Good morning. I'm Yoon Tae Kim, Vice President of the Business Management Office at Samsung SDI. First, I'd like to introduce our management team attending today's conference call. Head of the Business Management Office, Jong Sung Kim. Head of the Automotive and ESS Battery Strategic Marketing team, Michael Son. Head of the Small Battery Strategic Marketing team, JaeYoung Lee. Head of Electronic Materials Strategic Marketing team, Kyungho Yoon, are with us this morning. We will now begin the earnings call of the third quarter 2022. Let us start with the third quarter results. In the third quarter, despite global economic slowdown and tough business environment, both revenue and operating profit went up QoQ sharply, recording the highest quarterly result.
The third quarter revenue was KRW 5,368,000,000,000 , up by 13% QoQ and 56% YoY, which marked again as a new record high quarterly sales. Operating profit also hit a new record high number of KRW 565.9 billion, up 32% QoQ and 52% YoY. By business division, the energy business revenue recorded KRW 4,834,000,000,000 , up 19% QoQ and 76% YoY. In particular, the AEB division achieved more than KRW 1 trillion in monthly revenue for the first time in September. Meanwhile, the operating profit recorded KRW 484.8 billion, up 98% and 140% YoY. As the small battery division remains highly profitable and the AEB division's profit improved sharply, the profit rate of the overall energy business recorded a double-digit number.
Notably, the revenue from EV batteries, including both prismatics and cylindricals, is on the rise on a quarterly basis. In this quarter, such revenue accounted for more than 50% of the total. Further, backed by stable demand, the energy business is likely to have a positive impact on SDI's mid and long-term growth prospect. Electronic Materials division's revenues stood at KRW 534 billion, down 20% QoQ and 24% YoY due to weak end product demand. Operating profits stood at KRW 81.1 million, down 56% QoQ and 53% YoY. Pre-tax profit, including equity method income of KRW 300.5 billion, recorded KRW 866.4 billion, and net profit stood at KRW 638.3 billion.
In line with increased tangible assets driven by CapEx and accounts receivable, assets recorded KRW 30,367,400,000,000 as of the end of the third quarter, up by KRW 1,525,500,000,000 QoQ. Mainly due to increased accounts payable in headquarters and overseas subsidiaries, liabilities recorded KRW 13,460,300,000,000 , up by KRW 666.5 billion QoQ. Next, I'd like to briefly introduce our ESG management activities made during the third quarter. SDI recognizes ESG management as a key strategies for business growth, we are actively engaged in such activities. Last September, SDI joined the RE100 initiative, which aims to replace 100% of used electricity with renewable energy by 2050.
Early October, we declared an environmentally friendly management, which set out eight strategic tasks under two themes of climate change response and resource circulation. Beyond these eight strategic tasks, SDI will pursue ESG management further by fostering and developing additional activities. Next is the third quarter result and the first quarter outlook by each business division.
Morning, I'm Michael Son, Head of the Automotive and ESS Battery Strategic Marketing teams. In the third quarter, the revenue for our Automotive and ESS Battery business increased sharply, both QoQ and YoY, hitting the record high quarterly result with improved profitability. For automotive battery, despite concerns over sluggish EV demand in general, our sales remained strong, mainly driven by relatively stable demand for premium EVs. As a result, revenue and profitability improved considerably around high-value products such as Gen. 5 batteries.
For ESS battery, profitability improved as increased prices of raw materials were reflected in battery prices, and sales expanded for utility ESS in Europe. In the fourth quarter, we expect the demand both for EV and ESS to increase due to the effect of high season. Our EV battery sales are expected to grow steadily, with major OEMs increasing vehicle production as chip shortages abate. New vehicle models equipped with Gen. 5 batteries are scheduled to be launched. At the same time, we are committed to achieving tangible results based on new platforms for various form factors, including prismatic and 46-phi batteries. We expect the demand for ESS to increase along with highly volatile oil prices and the promotion of environmentally friendly policies. Revenue increase is expected in the fourth quarter as well, with sales boost for the utility ESS in the U.S.
This is the end of Automotive and ESS division's presentation. Thank you.
