Samsung Electro-Mechanics Co., Ltd. (A009150) Earnings Call Transcript & Summary

Good afternoon. Thank you very much for joining today's conference call. We will now start the Year 2020 Second Quarter Earnings Conference Call of Samsung Electro-Mechanics. This conference call will start with a presentation by the company followed by a Q&A session. [Operator Instructions] We will now start the company's presentation.

[Interpreted] Good afternoon. This is KwangWook Bae, VP and Head of Planning Team and IR at Samsung Electro-Mechanics. Thank you for joining our second quarter earnings conference call for year 2020. Before going into the presentation, I would like to introduce the management. Here, we have EVP, Bongyong Kang of our Business Support Team; SVP, Kook-hwan Cho, Head of Strategic Marketing; [ Jung Hoon Ahn ], Head of Support Team, Component Solution Division; [ Jang Won Lee ], Head of Support, Module Solution Division; and [ Won Ok Chae ], Head of Support Team, Substrate Solution Division. We will start with a presentation on our second quarter business results at a company level as well as a divisional breakdown, followed by market trends and outlooks by product before taking your questions. First, our second quarter results. In Q2 2020, our revenue was KRW 1.8122 trillion, which is a 19% Q-on-Q decrease and a 5% year-on-year decrease. The details regarding revenue increase/decrease factors by division will be explained later on during the divisional results. Q2 operating profit was KRW 96 billion, which is a 42% Q-on-Q decrease and a 41% year-on-year decrease. Pretax profit in Q2 was KRW 67.8 billion due to factors, including decrease in operating profit. Net profit after corporate income tax was KRW 39.2 billion. Next, in terms of our financials. As of end of June 2020, total assets was KRW 9.1884 trillion and approximately 3% decrease from end of the previous quarter. For major financial indicators, debt-to-equity was 65%, net debt-to-equity 16%, both a slight decrease Q-on-Q, and shareholders' equity was 61%, a slight increase Q-on-Q. Next is the results and future outlook by each division. First, the Component Solution division. The Component Solution Division's Q2 revenue was KRW 839.6 billion, which is a 2% decrease Q-on-Q and a 7% increase year-on-year. During Q2, the lockdown in the Philippines led to disruption in the MLCC supply, which prevented us from fully capturing the upside demand generated by the so-called untapped trend. Despite such challenges, our MLCC revenue increased slightly Q-on-Q, thanks to increase in MLCCs for PCs, servers and game devices, which offset some of the decreased demand from mobile or automotive applications. In the second half, the mobile MLCC demand is expected to grow, driven by the launch of new flagships by the strategic customer and overseas customers and the continued rollout of mobile 5G. Accordingly, we will focus on supply of high-end MLCCs by achieving design wins and timely mass production of small-size, high-capacitance MLCCs. We also expect PC and game device-related demand to remain solid even in the second half, and we will focus on actively demanding -- actively meeting the market demand and increasing our supply by flexibly operating our domestic and global production capacities. Next is the Module Solution Division. Module Solution Division's Q2 revenue was KRW 604.8 billion, which is a 38% Q-on-Q decrease and a 27% year-on-year decrease. Revenue decrease is mainly attributed to the decreased supply of camera modules and communication modules to the strategic customer due to COVID-19 as well as seasonality. However, there was a revenue increase from supply of camera modules to Chinese customers, especially around high-pixel OIS modules and optical 5x zoom. In the second half, even though high-end camera module demand is expected to recover versus the second quarter, uncertainties still remain around flagship sell -- set demand versus last year due to COVID-19. Given this market outlook, our strategy is to focus on increasing the supply of high-end camera modules for the strategic customer's flagship. Communication modules are also another growth opportunity as 5G communication module market starts to take off, and we will focus on winning new supply opportunities for the next-generation 5G antenna modules. Next -- last is our Substrate Solution Division. Q2 revenue was KRW 367.8 billion, which is a 4% Q-on-Q decrease, but a 20% year-on-year increase. In package substrate, our Flip Chip BGA revenue increased driven by increased supply of substrates for PC CPUs, which is tied to the trend of more people working and learning from home. The supply of GDDR memory substrates to overseas customers also increased, which helped deliver Q-on-Q growth of our package substrate revenue. However, for circuit boards, demand for the key customer remained weak, and there was a significant decrease for the OLED RFPCB supply, resulting in a Q-on-Q decrease of the Substrate Solution Division's overall revenue. In the second half, we expect demand of the OLED RFPCB and 5G substrates for new mobile flagships to increase. Accordingly, we will focus on increasing our RFPCB share of the overseas and strategic customers while at the same time, increasing supply of the SiP substrates for 5G antennas and RF front-end applications. That completes the presentation on our Q2 results. And now SVP Cho will go over the market trends and outlook by key products.

