LG Energy Solution Ltd

KRX:373220

Earnings Call Transcript 2023-Q2

[Sara Hwang, executive]

[Interpreted] Good morning and evening. This is Sara Hwang, Head of IR from LG Energy Solution. Thank you for joining our Q2 2023 earnings conference call. First, I'd like to introduce who are present today. Chang Sil, CFO/CSO; [ Yeong Su Gwon ], in charge of Finance and Accounting Group; Lee Sangyoon, in charge of Finance; Jeong-Do, in charge of Planning and Management; Kim Dong-Myung, in charge of Advanced Automotive Battery Planning and Management, [ Noin Hah ], in charge of Mobility and IT Battery Planning and Management; [ Chae Sang Gun ], in charge of ESS Battery Planning and Management; [ Chong Song Hun ], in charge of Corporate Strategy; and Park Jihyun, in charge of Market Intelligence.

For your reference with the presentation -- for your reference, the presentation for business performance and strategy will be conducted with simultaneous interpretation, after which, we will have Q&A with consecutive interpretation. The slide will be downloadable on the corporate website. In this conference call, I'm going to share our business performance of Q2 2023, and then CFO will explain our key achievement in the first half and key initiatives for the latter half, followed by Q&A.

Please note that the forward-looking statements include in the call are subject to change according to changes in future and business environment and corporate strategies. First, let me explain our business performance. While demand for EVs in Europe has been relatively slower than other regions, the metal price decline in the first quarter partially influenced the battery ASPs. However, as we expanded shipment volume proactively in response to sound EV demand in North America, our revenue in Q2 2023 posted a KRW 8.774 trillion. Compared with the same period of the last year, the revenue improved by 73% and was similar to that of the solid previous quarter.

Regarding profitability due to the temporarily increased costs of metal expense impact from lagging consumption of raw material inventories, the OP in Q2, excluding IRA tax credit effects, slightly decreased in Q2 to post KRW 500.7 billion. However, in line with the agreement with the customer, we decided to recognize KRW 151 billion in the second quarter financial results as one-off provisioning for the inflated costs of material expense from the ongoing GM recall process. Reflecting first one-off, the operating profit in the second quarter recorded about KRW 350 billion and the OP including KRW 110.9 billion of IRA tax credit posted KRW 461 billion.

On top of the considerable revenue growth, we are going to -- we are continuously improving OP margin through productivity enhancement, other expense items, efficiency improvement and cost innovation and the OP margin excluding the one-off item was 5.7% which improved by 1.8 percentage point Y-o-Y but including the one-off the OPM was similar to that of the previous quarter. In nonoperating items with about KRW 270 billion of foreign currency-related profits was just translation gains from foreign currency denominated debt, non-operating profit in Q2 came in at around KRW 185 billion. Accordingly, net profit recorded is KRW 465 billion with net profit margin of 5.3%.

Next financial position. The total assets at the end of Q2 2023 increased by KRW 1,681 billion from the previous quarter's end to stand at KRW 42,395 billion with liabilities to equity ratio of 83% and net debt-to-equity ratio of 19%. For cash flow in Q2, even with CapEx spending of around KRW 2.4 trillion, positive cash flow was made with around KRW 1 trillion of EBITDA generation and KRW 1 trillion of KRW denominated corporate bond issue. Thus the cash balance at the end of the quarter increased by about KRW 79 billion compared with the previous quarter's end to reach KRW 4,860 billion. CapEx spending in the first half rose 55% Y-o-Y to record about KRW 4.2 trillion which was mainly executed for investment in production capacity expansion in North America including JVs.

With this, let me end my explanation on the business performance of Q2 2023 and move on to the next part on the second half market dynamics and our key initiatives by CFO, Lee Chang Sil.

[Chang Sil Lee, executive]

[Interpreted] Good morning and good evening. This is Lee Chang Sil. For those investors and analysts who joined us with continuous trust and support, let me deliver my appreciation. In this earnings call, I'd like to walk you through the key achievements that we made in the first half of 2023 and also share our view on the battery market dynamics in the second half compared with early this year and our key initiatives.

