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Edited Transcript of 006400.KS earnings conference call or presentation 25-Jan-19 7:00am GMT

Q4 2018 Samsung SDI Co Ltd Earnings Call

Kyunggi-do Feb 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung SDI Co Ltd earnings conference call or presentation Friday, January 25, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hong-Gyeong Kim

Samsung SDI Co., Ltd. - CFO and Inside Director

* Ike Kim

Samsung SDI Co., Ltd. - VP of Finance & Accounting Team

* Michael SON

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

* Young-Hyun Jun

Samsung SDI Co., Ltd. - Chairman of the Board, CEO & President

* Young-No Kwon

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

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Conference Call Participants

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* Jeongu Ko

NH Investment & Securities Co., Ltd., Research Division - 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

* Seunghoon Han

Deutsche Bank AG, Research Division - Head of Korea Technology

* Woo-Hyung Cho

HSBC, Research Division - Analyst, Hardware and Materials

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Presentation

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Ike Kim, Samsung SDI Co., Ltd. - VP of Finance & Accounting Team [1]

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Good afternoon. This is Ike Kim, Vice President of the Business Management Office at Samsung SDI. Before we begin, I would like to thank all of you for attending our conference call. And I would like to first introduce our management team attending today's conference call.

We have our CFO, Mr. Young-Hyun Jun; our head of the Battery Strategic Marketing Team, Mr. Michael Son; and our head of the Electronic Material Strategic Marketing Team, Mr. Hong-Gyeong Kim are also joining us this afternoon.

We will now start the 2018 fourth quarter earnings call.

First, regarding fourth quarter results. Q4 revenue was KRW 2,478,600,000,000, a 2% decrease Q-on-Q. By business division, Battery division revenue was KRW 1,879,300,000,000, a 2% decrease Q-on-Q, mainly driven by a decline in ESS and polymer battery sales despite growth in cylindrical and automotive battery sales.

Electronic Material revenue was KRW 597.2 billion, which is similar to Q3 level.

Operating profit was KRW 248.7 billion, a 3% increase Q-on-Q. Pretax profit was KRW 391.2 billion and net profit was KRW 266 billion.

For full year 2018, revenue was KRW 9,158,300,000,000, a 44% increase year-on-year. Operating profit recorded KRW 715 billion as we saw a significant improvement in both our top and bottom line performance.

Next we will move on to our financial highlights. Assets as of the end of 2018 was KRW 19,349,700,000,000. Current assets increased by KRW 156.7 billion, Q-on-Q, while noncurrent assets increased by KRW 767 billion due to an increase in tangible assets from facility investments.

Liabilities stood at KRW 7,124,500,000,000, increasing by KRW 733.9 billion due to increased borrowings.

Shareholder's equity was KRW 12,225,200,000,000, an increase of KRW 489.8 billion.

Cash and cash equivalents decreased by KRW 226.7 billion due to continuous large scale for security investments.

Next moving on to Q4 performance by business division and our outlook for 2019.

In Q4, mid- to large-sized Battery revenue saw a slight decrease Q-on-Q, while maintaining growth trends on a year-on-year basis. There was a ramp-up in sales as new automotive batteries for EV, while ESS sales also continued positive trends for both domestic utility and commercial applications.

In 2019, the automotive battery market demand is estimated to reach 79 gigawatt hours, which is 58% growth year-on-year according to B3. Chinese and European automakers and the EV and PHEV segments are expected to drive overall market growth.

That said, we intend to focus on improving profitability given current conditions of the EV battery business, where it is difficult to deliver profit within a short time frame.

In the ESS market, global demand this year is expected to reach 17 gigawatt hours, a 40% increase Y-o-Y. Global ESS market growth will be driven by utility usage in Korea, U.S., Europe and Australia amid the global spread of renewable energy, power generation. We at SDI are committed to achieving substantive, sustainable growth building on the strength of our differentiated technologies and customer trust.

