Samsung SDI Co Ltd

KRX:006400

Earnings Call Transcript 2022-Q4

[Yoontae Kim, VP, Business Management Office]

Good morning, and thank you for joining us today. I am Yoontae Kim, the Vice President of Business Management Office at Samsung SDI. First, I'd like to introduce our management team attending today's conference call. This morning, we have with us Head of Business Management Office, Jong Sung Kim; Head of the Automotive and ESS Battery Strategic Marketing team, Michael Son; Head of the Small Battery Strategy Marketing team, Jaeyoung Lee; and Head of Electronic Materials Strategy Marketing team, Chijin Kim. We will now begin the earnings call.

Let us start with the fourth quarter results. The revenue for the fourth quarter was KRW 5.96 trillion increased 11% from the previous year and 56% from the corresponding period last year. Looking at each business segment, the energy businesses expanded sales with automotive and battery business playing the central role and recorded a revenue of KRW 5,341.6 billion, up 11% quarter-on-quarter and 72% Y-o-Y. The Electronic Materials business posted KRW 624.3 billion in revenue, which increased by 17% quarter-on-quarter but down by 12% year-on-year. The operating profit was KRW 490.8 billion, down compared to the previous quarter and leap from the same period last year.

Although the fourth quarter profit decreased quarter-on-quarter due to one-off costs such as [indiscernible] related allowance, excluding such one-off cost results in the profitability on par with the previous quarter. The pretax profit was KRW 803.2 billion and the net profit stood at KRW 629.2 billion. For the full year, we recorded KRW 20,124.1 billion volume revenue, up 48% versus last year, and our operating profit was KRW [1,808 billion], which increased 69% from the previous year, hitting a new record high 3 years in a row.

As of the end of 2022, the total assets are recruited at KRW 30,257.5 billion. which is down by KRW 109.9 billion quarter-on-quarter due to increased accounts receivable affected by exchange rate decline. Liabilities were reduced down to [indiscernible] or KRW 4,216 billion decrease quarter-on-quarter. Shareholders' equity posted KRW 17,217.5 billion, which is up by KRW 310.4 billion quarter-on-quarter.

Now our shareholder return policy. Last January, Samsung SDI disclosed and announced the shareholder return policy for the 3-year term that pays out common dividend of KRW 1,000 with additional 5% to 10% of the annual free cash flows amid the historic business volatility, this struck us in 2022. Samsung SDI means to achieve a record high revenue, yet due to increased CapEx and operating costs, the year-on-year cash flow stood at KRW 40.4 billion, duly considering those future needs for raising CapEx, we decide on the additional shareholder return at free cash flows with a total payout of KRW 69 billion, resulting in KRW 1,030 common dividends and KRW 1,080 preferred dividends.

The dividend payout will be made upon final approval of the shareholders meeting. Please refer to the fiscal year 2022 dividend page under the appendix.

Next, I would like to you through our ESG management performance last year. The year 2022 mark the first year, the Samsung SDI established sustainable management system and ESG mindset throughout the company under the management's firm determination. The specifics being, we set up a comprehensive framework for sustainable management by creating sustainable Managing Committee under the Board of Directors Sustainability Management Office under the CFO and Sustainability Management Council under the direct lead of the CEO.

Also, we have beared no efforts in devising our own vision and strategy for sustainable management and in selecting and carrying out pressure tasks for environmental management. Last October, SDI not only declared the environment-friendly management, but also during RE100 initiative in this context. In the new year, SDI drive for global ESG management will be in full swing by establishing and reinforcing dedicated ESG working groups under each business unit and overseas operations [indiscernible] our capability in taking action against the climate change. SDI plans to assess and calculate Scope 3 carbon emissions, which encompass indirect emissions occurring throughout the entire value chain and formulate carbon reduction plans accordingly.

We pledged to take the lead in ESG management by continuing our efforts and taking on even more environmental management tasks. Now each division will present the details of fourth quarter results and the outlook for the year 2023.