I'm JaeYoung Lee, Head of the Small Battery Strategic Marketing team. Let me start with the business performance of small-sized battery division. In the third quarter, sales of high value products such as high power batteries for power tools and high energy batteries for EV increased, bringing up revenue QoQ and YoY and operating profit at the same time. The demand for power tool batteries turned sluggish, but the revenue and profit improved mainly around SDI's competitive edge in power, high power battery. Increased revenue and profit of EV battery greatly contributed to profit of small-sized battery business. In the fourth quarter, we expect sales increase mainly around EV battery. To be specific, we expect battery sales for commercial vehicles to increase and the customer portfolio to be diversified.
Meanwhile, based on long-term agreement with our strategic partners, the impact of weak demand is expected to be minimized. In terms of batteries for IT applications, we are preparing to start battery supply for new flagship smartphones of our major customers. Thank you.
Morning, I'm Kyungho Yoon, Head of Electronic Materials Strategic Marketing team. Business performance of Electronic Materials division is as follows. In the third quarter, due to weak demand, we saw a decline in revenue and profit. The OLED revenue increased as we started sales for new platforms. The semiconductor revenue was on par with the previous quarter. Revenue for polarizer film declined QoQ due to weak demand, but we have been pursuing diversification of customer portfolio in order to minimize such impact. In the fourth quarter, sales expansion is expected mainly for display materials.
For OLED materials, sales are expected to grow with mass production initiated for new platform. In terms of semiconductor materials, we expect stable revenue with capacity increase of major customers. Finally, polarizer films revenue is expected to recover amid alleviation of inventory overload and diversification of customer portfolio and applications. This is the end of my presentation. Thank you.
The first question will be presented by Sung-ryul Kwon from DB Financial Investment.
Yeah.
First of all, I would like to congratulate on your excellent earnings. I have two questions. The first question relates to your earnings. Following the second quarter and the third quarter as well, earnings have exceeded market expectations. From the company's point of view, what was the key background or the key factors leading to such an uptrend in profitability, and do you believe such an uptrend is sustainable going forward? My second question has to do with the U.S. IRA. There are certain projections about how the IRA will be impacting the domestic companies. Does the SDI share such views? Also there are several conditions to be met in order to receive the tax credits under the IRA. Does the SDI believe that you'll be able to meet such conditions?
Yeah.
Hello, I'm Michael Son. I'm the Vice President. Let me take the first question. As is well noted, we view our industry as essentially a long-term acquisition business and a technology-driven business. In keeping with such characteristics, we are developing and driving strategies under the three key management policies of namely super gap technological competitiveness, superior quality and qualitative growth that prioritizes profitability. In particular, under the policy of qualitative growth that prioritizes profitability, we have expanded the sales of high value-added products such as Gen. 5 batteries, high-powered battery cells for power tools, UPS and residential use, ESS and polarizers for the premium TV sector. We're also engaged in preemptive sales and marketing activities to secure profitability on the one hand, and also to allow our customers to adopt better products by offering upgraded products to customers using older generation batteries.
In addition, the fluctuations in the raw materials prices have been fully reflected in the sales price, so as to minimize any risk arising from changes in the raw materials price in the future. Going forward, based on the business strategy outlined just now, the company's management and employees will work towards securing sustained competitiveness against changes in the external environment, and will ensure that we continue to deliver strong and stable performance. The second question was on the SDI's views on the U.S. IRA and also whether we will be able to meet the conditions related to the tax credits under the IRA. Let me get this question as well. I am, as has been introduced, our Vice President, Michael Son, in charge of EV strategies.
Our view is that as the IRA represents an acceleration of the U.S. eco-friendly policies, we expect the IRA to have significant positive impact. Among the conditions imposed, for the EV tax credit to be offered to customers buying clean vehicles, we expect to fulfill the critical mineral requirement, through using metals produced in countries with an FTA with the U.S. starting from 2023. Starting from 2025 onward with the use of minerals that are sourced from foreign entities of concern being banned, we're making preparations so that we can qualify through diversifying our suppliers phase. Although the conditions for tax credits related to electronic materials is a challenge to us at present, starting from 2025, when we begin local production through cooperation with key partners, we expect to be able to fulfill this requirement as well.
Meanwhile, for the tax credits to be made available to local battery producers, it appears we'll qualify for the tax credits at the point of local production. As of yet, there is some remaining ambiguity in terms of the legal interpretation of the text, and we need to see when things become more concrete. Going forward, we will be making thorough preparations to turn this into a good opportunity for driving further growth of the U.S. business.
