Good afternoon. Thank you for joining SKIET's Earnings Conference Call. After SKIET presents their business earnings, we will have a Q&A session with all of you here. For those of you who wish to ask a question, please press star and one on your phone. Now, we will start the 2024 fourth quarter earnings presentation for SK IE Technology.
Good afternoon, I am Chae Hee, leader of SK IE Technology's Treasury and IR team. Thank you for attending SKIET's 2024 Fourth Quarter Earnings Call. Today, we'll first present the business results of 2024 Q4, and then proceed to the Q&A session. We will now start the earnings presentation for 2024 Q4. Please note that today's numbers have yet to be audited by an outside auditor and thus are subject to change. Now, I will turn the call over to CFO Taek-Sung Oh, for the presentation.
Good afternoon. I am Taek-Sung Oh, CFO of SK IE Technology. Welcome, everyone, to SK IE Technology's 2024 Fourth Quarter Earnings Conference Call. To address any questions you may have, we also have other members and executives of the relevant teams with me on this call. First, let me explain the business performance of Q4 2024. To begin with, please note that the earnings numbers for 2024 Q4, 2023 Q4 have been revised to recognize the FCW business as profit from discontinued operations after the discontinuance from FCW in Q1 2024, and thus differ from the previously disclosed numbers. This quarter, revenue stands at KRW 59.3 billion, up KRW 8.5 billion QOQ, as product sales to key customers increased slightly.
However, gross profit fell by KRW 10.7 billion QOQ, reflecting a write-down of inventory assets, and our operating profit reported a loss of KRW 91.9 billion, down KRW 18.9 billion QOQ. Next, I will go over the financial position. As of end of 2024 Q4, assets stood at KRW 4.1501 trillion , up KRW 66.3 billion from end of last year. Liabilities was KRW 1.8256 trillion, up KRW 153.4 billion from end of last year. The company preemptively secured cash liquidity all throughout 2024 to prepare against a prolonged unfavorable industry landscape. As such, our net debt recorded KRW 1.4044 trillion, of KRW 544.8 billion YOY.
However, the debt equity ratio as of end of 2024 remains at a healthy level of approximately 79%. We will continue to closely monitor financial numbers mid to long term, so that we always maintain financial soundness to be above a certain level. Meanwhile, CapEx expenditure in 2024 was reduced to KRW 241.1 billion, which is less than half of last year. Most of it went to the build-out of Phase 3 and 4 in Poland, and once the remaining budget of around KRW 100 billion is executed, investment for all the phases in Poland will be completed. We are actively considering brownfield investment for the future North America expansion initiative and currently believe that a large-scale CapEx expenditure will be limited.
Going forward, we'll continue to proactively secure liquidity and conservatively execute investments only when they ensure financial soundness to establish a sustainable financial structure. Next, I will go over the Q4 financials for individual business segments. In the fourth quarter, LiBS sales volume stood at 69 million sqm , up 12% QOQ due to volume growth to key customers in both EV and IT application products. Accordingly, revenue rose 17% QOQ to KRW 59.3 billion. We believe that both volume and revenue will see a meaningful improvement in 2025. We expect that demand for separators from our existing customers will expand, and base load shipment for the new project that we disclosed yesterday is planned, which is why we project considerable uplift in volume compared to last year.
Meanwhile, some impact on revenue is expected from FX rate fluctuations as the base currency for pricing for key customers changed to USD from this year. With the re-election of President Trump, policy uncertainty in North America will likely increase, which leads to a challenging business climate this year, similar to last year. Nevertheless, we aim to lay the foundation for mid to long-term growth through meaningful revenue recovery from last year and signing more projects with new customers. Next, I will go over the earnings details for 2024 Q4 results. In Q4, operating loss was KRW 91.9 billion, up KRW 18.9 billion QOQ.
Despite profit improvement from savings and operating expenses and higher sales volume, profitability drop in Q3 persisted into Q4 because of continued fixed cost pressure from low utilization rates and large-scale one-off expense related to inventory. Starting in Q2 2024, the company has been strategically exhausting its on-hand inventory first, and as a result, has reduced the inventory level by 24.4% by the end of 2024 compared to Q2. Moving forward, we will continue to be conservative in our equipment operation until we reach an optimal level of inventory, but expect that the overall utilization rate will climb YOY, following start of supply to new projects.
