LG Energy Solution earns more than twice what analysts expected, with a U.S. tax credit supplying over half the profit

LG Energy Solution said early Thursday in Seoul that it made about 756 billion won in operating profit in the third quarter, more than twice what analysts had expected, as its North American plants shipped more batteries for power storage. More than half of that profit, 416.9 billion won, came from a U.S. tax credit for batteries made in America.

The figures are preliminary and unaudited. Sales were about 9.64 trillion won, up 59% from a year earlier and 27.6% from the second quarter, and the highest for any quarter in the company's history; the previous high, about 8.77 trillion won, was set in the second quarter of 2023. Operating profit rose 25.7% from 601.3 billion won a year earlier and was about 6.7 times the second quarter's 113.3 billion won, edging past the company's previous quarterly high of 731.2 billion won from the third quarter of 2023. The South Korean company gave no net income and no results by business; those come with its full report and conference call on Nov. 3.

How much came from the tax credit

The credit is the U.S. advanced manufacturing production credit, created under the Inflation Reduction Act and known by its tax-code section, 45X. The company booked 416.9 billion won of it for the quarter, its estimate of what its North American production will earn. Without the credit, sales were about 9.23 trillion won and operating profit 339.1 billion won, an operating margin of 3.7%.

That is the first quarter this year in which the business made money without the credit. In the second quarter it counted 241 billion won of credits and reported 113.3 billion won of operating profit, which means it lost 127.7 billion won without them. In the first quarter it reported an operating loss of 207.8 billion won even with 189.8 billion won of credits included.

Analysts' average forecasts compiled before the release were about 326 billion to 339 billion won for the quarter. The profit excluding the credit, on its own, landed in that range. LG Energy Solution shares were up 4.9% at 410,000 won at 10:20 a.m. on Thursday in Seoul, or 9:20 p.m. Wednesday in New York.

What drove the quarter

The company's explanation of the results, as reported by several Korean news outlets, pointed to three things. Its storage plants in North America shipped more, spreading their fixed costs over more output. Shipments to Europe of pouch-type cells for lower-priced electric cars rose, keeping its factories there busier. And some electric-car customers paid it compensation, a one-time gain whose size it did not disclose. A stronger won, which shrinks dollar sales once they are converted, worked against it.

Sales also rose with shipments to European carmakers of mid-nickel batteries, a restart at its North American joint venture with General Motors, the start of production at its joint venture with Hyundai Motor and steady shipments of cylindrical cells to what it calls strategic customers.

The shift toward storage

Energy storage systems, large battery banks for power grids and data centers, have grown far faster than the rest of the business. In the first half of the year, storage revenue was 4.6 times a year earlier and made up a share of total sales in the high 20s percent, the company said in July. It calls itself North America's largest maker of these systems and produces them at five sites in the region; it also said then that its joint-venture plants with General Motors in Tennessee and with Honda had started making storage cells.

On its July earnings call, the company said it expected storage output in the second half to be about double the first half and that full-year sales growth of more than 20% looked achievable. Nine-month sales are now up 26.1%, at about 23.76 trillion won.

Profit has not kept pace. Operating profit for the first nine months was 661.6 billion won, down 54.9% from about 1.47 trillion won a year earlier, after a first quarter in which shipments of pouch cells for electric cars fell as a major North American customer cut its inventory.