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

[Interpreted] Good afternoon. This is Taiyoung Kim, Head of IR and Planning at Samsung Electro-Mechanics. Thank you for joining our fourth quarter earnings conference call. Before going into the presentation, I would like to inform you of the new names adopted for our business divisions late last year. The name of the Module division has been changed to the Optics & Communication Solution division, and the Substrate division has been changed to the Package Solution division. This is to better align with the actual business direction and to better communicate the growth opportunities. On today's call, I am joined by our EVP [ DongJin Kim ], our CFO; EVP Kook-hwan Cho, Head of Strategic Marketing Center; [ Teutak Park ], Head of Support Team, Components division; Jungwon Lee, Head of Support Team, Optics & Communication Solution division; and VP Jung-hoon Ahn, Head of Support Team, Package Solution 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 fourth quarter results. In Q4, our revenue was KRW 2,429.9 billion, which is approximately a 5% decrease Q-o-Q and a 30% increase Y-o-Y. The details regarding revenue increase/decrease factors by division will be explained later on during the divisional results. Q4 operating profit was KRW 316.2 billion, which is a 30% decrease Q-o-Q and a 21% increase Y-o-Y due to the Q-o-Q decrease in revenue and also one-off expenses for last year's special year-end bonuses. Pretax profit in Q4 was KRW 324.2 billion, which is a 31% decrease Q-o-Q, driven by decrease in operating profit. Net profit was KRW 85.5 billion after deduction of KRW 115.7 billion of loss from discontinued operations, including the RFPCB business, and the KRW 123.8 billion of corporate income tax. The discontinuation of the RFPCB business was already announced to the market last October. This was for the sake of focusing our resources on core businesses and is expected to make our business portfolio stronger going forward. Next, in terms of financials, as of end of 2021, total asset was KRW 9,941 billion, which is a 1% decrease from the end of third quarter, mainly due to decrease in cash and cash equivalents resulting from debt repayment. Major financial indicators has liability to equity at 45%, debt to equity at 14% and net debt to equity at negative 3%, all decreasing since the end of third quarter. Next are the divisional results and future outlook. First, the Components division. The Component division's Q4 revenue was KRW 1,173.6 billion, which is an 11% decrease Q-o-Q but a 22% increase Y-o-Y. While high-end products such as large-sized MLCC for industrial and automotive sales expanded, IT application demand slowed down, leading to decrease in MLCC supply mainly in the commodity segment for PC and IT application, and divisional revenue dropped quarter-on-quarter. This year, MLCC market outlook is that while uncertainties remain about a demand slowdown around commodity MLCCs, the overall market, including high-end products, is expected to continue growth. Accordingly, we will actively respond to market changes using higher productivity and better product mix and focus on expanding our high-end lineup for 5G server, EV applications and add on more customer design-in. Next is the Optics & Communication Solution division. The division's Q4 revenue was KRW 777.4 billion, which is a 1% decrease Q-o-Q but a 38% increase Y-o-Y. The main reason for the Q-o-Q revenue decrease was a drop in camera module supply to the strategic customer and the Chinese OEMs due to seasonality, which offset the increase in high-end camera module supply to an overseas customers' flagship smartphones. That said, camera module for automotive applications increased Q-o-Q, as our supply of camera modules for key customers' high-end ADAS system increased. This year, camera module market outlook is that customers will continue to demand camera modules with differentiating functionalities for both smartphones and automobiles. In the case of smartphones, we will focus on leading the high-end flagship camera module market by developing high-performance camera modules with better video and zoom performance using our proprietary lens and actuator technologies. For automotive camera modules, we will continue to expand our supply of high-end camera modules by leveraging the camera module technology we have accumulated from the mobile applications. Lastly, for the Package Solution division, Q4 revenue was KRW 478.9 billion, which is a 9% increase Q-o-Q and a 38% increase Y-o-Y. First, for BGA supply of high-spec substrates for high-end AP and 5G antenna applications increased tied to the 5G demand growth contributing to our Q-o-Q revenue growth. Supply of flip chip BGA also increased for thin CPUs for the key customers' laptop computer as well as for automotive applications, contributing to the Q-o-Q revenue growth. This year, package substrate market is expected to remain solid, supported by demand for high-spec package substrates, such high multilayer and large-sized packages tied to the growth of 5G, AI and Big Data applications that require higher capacity and high-speed connectivity. Accordingly, we plan to expand our high-end product lineup for server and network applications and upgrade our overall production portfolio. We will also focus on satisfying the growing package demand on time by expanding our capacity. That ends my presentation on our Q4 results. And now, EVP Kook-hwan Cho of the Strategic Marketing Center will go over the market trends and outlook by product.

