2 billion, which is similar to the size it had last year in '23.

However, within the micromobility, the e-scooter market is expected to grow by around 17% Y-o-Y, thanks to the green subsidy policy in India and Indonesia. So in the mid- to long term, e-scooter demand is expected to overtake e-bike by 2026 and grow into a market roughly 4x the current size by 2030.

So we will focus on capturing the new business opportunities for e-scooter and increase our market share by operating sales hubs in India and Southeast Asia and expanding our long-life product lineup to contribute to revenue growth and profitability increase.

[Kyongho Yoon, executive]

[Interpreted] This is Kyongho Yoon of the Electronic Materials Marketing, and I will take your second question, which was about some new products we have in store this year.

First, looking back last year, in 2023, we completed development of the green, red photoresist for image sensors and successfully launched mass production of it. Also the OLED polarizer film completed customer certification in late 2023 and is scheduled to start mass production this year.

In 2024, we are preparing to start mass production of products that were delayed due to customer schedule changes such as the tungsten slurry and the EUV photoresist, as well as a new item, which is a premium EMC for graphic DRAMs during the first half of this year.

Also, in order to win opportunities in products newly adopting OLED, we are developing the G-Host and p-dopant in line with customer schedules.

So these new materials may not deliver a notable contribution to this year's revenue, but they are expected to be growth engines for future of the Electronic Materials business.

[Yoontae Kim, executive]

[Interpreted] And that completes our earnings conference call for the fourth quarter 2023. If you have any additional questions, please forward them to our IR team. Thank you.

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