Good morning and evening, this is Sarah Hong, Head of IR from LG Energy Solution. First, I'd like to introduce who are present today. Lee Chang-Sil, CFO/CSO, Jang Seung-Kwon, in charge of finance and accounting group, Lee Sang-Hyun, in charge of finance, Jung Jae-Woo, in charge of planning and management, of market intelligence. For your reference, with the presentation, for your reference, the presentation for business performance and strategy will be conducted with simultaneous interpretation, after which we will proceed. First, let me explain our business performance. While demand for EVs in Europe has been relatively slower than other regions, the metal price decline in the first quarter partially influenced the battery ASP and KRW 774 billion. Compared with the same period of the last year, the revenue improved by 73% and was similar to that of the solid previous quarter.
Regarding profitability, due to the temporarily increased cost of metal expense impact from lagging consumption of raw material inventories, the OP in Q2, including IRA tax credit effects, like with the customer, we decided to recognize KRW 151 billion in the second quarter financial results as one of precedents for the inflated cost of material expense from the ongoing GM recall process. Reflecting such, one of the operating profit in the second quarter recorded about 300, with about KRW 270 billion of foreign currency-related profits, such as translation gains from foreign currency-denominated debts. Non-operating profit in Q2 came in at around KRW 185 billion. Net profit recorded KRW 465 billion with net profit margin of 5.3%. Financial position.
The total assets at the end of Q2 2020, equity ratio of 83% and net debt equity ratio of 18%. For cash flow in Q2, even with CapEx spending of around KRW 2.4 trillion, positive cash flow was made with around KRW 1 trillion of EBITDA general previous quarter sales to reach KRW 4,860 billion. CapEx spending in the first half rose 55% YOY to record about KRW 4.2 trillion, which was mainly executed for investment in production capacity expansion in North America.
Our view on the battery market dynamic in the second half compared with early this year and our key initiatives. First, looking at the EV market, it can be considered slower. However, with continuous macro uncertainties in Europe, such as high inflation and negative growth of GDP in some countries, we understand that the EV sales of major OEMs are more sluggish than expectations. NCM lines into LFP for ESS battery production.
Furthermore, with not just our premium products, which have already gained clear competitive edge, but also NCM-based high-voltage nickel manganese rich and LPA batteries, will secure competitive advantage for each segment, which will help us respond to various market changes in a timely manner, such as mass-tier EV segment expansion and ESS and quality control. Based on such operational excellence, we'll be aiming to reach full ramp up for GM JV phase I within the year. For the following GM JV project, phase II and III, a newly signed company will proceed as planned through stable setup preparations.
Smart factory will be phased in from GM JV phase II and rolled out to ensure product quality stably and save processing costs with process automation and strengthen cost and quality competitiveness. Lastly, on raw material sourcing, we're continuously diversifying supply chain, and one achievement we made early this month was the sign off of LTA, long-term agreement with SQM, Chilean lithium producer, for 100,000 tons of lithium for a seven-year period, the largest volume of its kind. Through strategic partnerships with mid to long-term supply agreement and equity investment, we'd like to establish a structure to secure key raw materials at competitive prices and further accelerate supply chain localization. Considering the life cycle of EVs, the market for battery reuse and recycling is expected to increasingly expand after early to mid 2030s.
From the perspective of future ESG, such as introduction of others, also based on differentiated battery diagnosis technology and ESS business capability, we will be aiming to capture new business opportunities for battery reuse. Going forward, our order backlog reached KRW 440 trillion as of the end of June, which went up by over KRW 100 trillion within one year or so. As previously explained, even if there are more items of profitability through economies of scale with shipment expansion, productivity enhancement, cost innovation, others, we will strive to accomplish mid-to-high single-digit percent OPM, excluding the IRA tax credit effects. Investors, analysts, and our shareholders, I appreciate your time and continued interest. LG Energy Solution will be attentive to your feedback at all times.
Thank you. 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 have pressed the number star one. For cancellation, please press star two. That is possible within the restricted time. We would appreciate only two questions per each participant. The first question will be-
To ask questions.
There are two questions that I would like to ask you. The first question is that, you did mention that there was a one-off provision that you set in relation to the activities that you have ongoing with GM. If you would be able to elaborate.
