LG Energy Solution Ltd

KRX:373220

Earnings Call Analysis

LG Energy Solution Reports Strong Growth Amid Market Challenges

In Q3 2024, LG Energy Solution's revenue grew by 12% to KRW 6.9 trillion, driven by a surge in battery shipments. While the automotive division thrived, mobility battery sales lagged, and ESS shipments doubled. Operating profit soared 130% to KRW 448.3 billion, paving the way for a net income of KRW 561 billion. Looking ahead, Q4 revenue is expected to be stable, despite price pressures and inventory adjustments in North America. In 2025, cautious growth is anticipated due to geopolitical risks and increased competition, though strengthening emission regulations may boost European demand.

Navigating a Dynamic Market: Q3 2024 Performance

In the third quarter of 2024, LG Energy Solution reported a 12% quarter-on-quarter revenue increase, reaching approximately KRW 6.9 trillion, driven by growing shipments. Notably, the advanced automotive battery division excelled, benefiting from a proactive approach to meet the demands of key OEMs in Europe and the consolidation of their joint venture (JV) in Indonesia. However, the mobility and IT battery division experienced a revenue decline, while the pouch battery segment saw growth due to new premium products. The energy storage systems (ESS) division doubled its revenue, reflecting a significant increase in shipments driven by grid-scale demand.

Refinement in Profitability Metrics

Profitability saw marked improvements. The operating loss, excluding IRA tax credits, reduced to KRW 17.7 billion, reflecting better utilization rates from increased shipments and a decrease in unit costs. Including tax credit effects, operating profit surged by 130% quarter-on-quarter to KRW 448.3 billion, with an improved operating margin of 6.5%. Total net income before tax rose to KRW 339 billion, pushing net income up significantly to KRW 561 billion, or an 8.2% net income margin.

Financial Robustness Amid Rising Liabilities

The financial landscape remained relatively stable despite increased liabilities, which grew by approximately KRW 4.3 trillion, resulting in total liabilities of KRW 28.1 trillion. The equity rose to KRW 28.5 trillion, with a liability-to-equity ratio of 99% and a gross debt-to-equity ratio at 59%. The company generated about KRW 1.2 trillion in EBITDA, leading to an 18% EBITDA margin improvement.

Looking Ahead: Guidance for Q4 2024 and 2025

Looking forward, LG Energy anticipates a similarly robust top-line performance in Q4 2024, projecting revenue to match Q3 levels. However, they caution about potential challenges in profitability due to seasonal factors and adjustments in inventory levels among key customers. In 2025, uncertainties in the macroeconomic environment may temper revenue growth, prompting a conservative outlook. Geopolitical factors and fluctuating production conditions are expected to create a more competitive atmosphere.

Strategic Contracts and Future Production Plans

A significant highlight for the period is the signing of substantial supply contracts with major OEMs, amounting to 160 gigawatt-hours (GWh). Key developments include the planned mass production of cylindrical batteries in Arizona, targeting 50 GWh over ten years starting in 2028, as well as contracts for commercial vehicles in Europe, expected to yield 109 GWh starting 2026. The commencement of module production through the JV with Stellantis in Canada also marks a significant operational advancement.

Focus on Innovation and Sustainable Growth

Emphasizing innovation, LG has spearheaded efforts in R&D, achieving milestones like successful development of cell-to-pack technology and advancements in LFP battery production. The company aims to enhance product safety and efficiency through innovative designs and process improvements, with plans for mass production of LFP batteries expected to boost energy density by over 20% by 2025.

Weathering Potential Challenges in Key Markets

Despite positive trends, LG acknowledges challenges such as potential slowdowns in demand in North America and Europe due to inventory adjustments among OEMs. For instance, the increasing competition-induced pressures from internalizing battery production among key customers may also impact future orders. Nevertheless, the company is determined to strengthen its position via proactive management of production capabilities and strategic CapEx reductions.

