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

[Interpreted] Good afternoon. Thank you very much for joining today's conference call. We will now start the 2021 First Quarter Earnings Conference Call of Samsung Electro-Mechanics. [Operator Instructions] Now the company presentation will commence.

[Interpreted] Good afternoon. This is Taiyoung Kim, Head of IR and Planning Team at Samsung Electro-Mechanics. Thank you for joining our 2021 first quarter earnings conference call. On today's call, I am joined by EVP Bongyong Kang of the business support team; SVP Kook-hwan Cho, Head of Strategic Marketing; [ Choo Tek Park ], Head of Support Team, component division; [ Hang Wan Lee ], Head of Support Team, module division; and [ Bom Park ], Head of Support Team, substrate division. We will start with a presentation on our first quarter company-level and divisional business results, followed by market trends and outlook by product, before taking your questions. Now first, our first quarter results. In Q1, our revenue was KRW 2.3719 trillion, which is an approximately 14% increase Q-on-Q mainly attributed to the growth of component and module divisions which offset the decrease in substrate revenue. On a year-on-year basis, even though the module division revenue decreased, revenue increased from the component and substrate divisions. And overall year-on-year revenue growth was about 11%. The details regarding revenue increase and decrease factors by division will be explained later on during the divisional results. Q1 operating profit was KRW 331.5 billion, which is about a 31% increase Q-o-Q and roughly double the operating profit in first quarter last year. Pretax profit in Q1 was KRW 333.8 billion. Net profit after corporate income tax was KRW 233.2 billion. Next in terms of financials. As of end of March 2021, total assets was KRW 9.6815 trillion, which is about a 5% increase from the end of the fourth quarter. For the major financial indicators. Debt-to-equity was 57%, which is a 1 percentage point increase Q-on-Q reflecting a slight increase in short-term liability. And net debt-to-equity was 5%, which is a slight decrease Q-on-Q. Equity-to-asset was 64%, remaining flat. Next are the results and future outlook of each division. Firstly, components division. The component division's first quarter revenue was KRW 1.0884 trillion, which is a roughly 13% increase Q-o-Q and a 27% increase Y-o-Y. Revenue increase was driven by increase in MLCC supply, including increased sales of small-size and high-capacitance MLCC for mobile applications and MLCCs for PCs as well, increased supply of automotive MLCCs with the recovery of automotive demand. Profitability also improved with continued gains in manufacturing efficiency, particularly better yield and productivity in our overseas production. In Q2, we expect to see continued demand from IT applications, including smartphone and PC; and plan to focus on responding to market demand by expanding our supply capabilities in small-size and high-capacitance, high-end MLCCs. For automotive MLCCs, demand growth is expected as automotive demand recovers, and we will focus on expanding our high-reliability MLCC lineup and diversifying our customer base. Next is the module division. The module division's Q1 revenue was KRW 841.3 billion, which is roughly a 49% increase Q-o-Q but a 6% decrease Y-o-Y. A strategic customer's new flagship launch resulted in a Q-o-Q revenue increase, but revenue slightly decreased on a year-on-year basis as products were supplied earlier than usual due to the earlier launch of the customer's flagship. Also in Q1, camera modules for the upper mass-tier smartphones went into full-scale mass production, which increased revenue of the related camera modules. For the camera module market, second quarter has traditionally been a slow season, but we expect demand to -- and we expect demand to decrease. Accordingly, our module division revenue is expected to decrease on a quarter-on-quarter basis, but we will focus on revenue recovery by expanding supply of high-performance camera modules for flagship smartphones, for example, to Chinese customers; and continue to expand supply of camera modules for mass tier. Last, the substrate division. Q1 revenue was KRW 442.2 billion, which is roughly a 21% decrease Q-on-Q but a 15% increase year-over-year. For package substrates, revenue increased, thanks to increased supply of BGA for mobile AP and flip chip BGA for thin CPUs in laptops. On the other hand, PCB revenue decreased due to a large drop in OLED RFPCB supply caused by the seasonal weak demand of the overseas customer. As a result, on a divisional level, revenue decreased quarter-over-quarter. In terms of profitability, the substrate division recorded better profitability on a year-over-year basis, thanks to the strong performance of package substrates, but profitability decreased on a Q-on-Q basis due to decrease in PCB revenue. In Q2, strong demand for high-end package substrates for mobile and PC applications is expected to continue. Accordingly, we will focus on increasing supply of high-performance package substrates for AP, 5G antenna and thin CPUs while at the same time increasing capacity around high-end products and improving our product mix. That ends my presentation on our first quarter results. And now the Head of Strategic Marketing will go over the market trends and outlook for each of our major product groups.