The first question that you had about our one-off provisions that we set aside. This is Jang Seung- Kwon from Finance and Accounting. In the second quarter, as you can see, we did set aside and as we did mention during the presentation, a one-off, there has been an increase in overall material costs. With that impact, according to our agreement that we have had with our customer, there was some cost sharing that we needed to reflect. With regards to the overall burden that LG will take, will be responsible for, LG Electronics and ourselves, have each determined to take 50% of that share each. As a result of that is the cost that we have reflected.
In respect to the overall volume or the scope of the recall in itself, there is nothing that has changed.
There will be some, but there are various variables inside and outside. First, if we look at the third quarter, because of the IRA policy, there are some customers in the U.S. who are slightly higher because of the solid electric vehicle prices. I think there is a possibility that the battery purchase time will be adjusted to the fourth quarter. In general, if we look at the third quarter, of course, we are discussing various issues with the customers, so there is a possibility that this part will be added or changed. From the perspective of profit, as I said, even if we do not reflect the IRA tax credit, we will be able to generate mid-to-high single percent of business profits.
This is the CFO, and maybe I can take your second question. About mentioned, I do believe that, you know, first, before answering your question, I would like to thank you for a very good question. In the way of doing business, as you are aware, you know, there can be ups and downs within the cycle. Added to that, if we look at the internal and external environment, there are various elements that could work as variables within this backdrop. If we look at the third quarter, based upon the overall with our customers as of the current time, we do think that there could also be some overall changes to what we expect versus the current time.
In terms of the profitability, if we look at the key items on our cost side, including the overall, tightly managing our overall costs. For new capacity in terms of the production there, as that stabilizes and as we continue to see improvements in our productivity, we will also focus on increasing the overall yield. As of no different from the normal situation, we do think that due to the overall impact of the IRA and the momentum that we see there, we do think that that will be a larger momentum that we will be able to enjoy. Due to other issues and other things that are taking rent on the top line, versus 2022, we do think that we will be able to achieve a growth of the mid-30% range.
In terms of profitability for the full year, again, in the fourth quarter, we will see, we think that in terms of our operating margins, we will be able to achieve a mid-to-high single digit type of margin profile. Thank you.
The following question will be presented by Won-Suk Chung from HI Investment & Securities. Please go ahead with your question.
Yeah. 안녕하세요, HI Investment & Securities Wonseok Chung입니다. 질문질 기회 주셔서 감사하고요. 저도 앞서 말씀하셨던 그 질문에 좀 연장해서 질문드리고 싶은데요. 이제 1월부터 메탈 가격이 좀 많이 빠졌고, 이제 1, 2분기 판가에도 그렇고, 3분기 판가에도.
... 실제로 영향을 좀 미칠 것 같은데, 그 원재료 하락분에 대해서 저희가 어느 정도
To ask questions. This is Won-Suk Chung. There are two questions that I would like to ask. This is in relation to the previous answers and also I guess, previous questions that have been asked. The first question is related to metal prices. If you look at metal prices, since in addition to that, if we look at the third quarter, I do believe that the overall expectations is that battery prices will be declining further. However, metal prices are actually moving in the opposite direction, they're increasing. I do think that this may be a burden on the company. When do you think that the overall, you know, metal price burden in itself will be alleviated from the company's perspective?
The second question that I would like to ask you is that it would have on our price levels. On average, it actually takes around one to two quarters for the impact to actually come into realization. There is a lagging effect in terms of when the decrease in metal prices is actually reflect revenues. The fundamental purpose of having a metal price linked overall contract is because we do want to ensure that we're able to secure stable margins. If we look at the raw material prices and also the battery sales price, all of this is linked to the price levels that we see in the market for metal prices.
From a long-term perspective, we do well believe that this mechanism in itself enables us to ensure that the overall metal price impact that we have on our profitability over the longer term would be very small or extremely small. That has been said, however, if you look at it with a short-term horizon, the actual input metal price in itself may be higher than the quarter market price of metal. Because of the time difference that we mentioned before, in the second quarter, there was a somewhat of a cost increase because of the situation. However, going into the third quarter versus the second quarter, we do believe that the overall impact of the cost increase will be lower.
