Samsung SDI Co., Ltd.

[Interpreted] Welcome, everyone. Thank you for joining us today.

I'm VP Yoontae Kim of Samsung SDI's Business Management Office. First, we are joined by CFO, Jong Sung Kim; EVP Michael Son for Automotive and ESS Battery; EVP Hanjae Cho representing Small Battery; and VP Kyongho Yoon for Electronic Materials.

We will now begin the earnings call for the second quarter of 2024. First, let me enumerate our Q2 results and financial highlights.

Under the effect of slowed market demand incited by the EV adoption curve entering the chasm, Q2 revenue was KRW 4.5 trillion, down 13% quarter-over-quarter and 24% year-over-year. Operating profit went up 5% on quarter to KRW 280 billion but did 38% on year.

Speaking of performance by segment, the Battery business posted KRW 3.9 trillion in revenue, down 15% Q-o-Q and 27% Y-o-Y, impacted by slowing market demand and falling metal prices. The operating profit declined 3% versus last quarter and 46% versus last year to KRW 208 billion.

The Electronic Materials revenue was KRW 577 billion, which increased 5% quarterly and 1% yearly, centering on polarizer film earnings. The operating profit rose to KRW 72 billion, up 36% Q-o-Q and 16% Y-o-Y with profitability improving as well.

Pretax profit was KRW 377 billion with KRW 97 billion of nonoperating profit such as profit and loss under the equity method. The net profit was KRW 301 billion.

Quarter end total assets were KRW 37.8 trillion, up by KRW 2.3 trillion sequentially as the tangible assets grew on CapEx. The liabilities were KRW 16.6 trillion, up by KRW 1.8 trillion Q-o-Q.

The equity also rose KRW 585 billion on quarter to be KRW 21.2 trillion with the debt-to-equity ratio at 78%. Next, our ESG performance during the period.

On June 28, we released a Sustainability Report 2024 that details our ESG activities and outcomes. For the environmental factor, our commitment and aim for environment-friendly management with tasks like transitioning to renewable energy, cutting greenhouse gas emissions and building battery circular economy.

For the social factor, our effort in reinforcing supply chain sustainability, employee safety and health, product safety as well as ensuring diverse and inclusive global talent acquisition and work culture. For the governance factor, the Board of Directors' activities such as introduction of a senior independent director system along with ethics and compliance commitments and performance.

Also outlined in this report are Samsung SDI's efforts to secure super-gap technological competitiveness, which is the key element in our mid- to long-term growth and vision such as R&D, patenting and smart factory operations. This report is available on our official website and DART corporate filing system.

We'd like to ask for your continuous interest in this. Before moving on to business details, CFO Jong Sung Kim, will share the company's first half highlights and second half outlook of 2024.

[Interpreted] Good morning. I'm CFO Jong Sung Kim.

Let me start with our first half highlights. Samsung SDI's earnings fell short of the market expectations, mainly in EV battery due to continued market demand slowdown, which derailed more than anticipated.

Nonetheless, we maintained solid results by putting profitability as our priority in such challenging environment while preparing to accelerate growth once the market turns around. First, our preparation for commercializing also the state battery is well on course.

We began simple supply late last year, which this year expanded to 5 customers at their request. The preparation to launch mass production of LFP battery in 2026 is also going strong as we set up a dedicated pilot line.

This is to capture expanding demand in volume and entry-level EV markets, which are slated to grow at a high rate. We also further solidified our foothold in pouch battery market by bolstering development capability, which resulted in increasing our market share in key customers' flagship model.

As recently reported in media, we have been awarded a large-scale ESS project from one of the leading clean energy companies in the U.S. This reflects market recognition of our Samsung Battery Box competitiveness.

We are also engaging in additional talks on long-term supply of Samsung Battery Box, our total solution for utility application with key customers. Now turning to the upcoming half outlook.

The second half will likely see the repeat of the first half situation where the demand meets the initial forecast. We also expect the lagging demand to recover later than anticipated.

That being said, this is a temporary situation caused by a variety of factors such as EV market chasm, inventory adjustments at customers and macro uncertainties. We maintain our forecast that the EV industry's high growth will remain unaffected in the longer term.