Summary: A Cautiously Optimistic Outlook

In summary, LG Energy Solution presents a strong Q3 performance backed by strategic contracts and improved profitability metrics. As the company navigates a landscape fraught with challenges and uncertainties in 2025, its focus on leveraging technological advancements and strategic partnerships will be critical in maintaining competitive advantage and achieving sustainable growth amid evolving market demands.

Earnings Call Transcript 2024-Q3

[Sara Hwang, executive]

[Interpreted] Good morning and evening. This is Sara Hwang, Head of IR from LG Energy Solution. Thank you for joining our Q3 2024 Earnings Conference Call.

First, I'd like to introduce who are present today: Lee Chang Sil, CFO; [ Sangsung Hwang ], in charge of finance and accounting group; [ Lee Sang Hyeon ], in charge of finance; [ Jeong Do ], in charge of planning and management; [ Kim Kyounghoon ], in charge of advanced automotive battery planning and management; [ Doyn Hwang ], in charge of mobility and IT battery planning and management; [indiscernible], in charge of ESS battery planning and management; and [ Chang Jeong Woon ], in charge of corporate strategy.

For your reference, the presentation for business performance, strategy will be conducted with simultaneous interpretation, after which, we will have Q&A with a consecutive interpretation. The slide will be webcast live and also downloadable on the corporate website. In this conference call, we are going to share our Q3 2024 performance. And then CFO will share our action plans in response to the changing business environment and key initiative, followed by Q&A session.

Please note that the forward-looking statements included in the call are subject to change according to amendments in future business environment and corporate strategies.

First, let me explain business results. In Q3, the top line revenue grew by 12% Q-o-Q to reach about KRW 6.9 trillion on the back of a double-digit growth in shipment, while battery ASP was similar to that of the previous quarter, in line with the metal price stabilization during the previous quarter.

First, the revenue of the advanced automotive battery division increased Q-o-Q, driven by the shipment expansion led by our proactive response to the demand of key OEMs in Europe and the financial consolidation of the JV in Indonesia during the quarter, in addition to the sales of the JV in North America at a similar level Q-o-Q. Mobility and IT battery division showed a decline in revenue Q-o-Q, while revenue of pouch batteries rose with the increased volume of new premium products. The cylindrical shipment level declined due to softer demand of the major EV customer. ESS battery division posted a considerable increase in shipments, doubling revenue, driven by our proactive response to grid-scale demand following the previous quarter.

Next, profitability. The operating loss excluding the IRA tax credit effect marked KRW 17.7 billion, significantly reducing the amount of loss, compared to the previous quarter, with the help of utilization rate improvement led by shipment increase in both EV and ESS and the reduced unit cost burden in line with the metal price decline. With the IRA tax credit effect up by around 4% Q-o-Q, OP in Q3 improved by 130% Q-o-Q to KRW 448.3 billion, with the OP margin of 6.5% up by 3.3 percentage points Q-o-Q.

As for major nonoperating items, we posted a nonoperating loss of KRW 109 billion due to net interest expenses from increased borrowings, along with the valuation loss on the future currency and currency swaps related to the foreign currency corporate bonds despite the translation gains on foreign currency denominated borrowings.

[ With net income before tax recording KRW 339 billion ], net income increased by KRW 585 billion Q-o-Q to mark KRW 561 billion, resulting in 8.2% of net income margin.

Next, financial position. The assets at the end of Q3 2024 increased by about KRW 5.1 trillion compared to the previous quarter end, to stand at KRW 56.6 trillion, due to acquisition of [ tangible assets and others ]. The liabilities increased by about KRW 4.3 trillion to reach KRW 28.1 trillion Q-o-Q. And the equity increased by about KRW 0.9 trillion to post KRW 28.5 trillion. With the foreign currency corporate bonds procured in the size of $2 billion [ in ] others, the liability-to-equity ratio recorded 99%, with a debt-to-equity ratio of 59% and net debt-to-equity ratio of 40%.

