SK IE Technology Co Ltd

KRX:361610

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, everyone. Thank you for joining SKIET's earnings conference call. After SKIET presents their business earnings, we will have a Q&A session. [Operator Instructions] From now on, we will start the 2024 Q3 earnings presentation for SK IE Technology.

[Unknown Executive]

[Interpreted] Good afternoon. I am [ Che Hee ], Leader of SK IE Technology's Treasury and IR team. Thank you for attending SKIET's 2024 Third Quarter Earnings Call. Today, we will first present the business results of 2024 Q3 and then proceed to Q&A session. We will now start the earnings presentation for 2024 Q3. Please note that today's numbers have yet to be audited by an outside auditor. Based on the audit results, the content may be subject to change. Now I will turn the call over to CFO, Taekseung Oh, for the presentation.

[Taekseung Oh, executive]

[Interpreted] Good afternoon. I am Taekseung Oh, CFO of SK IE Technology. Welcome, everyone, to SKIET's 2024 Third Quarter Earnings Conference Call. To address any questions you may have, we also have other members and executives of the relevant teams with me on this call.

First, let me explain the business performance of Q3. To begin with, please note that the earnings numbers for 3Q -- Q3 2023 have been revised to recognize the FCW business as profit from discontinued operations after the discontinuance of the FCW business in Q1 2024, and thus differ from the previously disclosed numbers.

This quarter's revenue stands at KRW 50.8 billion, down KRW 10.8 billion Q-o-Q, due to a drop in product sales for some key customers. Accordingly, gross profit fell KRW 14.6 billion Q-o-Q and operating profit is down KRW 14.3 billion Q-o-Q, reporting an operating loss of KRW 73 billion.

Next, I will go over the financial position. As of end of 2024 Q3, assets stands at KRW 4,056.9 billion, down KRW 26.9 billion from end of last year. Liabilities is KRW 1,713.6 billion, up KRW 41.4 billion from end of last year. And net debt is KRW 1,195.1 billion, up KRW 335.5 billion from end of last year following CapEx execution for the completion of Poland Phase 3 to 4 build-out.

As the recent uncertainty in the business environment persists, SKIET is pushing forward to secure financial soundness that is sustainable mid- to long term. We are working to reduce our operation budget. And as part of that effort, we are reviewing the liquidation of Changzhou capacity, where currently operation is suspended and noncore assets such as equipment and IP of the FCW business, which we decided to discontinue, as we explained in the last earnings conference. We are currently in discussions with potential buyers. Once the talks are finalized, we will share the news through market disclosures.

Next, I will go over the earnings details for our 2024 Q3 results. LiBS sales volume in Q3 recorded 62 million square meters, down approximately 10% Q-o-Q, while revenue stands at KRW 50.8 billion. Revenue dropped because while the volume for EV applications was similar to last quarter, the volume for IT applications fell due to sluggish demand of our key customers. The uncertainty of downstream demand continues into Q4, but volume is expected to gradually pick up, including the shipment to a North America customer that began in July this year.

Also, we are currently talking to multiple potential customers about the supply of EV LFP and new form factor batteries as well as separators for ESS. We believe that we will soon be able to finalize discussions with [ Samasongson ] and look forward to starting shipment. Given such developments, SKIET is working towards a rebound in performance driven by a meaningful sales increase from new customers and new projects of existing customers in 2025. While the recent uncertainty in the downstream industry is very high, we are strongly committed to the recovery in sales volume.

Next, I will cover profitability. Operating profit for Q3 posted a loss of KRW 73 billion, down KRW 14.3 billion Q-o-Q. Despite partial profitability improvements from savings and operation expenses, as noted earlier, profitability declined due to lower volume to major customers, fixed cost burdens from continued low utilization rate, and inventory loss stemming from our destocking strategy.

There will be some recovery in utilization rate in Q4 following shipment for a new project, but uncertainty will still persist, including a continued downswing in the downstream industry. Furthermore, SKIET's annual inventory asset level is above average year levels due to the slow downstream demand that started from last year Q4. Accordingly, we are choosing to exhaust our inventory first as we flexibly respond to demand.

