Samsung SDI Co., Ltd.

[Interpreted] Good morning. I am Yoontae Kim, VP of the Business Management Office of Samsung SDI.

Thank you for joining the earnings call for the third quarter of 2024. First, I would like to introduce the management team joining today's call.

We are joined by CFO, Jong Sung Kim; EVP Michael Son for Automotive and ESS Battery; EVP Hanjae Cho, representing Small Battery; and EVP Sang-Kyun Kim for Electronic Materials. Before we begin, I would like to mention that Samsung SDI decided discontinue the polarizer film business on September 10 as disclosed on DART.

Please note that from Q3 results, the profit and loss from discontinued operations is separately stated, and we also separately categorize it as assets held for sale and liabilities held for sale in the financial statements. Let me enumerate our Q3 results and financial highlights.

Under the effect of slowed market demand, Q3 revenue was KRW 3.9 trillion, down 4% Q-on-Q and 30% Y-o-Y. Operating profit went down 46% on quarter and 72% in year to KRW 129 billion.

For reference, including the results of the polarizer film business, Q3 revenue was KRW 4.2 trillion, down 5% Q-o-Q and 29% Y-o-Y. Operating profit went down 50% on quarter and 72% on year to KRW 141 billion.

Speaking of performance by segment, the battery business posted KRW 3.6 trillion in revenue, down 5% Q-o-Q and 31% Y-o-Y, impacted by slowing market demand for small batteries and the base effect from one-off profit in the previous quarter. Its operating profit declined 69% versus last quarter and 85% versus last year to KRW 63.5 billion.

The Electronic Materials revenue was KRW 263 billion, which increased 24% quarterly and slightly increased yearly centering on OLED materials. The operating profit rose to KRW 66.4 billion, up 102% Q-on-Q and 24% Y-o-Y with profitability improving as well.

Pretax profit was KRW 266 billion with KRW 136 billion of nonprofiting -- nonoperating profit, such as profit and loss under the equity method. Profit from continuing operations before corporate tax was KRW 226 billion, and the net profit was KRW 230 billion, including profit from discontinued operations of KRW 3.6 billion from the polarizer film business as previously mentioned.

Quarter end total assets increased 3.62 -- KRW 362 billion to KRW 38.1 trillion sequentially as the tangible assets grew on CapEx. The liabilities were KRW 17.9 trillion (sic) [ KRW 17.009 trillion ], up by KRW 416 billion Q-o-Q.

The equity increased (sic) [ decreased ] KRW 54.4 billion on quarter to 21% -- KRW 21 trillion while the debt-to-equity ratio rose slightly to 80%. Next, I would like to share our ESG performance.

We are conducting the 8 environmental management strategic tasks under the guiding principle of ESG management lies at the core of our business strategy and offers a differentiating competitive edge. In July, we have started recycling the lithium retracted and recovered from cathode washing wastewater and established a local recycling system at the StarPlus Energy plant-Stellantis joint venture in the U.S.

In August, we also received carbon footprint certification for 2 battery products from Carbon Trust in the U.K., bringing the total number of certificated products to 4. Along with that, our efforts to manage ESG throughout the entire supply chain continues as we work with partners to monitor ESG risks and help them improve their ESG capabilities.

In recognition of our efforts, we received the highest rating of A+ by KCGS, Korea's leading ESG rating agency. We will continue to make every efforts in ESG management.

Now each business unit will present the details of the Q3 results and the Q4 outlook.

[Interpreted] Good morning. This is Michael Son, Head of the Automotive and ESS Battery Strategic Marketing team.

For EV battery in Q3, the revenue grew as P6 sales new EVs in the U.S. increased, but profitability weakened due to slower EU demand and FX effect.

Although the EV battery was affected by the short-term sluggish demand, we solidified our foundation for medium- to long-term growth by finalizing the joint venture contract with GM based on premium prismatic batteries and winning new orders for European and Asian major OEMs. Meanwhile, in terms of ESS, ESS revenue and profit improved as utility sales increased amid launch of the SBB 1.5, backed by growing power demand for AI as well as renewable power generation products in the U.S.

