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Edited Transcript of 006400.KS earnings conference call or presentation 30-Jul-19 6:00am GMT

Q2 2019 Samsung SDI Co Ltd Earnings Call

Kyunggi-do Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung SDI Co Ltd earnings conference call or presentation Tuesday, July 30, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Young-No Kwon

Samsung SDI Co., Ltd. - CFO

* Kyunghoon Kim

Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team

* Michael SON

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

* Yoontae Kim

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

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Conference Call Participants

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* H. Kwon

JP Morgan Chase & Co, Research Division - 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

* Won Suk Chung

HI Investment & Securities Co., Ltd., Research Division - Analyst

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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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Good afternoon. I am Yoontae Kim, Vice President of the Business Management Office at Samsung SDI. Before we begin, I would like to introduce the management team with us: 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 Q2 Earnings Call.

First, regarding Q2 results. Q2 revenue was KRW 2,404,500,000,000, a 4% increase Q-o-Q. By Business division, battery division revenue was KRW 1,821,400,000,000, a 5% increase Q-o-Q, mainly driven by an increase in ESS, automotive and polymer battery sales. Electronic Materials revenue was up 2% Q-o-Q to KRW 581,200,000,000, thanks to an increase in polarizer film and OLED material sales. Operating profit was KRW 157,300,000,000, a 32% increase Q-o-Q. Pretax profit was KRW 217,000,000,000; and net profit, KRW 160,200,000,000.

Next, I will move on to our financial highlights on the right-hand side. Assets, as of the end of the quarter, was KRW 19,765,800,000,000, an increase of KRW 211.5 billion. Noncurrent assets increased by KRW 406.7 billion due to facility investments and gain on equity method valuation. Liabilities stood at KRW 7,248,600,000,000, increasing by KRW 3.8 billion; and shareholders' equity was KRW 12,517,200,000,000, an increase of KRW 207.7 billion.

Next, moving on to Q2 performance by Business division and our outlook for second half. In Q2, mid- to large-sized battery revenue increased Q-o-Q. Automotive battery sales continued upward trend with increased sales to the European customers. ESS overseas sales increased for the U.S. utility applications and ESS domestic sales also picked up Q-o-Q, as partial sales for utility applications resumed. In the second half, we expect the sales to increase by a significant margin, improving profitability greatly. Automotive battery sales are expected to increase as the supply begins in earnest to our major customers, new EV and PHEV models. With the normalization of ESS domestic sales as well as growing overseas sales to Europe and to the U.S., ESS is likely to record a huge sales increase in the second half.

Next, moving on to our small-sized battery division. In Q2, small-sized battery revenue grew slightly Q-o-Q. Despite the sluggish demand in the downstream industries, such as power tools, cylindrical battery sales increased, thanks to e-scooters and e-bikes. Polymer battery sales increased Q-o-Q with the increased sales of mass-tier smartphones. We expect a robust sales and profitability from the cylindrical and polymer batteries continuing in the second half. We plan to increase cylindrical battery sales focusing on high output tools, such as power tools and vacuum cleaners, and expand the polymer battery supply, in line with the growing mass-tier smartphone market.

Next, and on to our Electronic Materials division. Electronic Materials sales increased slightly in Q2 in the display materials. With growing demand for large-sized LCD TVs, polarizer film sales increased and OLED material sales increased with higher demand for rigid OLED. Because of the weak memory market, semiconductor materials sales reduced slightly.

In the second half, display materials will contribute to improving sales and profitability. Polarizer film supply will be expanded for the ultra large TVs, and we will also begin to supply for mobile OLED as well. OLED materials supply is expected to increase with the launch of the major customers' new product. It is difficult to forecast when the memory market will recover, but we will supply upgrade products for the major materials planned for the second half to enhance our competitiveness in the semiconductor materials.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

[Interpreted] The first question will be presented by Mr. [Chu Tae Hee] from Hangul Investment & Securities.

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Unidentified Analyst [2]

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[Interpreted] This is [Chu Tae Hee]. I am from Hangul Investment & Securities. I have 2 questions. One is, what is your business outlook for the second half? After the investigation into the ESS accident, do you think the market will recover? And against the backdrop of the global economy and the IT market trends, what do you think is the business outlook for each division?

And the second question has to do with the automotive batteries. It was expected that the supply situation for the automotive batteries would remain tight because the EV market was growing so rapidly. But now we see new players coming in and they're increasing capacity. So there is concern in the market that this could turn into a buyers' market. So what do you think about this?

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Young-No Kwon, Samsung SDI Co., Ltd. - CFO [3]

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[Interpreted] Yes. This is Kwon, Young-No, the CFO. I will take the first question.