Next moving on to our small-sized battery division. In Q4, small-sized battery revenue was similar to Q3 levels. However, cylindrical battery sales maintained increasing trends on a Y-on-Y basis, faces strong power tool and ESS demand, while polymer batteries continued Y-on-Y growth from timely shipments to new premium smartphone model.

In 2019, we expect the small-sized battery market demand to reach 9.4 billion cell level which is 17% growth year-over-year. Non-IT applications in particular will continue to be a major driver for cylindrical battery demand, and we intend to continue leading high output power tools, garden tools and vacuum cleaners as they continue to strengthen our market dominance.

Meanwhile, the polymer market is expected to see a slight increase in global demand year-on-year a bit more diverse IT products adopting polymer batteries. We intend to scale up polymer battery sales with our strong lineup and differentiated products.

Next on to our Electronic Materials division. Q4 revenue was similar to Q3 levels, achieving solid growth on a year-on-year basis.

Semiconductor materials maintained robust growth despite a slowdown in the sector, while display materials sales increased significantly thanks to expansion of high value products and increased sales in the China region.

Looking ahead, we have projected slowdown in overall demand across the IT industry in 2019. The memory business cycle may show some weakness in the first half of the year, but is expected to improve into the second half as supply and demand regain stability.

In light of this outlook, we will strive to maintain our market share among core customers based on quality driven competitiveness while working to gain a preemptive lead at the next generation, market categories through new state-of-the-art materials for semiconductor processing applications. In display, we expect increased production of OLED and large-sized LED panels, and we will seek to develop and supply new OLED materials and polarizer films on a timely basis while focusing on boosting profitability by expanding sales to the China region. That is the end of our presentation. We will now move to the Q&A session, which will be interpreted consecutively. So please follow operator instructions to ask questions please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language) The first question will be provided by Seunghoon Han from Deutsche Securities.

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Seunghoon Han, Deutsche Bank AG, Research Division - Head of Korea Technology [2]

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(foreign language) Yes, this is Seunghoon Han from Deutsche Securities. And I have 2 questions for you. First, there are concerns of a slowdown in the global economy and also in the U.S. and there are some reasons for concern that there may be a slowdown in IT demand as well. So what is your overall business outlook for 2019 at Samsung SDI? And by division, what kind of improvement are you anticipating in terms of the actual areas of business? And second, I'd like to hear more about your CapEx plans for 2019 in terms of the size and, also how you intend to secure the necessary funding?

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Hong-Gyeong Kim, Samsung SDI Co., Ltd. - CFO and Inside Director [3]

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(foreign language) Yes, this is the CFO, Hong-Gyeong Kim. I'd like to answer that question on our business plan for 2019. So as you did mention, we do think that the business environment for 2019 may be very difficult given the ongoing trade dispute between the U.S. and China and concerns over a slowdown at the global economy.

But as far as the Battery business is concerned, we are continuing to see robust demand, particularly coming from the automotive space and for Electronic Materials as well, we are seeing a lot of demand coming from the wider Chinese region, and we intend to tap into that demand quite aggressively. And so we want to carry on our business objective from last year, and we believe we will be on good track to achieve both top line growth and improve profitability in 2019. To break it down further by business area, for automotive batteries, this is a market that is forecast to grow by more than 50% year-on-year. So we want to ramp-up our supply of new products with improved energy density to improve our profitability for that segment.

For ESS batteries, this is also an area where expect -- where we expect high growth, especially from the overseas market. So we will diversify our sales mix into the high-growth overseas markets to carry on last year's growth trends. For small-sized batteries, we want to take advantage of our dominant leadership in the cylindrical battery space in terms of our technological leadership and product portfolio and aggressively maximize our sales in the high-output market and also maximize sales for new [form factors] as well. And lastly, for Electronic Materials, we want to diversify more into the greater China markets and be aggressive about our new product developments to achieve the double goal of improved sales and also improved profitability.