First, looking at the EV market, the cumulative global EV sales from January to May 2023 showed a solid growth of over 40% year-on-year. In particular, the U.S. market marked 54% of EV sales growth, which is faster compared with other countries like China and Europe. As we focus on the rapidly expanding U.S. market with our business capabilities, during the first half, we generated noticeable financial results with about KRW 17.5 trillion of revenue, up by 86% Y-o-Y and about KRW 1.1 trillion of operating profit, up by 140% on a Y-o-Y basis. In particular, we successfully started mass production of GM JV Phase 1, the first joint venture with the customer, after which we put in place a structure to ramp up stably also for the EV cylindrical batteries for the strategic customer.

We maximize the sales volume, thus accelerating our revenue growth thus far. Not just that, the yield results across every site were above the internal target levels. As a result of continuous cost innovation and improvement of major expenses such as logistic costs, we're able to improve profitability considerably compared with the previous year. In addition, as part of our continuous efforts for supply chain diversification, we made equity investment in Australian upstream producers with lithium mines [ indoor ] production lines in North America, thus securing additional IRA compliant core raw materials.

And likewise, we continue to try to make a step ahead for enhanced sourcing competitiveness. However, the market environment in the latter half is expected to be still challenging.

Regarding EV demand forecasts by region, backed up by proactive government policies IRA, the forecast for North America was revised up, whereas the EV sales of China and Europe are expected to be somewhat lower than previous expectations. Regarding this trend with the base effect of having had relatively higher EV penetration rate, these regions' growth rates can be considered slower. However, with continuous macro uncertainties in Europe such as high inflation and negative growth of GDP in some countries, we understand that the EV sales of major OEMs are more sluggish than expectations.

Also the lithium hydroxide price, the main raw material for battery production plunged over 50% from its peak during the first quarter. Against this backdrop, that price decline is expected to impact battery ASPs mainly from the third quarter. Nevertheless, the EV battery market in the mid to long run is expected to grow over 5x by 2030 compared to the size of this year. So it is safe to say that the existing forecasts were solid growth going forward remains intact. Even then rather than getting swayed by short-term industry ups and downs, we intend to respond proactively to any market changes from the long-term perspective. In particular, LG Energy Solution has been implementing the key initiatives consistently based on 3 major pillars of product competitiveness, operational capability and stable supply chain which underpin our fundamental competitiveness.

First, product competitiveness. To meet market needs which are getting more diverse, we will develop and produce customized product for our customers. 4680 cylindrical new form factor, production lines will be set up in Ochang, Korea within the year; in Nanjing, China, we will convert some NCM lines into LFP for ESS battery production. Furthermore, with not just our premium products, which have already gained clear competitive edge, but also NCM based high voltage mid-nickel, manganese-rich and LFP batteries will secure competitive advantage for each segment, which will help us respond to various market changes in a timely manner, such as next year EV segment expansion and ESS demand growth.

Second, operation. Backed up by our experience of global operation that we have built up for multiple years, we're equipped with capabilities for stable capacity expansion and quality control. Based on such operational excellence, we'll be aiming to reach full ramp-up for GM JV Phase 1 within the year for the following GM JV project Phase 2 and 3, a newly signed expansion project in North America such as JVs with Stellantis, Honda and Hyundai Motor Company will proceed as planned. There is stable setup preparation. Also, smart factory will be phased in from GM JV Phase 2 and rolled out to entire production sites globally. It will help us assure product quality stably and save processing costs with process automation and strengthen costs and quality competitiveness.

Lastly, on raw material sourcing, we're continuously diversifying supply chain and one achievement we made early this month was the signup of LTA, long-term agreement with SQM, Chilean lithium producer for 100,000 tonnes of lithium for a 7-year period, the largest volume of its kind. There's strategic partnerships with mid- to long-term supply agreement and equity investments. We'd like to establish a structure to secure key raw materials at competitive prices, and further accelerate supply chain localization. Also, considering the life cycle of EVs, the market for battery reuse and recycling is expected to increasingly expand after early to mid-2030s. That's from the perspective of future ESG that suggests introduction of mandatory battery recycling policy, it is critical to build systematic closed loop preemptively.

