On the 28th, Samsung SDI announced that it achieved sales of 3,251.4 billion won and operating profit of 2462 billion won in the fourth quarter. Compared to the same period of the previous year, sales increased by 4305 won (15.3%). Operating profit also increased by 2261 billion won (1124.9%). Compared to the previous quarter, sales increased by KRW 164.2 billion (5.3%), but operating profit decreased by KRW 21.2 billion (7.9%).
Annually, it has succeeded in achieving sales of over 10 trillion won for two consecutive years. Sales exceeded 10 trillion won for the first time in 2019, and recorded a record high of 11,294.8 billion won last year. The driving force was the expansion of battery supply due to the recovery of the electric vehicle (EV) market.
The following is the full text of the conference call that took place after the announcement of earnings. Participants are Jong-Sung Kim, Vice President of Management Support Office, Michael Son, Senior Vice President of Medium and Large Battery Strategic Marketing, Jae-Young Lee, Executive Vice President of Small Battery Strategic Marketing, Kwang-Sung Kim, Executive Vice President of Strategic Marketing in Electronic Materials Business Division, and Yun-Tae Kim, Executive Vice President of Management Support Office.
Director Kim Yun-tae
In the fourth quarter of 2020, sales increased by 3,251.4 billion won by 5% compared to the previous quarter and 15% compared to the same period last year. By business division, sales in the energy division were 2,629.2 billion won, mainly for automobiles. Electronic materials sales declined 12% QoQ to 6262 billion won due to seasonal effects. Operating profit for the fourth quarter was 2462 billion won, a slight decrease from the previous quarter, and an increase compared to the same period for the remaining years. The energy division’s operating profit fell by about 15% QoQ to KRW117 billion. In 4Q, the cause is still being investigated regarding the quality issue of automobile battery customers. Provisions were set that reflects certain sector risks. As a result, operating profit declined more than expected. Electronic materials operating profit was KRW 129.2 billion, the same as in the previous quarter. Pre-tax profit is 4293 billion won and net income is 3419 billion won.
In terms of financial status, the total assets at the end of 2020 are 21,534.2 billion won. Current assets increased by KRW 91.6 billion from the previous quarter, and non-current assets increased by KRW 6332 billion, reflecting gains on valuation of available-for-sale securities and equity method stocks. The debt was 8,1753 billion won, an increase of 3306 billion won from the previous quarter. Current liabilities increased by KRW 54.9 billion and non-current liabilities increased by KRW 277.5 billion. Capital increased by 394.2 billion won to 13,3589 billion won.
4Q earnings by division and outlook for 2021. Sales of mid- to large-sized batteries increased sharply compared to the same period last year and the previous quarter, mainly for automobile batteries. In the second half of the year, sales of automobile batteries increased sharply compared to the previous quarter due to eco-friendly policies such as an increase in subsidies for electric vehicles in Europe. Sales of ESS also increased mainly on large projects in the Americas. In the first quarter of 2021, sales are expected to decrease compared to the previous quarter. Auto battery sales are expected to decline due to seasonal off-peak season, and ESS sales will continue to expand for power in the Americas, but the overall decline is due to a decline in domestic sales.
The annual outlook is about 236GWh for automobile batteries, which is a significant growth compared to the previous year. Europe is expected to become the world’s largest demand for electric vehicles this year amid the expansion of eco-friendly and electric vehicles. In the US and Chinese markets, fuel economy regulations will be strengthened and mandatory production of electric vehicles will expand. ESS market demand is expected to grow by more than 50% year-on-year at about 30GWh. Overseas, demand for ESS is expected to increase due to eco-friendly policies such as reducing carbon emissions and subsidies related to renewable energy. However, the domestic market is expected to shrink YoY due to the sunset of REC weights.
Sales of small-sized batteries in the fourth quarter increased compared to the same period last year, but decreased compared to the previous quarter. Round battery sales decreased slightly due to the off-peak season. Pouch battery sales declined mainly in the existing flagship smartphones. In 1Q, sales are expected to increase slightly compared to the previous quarter. Sales of circular batteries are expected to increase due to increased demand for power tools and wireless earphones, and pouch batteries are expected to begin supplying new flagship smartphones.
Annually, the size of the small battery market is expected to increase by more than 10% compared to the previous year to 11.2 billion cells. In the non-IT market, demand for EV and micro mobility is expected to drive the growth of the prototype battery market. As the housing construction economy continues to recover and DIY increases, the demand for circular batteries for power tools is expected to rebound. In the IT market, demand for pouch batteries and coin cells is expected to increase as the 5G and foldable smartphone markets grow and the supply of wireless earphones and wearable devices expands.
In the case of the electronic materials division, sales declined in 4Q, but profitability remained. Sales and profitability decline in the first quarter of 2021. Polarizing film and OLED materials sales declined QoQ. We maintain sales of semiconductor materials at the level of the previous quarter. Electronic materials expanded annually to focus on OLEDs other than semiconductors. Increased customer wafer input demand Increased demand for processes such as SOH and SOD. As for display materials, demand for low-end smartphone OELD materials is expected to increase. Untact demand continues, and demand for polarizing films in the IT market such as large LCDs and monitors is also solid.
Q & A
Q. I hope this year’s outlook by division. Regarding provisions, did the customer’s quality issue have an effect on the progress of the cause investigation and the turnaround? Will car batteries turn to surplus next quarter?
