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Edited Transcript of 006400.KS earnings conference call or presentation 30-Apr-19 4:30am GMT

Q1 2019 Samsung SDI Co Ltd Earnings Presentation

Kyunggi-do May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung SDI Co Ltd earnings conference call or presentation Tuesday, April 30, 2019 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kyunghoon Kim

Samsung SDI Co., Ltd. - Head of the Electronic Materials Strategic Marketing Team

* Michael SON

Samsung SDI Co., Ltd. - SVP of Battery - Marketing

* Yoontae Kim

Samsung SDI Co., Ltd. - VP of Business Management Office

* Young-No Kwon

Samsung SDI Co., Ltd. - Executive VP & Director

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Conference Call Participants

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* Gang Ho Park

Daishin Securities Co. Ltd., Research Division - Research Analyst

* Ji-San Kim

Kiwoom Securities Co., Ltd., Research Division - Team Leader and Electric & Electronic Analyst

* Jung Hoon Chang

Samsung Securities Co. Ltd., Research Division - Head of Small Cap

* S. K. Kim

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Woo-Hyung Cho

HSBC, Research Division - Analyst, Hardware and Materials

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Presentation

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [1]

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[Interpreted] Good afternoon. This is Yoontae Kim, Vice President of the Business Management Office at Samsung SDI. Before we begin, I'd like to introduce our management team attending today's conference call. Our CFO, Young-No Kwon; Head of the Battery Strategic Marketing Team, Michael Son; Head of the Electronic Materials Strategic Marketing Team, Kyunghoon Kim are with us this afternoon. We will now start the 2019 Q1 earnings call.

First, regarding Q1 results. Q1 revenue was KRW 2,304.1 billion, a 7% decrease Q-o-Q. By division, battery division revenue was KRW 1,730.1 billion, an 8% decrease Q-o-Q, mainly driven by a decline in ESS sales despite growth in cylindrical and automotive battery sales. Electronic materials revenue was KRW 572.1 billion, a 4% decrease Q-o-Q due to reduced sales of semiconductor and OLED materials.

Operating profit was KRW 118.8 billion, a 52% decrease Q-o-Q affected by sales decrease and operation of a new production line, but it was a 65% increase Y-o-Y. Pretax profit was KRW 70.5 billion and net profit was KRW 57.9 billion.

Next, I will move on to our financial highlights on the right-hand side. Assets as of the end of Q1 was KRW 19,554.3 billion, up by KRW 204.6 billion Q-o-Q. Noncurrent assets increased by KRW 312 billion due to an increase in tangible assets from facility investments. Liabilities stood at KRW 7,244.8 billion, increasing by KRW 120.3 billion due to increased borrowings. Shareholders' equity was KRW 12,309.5 billion, an increase of KRW 84.3 billion. Cash and equivalents decreased by KRW 198.3 billion due to continued CapEx investments.

Next, moving on to Q1 performance by business division and our outlook for Q2. In Q1, mid- to large-sized battery revenue decreased Q-o-Q. Automotive batteries continued with their upward sales trend Q-o-Q, thanks to increased sales to the European customers for their EV models while ESS sales took a dive due to lower demand caused by fire investigation and revision of safety standards in Korea.

We expect the sales to increase in Q2 for the mid- to large-sized batteries. Q2 automotive battery sales are expected to maintain a similar level Q-o-Q since new supply of automotive batteries for multiple EVs is scheduled for the second half of the year. And in the ESS space, we are expecting growth in the U.S. for utility and commercial ESS, and we also expect the domestic market to recover with the announcement of the cause of the fire and revised safety standards.

Next, moving on to our small-sized battery division. In Q1, small-sized battery revenue was similar to the previous quarter. On one hand, cylindrical battery sales increased, thanks to strong non-IT demand such as power tools, e-bikes and cleaners, and polymer battery sales also grew Q-o-Q with the launch of new flagship products. On the other hand, prismatic battery sales decreased due to weaker upstream demand.

In Q2, we expect the non-IT applications to further drive demand. We plan to expand sales of cylindrical batteries targeting high output power tools and vacuum cleaners, and we plan to increase supplies of polymer batteries targeting our key customers, mid- to low-end smartphones and smartphones for the Chinese market.

Next on to our Electronic Materials division. In Q1, Electronic Material revenue decreased Q-o-Q. Semiconductor and OLED material revenues decreased due to memory business slowdown and demand contraction for mobile OLED but polarizer film revenue grew on the back of higher demand for large-screen LCD TVs.

In Q2, we expect higher revenues Q-o-Q. The jury is still out whether the memory business will recover. But regardless, for the semi materials, starting in Q2, we will undergo major product upgrades including SOH and SOD to secure sure market share with our key customers. We expect the demand to continuously grow in the display materials with preference for bigger TVs and growing demand in the greater China region, and we will continue with the sales growth.

