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

Good afternoon. Thank you for joining our Earnings Conference Call. We will now start the 2022 First Quarter Earnings Conference Call of Samsung Electro-Mechanics. The conference call will start with a presentation by the company followed by a Q&A session. [Operator Instructions] Now, we will hear the company presentation.

[Interpreted] Good afternoon. This is Taiyoung Kim, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining our 2022 first quarter earnings conference call. On today's call, I am joined by our EVP and CFO, Sung-jin Kim; EVP, Kook-hwan Cho, Head of Strategic Marketing Center; [ Teutak Park ] Park, Head of Support Team Component division; Jung-won Lee, Head of Support Team Optics and Communication Solution division; and VP Jung-hoon Ahn, Head of Support Team Package Solutions 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. First, our first quarter results. In Q1, our revenue was KRW 2,616.8 billion, which is an approximately 8% increase Q-o-Q and approximately 14% increase Y-o-Y, thanks to strong sales across Component, Optics Communication and Package Solutions divisions. The details regarding revenue decrease and increase factors will be explained later on during the divisional results. Q1 operating profit was KRW 410.5 billion, which is a 30% increase Q-o-Q and 15% increase Y-o-Y. Pre-tax profit in Q1 was KRW 427 billion. Net profit was KRW 315.4 billion after deduction of corporate income tax. Next, in terms of financials, as of end of March 2022, total assets was KRW 10,065.7 billion, which is about a 1% increase from the end of the previous quarter. For major financial indicators, liability-to-equity was 42%, a slight Q-o-Q decrease, debt-to-equity was 17%, and net debt-to-equity was minus 1%, both increasing from the end of the previous quarter. Next are the divisional results and future outlook. First, the Component division. The Component division's Q1 revenue was KRW 1,229.3 billion, which is a roughly 5% increase Q-o-Q and a 13% increase Y-o-Y. Revenue growth was driven mainly by improvement of product mix around high-end MLCCs with increased supply of high-end industrial and automotive MLCCs and also increased sales of small size and ultra-high-capacitance MLCC for IT applications. Q2 MLCC market is expected to show soft demand around commodity products, but demand for high-end MLCCs for 5G, server and EV applications is expected to be solid. Accordingly, we will focus on responding timely to high-end IT application demand, such as small size and ultra-high-capacitance MLCCs. Also, we will focus on increasing the supply of industrial and automotive applications by expanding our high reliability product line-up with recently developed high-temperature MLCCs for powertrains that guarantees 150-degree Celsius and 200 volt high-voltage. Next is the Optics and Communication Solution division. The division's Q1 revenue was KRW 867.9 billion, which is a roughly 12% increase Q-o-Q and a 3% increase Y-o-Y. The main driver of the Q-o-Q increase was the increased supply of camera modules for the strategic customer. The new flagship smartphone launch drove increase of our supply of 100 meg, 10x zoom high-spec camera modules and the wider penetration of OIS camera modules for the upper mass-tier smartphones also helped increase our sales. At the same time, we also saw an increase in automotive camera module revenue Q-o-Q, thanks to increased supply of camera modules for ADAS and autonomous driving-related applications to key customers. In Q2, demand for smartphone camera modules is expected to be soft due to seasonality, but we will focus on securing the foundation for expanding sales by responding timely to new flagship projects of Korean and global key OEMs and also focus on driving up supply of new high-pixel automotive camera modules to global automotive customers in U.S., Europe and China, where the market size has been increasing in line with adoption of a large number of camera modules and higher pixel modules with advancement in ADAS and autonomous driving technology. Lastly, for the Package Solution division. Q1 revenue was KRW 519.6 billion, 8% increase Q-o-Q and 44% increase Y-o-Y. First, for BGA, revenue increased Q-o-Q, mainly due to increase in supply of high-spec products, supported by strong demand, including increased supply of mobile AP substrates for strategic customer's flagship and increase in supply of substrates for high-end AP and high-end SSD memory. Flip chip BGA revenue also increased Q-o-Q with increased supply of flip chip BGA for laptop ultra-thin CPUs and automotive applications, amidst continuing supply tightness. In Q2, supply in the package substrate market is likely to remain tight, and we will focus on increasing supply of high-spec substrates for high-end AP and ultra-thin CPUs and also prepare for mass production of high-end server substrates scheduled for the second half to drive our strong growth momentum. In the case of server substrates, because higher layers and larger sizes are needed compared to existing substrates, technical barriers are higher and only a limited number of suppliers are available. SEMCO aims to become the first in Korea to mass-produce server substrates during the second half of this year. That ends my presentation on first quarter results. And now, EVP, Kook-hwan Cho, of Strategic Marketing Center will go over the market trends and outlook for each product group.