Pressing through the difficulties in the second half, Samsung SDI will steadfastly pave the way for sustained future growth while improving business results. First, we'll maximize revenue to overcome demand slowing down.

For EV battery, we'll expand P6 sales in the U.S. market and secure new projects.

StarPlus Energy, our first joint venture in the United States, will push to start mass production ahead of schedule. For a small battery, we will expand sales of differentiated products such as high-power cylindrical battery and increase long-term agreements with key customers to ensure stable demand.

Second is driving cost innovation for higher profitability. Not only will we focus on improving manufacturing cost by maximizing productivity, but we'll also innovate our materials cost by optimizing product designs and execute efficiency investments by developing new tools.

Through such a holistic approach to cost innovation, we will continue improving our profitability. Lastly, we will secure market-leading future technologies.

In addition to our preparation for next-gen products like all solid state battery and 46-phi battery, we will develop affordable solutions such as NMX and LFP chemistries, building a pilot line for dry electrode processing, adding another global R&D base and securing top talent worldwide. Samsung SDI will further strengthen our fundamentals for qualitative and profitable growth so we can overcome this challenging business environment and leap one step further.

We ask for your continued support in our journey. Thank you.

[Interpreted] Now each business unit will present the details of the second quarter results and the second half outlook.

Good morning. This is Michael Son, Head of the Automotive and ESS Battery Strategic Marketing Office.

For EV battery, the earnings fell short of the market expectations due to sluggish demand, which led to a decline in sales and utilization rate. However, our efforts in preparing for sustained growth continued as we won new projects from key customers and engaged in detailed discussions with customers regarding our all solid state batteries supply.

As for ESS, both revenue and profit increased, thanks to robust sales of high-power UPS solution and Samsung Battery Box, which feature our trademark high energy and safety with data center boom propelled by the rise of AI on top of renewable energy boom. In the upcoming half, while remaining sluggish in the third quarter, EV batteries market demand will gradually recover in the fourth quarter.

We will expand P6 supply for the U.S. market while pushing forward mass production at StarPlus Energy as early as this year in order to improve results across the board in the second half.

ESS battery is anticipated to maintain an upward trend in both demand and sales in the next half as well with utility and UPS solutions playing the key roles. We will continue our external growth and improved profitability by securing new projects currently in talks with key customers in North America.

This is the end of automotive and ESS batteries presentation. Thank you.

Good morning. I am Hanjae Cho, Head of the Small Battery Strategic Marketing team.

The Q2 revenue decreased overall as the market demand slowed down for cylindrical battery despite revenue declining due to inventory adjustments at customers in power tool and mobility sectors. Profit went up, thanks to one-off compensation from long-term agreements.

For 46-phi battery, we secured a new customer for micro-mobility application with mass production planned to begin about a year earlier than scheduled around early 2025. Under the contracted market demand, pouch battery revenues decreased in the second half.

We expect the earnings to downward adjust to an extent, albeit briefly since Q2 earnings reflected one-off profit. We will focus on achieving stronger results than the first half by pursuing new business opportunities.

On cylindrical battery part, we'll push to expand sales in power tool and OPE market by preemptively developing high-power products. Leveraging differentiated products with long life and quick charging, we're looking to expand our business to commercial and special vehicle sectors.

With 46-phi battery, our focus will be on preparing mass production and acquiring projects that we are engaged to win within the year. For pouch battery, we'll expand sales towards new flagship models while duly preparing for timely supply for upcoming models planned early next year.

Thank you.

Good morning. I'm Kyongho Yoon, Head of Electronic Materials Strategic Marketing team.

The Q2 revenue and profit improved mainly on polarizer film and semiconductor materials. Both revenue and profit of polarizer film went up with solid sales of high-value large panel products, while our share increased at Taiwanese customers.

Semiconductor materials had better earnings with stronger sales at a major customer, along with our slurry product being adopted for our customers' new line. We minimized the revenue drop in OLED materials despite headwinds of flagship application absence supply for new IT application and maintaining our share in Chinese customers.

In the coming half, amid the forecast of demand fluctuations, we expect semiconductor and OLED materials to perform better than the last half. With memory market, we expect it to ease.

We'll work for better results in semiconductor materials through new supply of EUV materials and slurry while expanding sales at a key customer. Regarding OLED materials, we are looking to increase supply volume through adoption at key customers' new platform as well as Chinese customers' new products.

