Good morning and good evening. This is Sarah Hwang, Head of IR at LG Energy Solution. Thank you for joining our 2026 Q3 Earnings Conference Call. Today on the management side, we have Lee Chang-sil, CFO, Lee Sang-hyeon, in charge of Planning and Management, Ahn Min-gyu, in charge of Advanced Automotive Battery Planning and Management, Noh In-hak, in charge of Mobility and IT Battery Planning and Management, Jung Jae-wook, in charge of ESS Battery Planning and Management, Park Seong-pil, in charge of Accounting, Kim Young-jae, in charge of Finance, and Lee Yeon-hee, in charge of Corporate Strategy.
For your reference, the presentation for business performance and strategy will be simultaneously interpreted. The following Q&A session will be consecutively interpreted. The presentation materials are available on the real-time webcast or can be downloaded from the corporate website. In this conference call, I am going to go over our 2026 Q3 results, and then our CFO will share our key business achievements, recent market trends, and our response strategies, which will be followed by Q&A. Please note that the forward-looking statements included in the call are subject to change according to amendments in future business environments and corporate strategies.
I will first go over the business performance of Q3. Total revenue, supported by a significant increase of ESS shipment, on top of volume-driven growth for EV pouch and cylindrical products, increased by 28% QoQ to KRW 9.6 trillion. The automotive battery division recorded a double-digit revenue growth QoQ, driven by over 10% increase in high-voltage mid-nickel shipment in Europe, alongside the commencement of our North American JV and solid volumes to Asian customers. The small battery division posted similar revenue QoQ, despite the impact from the scale-down of the IT pouch business.
The 2170 cylindrical shipment to EV strategic customers show continuous expansion, and the 46-series volume also show solid trends backed by the strong sales of new models to our North American customer. The ESS battery division is gradually resolving the bottlenecks in pack link production capacity, and as a result, recorded volume growth of over 60% QoQ, expanding its share of total company revenue to the low 30% range. AMPC, which is reflected in revenue and operating income, backed by ESS product sales growth, mainly driven by power grids, increased by 73% QoQ to KRW 416.9 billion.
In Q3, higher utilization at the Poland site backed by solid demand from European customers, the continuous effect of stable supply volumes of cylindrical products with relatively solid margins, productivity improvements at the new ESS mass production sites, recognition of a one-off volume compensation from a customer, enabled the company to record significantly improved operating income QoQ at KRW 756 billion and operating margin at 7.8%.
As for non-operating items, while there were translation gains on foreign currency borrowing driven by the strong Korean won against the US dollar at quarter end, the recognition of valuation losses on derivatives related to foreign currency bonds, interest expenses, and asset impairment on small IT pouch batteries led to a non-operating loss of KRW 987.2 billion. The net loss before tax was KRW 231.2 billion, and net loss was KRW 296.9 billion.
Next is financials. Decrease in the Korean won translated value of the foreign currency assets due to FX fluctuations resulted in a drop of total assets by about KRW 7.6 trillion QoQ to KRW 70.3 trillion in Q3. Liabilities due to FX impacts on the repayment of some maturing foreign currency bonds decreased by about KRW 3.2 trillion to KRW 44.3 trillion QoQ. Capital fell by about KRW 4.3 trillion to KRW 26 trillion. Liabilities to equity was 171%, debt to equity 98%, and net debt to equity was 82%.
While EBITDA was about KRW 2 trillion, CapEx execution similar to Q2 levels at approximately KRW 1 trillion, increase in working capital, including account receivables due to business expansion, and the repayment of borrowings resulted in cash decrease by KRW 2.9 trillion QoQ to KRW 4.3 trillion as of Q3. This concludes the earnings presentation. The CFO will continue with the recent business achievements, market trends, and our response strategy.