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Young-Hyun Jun, Samsung SDI Co., Ltd. - Chairman of the Board, CEO & President [4]

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(foreign language) And then in terms of our CapEx plan for 2019, we do plan on doing facilities investments this year, particularly for investments into the mid- to large-sized batteries and cylindrical batteries at a scale similar to that of last year. And because we will continue to have large-scale investments up to this year, and we do intend to do some outside funding. However, starting next year, we believe that the internal cash flows will be sufficient to cover the CapEx funding needs, and we do not foresee any difficulties in terms of securing funding for these investments.

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Operator [5]

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(foreign language) The following question will be presented by Woo-Hyung Cho from HSBC.

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Woo-Hyung Cho, HSBC, Research Division - Analyst, Hardware and Materials [6]

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(foreign language) Yes, this is Woo-Hyung Cho from HSBC securities. The first question has to do with the small-sized batteries. There are concerns on the market amid sluggish iPhone sales that overall demand for smartphones may be going down. And so what kind of impact do you think this will have on your polymer battery business? And what is your strategy in terms of responding to that potential impact?

And then for your large-sized batteries, there has been recent media coverage suggesting that local automotive battery players have been increasing the battery prices. So could you elaborate on the background to any pricing increase? And then will this impact your time frame in terms of turning to profits? And also can this have a negative impact in terms of promoting growth in the electric vehicle markets?

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [7]

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(foreign language) Yes, this is Michael Son from the Battery Strategic Marketing Team. Let me first answer your question on the small-sized batteries, the polymer business outlook. In 2018, we were able to achieve very significant growth in polymer battery sales, driven primarily by application in the premium phones, and there was an improvement in the profitability as well.

In 2019, we do think that the premium phone market demand may become flat or more stagnant, which is why we intend to move into the mid-to low-end smartphone markets to grow our presence in that market going forward.

Although, as I mentioned, demand may be flattish, we will continue to defend ourselves and maintain our current dominant market share amongst our existing premium phone clients, while also moving into, again, the mid- to low-end smartphone space. And also for polymer batteries, there is -- there are forecasts that suggests that there will be consistent growth in demand for use in bluetooth headphones or smart watches and other wearable devices. So we will continue to expand our relevant product lineup so that we can achieve, again, both sales and also earning improvements.

(foreign language) And then as you asked about the change in pricing, how that may impact the turnaround period and how if the automotive battery pricing continue to go up, potentially they -- might have a negative impact on the EV industry overall. Well in terms of what led to the pricing increase, it was in part to reflect the rising material prices, and then it was also in part the result of our efforts to improve profitability.

In terms of the turnaround to profits, although in the short term, it may be difficult to expect the automotive battery segment, on a stand-alone basis, to turn to profit right away. We do think that through proactive cost cutting efforts and also efforts to raise prices, we will be able to improve profitability significantly compared to the prior year.

And if those results come or become visible, then we do think that, that should speed up the time to turning around to profits.

And then in the mid to longer term, you asked about how instead of falling if automotive battery prices actually go up or there's a delay in the reduction in the prices, how potentially that may have a negative impact on the EV industry overall.

Well, because battery prices do account for a big portion of the EV, it is certainly one of the important factors, but for the global automotive OEMs because of the CO2 regulations, they're in a position where they will have to increase electric vehicle shipments and the supply of the technology. So in the short term, we do not think that the increase in pricing will have an immediate major impact on demand. But looking more toward the longer or midterm, we do think that the battery players should be working in cooperation with the automotive OEMs and work toward technological advancement and cost-saving measures to try to achieve a more optimal battery price.

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Operator [8]

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(foreign language) 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 [9]

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(foreign language) Yes, this is Kim Sung Kyu from Daiwa Securities. I have 2 questions, one on small-sized battery and another on your Electronic Materials business. First I want to hear more about your company's view on the cylindrical EV battery business, and also the non-IT applications cylindrical battery outlook. And what is the current status of EV players that already currently adopt cylindrical batteries in their vehicle?