SKIET is aiming to increase volume, driven by recovery in demand of our key customers and higher utilization rate from ramp-up in sales to new customers. At the same time, we are improving other levers of profitability such as savings in fixed costs such as repair and utility expenses by increasing operational efficiency and diversifying our raw material sourcing options.

Lastly, I would like to discuss the implications of U.S. policy changes on SKIET. The U.S. presidential election will take place starting tomorrow night, Korea time, and the outcome will be clear around November 6. Our company is analyzing the impacts related to the concerns on the potential outcome of the U.S. presidential election from different perspectives. Overall, we anticipate that the North American EV market will continue to present a favorable environment for us in the broader context. U.S. green policies will likely continue mid- to long term, and an extreme scenario where the whole IRA is repealed is not realistically likely.

As per the different scenario analysis on the potential policy changes in the U.S., our company is designing response strategies to each of them. Regardless of shifts in U.S. policy, we believe that investment in North America will be necessary. However, we will carefully assess the specifics of North American investments such as investment site, scale and time line, depending on the results of the presidential election. We will then determine and subsequently execute the best North America expansion option. Furthermore, depending on the situation, we will be flexible in our response to a changing downstream environment by establishing various measures such as a phased build-out of capacity.

This ends the earnings presentation of 2024 Q3, and we will now go on to the Q&A session.

[Operator]

[Operator Instructions] [Foreign Language] The first question will be provided by Minwoo Ju from NH Investment & Securities.

[Minwoo Ju, analyst]

[Interpreted] This is Ju Minwoo from NH. I have two questions. First, I would like a detailed update on your customer diversification strategy. How is that going? Secondly, I would also like to understand the sales outlook for 2025 for the North America customer that you signed on and also SKIET's share in the project of the North America customer.

[Jay Kim, executive]

[Interpreted] This is Kim Jonghyun, Head of Marketing. Let me speak to our customer diversification strategy. So for our key existing customers, we are strengthening our relationship with them and working in various ways to expand the orders that we get from them. Now on the new potential customers, we are engaging with multiple potential customers, and there are largely two fronts to this. The first customer group is Europe. The second customer group is Chinese customers.

Now first, on Chinese customers. We recently received a CBP ruling. And now as a result, Chinese battery makers are not only looking for Chinese separator companies, they are turning their interest to non-Chinese -- outside China companies to get their -- to get the supply. So we are getting a lot of contact and engagement from Chinese customers. So all in all, there are multifaceted efforts ongoing on our customer diversification strategy and effort, and we will soon be ready, I think, with an LOI.

And with a domestic battery company, we have done the preaudit and preassessment of the production capacity for both Europe and U.S. So I think we'll be able to have a supply agreement with them in place next year. So on the new North American customer and their outlook for this customer for 2025, we -- at the request of this customer, I visited them last week and the technology which took 1 year to complete for this customer has now been finalized and completed, and the shipment based on this new development has been taking place since July. And when I visited, I confirm that there were no special call-outs or any issues.

The ramp-up on the customer side is going very smoothly. So the purpose of my visit was to discuss an increase in sales volume to them, and we are discussing ways to speed up the 2025 time line, and I went there to discuss the time line specifics for that. And you also asked about the share -- the wallet share. And with our key customers, we do have already a pretty large share with our key customers for -- but on the North American side, for the customers that we have signed on, we are planning to turn sizable volume to this new North America customer.

Lastly, I would like to say, for the North America customer that we signed on, currently, we are only supplying battery separators for one of their models. But through this visit, we discussed ways to expand this to other models from 2026.

[Operator]

[Foreign Language] The following question will be presented by Chang Min Lee from KB Securities.

[Chang Min Lee, analyst]

[Interpreted] This is Chang Min from KB. I have three questions. First is the utilization rate by size -- by site. And secondly, if possible, could you speak to the volume outlook and provide some guidance for Q4 and 2025? And thirdly is, I would like your opinion and also your insights on the demand trend that you're observing among your key customers for Q4 and 2025.