네, 다음 질문 받도록 하겠습니다.
다음으로 질문해 주실 분은 J.P. Morgan의 권재현 님입니다.
The next question will be presented by Jay Kwon from J.P. Morgan.
질문 기회 주셔서 감사합니다. 두 가지 질문이 있습니다. 첫 번째는 소형 전지 쪽인데, 최근 미국 주택 경기 시장이 침체되면서 전동공구 수요가 좀 줄는 그런 전망 나오면서 내년까지 수요 영향이 이어질 거라는 우려가 좀 있는데, 이런 상황에서 삼성 SDI의 전동공구용 원형 전지 판매 전략에 대해서 궁금합니다. 그리고 두 번째 질문은, 미국 IRA 이후에 미주 생산 거점 확보가 더 중요해지고 있는데, 최근에 완성차 업체들과의 협력을 논의할 시에 어떤 변화가 있으셨는지 말씀 부탁드립니다. 그리고 이에 따라서 동사의 미주 시장 진출 계획에도 변화가 있는지 같이 말씀 주시면 감사드리겠습니다.
Thank you very much for giving me this opportunity to ask my questions. I have two questions as well. My first question has to do with the small batteries for power tools. Because of the cooling housing market, there are concerns that the slowdown in demand for power tools will continue into the next year. What is SDI sales strategies for the power tools? That is my first question. My second question has to do with the U.S. IRA. Because in relation to the U.S. IRA, has there been any changes in your consultations with the OEM companies? And as a result, is there any changes in SDI's plans to enter into the U.S.?
첫 번째 질문, 경기 침체로 인한 전동공구 수요 둔화 및 당사의 전동공구 관련 판매 전략에 대해서는 제가 말씀드리겠습니다. 저는 소형전지사업부 이재영 부사장입니다. 글로벌 금리 인상으로 주택시장 경기가 둔화되면서 하반기부터 전동공구 수요 역시 영향을 받고 있는데 내년 초까지는 전반적인 시장 상황이 쉽지 않을 것으로 보고 있습니다. 그러나 당사는 기술적 차별화가 가능한 초고출력 전지 판매를 주력으로 하고 있어 삼분기에도 수요 둔화의 영향을 덜 받으며 전분기 대비 매출 성장과 수익성 제고가 가능했습니다. 사분기에도 전동공구 메이저 고객들과 장기 공급 계약을 기반으로 수요 감소 영향의 최소화를 추진하고 있고, 내년 확판을 위해 전문가용 코디드 전동공구 대체 및 잔디깎이 등 고출력 OPE 신규 과제 진입을 적극적으로 추진하고 있습니다.
The first question was on the concerns about the slowdown in demand for power tools owing to the economic recession, and whether this will continue into next year, and what is SDI sales strategy in this regard? I am Lee, JaeYoung , Vice President in charge of the small size battery division. Let me take this question. Because of the global interest rate hikes, the housing market is starting to cool, and demand in the second half for power tools is also impacted. As the global economic growth continues stalling, inventory stock of the power tools is also growing, and we expect that till early next year the overall market situation will be quite tough. However, our company's flagship product is high power battery cells, which are technologically differentiated.
Thus, in Q3 as well, we were less impacted, and it was possible for us to further improve sales growth and profitability over the previous quarter. In Q4 as well, based on the long term supply agreement that we have with major power tool makers, we intend to minimize the impact of declining demand. We are at present actively pursuing new product entry of high power OPEs, such as corded power tools for professionals and lawnmowers to prepare for expanded sales next year.