For mid- to large-sized battery in Q4, earnings is expected to improve around ESS. For EV battery, we see limited sales improvement due to sluggish growth in demand and customers' inventory destocking despite StarPlus Energy start-up production in the U.S.

and larger sales of high-value products for EU customer. As for ESS, as sales of utility SBB in the U.S.

continue to grow, we will drive earnings growth by expanding EU sales of utility in UPS in Q4 as we did in Q3. Thank you.

[Interpreted] Good morning. I'm Hanjae Cho, Head of the Small Battery Strategic Marketing team.

For cylindrical battery in Q3, despite power tools and m-mobility applications showing a slight uptick in their sales Q-o-Q, mainly to major customers, slow market recovery and inventory adjustment continued. The results weakened due to the base effect caused by the one-off profit realized in the previous quarter, low utilization led by declined cylindrical sales for EVs.

For pouch battery, the revenue increased with major customers' launch of new smartphones. As for cylindrical battery in Q4, challenging circumstances such as the slow recovery in demand are expected to continue.

However, we will expand sales of power tools to major customers in order to minimize the impact of weak demand in the short term. Also for mid- to long-term growth, we will develop new affordable products to address the mid- to low-end market and innovative products to the premium market.

And for our market expansion, in addition to pioneering a new market in Southeast and West Asia, where demand for E 2 wheeler is growing. We will also push forward for our entry into the E 4-wheeler market, which represents special-purpose 4-wheel vehicles.

The 46-phi battery is on track for mass production early next year with significant demand growth expected in the coming years. We're currently in discussions with major OEMs to secure EV orders and expect to see tangible results before year-end.

For pouch battery, we will maintain our momentum for earnings growth while duly preparing for upcoming flagship models planned in the fourth quarter. Thank you.

[Interpreted] Good morning. I am Sang-Kyun Kim, Head of the Electronic Materials business.

In Q3, OLED materials results improved significantly Q-o-Q and Y-o-Y due to increased demand driven by the launch of mobile flagships and increased sales from customers' inventory restocking. Semiconductor materials results remained on par with the previous quarter.

In Q4, customers' inventory destocking and low utilization rate is expected due to slow market demand. For semiconductor materials, we will sustain our market share with major customers and enter new orders for SOD and EMC to new customer.

For OLED materials, we will enter new platforms for materials such as G-Host in a timely manner in line with the launch of new products by key local and Chinese customers. Thank you.

[Interpreted] 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.

[Interpreted] My name is Won Suk Chung from iM Securities. Can you shed some light on the joint venture agreement with GM that was announced at the end of August?

In particular, how did GM, which had traditionally used pouches, decide to adopt the prismatic batteries? And are there any plans to expand into additional U.S.

locations? And do you also have any plans for capacity expansions as well?

[Interpreted] Thank you. My name is Jong Sung Kim.

I'm the CFO of the Business Management Office, and I'll be providing the answer for the first question. As for further clarification to the disclosure made on 28th August, the JV with GM will be located in New Carlisle, Indiana adjacent to the city of Kokomo, Indiana, where our Stellantis JV, StarPlus Energy, or SPE, is located and will produce and supply our prismatic premium product, P6, to GM for an 8-year period from 2027 to 2034.

The production capacity will be 27 gigawatt hour per year with the possibility of expansion to 36 gigawatt hour through [ consultation ] between the parties. Regarding GM's decision to adopt the prismatic cells, we believe that our high energy density P6 prismatic battery was able to meet the particularly high demand for longer driving range in America where there is a growing focus on EV safety recently.

Both companies plan to operate the joint venture by leveraging our manufacturing technology together with GM's strength in local operations, supported by JD's advantages of stable supply and financing. We also believe that both sides through the JV will enjoy various benefits of manufacturing locally in the U.S.

Regarding further expansion within the U.S., we are exploring various options, including JVs with other OEMs or stand-alone plants. This will be pursued in line with the company's mid- to long-term growth strategy, which takes into account not only automotive batteries, but also ESS and other businesses.