[Michael Son]

Good morning. I am Michael Son Head of the Automotive and ESS Battery Strategy Marketing team, despite concerns over sluggish demand in the fourth quarter, automotive and ESS business saw a big jump in the revenue, both quarter-on-quarter and year-on-year. Automotive Battery business and revenue continued to expand, pushed by strong supply P5 our prismatic Gen5 battery, which -- with the launch of new vehicle models of our customers. And ESS batteries recruited our higher revenue, thanks to increased utility sales in the U.S. Profitability remained above the same level as the previous quarter with onetime costs excluded.

In the first quarter of 2023, we expect those P5 sales to maintain its upward trend. Automotive batteries are expected to make higher sales, mainly with P5 for new vehicle models where seasonal low will steer easy battery sales to take the downturn.

We expect to see revenues going up in both automotive and ESS batteries compared to the same period last year. As for the 2023 outlook, there are looming concerns over weakening consumer demand for vehicles overcast by rising global interest rates and slowing growth. However, with major OEMs push for electrification and ease of supply chain disruptions that persisted last year, the EV production is forecast to continue its expansion. As such, the automotive battery market is projected to grow by 40% from the previous year, reaching a value of $159 billion.

SDI plans to maintain high level of revenue growth, where P5 battery will propel the sales increase in the premium EV market. Also, we will maintain our drive for project acquisitions and development of next-generation products such as [indiscernible] battery to PV for long-term growth. Yes, it's battery market size is forecast to grow to $16 billion by more than 40% from 2022. Utility sales is expected to lead the overall market growth driven by global push for green energy like EUs, repower EU and U.S. government IRA as well as economical synergy of renewable energies and ESS.

Rise of data centers is set to hoist UPS demand, while efforts reduce power bills, create constant demand for residential solutions in ESS business. Samsung SDI will stay committed to meeting the market demand by relaunching new ESS products for utility application gaining edge on our competitiveness. This is the end of Automotive and ESS division's presentation.

[Jae-Young Lee, Vice President]

Good morning. I am Jae-Young Lee, Head of the Small Battery Strategy Marketing team. Small Battery business maintained a quarterly revenue on par with the previous quarter. Although the premium U.S. housing markets slump caused the power tool demand slow down, Samsung SDI managed to mitigate the impact from such low demand based on long-term supply agreements for power products with key customers.

With increased sales in EV batteries, the revenue stood at about the same level as the last quarter. As for pouch battery start-up supply for the new product of our major customer has begun. Due to seasonality, the first quarter sales will drop quarter-on-quarter, but year-on-year growth is expected to be positive. In cylindrical battery segment, the unfavorable seasonality is likely to affect the power tools battery cells, while EV battery sales expected to increase significantly. We expect that the power tool demand will bounce back in the second quarter, making improvements in sales. Pouch sales is expected to rise slightly quarter-on-quarter stocked by a release of new flagship smartphone models.

Now on to the outlook for small battery market in 2023. The small size lithium battery market is forecast grow by 7% from the last year, reaching $38 billion. For non-IT applications, power tool market growth is expected to slow down due to the downbeat housing demand.

However, EV market, we will continue to high growth and micromobility demand is likely still float. Samsung SDI will keep up with growing EV market demand by launching new products with high capacity and high power in the first quarter, furthering our product competitiveness. In the market for IT applications, smartphone battery market is projected to be sluggish, yet rising popularity of foldable phones will push the demand for battery products for flagship smartphones.

Battery demand for wearable devices, such as TWS and smart watches, is forecast to maintain its growing trend. I will focus on expanding sales with timely supply of new products.

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

[Heonjoon Kim]

Good morning, everyone. I am Heonjoon Kim, Head of the Electronic Materials Strategy Marketing team. In the fourth quarter, Electronic Materials business saw a higher revenue. and better profitability quarter-on-quarter propelled by increased sales of high-value display materials as inventory of load cut in eased on customers, end-to-end customer portfolio diversified.

Polarizer film sales went up recruiting an increased revenue compared to the previous quarter. The revenue of display materials, including lasers rose on account of supply initiated for customers' new platform applications and semiconductor materials maintained its quarter-on-quarter revenue level, the sales expanding in high-value products. As for the 2023 first outlook due to the seasonality, the electronic material sales is forecast for quarter-on-quarter.