Going into the fourth quarter, the actual input price that we see for the metal prices will be larger than the market price. As a result of that, we do think that as time passes, the overall burden of our cost increase will be more alleviated. On your second question about the overall demand from our key customer base, maybe I can address that question. This is Kim Kyungwon from the Advanced Automotive. Auto in the European area, as mentioned, for some of our customers on the EV side, there are reports that sales have been a bit lackluster. Added to that, in the second half of the year, there are expectations that the overall price of battery quarter.
We enter into the overall vacation season during July and also August, there will be an overall decline in the overall utilization at our customer side. As a result of that, in terms of the demand, we do believe that there could be a temporary decrease in overall demand that we see. However, taking this overall situation into consideration, we have adjusted our production, and we are trying to minimize our inventory burden as much as possible.
The following question will be presented by Hyun-Soo Kim from Hana Securities.
With regards to the overall sales outlook that you see at your customer level.
In relation to the first question, what I would like to ask you in terms of policy direction in North America, is that recently, Tesla, during their earnings call, actually mentioned that they do believe that the IRA, AMPC tax credits, would be something that they would be benefiting from. Also, that, as a result of these comments, I do think that there has been a lot of increasing interest about OEM sharing, with regards to the overall benefit. For LGES, this is something that you have started to recognize within your overall performance.
Do you think that there could be some AMPC sharing with your OEM customers? What would be the possibility there? In addition to that, I also would like to ask you, in relation to the Canada Special Contribution Agreement or SCA, I do understand that recently there have been reports that the JV that you have with Stellantis has reached an agreement with Canada with regards to the terms and conditions. For the underlying SCA, what do you believe the benefits would be that you would be able to enjoy, and what would be some of the content of what you would be able to share with us? The second question that I would like to ask you is about your key customers in the North American region, including GM. In terms of their overall EV, current outlook and current situation, how is that having an impact on your overall performance?
For the GM JV in itself, it's one year now since you have had that facility up and running. In terms of the productivity and also in terms of profitability, what is the current status right now, and what is your outlook for the future?
Thank you for asking a question in which there is a lot of this interest. This is the CFO, and maybe I can take your first question about the IRA tax credit sharing possibilities and other such situations. If we look at the situation here in terms of the IRA tax credit, as you are aware, this is something that we have started to reflect into our overall performance. As a battery producer in the U.S., this is a benefit that we're able to enjoy.
We do believe that from a longer term perspective, that sharing the IRA benefits in itself, will further facilitate. Also, in consideration of the cost competitiveness or price competitiveness that we want to maintain, we are looking at the possibility of having a certain level of, sharing, that we would have. We do think that this will contribute to creating a virtuous cycle in terms of battery sales and also EV sales. As a result of that, we are planning to discuss a overall direction in which, both our customers and us, would be able to win. A win-win situation.
However, that have been said, in terms of the sustainability of the overall program that the U.S. government is trying to implement, I do think that there are some concerns about that. Measure of suspending the overall factory construction and also making stronger demands to our counterparty. As a result of that, we have been able to reach an agreement of conditions that are very similar to the IRA tax credit. As a result of that, going forward, we will make sure that the Stellantis JV construction of the factory in itself goes ahead according to schedule. In addition to that we can create this facility into another core production site for our North American battery business. Maybe I can take your second question about...
In the case of our GM JV, as you are aware, this is something that we have started commercial production for in the fourth quarter of 2022. From the beginning, our overall stance was, even, if the overall speed of our capacity expansion is a bit slow, we did want to make sure that we were able to secure, completely the level of quality and production that we were aiming for. This was the initial strategy that we have implemented from the beginning in terms of operation. Right now, in terms of the overall operations in itself, because it is stabilized significantly, we do think that towards the second half of the year that we will accelerate the production speed, so that within the full year, we will be able to fully ramp up the facility.
By doing this, we will be able to achieve a better economy of scale and also a better level of productivity, which will enable us to create a base for more stable profit generation going forward. If we look at the overall customer side in terms of their sales volume, versus the demand outstanding, I do believe that for the Ultium platform EV supply, it is true that there is a shortfall of supply that is being provided. However, I think that this is in relation to the fact that the production for the EV, you know, dedicated platform is something that is still in the early stages.