Polarizer film will be affected by a slowing demand due to customers' inventory buildup. This said, we expect the demand to take an upturn in Q4, where high season events await like Black Friday and China Double 11.

We'll continue our focus on increasing sales by expanding new business opportunities in high-functional products and water adhesive coated materials. Thank you.

[Interpreted] Now we will move on to the Q&A session, which will be provided in Korean followed by consecutive interpreting in English. If you have any questions, please follow the operator's guidance.

[Foreign Language] [Interpreted] I have 2 questions. The first question is about your competitive situation.

During the past several years, many new battery companies have entered the market in Europe and China. But it seems recently these companies are experiencing somewhat of difficulties.

For example, Northvolt had its BMW contract canceled. Do you think that the difficulty being faced by these newer entrants can provide benefits to SDI in, for example, larger opportunities to win new projects?

That's the first question. Second question is about your CapEx plan.

There is definitely a decrease in demand for EV, both in U.S. and European markets.

This has caused not only auto OEMs but also battery companies to scale down their CapEx plans. What about SDI's?

Does SDI have plans of adjusting its CapEx plans this year and going forward?

[Foreign Language] [Interpreted] This is Michael Son, Head of Strategic Marketing of the Auto and ESS BU from the competitive situation. According to recent media reports, it does seem that some new battery manufacturers are struggling with various issues as they enter mass production.

In terms of providing us with additional business opportunities, this has brought some positive effects on SDI. As you would know, production of automotive batteries requires not only sufficient financial resources necessary for the large-scale upfront CapEx investments but also the ability to produce tens of millions of batteries with consistent quality, which requires know-how and technology built over time.

Also, global SCM capabilities are critical, especially in order to navigate the various policy changes we see today. Today, also form factor and chemistry needs have become more diverse and specific to each customer or vehicle model, requiring battery manufacturers to further accelerate the pace of their technology development.

These are all challenges for a latecomer that does not have what it takes to deliver high-quality, safe batteries that OEMs want at mass production scale. And in light of this, the impact of new entrants is expected to remain limited even in the mid- to long term, and the existing top-tier players are likely to remain dominant in the battery market.

[Foreign Language] [Interpreted] This is Yoontae Kim of the Business Management Office. And I'll answer your second question about our CapEx plans.

As we mentioned during the last quarter's call, our investments are carried out with a long-term perspective, consistent with the inherent characteristics of the rechargeable battery business. And as the CFO mentioned during the presentation, we remain consistent about the growth potential of the business in the mid- to long term.

This year, key aspects of our investment program include, on one hand, investments to respond to already booked demand such as the expansion of our Hungary facility and the construction of the Stellantis joint venture plant 1 in the U.S. as well as, on the other hand, investments that are essential for the mid- to long-term growth such as the all -- solid batteries and the 46-phi.

There are no major changes to our investment plan, and investments executed in the first half have already more than doubled on a Y-o-Y basis. That said, near-term EV demand continues to remain weak, and changes have been detected in OEMs' electrification strategy.

And so we are also actively monitoring such market changes to make optimum investment decisions that are consistent with the market situation.

[Foreign Language] [Interpreted] I have 2 questions regarding your battery development. First question is about the battery development, an update of your battery development to address the mass and entry vehicle segment and also the plug-in hybrid.

I'm asking because in order to overcome the current chasm, many of the auto OEMs are putting more emphasis on the volume and entry segment vehicles and also plug-in hybrid vehicles, and that's why I would like to know a bit more about your development to address the segments. Second question is about your 46-phi development.

During the presentation, you mentioned that you would be bringing forward mass production to early 2025 next year. So in that context, can you give us some updates on the current development situation, your preparations for mass production and also the orders and contracts you are currently winning?

[Foreign Language] [Interpreted] This is Michael Son of the Auto and ESS BU. And I'll answer your first question about our preparations to capture the volume, entry segment and the PHEV.

Even though the recent chasm effect appears to highlight the growth of the volume and entry EV segments even more, actually, the demand for volume and entry segment EVs has always been expected to increase naturally as part of the wider penetration of EV overall, and that is why SDI has already been developing low-cost battery platforms using either NMX or LFP cathode material to capture this demand. Our current plan is to complete platform development, which is the stage for technology verification, during the second half of this year.