And overall, what is SDI's business plan for EV cylindrical battery business? And then regarding the Electronic Materials, there are wide views that the semiconductor market will see a slowdown in demand this year. If the semiconductor companies do reduce their capacity expansion this year, what kind of an impact do you think this will have on the sales of your main semi material products? And how do you think this will have a bearing on your growth?

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

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(foreign language) Yes, this is Michael Son, and I will also [mitigate this] question. You asked about our business outlook for the small non-IT application battery business and our plans for the cylindrical EV battery business as well. So as -- for this year, the cylindrical battery market is expected to grow by around 20%, if not more. As you mentioned, we do also think that non-IT applications will be the main driver for that growth in demand. And we think that there will be most notable increase in demand for -- or from power tool applications, e-bikes, EV or ESS.

And then for cylindrical EV, we actually are seeing several Chinese EV start-ups and also some global players also increasingly adopt more of the cylindrical batteries in their EV platforms. And they -- more are now joining in the development of the cylindrical EVs and also the sales. So we think that this kind of adoption rate will continue to expand going forward. We want to take advantage of our validated leadership in the high-output market and also, our strong position in the high-capacity cylindrical battery market as well to continuously reinforce our dominance in the EV market going forward.

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Young-No Kwon, Samsung SDI Co., Ltd. - Executive VP & Director [11]

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(foreign language) Young No Kwon from the Electronic Materials Strategy Marketing Team. Let me take your question on our outlook for the semi materials business. So you asked about how the slowdown -- potential slowdown in the memory sector may impact our product sales and our growth potential. Well, so as the market is expecting, we also do think that in the first half of the year, there may be a bit of a weakness in the memory cycle.

However, we think that demand should start to recover into the second half of the year. And so in terms of our semiconductor material sales, potentially, there may be a bit of a slowdown in sales growth in the first half of the year, but we will continue to defend our sales through various initiatives and efforts. For example, we are continuing to work on upgrading quality so that, of course, raises the value add of our products and then allows us to apply higher pricing. And so we will defend our market share and try to advance a slowdown in our sales through these types of efforts. We also are strengthening our sales from noncaptive customers, and those results are actually already translating into good performance, and they will allow us to fulfill, we think, our stated goals.

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Operator [12]

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(foreign language) 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 [13]

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(foreign language) Yes, this is Jung Hoon Chang from Samsung Securities. I have 2 questions on mid- to large-sized batteries. I think you mentioned that in terms of your growth outlook for the mid- to large-sized battery in the battery market, you have a higher outlook for automotive. The automotive battery business over ESS and the portion of automotive battery sales as a percentage of total sales mix, I think, is forecast to go up. So my question is in terms of the improved profitability that you are seeking to achieve in your mid- to large-sized batteries. If you were to identify some attribution -- I mean, could we distinguish how much of an impact would be coming from the change in the sales mix versus how much of an improvement in profitability, how much of that will come from an increase in sales revenue or scale? So attribution again, some mixed versus scale. And second regarding ESS. So in 2019 versus 2018, what kind of changes have you been observing in terms of domestic demand and also overseas demand for ESS solutions? And also are there any differences in the margins of domestic ESS projects or solutions versus overseas?

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [14]

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(foreign language) Yes, this is Michael Son. Let me answer both of those questions. I think the first question was asking whether we think we are able to improve the profitability of our automotive battery business. Well in 2018, our assessment is that it was the ESS business that led sales growth for the mid- to large-sized battery business. However, in 2019, we think it will be the automotive battery business that will be serving this kind of important role. So this year, we are forecasting that there will be a significant growth in automotive battery sales and the portion of new, high-energy density products will increase. And also like last year, this year we'll continue to reflect the previous increase in raw material prices in our current pricing. So overall, on balance, this will help improve the profitability of the automotive battery business itself. And then in turn this will contribute to improved sales growth for the overall mid- to large-sized battery business and also help us achieve better profitability.

