LG ENERGY SOLUTION Aktie

[Interpreted] Good morning and good evening. This is Sara Hwang, Head of IR at LG Energy Solution. Thank you for joining our 2026 Q1 earnings conference call. First, I'd like to introduce, who are present today. Lee Chang Sil, CFO; Lee Sang-hyun, In-charge of Finance; Park Sung-pil, In-charge of Accounting; Jeong Do, In-charge of Planning and Management; and Ann Min-gyu, In-charge of Advanced Automotive Battery Planning and Management; Noh In-hak, In-charge of Mobility and IT Battery Planning and Management; Kim Min-Soo, In-charge of ESS Battery Planning and Management; and Lee Yeon-hee, In-charge of corporate strategy.

For your reference, the presentation for business performance and strategy will be conducted with simultaneous interpretation, after which, we will have Q&A with consecutive interpretation. The presentation materials are available on the real-time webcast or can be downloaded from the corporate website.

In this conference call, I'm going to go over the 2026 Q1 results. And then our CFO will share our key business achievements, recent market trends and key initiatives, 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 and future business environment and corporate strategies.

Before we begin, I'd like to highlight the accounting changes applied from this quarter. Last year, most of the volume in North America was for the JVs. However, starting this year, the stand-alone production sites and ESS and EV mix lines within the JVs will start production in earnest. In order to currently depict our portion of the North American production incentive effects generated by sales to clients other than JVs, the amount will be consolidated into revenue under other income. For comparability of finance statements, past financial figures included in this presentation have been adjusted accordingly.

Now I'll go over revenue for this quarter. Company-wide revenue despite continued weak EV demand in North America, but thanks to relatively robust ESS and cylindrical battery demand increased by 1% Q-o-Q to reach KRW 6.6 trillion.

For EV batteries, low mid-end chemistry product segment to Europe continued to increase. However, conservative inventory management by a major North American customer led to a temporary suspension of JV production, resulting in a Q-o-Q revenue decline. For small battery business, upgraded EV models showing strong sales generated robust shipment of the 2170. Also, the domestic production of the 46-series began last quarter.

This quarter, we observed its shipments starting to take off, evidenced by Q-o-Q revenue increase. In the ESS battery business, the ramp up of capacity in North America enabled higher sales to major grid-scale ESS customers, sustaining meaningful revenue growth.

This quarter, the revenue contribution of the 46-series to the total small battery division revenue reached mid-single-digit percentage, while the ESS revenue contribution jumped to mid-20% level of the company's total revenue. Meanwhile, the quarterly revenue and operating profit includes the North American production incentives. Despite growing ESS shipment due to significant reduction of EV battery shipments, the incentives decreased by more than 40% Q-o-Q to KRW 189.8 billion.

I'll move on to P&L. Despite major cost-saving efforts, the North American ESS production site expansion and related initial ramp-up costs and reduction of EV pouch volume to strategic customer led to a weaker product mix. As a result, the company recorded a large operating loss than the previous quarter, KRW 207.8 billion with a negative operating margin of 3%. As for nonoperating items, disposal of obsolete assets led to a loss on disposal of PP&E, also reflecting interest expense, the company recorded a nonoperating loss of KRW 650.8 billion. Before tax net loss was KRW 858.6 billion and net loss was KRW 945 billion.

Next, I'll go over the financials. As of 2026, Q1 due to preparations of the cylindrical battery production site in Arizona, the Michigan ESS line expansion, PP&E increased. In result, total assets increased by about KRW 4.7 trillion from year-end 2025 to KRW 71.8 trillion. On the liability side, increased borrowings led to a KRW 4.1 trillion increase from the previous year of KRW 41.9 trillion. Capital rose by KRW 0.6 trillion to KRW 29.9 trillion. Liabilities to equity was 140%, debt to equity was 83% and net debt to equity was 70%.

Moving to cash flow, a KRW 0.9 trillion EBITDA generation and KRW 0.8 trillion domestic bond issuance generated a cash inflow of KRW 1.7 trillion. Meanwhile, CapEx focusing on essential investments decreased by 47% Y-o-Y to approximately KRW 1.6 trillion. As a result, cash as of Q1 stood at KRW 3.7 trillion, similar to the previous quarter.

This will conclude the business performance overview. Next, our CFO will present the key achievements, recent market trends and key initiatives of Q1.

[Interpreted] Good morning and good evening. I'm Lee Chang Sil, CFO. Let me start off by going over the major business achievements of this quarter. First in February with an existing ESS strategic customer, we signed an additional power grid project in North America. The project is scheduled to start supply in 2028. Compared to the currently manufactured LFP ESS products, energy density will be improved by approximately 10% and landed cost by around 15%.

Based on improved technology, cost competitiveness and local production capabilities, we are actively responding to the needs of ESS customers. We are enhancing our project pipeline not only in the short term but also for the mid, long term. Our efforts in ESS are already bearing fruit. Last year, ESS revenue contribution was less than 10%. It has now reached mid-20%.

ESS should continue to expand to contribute up to mid-30% by year-end. In addition, towards end of last year, we started production of the 46-series in Ochang, which is now running smoothly. We, LG Energy Solution, are preparing global operations center in North America based on diversified lineup tailored to customer needs, ranging from the 4680 to the 46120.

We are in active discussions with multiple OEMs to diversify our customer base. As a result, our order backlog, which was 300 gigawatt hours at the end of last year has now increased to over 440 gigawatt hours as of end of April. In terms of operations, the Tennessee UC Phase 2 site, we decided back in March to convert some EV lines to ESS lines in the second quarter, which means in North America this year, we will establish a total of 5 ESS production sites. This will enable timely response to ESS customer demand while also enhancing the utilization of idle lines. By year-end, in North America, we plan to secure more than 50 gigawatt hours of ESS production capacity.

Next, I will go over recent market trends. The war between Iran and the U.S., which is currently significantly impacting the battery industry has been ongoing for nearly 2 months. Supply chain uncertainty has increased due to logistics disruption, while oil prices from last year's $70 per barrel, have come to over $100, and it seems possible that this trend may be prolonged.

The gas and oil price volatility and supply risk on top of the rapidly surging global need for power are once again emphasizing the importance of energy security. Against this backdrop, the need for regional energy self-sufficiency and securing a stable power grid are expected to continuously go.

ESS combined with renewable energy is a realistic alternative that can supplement the limitations of existing power sources and therefore, should garner more attention, especially considering that it usually takes at least 5 to even more than 15 years for existing power sources from approval to the actual supply of power. Renewable energy and ESS is in the limelight as an effective solution to address surging power demand as it can be built within 1 year if done quickly.

In addition, considering the infrastructure investment and total lifetime generation cost, ESS is the most cost competitive choice. ESS can mitigate peak loads to enhance stability of the power grid and simultaneously prevent against blackout risk through uninterrupted power supply.

As such, as a data center's core power infrastructure, the importance of ESS is expected to be even more emphasized going forward. Energy supply uncertainty and high oil prices should also highlight the need for conversion to EVs as governments face the need for energy self sufficiency.

From the consumer's perspective, car installments, insurance, gas prices, when all of these costs are included, the total cost of ownership between ICEs and EVs is considerably narrowing, which should support consumer preference for EVs. The major leading EV makers are also writing this trend with significantly improved performance and user experience enabled by the rapid commercialization and sophistication of autonomous driving technology notwithstanding short-term demand volatility, it should serve as a mid-, long-term EV demand recovery driver.

Policy-wise, localization requirements are strengthening. The OBBBA in the U.S. requires power generators to source at least 50% of this ESS locally this year and 55% next year for it to be eligible for tax deductions up to 40% of related CapEx. This incentive system is effective until 2035. In Europe, according to the IAA proposed in March, to be eligible for public tenders and subsidies, EVs require at least 3 locally manufactured parts, including the battery cell and ESS require European production of batteries and BMS, which is why discussions on supply chain localization in Europe is taking place in earnest.

As major markets introduce detailed localization policies across the energy value chain, in order to maximize incentives and effectively respond to logistics, tariffs and other external variables, customers' preference for players with a local production base will continuously increase.

Amidst such change, I believe the most important business priority this year is to strengthen cash flow and secure a healthy financial structure. Therefore, we will continue to enhance EBITDA-driven cash generation capabilities. In addition, we will improve cash flow through disposal of noncore assets, including JV buildings and equity.

While tightly managing working capital to ultimately improve asset turnover and financial structure. In terms of cash out, while maximizing the usage of existing assets and facilities, we will maintain the policy of executing only the minimum special investment according to strategic priorities.

In terms of business for ESS, we will actively pursue new orders centered on key demand sources such as powered infrastructure and AI data centers based on technological and local production capabilities. Also, we will focus on early stabilization of operations at our 5 ESS production sites in North America to ensure that we provide high-quality products in a timely manner at competitive cost.

For EVs, we will closely monitor market conditions by actively leveraging our regionally diversified customer base while preoccupying opportunities when demand recovers by taking advantage of our flexible production capabilities. Moreover, throughout the year, cylindrical batteries are expected to show robust demand, which will be met with our capacity in Korea and Asia.

We are also preparing to start operations in Arizona by year-end as part of our efforts to strengthen the overall regional production mix. For the supply chain, we are further sophisticating our monitoring system used by all business divisions to monitor commodity sourcing and inventory levels in light of the recent hike in geopolitical uncertainty.

While actively leveraging our diversified supplier base in order to respond to commodity price volatility risk, we are securing metal volumes at fixed price and using future derivatives for hedging purposes to implement a preemptive sourcing strategy.

For logistics, efforts to diversify transport routes via land and sea and to preemptively secure shipping capacity are being made as stability of supply becomes top priority. At the same time, we'll be engaging in strategic negotiations to minimize possible transport cost increase.

Lastly, to ensure that we win in the competitive market, securing product competitiveness is crucial. In ESS, hardware performance, including that of battery cells and packs will be improved. Also, the battery state and lifetime production accuracy will be enhanced while advancing the power trading solution. Such efforts in enhancing the system integration capabilities will be made in parallel to increase turnkey orders.

In EV, stronger supercharging functions will be featured in the new cylinder type products scheduled for lease later this year. We will continue to develop products for each application that are optimal to addressing customer needs. In addition to secure differentiated technology for the future, our pilot lot is testing mass production of the dry electrode process. Solid-state and sodium batteries are also under speedy development.

Investors, analysts and shareholders. The business environment we are facing today implies that geopolitics has become a constant, not a variable. I believe that the secondary battery industry is undergoing change by redefining the direction forward. In such time of transformation, understanding the new direction and capturing opportunities would be crucial.

Therefore, LG Energy Solutions will responsively and preemptively be doing our almost to achieve tangible results. Thank you.

This is the end of our presentation, and let us move on to the Q&A session. [Operator Instructions]

[Foreign Language] [Operator Instructions] The first question will be presented by Kim Hyun-Soo from Hana Securities.