This brings us to the end of our presentation. We will now begin the Q&A, which will be interpreted consecutively. Please follow the operator instructions to ask questions.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions)

(foreign language) [Interpreted] The first question will be provided by Gang Ho Park from Daishin Securities.

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Gang Ho Park, Daishin Securities Co. Ltd., Research Division - Research Analyst [2]

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(foreign language)

[Interpreted] This is Park, Gang Ho from Daishin Securities. I have 2 questions. The first question was Q1 results slightly underperformed market expectation. And what is your outlook for the rest of the year? And will the performance pick up in the second half of the year?

And my second question is relative to the competition's more aggressive investment, SDI seems to be on the conservative side of automotive battery business investments and that may delay the growth, so what is your position and strategy about this?

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Young-No Kwon, Samsung SDI Co., Ltd. - Executive VP & Director [3]

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(foreign language)

[Interpreted] This is Young-No Kwon, the CFO. Let me take the first question. As you're well aware, the ESS sales in domestic markets fell in Q1 and because of the slowdown in the upstream industries, we did not produce good enough results. But in Q2, battery and material business will incrementally improve. And in the second half, we expect a huge surge in sales. So looking at the total 1-year frame, the graph is going to look low in the first half and high in the second half.

And to break down by business units. Because of the fire issue, the domestic ESS market is struggling but is -- the sales is increasing overseas. Of course, the government will have to identify the cause of the fire and produce necessary measures as soon as possible. And with that, we expect the domestic market to normalize in the second half.

Automotive batteries are continuing on a growth trend Y-o-Y. And in the second half of the year, it is scheduled to supply new batteries to multiple EVs, and this is going to accelerate the growth rate of automotive battery business. In the second half, the sales increase of automotive batteries is going to benefit the whole of the mid- to large-sized battery segment.

And the U.S.-China trade war prevented the small battery business from growing as much as we had expected. But throughout the year, we will be expanding sales focusing on high-output battery market requiring advanced technology. And we will continue with our growth momentum.

In the Electronics Materials business, semiconductor and OLED materials seem to have been affected by the upstream industry situation in the first half, but the polarizing film is overachieving our target. And we expect the demand for semi and OLED materials to recover in the second half, so we will be able to have excellent performance continuing from last year. As such, we will continue to make steady improvements throughout all the business divisions and continue with our growth both quantitatively and qualitatively.

(foreign language)

[Interpreted] And to address your concern about our conservative investments in the automotive batteries, well, we do fully understand and appreciate the concern, but we cannot agree to the opinion that SDI is lagging behind in its investment in the market or that we are conservative. I feel that it is regrettable that I cannot reveal to you the details of our investments or the projects won, but I can tell you that we are keeping pace with the market growth. We are getting orders, focusing on sound and robust customers and projects.

And in the process, we stringently validate any potential risk factors in each project. And internally, we unleash our maximum potential in product technology and productivity, so that we can achieve our aim of quality growth where profitability is guaranteed.

Going forward, the key differentiator in the high-growth automotive battery market is going to be, one, technological prowess that provides an upper hand in the cost competitiveness. And second, operational capabilities, enabling stable production and supply of large volumes. And so we will do our best to secure these strengths, grow our quality project portfolios and lead the market growth.

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Operator [4]

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(foreign language)

[Interpreted] The following question will be presented by Jung Hoon Chang from Samsung Securities.

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Jung Hoon Chang, Samsung Securities Co. Ltd., Research Division - Head of Small Cap [5]

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(foreign language)

[Interpreted] This is Chang, Jung Hoon from Samsung Securities. I have 2 questions. The first has to do with ESS. I'd like to ask about when do you expect the Korean government to announce the results of the investigation about the ESS-related fires. And when do you expect the domestic ESS sales to pick up?

And in relation to that, I have a question about the overseas ESS market. It seems that it is doing much better than the domestic market. Where do you see the biggest growth potential in the overseas ESS market? And what do you think is the growth driver?

And my second question has to do with the Electronic Materials. People are worried about the demand of the memory -- semiconductor products and there are concerns about the situation in the upstream industry. So in relation to this, how do you plan to respond in your segment of semiconductor materials?

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [6]

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(foreign language)

[Interpreted] Yes. Thank you for the question. This is Michael Son. On January 3, the Ministry of Trade Industry and Energy launched the joint ESS fire investigation committee composed of members from both the public and the private sector. They're investigating and analyzing the cause of the fire and carrying on with many tests and establishing more strict safety standards about installation and operation of ESS.

The fires may be caused by various reasons, and they're performing many tests to establish the proper safety standards, so this is taking much time. But the ministry did make it clear in the April press release that it is their intention to announce the cause of the fire and response measures within the first half of the year.