With the seasonal factor compounded by weakened market demand, sales of display materials is likely to decline. As for the polarizer film and semiconductor materials, despite the seasonality of the first quarter sales volume is expected to stay similar to the secure the start supply for the new applications such as [indiscernible] OLED and 5 functional [indiscernible] materials.

In 2023, while sluggish market demand is likely to render the market growth downwards, the demand for high-value materials, which is Samsung SDI's main focus, is forecast to a similar level compared to the last year. In display market, the overall demand for polarizer film is expected to year-on-year. Some of these high-value panel film is expected to slightly increase. Mobile panel also paint a green outlook.

Unlike the persisting business uncertainty in semiconductor market, our major customers transition to the next level process is set to slightly increase the demand for the semiconductor process materials compared to the last year since it calls for a higher volume supply. We expect to face a myriad of difficulties in the market since this year, but we will continue our efforts to secure continued growth by expanding the supply and sales of high value and high functional products, which are Samsung SDI's [indiscernible] strength in the market.

Before we move on to the Q&A session, Jong Sung Kim, our Executive Vice President and Head of Business Management Office will highlight Samsung SDI's performance in 2022 and business outlook in 2023. In 2022, we saw the business environment reaching an extreme volatility arising from the prolonged pandemic and unexpected Ukraine, Russian war on many variables. Despite high market uncertainty reduced by a stable raw material supply, price hike and auto part supply constraints, not only did Samsung SDI expand the sales of P5 battery for high-end models by major customers, but also achieved revenue growth, surpassing the market growth rate and remarkable profit improvement by implementing preempted risk management, which included strength and post pass-through mechanisms.

Whilst low-price batteries were aggressively finding their way to increase market share in the ESS market, we measure to leap in sales growth by capitalizing on our UPS and residential solutions leading to huge growth in revenue and better profitability. Small battery business focused on ensuring steady expansion of supply in cylindrical batteries for power tools to our key customers, while the supply for electric vehicles scaled up, all of which led to higher in your revenue for the total business.

Going through difficulties caused by drop in demand for polarizing film as the market's inventory adjustments went on in the second half, we were able to improve our profitability as we steered our focus on to display and semiconductor materials to augment the business structure. And as a result, we eventually managed to gain a growing momentum with new product launch. Even if such unstable business environment in 2022, it was also a milestone year, while all business segments reached in your business targets producing all-time high results and materializing the vision of profitable and qualitative growth.

Besides such feed we achieved a Samsung SDI have remained dedicated to laying down the groundwork for future growth as demonstrated by solid-state battery pilot line 46 Pi battery line, joint venture with Stellantis and the commencement of the second factory construction in Malaysia. In 2023, persistent global inflation and tightening monetary policy will continue to drive high interest rates and price volatility in raw materials and energy.

Against the backdrop of such high business risks, Samsung SDI will maintain a flexible and preemptive approach to promote the company's growth. This year, automotive battery business is going to sustain its high growth by expanding the supply of P5 products for a high-end vehicle market. which tends to be less vulnerable to the market fluctuations as well as bolstering our competitiveness. To ensure the next-generation technology readiness and competitive edge, our plan for 46 pi battery production line and solid state pilot line will proceed as planned.

Our push for market expansion in the U.S. will also continue. In the ESS business, while gaining an even more edge in UPS and residential solutions, in order to meet the demand of highly potential utility market, we will launch ESS specific battery cell products and integrated solutions quite a high performance and cost competitiveness to facilitate continued revenue growth and profit improvement. In the small battery business sector, the market for [indiscernible] batteries is forecast suffer from the downbeat housing market demand arising from stagnant housing market and inventory adjustment on the customers' end.

We are planning on mitigating such impact by securing long-term partnerships with our key customers and expect that sales level will recover in the second half as the market gains strength. In the meantime, the demand of cylindrical batteries for electric vehicles and bicycles is on a rapid growth trajectory, casting a positive outlook on the annual sales growth and likely repeating last year's success. Samsung SDI will keep up with the market's expectations and needs with effective production line operation, carrying on with our upward momentum in the revenue and profit growth.