Thank you.

[Interpreted] My name is Cho Woo-Hyung from HSBC Securities. I actually have 2 questions.

One question is related to the EV batteries for the North American market and the other for the European market. With the U.S.

potential election just around the corner, it seems that there is increased uncertainty related to EV policies. So I'm wondering, as you've mentioned, that SPE will be operational ahead of schedule in Q4.

This was mentioned during the presentation. So what are the projected time lines for each production line going forward?

Or so what are the estimated AMPC figures for Q4 this year and for 2025 after operations begin? And as for the European market, it seems that there's going to be accelerated electrification taking place on the European continent.

So with the European EV demand, which accounts for a large proportion of SDI's automotive battery sales slowing down this year, what is SDI's outlook for European market demand and sales next year?

[Interpreted] I am EVP Michael Son of the Automotive and ESS Battery business, and I'll be providing you the answers to your 2 questions. And your first question is related to the early operation of SPE and as well as the schedules for the lines as well as estimated AMPC figure for the year 2025.

Well, SPE will be our first U.S. battery cell production site with the first line coming online ahead of schedule in December this year, supplying P6-based cells and modules.

The remaining 3 lines are planned to start up sequentially every quarter starting in Q1 of next year, with a combined capacity of 33 gigawatt hour per year. We plan to apply the know-hows we have accumulated from operating the Hungarian plant to SPE to shorten the ramp-up period to 1 to 2 months to ensure optimal yields in a short period of time and respond to customer demand in a timely manner.

Regarding the AMPC amount outlook for SPE, although we expect only marginal benefit in Q4 this year as it will be the early stage of production, next year, we expect to be able to run SPE's lines at full capacity based on customers' aggressive EV strategies, including the launch of various new vehicles from Stellantis, which will result in a meaningful AMPC. And the resulting AMPC will be used to fund the joint venture's operations and future facility investments.

Let me continue to provide you with the answer to your second question. And your second question was related to the anticipated EV demand in Europe as well as SDI's sales outlook.

The European EV market is currently down around 2% year-to-date in August with the economic recession and the removal of subsidies in key countries contributing to sluggish demand compared to the rest of the world. However, thanks to a number of changing factors, European demand is expected to improve next year, and we expect our sales to increase as well.

First, starting next year, OEMs will need to produce more EVs than they did this year to meet tighter regulations that will require a 15% reduction in average CO2 emissions from vehicles sold in Europe compared to 2021, and many market research firms expect European EV demand to grow by at least 25% in 2025 compared to this year. In light of reinforced regulations, European countries are demonstrating a renewed commitment to providing policy support for EVs.

In particular, Germany, the largest market in Europe, is working to expand tax incentives and corporate vehicle tax discounts for EVs in corporate fleets, which make up nearly 60% of vehicle sales in Germany. It is worth noting that the upper price limit for electric vehicles eligible for corporate vehicle tax discount is expected to increase from EUR 70,000 to EUR 95,000.

This is anticipated to have a positive impact on sales of premium electric vehicles equipped with our batteries. In addition, with the recent confirmation of the EU's imposition of additional tariffs on Chinese EVs, the proportion of sales by local OEMs in Europe is expected to increase in the future, and demand for our products is expected to increase accordingly.

While we are currently working on our business plan for next year and it is too early to comment specifically on our sales outlook, we expect our battery sales to begin to improve from this year as key policy changes mentioned above drive demand for EVs in Europe.

[Interpreted] I actually have 2 questions. And the first question is related to the ESS market, and the second question is related to the Electronic Materials business.

And my first question is that the ESS business performance, particularly in the U.S. market, has recently shown a significant improvement.

So what are the main drivers behind the recent demand increase and outlook? And also what is the projected profitability for the ESS business as a result?

And my second question is related to the polarizer film business. So what is your strategy for the Electronic Materials business now that you have decided for the sale of the polarizer film business?