We anticipate overall profitability improvement in 2025, driven by higher sales volume, but we'll make our best efforts to deliver an earlier turnaround with optimization of production side, stronger cost competitiveness through proactive adoption of AI technology, and additional cost reduction through efficient execution of operation budget. Lastly, I would like to discuss our company's priorities for this year. Similar to last year, we believe that the uncertainty in the business environment in 2025 will be higher than ever. On the policy front, the North American market, which is our company's main target market, has shown higher policy uncertainty related to tariffs and downstream demand after President Donald Trump's inauguration on the 20th of January.
Furthermore, while Europe has tightened CO2 emission standards by vehicle type, European OEMs are calling for easing or repeal of such regulations, which is adding to the uncertainty around the policy. On industry side, end customers' demand to buy new cars will likely increase with the global move to lower interest rates. Also, the downstream customers are diversifying their supply chain to prepare against an uncertain business environment, which is a favorable development for our company, as we also work to diversify our customer portfolio. However, we expect that it will take some time before we see a clear recovery of EV demand, meaning that until demand recovers, there will be fierce supply competition across the industry.
Amid a challenging business environment, we are committed to strengthening our fundamental competitiveness to secure the conditions for sustainable survival and growth. First, we will strengthen our relationships with key North America customers. As for the North America customer that we signed on in 2023, we started shipment from the second half of last year, and we plan to seamlessly ensure the development of separators for this customer's next generation batteries within the year, further reinforcing our mid to long-term partnership with them. Furthermore, we will strengthen our core customer engagements to win more orders for our new capacity in North America.
SKIET has been committed to increasing sales to global battery makers, and this has paid dividends. We succeeded in winning a huge order for base films for our new project in North America region, and we'll start our shipments within the first half of this year. Aside from this, we are continuing supply talks for new projects with multiple customers, mainly for the North America region, and will make the best efforts to deliver successful outcomes in the near future. As noted before, we have signed a new project to supply base film separators ore prism-type LFP EV battery and will start shipment within this year.
With this, we now have a diversified portfolio of customers and products that cover prismatic, cylindrical, and pouch-type form factors, as well as products compatible with the cathode material of NMC and LFP batteries. Separately, we are in talks with multiple customers on the supply of separators for ESS batteries. SKIET will consistently reinforce our engagements with customers to build out our product and customer portfolio in the future as well. We are committed to strengthening our cost competitiveness through the adoption of new technologies. Our company has introduced AI models in some of our production processes of base films, and subsequently has seen tangible and intangible benefits, including higher quality through preemptive detection of defective products and reduction in labor expense.
Starting this year, we will develop and apply AI model to our R&D production quality in all areas of manufacturing to deliver stronger cost and product, product competitiveness. Also, we will fully leverage the automated equipment that has already been developed when we build out the North America capacity as a tool to overcome the higher labor cost challenge and strengthen cost competitiveness.
Lastly, we remain committed to developing next-generation technology to ensure stronger mid- to long-term competitiveness. While maintaining our competitiveness for new orders through our customer-tailored product offerings, we will enhance our technology leadership by developing next-generation products and processes that will lead the market. This ends the earnings presentation of 2024 Q4, and we will now go on to the Q&A session. Before you ask a question, please state your name and affiliation.
Now, Q&A session will begin. Please press star one, that is star and one if you have any questions. Questions will be taken according to the order you pressed star and number one. For cancellation, please press star two, that is star and two on your phone. The first question will be presented by Hyunryul Cho from Samsung Securities. Please go ahead with your question.
[Foreign language]
Hello, this is Hyunryul Cho from Samsung Securities. Thank you for taking my questions. I have three questions. My first question is about the utilization rate by region and also the share of customers. Secondly, I would like to understand the volume forecast you have for 2025, and utilization rate by site or region. And thirdly, my question is about the deal disclosure that you made yesterday. Compared to the revenue in 2024, this deal in size is very meaningful. Although, I do understand that you cannot disclose every detail to the extent you can. Can you share more details and specifics about this deal? Thank you.
[Foreign language]
First, I'll take your questions for utilization rate for the fourth quarter. We communicate utilization rate based on base film and not by based on time, but rather on volume. Recently there has been a significant drop in our overall utilization rate. Breakdown by region may not be meaningful. We are trying to optimize the volume for each site, and there are no differences across sites. Overall, in Q4 2024, the utilization rate for all Korea, Poland and China has been in the early —to 20% range.
[Foreign language]
As to the question about utilization rate for 2025, I do believe this is closely linked to your question about volume. As you may well know, it is very hard to predict volume accurately because it is dependent on the end customers demand. Also, this is linked to the cell makers utilization rate, which is also linked to our material companies utilization rate. But as we have gathered intelligence on this, as of last year, the inventory level of the customer side has gone down quite a bit and so has ours. So it's just to give you a range, compared to last year, our volume will increase about 70%-100% on a YOY basis.