[Interpreted] Yes. Good afternoon. This is Kook-hwan Cho of the Strategic Marketing Center. I would like to share the update and outlook for the MLCC, camera module and substrate markets, respectively. First, for MLCC, in Q4 last year, purchasing demand of overall MLCCs decreased Q-o-Q due to the slowdown of component demand from IT applications such as smartphone, PC and TVs, even though the overall server and automotive sales remained solid downstream. As of end of December, MLCC customer level inventory appears to have slightly increased Q-o-Q, as customers' inventory consumption slowed down compared to supplier shipments due to decrease in downstream production affected by the ship supply issue -- chip supply issue. For '22, despite remaining uncertainties, including the spread of the Omicron variant and signs of U.S. liquidity tightening, this year, the spreading anticipation of a global economic recovery and expected easing of the chip shortage would be a positive factor to the downstream production recoveries. MLCC market demand is expected to continue an upward trend driven by: increased downstream market; product demand such as 5G smartphone servers and networks; and increase in MLCC content in automobiles with greater penetration of EVs and ADAS systems. In Q1, MLCC purchasing demand may remain slow due to seasonality and inventory adjustment for commodity MLCCs. However, MLCC inventory is expected to gradually come down to stable levels, as the chip shortage improves and downstream production recovers. In 2022, we plan to respond flexibly to market changes by optimizing our product mix around growth markets and areas with supply/demand imbalances. Also, we will continue to achieve customer satisfaction by expanding design-in of our new high-end products, including the small-sized, high-capacitance products for IT applications and automotive high-reliability products. Next is the camera modules. In Q4, camera module demand decreased due to the impact of chip production issues and customer inventory adjustments. But in Q4, we started sales of a high-end camera module in preparation for the strategic customers' new flagship smartphone. In 2022, the camera module market is expected to continue growth driven by easing chip supply, wider adoption of 5G and wider adoption of foldable and triple-camera smartphones despite concerns about smartphone market growth due to weaker consumer sentiment burdened by higher interest rates and possible inflation. Camera modules for high-end smartphones are focused on differentiating themselves through features such as adoption of big sensors for better picture quality and high pixels for main cameras and optical 10x zoom or digital 100x zoom for telescopic cameras. And so we're also seeing the trend of high-pixel adoption even in the ultra-wide angle cameras. Demand for flagship-like specs, such as 64-megapixel modules or OIS is growing even for the mass market smartphones, driven by the trend of adopting high-performance camera modules. Accordingly, we will focus on leading the camera module market by continuing to launch differentiating products, such as 108-meg, high-pixel, optical 10x zoom and slim camera module products that showcase our technology advantage in core components, such as large aperture lenses for big sensors and ball-guided actuators. Also, we will expand our presence in the mass market by preemptively proposing technology for the high-end modules that have been adopting high-pixel modules and OIS technology. Lastly, for the substrates, in Q4, BGA substrate demand remains solid from applications such as high-end AP, 5G smartphones and memory chips. Flip chip BGA continues to see a supply shortage due to downstream demand growth for PC, server and network devices, combined with capacity erosion from increase in substrate layers and larger bodies. In 2022, the substrate market is expected to continue growth, mainly around the 5G smartphones substrates, such as 5G antenna and new high-end AP tied to overall growth in 5G smartphone penetration. While capacity for flip chip BGA suppliers is expected to increase, growth of the non-PC applications such as server and network is continuing, and the trend of adoption of larger substrates and more layers are also continuing. The growth of the Arm-based processor market is expected to drive demand for ABF substrates. Overall, this is expected to lead to flip chip BGA capacity erosion, and the increase of actual capacity to the market will be limited to the difficulties of the production technology. Therefore, overall supply of package substrates is likely to remain tight. We will focus on strengthening our product mix around high-end products, such as the high-end BGA for smartphone APs and 5G antennas and thin flip chip BGAs for high-performance CPUs. We will also expand the supply of products for the Arm processors. In the mid- to long term, we're also preparing for next-generation demand in the substrate market by providing differentiated package solutions, such as the high-multilayer, large-sized embedded components and ABF substrates. We also plan to further grow the substrate business in response to market change by expanding the flip chip BGA applications to servers and network devices and diversify our customer base. Thank you.