A. The business environment in 2021 will continue. With Corona, it will continue to improve its top-line growth and profitability following last year. By business division, automobile battery sales grew sharply this year thanks to growing demand for electric vehicles. Expand supply and improve mix. The Zen 5, which is scheduled for mass production in the second half, will also be prepared and supplied stably. ESS is growing rapidly in the overseas electric power market. We will prepare performance and specialized cells based on stability to expand sales and profitability. Small-sized batteries are tools that maintain high market share, high power output, improved profitability, and electric vehicles. ESS and wearables prepare products for each market. Double-digit sales will grow and profitability will improve.
For electronic materials, we will maintain the utilization rate of polarizing films and expand sales of OLED and semiconductor materials. We will also secure new materials such as EUV and foldable. It has grown meaningfully in Corona. We will make this year a year of sustainable growth along with sales growth.
When it comes to setting provisions, the cause of the customer’s quality issue is not accurate. We are working with our customers to find out the cause. Currently, the quality verification process has been further strengthened and products are being supplied well without any disruption. Regarding 4Q results, it is expected to turn profitable for automobile batteries, but it did not meet the target due to quality-related costs. Excluding provisions, car battery profitability is obvious. Normally, 1Q is a quarter when demand is weak, so sales growth will remain YoY, but we expect profit and loss to be BEP.
Q. Investing in electric vehicle batteries is growing rapidly. Is there a lack of capacity for battery demand? What are your plans for overseas bases in the United States? Gen5 batteries are mass-produced from the second half of this year, are there any concerns about the initial yield? I am curious about the impact of improving profitability.
A. The electric vehicle market continued to grow due to the corona. Reinforced eco-friendly policy this year. The full-scale OEM electrification plan accelerates the market growth. Capa proceeds according to the customer mass production schedule. This year will be conducted on a similar scale as last year. As the proportion of European-type customer projects is high, we respond with a Hungary plant. New locations are also carefully reviewed.
Gen5 initial yield is currently being tested for product and preparing for mass production. From Gen 5, High Nickel NCA and new construction method are first applied. Materials, construction methods, and processes were verified in the pilot line and applied equally to new lines in Hungary. Stabilizes early. Zen 5 will reduce material costs by more than 20% by increasing energy density. It is expected to improve profitability by increasing volume and diversifying projects.
Q. Demand for cylindrical batteries is solid in small batteries. Do you have any plans to increase capacity? What is the outlook with overseas customers in TWS coin cell demand?
A. The cylindrical battery market grew by more than 10% compared to 2019 even in Corona 19 last year. This year, the market is expected to grow by 20% annually from 6 billion cells to 7.2 billion cells in major markets such as electric vehicle micro mobility, power tools, and vacuum cleaners. There was no new expansion of prototype batteries last year, but plans to expand some this year.
In the case of coin cell batteries, major smartphone manufacturers’ wireless product launches and market demand are also growing rapidly. The market is growing by 60% compared to last year. Mass production has been successful since the second half of last year, and this year it plans to supply it to new customers. We will expand supply through customer diversification and grow faster than the market.
Q. Semiconductor demand is expected to recover in the market. What is the impact of semiconductor materials? Pouch battery sales forecast for which smartphone shipments are being revised upward?
A. This year’s semiconductor market improvement will lead to a 7% increase in wafer input for major customers. Demand for process materials will also increase. The number of layers has increased due to the impact of refinement and the expansion of the foundry business is also positive for our materials business. In the mid to long term, solid demand for semiconductors will also increase steadily. We will continue to grow continuously.
In the case of pouch batteries, the smartphone market last year reversed by more than 10% due to Corona. This year, expansion of new technology adoption models such as 5G and foldable. Waiting demand for smartphone replacement is also expected to grow to a high single level. Pouch sales also increased year-on-year. In line with the release of high-end smartphones, it responds by developing high-capacity, high-speed charging products.
Q. In the electric vehicle market, LFP batteries are expanding mainly in the Chinese market. How will the automotive market be affected? ESS expected high growth this year. What is Samsung SDI’s competitiveness in a high-growth market and in that market?
A. It is true that some OEMs occupy a certain portion of their price competitiveness as they have introduced LFPs. Specifically, LFP has a lower energy density than NCA and NCM due to the inherent characteristics of the material, and is limitedly used in commercial vehicles such as buses and low-end models with a shorter mileage. The ternary system is a high-nickel cathode material and a silicon anode material, which increases energy density and decreases the LFP price gap due to lower cost. In the long term, as in the present, the main market will be ternary batteries. LFP share will be limited.
ESS is growing in the US-centered power market. In the United States, each state has policies to foster new and renewable energy, and the power generation market is rapidly growing as power generation costs have an economic advantage. It is responding to the market with products with energy density and cost competitiveness by strengthening partnerships with major power generation companies in the Americas.
Q. What issues have changed as LCD panel makers extend production like Samsung Display? Could you explain the facility investment and necessary funding plan?
A. Samsung Display extended its LCD panel production, and we diversified our customers, focusing on Chinese customers. The effect of SDC extension is not significant. It is difficult to expect slower LCD panel growth, pressure to cut prices, and the same growth as last year. We will maintain manufacturing competitiveness and MS and overcome the market environment such as polarizing films for large TVs.
Regarding facility investment, this year’s Hungarian automobile battery capacity expansion and cylindrical battery expansion will be the focus. The scale itself is expected to increase from last year. Fundamentally, financing should be able to respond within the company’s operating cash flow. There are no special plans for capital increase or sale of holdings.
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