[Interpreted] This is Hyun-Soo Kim from Hana Securities. The first question that I would like to ask you is about the second quarter trends. So if you compare that to the first quarter, how do the trends look in terms of the overall performance? And if you could also discuss the full year 2026 outlook, that would also be appreciated. The second question that I have is about your ESS business. I do believe that this is the business that is showing the highest and most rapid growth, particularly if we were to look at the North American market, for the full year, what are your expectations in terms of volume and profitability for the year.

[Interpreted] So with regards to the first question that you asked, which was our second quarter trends and the full year in terms of our expectation. Maybe I can address the question. This is the CFO. So first to talk about the second quarter. If we look at the North American ESS demand, it does continue to remain strong.

And as we increase our capacity, we do actually believe that there will be a significant and meaningful increase in our ESS shipments. In addition to that, for our strategic customer, we do also see a stable supply of cylindrical volume that is going to continue within the quarter.

As you are well aware, in the case of EV batteries in the U.S., the overall demand is still continuously slow. However, on the European side for high-voltage vehicle, lower to mid-end products and also in terms of the batteries for hybrid vehicles, we relatively see robust trends taking place. So if we look at the full company top line on a quarter-over-quarter basis, we do expect that the growth will be 10% plus for the next quarter.

If we talk about the P&L in the short term, because of the recent war that is taking place and other external factors, we do think that there will be an increase in logistical costs and also utility costs. So that is a situation that is happening. However, for the company as a whole, we are engaging in various cost-saving efforts and trying to increase the operational efficiencies that we have. And for ESS new capacity, by stabilizing the overall ramp up, we do want to continuously decrease the ramp-up cost.

So when excluding the IRA tax benefits on a full company basis, the overall target would be to turn into the black. If we talk about the 2026 or full year expectations that we have because of the recent global developments that are taking place and also because there's a lot of volatility within the market, it is very difficult and a bit challenging to set out a forecast for the second half or for the full year.

However, that has been said, as we have already said, on the ESS side, we do see fair signs of the overall demand increasing. And in North America for the site as we stabilize the operations, we do think that there is a potential to maximize the overall capabilities to cater to the demand that we see within this market.

So on a quarter-over-quarter basis, we do think that there will continuously be a significant and meaningful growth that we see on the top line. For EV batteries, the customers still tend to be a bit conservative with their purchasing trends. However, as mentioned before, for European mid-nickel or LFP, so with regards to the mid- to lower-end batteries, there is a continuous increase in supply. And to our cylindrical strategic customer, we do expect the overall revenue to expand in that area.

So versus the overall full year guidance that we provided at the beginning of the year, I do think that we will be able to maintain the 10% -- 15% to 20% growth on the top line that we had mentioned before. At the company level, within a market environment that continues to change very rapidly, we will try to very agilely deal with the changes in customer demand that we see and at the same time make sure that we do not miss any growth opportunities so that we can leverage the most of the current environment.

[Interpreted] So thank you. Maybe I can address your second question about the ESS business in terms of the volumes and also the overall profit outlook that we have going forward. This is Kim Min-Soo from the ESS Battery Planning and Management team. First to talk about our volume expectations. If we look at the North American market as of the end of last year, our ESS order book already reached 140 gigawatt hours and by increasing our overall capacity on the ground this year. From the first quarter, we actually have been able to see growth in the top line in earnest from this business.

For the full year, we do think that we will continue to add on a meaningful volume of new orders. So towards the second quarter and also as we move into the second half of the year, we do think that quarter-over-quarter, we will see a gradual increase in the overall volume that we have and overall, the overall revenue that we -- revenue growth that we see from this business.

To talk about profitability, there are multiple EV production lines that we have converted for ESS purposes. And because the overall ramp-up is taking place on a consecutive basis, in the ramp-up period in itself, there is, of course, the upfront fixed costs that what we need to incur. And also due to the Middle East situation, oil prices have been on the rise. There's also the tariff effects.

So because of these unexpected external elements that are taking place or volatility that we see within the market, for the key raw material, there has been an increase in processing cost has also gone up. So this has somewhat impacted our overall -- our profit profile. However, at the company level for the newly converted capacity, we are focusing on stabilizing the yield and also utilization as early as possible and also engage in continuous purchasing cost innovation and also cost-saving efforts, including the overall processing cost.

So we will try to improve our overall profit profile and also the profitability of this business.

[Foreign Language] The next question will be presented by Lee Jin-Myung from Shinhan Investment & Securities.

[Interpreted] There are 2 questions that I would like to ask you. First is that with regards to the conflict between the U.S. and Iran, it does seem to be that there is a possibility that it will last for longer. So what do you think would be the impact or the upside that you see in terms of the downstream demand? And how is the company positioning itself to deal with the situation?

The second question that I would like to ask you is about your small battery business. So the business with Tesla is growing and is very strong. What is your expectations in terms of your cylindrical battery business? And also from the Arizona production facility, what type of preparations are being made on the 46-series production?

[Interpreted] So maybe I can address your first question, which is about the U.S. Iran situation in terms of the overall impact that we see and the possible upside on the demand side. This is the CFO. So versus our initial expectations, it does seem to be that there is a possibility that the U.S. Iran conflict will last for longer. So amidst such a situation, the company has taken a multifaceted analysis about what the impact could be on the battery industry as a whole and also our business.

So we do continue to monitor the trends that we see within the market. First, to talk about it from an operational standpoint. From the company's perspective, we had actually taken preemptive measures even before the recent situations emerged to build out our local production capabilities from region to region and also the supply chain in such regions.

So therefore, from the conflict in itself, we do believe that the direct impact on our operations will be limited. However, that have been said, across the board, we do expect that there will be an increase in logistic costs. And also, there could be a possibility that inflation will remain higher for longer.

So for that reason, the company will be engaging in various cost reduction efforts by minimizing CapEx as much as possible, trying to increase the efficiency of our cost expenditures and also optimizing our SCM. If we look at the market demand and the implications there, for global energy supply and demand due to the recent situation, we have seen a surge in oil prices and also natural gas prices.

Even after the conflict is over, we do believe it will be very challenging for this situation to ease at once. So on a relative basis, we have seen, as a result, an increase in the EV new car registrations and also the overall transaction that are taking place in the used car market. As a result, I do believe that there can be improved purchasing sentiment from consumers for EV vehicles because at the end of the day, they are free from any oil price volatility and can also provide a lower fuel cost.

So taking into consideration the possibility of demand coming from such a situation, we are planning to actively address any changes within market that we see. In the case of ESS, for the traditional energy infrastructure that has been hit due to the war situation, we do think that the recovery of such cannot help but take a significant amount of time.

So as a result of that, we do think that there will be a continuous customer preference for new and renewable energy products and also ESS at the same time because it does provide relatively less volatility in the energy price and provides better visibility and generation cost.

So from the company levels between EV and ESS, we are trying to be flexible in our overall stance. And also because we do have global production capacity, we will base -- and because we do have also market-leading operation capabilities, we will continue to see the what the market -- how the market evolves to flexibly deal with such a situation and also to ensure that we are able to actually deal with various business opportunities and actually realized results.

So maybe I can address your second question about the cylindrical demand that we have and also the production of our 46 -- series. This is [ Doen Ha] from the mobility and IT battery planning and management team. First, to talk about the cylindrical demand that we see from the second half of last year, because of the new models that had been launched in China, we have seen an increase in the overall EV sales from a customer side. And also in the European market, there continues to be solid sales trends that continue.

So as a result, for the cylindrical volume that we have, there continues to be an increase in that area. In addition, for this year, recently due to the higher increasing oil prices within the China area and also in India, we actually see an increase in demand for electric 2-wheeled vehicles, and towards the second half and also towards the second quarter of this year. As a result of that, we do think that the top line for the cylindrical battery business will continue to maintain very solid trends. So talk about our 46-series production. In the case of our 46-series from the end of last year from our Ochang line, we continue to, without issue, supply various volumes for our customers. And in Arizona, in order to deal with the overall order volume that we have, if early, we do think that we will be able to start production in terms of the mass scale production from the end of this year. For our 46-series based upon our global operational capabilities and technical competitiveness from various European OEMs, we have been able to secure orders of large volumes for 46 volume, that would be embedded into premium EV vehicles. And based upon that, we actually believe that we will be able to further diversify our overall customer base for cylindrical EV batteries.

At the same time, not only just in North America, but also from the European customer side, we are looking into the on-the-ground demand that is taking place. So therefore, over the longer term, we are actually reviewing the possibility of securing cylindrical battery capacity within Poland.

[Foreign Language] The next question will be presented by Chung Won Suk from IM Securities.

[Interpreted] There are 2 questions that I would like to ask. First is on the ESS side, I think that during our presentation today, you did mention that in North America, your ESS capacity would reach 20 gigawatt hours by the end of the year. So could you talk about your plans after that situation or going forward? In addition to that, do you think that there would be any possibility of there being an oversupply situation in the North American ESS market?

The second question that I would like to ask you is about your EV battery demand. So in North America, it does believe the overall market continues to be very sluggish. At the company level, do you see any signs of a recovery taking place? And what is your overall outlook for the second half of the year?

[Interpreted] So maybe I can take your question about the ESS business. This is Kim Min-Soo from the ESS Battery Planning and Management Division. So first to talk about how our capacity is evolving and the plans going forward. At the company level, focusing on the North American market, as you mentioned, we do see a significant increase in overall ESS demand.

So to deal with such a situation, we are trying to actively use the existing production sites that we have so that in a preemptive manner, we can actually build out our local production platform. So as the CFO had mentioned during the earnings highlights from the -- from last year, there is our Michigan factory and also Canada, Ontario site, which is stably mass-producing ESS batteries.

And added to that, we are also planning to in sequence add-on ESS lines in our Michigan Lansing stand-alone facility and also under the capacity -- some of the capacity that we have under the Honda JV and GM JV Phase #2. So by the end of the year, as you had mentioned in your question, the overall capacity in North America will represent 50 gigawatt hours in total.

So in addition to that, we do actually have additional space that we can utilize for ESS production purposes. So we will continue to monitor and take into consideration the overall production efficiencies and also the customer requests that we see and the timing of such to additionally control and moderate the overall capacity that we have within this market.

You did ask about a possible oversupply situation in North America. But if you -- if you currently look at the supply/demand dynamics within this market, based upon the overall volume in North America for ESS demand going forward, there is an expectation that driven by the overall grid-related demand that the market will grow at a CAGR of close to 20% until 2030. Take into consideration on the supply side that for the Chinese players, there are limitations in entering into the market. And for the non-Chinese players, there is a limited number that actually has local production capabilities. So as a result, for the local U.S. production supply, well, we do think that there will continue to be a shortfall versus the demand until 2030.