As we had mentioned in the previous quarter, we believe we'll be able to grow both our top line and bottom line in the second half.

First of all, the second half outlook for ESS is very positive with the normalization of the domestic market and growing sales overseas. Since the Korean market made public, the result of the investigation into the cause of the ESS accident and announced safety reinforcement policies in early June, the Korean market is normalizing and the domestic revenues have started recovering in June. We believe the sales will really take off in August. Overseas sales will also continue to grow because many new projects are starting in the U.S. and Europe. Automotive battery business is likely to grow significantly in the second half, as battery supply will begin in earnest in time for the major customers launching new models in the second half. New EV model launches are aligned up as well as full change or facelifts for key PHEV models. We plan to supply new high-energy density batteries to the major customers, and we expect there will be a huge increase in sales and improved profitability. It is inevitable that small batteries and electronic materials may be impacted in some areas by the IT downstream business, but we expect we will be able to generate stable profit on the back of robust sales. Overall, we will see improved profitability in mid- to large-sized batteries in the second half, leading to a healthier company-wide profit structure. Continuing from last year, we expect a steady growth in our top line as well as bottom line.

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [4]

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[Interpreted] This is Michael Son from Battery Strategic Marketing. I'd like to take your second question about whether there is concern about excess supply in the market. Many battery players are announcing aggressive plans for capacity expansion. However, the EV demand is increasing very rapidly and capacity is growing in line with the supply schedule and volume for each project. So I do not think that we need to worry about excess supply at this stage. And even when we reach a point that there is excess supply in the market, Samsung SDI will be nonetheless able to win quality orders from the customers based on our industry-leading product competitiveness and operational capabilities and we expect to be able to continue our sustainable growth, going forward.

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Operator [5]

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[Interpreted] The next question will be presented by Mr. Kim, Ji-San Kiwoom Securities.

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Ji-San Kim, Kiwoom Securities Co., Ltd., Research Division - Team Leader and Electric & Electronic Analyst [6]

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[Interpreted] This is Ji-San Kim from Kiwoom Securities. I have 2 questions. First is, after the ESS investigation, the government announced tougher safety standards. So how do you plan to meet those? And how will it affect your profitability? And the second question has to do with the small batteries. Because of the U.S. sanctions against Huawei, it is expected that the sales of Samsung Electronics mass-tier smartphones will increase. And how likely are the polymer batteries to benefit in the second half from this?

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

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[Interpreted] Okay. So I'll first answer the first question and then move on to the second one. This is Michael Son again. So the first question was about the stronger safety standards for ESS. As part of the stronger safety standards, ESS batteries will be subject to a new certification system. The government also has mandated installing safety devices to prevent electric shocks and put in place an emergency system that halts the operation of ESS products if abnormal systems are detected. However, despite these changes, Samsung SDI has already been applying this level of stringent safety management to its existing ESS products over the years. So this new regulation does not bear much additional product cost, and we expect there will be minimal impact on profitability.

Interpreted About the second question about the small batteries, how the Huawei sanction will impact our Polymer battery business? Well, if the Huawei factor pushes up our major customers' mass-tier smartphone sales, then it will most likely have a favorable impact on our polymer battery sales. But instead of waiting for such unpredictable market factors to play in our favor, we will enter the major customers' new model in a timely manner and also aggressively penetrate the mass-tier smartphones, so that we can increase polymer battery sales in the second half. We will also supply to the Chinese smartphone customers new models in the second half so that we can gain more market share.

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Operator [8]

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[Interpreted] The next questions will be presented by Mr. Chang, Jung Hoon from Samsung Securities.

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Jung Hoon Chang, Samsung Securities Co. Ltd., Research Division - Head of Small Cap [9]

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[Interpreted] This is Chang, Jung Hoon from Samsung Securities. I have 2 questions. I'll ask the first one and then ask my second question later. It has to do with ESS. There has been some noise in the ESS market in the first half. And aside from that, what do you think is the demand forecast for domestic ESS market after the REC weighting is adjusted downward? What do you think is going to be your strategic stance for the global ESS market? And what is the current proportion of domestic and overseas sales breakout? And what -- how will that change in the future?