[Foreign language]
On our share of customers, for our captive customer, which includes all the relevant JVs. In 2024, our captive customer share was in the mid-70% range, and in 2025, this will go down to the mid-60%. This means that volume to other customers will increase. On this point, when we talk about marketing later, there will be further elaboration.
[Foreign language]
Hello, this is Kim Jonghyun from Business. I will talk about the deal agreement that has been disclosed.
[Foreign language]
The deal that we disclosed yesterday is the first step or deliverable of the multifaceted customer diversification efforts that we have started to pursue from last year.
[Foreign language]
We are under NDA obligations, so please do understand that we cannot disclose specific detailed terms. But as you may have already seen the highlights in the media coverage, it is about supplying base films, separator base films to a prism-type LFP battery, and that cell will be equipped on a commercial EV.
[Foreign language]
The deal that we disclosed only covers Phase 1. We are in the midst of doing product development for Phase 2 and 3.
[Foreign language]
For Phase 1, in 2025, we will probably ship initial volume, but from 2026, we plan to ship meaningful volume.
[Foreign language]
As for the deal value, as you already may have seen in media coverages, it is about KRW 290 billion, and the contract term is over five years.
[Foreign language]
The significance of this new supply agreement is that we were able to add a new product offering to our portfolio. It's prism-type LFP batteries based on separator, and this market was previously dominated by the Chinese players, but now we are able to add this to our product offering, and this new track record is very meaningful for our company. And on another front, because this will heighten our utilization rate, we can also expect better profitability.
[Foreign language] . The next question will be presented by Hyun-hee Jung from Daiwa Capital Markets. Please go ahead with your question.
[Foreign language]
Hello, this is Hyun-hee Jung from Daiwa. Thank you for taking my questions. I have three questions. First, I would like to understand your view on this year's ASP drop level. Do you have any specific numbers in mind that you're thinking about? And secondly, for this year, 2025, do you think a turnaround will be likely? Thirdly, in the third quarter's presentation, you said that the inventory reduction is ongoing, and I would appreciate some updates on this effort. How is that going? And when do you think will you reach an appropriate level of inventory?
[Foreign language]
So on ASP, we have not communicated one single number, but gave you a product average on a YOY basis, and there were previously some agreements that we had that were based on Korean won. But as of 2025, January 1, these contracts have all been transferred on a USD basis. This was not a sudden change. We made the request back in 2023, but in 2024, the FX rate was expected to fall, but in actuality, the FX rate rose. So what we forecasted was an ASP drop of maybe 7%-8%, but because of the strong dollar that persisted, the actual ASP drop, I think, will be more close to 5%-6%.
[Foreign language]
Secondly, on your question about the turnaround timing, compared to other material companies or battery companies, we have a high share of fixed cost. This means a lot of amortization expenses and labor expenses. And for us to turn a profit under this cost structure, the biggest key driver is a huge volume growth. And, right now, it is difficult. Of course, we are planning a volume expansion, but right now it is difficult to pinpoint a specific timing of turnaround. But on a quarterly basis, we will see, I think, gradual improvement in profitability. And for the annual level turnaround, we believe that it will be sometime after 2026, but we'll be able to get back to you with a more accurate number on the specific turnaround timing after the middle of this year.
[Foreign language]
On when we will reach an appropriate level of inventory, usually we deem unhealthy level of inventory to be about three months of sales inventory. But as you know, the volume changes each year, and last year's bottom, we expect that to be the bottom, and this year we'll see an increase in the sales volume. So we can say that we have achieved considerable reduction in our inventory, and the inventory level of our customer side has gone down. So I think this year we'll be able to reach a level of safety inventory level.
[Foreign language] The next question will be presented by Chang-min Lee from KB Securities. Please go ahead with your question.
[Foreign language]
Hello, this is Chang-min Lee from KB. Thank you for taking my questions. I have three questions. First, aside from the deal that was disclosed yesterday, do you have other promising candidates that you will sign on this year? How is your customer acquisition efforts going? Secondly, compared to EV market, the ESS market looks much better. So I want to understand the company's plans towards this ESS market. And thirdly, I understand that there was a one-off expense that was incurred in Q4. Could you kindly break it down for us and tell us the details? Thank you.
