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

[Interpreted] Good afternoon. Thank you very much for joining our conference call. We will now start the 2020 Fourth Quarter Earnings Conference Call of Samsung Electro-Mechanics. The conference call will start from the company's presentation followed by a Q&A session. [Operator Instructions] Now we will start the presentation by SEMCO.

[Interpreted] Good afternoon. This is Taiyoung Kim, head of the Planning at Samsung Electro-Mechanics as the new Head of IR at SEMCO. I thank you for joining our 2020 fourth quarter earnings conference call. On today's call, I am joined by EVP Bongyong Kang of Business Support Team; SVP Kook-hwan Cho, Head of Strategic Marketing; Teutak Park , Head of Support Team, Component division; Jung Won Lee, Head of Support Team, Module division; and Bom Park, Head of Support Team, Substrate division. We will start with a presentation on our fourth quarter company level and divisional business results, followed by market trends and outlook by product before taking your questions. First, our Q4 results. In fourth quarter 2020, our revenue was KRW 2,086.4 billion, which is about a 6% decrease Q-o-Q, but a 17% growth Y-o-Y. The details regarding revenue increased decrease factors by division will be explained later on during the divisional results. Fourth quarter operating profit was KRW 252.7 billion, which is about an 18% decrease Q-o-Q, but a 73% increase Y-o-Y. Pretax profit in Q4 was KRW 248.2 billion, reflecting the impact of the stronger Korean won. Net profit after corporate income tax was KRW 202.5 billion. Next, in terms of the financials, as of end of December 2020, total assets was KRW 9,225.5 billion, which is a 0.1% decrease from the end of the previous quarter. For the major financial indicators, debt-to-equity was 56%; net debt-to-equity 6%, both a slight decrease Q-o-Q; equity asset was 64%, a slight increase Q-o-Q. In particular, net debt as of end of December decreased by 31% versus end of September to KRW 364.3 billion. Next are the results and outlook for each division. First, for the Component division, Component division's Q4 revenue was KRW 964.5 billion, which is a 2% decrease Q-o-Q, but a 24% increase Y-o-Y. While MLCC shipments increased in Q4 with greater Chinese mobile demand and also demand from automotive applications, the division's revenue decreased due to the stronger Korean won. However, despite the stronger Korean won and resulting decrease in revenue, we were able to maintain profitability of the division by achieving better yield in overseas plants and enhancing productivity around major bottleneck processes. This year, MLCC demand is expected to remain solid, especially for applications such as smartphones and PCs with continued rollout of 5G and remote working and learning trends. We will focus on continuing to expand our supply of IT applications with timely design and mass production of our small-sized high-capacity MSCCs. Automotive MLCC demand is likely to increase with expected recovery of automotive demand, and we will focus on capturing supply opportunities by further expanding our high reliability product. Next is the Module division. Module division's Q4 revenue was KRW 564 billion, which is a 29% decrease Q-o-Q and a 4% decrease Y-o-Y. Key factors explaining the decrease is seasonality of the strategic customer's flagship smartphone, which led to a decrease in our camera module supply. But our communication module revenue increased in Q4 driven by mass production of 5G millimeter wave high-end antenna modules. Demand for high-end camera modules is expected to continue this year as a way of differentiating smartphones. And we will focus on strengthening our leadership in the high-end camera module market with optical zoom and slim module technologies. This year, mass-tier smartphones are expected to be the major volume driver in the camera module market, and we will focus on capturing the opportunities in the higher end of the mass-tier segment. Last is the Substrate division. Q4 revenue was KRW 557.9 billion, which is a 23% increase Q-o-Q and a 30% increase Y-o-Y. For packaged substrates, supply of BGAs for high-end APs and 5G antenna increased and the supply of high-end flip-chip BGAs or thin CPUs used in laptop computers also increased. Also in circuit boards, RFPCB for OLEDs used in the new flagship model increased supply during Q4, which added to our revenue growth. Thanks to strong performance across all products, the substrate division's profitability improved versus the third quarter. The margin improvement is explained first by product mix improvement in package substrates with greater contribution from high-end products, such as high multilayer substrate for 5G millimeter wave antennas, as well as revenue increase in circuit boards driven by RFPCBs for OLEDs. This year, the main opportunity is expected to be around the high impact substrates for applications such as 5G, automotive and thin CPUs. And we will focus on increasing supply around these high-value growth markets. That ends my presentation on Q4 results. And now the Head of Strategic Marketing will go over the market trends and outlook by each key product group.