Good morning and good evening. I am Lee Chang-sil, CFO. First, I will talk about the business achievements for Q3. In the ESS business, on top of the additional projects secured from existing power grid customers, we also signed our first direct BESS supply contract for big tech, further strengthening our business presence in the AI data center market. Such achievements are testaments demonstrating our timely supply capabilities based on the local production sites in North America, our stable operational track record, and our SCM competitiveness. As a result, the ESS order backlog as of Q3 recorded 160 GW. We expect the momentum for additional orders to continue into Q4, as we are currently discussing supply for new projects with multiple utility companies and hyperscalers.
Last September, we were selected as the only Korean battery company to be a BESS partner for NVIDIA's DSX Ready program based on our capabilities for high-capacity LFP cells and advanced PCS. We proved our product competitiveness optimized for the high safety, long lifespan, and energy efficiency, which are the main requirements of AI data centers, strengthening the foundation for our future business expansion. For the EV business, we secured a stable revenue base for the mid-to-low price solutions in the European EV market by signing a contract to expand supply volumes based on our next-generation high-voltage mid-nickel product.
There were also improvements on the operational side. First, for North America ESS, production stability and supply responsiveness were improved with the utilization of an additional cell line and a newly expanded link line. In addition, we fully utilized the capacity for EV cylindrical products to meet solid customer demand, and the company-wide utilization rate improved meaningfully QoQ with the GM JV in the U.S. resuming production from August.
There were also achievements in strengthening our supply chain. We strengthened mid-to-long-term partnerships with the existing LFP cathode suppliers while simultaneously bolstering our response capabilities against non-PFE regulations through purchase contract with new suppliers. We secured a stable raw material procurement base within the region by entering into long-term supply agreements for locally sourced lithium with upstream companies in Canada and the U.S.
Next, I will cover the recent market trends. First, looking at U.S., our strategic market, the U.S. government further strengthened supply chain security standards for key power grid equipment, including BESS inverters through an executive order last August. In particular, the U.S.'s stance on establishing domestic supply chains in the U.S. energy market is becoming even clearer with the proposed direction of restricting the procurement and installation from designated foreign entities that pose potential security threats.
While the specific target and scope will be determined after the implementation guidelines are released, we expect this will further highlight the competitiveness of non-PFE companies like us that have local production capacity.
On the other hand, the final requirement of the CAFE standards, which regulate the average fuel efficiency by automotive OEM, was lowered by approximately 30% compared to previous levels, showing a softening trend for the policy momentum of EV transition. However, as this relaxation and regulation will have limited additional impact on EV demand, hybrid-driven demand is expected to be sustained for the time being.
In Europe, in accordance with the revised IAA recommendation announced last September, the scope recognized as local production has been narrowed from previously including third countries such as FTA partners to the 27 EU member states. The cost gap threshold granting exceptions to local content requirements has been raised to 40%, meaning that the scope and level of demand for regional localization are being strengthened from product manufacturing to the overall supply chain. In addition, more European countries are approving autonomous driving programs, which will help sustain the recent growth momentum of EV sales.
Meanwhile, the prolonged trend of high oil prices due to the ongoing U.S.-Iran conflict is expected to be positive for the mid-to-long-term battery demand as the relative cost competitiveness of EVs compared to internal combustion engine vehicles will improve and the need for energy independence across respective regions will increase. At the same time, on the raw material front, the cost burden is expected to be somewhat alleviated as the prices of key metals, including lithium, are stabilizing downward. In response to such market changes, LG Energy Solution will further strengthen our business competitiveness by optimizing operations by region and implementing strategic supply chain operations.
First, in North America, to proactively respond to ESS customer needs, on top of the pouch capacity of over 50 GW planned by this year end, we plan to secure over 70 GW of production capacity by next year end, including new prismatic lines. In addition, in Arizona, our first cylindrical battery production hub in North America, we will make the necessary preparations to seamlessly start utilization of the 46-series line by the year end and plan to sequentially address the awarded projects. In addition, we will start responding to HEV demand with Tabless 2170 within 2027 at the same site.