So added to that, if we look at the grid-related overall demand and also AI-based data center demand that is continuously growing. And if we take into consideration the current trends, as of the current time, I do think that it would be a bit premature to be concerned about an oversupply situation within the North American market.

[Interpreted] So this is Ahn Min-gyu from the Advanced Automotive Battery Planning and Management side. So maybe I can address your second question about the EV market. For the EV market demand, it is true that there are differences that we see by region in the case of the Europe market. Of course, on a relative basis, we do see more solid trends in terms of sales, whereas in the North American market, due to the overall abolishment of consumer purchasing incentives and also with regards to the stable inventory management stance that our customers have been taking. Overall, from the fourth quarter of last year, we do continue to see an overall weak trend within demand.

However, if we look at the month-over-month trends within the market, in March, though, it was a slight improvement. We actually did see an increase in overall U.S. EV sales, including our strategic customers. And in the used car market for EV sales, we actually do see signs of growth taking place.

So amidst a high oil price environment, we do believe that some of the overall purchasing sentiments that consumers have for EV vehicles has improved. And therefore, we do cautiously expect that, that may be something that is taking place.

However, as of now, we have not seen any signs of direct change taking place at the customer level. So in the case that the current trends do continue, we do expect that we cannot rule out the possibility that our customers may use their inventory earlier or depleted earlier than we had initially expected, and that there could be an increase in overall EV demand.

So we continue to see and monitor the overall recovery trends -- possible recovery trends within the market in a very diligent manner. So first, in terms of the relative stronger demand that we see in the U.S. customer -- in the European customers, rather, we will continue to cater to the demand that we see in the low- to mid-end products such as mid-nickel batteries or LFP batteries and also the hybrid-related demand. And in the North American market, we are going to ensure that in the second half of the year with our strategic customer, when we restart production there that we will be prepared to be able to restart without any issue.

[Foreign Language] The last question will be from [indiscernible] from Shinhan Securities.

[Interpreted] I also have 2 questions that I would like to ask you. First, with regards to prismatic batteries and also sodium batteries. What type of preparations has the company made in that area? How is the current situation evolving? And what would be our competitive edge in these areas? The second question that I would like to ask you is that recently, metal prices have been increasing and the U.S. dollar continues to remain strong. So what is the impact on our business? And how are we dealing with such a situation?

[Interpreted] So maybe I can address your first question. This is Lee Yeon-hee from the Business Strategy side. So first of all, to talk about the prismatic form factor for prismatic batteries, we are planning to first launch products for ESS battery purposes. So right now, we are preparing to do so. And the North American ESS customers, we are planning to start mass production on the ground at the end of 2027. So in line with that schedule, we currently have our product development and also investment targets, which are going ahead without any issue. For EV prismatic batteries, right now, we are developing various products with a multiple number of customers based upon LFP and LMR chemistry according to what the customer is requiring. So from Ochang pilot line that we have, we are currently producing samples and continue to engage in co-development.

So based upon the accumulated product development capabilities that we have and the supply chain that we have built out, we are trying to, in a timely manner, provide the products that our customer needs and also that the market needs. And with regards to the production sites, in line with the evolutions that we see on the demand side, we are planning to gradually expand our capacity. In the case of sodium batteries, as of now, the price is still very high. However, not only in terms of cost competitiveness, but also in terms of the performance in low temperatures and also power delivery characteristics versus LFP, we do think that there are many benefits that we would be able to see. So in terms of customer demand, we expect that there will be demand in the ESS market for the small-sized EV segment A and B.

And also in the case of 12 and 24 voltage alternative to lead asset battery type of market. So as of now, with a multiple number of OEMs, we have produced samples of 12-volt and 24-volt battery products, which are being used for technology verification with in-vehicle testing. And for ESS batteries right now, we are in the process of verifying the technology with a large-sized North American developer. So in the case of our prismatic type batteries versus other peers within the market that focus on this product, we have started a bit late. However, and also in terms of the sodium batteries, the development is still in the early stages. However, based upon our R&D know-how and also track record that we have accumulated across the past 3 decades, we do think that we can come up with an appropriate solution to meet our potential customers in the market and also the customer needs so that we can all secure a product in this area that can cater to this market.

[Interpreted] So maybe I can take your second question. This is Chang-Beom from the Planning and Management side. So first, to talk about the increase in metal prices for key metals, such as lithium and nickel, because of the expectations about an increase in demand driven by AI data centers from the fourth quarter of last year, we do see an increasing trend. So due to the overall business structure that we have in which the change in metal prices is reflected on our ASP with a time lag of around 1 to 2 months. We do think that we will actually see a gradual reflection in our ASP from the second half of this year due to the metal price increase trend that we see recently.

However, to minimize the overall impact on our business as much as possible from the volatility in metal prices, for EV projects, we do have a pass-through in our ASP of the key metal price changes that are taking place. And on the ESS side, due to the nature of the market in which it's more short-term contract focus and also because of various customer requests, there are some cases in which we will have a fixed price contract for the overall orders. However, if that is the situation then on the flip side of that with the metal producers or for the raw material providers, we also will engage in a fixed-price contract or we will actually use various features or derivatives to hedge the risk that we would actually be exposed to in a price increasing environment.

So at the end of the day, if we look at the overall impact from an increase in metal prices on our business, we actually believe that the impact would be limited in terms of our P&L. To talk about the exchange rate situation and the U.S. dollar. Of course, at the company level, we -- for foreign currency, we don't only have the U.S. dollar, but a wide multiple of various other foreign currencies that we transact in. However, if we just look at the U.S. dollar specifically, we do have a strong position in U.S. dollars. So therefore, if the dollar is in a strong position versus the Korean won, then both in terms of the top line and also in terms of our P&L, there will be a positive impact that we will see from that. However, in the case of the foreign currency corporate debentures that we have issued at the HQ level, in the case that the won does weaken, there may be an increase in the overall consolidated borrowings that we would recognize. However, and actually, for the FX risk in itself, we do hedge it using various forward transactions or currency swaps to minimize the overall impact of the FX change as much as possible.

[Interpreted] Thank you very much. With this, we would like to wrap up the first quarter 2026 Earnings Conference Call for LG Energy Solution. Thank you for your attendance today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

[Interpreted] Good morning, and good evening. This is Sara Hwang, Head of IR at LG Energy Solution. Thank you for joining our 2025 Q4 earnings conference call. First, I'd like to introduce who are present today. Lee Chang Sil, CFO; [indiscernible], in charge of Finance, [indiscernible], in charge of accounting, [indiscernible], in charge of Planning and Management; [ Ahn Min-gyu, ] in charge of advanced automotive battery planning and management; [indiscernible] in terms of mobility and ID battery, Planning and Management; Kim Min-Soo, in charge of ESS Battery Planning and management; and [indiscernible] in charge of corporate strategy.

For your reference, presentation for business performance and strategy will be conducted with the simultaneous interpretation. After which, we will have a Q&A with consecutive interpretation. Presentation materials are available on the corporate website for download.

In this conference call, I'm going to share our 2025 annual and Q4 quarterly results and key achievements. And then our CFO will share the 2026 market outlook, the company's growth strategy and annual guidance 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.

First, I'll go over the 2025 annual performance and major achievements of LGES. In 2025 in the U.S., the impact of the OBBB Act on supporting the downstream market, changes in sourcing regulations and tariffs levied on major economies affected the secondary battery market.

In the EU, carbon emission regulations were relaxed. These factors are some of many policy changes that influence the speed of electrification of major EV customers, which reduced visibility and led to contraction of the overall demand environment. Against this backdrop, the company's 2025 revenue decreased by 7.6% Y-o-Y to KRW 23.7 trillion. The decline of average metal prices and the expiry of EV purchase subsidies in the U.S. led to the reduction of EV sales. EV battery shipment reduced by more than 10% as inventory was managed conservatively by customers in the second half.

However, preference for non-Chinese locally manufactured products and the expansion of AI data centers created a relatively favorable environment for ESS in the U.S. The company preemptively responded to the ESS demand, leveraging our LFP capacity, resulting in a 40% Y-o-Y growth of ESS revenues. Including North American production incentives, annual operating profit jumped by 133.9% Y-o-Y to KRW 1.3 trillion. A high-margin oriented product mix and application of cost competitive materials improved the materials ratio by about 8 percentage points. In North America, the addition of ESS volume on top of EV batteries contributed to an 11% Y-o-Y rise products and incentives. Operating margin improved by 3.5 percentage points to 5.7%.

Also, higher production efficiency, lower inventory and enhanced SDN capabilities boosted working capital efficiency.

Meanwhile, the company quickly responded to the rapidly changing business environment by adjusting CapEx execution by about 20% against last year while also enhancing the efficiency of our asset portfolio to focus on preemptive risk management.

First, the ESS mass production site in North America was revised to Michigan rather than new expansion in Arizona, which has brought the local mass production timing forward. Idle EV capacity in Poland and JVs in North America have been converted to ESS lines to reduce CapEx pressure and to boost utilization of underutilized capacity.

In Europe, we started the production of low to mid-end chemistry, such as high-voltage mid-nickel LFP products. Since Q4, we have started shipment to customers, evidencing our ability to respond to customer needs.

The Honda JV is in talks to sell its building to our partner. And once the deal is closed in Q1, the proceeds will be used to fully repay JV's debt to boost financial health and structure.

Lastly, we expanded our product lineup and customer base. The cylindrical 46-series, which began production in Ochang started shipping in Q4.

Our differentiated product competitiveness, including superior mass production capabilities, high energy density and the company's proprietary technology for thermal propagation provision impacts recognized by the market. Traditional European OEMs as well as Chinese customers who usually prefer national battery makers have in supply contract with us.

As of year-end last year, the backlog of the 46-series battery surpassed 300 gigawatt hours. For ESS, we plan to leverage our North American production sites to make not only the currently manufactured pouch LFP long cell, but also to establish the prismatic LFP product lineup ahead of competitors. We have also been advancing our competitive strength of system integration capabilities to increase the contribution of high value-adding projects. Cumulative ESS backlog surpassed 140 gigawatt hours.

Next is the Q4 business performance. Since the expiry of EV purchased subsidies last September, conservative battery inventory management of strategic customers continued, leading to a decrease of EV part shipment. However, by more than doubling ESS revenue and robust volume growth of EV's cylindrical battery to a strategic customer, we were able to increase revenue by 7.7% Q-o-Q to KRW 6.1 trillion.

In terms of profitability, despite company-wide efforts to reduce cost, high-margin part sales declined to North American customers and upfront cost of ramping up ESS lines in our Holland Michigan plant resulted in an operating loss of KRW 122 billion.

Despite a growth of ESS volume, the EV sales slowdown led to a 9% Q-o-Q decline of production incentives to KRW 333 billion.