[Interpreted] Good afternoon. This is Kook-hwan Cho, Head of Strategic Marketing at SEMCO, I would like to share the update and outlook for MLCC, camera module and substrate markets, respectively. First, for MLCC, on a full year basis, the MLCC market in 2020 achieved high single-digit growth versus 2019 despite challenges of COVID-19. In the first half of last year, social distancing and remote working related demand in laptops, tablets, game devices and servers was a key driver of the market. And in the second half, recovery of smartphones, TV and automotive demand, combined with the launch of new flagship smartphones and game devices, supported solid MLCC demand growth. In Q4, which usually is a slow quarter with year-end inventory adjustments, the upside demand from Chinese smartphone manufacturers and automotive recovery, which started from Q3, kept market growth strong. Looking towards this year, despite persisting uncertainty around COVID-19 and U.S. Chinese tensions, there appears to be growing expectation for global economic recovery driven by stimulus policies in many countries and decreasing political risk. This will be a positive factor for component market environment in 2021. Specific to MLCC, we expect that the demand from applications such as laptop computers and servers will continue. And that demand from smartphones, network equipment and automotive applications will also increase. In particular, we look forward to pick up in the demand of high-end MLCCs, including small-size, high-capacitance and high reliability MLCCs with wider adoption of 5G smartphones, network equipment and electric vehicles as well as automotive autonomous driving. Overall, in 2021, we expect the MLCC market to continue its growth trajectory from last year. In Q1, MLCC orders have been continuing to grow across applications such as smartphones, PCs, TVs, networks and automotive applications. Especially the automotive MLCC orders in Q1 are on pace to reporting 20% year-on-year growth. Given such a demand environment, utilization of MLCC vendors, including SEMCO, is expected to remain at high levels. There is a possibility of inventory adjustments for some products during the first half, depending on sales performance of meter applications during first quarter. But we think that even if inventory adjustments do happen, it will be at a limited scale considering our order backlog and current market inventory. SEMCO's basic direction for MLCC this year is to increase MLCC revenue by preemptively sensing shifts in the market demand and actively moving to capture revenue opportunities. Another focus is delivering greater customers satisfaction by expanding our high-end MLCC offering in both small-sized high-capacitance products for IT applications and high-reliability products for industrial and automotive applications. Next for camera modules. In 2021, we expect camera module demand to increase as smartphone market resumes growth driven by pent-up demand and wider adoption of 5G technology. The outlook for the camera -- the outlook for the smartphone camera module market is that the mass-tier market will grow at a higher pace compared to the flagship tier. So the overall market is expected to grow by around 10% versus 2020. The key trends that characterize the camera module for high-end smartphones are: one, the bigger sensors on main cameras for better picture quality; higher power zooms such as 10x optical zoom and 100x digital zoom for telephoto cameras; also ultra-wide angle cameras have started to adopt higher pixel modules such as 48-megapixel products for better pairing with the main camera. In the case of Camera Module for mass-tier smartphones, we are receiving more demand for solutions where near high-end flagship specifications such as 64-megapixel modules and optical zoom functionality, which reflects the wider adoption of higher-performance cameras even in the mass tier. Our plan is to leverage the technology advantage we have in core components, such as large aperture lenses needed for big sensors and the ball-guided actuators, and to launch a series of differentiating products such as 100-megapixel modules, 10x optical zoom and slim modules that will capture demand for high-end camera models, while also expanding supply of camera modules for the higher end of the mass tier. Lastly, for substrates. In fourth quarter, BGA demand remained solid with the wider adoption of 5G smartphones. The supply disruption that happened in certain vendors appears to have worsened the supply shortage. As expected, the Flip Chip BGA continued to see tight supply with strong demand for high-end substrates from PC servers and network applications. In year '21, the package substrate market is expected to grow by more than 10% versus year 2020 with positive semiconductor market conditions. The key drivers for the BGA market will be demand from APs, 5G antennas and memory substrates as smartphone demand recovers and 5G rollout continues. For the Flip Chip BGAs, even though some vendors are expected to add capacity, the supply growth probably won't be able to keep up with demand growth as major applications such as servers and network equipment continue to grow, and demand for high multilayer and larger substrates eat up Flip Chip BGA capacity. Our direction this year will be to maintain our leadership in the market by continuing to focus on both bottom line and top line growth around AP, 5G antenna, RF front-end and high-end memory substrates and by delivering better customer satisfaction with our differentiated technology and customer support. For Flip Chip BGA, our focus will be on achieving growth around high-end products, such as the thin Flip Chip BGA and diversifying our customer base and target applications. Now that completes my market outlook. Thank you.

[Foreign Language] [Operator Instructions] The first question will be presented by Ji-san Kim from [ Kiwoom ] Securities.