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

[Interpreted] Yes. I have 2 questions. The first question is about the investment that you announced in the flip chip BGA. Can you give us some details about the future expansion plans and when you expect mass production to start? Also, I think the scale that you announced was -- is now considered large compared to your competitors. Is there a possibility of additional investments down the road? The second question is related with the MLCC business. Can you share with us your fourth quarter MLCC shipment, in inventory and ASP results and also provide some guidance on those data points for the first quarter of this year? I think overall this year, there's an expectation that MLCC prices would deflate. If there is an MLCC price deflation, what would be the impact on your business performance?

[Interpreted] To answer your first question about the flip chip BGA expansion, as we announced at the end of last year, we're currently in the process of expanding our flip chip BGA capacity in order to increase our supply of flip chip BGAs to meet the high-performance chip as well as the package substrate market demand growth. Our mass production start is targeting second half of 2023 with meaningful revenue contributions expected from 2024. You've also asked about whether we have plans for additional capacity expansions. That, we will respond appropriately by carefully watching the market situation as well as the supply and demand situation.

[Interpreted] To answer your question about the MLCCs. First of all, our fourth quarter MLCC shipment decreased, inventory increased, mainly due to the customers' component inventory adjustments, especially in the commodity MLCC segment in the Chinese market. However, the demand for high-end industrial and automotive MLCCs remain solid. And so even in fourth quarter, our blended ASP improved as our product mix focused more on the high ASP MLCC for server and network applications. For Q1 market outlook, even though there is still Q1 possibility of additional inventory adjustments, especially around the Chinese IT customers or commodity MLCC applications, in terms of market outlook, there will be continued growth. We expect for demand of the high-end IT as well as automotive MLCCs, which is our main area. And so in the Q1, we expect our MLCC shipments to return to an increasing trend, especially as we expand the supply of high-end MLCCs. You've also asked about the possibility of an MLCC price decrease this year and possible impact that would have on our business results. I think overall market expectation for year 2022 is that there could be the usual ASP decline in MLCCs, especially in the IT commodity segment due to expected decrease in demand related with the untapped trend and also customer inventory adjustments. However, despite that overall market outlook in the high-end segments, I think the factors that would drive a price decrease is relatively smaller compared to other segments, given the fact that 5G technology in the mobile side is expected to roll out from flagship to even the mid-end tier and also the continued increase in automotive demand due to the penetration of EVs and adoption of ADAS. Given this market outlook, we will focus on further improving our blended ASP by increasing the revenue contributions from our high-end products.

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

[Interpreted] I have 2 questions. First question is about the substrate. As you know, the substrate shortage is continuing, both in Korea as well as overseas. From SEMCO's perspective, do you have any insight as to until when this shortage will continue? Also, we're hearing from, for example, your Taiwanese competitors that they're planning to increase their substrate ASP by around 30% this year. Does SEMCO have plans of additional price increases on the substrate side? Second question is about your Camera Module business. I think we've seen media reports this -- today about the Galaxy S22 Unpacked Event. That is upcoming in the first quarter. So with all of that included, can you give us some guidance on Camera Module business performance in Q1?

[Interpreted] First, to answer your question about the shortage situation, given all of things that we see in the market, we do not expect there to be much change in the current shortage situation for the next 2- to 3-year period. There is continuous growth in the market driven by 5G, AI, Big Data, these applications that require high-capacity and high-speed connectivity. And so there is a very rapid growth in demand for high-spec package substrates for server and network equipment. And on the other hand, there is a capacity erosion as the substrates become larger and adopt higher layers. Regarding the pricing, there is a steady increase in package substrate prices, mainly driven by the supply and demand imbalance. We have not made any decisions about additional sales price increases this year. And we will respond by considering the overall situation, including our relationship with our customers and the supply/demand situation.