For nonoperating items, interest expense and loss on disposal of tangible assets resulted in a nonoperating loss of KRW 354 billion. Before tax net loss was KRW 476 billion and net loss was KRW 773 billion.

Next, I will go over the financials. Total assets as of 2025 due to growth of tangible assets in North America increased by about KRW 6.8 trillion to KRW 67.1 trillion. Liabilities to equity was 129%, debt-to-equity 77% and net debt to equity 64%.

I will now go over the annual cash flow for 2025. Approximately KRW 5 trillion EBITDA generation and KRW 6 trillion local and global bond issuances caused cash inflow of total KRW 11 trillion. CapEx was around KRW 10 trillion, about 20% less than the previous year. Year-end cash reduced slightly by KRW 0.1 trillion Y-o-Y to KRW 3.8 trillion. This will conclude the performance overview.

Next, our CFO will present the 2026 market outlook, the company's growth strategy and the guidance for 2026.

[Interpreted] Good morning, and good evening. I am Lee Chang Sil Lee, CFO. First of all, I would like to wish everyone health and happiness in the year 2026. Let me start by going over this year's battery market.

In 2025, the EV market was heavily impacted by the policy changes. In 2026, we expect growth to continue at least around 10%, although becoming more moderate than the past. For ESS Industrial electrification and growing cooling and heating demand due to climate change is supporting demand. In addition, increase of power consumption and resulting higher contribution of renewable energy, stronger demand for power grid stability, the expansion of AI and data centers are all factors triggering structural growth of the ESS market. We forecast that global ESS installation in 2026 will grow by more than 40% Y-o-Y basis.

In our strategic North American market, the expiry of EV purchase subsidy should have considerable impact on EV demand. OEMs are also expected to manage inventory conservatively while focusing on hybrids, which can inevitably result in negative growth of EV batteries. However, in the ESS market, like just mentioned, big tech companies are investing heavily in data centers mainly in the U.S., and policy support such as the clean energy investment tax credit is expected to increase ESS demand contribution to around half the total battery market in North America.

Batteries preferred by data center can be divided into different types based on purpose and where it is installed. Installed inside a data center, UPS provides emergency power during blackouts on the data center level, while BBUs can protect individual server racks from power loss.

Another type is the ESS for power grids, which is installed outside and is used to support power needs for overall data center operations. In particular, generative AI data centers when compared to traditional ones have 6x to 10x higher power density per unit. and is expanding in the form of large campuses. So on top of UPS and BBUs for emergency power, ESS for grids, which supports essential power supply is driving a strong growth of the ESS market.

Given that data centers require ESS projects based on the premise of long-term stable operations, the growth potential for ESS for grids, which takes up more than 95% of total ESS demand, is clear. The company will continue to preemptively respond to environment changes and business opportunities to expand our ESS business to improve performance. We will also ensure balanced business operations while minimize the impact of short-term market fluctuations are preparing for the future based on winning technologies and product competitiveness.

Let me now go over each business division. First, for ESS, we plan to continue to expand the order pipeline driven by mid, long-term North American projects. Our target is to outperform last year's record-breaking new orders of 90 gigawatt hours through strategic partnerships with North American top tier power grid utility customers on top of turnkey solutions based on differentiated SI capabilities.

We are also planning to actively capture the increase in UPS and BBU demands by targeting to more than double UPS revenue Y-o-Y with our high output NCM-based pouch products.

In addition, in case of the BBUs, which require ultra high output performance with limited space -- within limited space, the tabless 2170 cylindrical should start mass production in the second half.

With such strong ESS momentum, our global capacity will be managed with agility. We plan to almost double company-wide ESS capacity by year-end to at least 60 gigawatt hours.

Given that local production is critical in North America, we will utilize not only our wholly-owned production sites in Holland and Lansing, Michigan but also convert some EV lines to ESS lines at our JV site with partners such as Stellantis and Honda to secure more than 50 gigawatt hour capacity without incurring significant costs.

In fact, the Holland, Michigan site and Stellantis JV in Canada have already started operations and should fully contribute to this year's performance. Lansing site should start production within the first half and the Honda JV will also follow suit once the size and timing of the conversion is finalized.

In Europe, the Poland site completed conversion of some of its lines to ESS last year, and we will supply locally produced ESS products to customers who have needs for non-Chinese products.

In Asia, the Ochang line will be used to participate in domestic tender projects. We also plan to create additional growth opportunities by entering grid markets in Japan and Australia with capacity in China.

Let's move on to EVs. The company is strengthening responsiveness to a market that is becoming increasingly more segmented. First, we will grow presence in the low to mid and EV market with our strengthened product lineup.

In Q1, we will ramp up mass production of LFP and high-voltage mid-nickel products for EVs, which began production in Poland at the end of last year or LMR prismatic, we plan to secure sample production lines at Ochang in the first half and prepare for mass production in North America by 2028. We will also discuss further opportunities for additional orders.

We aim to stably expand the supply of the new cylindrical form factor, the 46-series to multiple customers from Ochang while also planning to start production of the new 46-series, which both enhance fast charging capabilities within this year.

In addition, the Arizona site, which can produce diverse sizes of the 46-series suspect production towards the end of this year so that we can proactively respond to orders won in North America. With a relatively more stable HEV demand, we will strengthen market responsiveness by adding cylindrical batteries on top of the existing pouch products.

As electrification is moving beyond EVs and spreading into diverse industries, we will continue to develop new businesses and technologies to ensure that we preoccupy new opportunities.

In the rollout market, where expectations for the commercialization of industrial humans are rising, we are already supplying cylinder-type batteries to more than 6 major customers. Safety, high energy and high power performance are most important in this market. We are closely collaborating with many industry leaders supplying samples for next-generation models and discussing specifications and mass production time lines.

Additionally, we aim to actively explore expanding battery applications in chips, urban air mobility and aerospace. We are also accelerating the development of materials and processes for next-generation products. While we have completed the setup of pilot lines for the dry coating process in Ochang last year, we plan to secure the mass products in our LFP this year.

For solid-state batteries in order to penetrate the market with competitive products, we are developing processes to deliver high density as well as enhancing materials such as electrolytes. We are also actively discussing product development and business models for sodium batteries for various potential applications.

Lastly, I will go over the guidance for 2026. Our target is to grow company-wide revenue by mid-10% to 20% on a Y-o-Y basis.

EV parts revenue is expected to decrease because of the slowdown of EV demand in North America despite low and mid-end product driven growth in Europe. We aim to achieve overall sales growth of relatively strong demand for cylindrical batteries and revenue growth from the launch of the new 46-series products. We also have the ESS business for which we are targeting more than triple sales growth based on stable North American production capabilities.

In terms of profitability, we will continue efforts to quickly stabilize operational capacity and reduce material costs, therefore, strengthening structural cost competitiveness. With operational efficiency improvements from enhancing the utilization rate of the existing facilities, we aim to achieve a company-wide operating profit margin of plus mid-single-digit percent, thereby expanding the scale of operating profit generation compared to the previous year.

Meanwhile, we plan to significantly reduce CapEx execution by more than 40% compared to the previous year. As the downstream market changes quickly, we are recalibrating company strategy to lay the foundation for future growth. In this regard, establishing healthy financial structure and stable cash flow is of utmost importance. Therefore, we are prioritizing cash flow management as the most important management task this year. We will minimize new expansion investments and capital expenditures by maximizing the operational efficiency of the existing assets as converting existing EV products lines to ESS.

While we selectively execute investments that are directly linked to sales growth, we plan to significantly reduce the CapEx amount and improve our financial ratios by reducing the size of borrowings.

Investors, analysts and shareholders. We anticipate that 2026 will be a time when structural changes such as the slowdown in the growth of the EV market and the rise in ESS demand becomes a reality. Based on strategies mentioned today, the company will continuously strive to stay ahead of these changes, respond proactively and turn opportunities into achievements. We kindly ask for your continued support and valuable advice throughout the year. Thank you.

This is the end of our presentation. Let us move on to the Q&A session. [Operator Instructions]

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] The question that I would like to ask is, in the short term, with regards to your fourth -- first quarter if you could provide some color about how you see the overall quarter progressing going forward, that would be appreciated. And in addition to that, I also have a question about your ESS capacity. I do think that in terms of operations that you are trying to stably expand the overall capacity situation. So how is that progress going?

And in particular, with regards to the various material sorting that you are requiring. So for example, for LFP cathodes, how is the preparation on that side evolving?

[Interpreted] So this is the CFO. So maybe I can address the first part of your question and talk about our outlook for the first quarter. And since we're talking about the view going forward and also talk about our outlook for 2026 as whole. So if we talk about the first quarter first, we do believe that in the North American area for EV sales, there will be continue to be somewhat of a slow situation. In addition to that, for our key customers, they continue to manage their inventory in a conservative manner. So as a result, we do think that for EV pouches in terms of overall sales volume, we will -- cannot help but experience an overall decreased situation.

In the case of cylindrical demand, we do think that our strategic customers in this area have seen very strong sales for the new EV models that they have been seeing. So as a result of that, there growth in terms of the overall supply that we have there. And on the ESS side, as we do continue to increase our production in North America, we do think that our overall sales will ramp up there. So in a total top line basis, we do think that in the first quarter versus the fourth quarter of last year, we will be able to see a similar type of revenue in terms of the overall amount.

To talk about profitability, on the ESS side, first, we are trying to secure more capacity to ensure that we can have a first mover advantage in this area and strengthen that. And in terms of our profitability, also, we do think that there will be for progress that we will be able to make. In addition to that, we also believe that any fixed cost burden that we will be having due to a decrease in our EV-related pouch volume and also due to a slightly weaker product mix is something that we will be able to fully offset. And at the same time, with regards to various cost efforts that we will be making at the full company level to try to save and also achieve better operational efficiencies, we do think that, that will also lead to better profitability going forward.

To talk about our overall outlook for 2026 as a whole, first, if we look at our key markets, which is North America focused in this area and to look about what we see going forward, as the overall purchase subsidies have been come to an end, we do think that in terms of EV sales trends and also the adjustments that are being made in electrification policies by OEMs that for the downstream environment for the full year as a whole, we do think that it will be challenging for things to improve. However, on the flip side of that, we also see that for AI-based data centers and also the overall grid expansion that is taking place. On the ESS side, we do think that there are opportunities that we would like to be able to gain as first mover. So therefore, we do expect to achieve around 40% growth in this area.

In the case of EV automobiles, there are various mid- to low-end products that are being expected to go into mass production this year. And in addition to that, there's also going to be new models and new volume that we are going to supply such as 46-series cylindrical batteries, so we will be focusing on trying to maximize the operational efficiencies of our existing capacity as much as possible. And on the ESS side, we will continue to stably expand our overall capacity so that we can cater to the increase that we see in the market and also have a very strong position that we can create so that we can continue to drive the overall revenue at a full company level.