Good afternoon. This is Kook-hwan Cho, Head of Strategic Marketing. I would like to touch upon the current market situation and future outlook for MLCC, camera modules and substrates. First, about the MLCC market situation and outlook. Q2 MLCC demand for so-called untact-related applications, such as PCs, servers and network infrastructure remains solid. Whereas demand for smartphones and automotive application was weak due to COVID-19. By region, in Q2, demand started to recover in areas like China, which resumed economic activities first, while demand in U.S., Europe and Asia remained weak in Q2 due to further spread of COVID-19 and negative consumer sentiment. Even on the supply side, there was some temporary suspension of production due to lockdowns in some countries and in response to confirmed COVID cases developing among workers, which resulted in a decline in an overall MLCC utilization level. Second half MLCC demand is expected to grow versus the first half given the second half seasonality even though the risk of COVID-19 resurgence remains. By application, smartphone-related MLCC demand is expected to grow, with major customers planning to launch new flagships and 5G devices. Launch of new game devices will be another source of demand growth. Demand for other applications such as TV, tablets and monitors, are expected to also recover from the weak first half. On the supply side, MLCC supply is expected to recover, together with demand growth as lockdown measures are eased and utilization improves. MLCC inventory is expected to remain at stable levels. Now given this market outlook, SEMCO will focus on operating our global manufacturing facilities with greater flexibility to effectively respond to market changes by each application and to actively capture market demand. COVID-19 has posed some challenges in communicating with our customers but we have been effectively using non face-to-face channels and increasing the frequency of customer contact to deliver on-time solutions that satisfy our customers' needs. Next, let's look at our Camera Modules. Camera Module demand in Q2 decreased overall due to drop in set demand, which was affected by COVID-19. By region, while Chinese demand slightly increased quarter-on-quarter, the demand in other key regions, including the U.S. and Europe, fell in Q2. In the second half, in addition to the usual upward seasonality, the new flagship launches planned by the strategic customer is expected to drive a recovery of high-end camera module demand versus the second quarter. However, despite such effects, compared to last year, demand in the second half still remains somewhat uncertain, given the effects of COVID-19. Accordingly, SEMCO will focus on increasing our revenue by leveraging our high-end cameras for the strategic customer's flagship model and supporting this with our design-in activities using our differentiated engineering expertise. In the camera module market, the demand for differentiated products with high-end features, high pixel count and high-power zoom is expected to continue. Therefore, we will focus on increasing our market position, especially in the high-end product groups by leveraging our internalized lens and actuator springs and building a stronger product lineup. Last is about the Substrates. For BGA, despite the decrease in set demand due to COVID-19, full utilization was maintained, especially around the high-end substrate, driven by the growth in antenna substrates and SiP for RF front-end with the wider adoption of 5G. In the second half, with the launch of many new 5G smartphones, the 5G market is expected to grow significantly compared to the first half. And as a result, new demand for 5G antenna substrates and SiPs for RF front-end is expected to continue growth. Also, BGAs for PC SSD and high-end substrates for new APs are areas of demand growth. Flip Chip BGA revenue remained strong with the introduction of higher-end PC CPUs and increased set demand. On the other hand, supply of Flip Chip BGA is expected to remain tight given the growth in network and server demand and the increase in layers and size of Flip Chip BGA to accommodate higher spec PC CPUs. The demand for thin Flip Chip BGAs for ultra-thin CPUs is expected to remain strong even on to the second half. RFPCB had a weak second quarter due to seasonality, but in the second half, OLED RFPCB revenue is expected to increase significantly, driven by the increased demand tied to the strategic mobile customers' new flagship. That completes my market outlook. Thank you.

Now Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be presented by Wonjae Park from Mirae Asset Daewoo.

[Foreign Language] [Interpreted] I have 2 questions. First question is about your company level profitability, which seems to have decreased significantly quarter-on-quarter. Can you give us a detailed breakdown of the main reasons for this decrease in profitability? Second question is about your MLCC. Can you give us your MLCC second quarter ASP and shipment? And also share with us your MLCC market outlook for the second half.

[Foreign Language] [Interpreted] To answer your first question about the main reasons for the decrease in profitability. If you look at our divisional performance, while at the Component and Substrate Divisions actually recorded results performance similar to the previous quarter, it was mainly the Module Solution Division that saw significant decrease in both top line and bottom line mainly due to the impact of COVID-19, as well as a decrease in smartphone demand. To answer your second question about MLCC second quarter ASP shipments and second half outlook. As we mentioned, by application in the second quarter, whereas our MLCC sales for smartphone and automotive applications were weak, our shipments regarding PC servers and game device applications actually increased as our overall sales in those applications increased. Also prices maintained at stable levels and our MLCC blended ASP also maintained at levels similar to the previous quarter. For our second half outlook, we do think that mobile-related demand or demand will recover mainly around mobile applications as the strategic customer is planning to launch its new flagship model, and there is a wider adoption of 5G. And we also think that while this goes on, the demand around PCs and game devices will continue in the second half. So overall, we think that second half shipments will increase by low 10% growth versus the first half, while ASP and sales prices remain stable so that with the -- we will be able to maintain a level similar to the first half, thanks to improvements in the product mix.

[Foreign Language] The next question will be presented by Dong Joo Lee from SK Securities.