[Interpreted] I have 2 questions. The first question is about the camera module business. The Galaxy S, the new flagship model was launched earlier than usual. What was the impact to the camera module business on your end for both the fourth and first quarter. Second question is about MLCC. Can you share us the shipments, the utilization, inventory and ASP? What you saw in fourth quarter as well as what you expect in the first quarter this year?

[Interpreted] To answer your first question about the impact from the earlier release of the flagship smartphone by our strategic customer, during fourth quarter, there was some revenue generated with the supply of the parts with the earlier release of the flagship, but the size of this revenue generated during fourth quarter was limited and did not have a significant impact on our revenue in Q4. During Q1, the camera modules for the strategic customers' flagships will go into full-scale mass production, and we will be supplying more camera modules to the high-spec mass-tier models. And so in Q1, our camera model revenue is expected to significantly increase versus the previous quarter and also grow on a year-on-year basis.

[Interpreted] To answer your second question, which was about our MLCC shipments utilization, inventory and ASP for the fourth quarter last year and first quarter this year, looking at fourth quarter, despite some year-end inventory adjustments, the recovery of automotive demand and also the upside demand from the Chinese mobile customers resulted in MLCC shipment in fourth quarter growing in mid-single digits versus the previous quarter. Utilization in fourth quarter remained at full utilization level and inventory also remained flat versus the previous quarter. During fourth quarter MLCC market price remained stable, but due to the stronger Korean won, the Korean won based blended ASP decreased slightly quarter-on-quarter.

[Interpreted] Looking towards the first quarter, even though first quarter usually is a slow season, we expect that this year, first quarter, we'll see continued MLCC demand growth. As the so-called untapped life related demand continues in smartphone and automotive demand recovers. So we expect first quarter MLCC shipment to recover mid-single-digit Q-o-Q growth to record mid-single-digit Q-o-Q growth, utilization in first quarter to remain at full levels and inventory levels to remain sound and ASP to remain similar to what we saw in the previous quarter.

[Foreign Language] The next question will be presented by Taewoo Lee from UBS.

Hi, this is Taewoo Lee from UBS. My first question is on the substrates business. So with 5G penetration increasing, it seems like strong demand for BGA will likely continue. So could you share how the business did in fourth quarter and how you see the outlook for this year? And my second one is on MLCCs. For the new Tianjin fab, the company mentioned on pilot production having started in the last call. So could you update us on the current ramp-up status and its outlook?

[Interpreted] To answer your first question about the BGA for last quarter as well as what we expect this year, in Q4, BGA demand remained strong. And we maintain full utilization levels and recorded high single-digit revenue growth on a quarter-on-quarter basis with increased supply of high multilayer SIPs and also substrates for APs. Looking forward to this year, 2021, we expect strong demand to continue and our focus will be on adjusting our product mix towards the higher end higher value products such as substrates for high-end APs as well as 5G antenna substrates to further enhance our revenue and profitability.

[Interpreted] You've asked about the Tianjin new plant update and to share with you the update, as we mentioned, we've already completed the equipment setup for the initial investment. And currently, we are undergoing testing and verification for mass production stability by gradually increasing our pilot production volume. At the same time, we're also focusing on developing the product expertise and the product personality experts to build in the capabilities to flexibly respond to future increases in market demand.

The next question will be presented by Chulhee Cho from Korea Investments and Securities.

[Interpreted] I have 2 questions. The first question is about the package substrates. It seems that this year, the package substrate will have a good outlook. Can you share with us some details about your capacity expansion plan for package substrates this year? Second question is about the smartphone business, it seems that you are emphasizing the expansion of camera module supply to the mass-tier smartphones this year. Can you give us a bit more direction or color to your business outlook?

[Interpreted] To answer your first question about the package substrates, as you mentioned this year, the package substrate demand is expected to increase with the IT industry outlook being positive and also smartphone demand expected to recover. In order to meet the increasing package substrate demand on a timely basis, we have been continuously increasing our productivity and production capabilities. This year in 2021, we plan to expand our capacity around the high-value products, such as substrates for APs, 5G antennas and the thin CPUs for laptops in order to continue to meet our customer demand.

[Interpreted] To answer your second question about our plans regarding the camera module supply for the mass-tier smartphones, in line with the smartphone OEMs demand for higher-specification camera modules for their mass-tier smartphones, starting from the supply of optical 3x zoom OIS, in the second half of last year, we have been supplying camera modules for more models in the mass tier and also increasing our camera module supply volume. This year, we plan to continue our volume increase around the camera module supply for the higher end of the mass tier, and expect to see double-digit growth in the revenue of these products this year.

[Foreign Language] The next question will be presented by Rok-ho Kim from Hana Financial Investments.