Electronic materials business will undergo a tough first half followed by a strong finish in the second half. Under such [indiscernible] display and semiconductor market demand, we expect, however, as the market inventory overload will be cleared in the first half and the semiconductor market will rebound in the second half, which will call for gradual increase in demand for display materials and semiconductor materials. Shareholders of business uncertainties and concerns are here to stay in 2023 as well. But while Samsung SDI's in those shadows is a great opportunity to grow furthermore, we will endeavor to execute each and all our business strategies as planned as mid-2023, a truly fruitful year, stepping up as a company fully geared with per gap technology competitiveness, the best quality and profitable and qualitative growth.

[Operator]

The first question will be presented by Woo-Hyung Cho from HSBC.

[Woo-Hyung Cho, HSBC]

My first question is about EV batteries with concerns over global economic recessions, there are concerns that the EV demand may also weaken. Can you tell us a bit more detail about your outlook for EV battery market this year and also your sales plans overall, do you think that it's possible for you to further improve your revenue as well as profitability this year? Second question is about cylindrical batteries. I think already from the second half of last year, we saw a noticeable weakness in the power tool market and the demand, probably the situation is going to worsen this year with that given, how are you planning to grow your cylindrical battery revenue this year?

[Unidentified Company Representative]

To answer your first question about EV market outlook and our expectations regarding sales and profitability, we do agree that there is a potential risk of a slowdown of the EV market growth and demand contraction considering factors such as continuing global inflation, high interest rate and concerns of an economic recession.

However, we are seeing OEMs continuing to expand their EV production according to their electrification plans and governments around the world are increasing support for EVs as part of their environment policy. Also consumer perception about EV is continuously improving. Given that, we expect EV market to continue growth this year. Also for reference, the market research firm, IHS, forecasted global EV demand to be 14.74 million vehicles this year, which is close to 40% growth versus last year.

Furthermore, SDI supply batteries mainly to the premium EV models, which are less affected by economic conditions and customer demand for our main product, P5 is showing even stronger growth this year. Also the new lines in our Hungary plant 2 added last year are in stable mass production after completing ramp-up. And so overall, we expect to achieve revenue growth and better profitability this year by significantly increasing P5 supply in line with customer demand.

[Unidentified Company Representative]

To answer your second question about our cylindrical battery revenue outlook, considering the weak housing market driven by higher interest rates continuing from last year and also weaker demand from Europe tied to the Russia and Ukraine war, we expect power tool demand this year to grow at a pace slower than last year. Even though the market situation remains challenging, we plan to minimize the impact through long-term supply contracts with our major power tool customers and also focus on actively developing and driving the LIB conversion market for professional and construction tools. which have a relatively more solid demand. We'll do that by launching new products with higher power output at the right time. While the power tool demand may slow down, we expect EV demand for cylindricals to increase and that this would lead to an increase in our overall cylindrical battery sales versus last year.

We will remain focused on maximizing our revenue by operating our production lines efficiently and flexibly by preparing for the possibility of greater-than-expected increase in EV demand.

[Operator]

The next question will be presented by Jay Hyun Kwon from JPMorgan.

[Jay Hyun Kwon, JP Morgan]

I have two questions. First question is about your U.S. plans. With the adoption of the IRA in the U.S., people are expecting the U.S. EV market to take off quite strongly.

Following the Stellantis joint venture announcement, I don't think SDI has made any significant announcements regarding the U.S. market. In that context, can you give us some plans or outlook on what you are planning for to address the U.S. market. Second question is about the battery material prices going up.

The major minerals, such as lithium, nickel prices have remained strong. This has increased the battery ASP and also in turn has resulted in higher EV sales prices itself. There are concerns that these higher prices may have a negative impact on mid- to long-term EV demand. Given that, how are you expecting this to pan out going forward?

[Unidentified Company Representative]

To answer your first question about the IRA and the U.S. market. Compared to Europe or China, the U.S. had a relatively lower EV penetration rate. But with the adoption of the IRA, the U.S.

is expected to become the fastest-growing market. This is why many business opportunities are being created for OEMs and battery suppliers targeting the U.S. market and SDI has been also identifying many opportunities among such situation. While maintaining our basic principle of pursuing high-quality growth with a focus on profitability, we are working to create collaboration arrangements that would be a win-win for both the SDI as well as its customers. Currently, we are in discussion with many customers and will communicate with the market once details are determined in the future.