During this quarter, we generated about KRW 1.2 trillion in EBITDA, with improved EBITDA margin of 18%, 2.9 percentage points up Q-o-Q.

Regarding cash flow for the quarter. A positive cash flow occurred through such EBITDA generation as well as about KRW 2.8 trillion of the funds inflow due to increased borrowings. With around KRW 3.1 trillion of CapEx executed for capacity expansion, mainly in North America, the cash balance at the end of Q3 increased by about KRW 1.5 trillion Q-o-Q to reach KRW 5.4 trillion.

With this, let me end my explanation. Next, CFO will present you on key achievement and our action plans in response to the recent changes in the business landscape.

[Chang Sil Lee, executive]

[Interpreted] Good morning and evening. This is CFO Lee Chang Sil.

The most notable business achievement is the signing of large-scale supply contracts with global top OEMs totaling 160 gigawatt hour based on new form factors and chemistries despite challenging market environment. First, regarding the cylindrical one, starting from early 2028, we'll begin mass production at our Arizona plant and supply a total of 50 gigawatt hour of batteries for EVs to be sold in North America over the next 10 years. While cylindrical products have mainly been supplied to EV start-ups in the past, this allowed us to expand our customer portfolio to including -- to include leading global OEMs. Furthermore, we'd like to solidify our position as a leading company supplying new cylindrical batteries for next-gen EVs in the United States.

On another note, we have signed 2 projects targeting commercial vehicle models in Europe. With a total capacity of 109 gigawatt hour, we plan to mass produce and supply batteries in Poland, starting from 2026. Given the characteristics of commercial vehicles requiring high-power batteries with long-cycle life for long driving distances and frequent charging requirements, we are thinking that this supply contract is a recognition of our NCM technology's competitiveness in the European market. With full-scale production starting in 2026, we expect further improvement in production efficiency at our Poland plant.

Since September, we have successfully started production and supply of modules through the JV with Stellantis in Ontario, Canada. With local cell production starting from the second half of next year, we plan to gradually expand production capacity in close discussion with our partner company.

Regarding new businesses. In September, we successfully completed the construction of an ESS power plant in Jeju, the first of its kind in Korea, through our internal start-up AVEL, marking our first step into the energy integration management business. While our previous ESS business is focused on producing and selling ESS solutions, this new energy integration management business allows us to directly participate in the energy market and sell the stored energy, which serve as a foundation to enter the independent power producing sector.

Next, on R&D, we have made significant progress by successfully developing the world-first cell-to-pack technology. Applied to our high-voltage mid-nickel pouch-type products, this maximizes energy efficiency and price competitiveness while providing driving ranges up to 600 kilometer and a long life of 5,000 cycles.

In September, we launched a new BMTS brand built upon our own safety diagnostic software solution for advanced battery safety and degradation diagnosis. With this, we plan to strengthen collaborations with global OEMs and seek sales opportunities going forward.

Next, I'd like to discuss the recent trends in the battery industry and our action plans.

Firstly, in the recent EV market, as EV models are launched in diverse price ranges, we're witnessing OEMs' needs expanding, for battery chemistries and form factors across segments, from affordable to premium. Furthermore, the growing importance of ensuring price competitiveness for EVs has led to considerably increased cost sensitivity toward key EV components such as batteries that we are producing. And the consumer interest also increased in safe EVS. In light of these diversifying trend within the EV market, LG Energy Solution is dedicated to developing and delivering optimized solutions that cater to the specific needs of customers.

Firstly, in terms of chemistry, we aim to provide differentiated values in safety and cost in the [ standard ] segment by focusing on high-voltage mid-nickel batteries as our main offerings. For customers in the affordable segment, we will offer product lineups equipped with enhanced space utilization and energy density with CTP-applied LFP products to secure cost advantage. In terms of form factors, we are preparing for stable mass production of new cylindrical products like 46 series. We'll secure capabilities to provide additional form factors to respond to demand from our customers.