The ministry will produce their set of guidelines in good time. In the meanwhile, SDI has preemptively taken a suite of measures to enhance the safety of ESS. And other than the multi-use facilities whose operation has stopped, other outdoor facilities are in normal operation. We are closely discussing with our customers about the topic of resuming projects. So immediately after the safety standards are announced, we believe the sales will also resume soon.

Contrary to our expectation, the domestic ESS business has been put on hold for longer but -- it is causing short-term issues. But in the mid to long term, I believe that this will serve as an opportunity to enhance the Korean ESS industry competitiveness.

(foreign language)

[Interpreted] And as to the second part of the question about the overseas ESS market outlook and the growth drivers, it is inevitable from what I told you before that the domestic ESS market took a hit, but it is for certain that the overseas market will grow and SDI's overseas revenues will continue to grow Q-on-Q. The biggest driver for the ESS market is the government's initiative to expand renewable energy development under the framework of eco-friendliness. As the portion of renewable energy increases in the total energy mix, the more ESS installation you need to ensure stable supply.

By region, the U.S. federal government is providing tax-based incentives to the ESS that is installed with the renewable energy development systems. They're moving to pass a law that extends the tax deduction period and also providing similar tax benefits to ESS-installed without renewable energy system. And state governments, including California, has presented its goal to expand renewable energy and is promoting ESS installation with subsidies and making the ESS installation a mandatory requirement.

And if you go to Europe many economies, including Germany, Spain and the U.K., have come up with their own renewable energy targets, and they're also encouraging ESS installation by providing bilateral incentive packages like subsidies and tax cuts.

In Australia, they were increasing the portion of renewable energy at a very fast pace. And in the due course, they suffered from unstable supply of energy due to natural disasters and extreme weather events. And to resolve this problem, they're quickly expanding the ESS installation as a stabilizing measure.

So all in all, the overseas ESS market will continue to grow fairly for a long time. And this year, we expect the growth to be visible in the U.S. and Australia utility market.

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Kyunghoon Kim, Samsung SDI Co., Ltd. - Head of the Electronic Materials Strategic Marketing Team [7]

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(foreign language)

[Interpreted] Yes. This is Kyunghoon Kim, and I'm with the electronic materials strategic marketing team. To answer the question about the second half of the year, it is difficult to predict the outlook for the upstream industry, but the positive outlook for the second half exists in the market. So we had a bit of an unsatisfactory quarter in Q1.

But if we look at the market plans, Samsung Electronics is planning to introduce high-quality product lineup. And as for hynix with the Wuxi plant in China, their production is also going to increase. So Q -- the second half looks promising, and we expect that the second half sales for our semiconductor materials will be greater than what had been in Q1.

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Operator [8]

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(foreign language)

[Interpreted] The following question will be presented by Ji-San Kim from Kiwoom Securities.

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Ji-San Kim, Kiwoom Securities Co., Ltd., Research Division - Team Leader and Electric & Electronic Analyst [9]

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(foreign language)

[Interpreted] This is Ji-San Kim from Kiwoom Securities. I have 2 questions. One is about the automotive battery. The EV model that has -- that is powered by the SDI battery has passed China's preliminary approval, so what are the possibilities of making the subsidy list in China? And what are your strategies for the Chinese EV market going forward?

And the second question is about the cathode materials. Most of the competition are going with the NCM for their cathode materials, but SDI is preparing for NCA. So I was wondering why you chose NCA. And what are the benefits of NCA over NCM?

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [10]

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(foreign language)

[Interpreted] Yes. This is Michael Son. I'll take the first and the second question. To answer the first question, SDI-battery powered Jinkang EV model passed the preliminary approval. And it is not yet on the subsidy list, but it is possible to sell in the Chinese market. And there is ongoing collaboration with local Chinese OEMs other than Jinkang. We believe that this preliminary approval can be read as a sign that the Chinese government is planning to deregulate and open the market to more foreign companies, so this is a very positive signal indeed.

The subsidies provided to the eco-friendly cars are shrinking every year and have less than -- less impact. Therefore, we expect in the future that there will be more fair business opportunities.

Especially since SDI has the cylindrical battery technology for the automotive, we can meet the demands of the Chinese customers who have high demand for both mid- to large-sized batteries and cylindrical batteries.

We also have a long track record of having collaborated with European OEMs in China, so this is going to play in our favor in resuming business in China.

(foreign language)

[Interpreted] Yes. And as to the background of why we chose NCA and its benefits. As you know, the key success factor of an electric vehicle is a long-driving range. And in order to enhance the driving range, you need to increase the energy density and output performance of the battery and at the same time maintain the structural stability, and we believe that NCA does that much better.