To answer your second question about increasing battery and EV costs, the impact to the mid- to long-term demand. Even though lower battery price is an essential hurdle for increasing EV penetration and driving market growth. In 2022, with global inflation and widening volatility in commodity prices, battery costs actually increased contrary to market hopes. Raw material volatility is affected by a wide range of factors, including macro environment, and there is a limit to what SDI can control. Given that the focus of our battery cost reduction is on reducing the material cost per unit of power capacity by increasing energy density using innovative materials and also leveraging the benefits of scale gain from the R&D and production organized around platforms, such as P5 and P6.

In addition to this, the industry continues to explore various cost-saving approaches at the module or pack level, such as cell to pack. And such efforts are expected to further bring down battery costs as well as EV costs. In the near term, raw materials are going to be affected by volatility. But in the mid- to long term, we believe that the industry's technology innovation efforts will drive a gradual decrease in battery prices and that the EV market will also maintain a high growth rate.

[Operator]

The next question will be presented by Junghoon Chang from Samsung Securities.

[Junghoon Chang, Samsung Securities]

I have two questions. The first question is about your preparations for operating, the 46-millimeter cylindrical battery line. I think you mentioned during the presentation that the company is preparing to put that into operation. Can you give us some updates on the preparations of that new line when do you think it would start operation? And also in connection with that, can you give us some details about customer orders for that 46-millimeter battery form factor.

If you can give us some more details and color about the customer order situation, it would be very helpful. Second question is about the profitability of your overall small-sized batteries, especially the cylindrical battery market, you mentioned during the presentation with seasonality and also the overall weak housing demand, there is a weak demand from power tools for cylindrical batteries. You also mentioned, however, overall revenue for your small-sized slings is expected to grow this year driven mainly by increase in EV revenue. I understand that at the top line. But would there be any implications to your profitability of the small-sized battery as the share of EV revenue increase.

[Unidentified Company Representative]

To answer your first question about our 46-millimeter line, the 46-millimeter diameter cylindrical battery line currently undergoing investments in our [indiscernible] plant, is scheduled to complete equipment setup during first half of this year and start operation. The 46-millimeter battery is designed for maximum capacity using our high-nickel NCA cathode material and SCN anode material technology, while also maintaining the same level of SDI's quality competitiveness which would set it apart from products offered by other battery suppliers. You've also asked about our order win status. We're not able to details at the current moment, but we are in discussion with many customers about ways of collaborating, and we're planning to start production of mass production samples from the new line to drive business development. To answer your second question about the implications of the profitability of the cylindrical battery business.

The rapid growth in demand of key customers, including Rivian, resulted in our cylindrical sales for EV applications, more than doubling in 2022 versus the previous year. This year, once again, we are expecting customer demand to grow significantly and our revenue to record a high growth rate. We understand that some in the market are concerned that the decrease in the share of our higher-margin power tool revenue in the cylindrical battery business and the increase in the lower-margin EV revenue may lower our overall profitability.

However, in fact, the cylindrical batteries that we produce for EV projects consist of a limited number of product types produced at mass scale and offer greater production efficiency and profitability with an increase in product scale. In fact, since second half of last year, the significant increase in our cylindrical volume for EV has led to improved margins to levels similar to Power 2 batteries.

And this year, with an even more significant jump in EV battery supply volume, we expect cylindrical EV batteries contribution to our profitability to further increase.

[Operator]

The next question will be presented by Sang Kim from Credit Suisse.

[Sang Kim, Credit Suisse]

My first question is about your all solid-state battery line that you've started investment for the pilot line for the all-solid-state battery. Can you give us some updates on when you expect that to be in operation? And also, can you give us some color on to what are the key tasks or challenges the company is focusing on in taking the all solid-state battery to a large-scale mass production level? Second question is about the polarizer film business. The LCD downstream industry has been weak since last year.

Things appear to be -- we'll likely to continue to remain weak this year for the LCD downstream industries. Given that, what is your sales plan for the polarizer film this year? And how do you plan to address the weak downstream market?