두 번째 주신 질문은 미국의 IRA 발표 이후에 완성차 업체들하고의 협의에 변화가 있는지, 또 당사의 미주 진출 계획에 어떤 변화가 있는지, 이런 부분에 대한 질문이셨는데요. 이건 제가 답변드리겠습니다. 저는 손미카엘 부사장입니다. IRA 이전에도 USMCA 등 미국에서의 현지 생산이 요구되는 정책 영향으로 인해서 주요 완성차 업체들과 미주 현지 생산에 대한 협의를 지속해 왔는데, IRA 발표 이후에는 더욱 다양하고 큰 규모의 프로젝트들에 대해서 논의가 보다 활발하게 진행되고 있습니다. 특히 당사의 고에너지 밀도 전지는 긴 주행거리의 차량을 선호하는 미주 소비자들의 성향과 부합해서 수주 과정에서 큰 강점으로 작용할 수 있을 것으로 기대하고 있으며, 이를 통해서 IRA 발표 후 활발해진 고객과의 협의를 통해 좋은 성과를 낼 수 있도록 노력하겠습니다. 미주 진출 계획은 Stellantis joint venture 외에 아직 확정된 것은 없지만, IRA의 구체화된 실행 내용을 확인하면서 당사 글로벌 사업 전략을 고려하여 결정해 나가도록 하겠습니다. 이상입니다.
The second question was in relation to the U.S. IRA, whether there's been any change in our consultations with the OEMs, and as a result, whether this has brought any changes in the SDI's plans to enter the U.S. region. I'll take this question. I'm Vice President Michael Son. Even before the IRA, due to the government policies such as USMCA that call for local production in the U.S., we have continued to engage in discussions with major OEMs regarding local production projects. After the IRA announcement, such discussions are being pursued more proactively for more diverse and larger projects. Especially, our company's strength in high energy density battery cells is well aligned with the preference of U.S. customers for longer driving range, and we believe this will work greatly to our advantage in the course of winning orders.
We will do our best to produce fruitful results from our ongoing consultations with the customers. As for plans to enter the U.S., aside from the Stellantis joint venture, nothing has been finalized yet, and after confirming the concrete details of the IRA, we will make the relevant decisions in consideration of the company's global hub operation strategy.
The next question will be presented by Won-seok Jung from Hi Investment & Securities.
I have two questions. Due to a decline in the sales of polarizers on the back of falling downstream demand, there is much concern over the earnings of the electronic material division. Like, also there are concerns about the sales of the polarizers going into the fourth quarter as well. You have noted during your presentation that the inventory adjustment is almost complete.
Can you share your outlook of whether you believe that recovery in the earnings of the polarizers in sales can be possible in the fourth quarter? That is my first question. My second question is on the European energy price surges. There are concerns of sluggish demand on the back of sharp increases in Europe's energy prices and the rising inflation as well, and the impact it will have on the demand for EVs in Europe. What is the company's outlook for EV demand in Europe and the sales of SDI batteries going forward, especially the AEB sector?
I am Yoon Kyungho from the Electronic Materials Division.
Let me take the first questions on how due to the decline in the sales of polarizers on the back of falling downstream demand, there's concern about the earnings of the electronic material division, and that, and whether we believe it will be possible to stage a recovery of earnings during the fourth quarter. In the first half of the year, because of concerns over the supply chain risk, TV makers have secured for themselves safety stock. Since then, due to the slowdown in demand for TV, panel stock adjustment had taken place, and our company's Q3 sales of polarizers also experienced reverse growth over the previous quarter.
However, the stock adjustment of the TV makers have progressed to a certain extent, and in Q4, advanced demand for the 2023 new premium model is to be launched, and the supply to new customers will enable a recovery of both sales and profitability from the previous quarter. Also, next year, we intend to enter the OLED polarizer market and complete the approval process for the new polarizer for premium TV as well to drive sales expansion. Meanwhile, the OLED materials is expected to see a substantial jump in sales growth due to the Q4 high season effect. For the semiconductor material, we foresee solid sales for Q4 as well. The electronic material division overall is expected to realize improved sales and profits over the previous quarter. Going forward, we at Samsung SDI will continue to make the necessary efforts to maintain sustained growth and high profitability.
The second question was on concerns over sluggish demand in Europe on the back of sharp increases in energy prices and rising inflation and the company's outlook for EV demand in Europe and sales of our batteries. I am Michael Son, Vice President, and let me get this question. Owing to supply chain issues such as semiconductor chip shortage and disruptions of wire harness supply caused by the war in Ukraine, slowdown of demand in the overall European automotive market is underway, but the growth in EV market remains strong. In particular, premium EVs, which take up a substantial share of SDI sales, is witnessing robust sales, which allow the company to expand EV battery sales led by high value products such as Gen 5.