In addition to that, for the efforts that we are making for our continuous cost innovation and also by strengthening our overall competitiveness from a structural manner, even when excluding the IRA-related tax credit, we do believe that we will be able to focus on trying to achieve a meaningful performance in the black, which is possible.

[Interpreted] So this is Kim Min-Soo from the ESS battery planning and management side. So maybe I can address the second question. First, to talk about our North American operations. So first of all, if you look at our Michigan site, we started operations in May of last year, there were some unexpected factors that did take place. So temporarily, some of the operations were impacted and were suspended. However, right now, if you look at the situation, whether it be in terms of yield or the overall utilization, we do see a stable performance.

However, as you have mentioned, with regards to the Michigan site and other sites that we have, of course, right now, we're trying to stably expand our overall ESS capacity on the ground to a very scalable level. So therefore, we have created a North American operation stabilization organization, which would be a dedicated organization that would look at the development and product stabilization to also the aspects of customer delivery. So this is an end-to-end operational organization that would oversee the full line of business that is being provided. And focused on this organization or led by it, we will be able to strengthen our overall business development and also the supervision and management of the overall -- the chain of business.

And at the same time, with regards to our overall production capabilities, our yield and our SCM, we do think that we will be able to expand the support staff that is needed to ensure that we can very quickly stabilize the operations that we have. So we're trying to focus as much as possible on upgrading our operational excellence.

In addition, in North America -- in addition to North America, actually, if we look at Korea, if necessary, we also have the Ochang line that we can utilize, which represents 5 gigawatt hours. So this is a capacity that we do have that we can use for any bidding for domestic projects that are necessary. And in addition to that, the Poland and Chinese lines could also be actively utilized to deal with any customer demand that we see going forward.

You did ask about our sourcing. So from a sourcing perspective, I do think that in line with the rapid growth that we see in the ESS market, we want to ensure that we are able to secure the production and also the material that we need in a prompt and in an efficient manner. So we are trying to focus on building out a supply chain and diversifying our suppliers to ensure that we have a stable base and also the cost competitiveness that we want.

So on a relative basis, we do think that the LFP cathodes are more important and also they do account for a sizable overall portion of our -- the material that is required. So right now, we do have stable sourcing that we're able to enjoy through a local Indonesian material supplier. And going forward, we also have the plans to sight an MOU or we have already signed an MOU actually with another Indonesian local provider with a target of starting in 2027. So right now, we continue to actually engage in various efforts to diversify our sourcing.

Over the mid to longer term, we want to expand our overall supply chain to include Korean suppliers so that we can flexibly deal with various regulations that we see on the ground in the markets that we're trying to cater to such as the non PFE-related supply chain conditions.

[Foreign Language] The next question will be presented by Will Cho from HSBC Securities.

[Interpreted] This is Will Cho from HSBC. I have two questions that I would like to ask you. One is about EV batteries and one is about more specifically cylindrical batteries. So to ask the first question on the EV side, because of the weakness that we see in the downstream demand, I do think that it is inevitable that we will be experiencing a decrease in overall sales volume. How much do you actually believe that volume will represent? And accordingly, what's the company's overall strategy to deal with this EV business dynamic going forward?

The second question that I would like to ask you is about your cylindrical batteries. If you look at the -- what is your outlook for the demand that you see coming from Tesla? In addition to that, for the 46-series specifically, what's the current progress that you see in that area? And what are your plans going forward?

[Interpreted] So maybe I can take your questions. This is [ Ahn Min-gyu ] from the advanced automotive battery planning and management side. So first, if we look at the overall downstream situation, recently in the EV market as the overall subsidies in the U.S. have been abolished, from the fourth quarter of last year, the overall EV sales volume has dramatically decreased. In addition to that, if you look at the key OEMs recently, there has been some adjustments in their overall electrification strategies. And focused on the North American area, we do think that in the short term, there will inevitably be a decrease that we see in EV sales volume as a whole.

So if we look at our strategic partners in this area of our customers, for the time being, we do think that the overall stance to considerably manage inventory will continue. However, towards the second half of the year, we do think that their overall inventory that they have of batteries will be depleted. So we will be preparing to ensure that we can cater to the overall production volume that they need as of that time.

In addition to that, within the year, we do have SOPs planned for the Honda and also Hyundai Motor JV that we have. In addition to that, we also have the landing site that we will be operating independently. So we are planning to ensure that we can have stable mass production taking place from these capacities. So that towards the second half of the year, we will be able to see a moderate recovery in our overall sales volume.

That has been said, in addition, if we look at the end of last year, there has been various solutions that we have been providing on the mid- to low end, such as high-voltage mid-nickel batteries and LFP batteries which we started to mass produce at that time. And right now in the European market, we actually expect there to be a growth in the overall sales volume if we look at it on a Y-o-Y basis.

So recently, on a relative basis, there are some very stable sales trends that we also see on the HEV-related volume. So actively dealing with such demand and also trying to offset as much as possible any of the North America-related EV sales decrease would be the strategy that we are expecting to deploy.

[Interpreted] So this is [ Doen Ha ] from the Mobility and IT Battery Planning and Management department. And maybe I can address the question that you have. First, if we talk about our strategic customer for the cylindrical demand that we have, from the second half of last year, it has been that for the new cars that were issued, there seems to be a very solid sales trend taking place for those models. So this year, again, we do think that, that growth is something that we can expect will continue going forward. So accordingly, we will be catering to that situation.

For the 46-series and what the overall status is today and the plans going forward, to talk about that because it is our new form factor. At the end of last year, we did very smoothly engaged in the mass production on the Ochang line. And from the first quarter of this year, are planning to gradually expand our overall supply and the volume there so that it can start to full fledge realize into sales.

In the case of our Arizona site, right now, we are trying to the plan that we would have is to start the overall production of our lines one by one from the end of this year, if early, to ensure that we can cater to the 3 customers in which we already have orders for.

And in the case of the Europe capacity that we have, in light of the overall demand that we see from the local customers there, we are looking into whether over the longer-term horizon, we would be able to use some of the cylindrical capacity that we have in Poland. At the same time, in addition to the overall order book that we have already built with multiple other customers, we are in discussions about products from a wide variety -- that would represent a wide variety of specifications ranging from 4680 to 46120. So going forward, we will continue to try to solidify the position that we have been able to gain in the premium segment.

[Foreign Language] The following question will be presented by Jin-Myung Lee from Shinhan Securities.

[Interpreted] This is Lee Jin-Myung. There are two questions that I would like to ask you. First is related to your business strategy. How are you planning to operate the capacity that you currently have? And in relation to that, what would be your CapEx for 2026?

The second question that I would like to ask you is that in relation to the overall CapEx that you have budgeted for this year, will you be issuing any debt or raising any external financing? And in addition to that, how are you going to maintain your financial profile for the year?

[Interpreted] So this is the CFO, and maybe I can take the first question. So as I mentioned in the presentation, I do think that this is an area in which you would probably be very interested in because there are various changes that are taking place. So maybe to talk about our overall capacity and CapEx would be useful.

First, to talk about how we're going to run the overall capacity that we have. If we look at the market, right now, we do want to ensure that we are agile and dealing with the changes in our customer situation. So with regards to any investments for new capacity, we do want to be able to quickly be able to decrease that and at the same time try to focus and continue to focus on maximizing increasing the operational efficiencies of the existing capacity and lines that we have. So this is a trend that we are going to bring into this year again.

So in terms of the total global capacity that we will be having we are planning to maintain it at the same level that we had last year or a similar level, which would be at around approximately 300 gigawatt hours in total. However, that have been said, in the case of the North American market, which is a strategic market for us, we do want to be able to preemptively be able to deal with the increasing -- rapidly increasing ESS demand. So for this year's plan, we will continue to build up capacity in this area. So that as of the end of 2026, we would be able to stably secure more than 50 gigawatt hours in ESS capacity.

On the EV side, there are SOPs that we are planning within the year related to the Honda JV and also HMC JV. So for these new projects, we want to be able to ensure that the execution does take place very smoothly and stably.

And in addition to that, we want to secure the capacity necessary for 46-series so that we can deal with the demand that we have accordingly. So as a result of that, we will be looking into the Arizona site to reform it and ensure that we do have the capabilities that we need for mass production as necessary.

Over the mid- to long term in North America for ESS and also for prismatic-type LFP batteries and also for EV-prismatic LMR batteries, we are looking to ensure that we can secure a mass production capacity and capabilities. So we're also looking into whether we can utilize on the absolute capacity that we have in Poland to actually set up lines for 46-series cylindrical batteries. So according to the demand and the customer needs, we will try to actively cater to such a situation.

To talk about CapEx specifically, I think that this is something that I did mention before. But right now, the target for this year is to achieve a 40% decrease in our CapEx on a Y-o-Y basis. So for the existing capacity that we have, again, we will maximize the utilization of that and also try to achieve more active efficiencies with the assets that we hold. So that for the time being, we can continue to cut back on our CapEx around 20% and 30% each year on average.

[Interpreted] So this is [indiscernible] from finance. And maybe I can address your question about what type of financing plans that we have going forward. So if you look at this year on a Y-o-Y, if we look at this year in terms of the overall situation on CapEx, again, we do expect there to be a decrease in our overall CapEx levels. So again, the intention that we have is to use as little CapEx as possible. So first, if we look at the funding versus of that, of course, any operational cash flow that we generate internally would be what we would utilize first. And additional, if there is any shortfall that is created, then we are planning to fund that with external borrowings that we would be able to generate.

So in terms of the external borrowings to be a bit more specific, in the case of the headquarter, in line with the overall CapEx that we have executed for the past 3 years, we actually had been financing through issuing debt or corporate debentures. And this year, again, for some of the debentures or bonds that we have outstanding, some of them will be reaching maturity. So there will be some refinancing requirements.

In addition to that, there's also a day to Q level, some other types of needs that we have. So taking everything into consideration, we are going to issue debt again this year. So in terms of the specific timing of that or what the actual size would be, this is something in which we are planning to be a bit flexible based on the overall cash flow that we see generated and also in terms of the overall trends that we see in the financial markets.

So if we go to the overseas subsidy level, first, in the case of the Michigan entity that we have in the U.S. For the ESS investments that is necessary here, I do believe that we will be drawing down on the ECA financing, again, that we have there that was agreed upon at the end of last year. And in addition to that, for the HMC North American JV and the investments there, which are being planned to have SOP within this year. Any necessary financing that would be needed is something that we are looking at as of the current time, in terms of low-cost financing options that are available for us.

Finally, I think that what I can say is that this year, again, we are going to continuously cut back on our CapEx and try to minimize the cash outflows that we have so that we can try to refrain from increasing the overall total company level borrowings as much as possible and to maintain and continue to sustain a very stable financial structure.

[Foreign Language] The last question will be presented by Ji-Woong Yoo from DAOL Investment & Securities.