Regarding materials and processes. We are dedicated to implementing the industry-leading technologies to introduce products with 100% of single crystal cathode as well as anode with higher silicon content, enabling fast charging in less than 10 minutes, in the near future. Furthermore, we are actively developing dry electrode processes that enable additional improvement in energy density and cost innovation, with the aim of full-scale implementation starting from 2028.

In terms of safety, we are currently developing technologies to design rapid heat dissipation and surface cooling structures for pouch products. Also we have developed a cooling module structure optimized for the new cylindrical form factor, further enhancing safety in our solutions.

Looking at the ESS market, it is expected that demand will show a CAGR of over 20% from 2024 to 2028 mainly driven by the grid-scale ESS. In addition to products that offer cost advantage, customer demand is expected to increase continuously for system integration solutions that provide values beyond just hardware. Additionally, there is a clear trend towards localization in the supply chain related to renewables, propelled by regional subsidy policies and regulations such as countervailing tariff against China. To respond to these market changes, we are to leverage our successful global operation know-how and actively engage in discussions with customers in North America who require large-scale projects for the power grid. We're also expanding supply contracts for mid- to long-term project to generate stable revenue going forward.

Furthermore, we plan to improve the energy density of LFP batteries for ESS which are already being produced in China by over 20% and begin mass production within 2025. And also we will incorporate advanced energy management software into our ESS integrated system solutions to provide customers with even more differentiated value. To address the need for localized supply chains, we're actively proceeding with local production for ESS batteries in 2025 in the U.S., thus securing a stronger presence in North America. In Europe, we're also considering the possibility of converting existing EV lines into ESS if necessary.

LG Energy Solution aims to establish a robust business structure which remains resilient even in the face of changing external variables. Taking a long-term perspective, we'll pursue the action plans thoroughly based on 3 pillars: first, proactive operation adjustment to adapt to market changes; second, reinforcement of R&D investment to secure technological leadership; and third, portfolio expansion to secure new growth engines.

On the operational front, we will aim to minimize CapEx execution by swiftly and proactively adjusting the pace of ongoing investments. In North America, there are discussions with our partners. And we will maximize production efficiency by converting idle lines at existing sites for other application or new products, while for the sites nearing operational -- for the sites nearing operation such as the Honda JV and the Arizona stand-alone factory, we will prepare for a smooth ramp-up. Also we will enhance the competitiveness of our supply chain, including raw material sourcing, to improve our fundamental cost structure.

On the technological front, we will concentrate our R&D resources on differentiating key materials such as cathode-anode separator and electrolyte. Additionally, we will focus on the development and implementation of new processes such as dry electrode. We will also pursue the development of next-gen batteries for semi-solid batteries applied with bipolar technology and sulfur-based all-solid-state batteries.

Lastly, portfolio expansion. We aim to establish a closed-loop recycling system, in cooperation with our partners by regional basis, to take the lead in the metal recycling business. Also we will gradually make the battery-based software and service businesses more concrete, such as battery as a service and energy as a service, and expand these businesses gradually. Additionally, we will proactively explore new applications for batteries that can serve as new growth engines, such as UAM, construction equipment and robotics, beyond EV for our future that we are going to face together.

Investors, analysts and shareholders, the significant changes in global economic, geopolitical landscape are creating numerous numbers of cases in the battery industry. We believe that it is now more important than ever before to recognize how companies will be able to create opportunities through their strategies and decisions within that environment. Going beyond objectively perceiving the evolving landscape, LG Energy Solution will think deeply and intensely to device preemptive responses from a long-term perspective, thus turning these into opportunities for a leap forward in the future.

Thank you.

[Unknown Executive]

[Interpreted] This is the end of our presentation. And let us move on to the Q&A session. [Operator Instructions]

[Operator]

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Will Cho from HSBC Securities.