Based upon the announcements that have been made by the GM CEO, I do believe that towards the second half of the year, in terms of the overall production volume and also sales volume.
The following question will be presented by Cho Hyun-Ryul from Samsung Securities. Please go ahead with your question.
Yes, thank you for the opportunity to ask questions. There are two questions that I would like to ask you. One is related to your ESS business, and the other would be related to your Mobility & IT Battery business. In the case of the ESS business, the question that I would like to ask you is that during your presentation, you did mention that for the Nanjing line that you have, that you will be converting this for LFP, for ESS. In actuality, with regards to the stage at which you would be able to engage in full production or in full sales, what would the timing be for that?
In addition to that, if we look at your outlook for the ESS performance in the second half of the year, what would that look like? In addition to that, if you look at your Mobility & IT Battery business, the question that I would like to ask there is that, you did mention the overall situation about EV battery inventories for cars. On the EV cylindrical side, what is the demand outlook? What does the demand look like there? In addition to that, for the Ochang line that you are going to build out for the 4680 batteries, in terms of the SOP for that, when would we be able to look at an SOP?
Yes, thank you for the opportunity to ask questions. There are two questions that I would like to ask you. One is related to your ESS business, and the other would be related to your Mobility & IT Battery business. In the case of the ESS business, the question that I would like to ask you is that during your presentation, you did mention that for the Nanjing line that you have, that you will be converting this for LFP, for ESS. In actuality, with regards to the stage at which you would be able to engage in full production or in full sales, what would the timing be for that?
In addition to that, if we look at your outlook for the ESS performance in the second half of the year, what would that look like? In addition to that, if you look at your Mobility & IT Battery business, the question that I would like to ask there is that, you did mention the overall situation about EV battery inventories for cars. On the EV cylindrical side, what is the demand outlook? What does the demand look like there? In addition to that, for the Ochang line that you are going to build out for the 4680 batteries, in terms of the SOP for that, when would we be able to look at an SOP?
The ESS Battery Planning and Management Division. First, to talk about our outlook for the ESS market in the second half of the year. Because of the characteristics of the ESS business, versus the first half of the year, we do believe that the second half will represent a much stronger performance level. If you look at our second half, there are various North American grid-related projects that are ongoing. We do believe that we will be able to enjoy a significant increase in our top line.
In the second half, if you look at the nature of the overall projects that we will be recognizing into our top line, these are projects that are based upon an appropriate level of profitability, so we also believe that it will contribute to our profitability of this business. Secondly, if you look at the LFP side of things, for this year, in the second half of the year, some of the lines that we have for NCM capacity in China will be converted for LFP use. In addition to that, in Arizona, in the U.S., from 2026, we are planning to build a 16 GWh level of capacity that was to have more competitiveness in LFP manufacturing.
That we are able to build out a overall production base inside, so that we can meet the demands of localization that we see at our customer level.
Ne, Dubonje Germanin, Graba NGI Beyond 1,000 suya wa grama four six eight one yang sangi episode yesterday. Dr. Niddery, sometime down to in Hakima. 우선 올 상반기는 이제 글로벌 경기가 불확실함에도 불구하고 당사 이제 주요 고객사의 판매 확대호 원통형은 견조한 실적을 달성했습니다.
... 다만 Q3에 이제 주요 고객사의 공장 업그레이드가 이제 계획되어 있는데, 생산 축소가 단기적으로 예상됨에 따라서 당사의 추가 물량에도 일시적인 영향은 있을 것으로 판단하고 있습니다. 하지만 이제 원통형은 기본적으로 이제 표준화가 개발이 된 제품이다 보니까, 다양한 거래선에 타용도로 이제 사용할 수 있다 보니까 LEV와 전동용 물량을 확보해서 영향을 최소화할 계획이고요. 또 한편으로는 이제 IT 파우치가 이제 계절적 성수기에 도래했는데, 해당 매출을 이제 극대화해서 수소연료전지 사업 전체의 매출도 성장을 이룰 수 있을 것으로 판단하고 있습니다. 다음으로 4680 양산 계획에 대해서 말씀해 주셨는데요. 현재 이제 4680은 제품 개발 완성도를 높이는 단계에 있습니다. 연내에 이제 5,000개의 양산 라인을 구축하고, 내년 하반기 생산을 이제 목표로 준비하고 있으면서, 다양한 고객들의 수요에도 적극적으로 대응할 계획입니다. 이상입니다.
