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Edited Transcript of 006400.KS earnings conference call or presentation 26-Oct-18 1:30am GMT

Q3 2018 Samsung SDI Co Ltd Earnings Call

Kyunggi-do Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Samsung SDI Co Ltd earnings conference call or presentation Friday, October 26, 2018 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ike Kim

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

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Conference Call Participants

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* Dong Jin Kang

HMC Investment Securities Co., Ltd., Research Division - Analyst

* H. Kwon

JP Morgan Chase & Co, Research Division - Analyst

* Jae Sun Lee

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

* Ji-San Kim

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

* 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 morning. This is Ike Kim, Vice President of the Business Management Office at Samsung SDI. Before we begin, I would like to introduce the management team present on today's conference call. We have our CFO, Young No Kwon; Head of Battery Strategic Marketing team, Michael Son; and Head of Electronic Materials Strategy Marketing Team, [Kyunghoon Kim].

We will now start the 2018 third quarter earnings presentation. Now first, regarding Q3 results. Q3 revenue was KRW 2,522,800,000, which is a 13% Q-on-Q. By business division, Battery division revenue was KRW 1,922,300,000, which is an 11% increase Q-on-Q, mainly driven by large increase in polymer battery sales and continued growth in cylindrical battery cells.

Electronic Material revenue was KRW 598.2 billion, which is a 15% Q-on-Q increase thanks to strong performance in all segments, including semiconductor polarizer film and OLED materials.

Operating profit was KRW 241.5 billion, which is a 58% increase Q-on-Q.

Pretax profit was KRW 306.3 billion. Net profit was KRW 214.1 billion.

Next is our financial standings, on the right-hand side. Assets as of end of Q3 was KRW 18,426,000,000,000 as a result of increase in revenue and royalty, current assets, including account receivables and cash and cash equivalents increased by about KRW 768.7 billion, and noncurrent assets increased by KRW 774.8 billion, due to increase in tangible assets from facility investments.

Liabilities was KRW 6,390,600,000,000, increasing by KRW 1,255,800,000,000 due to factors including borrowings and increased accounts payable.

Shareholders’ equity was KRW 12,335,400,000,000, an increase of KRW 279.7 billion. Cash also increased by KRW 527.9 billion due to increased borrowings.

Next is the third quarter performance of each business division and Q4 outlook. In the quarter 3, mid-to large sized battery revenue continued to see a significant increase on year-on-year basis. In particular, supply of automotive batteries for European EV models increased, while ESS sales increased both for domestic, commercial and U.S. utility applications, driving overall strong revenue growth. In the fourth quarter, mid- to large-sized battery revenue is expected to significantly increase year-on-year. But modest battery sales will continue to increase as supplied to European customers' new models, which started in the first half, taking it to scale up. And ESS is expected to continue strong performance with increased sales to domestic utilities and commercial applications as well as to domestic and overseas UPS applications.

Next is the small-sized battery division. In the third quarter, small-sized battery business recorded over KRW 1.1 trillion of quarterly revenue for the first time in history, driven by strong seasonality.

Cylindrical battery sales increased, thanks to strong demand for high-end, high-power products. Polymer battery revenue also increased significantly with the launch of new product by domestic and overseas major customers.

In the fourth quarter, we expect the revenue to grow even further as strong sales continue. In particular, demand for non-IT applications will be a major driver for cylindrical demands and polymer sales to premium and low-mid end handsets of major Korean and overseas customers, as well as to China, is expected to increase significantly.

Next is the Electronic Materials division. In the third quarter, Electronic Materials revenue increased by 15%, thanks to the solid performance in all sectors.

Semiconductor materials maintained continued revenue growth trends, especially along DRAM memory and revenue of display materials such as polarizer and OLED, all increased significantly, thanks to a diversified customer base and increased volume.

In the first quarter, Electronic Materials revenues is expected to remain similar to the previous quarter. We are focused on improving revenues for semiconductor materials by further diversifying the customer base and secure better profitability in polarizers and increasing supply around large screen TVs and mobile applications. For OLED materials , we will focusing on diversifying our consumer base, including increasing Chinese customers and prepare for adoption into new platforms.

So this completes the presentation, and now we will start the Q&A session, which will be interpreted consecutively. Please follow the instructions of the operator to ask questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is presented by Kim Ji-San from Kiwoom Securities.