[Woo-Hyung Cho, analyst]

[Interpreted] Yes, this is Cho Hyung from HSBC. There are 2 questions that I would like to ask you. One is related to your guidance for the future, and the second is related to GM. To ask the first question: If you could provide an updated guidance for the fourth quarter in terms of your overall outlook and also the growth expectations for 2025, that would be appreciated.

The second question that I would like to ask you is about one of your key customers in the North American region, which is GM. In terms of their target for the full year, they have maintained their target level. However, if you look at their actual sales volume, it seems to be underperforming, so we do expect that, in the fourth quarter, there may be some adjustments in their inventory levels. And as a result of that, we would like to know how that would actually impact your overall performance. Specifically around the AMPC guidance, if there is anything that you could share, that would be appreciated.

[Chang Sil Lee, executive]

[Interpreted] This is the CFO, Lee Chang Sil. Maybe I can address the first part of your question. And then for the second part, which was regards to GM and AMPC, maybe we can ask the advanced automotive battery planning and management department head to talk about that. To, first, talk about the fourth quarter, we do believe that in the North American side, if we look at our key customers, there may be some adjustments at the year-end in terms of their inventory levels, which may lead to some decrease in the overall volume. And in the second half of the year, for the key metal prices, which have been on a decline, this will be reflected into the ASP, so as a result of that, we do believe that there may be some adjustments in terms of the overall revenue decline. However, that have been said, if we look on the flip side of that, for the demand for Europe, OEM overall volumes, there are some improvements that we are seeing there, which we do believe is very encouraging. And as I have mentioned during my presentation, for the Stellantis JV, the module production there is also gaining speed, so I do believe that there will be -- in addition to that, there's also a very strong level of sales that we see for North American grid-type ESSes, so as a result of that, for the fourth quarter, if we look at the top line, we do believe that it will be similar to the third quarter on a Q-o-Q basis.

If we look at it from a profitability standpoint. Due to the seasonality factor, we do think that there could be a temporary decline in the high-profitability products in terms of shipments, so there may be some product mix changes that are taking place. And not only on the OEM side will there be inventory adjustments, but on our side also, at the end of the year, we do want to or -- reorganize some of the legacy inventory that hold. So we do think that there will be some one-off factors taking place. So versus the third quarter, in terms of the overall profitability, we do think that it will be a bit challenging to show improvements. However, by improving our overall productivity in terms of the yield and also by trying to cut back on various costs and maximize our efficiencies as much as possible, we will try to minimize the impact on our profitability as much as we can.

If we talk about our full outlook for 2025, right now there are various uncertainties in the macroeconomic environment. And also there continues to be geopolitical risks [ that pertain ], so if we take these situations into consideration and also the fact that from the Chinese companies there continues to be an increase in exports and our key customers continue to internalize their battery production -- so we do believe that, all in all, this is leading to a more competitive environment for the market as a whole. In addition to that, we will have an upcoming U.S. election next week. And we do think that the election results will have an important impact on the overall future direction of the EV market. So as if we -- so as a result if we take all of this into consideration, as of the current time, it's very challenging to set out a forecast for next year.

However, that have been said, we do think that there are positive factors behind demand for next year such as stronger CO2 emission regulations from Europe and also new EV models that would be released on the mainstream side by global OEMs, so as a result, from the company side, if we look at our business and our customers and also from a perspective of R&D and also our regional and investment portfolio, we will continue to try to gain a competitive edge in terms of our products and costs; and also focus on upgrading our overall quality, capacity; and prepare for the future so that we can rebalance our overall activities, focusing on providing a differentiated value to our customers. And by doing so, we do believe that it's very important for us to create very sound fundamentals that will not waver even if there are changes in the external risk environment.

As a result, if we talk about the overall revenue for 2025, on the downstream side, we do think that we are looking at a more conservative view in terms of the revenue growth that we would be -- achieve. And in addition to that, because the market is rapidly changing and also our customer situations are changing, we will continue to monitor the situation very closely to make sure that we can adapt in a very speedy and proactive manner.