[Interpreted] I have 2 questions. First is about the MLCC market. It seems that the supply in the MLCC side is still quite tight. Does the company see any possibilities of MLCC price increases? The second question is about your camera module business. There has been some reports in the media of possibilities of you supplying folded zoom modules to a North American OEM. Can you share with us within whatever is publicly disclosable, whether, for example, it's possible for the company to supply folded zoom modules to the North American company?

[Interpreted] To answer your first question about MLCC pricing, it seems recently, especially some security firms have been raising the possibility of an MLCC price increase. Our basic posture regarding price increases is to maintain a flexible posture regarding price increase by considering various factors, including future supply and demand situation and industry trends, and also taking into account the mid- to long-term business relationship that we have with our customers based on trust.

[Interpreted] Regarding your second question about these media reports of us supplying folded zoom to the North American company, I think that those media reports continue to surface because SEMCO does have its own technology related with the folded actuators and the D-cut lenses. But we are not able to comment on specific supply plans pertaining to any specific customers.

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

[Interpreted] I have 2 questions. First question is about your capacity increase plan for the MLCC, can you give us a bit more detail of your MLCC capacity increase plans for year 2021? Second question is about the outlook. For the 5G millimeter wave antenna substrates which would probably benefit from the increase in the 5G smartphone adoption, can you give us your outlook?

[Interpreted] Regarding the first question about our MLCC capacity increase plan for year 2021, currently, our MLCC capacity is at full utilization. So this year, we will continue to increase more capacity by enhancing our productivity and also enhancing our manufacturing efficiency. We will also be very efficiently utilizing our new capacity in Tianjin, in line with the demand and supply situation that unfolds during this year in the market. Our basic approach is to increase our capacity above-market growth levels to be able to supply and satisfy our customer demand.

[Interpreted] Regarding the 5G millimeter wave antenna substrates, the demand for these substrates is expected to continue growth in 2021 as wider adoption of 5G handsets continue. We are aiming this year to continue revenue growth versus the previous year by winning more design-ins and more models of the strategic customer and also increasing supply by enhancing our production capabilities.

[Foreign Language] The next question will be presented by Gang Ho Park from Daishin Securities.

[Interpreted] I have 2 questions. First question is about the CapEx plan. I recall that last year due to various uncertainties, the company maintained a conservative approach to its CapEx. But this year, supply situations are tight on many of your products, so it seems that CapEx increase or CapEx spending is likely. Can you share with us some details about your CapEx plan this year? Second question, there is still a lot of uncertainty this year, but can you share with us your guidance for first quarter this year as well as full year 2021?

[Interpreted] To answer your first question about our CapEx plan this year, this year, we are planning to increase our CapEx versus last year to meet the recovery of downstream industries such as smartphone and automobiles, and as well as to capture the demand growth that's happening in some of the upcoming promising sectors such as 5G and automotive. Based on the principle of achieving revenue growth above market growth, we will focus first on improving the productivity and then to execute CapEx for the additional capacity needed to capture the customer demand. By doing this, we will be aiming to maximize our CapEx efficiency, at the same time, maintaining sound cash flow.

[Interpreted] This is Bongyong Kang, EVP at SEMCO. I would like to answer your question about first quarter and full year guidance for year 2021. First, looking towards the first quarter of this year, we do think that slight Q-on-Q revenue growth would be possible. Our revenue growth is expected on our component division with the strong demand for MLCCs continuing. Also from the module division, which will see the effects of the new flagship smartphone launch by our strategic customer. However, the substrate division revenue is likely to decrease due to the seasonality of our PCBs. Looking towards this year, for the full year 2021, first of all, the global economic outlook seems to be expecting growth versus year 2020 despite various uncertainties such as the tension between U.S. and China and continued persistence of COVID-19. Also looking towards the component markets that are related to SEMCO, most of the component markets are expected to record growth versus the previous year in areas such as 5G and automotive applications. Also, given that global economic backdrop and market outlook, we will be focusing on recording revenue growth also in 2021 by strengthening our technology advantage by securing core technologies and launching differentiated products -- new products. Number two, by continuing to work on better productivity with enhanced equipment efficiencies and manufacturing, engineering and know-how; and third, by continuing to improve our product structure. Lastly, In terms of our investment approach, a key focus this year would be efficient investments in CapEx execution so that we're able to increase the revenue and profit share versus the investments that we make in the industry. Also another focus will be to effectively respond to any changes in the external environment so that we're able to achieve positive cash flow and maintain business stability.

[Foreign Language] That completes our earnings conference call. If you have any further questions, please forward them to our IR team. Thank you very much for attending. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]