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Ji-San Kim, Kiwoom Securities Co., Ltd., Research Division - Team Leader and Electric & Electronic Analyst [2]

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(foreign language) I have 2 questions. First question -- congratulations on the very strong performance in the third quarter. I noticed that the operating income in third quarter increased by more than 50% on a Q-on-Q basis. Can you give us a bit more detail of that profitability improvement. Which of these divisions -- which of the businesses contributed most during the third quarter, and can you give us some outlook by division for the fourth quarter? I am also assuming that the EV battery has not contributed to profitability in Q3. Can you give us an update on how the profitability of the EV battery business is improving? My second question is about the outlook for ESS business next year, specifically domestic as well as overseas business. Regarding domestic ESS sales, there are concerns in the market that because demand was so strong in 2018, this may show up as a relative decrease in demand in sales in 2019. Is that a valid concern? Second question is relating ESS in the overseas. Can you give your overseas ESS demand outlook for next year, and which segment was in ESS do you think will have the strongest growth potential?

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Unidentified Company Representative, [3]

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(foreign language) To answer your first question, about which of the divisions contributed most in the improvement of our performance in third quarter versus second quarter. I guess the most contributing division would be the small battery division, especially high-end cylindrical and polymer battery revenue grew pretty significantly in third quarter, contributing to our overall profitability. Also, in the mid- to large-sized ESS, that business continues to record solid profitability, so that also contributed. In terms of Electronic Materials, polarizers, as you noted, the profitability of that business improved quite significantly. Also that semiconductor and display [lead] material businesses maintained their performance throughout the third quarter. And so to answer your question, the division that contributed most in our third quarter results is the small battery division, and that played the greatest role in overall business performance. Looking forward to the fourth quarter, we actually expect these trends to continue into the third -- fourth quarter, and we actually are expecting better performance in terms of both revenue and profitability in fourth quarter versus third quarter, and we will work hard to deliver that. Regarding your second question about the profitability of the EV batteries. I think we mentioned this in the past conference call as well, but because of the fact that we are still supplying under the existing contract terms, structurally it's difficult to include the profitability of our EV battery business in the short term. But we are continuing to renegotiate terms on existing contracts. And regarding new contracts, we are signing them very early in terms of profitability and so these are all part of our efforts to include the profitability of EV battery business as soon as possible.

(foreign language) Your second question regarding the direction of ESS demands for 2019. According to our current estimates, we expect the global ESS demand in 2019 to be about 17-gigawatt hours, which will be about a 40% year-on-year growth versus 2018 demand. About 35%, we're expecting to be domestic Korean demand. As you mentioned, there was very strong demand ESS from the commercial segment this year, and especially because the ESS promotional power system will be removed from next year, we think that, versus this year, commercial segment of ESS demand in Korea would be decreasing. However, we see factors of increased ESS demand in, for example, the utilities. There is the Renewable Energy 3020 program in Korea, and this will be driving a wider adoption of renewable energy. And especially given the fact that the RET multiplier for our ESS renewable will be maintained at 5.0 until 2019. We expect that actually in 2019, this utility-related or renewable-energy-related ESS demand could actually double versus 2018. In terms of overseas, the major ESS demand growth areas in terms of region, we're expecting will be the U.S. and Australia. In the case of U.S., there is, for example, the ESS -- mandatory ESS installation being adopted in California. Also, with wider adoption of renewable energy, there is the ESS demand generated from that. Also, there are subsidies that are being introduced in the U.S. that will actually create ESS demand from households as well. But that will be the additional sector of -- segment of its [mand well]. In terms of Australia, Australia is now engaged in a very active program to replace its existing fire-burning generators to renewable-energy generators. Currently about 65% of power generation capacity in Australia is done by fire generators, and that will be replaced with solar and wind. So we're expecting quite a lot of increase in solar and wind generation invest facilities, which will also be combined with ESS demand. So that will be a major driver of ESS demand growth in Australia. Also, Australia is adopting subsidy programs for households installing ESS. So that would also contribute to ESS demand growth.

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Operator [4]

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(foreign language) The next question was presented by Mr. Kwon Jay Han from JPMorgan.