[Unknown Executive]

[Interpreted] So maybe I can address your second question, about how GM's year-end inventory adjustments may have an impact on our performance and what the AMPC guidance impact would be. I am from the advanced automotive battery planning and management department, and my name is [ Kim Kyounghoon ]. So if we look at the current or -- and recent trends in terms of the overall demand side, of course, at the GM JV, we do want to minimize the year-end inventory burden as much as possible, so we are currently focusing on the operational efficiency of our existing facilities and also trying to control our overall production volume accordingly. At the customer side also, for the yearly EV production targets that they have recently, they have set the overall target levels at the lower band of their existing guidance. And we do believe that, in order to make sure that they are in a sound position for their inventory as of the end of the year for EVs themselves, that -- for the battery purchasing speed, that there may be some temporary adjustments that we will be experiencing. However, in the second half of the year, well, we have seen some meaningful improvements in the EV sales performance at our customer side.

And also, if we look at the Honda EV sales, which actually use batteries that have been produced by the GM JV, that performance is also being maintained at a sound level, so we do believe these -- if we take these factors into consideration for the yearly guidance that we had provided, based on a acceptable capacity on -- for IRA tax credits of around 30 to 35 gigawatt hours, that we will be in line with that overall guidance level. Going forward, we will continue to closely communicate with our customers and also monitor the market situation very closely to make sure that we can moderate our production speed for the JV according to how the demand evolves. And we will continue to cater to the changes in the overall demand dynamics.

[Unknown Executive]

[Foreign Language]

[Operator]

[Foreign Language] The next question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Dong Jin Kang, analyst]

[Interpreted] There are 2 questions that I would like to ask you. First is I think that the market is very interested about how the changes will be taking place going forward. In Europe, for example, there will be stronger emission regulations regarding CO2 that will be implemented. So according to this new policy, I do think that there can be more demand momentum that is created. And also, what that would be in terms of impact on the company is something that we are interested in hearing about, so that would be the first question. In terms of the second question: If we look at the overall demand dynamics by different regions, it does seem to be that, by region to region, there are differences that are emerging. And according to this trend, how is that impacting our overall utilization that we see for the different regions? And what the outlook would be for each region.

[Unknown Executive]

[Interpreted] So maybe I can address your question about the CO2 emission regulations. This is [ Chang Jeong Woon ] from corporate strategy. If we look at the situation next year in terms of the CO2 emission regulations from the EU: They will be strengthened by around 20%, so we do believe that -- from the OEM side, that there will be more expansion in terms of their overall sales volume in the European market in the standard or below -- maybe standard and below segments of the EV market, focusing more on the affordable segment. And specifically speaking, we do think that there will be an increase in the price range of EUR 25,000 and below, so we do think that, that will provide an opportunity. In terms of the overall emission regulations and the changes that we see, we do think that, that clearly will have an impact in increasing and improving the overall penetration of EV vehicles in the European market. However, if we look at the European economy itself, I do think that it would be difficult to say that there has been a overall alleviation of the contraction that we have seen in consumer sentiment, so for next year, in terms of the overall growth expectations for the European market, we are taking a somewhat conservative view.

Right now we are in the process of talking and discussing about forecasts for next year with our customers, so as a result of that, it would be a bit difficult as of this time to make a determination about how much volume that we do see. However, in light of the tighter CO2 regulations, we do think that customers will, first, try to deplete the existing inventory that they have; after which, we would be able to see an increase in overall battery demand. In addition to that, from our side, we do want to provide a wider range of chemistries, including LFP and high-voltage mid-nickels, to our customers so that we would be able to provide a better performance, better cost and a better competitive edge. And we will continue to look at the overall opportunities that are presented in the mid-range market so that we can continue to address that. For the mid-range solutions that we want to provide, we will be seeing various products come into the market from 2026. So we will try to capture that situation. And in addition to that, in addition to the chemistries that we talked about before, also, on the cylindrical 46 series and other types of opportunities, we will be trying to refine the opportunities that we see in this segment so that we continue to create more momentum in the mid-range market for EV vehicles.