For this, we intend to secure leading market presence for recycling. There are partnerships with competitive companies across the entire value chain, ranging from collection, pretreatment, post-treatment to precursor until 2027 for each production site in the U.S., Europe and Asia and others, also based on differentiated battery diagnosis, technology, and ESS business capability. We will be aiming to capture new business opportunities for battery reuse. Going forward, to diversify our portfolio and secure sustainable competitiveness, we would like to identify key strategic initiatives in the mid to long run perspective and implement them systematically.

Last but not least, let me update our 2023 annual achievement goal. Our order backlog reached KRW 440 trillion as of the end of June, which went up by over KRW 100 trillion within 1 year or so. As previously explained, even if there are more heightened concerns over downstream demand than expected, we will monitor closely and be alert to what are changing in the market and demand side. With these efforts in place, we will make sure our annual revenue grows over mid 30% Y-o-Y. As previously provided in terms of profitability through economies of scale with shipment expansion, productivity enhancements, cost innovation and others, we'll strive to accomplish mid to high single digit percent OPM excluding the IRA tax credit effects.

Investors, analysts and our shareholders, I appreciate your time and continued interest. LG Energy Solution will be attentive to your feedback at all times. Thank you.

[Operator]

[Foreign Language] [Operator Instructions] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Dong Jin Kang, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] Thank you for the opportunity to ask questions. There are 2 questions that I would like to ask you. The first question is that you did mention that there was a one-off provision that you said in relation to the activities that you have ongoing with GM. If you would be able to elaborate a bit more about that, that would be appreciated.

The second question that I would like to ask you is that during your presentation, you did mention that in terms of the second half outlook that you do believe that the market will not be easy. So if you could share your outlook specifically for the third quarter and also for the full year that would be appreciated also.

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Yes, let me take the first question that you had about our one-off provisions that we set aside. This is [ Yeong Su Gwon ] from finance and accounting. In the second quarter, as you can see, we did set aside and as we did mention during the presentation, a one-off provision of around -- an approximately KRW 150 billion. The reason for that is because in the process of conducting the recall for the GM Vault, there has been an increase in overall material costs. And with that impact, according to our agreement that we have had with our customer, there was some cost sharing that we needed to reflect. So, with regards to the overall burden that LG will take -- will be responsible for, LG Electronics and ourselves have each determined to take 50% of that share each. So as a result of that, that is the cost that we have reflected.

In inspection to the overall volume or the scope of the recall in itself, there is nothing that has changed. And as of the current time, as we see things are taking place as of now, we do not -- we do believe that the possibility of additional costs in relation to the recall being incurred would be significantly low.

[Chang Sil Lee, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] So this is the CFO. And maybe I can take your second question about our overall outlook for the third quarter and for the full year. As you have mentioned, I do believe that, first, before answering your question, I would like to thank you for a very good question. In the way of doing business, as you are aware, you know, there can be ups and downs within the cycle. And added to that, if we look at the internal and external environment, there are various elements that could work as variables within this backdrop. So if we look at the third quarter, based upon the overall effects of the IRA policy that we have seen in North America in itself, for EV demand, there has been continuous and very strong growth. And we do believe that this is something that will continue into the third quarter.

However, on the other side of that, as we have mentioned before, in the case of EV demand in Europe, we do believe that there is a high possibility that it will be lower than what we had initially expected. And added to that, in the first half of the year, there has been changes in the metal prices. And as a result of that, because of the fall in the prices that we have seen, there can be an overall impact that we see on our overall prices also. In addition to that, on the European side, if we look at our European customers, some customers do have relatively high level of inventory that they are holding. So as a result of that, we do think that for their purchasing demand, there could be some pushback into the fourth quarter for the overall placements that they may make.