(foreign language) And then let me take your question on ESS. You asked about the split in our ESS business between domestic versus global. And you asked whether there were any differences in the profitability or margins between the two? Well, first, as we already mentioned this year, we think that the ESS market will reach 17 gigawatt-hour scale, which would be about 40% year-on-year growth, and of that we think that the domestic market will account for about 1/3.

Last year, in 2018, our domestic demand accounted for as much as 1/2 of total global demand, therefore, we had to allocate a great deal of our effort and time to addressing the domestic customer needs.

And consequently, the share of domestic sales increased significantly.

However, in 2019, we are expecting that domestic demand will become a little more stable or stagnant, whereas, global demand from the U.S. or European countries is expected to increase primarily around ESS or utility applications as more players look to renewable integration or supplement their aged power grids. Our company SDI has accumulated the #1 installation track record in the industry, which is validation of our product competitiveness. And through cooperation with the global SI partners, we are working to continue to expand our global market share. And so last year, yes, our sales mix was heavily concentrated on the domestic market, but we think that this will be significantly improved going forward. In terms of pricing or profitability, there are no major differences between overseas projects or domestic projects.

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Operator [15]

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(foreign language) The last question will be presented by Jeongu Ko from NH Investment Securities.

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Jeongu Ko, NH Investment & Securities Co., Ltd., Research Division - Analyst [16]

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(foreign language) Yes, this is Jeongu Ko from NH Investment Securities. I'd like to ask questions about your Electronic Materials and display. First of all, I'd like to hear about the company forecast on your polarizer films business. There are some who are quite concerned that the Chinese market is slowing down, in particular, the Chinese LCD sector is slowing down. And also Samsung Display or Samsung is reportedly converting some of their LCD lines to QD-OLED, which may then limit sales for SDI. So can you address those concerns? And how will these developments impact your polarizer business? And second question has to do with OLED. We -- the materials for OLED. We are hearing that Samsung Display may be moving to expand their overseas accounts. And so can you give us some color on how you may stand to benefit from those movements in terms of OLED materials?

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Hong-Gyeong Kim, Samsung SDI Co., Ltd. - CFO and Inside Director [17]

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(foreign language) Yes, this is Hong-Gyeong Kim. Let me take that question. You asked how because of the slowdown in the Chinese economy that may lead to a slowdown in the Chinese LCD sector, how will that impact our polarizer business, and also you talked about possible line conversion by Samsung Display toward QD-OLED, and what kind of impact you foresee from that? Well there were initially some expectation that this year, the LCD panel market may slowdown.

But actually, if you look at major players like CSOT, they've actually been expanding their 10.5 generation capacity, and they are actually running their lines at full capacity. And so many are aggressively producing large-sized TV and panels. So into the first half of 2019, it's not just SDI but the polarizer, the market overall we think will show or will be driven by strong demand overall. And then even if Samsung Display does convert over to QD-OLED because they have already transitioned significantly so that the portion of business from the greater China market is now higher as a percentage, we do not foresee a major impact from that, and also we intend to continue to expand our noncaptive business this year as well. And so in terms of the growth of our polarizer business, we think growth will be similar to last year's levels if not greater.

(foreign language) And then the other question was how we stand to benefit from SDC's expansion of global accounts, and then what kind of growth outlook we have for OLED materials.

Well, yes, Samsung Display has continued to expand into the overseas markets and has now been building more overseas accounts. And we stand to benefit shared growth in our OLED material business in line with their expansion. And if you look at Chinese players like BOE or Tianma, we have already worked on getting material approval from these players up till now and many of these companies are ramping-up their OLED production this year.

So we think that we will be in a good position to benefit from this market growth coming out of China in terms of OLED material sales. So we are looking forward to an expansion in OLED material sales primarily from the wider Chinese markets.

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Ike Kim, Samsung SDI Co., Ltd. - VP of Finance & Accounting Team [18]

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(foreign language) Thank you. We'll now conclude our earnings call for fourth quarter 2018 for Samsung SDI. Please contact our team for any further questions. Thank you.