In Q4, we expect supply chain pressures are faced by the OEMs to get better and coupled with the surge in demand as we enter the industry's traditional high season, we expect the EV battery demand to continue to increase. Against such a backdrop, our outlook is that the sales to key customers will grow, and we expect Gen 5 to see expanded sales due to the launch of new models. However, as the global economic recession is still underway, we will continue to closely monitor the economic situation through careful sensing of the downstream conditions as well as customer demand.
The next question will be presented by Sanguk Kim from Credit Suisse.
Thank you very much for giving me this opportunity to ask my question. I have two questions. It seems that within the small sized battery segment, the share of EV batteries have grown significantly. Do you believe such a trend will continue into next year as well? What kind of impact do you expect that this growing share of EV batteries will have on the profitability of the small battery business? That is my first question. My second question has to do with the rising electricity cost in Europe. As you have noted, due to the protracted war in Ukraine, natural gas prices have really surged and this is leading to higher electricity prices across Europe. I believe this will have an impact on your utility cost in the Hungarian plant as well.
What is the impact on the P&L of the automotive battery business due to the recent rise in the electricity cost in Europe? What is your outlook going forward and how do you intend to respond to this situation? That is my second question.
첫 번째 질문, 소형 전지 내에서 EV 비중이 올해도 높아졌고 내년에도 지속될 것인지, 그다음에 소형 전지 사업부 수익성에는 어떤 영향을 미칠 것인지에 대한 질문에 대해서는 제가 답변드리겠습니다. 저는 소형 전지 사업부 이재영 부사장입니다. EV용 전지는 향후 성장성이 높아 소형 전지 내에서 비중이 점차 확대될 것으로 전망하고 있으며, 기존의 어플리케이션들보다 수요 변동성이 상대적으로 낮다는 장점이 있습니다. 일반적으로 EV용 전지 수익성이 낮아 소형 전지 전체 실적에는 안 좋은 영향을 줄 수 있다는 생각을 하실 수 있지만, EV용 전지는 차량 한 대당 탑재되는 셀의 수량이 많고 당사가 공급하는 기종의 수가 적어 생산 캐파의 효율적 운영이 가능하고, 이에 따라 안정적인 수익성 확보가 가능합니다. 한편, 전동 공구용 전지가 최근 재고 조정 등으로 수요가 둔화되고 있으나 고출력 전지를 활용한 다양한 제품의 출시 등으로 향후 수요 반등이 예상되므로, 당사는 최적의 제품 판매 포트폴리오 운영을 통해 소형 전지 사업의 성장성과 수익성을 동시에 확보할 수 있도록 노력하겠습니다.
The first question was on how the growing share of EV batteries within the small size battery segment, whether this trend will continue into next year, and what kind of impact we expect that this will have on the profitability of the small battery business. I will take this question. I am Vice President Lee JaeYoung from the small size battery division. The EV batteries have high growth potential, and our outlook is that its share in the small battery business will gradually expand. A key advantage is that compared to existing application, the demand volatility is relatively lower. You may think that generally the EV batteries have low profitability and that this will have an adverse impact on the overall performance of small sized battery business. However, in the case of EV batteries, large number of cells are installed per vehicle.
The model that our company is producing is few in number, which allows for efficient operation of the production capacity, and as such, stable profitability can be gained. Meanwhile, power tool batteries have seen a slowdown in demand, due to recent inventory adjustment. Owing to the release of a range of diverse products based on high power batteries, we are expecting a rebound in demand. Thus, by running an optimal product sales portfolio, we will ensure that both growth potential of the business and profitability can be achieved.
두 번째 주신 질문은 유럽의 전력비 상승에 따른 자동차 전지 사업의 손익 영향 및 향후 utility cost 전망과 SDI의 대응은 어떤가에 대한 건데, 이 부분은 제가 답변드리겠습니다. 저는 중대형 전지 사업부 손미카엘 부사장입니다. 러시아, 우크라이나 전쟁이 지속되고 러시아의 대 유럽 천연가스 공급이 감축 또는 중단되기도 하면서 유럽 내 전력 단가가 8월까지 상승세가 지속이 되었고 당사 원가에도 부담을 주었습니다. 그럼에도 불구하고 매 분기 큰 폭의 매출 성장과 고부가 제품 비중의 확대, 그리고 우호적인 환율 효과 등이 전력 단가 상승에 따른 원가 부담을 상쇄하면서 수익성은 오히려 크게 개선이 되었습니다. 최근 전력 단가의 하향 안정화로 원가 부담은 축소되고 있으며, 당사 자체적으로도 다양한 대내외 활동, 즉 에너지 절감 활동이라든지 자체 발전 방안을 검토한다든지 등을 통해서 영향을 최소화할 수 있도록 노력하고 있습니다.