For more than 5 years now, we have been developing the cylindrical battery applying the NCA material with nickel content increased up to 88%. And since 2015, this has been applied to power tools and e-bikes and many applications. So based on such know-how, we plan to lead the market developing the automotive battery applying the high-nickel NCA.

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Operator [11]

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(foreign language)

[Interpreted] The following question will be presented by Sung Kyu Kim from Daiwa Securities.

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S. K. Kim, Daiwa Securities Co. Ltd., Research Division - Research Analyst [12]

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(foreign language)

[Interpreted] This is Sung Kyu Kim from Daiwa Securities. I have 2 questions. The first is key customers of SDI are diversifying their sourcing vendors for their smartphones, and how do you plan to respond to this? And what is the outlook for SDI's polymer business?

And the second question is there's talk about lower demand about -- of the power tools, and there are some concerns in the market. So how do you forecast this demand going forward for cylindrical batteries? And how do you think the outlook is for the cylindrical EV batteries? And how will this impact SDI's small-sized batteries overall?

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Unidentified Company Representative [13]

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(foreign language)

[Interpreted] Yes. To answer the first question, as you're well aware, a good number of smartphone manufacturers already source their batteries from a diversified pool of suppliers, and SDI's major customer is also doing business with a number of battery players. And in this competitive landscape, SDI has been recognized for its excellent performance and stability, and we enjoy a fairly high share within that key account.

And this year, the key customer is going to strengthen their mid- to low-end smartphone product lineup, and the Chinese market is expected to expand further. SDI will ship the initial volumes for the key customer's flagship models, increase sales that go in the mid- to low-end phones and expand supply to the Chinese region to improve our performance.

(foreign language)

[Interpreted] And to answer your second question, due to the slowdown in some parts of the U.S. economy and the U.S.-China trade disputes, the power tool demand growth fell short of the market expectation. But we believe it is only temporary, and we expect the power tool market demand to grow 20% Y-o-Y. In the long term, major power tool companies are increasing their use of lithium ion batteries, so we expect steady growth in the double-digit area every year until 2025.

Tesla is leading the cylindrical battery part EV market, but Chinese EV companies and global OEMs are strategically using cylindrical batteries in some of their models, and so the demand for EV cylindricals is going to increase.

And according to the market research by an outside agency, the cylindrical demand for EVs is going to increase from 2.5 billion cells in 2019, grow more than twofold to about 6 billion cells in 2025. Currently within SDI, the EV portion out of the whole cylindrical sales is not that high yet, but we are cooperating with many of the big customers in development. So we expect the EVs will drive the cylindrical revenues along with the power tools.

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Operator [14]

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(foreign language)

[Interpreted] The last question will be presented by Woo-Hyung Cho from HSBC Securities.

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Woo-Hyung Cho, HSBC, Research Division - Analyst, Hardware and Materials [15]

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(foreign language)

[Interpreted] This is Woo-Hyung Cho from HSBC Securities. First is about the Electronic Materials business. I hear that the polarizing film supply situation is very tight, and I was wondering about the market situation and SDI's competitiveness in polarizing film business.

And the second question is about the Samsung Display's plan to switch their TV panel type to QD-OLED. And with that conversion, what -- how will that impact SDI's business? And which item are you preparing for right now?

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Unidentified Company Representative [16]

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(foreign language)

[Interpreted] Yes. To answer the first question, the Chinese panel companies are increasing capacity and the production of panels for large-screen TVs increased, and the tight supply situation for the polarizer film is going to stay this way for some time. And the production of large screens will be increased by 50% in the second half of this year according to the plans announced by the set makers, so the situation is going to stay tight for some time.

And SDI started the operation of an ultra-width line in Wuxi in 2016 to meet the demand for larger-screen TVs, and we're ramping up productivity and have the industry's highest level of productivity. And we are also getting good customer feedback for developing moisture-resistant film that the market had demanded.

So going forward, we will continue to perform well in the polarizing film business, armed with cost competitiveness and ability to develop differentiated products.

(foreign language)

[Interpreted] And as for your second question, SDI is not in the position to discuss in detail a customer's business strategy. But we can say if the conversion is made to the QD-OLED type, then this will mean that the materials market will expand. So this will be a favorable opportunity for SDI. The QD-OLED that is used for TV panel is different from that used for mobile OLED, so there is a need to develop new materials.

As of now, of the current SDI OLED products, we can readily apply QD ink, TFE and p-dopant, and we're internally getting ready for the QD layer materials. And when the customer's conversion plan is confirmed, then SDI will follow up and expand the relevant items.

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Unidentified Company Representative [17]

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(foreign language)

[Interpreted] And we will now conclude the Q1 2019 earnings call for Samsung SDI. If you have any additional questions, please contact the IR team. Thank you.

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Editor [18]

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