Good afternoon. This is Kook-hwan Cho, Strategic Marketing Center at SEMCO. I would like to share the update and outlook for MLCC, camera module and substrate markets, respectively. First, MLCC. During Q1, overall MLCC market demand was slow due to seasonality of downstream markets and also adjustment of MLCC buffer inventory built up until fourth quarter of last year. The slow downstream demand appears to be the result of many factors, including the Russian-Ukraine war, China's 0 COVID policy, raw material prices increasing, the rising interest rate, which has hurt consumer sentiment. Also during Q1, our customers went through MLCC inventory adjustments, which has led to a decrease of MLCC purchasing demand during Q1. Under such circumstances, we focused on actively meeting changes in customer and market demand by increasing the production of high-capacitance MLCC for IT applications and automotive industrial MLCCs. In terms of Q2 and second half outlook, MLCC demand is expected to remain soft in Q2 due to increased external uncertainties, delay in smartphone demand recovery in certain markets and MLCC inventory adjustments continuing. However, starting from the latter part of Q2, MLCC purchasing demand may return in anticipation of better economic outlook for the second half. During the second half of the year, MLCC demand from IT applications is expected to increase versus the first half with partial improvement in IT supply shortages -- IC supply shortages, launch of new smartphone and the launch of new smartphone markets -- models. The demand for industrial automotive MLCC is expected to maintain a growing trend. MLCC market inventory levels are expected to gradually come down after peaking during Q2. That said, within MLCC, the access of industrial and automotive inventory is less of an issue, and we expect to see restocking demand to return in anticipation of the chip shortage improving in the second half. We will continue to monitor the key factors impacting the MLCC market, including macroeconomic indicators, the Russian-Ukraine war and key component supply situations and actively respond to changes in MLCC market demand by focusing on the high-quality products where growth will continue, such as high-temperature, high-voltage and high-capacitance MLCCs for industrial and automotive applications and by gaining greater foresight into changes in customer demand. Next, our camera modules. During Q1, camera module demand was stagnant in certain geographies, but the strategic customer's new flagship smartphone launch helped increase demand for smartphone camera modules that are relevant to SEMCO. In Q2, camera module demand is expected to decrease Q-o-Q as the effect of flagship launches decreases and seasonality kicks in. In the second half, growth is expected in slim camera modules tied to the expansion of foldable smartphones planned by key OEMs, including the strategic customer and the trend of high picture quality, high-pixel and high-power zoom camera modules for flagship smartphones is likely to continue. With greater adoption of high-performance cameras on mass-tier smartphones, the demand for flagship level specifications such as high-pixel and OIS modules is continuing to increase. Accordingly, we will actively respond to the demand of slim camera modules by strategic customer and also Chinese OEMs for their flagships and foldable smartphones and focus on increasing our revenue by winning the new projects of strategic customer and global OEMs, including the Chinese customers. We will highlight our technical differentiation in flagship models with internalized key components such as large aperture lenses for big sensors and ball-guided actuators, and focus on winning more opportunities in mass-tier, in particular, the higher-end mass-tier where high-pixel and OIS adoption is increasing. Also, given the continued growth of camera demand from automotive applications tied to autonomous driving technology, we have been increasing supply of high-pixel camera modules to key automotive customers and will continue to focus our development and supply capabilities in this area. While risk remains, particularly in terms of raw material supply and consumer sentiment due to the lockdown in key Chinese cities against the resurgence of COVID-19, we will focus on minimizing disruptions to our camera module business by closely cooperating with customers and proactively meeting customer demand. Lastly, for substrates. In Q1, despite slower smartphone demand, BGA demand for mobile applications such as high-end AP, 5G antenna and memory remains strong with greater penetration of 5G smartphones. Flip chip BGA supply remained tight due to increased demand tied to the high-end PCs and greater demand for high-multilayer large-size substrates for servers and network equipment. Also, ARM processors with high-performance and low-power advantages have been quickly winning market share, supported by positive market responses. As more downstream products and more developers adopt ARM processors, the ARM processor market is expected to rapidly grow and lead to rapid increase in demand for new substrates. In terms of Q2 and second half substrate market outlook, despite concerns of smartphone demand slowdown and delayed recovery, 5G-related BGA demand such as 5G antenna, communication module, SIP, substrates and high-end AP substrates is expected to continue growth with further 5G penetration and increase in the number of 5G smartphones. For flip chip BGA, while PC demand is expected to become stagnant, the growth of server and network equipment, which requires high-multilayer and large-size substrates and has a significant impact on overall flip chip BGA demand and capacity is expected to continue driving further growth in overall flip chip BGA demand. Recently, many flip chip BGA suppliers have announced capacity expansion plans, causing some worries about mid- to long-term implications to supply. However, we continue to see growing demand driven by increase in server and network equipment and the increase in substrate layers and size to support the higher performance. When considering such demand growth and technical factors, despite the increasing capacity on the supply side, mid- to long-term supply is expected to remain tight and customers are continuing to look for sources where they can secure long-term stable supply. We will focus on generating growth from package substrates, such as 5G antenna substrates, high-end AP BGA and ultra-thin flip chip BGA for laptops and further enhance our product mix around the high-end products. At the same time, we will also focus on winning new opportunities in the growing ARM processor substrate market and on diversifying the flip chip BGA applications and customers to include servers and data centers. Also to further strengthen the competitiveness of our substrate business and to proactively respond to market growth and customer demand, we will carry out mid- to long-term capacity expansions and also development of differentiating technology. Thank you.