[Unknown Executive]

[Interpreted] So maybe I can take the second part of your question, which was the overall utilization that we would have by the different regions according to the demand trends that we see. This is [ Jeong Do ] from planning and management. If we look at the third quarter: Because of the increase in volume that we saw for EV pouches and also for grid-type ESS demand, we did see an increase in production both from our Poland and Chinese sites. And as a result of that, if we look at the overall utilization at the company level as a whole, on a Q-o-Q basis, there was a slight improvement that we were able to experience. In particular, in the first half of the year, if we look at Poland, for some of the Europe OEMs, in terms of the overall demand, there has been some recovery taking place there, so as a result of that, utilization since the first quarter has continuously shown a gradual improvement. Going into the fourth quarter, we do think that there will be a gradual improvement in Europe OEM volume. And as a result of that, we do think that the current improvement that we see from the Poland factory will continue. And in addition to that, for the key customers that we have, because there will continue to be some adjustments in inventory at the end of the year, we do think, as a result of that, for the Chinese site and also the U.S. sites that we have, that improvements in utilization will somewhat be limited.

[Unknown Executive]

[Foreign Language]

[Operator]

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

[Hyun-So Kim, analyst]

[Interpreted] I would like to ask you a question about how you will be managing or utilizing your overall capacity and also how you want to execute your CapEx going forward. The first question is on the capacity overall operational side. As you have mentioned, EV demand seems to be sluggish. And added to that, in terms of policies direction going forward, there are uncertainties that we are seeing which are increasing, so in terms of your capacity management overall stance and also capacity addition plans, have there been any chance -- changes that we are seeing there? That would be the first question. And the second question would be, as an extension of these overall operational stances that you have for CapEx execution going forward, versus the stance that you have had in the past, would there be any changes that we can expect?

[Chang Sil Lee, executive]

[Interpreted] This is the CFO, Lee Chang Sil. And maybe I can address the question that you have. I do believe that this is probably one of the areas that you are most interested. If we look at the past 1 year, in terms of the market dynamics, there have been many changes that were unexpected. And as I mentioned during my presentation, I do believe that, in light of the ever-changing market environment and also the changes that we see in our customers, we are trying to make sure that we can actively deal with such a situation and also ensure that we are ready. So as a result of that, in terms of our capacity management on the global scale, we are trying to optimize that. And at the same time, we do believe that efficient CapEx execution would be a very important element from a management perspective, so we continue to monitor the situation closely and try to take action accordingly.

With regards to our capacity operations in terms of the global sites that we have, right now, in light of the recent market trends and also the changes that we see on our customer side, for any battery production lines that we are -- that we have that are unused as of the current time, we are trying to convert that very quickly for other applications and for new products. So this is something that we're very quickly engaging upon. And we're also trying to maximize the utilization of our existing lines to improve the overall utilization of our sites as a whole, so as a result of that, we are trying to cover with additional profitability any increase there may be in our fixed costs. For North America, where a lot of our investments are focused on, for the new capacity additions, we are trying to moderate the overall scale of that and also moderate some of the pace of the execution of the expansions that we have to prevent any overcapacity situations that may emerge and also try to minimize any investment losses as much as possible. However, that have been said, on the ESS side focusing on the North American grid, there is a lot of growth potential that we see there, so therefore, we are trying to make sure that we don't miss any opportunities in terms of orders there. So while we are trying to be very active in our -- in gaining new orders and also try to be more efficient in the investments that we have, for example, we are trying to utilize any existing capacity that we have on the EV side to quickly convert over for ESS purposes.