[Interpreted] Good afternoon. This is Kook-hwan Cho, Head of Strategic Marketing at SEMCO. I would like to share with you the market update and outlook for MLCC, camera module and substrates. Firstly, MLCC. Even though Q1 is usually a slow season for MLCC, this year, first quarter demand was strong, especially around PC and TV applications distributed to the so-called untapped demand. With smartphone production remaining strong and pent-up demand recovery in automobiles, MLCC was solid overall in terms of demand. We expect this trend to continue in the second quarter. Regarding the implication of the recent semiconductor shortage on MLCC demand. Even though the semiconductor shortage that started in automotive has spread to some IT devices, raising concerns about a possible production disruption at set levels and even in turn decrease in MLCC demand, what we have seen is that the lack of visibility in component supply has rather heightened the need to build up inventory for all components, including MLCC. Also the semiconductor situation is expected to stabilize gradually from the second half, so impact on full year MLCC demand is expected to be limited. As of end of March, MLCC channel inventory appears to have slightly increased versus the end of last year but still remain within balanced levels. Perhaps through the experience of the recent semiconductor shortage, we are sensing some movement in the market by companies seeking to preemptively claim capacity for their next year's demand in order to gain stable supply. Looking forward to the second half. Even though some uncertainties such as possible resurgence of COVID-19 remain, expectations of a global economic recovery is building up as vaccinations continue. And key institutions, including IMF and OECD have been upward revising their economic outlook. The expectation of improved semiconductor supply; launch of new flagship smartphones; and positive seasonality by applications such as PC, TV and game devices are all supportive of a positive outlook for MLCC demand. Accordingly, we will strategically operate our product mix across each application while preemptively [ sensing ] market demand and focus on boosting MLCC revenue by increasing our production capacity step by step. In particular, we will focus on securing supplies capacity in high-growth markets, including small-size, high-capacitance MLCCs for IT applications; and high-reliability MLCC for industrial and automotive applications to achieve customer satisfaction. Next, about the camera modules. In Q1, smartphone camera module demand increased year-on-year, driven by pent-up demand and greater penetration of 5G smartphones. In particular, demand for high-spec camera modules, which is our key focus area, saw a strong increase from the previous quarter, thanks to the full effect of the strategic customer's flagship launch and adoption of high-spec camera modules on mass-tier models. In Q2, camera module demand may be a bit soft given seasonality, but we also expect that demand for mass-tier model camera modules will actually grow with recovering consumer sentiment and also the launch of new models by Chinese OEMs. Also, in the second half, we expect high-end camera module demand to expand with the launch of new flagships, including new foldable models. Accordingly, we will actively respond to the flagship of the strategic customer and Chinese OEMs while also focusing on expanding our position in mass tier. We will leverage our technology advantage in [ internalized ] key components such as lens and actuators to show technology differentiation in the flagship models; and also focus on winning the mass tier, especially the higher end of the mass market where high-feature, high-pixel and high-power zoom camera modules are gaining greater penetration. Semiconductor supply has been a major issue; and aggravated by earthquakes, fires and power outages. And some manufacturers had to lock down due to COVID-19, so we will make sure that our camera module business avoids any obstacles to its growth by preemptively checking key risks associated with customers and the supply chain. Lastly is the substrate business. In Q1, BGA demand grew especially around smartphone applications such as 5G antenna, AP and memory, while supply remained tight, with a supplier experiencing production issues due to fire. Flip chip BGA demand for PCs remained strong in first quarter. And demand for server and network also continued with growth in various online services and greater adoption of 5G. At the same time, the demand for more server and network performance has resulted in the introduction of new [ SOCCs ] with higher performance specs and adoption of more semiconductor, which in turn drives greater substrate demand and called for package substrates with more layers and larger sizes. This has aggravated the capacity erosion and is a main reason supply has continued to remain tight overall. In terms of market outlook. For BGA, we think that demand growth will continue given the expected smartphone demand recovery and 5G adoption in mass tier, which will support solid demand in applications such as 5G antenna, AP, RF modules and memory. On the other hand, substrate capacity expansions have been behind schedule as some suppliers experience production disruptions followed by delayed recovery. And there were some issues with substrate production equipment supply, so tight supply is likely to continue. While flip chip BGA demand is growing in several applications, including PC, automotive, and large-scale investments are being discussed in server and network markets, flip chip BGA capacity increase is likely to not keep up with the growth in downstream markets and substrate demand growth. We have heard some customers voicing concerns of a possible flip chip BGA supply capacity shortage and expect flip chip BGA supply to remain tight for some time. Accordingly, we will focus on improving our product mix around high-end products such as microcircuit [ BGA ] for smartphone, AP, 5G antennas, RF modules, SiP and thin -- flip chip BGA; and respond to demand preemptively and flexibly, including expanding capacity by watching market demand trends, including upside requests from customers. Our goal is to drive revenue growth while maximizing customer satisfaction based on reliable quality and differentiated technology, supported by stable supply capability. That completes my market overview. Thank you.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Rok-ho Kim from Hana Financial Investments.

