Samsung BioLogics' Labor Dispute and Q2 Earnings Outlook

The wage and collective agreement negotiations at Samsung BioLogics have been prolonged recently. Consequently, the impact on Q2 earnings is expected to be limited. However, one-time labor cost burdens and initial expenses for the US plant are anticipated to become variables for profitability in the second half of the year.

The Union's Withdrawal from the Super-Union and its Background

According to the pharmaceutical and biotech industry on the 30th, the Samsung Bio 'Sangsaeng' branch (union) decided to withdraw from the Samsung Group's super-union through a member vote held between the 24th and 28th. Out of 2479 voters, 2392, or 96.5%, reportedly voted in favor.

With Samsung Electronics' labor and management reaching a wage agreement, the collective bargaining power of the super-union weakened. It appears the Samsung BioLogics union has shifted its strategy to directly address its own wage and collective agreement issues rather than pursuing group-wide solidarity. While this change could potentially have a positive impact on future negotiation dynamics, it's important to note that the weakening of group-level solidarity effects due to the super-union's departure requires caution.

Ongoing Negotiations and Strikes

Although labor and management have been engaged in wage and collective agreement negotiations since the initial meeting on December 23rd of last year, no agreement has been reached even after more than six months. Following partial strikes in April, a full-scale strike involving approximately 2500 members took place in May, with the company estimating losses of around 150 billion won due to this strike.

• Union's Demands:
• 14.3% increase in base salary
• A fixed increase of 3.5 million won
• Payment of 30 million won in bonuses
• Incentive pay based on 20% of operating profit (OPI)
• Company's Offer:
• A wage increase rate of 6.2%
• Approximately 6 million won in bonuses
• OPI based on 10% of operating profit

Subsequently, the union presented a revised proposal to the company with softened terms for some items, but a significant gap remains, and no agreement has been announced.

Q2 Earnings and H2 Outlook

Nevertheless, Q2 earnings are expected to be resilient due to favorable exchange rates and high operating rates across plants 1-4. The ramp-up of Plant 5 and revenue contributions from the US Rockville plant are anticipated to drive growth in the second half of the year. Various securities firms have released the following revenue and operating profit forecasts:

• DB Securities: Revenue 1.3068 trillion won, Operating Profit 586.8 billion won
• IBK Investment & Securities: Revenue 1.3189 trillion won, Operating Profit 606.1 billion won
• Daol Investment & Securities: Revenue 1.3097 trillion won, Operating Profit 590.6 billion won

However, these risks are not yet reflected in the Q2 earnings and still exist. Particularly, even if an agreement is reached between labor and management in the second half, the one-time labor costs are likely to be a burden. Daol Investment & Securities noted that new order placements have been delayed in the first half of the year, and there will be a burden of one-time labor costs if negotiations are settled in the second half.

Furthermore, while the US Rockville plant is expected to begin operations in Q2 with full revenue recognition starting in Q3, there will also be cost burdens associated with initial operations. The overall sentiment in the securities industry has not turned entirely negative, with DB Securities maintaining its target price at 2.2 million won and IBK Investment & Securities at 2.09 million won. In contrast, Daol Investment & Securities has lowered its target price from the previous 2.2 million won to 2.1 million won, reflecting the delays in new orders and the burden of one-time labor costs upon union settlement.