[Foreign Language] [Interpreted] I have 2 questions. The first question is about the Module division. It seems that Module division was a major factor in the overall company's profitability in the second quarter. What was the stand-alone Module division's profitability like in the second quarter? And do you think that there is a possibility of this recovery in the third quarter? Second question is about the MLCC. Can you give us your MLCC second quarter utilization as well as inventory levels and second half outlook on these factors?

[Foreign Language] [Interpreted] To answer your first question about the Module division's profitability. In the second quarter, Module division's revenue decreased by more than 30% quarter-on-quarter mainly due to the weak global economy brought on by COVID-19 as well as the seasonality and weak smartphone demand due to seasonality. However, thanks to the timely supply of new products to key Chinese customers and the increase in internal efficiencies, such as cost reduction initiatives and FX effect, the division was able to record or meet the [ BEP ] point. Looking towards the third quarter, given that the major customers for both Korean and overseas major customers are planning to launch their new flagship smartphones, we believe -- we expect that the Module division will be able to recover both revenue and profits versus the second quarter by supplying the high-end camera modules on time. To answer your second question about our MLCC second quarter utilization and inventory levels. During the second quarter, due to COVID-19, there were production disruptions in the Philippines due to the Philippine lockdown and our utilization in second quarter was around low 80%, which is lower than the first quarter. We made up for the shortfall in the production caused by the disruption in the Philippines by increasing our operations in Tianjin and Busan and also selling existing inventory. As a result, our inventory levels decreased versus the previous quarter. Regarding our second half MLCC utilization, we do expect the shipments to increase in the second half as we just previously mentioned. And so we're planning to maintain our MLCC capacity at near-full utilization while keeping our inventory at normal levels.

[Foreign Language] The next question will be presented by Jay Kwon from JPMorgan.

I have 1 each for MLCC and the Substrate business. Firstly, telling from the management presentation earlier, we would assume there was a negative impact on our Philippine MLCC [ front from ] the lockdown. Hearing production was normalized from June, so what was the impact in Q2 and also the current status? Secondly, also, please let us know the details of the substrate business result in Q2 with more details, especially the Flip Chip BGA and our future plan to expand the business? [Foreign Language]

[Foreign Language] [Interpreted] Regarding your first question about the impact of the Philippine lockdown and the production disruption that we had. There was a point around late April where only -- or less than half of our employees in the Philippines were able to come to work. But Philippine lockdown started to ease from 1st of June. And so as of end of June, we were having around 95% of our people coming to work and the Philippine operation is now in normal operation. Saying that -- that being said, we are continuing to closely monitor the situation, given the recent signs of COVID-19 cases increasing again in the Philippines. To answer your second question about our Flip Chip BGA supply situation and our future business strategy. As you know, the demand for substrates for CPUs and GPUs that are used in PCs and game devices have been increasing due to COVID-19. And therefore, the supply situation for Flip Chip BGAs currently still remains tight and we are maintaining full utilization levels. Looking towards the future, we will be focusing on meeting future demand by, first of all, preemptively increasing our capacities given the trend of the Flip Chip BGA layers continuing to increase in order to accommodate the new CPUs for PCs that are being introduced. Also, we will be focusing on securing a stable revenue growth and profitability source by increasing our [ design-ins ] in the automotive Flip Chip BGA substrate market, which is an area that we can look forward to future growth.

[Foreign Language] The next question will be presented by Jong Wook Lee from Samsung Securities.

[Foreign Language] [Interpreted] I have 2 questions. First question is about the components for 5G applications. Can you give us your view on currently where the business stands for 5G -- or 5G device components? And also, how are you responding as a company to this opportunity? Second question is about the automotive MLCC market. When do you think the automotive MLCC market will start to turn around? And in that context, when are you planning to start operation of your new Tianjin plant?

[Foreign Language] [Interpreted] To answer your first question about the 5G component business and our strategy. As you know, even though downstream demand remains subdued due to COVID-19, the 5G smartphone and communication equipment-related component market has actually continued to grow. SEMCO currently mass produces MLCCs for 5G smartphones and base stations as well as 5G-related package substrates. We also plan to increase supply of these products. We are also preparing for mass production of 5G antenna modules, which will add the 5G growth momentum to all of our 3 business divisions. To answer your second question about the automotive MLCC market, automotive MLCC demand still remains weak overall. But we do expect that after bottoming out in the second quarter, it will recover slightly in the second half. However, it will take some time for automotive MLCC demand to recover to normal levels given some long-term factors such as the Chinese-U.S. dispute that's going on as well as the impact of COVID-19 persisting. To give you an update on the time line for our Tianjin new plant, we are currently scheduled to finish all of the remaining construction work as well as the equipment setup during the second half, so that the plant will be ready for operation. The Tianjin new plant lines were designed to be highly flexible and can be used to produce not only automotive MLCCs, but also IT and industrial MLCCs. So depending on the market situation that we see, if we see, for example, more demand on the IT and industrial applications, we can use the Tianjin operation even during the second half to capture some of that market demand and then flexibly adjust to automotive MLCCs when the automotive demand recovers.