[Interpreted] I have 2 questions regarding MLCC. First question is, can you share with us the first quarter MLCC shipment and ASP? And also can you share with us your guidance for each of that for second quarter? Second question is about the MLCC price increase possibility. I think, compared to other competitors, SEMCO has been more conservative about increasing MLCC prices. Perhaps that's because of considerations of your relationship with the large customer, but does the company still believe that the possibility of MLCC price increase is low?

[Interpreted] To answer your first question, about first quarter MLCC shipment, ASP and second quarter guidance. In first quarter, MLCC shipment increased by double-digit quarter-on-quarter, driven by strong demand from Chinese mobile OEMs and also automotive demand recovering. Market price continued to remain stable. And on a blended basis, blended ASP increased slightly versus the fourth quarter. In the second quarter, stable demand is expected to be maintained in all applications such as IT, industrial and automotive. And shipment as well as ASP in second quarter is expected to be similar to the first quarter. Your second question was about MLCC price increase possibilities. We are in a process of adjusting prices for certain products in order to improve our overall product mix, but we plan to respond flexibly in terms of price increases, depending on future market demand and supply situation and also considering the mid- to long-term business interest based on our relationship with customers.

[Foreign Language] The following question will be presented by S. K. Kim from Daiwa Capital Market.

[Interpreted] I have 2 questions. The first question is about the substrate division. The market outlook for the package substrates appear to be very strong even going forward, and so in that context, can you share with us your revenue and profitability guidance for the second half versus first half? Do you see further upside in your package substrate business in the second half of this year? Second question is about the mid- to long-term business strategy for your camera module business. The camera module business itself has very positive outlook, but I think there were other opinions regarding the valuation of the camera module business itself. Does the company have any thoughts of, for example, diversifying its camera module business by commercializing the lens and actuator and other component businesses? Can you share with us your strategy and thoughts regarding the camera module business?

[Interpreted] Your first question, about the second half package substrate outlook. As you know, due to the strong PC demand from video conferencing as well as remote learning and working and also supply issues in substrates for mobile AP, the package substrate supply is expected to remain tight for some time. In order to respond to the customer demand, we are in the process of increasing our package substrate supply capabilities. And we expect to achieve higher revenue and profitability in the second half versus the first half of this year by also continuing our product mix improvement towards higher-end and higher-value substrates.

[Interpreted] Your second question was about possibilities of diversifying our camera module business. As you know, securing a competitive advantage in core components such as lens and actuators is a critical piece in maintaining leadership for camera modules, especially for flagship smartphones. SEMCO has been able to develop proprietary differentiated technology in key components such as large aperture and D-cut lenses and slim lens and ball-guided actuators. The question of whether to develop our core component capabilities into a separate commercial business is a topic that we will be determining by considering various factors, including the market environment.

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

I have one question each for your MLCC and the camera module operations. So first, on MLCC, it looks like your operation utilization continues to be at a full running rate. Is there realistically an upside to the utilization in the coming quarter? And if so, should we view the first quarter or upcoming second quarter to be the peak of their production at SEMCO this year? Also, if you could share your recent inventory status and outlook, that will be great. Next quick question, also on the camera module: There seems to be continued spec upgrade ongoing that leads to higher [ BOM ] costs and pressure to your customer. And SEMCO may face some price and margin pressure more, so what will be the contingency plan and the strategy from SEMCO on this?