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

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[Interpreted] This is Michael Son, again. About your question about the ESS market after REC weighting adjustment downward, our strategy going forward and our revenue breakout between global and domestic. Well, as you said, the REC weighting will be lowered in June 2020. And the demand forecast for domestic ESS is dependent on whether follow-up measures will be introduced to the Renewable Energy 3020 policy and what the details will look like. In the overseas markets, including the U.S., Europe, Japan and Australia, they have set the environment-friendly agenda and specific goals and policies under which they support renewable energy development and ESS installations. This is the reason behind rapid growth in global ESS market. And even if we make the assumption that the domestic market is going to be stagnant, the global ESS market is expected to grow 30% to 40% annually until at least 2025. This year, Samsung SDI's ESS revenue will be evenly spread out between domestic and global. But going forward, we expect overseas sales to reach about 80% to 90% of the whole portfolio in the mid to long run.

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Jung Hoon Chang, Samsung Securities Co. Ltd., Research Division - Head of Small Cap [11]

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[Interpreted] My second question goes to Mr. Hong-Gyeong Kim from Electronic Materials Strategic Marketing. I have a question about the polarizer film supply situation. It continues to remain tight. And how long do you think this will last? And what is the reason Samsung SDI is in a more favorable position vis-à-vis your competitors?

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Young-No Kwon, Samsung SDI Co., Ltd. - CFO [12]

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[Interpreted] Yes. This is Hong-Gyeong Kim from Electronic Materials strategic marketing. You asked about 2 things, whether the tight supply situation in polarizer film market will continue in the second half? And what our strategic advantages are? It is true that Chinese panel makers have been increasing capacity since last year, and there was an increased production of 65-inch and plus large screen TV panels in those plants tightening the polarizer film supply. And in the second half, we don't think the supply situation is going to be as tight, but there still will be very strong demand for polarizer film. And amidst such market changes, Samsung SDI maintains its competitiveness with the industry's highest level of productivity and functional film development. It is difficult to forecast far into the future. But in the second half, we will see the panel market continue to grow with demand for larger sizes. And growth is expected in the set market as well, although it may not be as vibrant as we had expected. In addition to maintaining our industry-leading cost competitiveness and product excellence, through stable mass production of the viewing angle enhanced polarizer film and OLED polarizer film that we begin supplying in the second half, we will respond to these market changes.

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Operator [13]

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[Interpreted] The next questions will be presented by Mr. Chung, Won Suk from HI Investment & Securities.

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Won Suk Chung, HI Investment & Securities Co., Ltd., Research Division - Analyst [14]

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[Interpreted] This is Chung, Won Suk from HI Investment & Securities. I have 2 questions. One has to do with automotive battery. The Chinese government is going to scale back subsidy. And your competitors are expanding investment, like building plants and establishing JVs to prepare for entering the Chinese market. And I was wondering what Samsung SDI's strategy was for entering the Chinese market? And the second question has to do with the small batteries. With the global economic slowdown triggered by the U.S.-China trade friction, there is much concern in the market about the power tool demand. So I was wondering what your demand forecast for the cylindrical batteries for the power tools were for this year and in the mid- to long-term?

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [15]

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[Interpreted] Yes, this is Michael Son. You asked about the automotive battery. We believe that there will be significant business opportunity in China as the world's largest EV market. We are discussing various projects with many customers as we speak. However, we do feel the need to carefully watch the market at this point because there are so many factors related to entering the Chinese market. For the time being, we will utilize the plants that we already have in Xi'an and Shenzhen as much as possible. And as to making new investments, we will be giving it serious thought as we go along, closely watching the market situation and project status by each customer.

Interpreted Yes, let me address your second question about the concern in the market about power tool demand and the forecast for cylindrical batteries. Power tool market was somewhat impacted by the sluggish global economy. The demand forecast for this year's cylindrical batteries for the power tools has been adjusted downward since the beginning of the year. Still the market is expected to post a double-digit growth this year. And Samsung SDI also expects a similar level of growth in its cylindrical battery segment as the market. There is a shift in the lithium-ion battery application. It used to be the small power tools and gardening tools, and now lithium-ion battery adoption is increasing in the commercial power tools and mid and large-sized gardening tools, and we think double-digit growth here can also be maintained. According to the market research agencies, the total demand for cylindrical batteries will almost double from 5.5 billion cells in 2019 to approximately 10 billion cells in 2025. The growth will be driven mainly by the high output market, including power tools and vacuum cleaners, and the medium output markets, such as EVs, e-bikes and e-scooters.

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Operator [16]

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[Interpreted] The next questions will be presented by Mr. Kwon, Jay Hyun from JPMorgan.