[Unknown Executive]

[Interpreted] So first, on your question on utilization rate by size -- by site, we have been disclosing utilization rate based on base loan basis. And compared to the first half and the second half, we did not see a big increase in utilization rate. Overall, the utilization rate is low, around 20% to 30%.

And on your second question regarding volume guidance for 2025, we are in the phases of establishing a business plan for next year, and we believe that there will be much bigger volume in 2025 compared to 2024. However, there still is downstream demand uncertainty. And also on our customer side, they are developing their own plans yet, and this is not finalized. So I believe we'll be able to give you more specifics in our next earnings presentation.

Thirdly, I will take your question on the customer trends that we have been observing. There are three parts that I would like to discuss with you. One is the captive customer size, second is our North America customer, and third are the domestic major customers. So on the separator volume, it will fall likely short of last year's volume on a Y-o-Y basis. And up until next year, where we will see the tangible fruits of our customer diversification efforts, it is true that our dependence on our captive customer will remain high.

From Q4 onwards, we are seeing signals that the demand will recover. So from next year onwards, compared to this year, there will be, I think, a huge uplift in volume to our captive customer. I think for the North America customer, my previous answer would suffice.

And on the major domestic customer front, we have 2 major customers domestically. And with both of them, we are talking about the supply of sizable volume. Now with one of them, the talks has progressed quite a bit and they have visited our [ BNP ], our Poland facility, and did due diligence on production. Once the assessment on quality is finished and if we proceed to [ 4M ] step, then I believe we'll be able to start shipment in the second half of next year 2025.

And after the CBP ruling in August, it has become clear that retaliatory tariffs may be levied if coating is done overseas on Chinese-produced base films. So after this ruling came out, Korean battery companies became more interested in engaging in talks with us on the supply of base films. So I believe we'll be able to see some visible results and fruits from these talks within November on volume and any specific supply details.

[Operator]

[Foreign Language] The following question will be presented by Taekyoung Ha from Bank of America Securities.

[Taekyoung Ha, analyst]

[Interpreted] I have two questions. Now it seems that your profitability is hurting because of the fixed cost pressure that came from the low utilization rate because you needed to exhaust your online inventory first. I would like to understand the current inventory level that you have, and compared to Q4, what -- compared to Q3 and Q4, what would the utilization rate largely look like? And when do you think there will be a meaningful rebound in utilization rate?

My second question pertains to the robust demand that you said you anticipate for North America in 2025. Now in line with such developments on the horizon, when do you start -- when will you start the operation of Poland Phase 2?

[Unknown Executive]

[Interpreted] Now on the current inventory level, I cannot give you a specific number, but it is about twofold or threefold of the appropriate level of inventory we deem fit. It was because demand this year has been very low, and we are managing our inventory in connection with the inventory stockpiled at our customer site. And up until the end of this year, we will continue to decrease our stock.

SKIET's inventory level is closely related to the inventory level of our customers, and this is also in turn linked to the sales volume that they will ship -- that they will sell. So we have intelligence that on our customer side, their inventory on SKIET's products has gone down quite a bit. So the situation around inventory will clear up late 2024 or early 2025. So we believe we'll be able to see a recovery in demand, and also accordingly, a recovery in our situation -- inventory situation in the first half of next year.

And on the go-live timing for Phase 2 of Poland, it will differ depending on some -- maybe some potential IRA changes that are to come after the U.S. presidential election. But what we gathered from the talks that our marketing department had in the U.S., it seems that there is a positive atmosphere in the U.S., and there is a lot of requests asking for volume to be supplied from Europe to the U.S. So it is my cautious anticipation that we will be able to start the operations of our Poland facility mid next year.

[Operator]

[Foreign Language] The following question will be presented by Yushin Park from HSBC.