So all in all, if we look at the overall situation, as a result of that, if we look at 3Q revenue, we do think that versus the second quarter, there could be a slight decrease in the overall top line. And in addition to that, there are ongoing discussions that we have with our customers as of the current time. So we do think that there could also be some overall changes to what we expect versus the current time. In terms of the profitability, if we look at the key items on our cost side, including the overall logistics cost, there has been improvements. And added to that, we are also very tightly managing our overall costs. So as for new capacity in terms of the production there as that stabilizes, and as we continue to see improvements in our productivity, we will also focus in increasing the overall yield.

So as a result of that, if we look at the profitability outlook, we do think that the third quarter will represent a better situation than what we have seen for -- during the first half of the year. If we add on the outlook for the full year, in the fourth quarter, different from the normal situation, we do think that due to the overall impact of the IRA and the momentum that we see there, we do think that that will be a larger momentum that we will be able to enjoy. And due to other issues and other things that are taking place, we do think that in terms of purchasing by our key OEMs that there should be a recovery in the fourth quarter. So as a result, if we look at our full year performance on the top line versus 2022, we do think that we will be able to achieve a growth of the mid-30% range.

In terms of profitability for the full year, again, in the fourth quarter, we will see an increase in shipments and also be able to enjoy a higher level of economy of scale. And in addition to that, the overall lagging effect from the total inventory that we hold will somewhat subside. So as a result, even if we don't include the effects or the benefits that we will have from the IRA tax credit, we think that in terms of operating margins, we will be able to achieve a mid to high single digit type of margin profile. Thank you.

[Operator]

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

[Won Suk Chung, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] This is Chung Won Suk. There are 2 questions that I would like to ask. And this is in relation to the previous answers. And also, I guess previous questions that have been asked. The first question is related to metal prices. If you look at metal prices, since January, there has been an overall decline in the price levels. So what was the -- and I do believe that that is a event that has had an impact on not only your first quarter and second quarter ASP, but also in the third quarter.

So if we look at the overall decline in the raw material prices, what impact has that had on battery prices? And how should we see or look at this overall situation? In addition to that, if we look at the third quarter, I do believe that the overall expectations is that battery prices will be declining further, however, metal prices are actually moving in the opposite direction. So they're increasing. So I do think that this may be a burden on the company. When do you think that the overall metal price burden in itself will be alleviated from the company's perspective?

The second question that I would like to ask you is about your European customer base. If you look at your European customers relative to other companies, you do have a larger portion of customers that are located in Europe. So in relation to the overall concerns that you have about demand going forward, how should we view your overall outlook about volume during the second half of the year? And in addition to that, in Europe, when do you think that the demand will actually recover?

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] So maybe I can address your first question about the overall metal price decline that we have seen and also when we think that the overall burden from our raw material cost will be alleviated. This is corporate strategy, [ Jeong Do ]. As you have mentioned, lithium prices from February in actuality have been declining significantly. And if you look at the overall impact, it has impacted somewhat our ASP from the second quarter. If you look at metal prices and the effect that it would have on our price levels, on average, it actually takes around 1 to 2 quarters for the impact to actually come into realization. So there is a lagging effect in terms of when the decrease in metal prices is actually reflected into our battery sales price.

So if you take that lagging effect into consideration, we do think that there will be somewhat of an impact on our second half revenues. The fundamental purpose of having a metal price linked overall contract is because we do want to ensure that we're able to secure stable margins. So if we look at the raw material prices and also the battery sales price, all of this is linked to the price levels that we see in the market for metal prices. And from a long-term perspective, we do, well, believe that this mechanism in itself enables us to ensure that the overall metal price impact that we have on our profitability over the longer term would be very small or extremely small.

So that has been said. However, if you look at it with a short-term horizon, the actual input metal price in itself may be higher than the quarter market price of metal, and because of the time difference that we mentioned before, in the second quarter, there was a somewhat of a cost increase, because of the situation. However, going into third quarter versus the second quarter, we do believe that the overall impact of the cost increase will be lower. And going into the fourth quarter, the actual input price that we see for the metal prices will be larger than the market price. So as a result of that, we do think that as time passes, the overall burden of our cost increase will be more alleviated.