[Foreign language]
Hello, this is Head of Business, Kim Jong-hyun. You asked about the promising projects for this year, and I would like to take that question and tell you some of the projects that we are pursuing on a regional basis.
[Foreign language]
First, on the U.S. market. In the U.S. market, we have a captive customer, and to them, we will further expand the volume of high-quality and safe products.
[Foreign language]
Aside from our captive customer, among there are two Chinese companies, which are among the top five major cell companies in China, which have approached us, and they're trying to expand into North America and Europe. But under the second Trump presidency, they are considering a lot of uncertainties that could come out of this administration. Because of this, the preference towards non-Chinese separator companies has gone up. So with these two, we are in the process of RFQ and believe that with one of these two, we can have some visible outcomes, tangible outcomes within Q1.
[Foreign language]
Secondly, on the domestic market front, there is this company to which we have been supplying a lot of IT application volume. From December, we do have an audit for them for plan for our Poland facility. The paperwork audit, it has been finished. Now, the on-site inspection and due diligence will take place, and once that is completed, we will be registered as their vendor. And if that comes to pass, then we'll be able to cooperate on projects for EVs destined for the U.S. and E.U. market.
[Foreign language]
For customer related to Stellantis, we are awaiting a PO for Base Film separators, and once that PO comes in, we'll start shipment from March.
[Foreign language]
We’ll be progressin on the Stellantis front, and also there are supply schedule for Honda as well. So overall, the Base Film utilization rate will likely go up.
[Foreign language]
Aside from Base Films, we are also doing product evaluation for cylindrical type separator to go into a cylindrical type battery, which is destined for the North American market. And if this is successful, this will be the first time where we directly supply our CCS-coated products. So we believe that we'll be able to expand our volumes with these new projects that are ongoing.
[Foreign language]
And on the Asia front, we are working with Japanese customers and also in the emerging market of India, we are also making engagements there. With these customers, we are in talks with, in supply talks about ESS application products, and we'll do our best to deliver outcomes on this front as well.
[Foreign language]
And to your quesions about plans for the ESS separators. Compared to our expectations, we are seeing a lot of ESS-related projects coming out from the Asian markets. With one Japanese player and one Chinese player, we are in talks with ESS for ESS project.
[Foreign language]
And lastly, on the European market, as you know, in Europe, there are not many companies that are able to develop cells. But nevertheless, there was this promising company in terms of cell development, and with them we are in talks of supply. So if they indeed succeed in developing the cell, it looks like we are to be the likely pick for their projects going forward.
[Foreign language]
And thirdly, on the one-off expense, it was more than KRW 30 billion, and 90% of the KRW 30 billion was due to inventory valuation loss write-down. And for companies, when we sell products to them, we give them a quality guarantee for a certain period. And because there was a high level of inventory last year, there was some inventory that was going to be aged. On a conservative basis, we booked the inventory write-down losses, but we did not, of course, discard the actual inventory. We just booked the losses on our ledgers.
[Foreign language]
The second is related to LCM, the lower of cost or market price for inventory, and this is related to the raw material, the secondary material, and the semi-finished goods and the final finished goods, and the prices that are tied to each of these items. Again, this is not related to cash flow. It's related to the evaluation loss, the write-down. And if the prices for the raw materials or the secondary materials go up, then this loss may be recovered as well.
[Foreign language]
And on top of that, to maintain sound inventory, to maintain sound assets, we do due diligence and evaluation of our tangible assets. And for those assets that are outdated or have lost their value, we book them as a loss. With this and also the aforementioned factors, we came to arrive at the one-off expense that was incurred in Q4.
[Foreign language] The next question will be presented by Jin-Myung Lee from Shinhan Securities. Please go ahead with your question.
[Foreign language]
This is Jin-Myung Lee from Shinhan. Thank you for taking my questions. I have two questions related to Trump's presidency. First, there are a lot of uncertainties ongoing, including the IRA, and I would like to understand the company's stance on this. And it looks like secondly, and it looks like from recent developments, North America expansion or capacity build-out locally in North America may not be a requirement, but what do you think about this?
[Foreign language],
This is Jae-seong Chung from the Office of Competitive Enhancement. As you said, with Trump's re-election, uncertainty has risen, and there are a lot of diverging opinions about whether the IRA is going to be repealed or not.
[Foreign language]
It is true that if tax credits for customers are repealed, there might be... Of course, there may be an impact from this on the market, but at the same time, at the local state government level, there are zero emission vehicle requirements that are still valid, so that may offset the market shrinking.