[Foreign Language] Now, Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be provided by Ji-San Kim from Kiwoom Securities.

[Interpreted] I have 2 questions related with MLCC. First of all, can you share with us your first quarter MLCC shipment, inventory and ASP and also your guidance for the 3 data points for the second quarter? Second question is, I think there are some that are looking towards possible ASP decline of MLCC during second quarter. In that context, can you share with us your outlook for MLCC ASP first half, as well as second half of the year and your guidance on profitability?

[Interpreted] To answer your first question about first quarter MLCC shipment inventory, ASP and second quarter outlook. During first quarter, both MLCC inventory and shipments remained flat quarter-on-quarter with inventory adjustments continuing mainly around the IT commodity-grade MLCCs. Also, however, our blended ASP actually increased as the product mix improved, including the gain in the share of high-capacitance MLCC. Looking towards second quarter, demand increased expansion may be delayed somewhat as there is continuing international political uncertainties and also some regions going into COVID-19-related lockdown but actually, demand for high-end MLCC, such as server and automotive applications, is expected to remain solid in the second quarter, and we're expecting our shipments to increase quarter-on-quarter. Your second question was about our expected MLCC ASP trend for first and second half and also profitability outlook. I think until around second quarter, inventory adjustments may continue mainly around the IT MLCCs. And if ASP adjustments may continue, but they -- we expect them to remain within routine levels. So we will focus our business capabilities on further increasing the high-end industrial and automotive MLCC share to maintain our current level of profitability in the second quarter. Looking towards the second half, volume growth is expected during the second half of this year as all segments or all MLCC segments overall market situation improves. And so, in the second half, we plan to further improve our profitability versus first half by increasing both our revenue and further improving our product mix.

[Foreign Language] The following question will be presented by [ Tae-Joon Min ] from Mirae Asset Securities.

[Interpreted] My first question is about the package side. I think since December last year, the company has announced total investment plans around KRW 1.6 trillion, and it flipped to BGA capacity. In terms of timing, when do you think this investment will have some meaningful impact on your package business performance? In that context, can you share with us your overall outlook for the package business of the company, as well as the market? Second question is about the smartphones. Recently, Chinese smartphone demand has been rather sluggish and there has been some serious of negative news around the smartphone business of your strategic customer. Has there been any impact on the camera module business of SEMCO? I wonder what your outlook is?

[Interpreted] To answer your first question regarding our flip chip BGA capacity expansion, in order to respond timely to the expected growth in flip chip BGA demand driven by chip performance enhancements, as well as market growth, we have decided a multistage investment plan to increase our production capacity. This will -- we will also be driving a product mix shift from the existing PC-focused substrates to higher-end multi-high-layer and large area substrates for server and network equipment where strong growth is expected. The high-end server substrate mass production is scheduled for the second half of this year, and we will actively drive our business growth with this new capacity. So supported by both the capacity expansion and also the product mix transition, we expect to deliver significant top line growth in the mid- to long-term for our flip chip BGA business. To answer your question about the smartphone market situation, the camera module market situation faces some challenges, including the likely stagnation in overall smartphone growth due to weak demand in certain regions. However, in Q1, despite such concerns, SEMCO was able to increase our supply of camera modules to the strategic customer flagship and also our camera module revenue increased slightly year-over-year. Looking towards the second quarter, our camera module revenue is expected to decrease quarter-on-quarter with seasonality, but we will focus on offering differentiated camera modules for the new smartphone projects of Korean and overseas OEMs scheduled for the launch in third quarter to gain the foundation for revenue growth.