[Dong-Myung Kim, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] So on your second question about the overall demand from our key customer base, maybe I can address that question. This is Kim Dong-Myung from the Advanced Automotive Battery Planning and Management department. So as we have mentioned before in the European area, as mentioned, for some of our customers on the EV side, there are reports that sales have been a bit lackluster. And added to that in the second half of the year, there are expectations that the overall price of batteries will be declining. And in addition to that, if we see, as mentioned, we do believe that there will be some customers that will be pushing back their purchases to the fourth quarter.

As we enter into the overall vacation season during July and also August, there will be an overall decline in the overall utilization at a customer site. So as a result of that, in terms of the demand, we do believe that there could be a temporary decrease in overall demand that we see. However, taking this overall situation into consideration, we have adjusted our production. And we are trying to minimize our inventory burden as much as possible. However, that have been said, if we look at the U.S. market, which is one of the main markets that we're focusing on, in this area, customer demand continues to be very strong.

And in addition to that, as mentioned, though, there are some purchases from the third quarter that have been pushed back in the fourth quarter, we do think that these will come in again, which will lead to a recovery. So as a result of that, if we look at our overall expectations for the full year in terms of the top line, as we have planned, we do think that we will be able to achieve a mid-30% level of growth.

[Operator]

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

[Unknown Analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] I would like to ask 2 questions: one about the overall policy direction in North America, and the second would be with regards to the overall sales outlook that you see at your customer level. So in relation to the first question, what I would like to ask you in terms of policy direction in North America is that recently, Tesla during their earnings call actually mentioned that they do believe that the IRA AMPC tax credits would be something that would -- they would be benefiting from.

And also that as a result of these comments, I do think that there has been a lot of increasing interest about OEM sharing with regards to the overall benefits. So for LG ES, this is something that you have started to recognize within your overall performance. So do you think that there could be some AMPC sharing with your OEM customers? What would be the possibility there?

In addition to that, I also would like to ask you, in relation to the Canada Special Contribution Agreement, or SCA, I do understand that recently there have been reports that the JV that you have with Stellantis has reached an agreement with Canada with regards to the terms and conditions. So for the underlying SCA, what do you believe the benefits would be that you would be able to enjoy and what would be some of the content of what you would be able to share with us?

The second question that I would like to ask you is about your key customers in the North American region, including GM in terms of their overall EV current outlook and current situation, how is that having an impact on your overall performance? And for the GM JV in itself, it's 1 year now since you have had that facility up and running. So in terms of the productivity and also in terms of profitability, what is the current status right now and what is your outlook for the future?

[Chang Sil Lee, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] So thank you for asking a question in which there is a lot of interest. This is the CFO and maybe I can take your first question about the IRA tax credit, sharing possibilities and other such situations. So if we look at the situation here in terms of the IRA tax credit, as you are aware, this is something that we have started to reflect into our overall performance. And as a battery producer in the U.S., this is a benefit that we're able to enjoy. But we do believe that from a longer term perspective that sharing the IRA benefits in itself will further facilitate the electrification within the overall market, and also increase EV battery shipments. So we do think that there could be positive implications as a result of that.

So from LG Energy Solution's overall perspective, based upon our strategic partnership that we have with each of the OEM companies, and also in consideration of the cost competitiveness or price competitiveness that we want to maintain, we are looking at the possibility of having a certain level of sharing that we would have and we do think that this will contribute to creating a virtuous cycle in terms of battery sales, and also EV sales. So as a result of that, we are planning to discuss overall direction in which both our customers and us would be able to win. So a win-win situation.

However, that have been said, in terms of the sustainability of the overall program that the U.S. government is trying to implement, I do think that there are some concerns about that. So in terms of our capacity expansion in the U.S., this is something that we have preemptively done even before the IRA. So as a result, noticing and also recognizing that there are some volatility risks related to the tax credit program in itself, we won't depend upon this alone, but try to strengthen our overall fundamental competitiveness so that on a independent basis, we would be able to achieve profitable growth going forward.