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H. Kwon, JP Morgan Chase & Co, Research Division - Analyst [5]

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(foreign language) I have 2 questions. First question is about the automotive battery business. Recently, many of the automotive OEMs have been announcing their EV targets. Also, this has driven -- created a lot of expectation about EV-related demand growth. From your perspective, as EV battery supplier, what is the direction that you see, what is your outlook? And what kind of changes would this market growth bring to your automotive battery business? And what kind of business opportunities do you think it will present, specifically for SDI? Second question is, recently there was a news report that a Korean battery company will be supplying to a Chinese truck OEM and this has actually driven up expectations that finally maybe Korean batteries will be used in the Chinese market. Do you think that this could actually lead to sales? And do you think this is a sign that in the future, the business environment in China will become more favorable towards Korean companies? Also, briefly, are there any changes or updates that you can share with us regarding the Chinese automotive battery business?

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Unidentified Company Representative, [6]

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(foreign language) Taking your first question of how this increased demand for EV's electric vehicles, what kind of business opportunities that is presenting to SDI. As you mentioned, there is a aggressive drive for greater production and adoption of EVs, especially you're noticing this drive to be strong in the EU area. This -- one of the reasons is because of the Dieselgate, new, stronger fuel efficiency standards, the WLTT was adopted, and a stronger CO2 emissions standards are being applied to passenger cars. So that's driving the demand and this demand for EV. The other is, even in commercial vehicles, stronger environmental regulations are being adopted in the EU area in Europe, and this is also another great driver for EV. Another impact of the Dieselgate is the fact that actually that has brought challenges to European OEMs meeting their CO2 reduction plans. The European OEMs had already a deal to reduction plan. A large part of that was to be accomplished by selling diesel vehicles. Because of Dieselgate, diesel vehicle sales have declined and the only way that European OEMs can compensate, make up for that, is by increasing the sales of their EV. So this is actually giving -- presenting a very positive business opportunity to SDI. About the automotive battery -- so therefore we expect automotive battery demand to increase, both in the short-term and mid- to long term versus what we had originally planned. We're seeing -- our customers asking for increased volumes on increasing contracts, and also expect that future business size and scale will increase.

(foreign language) Your second question was about the Chinese EV battery market. As you know, the Chinese market has so much variables, so it's very difficult to make any conclusive statements regarding the Chinese market and outlook there. Recently, there hasn't been much changes or new policies announced, so that's makes it even more difficult for us to make any conclusive statement. But there is actually a greater voice among the Chinese industry as well as the Chinese academia that in order to develop the Chinese EV industry as a whole better, this policy of trying to protect Chinese companies needs to change. Also, many of the Chinese OEMs actually want to work with companies such as us, that are global players. And so we are expecting that this policy will gradually change. It's just that we can't say definitely when or how that change will happen. But we are already preparing by one -- by preparing a lineup of competitive products that also have cost competitiveness, and we are currently talking actively with several Chinese OEMs.

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Operator [7]

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(foreign language) The next question is presented by Sun Jae Lee from KTB Investment & Securities .

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Jae Sun Lee, KTB Investment & Securities Co., Ltd., Research Division - Research Analyst [8]

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(foreign language) I ask 2 questions. The first one is about your cylindrical batteries. Recently, there has been a great increase in demand for cylindrical batteries, resulting in very tight supply-demand situation. By application, which is the application that you're seeing the greatest growth in or where there's growth potential going forward? And what is the growth like in Power Tools, which is one of your main segments? Also, in terms of cylindrical batteries, can you share with us your CapEx strategy to meet such strong demand? Second question is about the Semiconductor Material division. Recently, there's been decline in the memory prices, and there's bit of concern about future memory demand. And in that context, what kind of impact do you expect on your Semiconductor Material business?