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

So the first one is on MLCCs. When we look at the MLCC cycle this time, despite market concerns, the company has been delivering much more stable results and with better profitability compared to prior cycles. So if we were to take a step back, wondering what has changed versus before to enable this? And should we expect future cycles to be similar, i.e., much more stable going forward? And secondly, on substrates, it seems like the supply-demand remains tight and favorable. So for each of BGA and flip chip BGA, wondering if the company has any plans to further raise pricing this year? And subsequently, what should we expect for -- in terms of margins for each going forward?

[Interpreted] Your first question was about the MLCC cycle and the implications on our profitability. If you look back on the demand cycle that we saw for MLCC in 2018 and '19, the demand and supply mismatch actually drove up customers overdemand and also the ASP, which ended up amplifying the peak and the bottom of the business performance of MLCC companies that went through that cycle. But the recent MLCC cycle that we have been seeing is being driven by 2 factors. One is, yes, there is an increase in downstream set demand, but also there is an increase in the MLCC content per box as downstream products adopt higher performance applications, such as 5G and ADAS. This appears to help keep the market demand stronger versus the previous down cycles. In addition to that, SEMCO, at the company, level has been managing to maintain the stable growth in both top and bottom line in its MLCC business by increasing our productivity, for example, with a better yield and also increasing the share of high-end MLCCs, such as small size and high-capacitance for IT applications, as well as industrial and automotive high-reliability MLCC. Now, going forward, we will continue to focus on improving the profitability through revenue growth supported with productivity improvements and further enhancement of our product mix. Your second question about the BGA and flip chip BGA, ASP and margins. With demand for package substrates continuing to increase in the market, supply remains tight, as you mentioned, for both BGA and flip chip BGA. We are currently running at full capacity level, and we adjusted the prices for some BGA and flip chip BGA products last year in 2021. Overall, we think that the trend will remain similar this year. And so, we will be appropriately responding in terms of ASP, considering customer relationships and also the market situation. Overall, our strategy for driving further revenue and margin growth is to, #1, further improve our product mix towards the higher end substrates and also to concentrate our capabilities to flip chip BGA for server and network applications, which is a major source for future growth.

[Foreign Language] The following question will be presented by Kwon Sang-Ryul from DB Financial Investment.

[Interpreted] I have 2 questions regarding MLCC. First is about the -- your automotive MLCC product lineup. If you had to compare your automotive MLCC lineup to your competitors who have had a head start in the automotive segment, where does your automotive MLCC currently stand in terms of lineup? Also, the Tianjin plant, if I recall correctly, was supposed to produce automotive MLCC. Is it currently producing automotive MLCCs? If not, what is the current purpose? What type of MLCC is the Tianjin new plant currently producing? Second question is about raw material prices increasing and the impact that would have on your MLCC, especially with the Russian-Ukraine war, raw material prices globally have been going up. There is concern overall in the industry. I understand that nickel is one of the key raw materials for your MLCC. Nickel prices have been going up. What would be the impact on your margins?

[Interpreted] To answer your question about our automotive MLCC lineup, as you know, we have continued to expand our lineup towards the high-capacitance MLCC, which does account for a large part of demand. Our automotive MLCC business actually outgrew the market in terms of revenue last year. Our strong growth is expected in overall automotive MLCC with some expecting up to 20,000 MLCC pieces expected to be used per car as ADAS and also EV autonomous driving. These new technologies are adopted onto the vehicle. We have been consistently gaining position in the high-capacitance MLCC for ADAS. And also, we have been actively adding our product lineup, the high-voltage and high-temperature MLCCs for powertrains. So, we will focus on winning new accounts and also new design-ins to maintain above-market growth for our automotive business going forward. You've also asked about our Tianjin new plant. Tianjin has been in mass production in second quarter of last year, mainly around high-end MLCC for IT applications. Currently, the Tianjin manufacturing line is in stable operation. At the same time, Tianjin has been preparing for automotive MLCC mass production and started pilot mass production earlier this year, and we'll be focusing on ensuring stable supply capabilities. We plan to further drive revenue growth by introducing meaningful automotive MLCC volume from Tianjin starting from next year, in line with the automotive MLCC demand growth. You also asked about the recent raw material increase and the impact on our MLCC margins. Yes, recently, raw material price movements, such as oil and nickel has had some impact on our profitability, but actually no single raw material accounts for a large portion of our overall MLCC material cost makeup. We think that the magnitude of material cost increases would remain within levels that are absorbable internally by our efforts, such as internal efficiency gains, but we'll continue to carefully monitor against additional risk.