And in addition to that, in the case of the Canada situation, of course, the overall framework is very similar to the U.S. IRA tax credit in itself. Initially, if we look at the level of support that was going to be provided, and also the initial proposal that was set forth, there was a significant gap between our position versus theirs. And as a result of that, we did take a somewhat extreme measure of suspending the overall factory construction and also making stronger demands to our counterparty. So as a result of that, we have been able to reach an agreement of conditions that are very similar to the IRA tax credit. And as a result of that, going forward, we will make sure that the Stellantis JV construction of the factory in itself goes ahead according to schedule and in addition to that, that we can create this facility into a another core production site for our North American battery business.

[Dong-Myung Kim, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Maybe I can take your second question about our GM JV productivity level and also the overview of sales at our customer side. This is Kim Dong-Myung from the Advanced Automotive Battery Planning and Management division. So in the case of our GM JV as you are aware, this is something that we have started commercial production for in the fourth quarter of 2022. And from the beginning, our overall stance was even if the overall speed of our capacity expansion is a bit slow, we did want to make sure that we were able to secure completely the level of quality and production that we were aiming for. So this was the initial strategy that we have implemented from the beginning in terms of operation.

And right now, in terms of the overall operations in itself because it is stabilized significantly, we do think that towards the second half of the year that we will accelerate the production speed so that within the full year we will be able to fully ramp up the facility. By doing this, we will be able to achieve a better economy of scale and also a better level of productivity which will enable us to create a base for more stable profit generation going forward. If we look at the overall customer side in terms of their sales volume versus the demand outstanding, I do believe that for the ultimate platform EV supply, it is true that there is a shortfall of supply that is being provided. However, I think that this is in relation to the fact that the production for the EV dedicated platform is something that is still in the early stages.

And based upon the announcements that have been made by the GM CEO, I do believe that towards the second half of the year in terms of the overall production volume and also sales volume, this is -- that this is something that will increase going forward.

[Operator]

[Foreign Language] The following question will be presented by Hyunryul Cho from Samsung Securities.

[Hyunryul Cho, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] There are 2 questions that I would like to ask you. One is related to your ESS business and the other would be related to your mobility and IT battery business. So in the case of the ESS business, the question that I would like to ask you is that during your presentation, you did mention that for the Nanjing line that you have -- that you will be converting this for LFP, for ESS. So in actuality with regards to the stage at which you would be able to engage in full production or in full sales, what would the timing be for that? And in addition to that, if we look at your outlook for the ESS performance in the second half of the year, what would that look like?

In addition to that, if you look at your mobility and IT battery business, the question that I would like to ask there is that you did mention the overall situation about EV battery inventories for cars. On the EV cylindrical side, what is the demand outlook? What does the demand look like there? And in addition to that, for the timeline that you are going to build out for the 4680 batteries in terms of the SOP for that, when would we be able to look at an SOP?

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] So maybe I can take your question about our ESS outlook and also the LFP conversion that we're conducting. This is [ Chae Sang Gun ] from ESS Battery Planning and Management division. So first to talk about our outlook for the ESS market in the second half of the year because of the characteristics of the ESS business versus the first half of the year, we do believe that the second half will represent a much stronger performance level. And if you look at our second half, there are various North American grid related projects that are ongoing. So we do believe that we will be able to enjoy a significant increase in our top line.

In the second half, if we look at the nature of the overall projects that we will be recognizing into our top line, these are projects that are based upon appropriate level of profitability. So we also believe that it will contribute to our profitability of this business. Secondly, if you look at the LFP side of things, for this year, in the second half of the year, some of the lines that we have for NCM capacity in China will be converted for LFP use. And in addition to that, in Arizona in the U.S. from 2026, we are planning to build a 16-gigawatt hour level of capacity that will service the overall demand that we see for grids in North America and cater to that overall demand.