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H. Kwon, JP Morgan Chase & Co, Research Division - Analyst [17]

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[Interpreted] This is Kwon, Jay Hyun from JPMorgan. Thank you for giving me the opportunity to ask questions, I have 2. One is OEMs other than Tesla seem to be taking interest in the EV batteries. And I was wondering what the strengths and weaknesses are for the EV cylindrical batteries? And what is your outlook for the cylindrical batteries in the EV battery market? And the second question has to do with the semiconductor material. It seems that gloom persists in the semiconductor market? And when do you think the market will recover? And what are the prospects for Samsung SDI Semiconductor Material business? And is there anything that you're planning as a new business item?

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [18]

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[Interpreted] Yes. This is Michael Son. I'd like to answer your question about the strengths and weaknesses of the EV cylindrical batteries and the market outlook. Cylindrical batteries have a know-how accumulated over the course of the past 20 years. And compared to the other form batteries, they have excellence in productivity, cost competitiveness, energy density, and they can be applied to a variety of devices on which they have been tested and proven. And also the cell height and size is smaller than the large-format batteries, giving them freedom of design. Also, they have the merit of lowering the height of the car. The known downside was that you had to control thousands of cells at the same time and battery life was shorter than that of the large-format batteries. However, with the recent BMS technology development and battery life enhancing efforts, the demand for EV cylindrical batteries is going up. Until now, it was mainly the EV startups led by Tesla and some Chinese local OEMs that form the EV cylindrical battery market, but now we see that more and more global OEMs are taking interest. So the demand is on the rise and Samsung SDI's customer portfolio is also getting diverse. We expect the large-format batteries to gain more market share in the EV market by improving energy density and cutting cost. However, we also believe the EV cylindrical battery demand will grow for some time because of the merits that I have just mentioned. And we expect that out of SDI's cylindrical battery sales, the EV portion will continue to grow every year.

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Kyunghoon Kim, Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team [19]

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[Interpreted] Yes, this is Kyunghoon Kim, and I'd like to take your second question. Due to the slowdown in global economy, the demand for mobile and PC is stagnant and especially, the server demand growth is short of the market expectation. And so the recovery in the semiconductor market is slower than we had expected. Against this backdrop, Samsung SDI's Q2 revenue in semiconductor materials had decreased slightly. But we plan to improve our sales in the second half with the SOH performance upgrade and increase our SOD market share, not only in our strategic but also in our new customers as well. And we cannot share with you all the new developments, but we would like to mention that we are making preparations for the mid- to long-term growth with new materials that are applicable for the new EUV process and materials for V-NAND.

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Operator [20]

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The last question will be presented by Mr. Kim, Sung Kyu from Daiwa Securities.

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S. K. Kim, Daiwa Securities Co. Ltd., Research Division - Research Analyst [21]

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[Interpreted] I have questions about the Electronic Materials. The first question is, it seems that the OLED material business underperformed, relatively speaking, in the first half? And what is your outlook for the second half and for next year? And any upside, for example, like entering new form factors or development of new materials, like the ones that you shared with us for the semiconductor materials? And the second question is, launch of 5G phones and foldable phones and expansion of wearables are some of the trends that we see now in the market? And how do you think they will affect the polymer battery demand?

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Kyunghoon Kim, Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team [22]

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[Interpreted] This is Kyunghoon Kim. I'll take the first question. IT demand has the seasonality factor, and it usually follows the pattern of low in the first half and high in the second half. So if you compare against the second half of last year, then this year's first half may look like an underperformance. But if you compare against the same period last year, then we actually achieved robust growth. In the second half, new flagship smartphone launches are scheduled for both our domestic and overseas customers, which means the flexible OLED production will go up compared to the first half. And with higher adoption of rigid OLED in the mass-tier smartphones, we expect the demand in that material to go up as well. In the second half, our company is targeting a significant growth in sales by expanding supply of new materials, including green host, TFE and p-dopant to China. And to continue with the growth momentum next year, we will prepare for entering next-generation platform and also get new materials ready, including red host and QD materials.

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Michael SON, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [23]

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[Interpreted] This is Michael Son. I'll take the second question about the changes in the mobile industry and how that will affect our polymer battery business. Traffic will increase with the launch of 5G communication service and display size will grow on the foldable phones, which will mean higher power consumption compared to the existing smartphones. The battery will become all the more important, and Samsung SDI will respond to these new trends by consistently improving energy density and ultrafast charging technology. We are expanding polymer battery supply to the growing segment of wearable devices and also in line with miniaturization trend like we see in the Bluetooth earphones, we're developing ultrasmall batteries as well. So as such, we will continue to see these types of new and diverse devices emerge. And since the polymer battery has a very good fit, we expect the polymer battery demand to continue to go up.

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [24]

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[Interpreted] This concludes the second quarter earnings call. Please contact the IR team for any further questions, thank you.

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