[Interpreted] Once again, this is EVP Michael Son of the Automotive and ESS Battery business. I'll be providing the answer to the first question that you have asked.

And those are questions related to the main drivers behind the recent demand increase and outlook and also about the projected profitability for the ESS business. The increase in demand for ESS is set to become a long-term trend as electricity demand rises in line with the growth of the AI industry and the expansion of renewable power generation particularly in the U.S.

market. The demand for electricity for AI in the U.S.

market is forecast to grow by approximately 6 folds from 16 terawatt hour in 2024 to 97 terawatt hour in 2030. This growth is expected to be driven by the increasing promotion of climate commitments such as carbon neutrality by major tech companies.

As a result, the demand for ESS in the U.S. is anticipated to expand considerably from 41 gigawatt hour in 2024 to 90 gigawatt hour in 2030, representing a notable increase from last year's forecast.

In this context, we have launched SBB or Samsung Battery Box, a solution for power with increased energy density and safety, which has increased product competitiveness and is rapidly improving sales and profitability. Following sales growth of more than 20% Q-o-Q in Q3, we expect further sales growth in Q4 and continued improvement in profitability.

On the other hand, ESS customer demand has historically been dominated by short-term projects with short lead times from order to mass production but in recent years, the size of individual projects has increased and long-term supply projects are on the rise. In the midst of this, we have secured stable orders for next year's deliveries based on our long-term partnerships with 3 major U.S.

utilities, and we expect our earnings to continue to grow in the future. Thank you.

[Interpreted] This is EVP Sang-Kyun Kim of the Electronic Materials business, and I'll be providing the answer to the second question. And your second question was related to our strategy for the Electronic Materials business after the sale of the polarizer film business.

Well, going forward, the Electronic Materials business plans to secure future growth engines by developing new materials through active R&D investments mainly in semiconductor materials, OLED materials and battery materials. In terms of major materials, semiconductor market is expected to grow at a CAGR of 8%, mainly in patterning materials.

As fine patterning process increases with the expansion of AI-based technologies. We plan to secure patterning materials for new nano process, including SOH, slurry, EUV, inorganic PR, et cetera, to achieve a first in position with major clients' next-generation tech nodes.

Based on this foundation, we will also work to expand entry into other external customers. The OLED or O-L-E-D market is expanding into IT devices such as tablets and monitors.

With the growth of foldable display market, the material demand is expected to see a steady annual growth rate of around 6%. In addition to our existing green host, we plan to secure new deposition materials like blue host and next-generation color conversion materials for OLED, thereby increasing our share with major customers.

We plan to increase sales of FOCA or F-O-C-A for foldables through expansion of our customer base. In addition to Battery Materials business will be fostered in line with the battery business road map by promoting the black boxing of core technologies such as additives for electrode and materials for all solid-state batteries in addition to existing separator materials.

While the divestment of the polarizer film business will reduce sales volume in the short term, we plan to use this as an opportunity to realign our portfolio around high-value materials business and continue our profitable qualitative growth. Thank you very much.

[Interpreted] My name is Sang Uk Kim from UBS, and I have 2 questions. And my first question is related to ESS.

The first question is that the introduction of LFP batteries seem to be necessary to further enhance ESS competitiveness in the United States, where demand is growing rapidly. So what is the current progress on LFP?

And what are your plans for capacity expansion and overseas locations? And as for my second question, with the ongoing slowdown in business results, as sluggish demand for cylindrical batteries continues, so when do you expect demand to recover for SDI?

And what is your medium and -- to long-term strategy?

[Interpreted] This is Michael Son, the EVP for the Automotive and ESS Battery business, and I'll be providing you the answer about the LFP batteries for ESS. As you have mentioned, we are -- or have been preparing for the introduction of LFP batteries to expand the growth of the ESS business and have recently completed the verification of large-sized LFP cells, confirmed the product and plant concept, and last month started the construction of a mother line at the Ulsan plant with the aim of mass production and supply to global projects in 2026.