Meanwhile, in Europe, we plan to reinforce our production portfolio in line with the localization policies for battery manufacturing and supply chains, as well as the EV model diversification trend. Previously, our capacity in Poland was concentrated on EV pouch, but we have been converting and utilizing some of these lines for ESS since last year, and we plan to secure local production capabilities for the 46-series from 2029. In particular, we will respond to the diversified needs of EV OEMs with the pouch-based mid-to-low price solutions and cylindrical-based high nickel products.
At our mother factory in Ochang, Korea, the sodium-ion battery is the product we are currently preparing at the most accelerated pace, with the sample production for ESS scheduled to begin within this year and the test product shipments to North American customers planned for next year. The LFP-based Tabless 2170, which is a new product, is undergoing preparations with the goal of starting mass production in the first half of 2027. In addition, we will continuously advance our global SCM system to ensure more flexible market response.
In North America, while continuing efforts to diversify LFP cathode materials to secure supply chain compliant with regulations, we are also diversifying our non-PFE supply chain pool for other materials such as anodes and electrolytes. In Europe, we will strengthen our structural cost competitiveness through continuous localization efforts for core material and parts.
Investors, analysts, and shareholders, the battery industry has faced new challenges amid changing policy landscapes and geopolitical tensions. Moving forward, LG Energy Solution will drive our business operations at the full efficiency with limited resources by further reinforcing our strategy of select and focus in order to respond to such changes more proactively and efficiently. Based on such advance, we will go a step further to make evaluations against the most rigorous standards to fine-tune our strategy in terms of QCD, product quality, fundamental cost competitiveness, and margin improvement, and SCM optimized for customer needs. In parallel, we will take bold actions to execute necessary changes, making the utmost effort to meet market trust with tangible results. Thank you.
This is the end of our presentation. Let us move on to the Q&A session. For more participants to get chances, please limit your questions to two.
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Questions will be taken according to the order you have pressed star and one. For cancellation, please press star and two on your phone.
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The first question will be presented by Jeong Won-seok from iM Securities. Please go ahead with your question.
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Yes, good morning, and thank you for the opportunity to ask questions. There are two questions that I would like to ask you. The first question is related to your outlook for the fourth quarter in terms of the overall performance. If you could elaborate about that and also talk about 2027, though it might be a bit early, I think that if you could provide maybe a big picture for the outlook for 2027 also, that would be something that we would like to hear.
For the second question, right now you are expanding your LFP production, and you did mention during the presentation about in North America how and what type of strategy you are executing to meet the PFE-related requirements. However, if you could elaborate a bit more in detail about what type of preparations you have in place and also the strategy, I think that that would be appreciated, particularly with regards to your cathodes, because you are using a Chinese cathode provider. I do think that there are some questions within the market about that. If you could touch upon that would also be very good.
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This is the CFO, and maybe I can take the first question. I do believe it's a natural question for you to ask. For that, maybe to start with the fourth quarter, which has already started. In the fourth quarter, I think that for ESS shipments, in order to deal with the demand that we see from North American customers, we do expect that during the quarter, there will be around a 40% growth that we will be able to see quarter-over-quarter. In addition to that, as mentioned during the presentation, for European customers, the high-voltage mid-nickel pouches that we have, and also in terms of cylindrical volume, we do think that the strong trends that we see in shipments will continue until the end of the year.
In addition to that situation, from the third quarter, we have started the production of the North American JV volume. As a result, if we look at the total top line for the company in the fourth quarter on a quarter-over-quarter basis, we do think that we can expect and look forward to around 10% growth. However, if we look at the profitability behind that, of course, there will be an improvement in our overall utilization, and there is continuous ramp-ups that are taking place at various sites that we have globally, which is very important. We will continue these efforts. However, in the fourth quarter, the one-off gains that we had in the third quarter will no longer be present, which will create a base effect.