And currently, we are discussing concrete projects with customers and pursuing contract opportunities with the mass production target of 2026. Going forward, our focus will be on developing larger form factors, material optimization and developing differentiated manufacturing processes for better cost competitiveness, which will give us greater edge even in the volume and entry segment.

Now regarding the plug-in hybrid PHEV demand. In fact, we have been getting increasing requests from customers recently for new PHEV projects.

SDI has an excellent track record of supplying prismatic batteries with the high-power output needed for PHEVs, and we will focus on capturing market demand using our product competitiveness.

[Foreign Language] [Interpreted] This is Hanjae Cho of the Small Battery BU, and I'll answer your second question, which was about the 46-phi development update. Our 46-phi battery development and mass production preparations are underway smoothly.

And recently, we secured the first 46-phi project, which is an m-mobility project, and mass production is scheduled to start from early next year. Even though this is not an EV project built, it is significant in that our 46-phi mass production will be accelerated by more than 1 year versus our original plan and that SDI will be able to demonstrate even faster to the market our mass production ability and the product competitiveness of the 46-phi.

Meanwhile, we are currently engaged in an active discussion with major OEMs about projects and look forward to announcing tangible results in the near future even in the EV application, leveraging our edge in technology gained over time, including excellent energy density and fast charging.

[Foreign Language] [Interpreted] I have 2 questions. My first question is about the recent news that you've announced that you've won an ESS supply contract to a North American customer.

Do you think that going forward, there will be even more market share for you in the utility ESS segment? Can we look forward to that?

Second question is about the prismatic battery. Many OEMs have started to adopt more prismatic batteries on their vehicles, and some battery companies and cell companies are set to be considering the production of prismatic.

What do you think is the advantages of prismatic? And do you think this trend will have a positive impact on SDI?

[Foreign Language] [Interpreted] This is Michael Son, and I'll be answering the 2 questions that you gave us, the first question being whether we can look forward to increased market share for SDI in the utility ESS market. Recently, SDI has been winning ESS supply projects from various many major customers in the North American market.

In the past, cheaper Chinese ESS had been increasing market share in the North American market. But customers, we believe, have growing concerns about geopolitical risk, including large increase in U.S.

tariffs against Chinese batteries and about the overall product competitiveness itself. Meanwhile, SDI's utility ESS solution, which is the SBB has become more competitive with higher energy density, better safety and longer product life, which has increased business opportunities for us in the North American market.

Going forward, we will continue to focus on increasing market share by introducing higher-capacity SBB for utility applications using large-capacity modules and maximizing space utilization and also preparing high-quality LFP products, leveraging SDI's unique product competitiveness and aiming for mass production in 2026. At the same time, we're looking into various ways of expanding our global footprint, including the addition of new global production sites in order to expand our local supply capabilities.

I'll continue to answer your second question, which was about the advantages of the prismatic form factor and whether the current trend is likely to benefit -- is likely to have a positive effect on SDI's business. Well, regarding the advantages of the prismatic form factor, in addition to the well-known advantage, which is the ease of standardization, other advantages include safety and also pack design.

And these advantages have been attracting more attention recently. In terms of the safety advantage, EVs have been increasing battery content in order to cover longer ranges, which further raises the importance of battery safety.

Because prismatic batteries structurally have a large bottom surface area, a larger area would come into contact with the underlying cooling plate, which is optimal for preventing thermal propagation, which is the phenomenon when abnormal heating in one cell spread to adjacent cells. In terms of pack design, prismatic batteries can be used efficiently in the new pack design concepts such as cell-to-pack or cell-to-chassis, which are being studied to improve energy density and cost because in prismatic battery, cells can be loaded directly without additional safety devices.

Given these advantages, we expect the share of prismatic batteries to continue to increase within the EV market. And in fact, we have been receiving increasing requests from OEMs recently to work together on prismatic projects.

Prismatic form factors have been a key focus of SDI for a long time from the early days of our automotive battery business. SDI has, therefore, the extensive know-how in developing and mass-producing prismatic batteries and also has built a component SCM optimized for the prismatic form factor based on our close collaboration with various partners.

This is SDI's differentiating edge that new entrants cannot easily emulate, and we will leverage this unique competitive edge to actively capture market demand.