[Foreign Language]

[Interpreted] To answer your first question. MLCC, as you mentioned, is -- has been operating at full utilization, continuing in first quarter as it did in fourth quarter. We will be continuing to expand our supply capabilities through productivity gains and also manufacturing efficiency improvements that we have scheduled until the end of the year. At the same time, the capacity at Tianjin will be used to efficiently and flexibly respond to market demand. You've also asked about inventory. Inventory remains similar to fourth quarter and is expected to remain within a sound level continuing in the second quarter.

[Interpreted] Your second question, about our camera module. SEMCO's strategy in camera module remains focused on satisfying the needs of each customer by leveraging our differentiated technologies such as the 100 meg pixel (sic) [ 100-megapixel ] ultra-high pixel camera modules and folded zoom camera modules. Going forward, we will continue to lead the wave of introducing differentiated camera modules through continuous development of next-generation technology and, at the same time, push forward initiatives to improve the cost competitiveness such as yield improvements to maintain a camera module business that is sustainable and also competitive.

[Foreign Language] The following question will be presented by Hyung Wou Park from Shinhan Investment.

[Interpreted] Well, I have 2 questions. The first question is about the package substrates. I think many people have mentioned that the prospects, outlook of package substrate is very bright and strong. In that context, does the company have plans of adding additional capacity for BGA and flip chip BGA, respectively? Second question is about the financials. We do notice that your nonoperating profits as well as the overall financial status condition of the company is continuing to improve since last year. Will the company maintain its position regarding its financial policies this year? And also in that context, can you share with us your guidance for CapEx this year?

[Interpreted] Your first question, about capacity increases for package substrates. During our last conference call, we mentioned the plan to expand capacity continuing in 2021, especially around the high-end package substrates such as AP, 5G antenna and substrates for the thin laptop CPUs, to respond timely to the continued increase of package substrate demand. The capacity expansion is currently underway as scheduled, and we will continue to carefully monitor the market situation to meet demand in a timely manner.

[Interpreted] Your second question was about our financial policy this year and about CapEx guidance for this year. As mentioned during the last conference call, this year, we are planning to increase our CapEx versus last year to capture the recovering demand in key downstream industries such as smartphone, PC and automotive industries; and also to capture the growth of component demand related with key promising sectors such as 5G and automotive. At this point, we are also considering whether to upward adjust our full year CapEx plan given the higher or the stronger-than-expected demand growth that we have seen year-to-date. Under the basic principle that high-value businesses that are aligned with customer demand should be the focus of our investment, we will continue to work on maximizing our investment efficiency and cash flow soundness.

[Foreign Language] The next question will be presented by Giuni Lee from Goldman Sachs.

Congratulations on the strong results. My first question is essentially an update on your auto MLCC business. Can you please update on the ramp-up schedule of your Tianjin fab as well as the progress you're making in entering into the powertrain segment? And my second question is on camera modules. Understand that you have started to enter in full scale into the camera module market for the upper mass-tier smartphones, so we would like to know the progress as well as the outlook of that.

[Foreign Language]

[Interpreted] Well, to answer your first question, about the automotive MLCC business. The Tianjin new plant is in the final stages of completing its pilot production, which is -- the purpose of this is to prove that it is mass production ready. And the Tianjin plant is therefore now preparing to go into full-scale mass production, depending on the market situation. Regarding the automotive MLCC business update: In the case of the high-capacitance MLCCs, which do account for the [ largest ] share of automotive MLCC demand, we have already completed a product lineup comparable to the competitors. In the case of high-reliability MLCCs for powertrain applications that require high pressure and high temperature, we are planning to continuously expand our addressable market by expanding our lineup to align with the market demand on a step-by-step basis.

[Interpreted] To answer your second question, about the mass-tier camera modules. Even the mass-tier smartphones have started to adapt multi-camera modules and have a growing need for the technology such as high pixel and zoom previously associated mainly with the flagship category. We have been supplying mass-tier camera modules to the strategic customer from the first quarter. And also we started supplying to the Chinese OEMs mass-tier models, which will help drive volume even further. So as mentioned during last quarter, this year's revenue in mass-tier camera modules is likely to record significant growth versus last year.

[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 substrates, the semiconductor substrates, the BGA substrates, which I think we have already mentioned several times during the conference call the supply is quite tight. I'm wondering whether SEMCO has already increased its prices, effective prices, for its BGA products; or if not, has plans of doing so in the future. Second question is about the financials. Especially with a very efficient investment policy implemented last year, I do notice that your cash positions have increased quite a lot significantly. Also the company has gone through a wave of repaying its borrowings, and so I do wonder what plans the company has in terms of using its cash position on a long-term basis. Can you give us some direction regarding your plans of using the cash?