The second question was on the impact on the P&L of the automotive battery business due to the rise in electricity cost in Europe and what our outlook is concerning utility cost and our response regarding this situation. Let me take this question. I am Michael Son, in charge of the AEB division. As we brace for protracted war in Ukraine and with Russia either reducing or cutting off gas supplies to Europe, electricity prices in Europe has continued to rise till the month of August, weighing down on our cost burden. Despite this being so, however, every quarter we've been able to achieve substantial growth in sales, expansion of high value products and a favorable exchange rate effect had offset the cost burden from rising electricity prices and profitability has been greatly improved.
Recently, electricity prices have been showing a gradual downward trend, resulting in reduced cost burden. SDI, for its part, is also making efforts to minimize the impact of such costs through various activities both at home and abroad.
네, 마지막으로 한 분만 더 질문을 받도록 하겠습니다. 마지막으로 질문해 주실 분은 Kiwoom Securities의 김지산 님입니다.
The last question will be presented by Ji-San Kim from KIWOOM Securities.
예, 분기 최대 실적 다시 한번 축하드리고요. 두 가지 질문드리겠습니다. 첫 번째는 최근 완성차 업체들이 다양한 폼팩터의 전지를 채용하면서 공급자 다변화를 추진하고 있는 것으로 보이는데요. 그 배경을 어떻게 보시는지와 삼성 SDI의 대응 전략은 무엇인지 궁금합니다.
Once again, let me also congratulate you on your very robust results for this quarter. I have two questions. My first question relates to the recent trends that are being shown by the global OEMs, which are appearing to be moving to diversify their supplier base and adopt batteries of various form factor. What do you see as the reason for this trend, and what is SDI's strategy to respond to this? My second question has to do with Samsung SDI's ESG activities. Recently, Samsung SDI appears to be very proactive in its ESG activities, such as becoming a member of RE100 and Environmental Management Declaration. In this regard, what are your future plans for the recycling business, which is of great interest for the market?
I will answer the first question. I'm Michael Son, Vice President of the AEB division. The first question concerned the recent trend of global OEMs moving to diversify their supplier base and adopt their batteries of various form factor, and what we see as a reason for this trend and our strategy to respond to this. In the initial stages of the EV market, the need for OEMs to review different form factors and different suppliers was not that great. Recently, as a range of diverse EV platforms were developed and volumes ramped up under a proactive adoption strategy, there is a clear trend in the market to look for the most optimal form factor for each platform.
At the same time, it appears a diversification strategy is being employed so that stable supply of automotive battery can be ensured without having your choices being restricted to a specific supplier or a specific form factor. Faced with such needs of the OEMs and changes in the business environment, our company has developed a battery cell portfolio that offers various form factors from our flagship prismatic cells, the cylindrical shape batteries backed by our long experience and technological capabilities to the 46-phi, which embodies all of our key strengths. In terms of battery materials, we have established a range of platforms, such as high-nickel for the premium applications, NMX to target the volume market, as well as the solid state for the next generation. We will continue to offer the most optimized solutions for our customers.
The second question was on our ESG activities and our plans for battery recycling business. I'm Kim, Yoon Tae from the Business Management Office. Let me take this question. As we have announced early this month, through our Environmental Management Declaration, we will not only practice ESG business management, we will respond to the tighter environmental regulations globally, and we will expand recycling to secure stable supplies of critical raw materials. Through such efforts, our expectation is that we'll be able to reduce our dependency on the market for critical materials and also cut costs. The recycling business is carried out by making equity investments into recycling business partners centering around nickel, lithium, and cobalt for now. Starting from domestic plants, this year spanning, the Malaysia and Hungary plants as well, we have completed an industry-leading closed-loop system.
Going forward, our plan is to have the same system established in China and United States as well. In the long term, we are planning on building a recycling value chain where we will collect the end-of-life EV batteries for recycling. Toward this end, we are engaged in active discussions with the OEMs and the suppliers.