[Foreign Language] [Interpreted] I have 2 questions, and the 2 questions are about the implications of the recent surge in AI industry on SDI's businesses from 2 aspects. The first question is about the impact on your semiconductor material business.

Recently, there's been an increase in demand for HBM tied with the AI industry. Would this have -- do you think have some positive impact on your semiconductor material business?

Second question is the implications on your ESS business. There is expectations that power consumption and demand for data centers would also quite significantly increase tied to the growth of the AI industry.

In that context, are you seeing an increase in the sales or contracts of your ESS business?

[Foreign Language] [Interpreted] This is Kyongho Yoon of the Electronic Materials BU, and I'll answer your first question about our semiconductor material business. First of all, key customers increasing HBM production would lead to more advanced node production, which would increase wafer input and also material consumption.

Accordingly, demand for SDI's major products such as SOH and SOD is expected to increase, bringing positive impact on sales as well as profitability. Furthermore, growth of the market size for high-end AI semiconductors such as HBM is expected to lead to greater demand for related materials and new materials.

In terms of the process material, we are planning to complete qualification during Q4 of new EUV materials and slurry whose usage has been increasing with the increased advanced node production. For packaging material, we are currently developing high heat dissipation EMC products for graphic chips and preparing for customer qualification during Q3 to capture AI semiconductor-related material demand in the future.

Regarding the semiconductor material outlook for the second half of this year, even though some demand volatility may occur versus our original forecast in areas such as foundry, we will focus on maintaining the growth momentum overall in the second half with more customer diversification and also volume increases.

[Foreign Language] [Interpreted] To answer your second question, which was about the impact, the implications to our ESS business from the expected increase in power demand from -- driven by AI industry growth, according to market research firms, with the growth of the AI industry, total data center power consumption is expected to more than triple by 2030. And this is already a 51% upward adjusted figure than levels that were projected at the start of the year in order to account for the rapid increase in power used for AI.

In particular, the increased share of renewable power within the incremental power supply mix is expected to drive rapid increase in the demand for ESS, which is necessary to ensure stable power supply. Also, demand for UPS, which is an essential infrastructure for data centers, is also expected to surge.

Greater market demand has rapidly increased business opportunities for SDI, and we are using the SBB, which is our ESS solution for utilities, as well as our ultra-high-power UPS products to closely collaborate with the large-scale power companies that have the capabilities to take on large-scale projects targeting data centers. Currently, we have already booked orders to cover next year and a large part of the year after.

[Foreign Language] [Interpreted] Lastly, we will answer questions that we have received in advance via online. Starting from this quarter, in order to strengthen communication with retail investors and also to promote better understanding of the company, we have been receiving questions through our website in advance.

And many people have left a wide variety of questions. It seems most of them have been sufficiently covered during the Q&A session we just had.

And so we will answer one more question that addressed the topic that many other investors have also been interested in. The question is the following.

There have been media reports saying that SDI is leading the pack in all solid battery development, raising investors' expectations level. And is the development moving ahead as planned?

Have investment size and mass production timing been decided yet? And this question will be answered by Michael Son, the Head of Strategic Marketing of our Auto and ESS Battery division.

[Foreign Language] [Interpreted] SDI built a pilot line for the all solid batteries last year and have been producing samples. Customers have been showing growing interest.

And in Q2, we supplied samples to new global premium OEMs in addition to our existing customers at these new customers' request, and performance evaluation is currently underway. The current samples have been delivered -- have delivered performance in line with our development road map, and also customer feedback overall has been positive regarding the product characteristics and the performance of the sample supplied.

We are currently also finalizing our production process, which is one of the most critical aspects in mass production, and we're also finalizing our line investment plan. In the second half of this year, we plan to, therefore, finalize the production process and carry out some initial facility investments while also supplying the next stage samples with larger sizes and capacity.

This will provide an important basis for carrying out more detailed project discussions with customers such as specifications in the context of mass production.

[Foreign Language] [Interpreted] Thank you, VP Son, for that answer. And also thank you, everyone, who shared their valuable opinions with us.

We will be sure to refer them -- refer to them in our decision-making process. This completes our earnings call for second quarter 2024.

If you have any additional questions, please forward them to the IR team. Thank you.

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