[Interpreted] Your first question, about package substrate price increases. As you know, the demand for package substrate has continued to grow, driven by strong PC demand with more people working from home and also the wider adoption of high multilayer substrates for [ 5G APs ]. The demand for more layers and large-size substrates has increased the capacity load, resulting in tight supply. To reflect this market situation, we did adjust prices for certain products after holding discussions with customers, and going forward, we will respond by considering both the market situation and the relationship with our customers.

[Interpreted] To answer your second question, about the cash. Since the onset of COVID-19 in 2020, the cash flow management has been a particular focus for us. And as of end of first quarter this year, we hold a total of KRW 1.6237 trillion in cash and cash equivalent assets, which is about double the cash that we had at the end of 2019 which was KRW 803.8 billion. The cash will be used primarily in facility investments necessary to drive growth of our existing businesses and also to strengthen our competitiveness. On the other hand, our net cash position is still in negative, so in the short term we will focus on bolstering our net cash position before looking into new business initiatives, including M&A ideas.

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

[Interpreted] I have 2 questions. First question is about MLCC. I think there's some concern that, with various commodity prices increasing, that would increase the cost burden felt at SEMCO level for MLCC. Can you share with us whether you are expecting an impact on your MLCC business due to possible raw material price increases? Second question is about the package substrates. Can you give us an update on your server flip chip BGA development status and when you expect to have some visibility in terms of mass production?

[Interpreted] To answer your first question, about possible raw material price increases and the implications to our MLCC costs. As you mentioned, with the recovery of the overall global economy and industry, there is a factor that this may cause increase in key commodities. However, we are continuing to work on cost improvement initiatives. And we'll try to minimize any impact by expanding the volume of our operations by taking advantage of the market growth.

[Interpreted] Your second question, about server flip chip BGAs. As you know, flip chip BGAs for servers is an area that is expected to continue to grow given the increase in demand of high-performance processors needed for cloud, AI and high-speed communication. Currently our flip chip BGA business are mainly supplied for PCs, such as for thin CPUs used in laptops, but we have also been developing key technologies needed for servers such as large area and high multilayer. Currently we are working on the development of server flip chip BGAs upon invitation by several companies, and we will do our best to enter the server flip chip BGA market soon.

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

[Interpreted] My first question is about the folded zoom camera modules, which seems to be emerging as a mainstream trend in global mobile devices, but there are issues, for example, the high price and the size requirements, [ that means some concern ] would reduce or limit the spread of its adoption. In that context, can you share with us your outlook for the folded zoom market and how you plan to address this market? Second question is about the automotive MLCC, which is expected to grow quite significantly. I'm wondering about the mid- to long-term perspective SEMCO has for its automotive MLCC business. Can you share with us a range of your growth targets for the MLCC -- automotive MLCC business in the mid to long term?

[Interpreted] The first question, about the folded zoom market outlook and our response plans. I think the latest trends and the strategy of OEMs in trying to differentiate their flagship smartphones is to adopt 4 to 8x continuous zoom camera modules. That seems to be the latest frontier in terms of optical zoom technology that the smartphone OEMs are adopting. This will inevitably drive the need to -- for folded zoom camera modules SEMCO is currently supplying optical 10x zoom and other high-spec folded zoom models to Korean as well as overseas OEMs and has a competitive edge in the folded zoom market with our D-cut lens and actuator technology. We will continue to lead the market by developing next-generation models including continuous zoom to differentiate flagship handset models and also supply a -- standard camera module models for mass-tier smartphones to cover the entire market.

[Interpreted] Your question about our mid- to long-term automotive MLCC business. As you know, looking back, last year, in 2020, automobile vehicle shipments decreased due to COVID-19. However, this year, vehicle shipments is rebounding. Semiconductor supply is expected to stabilize from the second half, so automotive MLCC demand is expected to continue this upward trajectory. Looking towards the mid- to long term, with the wider adoption of EVs as well as ADAS, the automotive MLCC growth is expected to significantly outpace overall MLCC growth rates. Given this outlook, we will focus on continuously expanding our market share in automotive MLCCs by setting high growth targets that are above market growth rates and concentrating our business capabilities behind it to achieve our targets.

[Interpreted] Well, that completes our first quarter earnings conference call. Thank you very much for joining us. And if you have any questions, please forward them to our IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]