[Unidentified Company Representative]

To answer your first question about the solid-state battery pilot line, SDI's all solid-state battery pilot line will be the industry's first production line to produce completely all solid-state batteries. Our plan is to complete line construction during the first half of this year, manufacture small size sample sales during the second half and to carry out cell performance, material component and manufacturing process testing. For commercialization of an all solid state battery in the future, an important task is to develop technology for implementing larger cells and also scaling up production. The critical point is to secure stable mass production technology while maintaining the same performance in high capacity and large-sized cells usable on EVs. Our plan is to use the test cells produced in the pilot line to carry out a wide range of technology evaluation and testing to drive an iteration of improving self-performance and mass production technology.

We're currently under discussion with several OEMs on collaboration and also plan to cooperate with parts and raw material suppliers to build a stable SCM and to ensure that we're fully prepared to develop and mass produce all solid-state batteries with characteristics suitable for EVs. Our pace of development for mass production will significantly accelerate once the pilot line is in operation, and we will concentrate on shortening the time until mass production. To answer your second question about our polarizer film business. This year, total LCD TV panel shipments is expected to be around 240 million units, which is a roughly 6% decrease versus last year. And in line with that, the overall polarizer film demand is also expected to decrease.

However, when you look at the 65-inch and larger segment where we have a high share, shipments are expected to increase slightly in 2022. And also in line with that, the large-sized polarizer film demand is also expected to slightly increase. The LCD panel market is expected to remain weak in the first half tied to recent weakness in the overall IT industry However, in the second half, demand is expected to recover as customers use up their inventory and consumer sentiment starts to improve. The market environment is challenging, but we will focus on continuing to diversify our customer base and also improving our product mix with a greater focus on high-end products to secure profitability. Also in the second half of this year, we plan to launch our polarizer film for mobile LEDs to keep customers to expand our product portfolio.

[Operator]

The last question will be presented by Hyun-Soo Kim from Hana Financial.

[Hyun-Soo Kim, Hana Financial]

My first question is about the ESS market. Your ESS battery business has continued to record revenue growth especially last year, I think the UPS and the residential ESS demand has played an important role in that. Now looking forward, the utility ESS is the largest segment. It's the segment that's expected to grow quite fast. I'm wondering what the company's plan is in terms of addressing the utility ESS market.

Second question is about the OLED materials with global inflation concerns of economic recession. I think there are concerns in the market that demand for smartphones will continue to remain weak. Despite the challenging environment, your OLED business has been able to maintain a growing trend. Do you think you can continue growing your OLED business this year?

[Unidentified Company Representative]

Last year, we increased sales in the UPS and residential markets where our strength in high energy density had very strong appeal, and this has contributed to both our revenue and profitability. However, given that the power utility market, which does account for about 60% to 70% of the entire ESS market undeniably remains the main ESS segment.

In order to drive continuous growth, SDI is currently preparing new ESS products targeting the power utility market with improved battery materials, manufacturing processes and systems to capture this utility segment. First, during the second half of this year, we're planning to launch a new ESS specific cell product with 15% higher energy density using high-nickel NCA cathode material and new manufacturing processes. We will also start supply of an integrated utility ESS solution that includes cell, module and system with maximized safety and efficiency features during the second half.

We also have other products in the mid- to long-term pipeline being developed with better product performance and cost competitiveness and plan to expand our power utility ESS market sales using these new product line-up. To answer your question about the OLED materials business outlook tied, especially to the smartphone market outlook. The smartphone market demand is slowing down, but within the smartphone market, demand for the flexible OLED panels, which is our particular strength, is expected to slightly grow this year. In addition to smartphone, OLED demand is spreading to new applications such as laptops, tablets, TVs, and this is driving growth in the overall OLED market. This year, we plan to continue to drive sales growth using our differentiated products, such as p-dopant and the green host. And going forward, we will focus on maintaining this growth momentum over the mid- to long term by winning customers' new platforms and developing new items.

[Unidentified Company Representative]

And this completes our earnings conference call for fourth quarter 2022. If you have any further questions, please forward them to our IR team. Thank you.