[Interpreted] There are two questions that I would like to ask you. One is about the overall market demand that you see? And the second would be with regards to your technology development. So first, in terms of the EV market and recovery that would be taking place in the market, when do you actually believe that, that will take place? So do you that it would be this year's business? Or do you actually think that it would take longer, so that it would be more like 2027?

In addition to that, we also see new markets emerging such as human and robots. So how is the company planning to deal with such new markets?

The second question that I would like to ask you is that if you look at the overall market trends, not only for the domestic players, but also on the overseas side, we do think that there is an increased competition with regards to technology, especially with foreign precursors and also for sodium batteries. So in line with this overall trend for this year, if we were to talk about what key projects that we have on the technology R&D side for the company, if you could explain that, I think that, that would help us in analyzing the company.

[Interpreted] So this is [indiscernible] from business strategy, and maybe I can address the 2 questions that you have. First, with regards to the growth going forward, I do think that for the market, we actually do see the situation evolving at different speeds from region to region. But maybe to talk about North America first, we do think that because of the competition between the OEMs and the adjustments that we see at the business strategy level that inevitably for the time being, we do think that EV demand will be dampened. However, if we take a bit of a longer-term horizon, I think that the overall interest that we see and robots and also for autonomous vehicles is something that will continue to drive a recovery in the growth that we see in more affordable level EV lineups going forward.

In the case of the European market, in addition to the changes that are taking place with regards to CO2 regulations, also, the purchase subsidy has been restated. So relative to the North American market, we think that the overall level of electrification will be at a higher level, and that we will continue to see a demand in overall EV growth.

You also asked about new markets going forward. And as AI technologies does develop, we do think that there will be new applications such as robots that we can have very positive and maybe high expectations for. And to ensure that we are able to cater to this market, right now, we do have a product lineup that is differentiated in terms of the overall safety level that we can achieve, also in terms of the high energy density and high output. So therefore, regardless of whether it is in the U.S., Korea or China, I think that across all of these different markets, we are being seen as the preferred partner to work with from all of the top-tier players within these markets.

Specifically, to talk about the robot market for human -- not only for humanoid robots but also robots that can be used in the logistics and service areas, such as the 4-legged robot. There is a lot of different applications in which, as the CFO mentioned, we already have around 6 customers that we're engaging with. And these are mostly the leading customers in their industry that you could think of. Well, based upon the already verified high energy density and also high output specifications that we can achieve in the high nickel NCM-based 217 cylindrical battery area, we are currently supplying such batteries. And also, we are cooperating with our partners to develop next-generation products.

For the market in itself, if you look at the overall battery capacity that are required per product, it is small. So therefore, as a result, for the overall market pie in itself to reach a meaningful level, we do think it will take a bit more time. However, when the market does start to mature at a quicker pace, I think that we will be in a very good position to enjoy that growth momentum. So therefore, we are planning to continue our cooperation with a lot of the customers that would have high growth potential.

And secondly, you talked about our R&D development on the technology side. To maybe address that, I think that the first project that is worth mentioning would be prismatic type LFP LMR type of batteries. So we do think that in this area for 2027 for ESS purposes and 2028 for EV purposes, right now, that is the target time lines that we have to be able to develop the prismatic-type LFP and LMR batteries that we're trying to achieve. So we do think that with regards to the Ochang pilot line that we have, the investment has been completed. And right now, we are providing various sample products to a multiple number of customers.

In the case of solid state, there are 2 forms of solid state, one would be graphite-based and the other is anode-based type of solid-state battery.

In the case of the graphite batteries, we are targeting to try to commercialize in the beginning of 2029 for EV purposes. And in the case of anode-less batteries, in light of the overall better energy density that we can achieve and also the overall safety, we do think that the best application for this battery type would be for humanoid robot. So right now, we're planning to apply it to this area first at around maybe 2030.

To talk about sodium batteries as the last point. In the case of sodium batteries, if you compare it to LFP batteries, the overall energy density is around 30% lower. However, it does have a strong benefit and the performance that it shows at low temperatures and in terms of the output there. So theoretically speaking, in terms of the cost also, it is a more competitive solution than the lithium-ion batteries that we see in areas in which the constraints on space where weight is less. So for the markets in which batteries are necessary in lower temperatures or at higher output, we do think that there can be demand there.

However, for this battery type as of now, it's still in the early stages of development. So the market in itself as of the current time is small. So the unit cost right now is much higher than what we see for lithium-ion batteries. However, after 2028, if the overall material costs were to decrease, then we do think that it can be a cost-competitive solution.

So looking at the potential going forward, we have actually beefed up our R&D organization that is looking at sodium batteries. And by producing various samples, we are right now in the proof-of-concept stage with various customers.

In the case of these batteries, similar to lithium-ion batteries, they do have similarities in terms of the design and also the processing that is needed. So we can actually utilize the existing production lines that we have to produce sodium batteries. So therefore, at the global stage, utilizing the overall development and production capability that we already enjoy, we do think that we will have a wide variety of applications and product solutions that we could prepare to ensure that we can cater to the future potential market and also customer needs.

[Interpreted] So with this, we would like to wrap up the 4Q 2025 earnings conference call for LG Energy Solutions. Thank you for participating today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

[Interpreted] Good morning and evening. This is Sara Hwang, Head of IR from LG Energy Solution. Thank you for joining our Q2 2025 earnings conference call.

First, I'd like to introduce who are present today. Lee Chang Sil, CFO; Jang Seung-kwon, in charge of Finance and Accounting Group; Lee Sang-Hyeon, in charge of Finance; [indiscernible], in charge of Planning and Management; [indiscernible], in charge of Advanced Automotive Battery Planning and Management; [indiscernible], in charge of Mobility and IT Battery Planning and Management; Kim Min-Soo, in charge of ESS Battery Planning and Management; and [ Lee Hyeon Hee ], in charge of Corporate Strategy.

For your reference, the presentation for business performance and strategy will be conducted with simultaneous interpretation, after which we will have Q&A with consecutive interpretation. The presentation slide will be webcast live, and you can download the material from the corporate website.

In this conference call, I'm going to share our 2025 second quarter result and then CFO will share the recent business environment trend, key achievements and action plans for the second half, followed by Q&A session. Please note that the forward-looking statements included in the call are subject to change according to amendments in future business environment and corporate strategy.

First, let me talk about our Q2 business performance. First, shipment in North America increased due to stable product sales for EV and start of production at the new ESS site in Michigan. However, due to growing policy volatility during the quarter such as tariffs and customers' weakening purchase intention, the corporate-wide shipment decreased slightly Q-o-Q. With the softening trend in metal prices being reflected into ASP, the revenue declined by 11.2% Q-o-Q to record KRW 5.6 trillion.

In the automotive battery business, while the shipment volume increase in North America and Asia due to the volumes for the customers showing stable selling trends, the shipment volume in Europe decreased due to major customers' conservative battery inventory management, even with good EV sales. In the small battery business, despite the seasonal downturn in pouch demand for IT devices, the shipment increased slightly due to the full-scale sales of upgraded cylindrical product for EV and proactive response to LEV demand.

In the ESS battery business, with continued seasonal downturn impact, the ESS shipment declined Q-o-Q due to the reduction of the U.S. bulk shipment from China impacted by high tariff despite the start of operation at a new capacity in the U.S.

Regarding profit, despite the revenue decrease, with the product mix improvement from increased production of high-margin products and projects, along with considerable cost efficiency enhancement and cost innovation efforts such as material cost reduction, OP, excluding the North America production incentive, turned surplus for the first time in 6 quarters. With the North America production incentive recording KRW 490.8 billion, OP in Q2 marked a 31.4% increase to post KRW 492.2 billion and OP improved 2.8 percentage points Q-o-Q to record 8.8%.

As for major nonoperating items, even with translation gains on foreign currency-denominated borrowings and others impacted by a strong won against the USD at quarter end, due to net interest expense and evaluation loss from derivative relating to foreign currency-denominated corporate bond, the nonoperating loss amounted to KRW 590.2 billion. With the net loss before tax recording KRW 27 billion, the net profit marked KRW 90.6 billion.

Next, financial position. The asset at quarter end increased by about KRW 0.7 trillion compared to the previous quarter end to stand at KRW 63 trillion due to increase in cash and cash equivalents. Liabilities increased by about KRW 3.7 trillion to reach KRW 34.7 trillion compared to the previous quarter end due to borrowings increase, including the issuance of foreign currency-denominated bonds. Equity totaled KRW 28.3 trillion, down by about KRW 3 trillion due to foreign currency translation difference of overseas subsidiaries in line with significant interest rate fluctuation at quarter end.

The liability-to-equity ratio recorded 123% with net debt -- with debt-to-equity ratio of 74% and net debt-to-equity ratio of 54%. During this quarter, EBITDA generation was about KRW 1.4 trillion and EBITDA margin improved by 5 percentage points compared to the previous quarter end to 25%.

Regarding cash flow, during the quarter, even with CapEx spending of KRW 2.7 trillion for the North America capacity, due to cash inflow of around KRW 4.7 trillion, including funding of KRW 3.2 trillion such as corporate bond issuance, the cash balance increased by around KRW 1.9 trillion compared to quarter end to reach KRW 5.4 trillion.

With this, let me end my explanation. Next, CFO will present you on the second half business environment and our key achievement and action plans.

[Interpreted] Good morning and evening. This is CFO, Lee Chang Sil. Amid the continuing global economy and geopolitical uncertainties since the beginning of the year as the U.S. Tax Cut Act, which has had a significant impact on the battery industry, was confirmed, the volatility since gradually subsidizing. Accordingly, I'd like to explain the business environment landscape and our action plan for the second half of the year, together with the major policy updates.

First, since the Trump administration took office, as you know very well, the U.S. has been leveraging tariff actively as a tool for diplomatic and security strategies. Starting in April, a 10% universal tariff has been applied to all imports into the U.S., and now it is pressuring by applying different tariff rates for each country through negotiations. The China negotiations appear to be underway in multiple areas, including rare earth, but currently, Chinese products face high tariff of 73% for EV batteries and 41% for ESS batteries, implying its continued containment stance against China.

The IRA, which has been affecting the EV and battery industries in North America most directly, was amended due to the implementation of the OBBBA this month. Consequently, the EV subsidy for consumers up to $7,500 will expire after the end of this September. Such tariff impositions and early termination of the EV subsidy put a burden on OEM and highly likely to raise car price tags, slowing the growth rate of the North American EV market for the time being.

However, as now EVs incorporate AI features and self-driving tech services become visible, as more consumers are building -- experiencing autonomous driving, the intrinsic value of the EV is expected to go up more, bringing a bigger EV momentum for demand in the long run. Meanwhile, the amended IRA includes a new PFE, or prohibited foreign entity, clause, adding a supply chain requirement to the eligibility criteria of the AMPC for battery producers and ITC for companies investing in clean energy plant. In other words, the entities threatening the national security, key Chinese battery companies and entities designated as PFE deemed to be under significant influence of those entities cannot receive tax credits when investing in batteries or power facility in the U.S.