[Interpreted] To answer your question about the Q1 guidance for our Camera Module business, you mentioned the strategic customer preparing to launch its flagship smartphone. We have been already supplying a high-pixel, high-spec camera module for that model since last quarter. But with the strategic customer producing that on full mass production scale from Q1, we do expect the related revenues to that model to increase. However, during Q1, we also expect there to be decrease in demand for the camera modules we have been supplying to an overseas customers' flagship product. So combining the 2 overall, in Q1, we expect to see a slight increase in revenue of the Camera Module business.

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

I have one on MLCC and another on CapEx. Given the general slowdown of IT demand and the persistent semi chip shortages, there are concerns building up that we are passing through the peak of the MLCC cycle. Given this backdrop, I would like to ask your MLCC capacity plans for this year. Do you have any plans to either lower utilization or add less capacity than previously planned? And my second question is on CapEx guidance for this year. It seems like there is room for CapEx to grow meaningfully given several projects, including the KRW 1 trillion investment in flip chip BGA. So how would you guide your capital spending plan for the year? [Foreign Language]

[Interpreted] To answer your question about our MLCC capacity strategy, when we look at, first of all, the MLCC market outlook for this year, there are risks including the expected demand decrease related with the untapped trend now passing. Also, there is the issue of a possible additional variant viruses spreading and also the inflation concern. But on the flip side, there are positive opportunities, including the increased MLCC content per box as there is additional penetration of 5G smartphones; also the increase of foldable phones, increase of the industrial application market with the growth of servers driven by increased data usage and also the automotive opportunities. Balancing out these 2, this year, we'll be focusing on strengthening our supply competitiveness by improving the productivity and also improving our manufacturing efficiency and also operate our capacity in alignment with the market demand and supply situation.

[Interpreted] To answer your question about our CapEx guidance for this year, as you know, the company has always maintained its continuous investments for future growth, especially in areas that are promising such as 5G and automotive. This year, on top of that consistent investment, we have added the additional investment in Vietnam for the flip chip BGA capacity. And so overall, this year, we expect our CapEx to increase versus last year. While we will expect to see higher CapEx this year, the company will continue to stand by its basic principles of investing in high-value, high-growth businesses that are well aligned with our customer demand and also focus on maximum investment efficiency and maintaining a sound cash flow.

[Foreign Language] The following question will be presented by Kim Sung Kyu from Daiwa.

[Interpreted] I have 2 questions. First question is about the automotive MLCC. I do notice that SEMCO has managed to significantly narrow the gap between you and the leader in the automotive MLCC space, both in terms of product specifications and product lineup. Can you share with us an update of your MLCC -- automotive MLCC business and give us some detailed guidance that you expect for this year? Second question is about your package business, the package substrate business, especially since the discontinuation of the RFPCB seems to have wrapped up its overall transformation. In that context, can you give us some more details of your business strategy and also expected performance of the package substrate business this year?

[Interpreted] To your question of the automotive MLCC, yes, last year, in 2021, especially in the high-capacitance MLCC, which does account for a large share of demand, we were able to complete a product lineup that is comparable to the competitors, and our overall MLCC business outgrew the market. The basic strategy of our automotive MLCC business this year is the #1 focus on actively expanding our high-reliability lineup, including the 150 degrees Celsius-plus high temperature, 200 volt-plus high-voltage products where we expect to see especially high growth related with, for example, EV powertrain applications and also to continue to win new customers so that we're able to maintain the revenue growth trends above market.

[Interpreted] To answer your question about our package substrates, the company decided to discontinue the loss-making RFPCB business and to refocus the human and physical resources to more high-growth expecting package substrate businesses. The focus of the package substrate businesses strategy would be, number one, to diversify the application base; increase the revenue contribution from the sophisticated high-end products; further improve our productivity; and have a staged expansion of our production equipment, so that we will continuously increase our capacity side. Combining the 2, we expect our package substrate revenue and operating profit to both grow on a year-on-year basis.