In the fourth quarter, we do expect that the Honda JV ESS capacity will start operations, and as a result of that, we do think that there will be some initial fixed costs that will be generated. Overall, for the fourth quarter, in terms of profitability, we do think that it is inevitable that there will be a slight decline.
To talk about 2027 and the overall outlook there, I think that right now we are in a process of setting forth the business plan based upon the demand that we see within the market, and we do think that there are many variables right now in the downstream side that can have an impact on our business. Therefore, as of the current time, we do think it would be very difficult to share with you a more detailed outlook. Broadly speaking, on the ESS side, if we look at the demand growth in North America, and based upon the already strong order book that we have, we do think that there will continue to be meaningful growth in volume there.
On the small battery side, not only on the EV cylindrical batteries that we have for our strategic customer, but there will also continue to be sales on the 46-series new applications, which should provide a very stable growth trend. For our EV pouch batteries, and in addition to that, on the mid to low-end product side, we do think that there will continue to be volume growth, and also there will be production coming from North American EV customers for EV customers in North America. For the business division there, we do think that there will be revenue growth.
That have been said, for the company as a whole, we will continue to focus on our key products that meet the demand within the market. We will also focus our competitive edge and also increase the efficiency of operations that we have within the capacity that we have already been able to build out. So focusing on maximizing the utilization and also strengthening our overall cost competitiveness from a structural standpoint will be efforts that we will engage upon, so that by being selective and also being concentrated in these areas, we can build out a base to further solidify our fundamentals.
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For the second question, maybe I can address that. This is Yeon-hee from Business Strategy. In order to acquire the tax credits that we can enjoy from producing within the U.S., we do need to satisfy the MACR conditions, which would be the total amount of non-PFE material that we would have within our direct material cost. Therefore, building out a supply chain, of course, is very essential.
If we look at the amount of permissible PFE material in terms of the conditions, this level is being strengthened each year. From this year, it would be 40%. From next year and forward, it's going to be 30% and under. Therefore, to be able to satisfy these conditions, we are in a situation in which we are preparing a very detailed sourcing strategy for each of the different material types, and this overall process is going forward without any issues.
To elaborate in a bit more detail, of course, of the material, the largest and highest cost would be the cathodes. For the cathodes right now, in addition to the local Korean producer that we have already signed a contract with, right now we can secure multiple non-PFE sourcing companies to be able to source the material, to be able to stably satisfy the conditions that we have.
Outside of cathodes, I think that if we look at the anodes, the separators, and also the electrolytes and other key material, we already have and secured non-PFE supply chain. However, we are also actively pursuing discussions with additional companies in this area. Therefore, our view is that for the regional supply chain regulations, this is something that will strengthen going forward. From the company level, if our stance up until now has been focused on our cost competitiveness and operating and optimizing our supply chain from that standpoint.
I think that going forward, we are going to take into consideration the global policies and the geopolitical risks that we have to ensure that we have a stable supply chain from that standpoint. Therefore, we will take into consideration fully the overall suppliers' costs, the technical competitiveness, and also how much volume that they can actually provide to ensure that we have a broad and non-PFE-based supply chain pool. Over the mid to long term, of course, we will continue to build out our supply chain to create a geopolitical risk-free environment by developing local producers and also engaging in our own localization efforts. Thank you.
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The next question will be presented by Kwon Jun-soo from Kiwoom Securities. Please go ahead with your question.
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Yes, thank you for the opportunity to ask questions. There are two questions that I would like to ask you related to your ESS business. The first is that for your profitability outlook for ESS, what would that be and what measures are you taking to improve it? The second question is that in the North American area, what new orders have you won on the ESS base and what type of momentum do you see within this market?
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This is Jung Jae-wook from the ESS Battery Planning and Management Division, and maybe I can start with the first question about our profitability. For this year, we have converted a lot of lines from EV to ESS, and this is to ensure that step by step we can build out a production base that is in line with the market demand. In the North American region, we do see that there is customer demand that is growing, and we do want to focus on ensuring that we have the capabilities to address this demand in a timely manner.