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Unidentified Company Representative, [9]

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(foreign language) To answer your question about cylindrical batteries and growth in terms of each of the application. Demand for cylindrical batteries is very strong in all of the applications: car tools, garden tools, e-bikes, cleaners, ESS. And the -- overall we're expecting to see two-digit demand growth. Especially there is very strong growth in these high-capacity and the high-output batteries. So the new form factor 21700, actually the growth demand -- demand growth there would even be faster in terms of pace. To give you a bit more detail in the Power Tool segment. Even though at the step level, Power Tool itself, the growth rate is relatively low at a single-digit rate. Within Power Tools, there is actually a conversion happening from quarter-to-quarter. And also, replacement of retail cadmium batteries to lithium-ion batteries. And because these 2 conversions are happening at the same time, this has been driving a very strong increase in lithium-ion battery demand, cylindrical battery demand from Power Tools segments. Also, in terms of garden tools and cleaners, there is adoption and also conversion to lithium-ion batteries. And this -- is actually accelerating which is another strong driver for cylindrical battery demand going forward. In terms of CapEx plans, given the fact that we have a competitiveness, not only in terms of the product, but also mass production capabilities in non-IT cylindrical batteries, we will further leverage this competitiveness to drive up our market share and we will follow up with additional expansion of our production capacity.

(foreign language) To answer your second question about our semiconductor material business, there is market concern we've heard that the memory growth rate will -- may decline next year. But we think that even if growth rates decline next year, the memory prices itself -- drop in prices will not be as severe as markets are concerned of. Also, in terms of shipment, memory shipment, according to our view, memory shipment next year will either remain flat or actually increase versus this year. So as a semiconductor material supplier, the impact that we will be feeling will be very limited. Regarding next year, we have 2 main directions in terms of strategy: one, regarding our captive market, we will continue to meet the demand of our customers process migration scaling by developing next-generation material that would also help us to gain upper hand in terms of profitability. Also at the same time, we will be addressing the Chinese customers and add on new Chinese customers to diversify our overall customer base. And this will also help us drive up growth in terms of size and volume. And so overall, looking at the market outlook and our strategy, we actually expect that our revenue as well as profitability of Semiconductor Material business may actually improve versus this year.

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Operator [10]

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(foreign language) The next question was presented by [Mr. Kim Jeongu] [Tyler Securities].

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Unidentified Analyst, [11]

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(foreign language) I just have 2 questions regarding the EV battery business. First, we've heard that you will be supplying to Jaguar as well as increasing cooperation with Chinese companies. And these are all related with the cylindrical batteries for EV application. So specific to cylindrical batteries for EV application, what is -- how much in terms of revenue do you think this business can grow to? And within your revenue, what kind of share are you expecting from cylindrical batteries for EV application? Second question is, how much growth do you think would be possible from new EV battery contracts? The reason I'm asking you this question is recently, your Korean domestic competitor has made several comments of them being very aggressive in winning new EV battery contracts. Whereas, SDI seems to be more quiet and not much news coming out, which is, I think most of the market misunderstanding that perhaps SDI is falling behind in competition in some of these new contracts. So can you give us your view on what's the growth potential you can achieve in terms of new EV battery contracts?

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Unidentified Company Representative, [12]

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(foreign language) Regarding your first question of EV battery applications, cylindrical batteries for EV. Even though we can't go into detail of supply contracts with specific customers, overall, we see that the growth potential for EV cylindrical batteries to be very positive. Not only the conventional or traditional OEMs, but also EV startup and major EV players in China, are either now adopting or are increasing their use of cylindrical batteries. So this is a very positive sign. Even though currently our EV applications account for a small portion -- a very small portion of our cylindrical battery sales, we expect that going forward, EV demand will play a very important role in driving up our smaller-sized battery business.

(foreign language) Regarding EV batteries, the contracts, the new demands that are coming up, even though, once again, we can't go into detail of specific customer contracts, in terms of the share that we have in long-term battery supply of major customers, we believe we are one of the leaders in the industry, currently already. Also one of the trends that we're seeing is that when OEMs select a battery supplier, they're looking at not only cost price but also the performance, the quality and a proven track record of stable supply. So they are actually -- contractors are actually preferring the suppliers with the scale and proven track record in selecting their vendors, and that is an area where SDI already has a strength. And so we're expecting our long-term contract volume to quickly increase going forward. In 2019, even though we can't give you the specific numbers, there are many OEMs coming up to select vendors for their batteries. And next year, therefore, we're also expecting our contract winning trend to pick up and accelerate throughout 2019. But as we mentioned during the previous Q&A, in winning your battery contract rather than just pursuing a size and business volume, we will very thoroughly review the profitability of that supply opportunity so that we are able to achieve not only growth but also profitability and become a global first-tier battery supplier.