In terms of CapEx, of course, we don't think that we will be able to continue the CapEx investment patterns that we had in the past. We are going to continue to very closely review what areas are necessary and how effective the CapEx investments would be so that strategically we only spend the CapEx that is very essential and necessary. So for new investments that we have, we are trying to be more efficient in our investments and also moderate the pace more; and at the same time, for our asset management, try to optimize it. So as a result of that, with the exception of certain inevitable investments, we are trying to minimize our CapEx as much as possible. And for next year, as a result of that, when compared to the overall CapEx that we have had this year, we do expect that there will be a significant reduction that we would be able to see. So as a result of that, we are going through each of the items line by line right now to monitor and review the situation.

[Unknown Executive]

[Foreign Language]

[Operator]

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

[Won Suk Chung, analyst]

[Interpreted] The first question that I would like to ask is related to something that you mentioned before, which would be your LFP batteries and also the high-voltage mid-nickel batteries that are targeting the mid- to lower range of EV vehicles. In terms of the cost competitiveness that you would have in this area and also maybe any additional orders, if you could talk about that overall situation, that would be appreciated. The second question that I would like to ask you is about your 4680 batteries that are going to go into production within this year. If you could talk about the development on that side and many -- and any additional developments related to orders from Tesla, that would also be appreciated.

[Unknown Executive]

[Interpreted] So maybe I can address your question about our products that are targeting the mid- to low-range market, in terms of the cost competitiveness of these products and also additional orders that we may have. I am [ Kim Kyounghoon ] from the advanced automotive battery planning and management. So if we look at the overall products that we have targeting the mid- to low-end segments, for example, in terms of the more mass -- mainstream products, of course, there is continuous interest and increasing interest in this area, so for our company also, we are trying to secure various -- a wide variety of low-cost solutions, including LFP and also high-voltage mid-nickel batteries. And so right now we are trying to cater to the needs of the market and our customers by signing contracts with the key OEMs. In July of this year, we did see to our European customers the first shipment, EV LFP batteries that we had. And this battery actually applied CTP solutions for the first time for pouch-type batteries, which enabled us to have a higher energy density and stronger safety of the product. In addition to that, we also simplified the manufacturing process and also reduced the number of parts and integrated more parts so that we could also see cost savings in terms of the manufacturing cost in itself, so both from a quality and cost perspective, we do believe that we have been able to create a more competitive product.

In addition to that, when compared to the existing mid-nickel products that are out within the market, because there has been an improved energy density and also in terms of the safety and cost competitiveness, there will be stronger high-voltage mid-nickel products that will be provided from next year through the plans that we have for mass production. So going forward, we think that, in the mid- to low-end EV market, we will be able to further solidify our positioning through these efforts. For LFP that apply CTP technology and also for the high-voltage mid-nickel products, creating a robust mid- to low-end product lineup is something that we will be doing. And we are continuously discussing very closely about orders with potential customers that we have, so once we do have the orders in place, we do think that we will be able to communicate with the market via means of disclosures and other channels.

[Unknown Executive]

[Interpreted] So maybe I can address your second question, which was about the preparation of mass production of 4680 batteries and also additional orders and the possibility of that. This is [ Doyn Hwang ] from the mobility and IT battery planning and management side. So right now at the Ochang site, which is the new line that we will have for 4680, right now, we are in the last stages of preparation for mass production. So we will be starting with samples in the fourth quarter, and right now we are in discussions with our key customers about the supply schedule. In addition to the existing key customers that we have and also legacy OEMs that we recently announced supply arrangements and supply contracts with, we continue to closely communicate about a wide variety of 46 series products with multiple customers. And we do think that we will be able to supply from 2026 from the Arizona site that we are currently constructing. For the 4680 new lines, in terms of the lines themselves, we are currently trying to focus on getting the mass production capabilities in place. And once there are additional supply arrangements that have been confirmed, we will make sure to communicate with the market.

[Unknown Executive]

[Interpreted] Yes, thank you very much. Due to the time constraint, we would now like to wrap up the Third Quarter Earnings Conference Call for 2024 here. Thank you very much.

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