From multiple sites, we actually have had simultaneous ramp-ups that have been ongoing, and it is true that in reality, this was not just an easy situation. Internally, though we have made various efforts to cut back on our fixed costs, in terms of the overall improvements in profitability, I think that we have been progressing a bit slow versus the market expectations.
By the end of the year, for the 50 GWh of cell ramp-ups and cell line expansions, I think that that process in itself is almost at the end. On the pack and link side, in terms of capacity, we will continue to see an increase in the fourth quarter versus the third quarter. As capacity becomes more stable, we will see gradually our fixed cost burden to become less. Not only in ensuring that for the ESS capacity that we already have secured, that it is running in an efficient manner, we also want to focus on cutting back and saving on our raw material cost and also our logistics cost by diversifying our sourcing for various materials.
In addition to that, we also have efforts that we are putting forth to optimize our customer portfolio by increasing the portion of ESS business that we have for AIDC customers and also SI projects. Lastly, of course, we will continue to try to strengthen our cost competitiveness by increasing our high-capacity cells and systems. Based upon this structural competitive edge, I do think that we will be able to continue our efforts to achieve some meaningful progress in terms of profitability.
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To move on to the second question about our ESS order book and the orders that we are winning, to give you an update on this side, as you are well aware, in the North American ESS market, there is a surge in demand that we actually see. As mentioned before, there are various policy measures that are also favorable to non-PFE suppliers. From that standpoint, we do think that there is continuously a need for North American customers to find a supplier that has a local capacity in terms of the cells that are created.
From that standpoint, right now, for the orders that we have in place, most of the volume up until 2028 has been satisfied. Therefore, right now, for the customer discussions that we have ongoing, it is focusing on the volumes that would come after 2028. In addition to that, from the customers that we are currently in discussions with, the type of customers represent not only the existing power grid and utility customers, but also AIDC-related demand for people who do want to secure BESS capabilities through these utilities or power grids. There are also hyperscalers that directly want to purchase BTM capabilities.
In terms of the expected demand that we see going forward, we do think it would exceed the supplyable capacity that we actually have. From a strategic standpoint, we are trying to focus on the more important agendas and orders that we have so that we can use our future capacity in a more efficient manner and operate it thereafter.
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The next question will be presented by Tim Bush from UBS Securities.
Thank you. I have two questions on cylindrical batteries. First is, can you give us some detail on the additional order momentum for 46-series battery? Second, can you elaborate on the competitiveness of Tabless 2170 and order momentum?
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This is Noh In-hak from the Mobility and IT Battery Planning and Management Division, and maybe I can address the questions that you have. First, starting with the questions about the 46-series order book and also the order momentum that we see here. Right now, we already have a secured order book of 440 GWh from our legacy OEM customers and also some EV startup customers. In addition to that, right now we are in discussions for orders with a multiple number of global OEMs.
In the not too far future, we do believe that we will be able to share some meaningful progress in terms of our momentum going forward. Based upon the product competitiveness that we have and also the regional production capabilities, we do want to further solidify our position as a leading 46-series supplier. Therefore, from that standpoint, we are continuously going to expand our customer portfolio.
To talk about your second question, which was the Tabless 2170, in terms of the competitiveness that we have, if you compare this to our existing products in terms of the thermal characteristics or the resistance, it is much lower, so that provides more safety. Added to that, it also is more beneficial in terms of high power delivery. Therefore, it is a product that is suited for a wide variety of applications. That would include HEV, BBUs, and also robots.
Right now, in terms of our production, we do have mass production that is taking place for electrical tools in our Ochang Tabless line. From the second quarter of next year, we are targeting to mass produce LFP 2170s for BBU. For HEVs, at the end of next year or so, we are currently planning mass production from our site in the U.S. Arizona area.