Additionally, all other manufacturers must ensure that the proportion of material sourced from the PFEs does not exceed 40% of direct material costs starting next year, and the proportion should gradually go down further by 2030. Therefore, we think that PFE companies will face many hurdles in entering the U.S. market directly. For raw material sourcing as well, it will become more important to secure non-PFE partners with price and quality competitiveness and operate NCM strategically within the allowed PFE sourcing scope.

Despite initial concerns about early phaseout, the AMPC will remain intact until 2032 without changes in the effective period. The original draft regarding the ESS installation project among the ITC-eligible items also remain the same. So if the construction begins by 2035, they can receive up to 40% of the CapEx as tax credits. In particular, in North America, the growing AI trend is accelerating data center expansion by big tech firms, which is causing a dramatic spike in power consumption.

That said, in addition to the demand arising from new renewable power plants, the need for ESS installations eligible for tax credits is rapidly increasing even at existing power plants. Additionally, if the local sourcing requirement in the U.S. are met, the ITC benefit can be maximized, further strengthening customers' demand for locally produced ESS in the ex China region.

Meanwhile, the EU announced a policy for investment support of EUR 850 million for the regional battery production projects to strengthen the local supply chain for EV, and the U.K. has also reintroduced EV purchase subsidies, which stopped in June 2022, with a budget of around GBP 650 million, actively boosting sales of domestically produced EVs. As both North America and Europe strive to expand their local battery supply chains and promote demand for domestically produced EVs like this, the customer trust and preference for battery companies capable of responding to local demand with stable operation capabilities will become even higher.

Amidst such considerable changing dynamics, LG Energy Solution is realizing notable progress. First, at our Michigan site, this May, we began mass-producing LFP-based ESS long cells, which offer improved energy density and cost competitiveness, thus securing the ESS production site in North America most preemptively and most promptly in the industry. Building on this, we would like to continue to respond to customers' ex China needs proactively. Also, as we are under active discussion with multiple customers with our diverse form factor portfolio, including prismatic type, we will be able to continue winning meaningful ESS orders focusing on power grids in North America.

Also for the new 46-series supply contract we signed with Chery Automobile in June, we plan to ship out from the second half of this year in Ochang site in Korea. And it holds significant meaning as our first cylindrical battery order with a Chinese OEM that typically prefers adopting domestic batteries. And we think that based on this, we'll be able to build a more diversified customer portfolio. Also, we have decided to establish a joint venture for preprocessing for used batteries with Toyota Tsusho in North Carolina, preparing our resource circulation system step by step across North America following our efforts in Europe.

Now let me explain the action plan for the latter half of this year. Although challenging business environment is expected in the second half as well, we intend to continue meaningful improvement in achievement and financial performance from the second quarter onwards by securing fundamental competitiveness through detailed action plans. First, in response to the EV demand slowdown, we aim to address this by increasing the revenue of the ESS business with rapidly growing power grid-centric demand and expanding the mass production of the new form factor for future growth and low -- new low to mid-chemistries to optimize the operation of the production line and maximize the capacity utilization as well.

Furthermore, we must reduce fixed cost burden. So we are resetting capacity expansion plans in line with the demand landscape and adjusting the timing and scale of ongoing projects in prompt response to the changes. And also, we are actively reallocating internal resources, including human resource operations, from the company-wide perspective with speed. Additionally, to strengthen our sourcing competitiveness, we are lowering the material cost ratio by persistently identifying low-cost materials and actively managing optimized supply chain strategies for each project through multidimensional assessment on supply regions, performance and cost by material type.

Regarding our business portfolio, to actively respond to the North American demand for decoupling from China and localization, with the ramp-up at our ESS site in Michigan, we will secure a stable 17-gigawatt hour level of ESS capacity in North America by the end of this year. Additionally, by converting some EV battery lines to ESS, we're going to expand the business by establishing over 30 gigawatt hour of ESS capacity in North America by the end of 2026.

Also, to respond to the European market where low- to mid-end EVs are mainly growing, we are preparing mass production of new cost-competitive products such as high-voltage mid-nickel and LFP batteries at our Poland plant in Europe. Also, we will preemptively secure additional orders for both EV and ESS applications with a new form factor like cylindrical 46-series and prismatic batteries while also exploring new markets such as new mobility and humanoid robots.

Lastly, we will also go all out for the development of competitive technologies. To meet customer needs through cost reduction, we will develop LFP batteries for EV applied with new processes and dry electrode processes, differentiating ourselves through enhanced cost competitiveness and fast charging performance. And we intend to develop LFP batteries for ESS with a new pouch product with a step-up in energy density while also preparing new form factor product with improved product specification through high-density design and cost competitiveness.

The newly developed LMR, or lithium manganese-rich, chemistry targeted for deployment in new-gen EVs of key customers by 2028 aims to achieve energy density improvement of over 30% compared to LFP while maintaining a similar cost. We aim to introduce fast-charging technology under 10 minutes across both 46-series and EV pouch products in the near future. Also, the dry electrode process, which is a key driver of cost innovation, will secure mass producibility in Ochang, Korea, establishing a system for sample supply within this year. From R&D perspective, we will swiftly secure materials and foundation technologies suitable for new products and achieve significant reduction in the lead time from product development to mass production based on AI and digital transformation.

Investors, analysts and shareholders, despite the challenged business environment, LG Energy Solution has successfully turned a profit in the second quarter without factoring in North America production incentive by firmly building on our internal strength and accumulated capabilities. The battery market, which has been on a growth trajectory, is now going through an unprecedentedly tough period of adjustment. However, by securing fundamental and structural competitiveness through swift response to market changes, we must achieve sustainable profit-making capabilities of our own. Thank you.

This is the end of the presentation. We'll have a Q&A session. [Operator Instructions]

[Foreign Language] [Operator Instructions] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] I do think that the second quarter performance has been strong. And if you look at the market, however, I do think that in general, there are concerns about the second half because of the uncertainties that still prevail. So could you provide your third quarter and also second half expectations in terms of the business performance going forward?

The second question that I would like to ask you is about your North American ESS business, which is something that you have emphasized during your presentation. I do believe that the market also believes that there will be high growth within this area. However, how are you planning to address the demand within the market? And if you could share any new orders or your outlook for the business, that would be appreciated.

[Interpreted] So thank you for asking these questions. I do believe that the questions you have asked are what are the center of interest right now for the market. So thank you for them. For the first question you asked, which was the second half outlook for our business, I can address this. I am the CFO, Lee Chang Sil. And maybe for the second question, I can ask the related business division to address that question.

So as you are aware, in the U.S. right now, from country to country, the U.S. is coming to an agreement with various countries about their tariff policies. And as a result of that -- in addition to that, the One Big Beautiful Bill Act has been finalized, which had led to some of the uncertainties related to the demand. So going forward, we do think that somewhat -- some of the volatility that we have seen within the secondary battery industry would be coming into a more moderate phase going forward.

However, as mentioned before, because the IRA in itself has been amended with new policies on one side for the consumer EV subsidies, it will be coming to an end earlier than initially expected. And we do think that naturally in the second half, the EV demand will be impacted. However, if you look at the EV auto sales trends in itself, they remain solid. And with regards to the battery inventory that remains within the industry, we do think that towards the second half of the year, there will be adjustments that will be taking place.

So if we look at the market, for the cylindrical EV customers that we have, there will be new models that will be launched in the market in the second half of the year. And also for IT manufacturers, there are also demands related to the new models that will be generated. So we do think that this will drive an increase in the mobility and IT device-related batteries. In addition to that, related to grid-related projects from the third quarter, we will be full fledgedly shipping out various production volumes from our site in Michigan. So in the second half, we do think that there will be a significant increase in our ESS-related revenue that we will be able to achieve.

To talk about our overall profitability, we do think that there will be a full-fledged adjustments of the existing CapEx plans that we have. And therefore, for a certain period of time, there will be somewhat of a slowdown in EV demand, which we think we can overcover with the ESS business growth that we will be able to see. So we are trying to use the existing capacity that we have in terms of the utilization to maximize it as much as possible. In addition to that, there will be some reallocation of resources and also some cost-efficiency efforts that will be put in place to minimize our overall fixed cost.

In addition to that, we will be trying to decreasing our overall material cost ratio by engaging in cost innovation efforts. And at the same time, for mobility and IT devices and ESS-related demand, which we do believe will continue to grow, we do think that this will continue to contribute to our profitability. So using the second quarter as a standpoint, we will try to continue with the meaningful momentum that we have been able to generate.

[Interpreted] For the second question that you have asked, which was about how we would be dealing with the strong ESS demand that we see in North America in terms of any new orders that we have and the outlook going forward, maybe I can address that question. I am from the ESS Battery Planning and Management department. My name is Kim Min-Soo.

So if you look at the current situation, in the North American market, we do have a strong competitive edge as being the only company that is able to produce LFP ESS products in North America and supply them on the ground. So therefore -- not only that, in terms of market demand and also our customer needs, we are preparing a product portfolio that would be able to satisfy these elements.

In addition to that, if you look at the market, because there are more AI data centers that are being created and as a result of that, overall power demand is increasing, surrounding the power grid in itself, there is a very high growth that will continue within the market, representing a CAGR of more than 20%. So as a result of -- in addition to that, on the ESS tax benefit side, these tax benefits are being maintained, which does provide a backdrop of policy support for the market. So we think this all in all will lead to a much stronger demand going forward in terms of the demand momentum.

So as of the end of June for the company, we already have been able to secure an order book that is above 50 gigawatt hours. And currently, we also continue to see new order momentum flowing in from a wide variety of customers, including local developers and also utility companies. So as of the current time for the company, including new form factors that we have for ESS batteries, we do have various discussions on the supply side for a wide variety of LFP products that are ongoing. And in addition to that, there are also discussions for a multiple number of large-scale power grid-related projects. So once these orders are completed, we will make sure to communicate with the market accordingly.

[Foreign Language] The next question will be presented by Hyun-Soo Kim from Hana Securities.

[Interpreted] I have 2 questions that I would like to ask you about policy. The first is that, as you have just mentioned in the U.S., the OBBBA has been finalized. And as a result of that, I do think that there will be impacts on the EV subsidies that were provided and also the renewable energy market as a whole. So in terms of the demand changes that may take place as a result of that, could you break it down between what changes you see on the EV demand side and on the ESS demand side? And talk about what strategies you're going to implement to address these changes accordingly.

The second question that I would like to ask you is that if you look at the AMPC- and ITC-related changes that have been taking place, with the new act, there is a new PFE cost that does need to be satisfied from 2026 to be eligible for AMPC and ITC credit. So this is a new condition that has been added. What do you -- what impact do you see coming from this? And how are you planning to deal with this? And how is the company preparing for this going forward?