So what we're focusing on now is to ensure that we have a differentiated product performance that would enable us to have more competitiveness in LFP manufacturing and also that we are able to build out overall production base and site so that we can meet the demands of localization that we see at our customer level.

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Maybe I can take your second question about EV cylindrical demand and also our overall commercial production plans for the 4680 batteries. This is Noin Hah from the Mobility and IT Battery Planning and Measurement division. So in terms of the cylindrical batteries, if we look at the overall situation, there have been various uncertainties within the global economy within the first half of the year. However, nevertheless, in terms of our key customer demand and the overall sales that we have seen, there has been an increase in that. So as a result of that, we have been able to enjoy solid performance on the cylindrical battery side.

However, in the third quarter, the key -- one of our key customers is planning to have a factory upgrade. And as a result of that, we do think that over the short-term, there could be a decrease in production as a result of that. So on a temporary basis, we do think that that will also be an impact that we will see in our overall shipment volume. However, for cylindrical batteries themselves, it is a standardized form. And as a result of that, it can be converted for other customers and other purposes. So as a result of that, we do want to secure more volume on the [ LEV ] and also electrical tool side to try to minimize the impact as much as possible. In addition, if you look at the overall demand for IT pouches, we are entering into a high season for this demand and as a result of that by maximizing the overall revenue on that side, I do think that we will be able to achieve our revenue growth for the mobility and IT battery business as a whole.

Secondly, to move on to the 4680 commercial production plans, as mentioned for the 4680, this is something in which we're currently at a stage in which we're trying to enhance the quality of the overall finished product. The plan is, as mentioned, to build out our commercial production line in Ochang within the year and also be able to be in a position and we're trying to target production starting in the second half of next year so that we can cater to the overall demand that we see at various customers. Thank you.

[Operator]

[Foreign Language] So due to the time constraint and the overall time right now, we will take one last question. The last question will be presented by Bo Young Choi from Kyobo Securities.

[Bo Young Choi, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] This is Choi Bo Young and the questions that I would like to ask you would be related to your LFP batteries. Recently, if you look at the LFP battery market, it is being adopted for more EVs by the OEMs. And also we see this market continuously increasing. So during the presentation, you did mention that to build your overall product competitiveness that you would be converting some of your lines in Nanjing for LFP purpose and also that you would be building out capacity in Arizona to actually cater to your ESS customers. On the LFP EV battery side, what would be your overall strategy there? And for the mid to low end EV market, what would be the strategy to try to cater to that market?

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] So maybe I can address your question about our EV LFP possibilities going forward. This is Chong Song Hun from Corporate Strategy. So as you have mentioned and as you have seen, we do see that LFP batteries have been increasing in terms of their overall portion of the market. And we do think that this is an important solution that will continue to grow going forward. So from our side also, as mentioned before, we are planning to engage in commercial production of LFP for ESS purposes within the second half of the year. However, for the adoption on the EV side, I do think that it will require a bit more time because we do want to make sure that we get things right in terms of the overall energy density and the overall electricity output that we're looking to achieve.

So as a result of that, right now we're in the phase in which we are trying to plan production accordingly to our development. And as a result, I do think that this is an area in which we will continue to see an increase in and we are trying to improve the overall quality of the finished product that we're trying to develop as of now. In addition to that, I think that we do want to differentiate ourselves versus the Chinese players within the market in terms of our energy density levels and also the performance. So on that side, there are continuous efforts that we are making. So at the end of the day, we do want to create an LFP chemistry that is more advanced in terms of the overall level of performance and quality that is being provided.

In addition to that, however, to cater to more of the mass market and the mid-tier market, we are looking at other alternatives, which would be the high voltage mid-nickel type of batteries that we can provide. So we do want to make sure that in this area in terms of the stability, the safety, the cost competitiveness and for other areas that we can be on a competitive edge versus the existing players within the market.

[Operator]

[Foreign Language] Thank you very much. With this, we would like to wrap up the earnings conference call for the second quarter of 2023 for LG Energy Solution. Thank you for your attention today.

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