For the LFP 2170s, when you compare this to NCM batteries, it is much better in terms of the thermal stability performance that we enjoy. This has received a lot of positive feedback from our customers. Therefore, based upon the demand that we see and the needs that we see on our customer side, this is an area in which we also want to secure a lot of competitive edges since it is a new market. Thank you.
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The last question will be presented by An HoeSoo from DB Securities. Please go ahead with your question.
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Thank you for the opportunity to ask questions. There are two questions that I would like to ask you. First is related to your financial position or profile. Right now, if you look at your liability to equity ratio or the debt to equity ratio, it is increasing. In terms of improving your financial soundness, what measures do you have? If you could provide an update about your funding plans for next year, that would be appreciated.
The second question that I have is about the European market right now in terms of the IAA in Europe. Take into consideration the direction that this policy is heading over the mid to long term. From that perspective, what plans do you have to secure your market share in the European market, and what would be the strategy behind actually executing that?
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Yes, this is Kim Young-jae from finance, so maybe I can address your first question. In the past, in order to be a bit preemptive in terms of catering to the market demand, we did continue to build out new capacity and had CapEx investments in this area. How we funded that was through a lot of the policy facilities that were available and also low long-term financing that we received from banks. Also we did issue bonds in the Korean won and also overseas foreign currency market to have a stable foundation for that funding.
If you look at the CapEx in itself, most of the key investments have already been executed, and the CapEx budget in itself is showing a meaningful decline with last year being the peak. Going forward, we also believe that our operating cash flow will become stronger. Based upon this better cash flow position, we are going to put priority in paying down the outstanding debt that we have, and we're also going to secure additional revenue sources by monetizing some of the assets that we have. By doing this, we will continue to decrease our overall borrowings in terms of the debt level and also the interest costs that we have to better our financial indicators and the overall financial soundness that we have.
To talk about our funding plans for the future, for this year, we don't have any other funding plans at the HQ level. For our foreign subsidiaries, there will be some additional drawdowns on the existing lines that they have or facilities that they have. In terms of next year, I do believe that we are planning some funding activities that would be at the minimum level and also only necessary to refinance some of our existing debt and also maybe to cover some of the operational needs that we have. However, as our overall operating cash flow increases, and also since we will have a smaller CapEx budget and less investment needs, any additional resources that we have will be prioritized to continue to decrease the overall borrowings levels that we will have. Thank you.
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Maybe I can take your second question. This is Ahn Min-gyu from the Advanced Automotive Battery Planning and Management Division. For the policy direction that we actually see taking place in the European area, of course, the final version has not been confirmed yet, but if we look at the revised IAA recommendations, we do think that there will be stronger requirements in terms of the FDI that is required and also the local content requirement. For key materials, which would include batteries, we do think that the local production capabilities will become more important in the future.
From the European OEMs, at the same time, of course, they are trying to diversify their battery supply chain in itself. For companies like ourselves, that would be non-Chinese in nature and do have local production capabilities, I think that there are increasing needs. As a result, from a competitive standpoint, we do think that it is a favorable environment.
At our Poland production site right now, we do have mass production capabilities. We also have a material and also parts supply chain in place. So we do have the overall capability to deal with these local battery production and sourcing needs. At the same time, from European customers, I do think that there is an increasing interest that we see recently for high-voltage mid-nickel products. From a cost-competitive side also, the Poland factory has already seen a meaningful decrease in its overall depreciation cost. From a price standpoint also, that makes us more competitive.
Going forward, not only in the high-voltage mid-nickel area, but also for LFP and CTP, and a wide variety of other products, based upon this more diversified product portfolio, we will try to engage in more active orders so that we can gradually expand our market share in the European market.
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Thank you very much. With this, we would like to wrap up the third quarter 2026 earnings conference call for LG Energy Solution. Thank you for your time today.