Thank you. Maybe I can take your second question about EV cylindrical demand and also our overall commercial production plans for the 4680 batteries. This is [Doin He] from the Mobility & IT Battery Planning and Management Division. In terms of the cylindrical batteries, if we look at the overall situation, you know, there have been various uncertainties within the global economy within the first half of the year. However, nevertheless, in terms of our key customer demand and the overall sales that we have seen, IT pouches, we are entering into a high season for this demand.
As a result of that, by maximizing the overall revenue on that side, I do think that we will be able to achieve revenue growth for the Mobility & IT Battery business as a whole. Secondly, to move on to the 4680, you know, commercial production plans. As mentioned, for the 4680
related 질문을 드리고 싶은데요. 어, 최근에 LFP 배터리의 완성차 채용과 그리고 이에 따른 시장 확대가 이어질 것으로 예상하고 있습니다. 앞서 추진 계획에서 제품 경쟁력 강화 측면에서 중국 남경, 그리고 애리조나에서 LFP를 생산해서 ESS향으로 나갈 것이라고 말씀을 주셨는데, 여기에 이어서 향후 EV향으로 LFP 적용 계획, 그리고 중저가 EV 시장 대응 전략에 대해서 말씀 부탁드립니다. 감사합니다.
Yes, thank you for the opportunity to ask questions. This is Choi Bo-Young, and the questions that I would like to ask you would be related to your LFP batteries. Recently, if you look at the LFP battery market, it is being adopted for more EVs by the OEMs, and also we see this market continuously increasing. During the presentation, you did mention that to build your overall product competitiveness, that you would be converting some of your lines in Nanjing for LFP purpose, and also that you would be building out capacity in Arizona to actually cater to your ESS customers. On the LFP EV battery side, what would be your overall strategy there?
For the mid to low-end EV market, what would be the strategy to try to cater to that market?
전략 부문에서 말씀드리겠습니다. 경영전략 담당 Jang Seung-kwon입니다. 말씀하신 대로 LFP가 전기차 단기에는 ESS용으로 양산이 가능하도록 지금 준비하고 있고, 그렇지만 EV용으로는 확대 적용하기 위해서 에너지 밀도나 출력 등 일부 성능 튼이 지금 필요한 상황.
Yes, your question about our EVLFP possibilities going forward. This is Jang Seung-Kwo n from Corporate Strategy. As you have mentioned, and as you have seen, we do see that LFP batteries have been increasing in terms of their overall portion of the market, and we do think that this is an important solution that will continue to grow going forward. From our side also, as mentioned before, we are planning to engage in commercial production of LFP for ESS purposes within the second half of the year.
However, for the adoption on the EV side, I do think that it will require a bit more time, because we do want to make sure that we get things right in terms of the overall energy density and the overall electricity output that we're looking to achieve. As a result of that, right now we're in the phase in which we are trying to plan production accordingly to our development. As a result, I do think that this is an area in which we will continue to see an increase in, and we are trying to improve the overall quality of the finished product that we're trying to develop as of now.
In addition to that, I think that, you know, we do want to differentiate ourselves versus the Chinese players within the market in terms of our energy density levels and also the performance. On that side, there are continuous efforts that we are making. At the end of the day, we do want to create an LFP chemistry that is more advanced in terms of the overall level of performance and quality that is being provided. In addition to that, however, to cater to more of the mass market and the mid-tier market, we are looking at other alternatives, which would be, you know, the high voltage vindico type of batteries that we can provide.
We do want to make sure that in this area, in terms of the stability, the safety, the cost competitiveness, and for other areas, that we can be on a competitive edge versus the existing players within the market.
Yes, thank you very much. With this, we would like to wrap up the earnings conference call for the second quarter of 2023 for LG Energy Solution. Thank you for your attention today.