[Foreign Language] The following question will be presented by Cho Chulhee from Korea Investment & Securities.

[Interpreted] I have 2 questions. So first question is about your outlook on the MLCC profitability this year. Do you expect profitability of the MLCC business to remain flat versus last year, slightly decreased, slightly increased? Which scenario do you think is most likely? Second question is about your Camera Module business. I think there are signs of the smartphone market growth slowing down, that may have some headwinds to your Camera Module business? How do you plan to respond? And what is your strategy of maintaining profitability?

[Interpreted] To answer your question about MLCC profitability outlook, looking back at last year, we enjoyed market growth due to the increase in content per box of MLCC. And also, we were able to enhance our product competitiveness and improve our manufacturing efficiency. Last year, therefore, we outgrew the market in terms of revenue, and our margins also improved. Now this year, there is risk of the growth rate decreasing, especially around the commodity-grade MLCCs, but we expect overall MLCC market to continue growth this year. We are focusing on further improving our profitability by expanding the high-end market -- high-end MLCC market, improving our productivity, improving our product mix and continuing to improve our cost base.

[Interpreted] Looking at the camera module market, we see a mix of positive and headwind factors. As you mentioned, there is concern that the smartphone market growth rate may slow down, but also, there are some positive opportunities, including the wider penetration of the foldable phones and also adoption of higher features and functions in the flagship camera modules. This year, our strategy for the Camera Module business is to, number one, supply timely the high value-added products that differentiate from others and also meet the market needs, such as video and better zoom performance. These are camera modules for smartphones, and also at the same time, internally enhance our cost competitiveness to maintain competitiveness on a business level. In addition to the smartphone camera modules this year, the automotive camera modules would also be important. So we will focus on timely supply of automotive camera modules as there's an expansion of autonomous driving-related demand and also supply high-performance products to gain additional expansion of our revenue and profitability.

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

[Interpreted] I have 2 questions. First question is about flip chip BGA mass production schedules for server applications. Right now, most of the company's flip chip BGA is for PC applications. You've mentioned that the company plans to mass produce a server flip chip BGAs from second half of this year. Can you give us some update on that? Is any part of the KRW 1 trillion CapEx for Vietnam related with the server flip chip BGA mass production schedule? Second question is, given the increasing uncertainty in overall business environment, there are concerns of slowing down growth in the downstream markets. With all of that in mind, can you give us your Q1 and full year guidance?

[Interpreted] To answer your question, yes, we are currently in the product development phase of the high-end server flip chip BGA substrates with targeted mass production during the second half of this year. To clarify, this is a separate investment item from the Vietnam CapEx investment. We're currently building out the pilot mass production lines for the server flip chip BGAs. And once we get the track record, we will leverage that to actively expand our business.

[Interpreted] Yes. This is CFO, [ DongJin Kim ]. I'd like to answer your last question about our guidance. Looking towards Q1, there are some weak factors on the demand side, especially in the IT applications such as PC or TV. But also in Q1, our strategic customer will be launching its new flagship smartphone, and we are seeing an improvement in recovery of automotive demand. So overall, in Q1, we expect our revenue to be similar to the previous quarter. Looking towards the full year of 2022, as you mentioned, there are several uncertainties in the external business environment. Even though the overall global economy is expected to continue a growth trend, there is the possibility of the additional variant viruses, inflation, supply chain issues and also geopolitical tensions. In terms of the market demand growth, some of the sources of demand growth last year, such as smartphone or PC, are expected to record a slower growth rate this year. But we also see continued growth opportunities from the promising areas that we are focusing on, such as 5G, Big Data, AI, autonomous driving and EVs to continue this year. And so we will focus this year on maintaining our growth momentum by leading the market, by developing differentiating products on time, further improving our product mix, further improving our productivity to gain more cost competitiveness. Also, we will carefully monitor changes in the business environment and customer demand and to thoroughly control the risk to minimize any impact of these external uncertainties on our own business performance.

[Interpreted] That completes our fourth quarter earnings conference call. If you have any further questions, please contact our IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]