[Yushin Park, analyst]

[Interpreted] This is Park Yushin from HSBC. I have several questions. First is, on the year-end inventory, would there be any one-off costs that will be incurred related to the inventory that we can expect? And currently, in the oversupply situation, I believe there is huge downward pressure in terms of ASP. Could you provide an ASP outlook?

And thirdly, on the CapEx, I would like to understand the amount of CapEx that has been executed so far year-to-date this year and what is remaining, and also the CapEx outlook for next year as well. Lastly, on expansion into North America, you said this will be an initiative that will be executed regardless of the U.S. presidential election outcome. And could you provide some specifics around the time line for this?

[Unknown Executive]

[Interpreted] First, on the one-off expense related to inventory in Q4 at the end of this year. So every quarter, at the end of every quarter, we do assess our inventory and try to identify obsolete goods or defective goods and inventory. And in Q4, at the end of this year, not only for inventory, but for other assets, we will carry out the [ assignments ] evaluation where we assess the assets that we have. So there will be various cost items that will be recognized on a one-off basis at the end of this year. So to your question, yes, there will be some cost expenses that will be incurred on a onetime basis in Q4.

And on your second question, about ASP coming from -- ASP downward pressure coming from oversupply, yes, you're correct. For the past 1 year, there has been serious competition between us and Chinese players, and this has resulted in oversupply, which has put downward pressure on ASP. Recently, I think that this ASP drop has bottomed out. I don't think there is a lower point beneath the current level. Now on EU and North America side, I think situations will differ depending on the presidential election outcome. But on the EU side -- Europe side, there is still oversupply. But in the North American market, I think we can expect a slight uplift in ASP after the presidential election.

Third, I'll take your question on CapEx. Now for 2024 and 2025, the key initiatives that require CapEx will be the Phase 3 to 4 build-out in Poland and other existing current projects, which require about KRW 10 billion to KRW 20 billion. Now in 2024 as a whole, we expect a CapEx execution of about the mid KRW 200 billion. And in 2025, 40% to 45% of the CapEx executed in 2024 will be needed for us to push forward with strategic CapEx initiatives that we have planned out.

And on the expansion time line into North America, as I've told you, for strategic investment, our CapEx will be about KRW mid-200 billion in 2024 and about KRW 100 billion in 2025. After that, we don't have any major CapEx initiatives planned. The next major initiative will be our expansion into North America as part of our strategic investment.

And on North America, of course, this market has huge growth potential and has some policy advantages, which is why this market will be a market of opportunity for SKIET, but at the same time, it requires higher CapEx. And also, there is policy risk from the uncertainties and policy changes. So while we are talking with many multiple customers, these customers also have difficulty in giving us a certain commitment or a firm answer until the end of this year. So I believe we'll have to monitor the situation up until the first half of 2025 before we make a decision then.

Under the overarching premise that our sustainable profitability has to be sustainable irrespective of the IRA, we are reviewing various options that include U.S., Canada and Mexico. But there will be, I think, a huge sway in policies depending on the outcome of the presidential election in the U.S. So we are not only contemplating profitability, but we are also looking at the specific region and site. And after the U.S. election, depending on customer demands and how they will respond to the IRA, I think will determine much capacity we will plan in North America and also when we will make the entry into the North American market. So we will consider these various options, and we are doing scenario planning on each of these options, and we will reach a decision in the first half of 2025.

[Unknown Executive]

[Interpreted] This is [indiscernible] from Business Strategy. Now if candidate Harris gets elected as the new President, we will build our coating lines for us depending on the exact demand that we assess from North America. And in this case, we'll be able to utilize the base films from Europe and Korea, depending on the customer needs. And if Trump gets reelected, then I think there will still be a part of the IRA that is less effective. But even if the IRA is repealed altogether, there is this retaliatory tariff. That is another key factor. And in such cases, we'll be still able to utilize our Europe and Korean capacity as well. So depending on the election result and also according policy changes to come, we are factoring in various options and scenarios for both Europe, Korea and U.S., and we will utilize all these parts together as we make the final decision and execution.

[Operator]

[Foreign Language] We will now close SKIET [Audio Gap]

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