[Interpreted] So for the first question that you have asked with regards the changes that have been taking place in the tax act, what the overall impact would be on EV and ESS demand and what would be our strategy to address this going forward, maybe I can address that. From corporate strategy, I am [ Lee Hyeon Hee ].

So as the CFO did explain in detail in the presentation before, if we look at the overall situation, from the end of September, the overall EV subsidiaries that would have been provided will be going away. And there is a new prohibited foreign entity or PFE procurement condition that has been added on. So we do think that this will have an impact on the EV and ESS business environment.

To talk about the EV side first, right now, because the subsidies will be abolished going forward, we do think that on the OEM side, they will be pacing themselves a bit more in terms of their EV business expansion. And after the subsidies end, from that point of time until the early part or first half of next year, we do think that there will be an overall slowdown in the demand within the market. Nevertheless, we do think that the OEMs will be continuously expanding their low-end EV lineup so that they can lessen the burden that consumers may feel when purchasing new cars. And in addition to that, as autonomous driving becomes fully commercialized, with that, we do think that, that will increase consumers' willingness to pay for EV vehicles.

So for the company, from the first half of next year, we will be utilizing and putting our North American JV online. And we do think that, that will lead to a gradual increase in the overall volume growth that we see. So therefore, for EV customers that we have, we're talking about prismatic battery development, LFP and also lower-cost LMR solutions so that we can strengthen our fundamental competitiveness within this area.

On the ESS side, right now for power grid-related market demand, we do believe that next year, the overall demand growth will be above 60%, and that would be a very high level of growth that we would expect. So since the ITC credits are something that will be maintained, we don't believe that there will be a large overall change or impact from this. And because we do have local production capabilities and there continues to be a preference for non-Chinese providers, we do think that, that trend will continue going forward.

So therefore, utilizing the better conditions that we have on the supply chain side, we do think that we can apply lower-cost materials and strengthen our cost competitiveness with -- at the same time, also utilize the competitive edge that we have as being the only company that is able to provide LFP ESS batteries on the ground. So in light of the increasing demand or sharp increase in demand that we see going forward, we will continue to engage in marketing activities and continue to win orders going forward.

Yes. This is [ Lee Hyeon Hee ] again, and maybe I can address your second question, which was the new conditions for PFE that have been installed, what's the overall preparedness that we have or strategy that we have to achieve this and what we are going to do going forward. So even before the current changes take place, the company had been planning to create a supply chain that satisfied the previous FEOC conditions under the IRA that we require to be eligible for consumer subsidies. If you look at the new PFE-related procurement conditions, in some areas, we do actually believe that they are less demanding than the previous FEOC conditions. So we do think that we can utilize this to optimize our supply chain.

So first, under the current supply chain conditions, if you look at manufacturers or producers, they will be allowed to procure a certain percentage from PFEs each year. And these conditions will be limited to direct material. So we do think that this enables us to utilize some low-cost supply chains that are out there. In addition, since EV consumer subsidies will be abolished, we will no longer be required to source battery parts from the U.S. or critical raw materials from FTA countries. So this provides us more discretion in the way that we operate our overall supply chain.

And at the same time, for materials that we will be sourcing to be compliant with the PFE conditions, in the short term, that would be a bit more challenging. I do think that we would have a bit more time to prepare for the situation going forward. So thus, we can effectively utilize our existing suppliers, which have long-term supply capabilities and cost competitiveness, while over the mid- to long term, we would be able to dualize our supplier base and also ensure that we satisfy PFE conditions so that at the same time, we can increase or strengthen our cost competitiveness and improve our profitability.

[Foreign Language] The following question will be presented by Tim Bush from UBS Securities.

I have 2 questions. The first is on ESS. So considering your new ESS LFP capacity in the U.S. that started operation in the second quarter, what is the outlook for further ESS capacity expansion? And the second question is on overall North America demand. So you had a very solid first half. What is the outlook for the second half of the year? [Foreign Language]

[Interpreted] So for the first question that you asked, maybe I can address that. This is Kim Min-Soo from the ESS battery planning and management side. So as you have mentioned, from May of this year from our Michigan site, we have been commercially producing LFP batteries for ESS purposes, so utilizing the overall capabilities that we have accumulated in North America in conducting local production and operations. And adding to that, also using the LFP production know-how that we have accumulated in China, we are able to stably produce and supply as of the current time.

So if we look at the demand in the U.S. for power grid-related ESSs, we do expect that versus our expectations, the market is growing at a faster pace. And we do want to maximize the business opportunity that this does present. So this year, we had expected that overall, approximately 17 gigawatt hours would be this capacity that we would have from the Michigan capacity. This is something that we want to stably ramp up.

And at the same time, from the existing sites that we have, we are going to transition or review actively the possibility of transitioning some of the EV capacity that we have for ESS purposes. By doing this, by 2026, we want to reach 30 gigawatt hours or higher in total capacity. So this is the overall target under which we are conducting discussions.

In addition, from a product standpoint also, in addition to the current long cell LFP products that we have and utilizing the SI capabilities that we have, we do want to provide a differentiated product competitiveness and at the same time, also have innovation in terms of materials and design. So we are in the process right now of developing large capacity -- new large-capacity cells. So by stably expanding our business within the U.S. and also gaining more market share, this would be the overall direction that we would be heading going forward.

[Interpreted] So this is the CFO, Lee Chang Sil. Maybe I can address your second question. I do think that although we have discussed this before, you still have a lot of questions about the second half outlook for the overall business. So maybe I can briefly provide an explanation. So if you look at the first half U.S. shipments that we had, which was relatively strong, and if you look at the drivers behind that, first, I do think that it was that for our key customers, their overall EV sales performance in itself was better than they initially expected. So that was one factor.

However, added to that, I do think that on the customer side, there was a lot of preemptive pull-in demand that they had because there were a lot of variables that could take place, for example, a lot of policy uncertainties within the market. So if you look at the second half, because the EV subsidies will be going away after September, we do think that, that will lead the OEMs to pace themselves in terms of their overall electrification expansion. And added to that, we do think that relatively, there may be more conservative inventory management as a result of that. So therefore, in terms of the growth momentum, I do think that for the time being, it cannot help but be somewhat limited.

However, that have been said, on the North American ESS side and the overall customer demand there, as mentioned before, it is stronger than -- much stronger than we had expected. And as the company that -- the only company that has local ESS production capabilities, we do think this would be a very attractive opportunity for our company. So as we have said for the time being, we do think that the void that we have on the EV side can be somewhat fulfilled with ESS demand that we would have going forward.

For the company, we will continue to review the market demand and customer needs so that we can come up with the most efficient operations for the capacity that we have, and this is something that we are in discussions with our customers about. So therefore, in terms of the production timing and sizes that we have from -- for the different sites, this is something that we're adjusting on a real-time basis to ensure that we can reduce any capacity loss or investment loss as much as possible.

However, one thing that we do believe that is very fortunate is that for the ESS demand in North America, there is a very solid trend that we see of growth. So therefore, we think that in North America, using the overall capacity advantages that we have with local production, we will continue to utilize some of the capacity that we have, including JV capacity, to cater to first, the ESS-related demand that we see and try to maximize the overall capacity efficiencies that we have for our operations.

[Foreign Language] The last question will be presented by Junsu Kwon from Kiwoom Securities.

[Interpreted] There are 2 questions that I would like to ask you. First is that if you look at the European overall volume trend that you see versus the U.S., it does seem to be that it is a bit sluggish. So what trends do you see within the overall market in Europe? And how are you going to address that in terms of your strategy going forward?

The second question that I have is that there is some development of LFP batteries and also some prismatic LMR batteries that you have for GM. So what is the recent updates about that? And what would be your future strategy for production?

[Interpreted] So for the first question that you have, which is about the European market in terms of the trends and what our strategy is, maybe I can address that. This is [indiscernible] from Planning and Management. So if you look at the overall performance that we have seen in the first half, although the EV market in Europe was relatively stronger than expected, if you look at our overall shipments versus that -- to the U.S., it was a bit sluggish. And I do think that there are a couple of reasons behind that. One would be that in terms of the overall inventory management, we do think that our customers were a bit conservative on that.

And the second, that is that if you look at where the overall EV demand growth is coming in the European market, it seems to be on the mid- to low-end. And there are more Chinese batteries that are being used for EV vehicles in which the Chinese OEMs are trying to make inroads into in Europe. So we do think that, that somewhat had an impact.

So as this type of competition does continue, we do think that relatively speaking, that the overall slower shipments that we see in volume for Europe will continue for the time being. However, in the second half of the year, if you look at our key customers, there are some new model launches that are being planned. In addition to that, from our side also, we do have some new low- to mid-end chemistries that will go into commercial production one by one. So that is something that is being prepared.

In addition, within the year, we are planning to convert some of our EV lines to -- for ESS purposes and also produce off of those lines. So we think that, that will improve the overall utilization of our Poland capacity and the overall profitability that we see within this area.

So going forward, on a relative basis, we do, in the premium market in which we think that we have a stronger competitive edge, want to actively pursue more order opportunities based upon the new form factor for cylindrical batteries, which would be the 46-series. So using that competitiveness, we want to seek more opportunities and try to adjust the demand within the market.

[Interpreted] So the second question that you asked, which was the new developments that we have with GM and also our future product development strategy, maybe I can address this. From the advanced automotive battery planning and management, this is [indiscernible]. So right now, with our strategic customer, which is GM, we do have a co-development of prismatic-type batteries that is going according to plan without any issues. And as recently had been mentioned in the news, right now, we are developing or looking at the development of lower- to mid-end types such as LMR and LFP batteries.

So by this, we are trying to diversify not only our form factors, but also chemistries so that we can cater to the demand in each of the different segments and also the needs that customers have to diversify products. So we want to be able to be in a position to provide a wide variety of product solutions. So using the commercial production as the general assumption, there are various options that are currently being reviewed.

Due to the recent policy changes that we have seen within the market, there is some uncertainty with regards to EV demand going forward. So as a result of that, I do think that it would be a bit too early for us to discuss the production time lines or the size and overall specifications of products that we are currently looking at. However, for the existing NCM pouch products, we are going to continue to produce that from our Ohio site, the JV phase 1, which is currently in operation and is producing very stably. And for the new prismatic-type LMRs or LFP or other new products that we have, the overall plan would be to produce them from the Tennessee JV 2 -- JV phase 2, which would gradually expand its capacity going forward. So in light of the overall demand backdrop, we do want to have flexibility and catering to the situation so that we can maximize our capacity utilization as much as possible.

[Interpreted] Yes. With this, we would like to wrap up our second quarter earnings conference call for 2025. Thank you once again for attending.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]