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Operator [13]

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

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Woo-Hyung Cho, HSBC, Research Division - Analyst, Hardware and Materials [14]

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(foreign language)

[Audio Gap] we see then in corporate prices have been declining since April. What kind of impact are you seeing on your profitability? Second question is about the polymer battery business. This year, you were able to increase your polymer battery revenue quite significantly by increasing the share that you have of your customers. But given the fact that smartphone market is expected to be stagnant next year, what are your strategies in growing your polymer battery revenue and defending your profitability?

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Unidentified Company Representative, [15]

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(foreign language) Regarding your first question of the impact we're seeing in our profitability due to declining raw material for batteries. As you mentioned, major raw materials for batteries, including global prices, have been declining since April and are being maintained at stable levels. However, the profit that impacts on raw material price declines in the short term, is not significant, it's quite limited. In the long term though, we expect that this may be a positive factor in the profitability of the battery business. Also, overall in the EV battery -- EV market, this could help have a positive impact on the EV industry. In terms of 2019, the share of our sales price is [key] that link to raw material price fluctuations will increase. Therefore, in 2019, we would see a less impact from changes in raw material prices.

(foreign language)

Regarding our polymer battery strategy next year given the expected stagnation of smartphones. Because of the stagnation in smartphones, both sell-in and sell-out volumes at the set level have been declining and we're expecting, therefore, that the set makers will run a very tight inventory policy next year. Our response to this is to leverage our proven stability as well as quality to win a high market share in the new flagship launched by major customers, also to increase our supply to mid- and low-end handset driver of our supply volume. So we will be actively responding on channels to Chinese local set makers so that we are able to continue our growth. Also internally, we will continue to cut our costs and also improve our profitability to further enhance the profit -- improve our productivity so that we are able to further improve the profitability of the polymer battery business.

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Operator [16]

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(foreign language) The last question will be presented by Mr. Jin Kang Dong from HMC Investment & Securities.

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Dong Jin Kang, HMC Investment Securities Co., Ltd., Research Division - Analyst [17]

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(foreign language) I have 2 questions regarding the Electronics Material business. First is, you mentioned that the revenue of the polarizer film business increased quite significantly. Can you give us a bit more detail, and also your outlook for 2019 of polarizer film. Second question is, can you also give us an update on M9 of the new platform for the OLED materials, the approval process, where is it? Also can you share with us any kind of launching new product for OLED material?

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Unidentified Company Representative, [18]

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(foreign language) Regarding your first question of our polarizer film business. Even though the target market, the end market has very -- was a very challenging market environment this year, we were able to do quite well in the polarizer film business. One, because we've increased quite significantly our supply to Chinese customers. Also, we have enhanced our manufacturing competitiveness. Also, we were able to develop a new product or mobile application at a right time, which has helped us increase our revenue quite significantly for polarizer film. And we are expecting that for the full year, we will be delivering positive result. For 2019 outlook, we are currently in the process of drawing out our business plan for next year. I think one given fact that we're assuming is that the Chinese panel makers will start mass construction of our 10.5D panels next year. And so to prepare for this internally, we are further enhancing our manufacturing efficiency, also, focusing on a supply to large TV, 65-inch plus. And also continue to increase our supplies for mobile applications which will further enhance the profitabilities of high-end or high-margin mobile applications will be another focus of our business next year. So based on this, we will focus our production and sales mainly on the more high-end, high-margin side of the product mix. Also, we will be developing new product next year in order to enhance both revenue and profitability versus this year.

(foreign language) To answer your question about the OLED -- the platform approval process for M9. As you know we are currently in the process of being evaluated for mass production for greenhouse and p-dopant. We're expecting to get the final approval closer to the end of this year. In terms of new material development, I think a lot of people in the market are excited about the possibility of a foldable phone. Foldable phones are being launched next year, so we are anticipating that by developing the SOCA, which is a film that's -- the T system that's transparent for foldable display. Also, we are preparing a new product that's used in the manufacturing process of OLED. It will be a protective firm. We are in the final stages of development, and we plan to have this product ready, so that we're able to supply next year to customers when they need them.

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Operator [19]

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(foreign language) And this concludes this conference call. If you any additional questions, please forward them to our IR team. Thank you.