Our LFP batteries will leverage the benefits of the prismatic form factor to enable the industry's largest cell size for cost competitiveness while applying differentiated manufacturing technologies and cell design to achieve the highest energy density and longest life characteristics. And regarding capacity plans, we are responding to the recent increase in demand by producing NCA chemistry-based SBB products in Ulsan, Korea and Xi'an, China and are planning to expand LFP capacity in the mid- to long term and are also considering setting up overseas LFP production bases.

For our overseas LFP production base, we plan to complete validation and initial mass production first at the domestic mother line. Given the continuously expanding market size and the active support policies for local production, we are prioritizing the United States as the initial location.

Moving forward, we will proceed to enter the market at the appropriate time considering the future market demand and policy changes.

[Interpreted] My name is Hanjae Cho. I'm responsible for the Small Battery business, and I will be providing the answer related to the cylindrical batteries.

So with the ongoing slowdown, as you said, for the demand for the cylindrical batteries, my answer -- you had some questions related to that. So our cylindrical battery business is slowing down, as you said -- as demand for power tools and e-bikes has slowed -- been slow to recover after a sharp decline due to post-pandemic recession and high interest rates and also sales for EV applications, which have been growing as strongly in recent years, have also declined significantly.

Despite a rate cut in September, real mortgage rates remain high and U.S. housing market indicators remain weak.

Many research firms forecast a full recovery in demand for housing-sensitive power tools only in the second half of 2025. Additionally, e-bikes are expected to be affected by the off season in the second half of the year, and EV demand will take some time to recover.

In the short term, we will strive to minimize the impact of the slowdown in demand by strengthening cooperation with major customers in power tools and entering into new micro-mobility markets while thoroughly preparing to respond to demand recovery for cylindrical batteries in the medium to long term. Our first objective is to maintain our technology leadership in cylindrical batteries.

To this end, we will launch cost competitive products for mid- to low-end markets for power tools and micro mobility as well as innovative products for the premium market. We will also look for new markets for E 2 wheelers like India and enter into E 4-wheeler market, which is a market for specialized 4-wheeled vehicles used in construction, agricultural sectors and so on.

Regarding the new 46-phi form factor, we anticipate commencing mass production in the first quarter of next year and actively pursuing orders for EV application within the year to secure new mid- to long-term growth engines. Thank you.

[Interpreted] So now we would like to answer a question that we have received online in advance. Since our last earnings call, investors have been able to submit questions in advance via our website.

And this quarter, we received a variety of questions, many of which were not addressed during the Q&A session, so we'll close today's earnings call with an additional response to one issue of particular interest to our shareholders.

[Interpreted] This is Michael Son of the Automotive and ESS business -- Battery business, and I will be providing the answer to our retail investor. EV demand growth has slowed over the past year or so, impacting the performance of the rechargeable battery industry.

However, we believe that the medium- to long-term growth of the EV market will remain unchanged, driven by continued agreement policies in major countries, introduction of a range of EVs with improved performance and competitive pricing and the impact of expanding charging infrastructure. Most market research firms maintain a 15% CAGR growth forecast through 2030 and most of the major OEMs that we work with are launching new EV projects in various segments to increase electrification rates from 10% this year to 30% to 40% in the next 3 years.

In response, we are actively developing technologies and winning orders in line with these market needs. In terms of new orders, our business opportunities are expanding as OEMs are actively considering the adoption of prismatic batteries for safety, energy density and fast charging capabilities.

In addition to the JV with GM, the largest automotive company in the U.S., which you may already know, we have recently reached some tangible results on new orders for European and Asian customers. We are also in discussion with a number of customers for ultra-premium all solid-state batteries, volume segment focused NMX and LFP, and a new form factor, 46-phi batteries.

We will strive for mid- to long-term growth and profitability by securing continuous high-quality orders, leveraging industry-leading technology for competitiveness and the highest quality standards. Thank you.

[Interpreted] thank you very much for your response. We appreciate our investors' feedback, and we will take the feedback into account when we make key management decisions.

So this concludes our Q3 2024 earnings call. If you have any further questions, please contact our IR team.

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