[Foreign language]
While there may be some changes and some setbacks, I don't think any of them will be significant enough for us to greatly change our business direction.
[Foreign language]
If the customer, consumer tax credits are repealed, then you said this may be the IRA benefits going away, but there still is a lot of opinion that says the production side tax credits will still be maintained. If that is true, then I believe that the relevant market can be upheld by this producer side tax benefit.
[Foreign language]
These battery companies, to win these producer side tax credits, will need to produce locally, and that will be an incentive and reason for capacity build out to still take place in North America.
[Foreign language]
Situations are still fluid. For the short term, we will minimize our CapEx investment. But once the risk factors become more clear, we will try to do more competitive projects, investments in the market.
[Foreign language]
Furthermore, on tariffs, the tariffs on Mexico and Canada were delayed, and I don't think any tariffs against Mexico and Canada are sustainable in the long term. But you also may have heard of the 10% extra tariffs to be levied on China, and we believe that this kind of tariff may actually gradually go up. So compared to our Chinese players and peers, SKIET may have a competitive edge.
[Foreign language]
You asked about the CTC and the FEOC requirement under the consumer side tax credit vanishing. But we believe that the FEOC requirement previously under CTC, it can now be transferred towards AMPC, the producer side. So the cell makers will try to prefer and favor non-Chinese players to get these AMPC benefits. Now, previously we have communicated that we would land on a decision on our North America expansion within Q1 of this year. But because of the turmoil and confusion around policies, we want to delay our final announcement. But anyhow, we will try to minimize the cost by not going for the greenfield option, where we build everything anew, but where we go for the brownfield option, where we leverage the current existing sites, and we will try to minimize the cost in our investment.
[Foreign language] . The last question will be presented by Junsu Kwon from Kiwoom Securities. Please go ahead with your question.
[Foreign language]
Hello, this is Junsu Kwon from Kiwoom. Thank you for taking my questions. I have three questions. First, I would like to understand the CapEx size for 2025. Second, you said you would be utilizing AI to reduce your costs, but could you share more details around this, how you will achieve this? Thirdly, I understand that your Poland facilities are undergoing the formal certification for the U.S. customer that you signed on. Could you tell us how that is going to progress and when you will operate your Phase 2 facilities? Thank you.
[Foreign language]
First, I will take your questions on the CapEx for 2025. All of the major CapEx expenditures have been completed in 2024. There have been some amounts that have been deferred into 2025 for the Poland phase, which is about KRW 100 billion, and there is about KRW 10 billion for other current investments. So altogether, for 2025, our CapEx will be around KRW 110 billion. And if that is all executed within the year 2025, then in 2026, there will be only just about KRW 10 billion for the current investments.
[Foreign language]
On your question about how we will use AI to drive down our costs. In 2025, we used AI, specifically for the quality area. Previously, quality check was a very labor-intensive part of the process, but using big data and software, we trained our AI to identify which areas the defects occur the most. This kind of AI model will be applied from this year onwards. There are many areas of quality that AI could be introduced to. We started with one or two, but we'll expand our application areas going forward.
[Foreign language]
Second area of AI application is R&D. I understand that AI is used extensively in the bio industry and also, in our company, we have 20 years worth of data. So previously, what was all done through learnings, through trial and error, can now be done much more quickly with AI development and AI training. And with now AI applied, we believe that product development lead time can go down as much as by 50%.
[Foreign language]
Lastly, the AI with model will be introduced to production and manufacturing areas. Previously, we also had automated equipment that enables smart factory, but AI could be applied to troubleshooting in our models and processes so that it can detect more defects effectively, and this will lead to an improvement in yields of 5%. And on your last questions about our foreign certification process for our Poland facility, it is ongoing. It is progressing, and there are some property requirements that have been enhanced and strengthened, so this has caused a delay, but it is still within the normal timeframe, but we'll work hard to complete this with ASAP, although it's unfortunate that it's getting slightly delayed.
[For language]
So for the go- live timing for our Poland Phase 2, we've decided that we would talk about specific volume after the foreign certification process for this facility has been completed. So the Poland Phase 2 activation timeline is still fluid, but we project some time in the second half of this year, maybe around Q4.
[Foreign language]
Our strength is in our global presence of SCM, supply chain. So by delivering the lowest cost to our customer, we will respond to their volume requirements. Thank you.
[Foreign close] We will now close SK IE Technology's 2024 Fourth Quarter Earnings Conference Call. If you have any further questions, please feel free to contact our IR team at any time. Thank you everyone for joining our call.