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

I have one each for substrate and the camera module. First, on the substrate. We've been hearing substrate package equipment tightness recently. May I ask what is the typical time required to do the new substrate plant line? And do you foresee any impact to your flip chip BGA capacity expansion because of this? And my second question is, can you share the auto camera content growth trend for the electric vehicle applications? Great if you could also share SEMCO's automotive camera revenue, the prospect?

[Interpreted] Regarding your first question about substrate equipment, similar to the package substrate supply situation, the substrate equipment supply lead time has also become longer with more orders being placed. We are hearing that in some key equipment, the lead time from order placement to delivery is as long as 2 years or more. Fortunately, we were able to coordinate the schedules with our customers and equipment suppliers early on. And so, we have secured the necessary equipment ourselves, and we do not expect any schedule disruptions in terms of our capacity expansion. To answer your question about the automotive camera models, especially for EVs, as you mentioned, the number of camera modules per vehicle has been increasing with the adoption of ADAS and other autonomous driving technology. In the case of electric vehicles, EVs, especially camera module requirements per vehicle is growing faster. We're seeing around 2x the growth versus IT applications and EVs mainly use the high-pixel camera modules. In order to capture this market and technology trend, we are leveraging our IT camera module technology to increase the design-in of camera modules aligned with customer needs and also we're using this to diversify our customer base on automotive camera modules. For this year, 2022, our automotive camera module revenue is expected to record significant growth year-over-year as we win a greater share of our key customers' wallet and also expect this revenue growth momentum to continue going forward.

[Foreign Language] The following question will be presented by Kim Woon-Ho from IBK Investment and Securities.

[Interpreted] I have 2 questions. The first question is about the flip chip BGA business recently with strong data center demand, the demand for semiconductor-related components is also very strong. And if my information is correct, SEMCO is also producing flip chip BGAs for network equipment. Can you share with us your current status of network equipment flip chip BGA and also your outlook for that segment? Second question is about your performance guidance. Recently, there is the Russia and Ukraine situation, also market uncertainties, interest rates rising, raw material prices rising. Overall, it's a very challenging business environment. With that in mind, can you share with us your guidance, outlook for your business for second half and also after that period going forward?

[Interpreted] To answer your question about the network equipment flip chip BGA substrate, our current status and future outlook, growth in AI, as well as cloud services is driving data center demand, as you mentioned. And this is accelerating the performance increase of semiconductors used in the data center for large scale and high-speed connectivity and data processing. This is also driving an evolution of the flip chip BGA technology, such as larger size and high-multilayer finer-pitch circuits, which is needed in order to open up and unleash the higher performance of differentiating processors, semiconductors. We continue to receive customer inquiries about high-end network substrates using our differentiated substrate technology. As you mentioned, we are already supplying substrates for network equipment IC for overseas customers, and we'll be able to increase our supply of high-end flip chip BGA using our expanded capacity for both server, as well as network equipment. To answer your question about our performance outlook, looking back on first quarter, demand -- overall market demand for key IT components was somewhat slow as the demand consumption for electronic products related with the untapped economy was rather sluggish during first quarter. But despite this overall slow demand, we were able to actually deliver quarter-on-quarter performance improvement, thanks to increase of supply of high-end MLCC for industrial and automotive applications, also increase of our camera modules tied to the launch of the new flagship smartphone by our strategic customer, and also continued strong performance of our package substrates. Looking towards the second quarter, once again, the IT-related market situation does not look quite easy given the expected delay in the recovery of smartphone demand in certain regions. And also as the effects of smartphone flagship launches weakened during the second quarter. However, the outlook for future growth markets, such as 5G, server, network, automotive, remain relatively solid. And so, we will focus on creating growth opportunities by concentrating our resources on these areas, such as industrial, automotive MLCC, automotive camera modules and also high-end package substrates. Looking towards the second half of this year, first, MLCC demand, including MLCC for IT applications is expected to recover in the second half as the chip shortage is likely to ease than now in the second half and also new smartphones are launched during the second half. Also, we're expecting to see an increase in demand for slim camera modules as many of the OEMs have scheduled launch of new foldable smartphones. Also, overall high-end package substrate is expected to maintain a solid demand in the second half. So considering all of these factors, we do expect our overall business results to improve in the second half. That said, there are many factors that we need to watch out for, including the higher interest rates, the Russian-Ukraine situation and other external factors, but we will do our best to minimize the fluctuation in the results -- in our results from these external uncertainties by carefully watching the business environment changes and also analyzing customer demand to manage our risk effectively.

[Interpreted] That completes our earnings conference call for 2022 first quarter. If you have any further questions, please forward them to our IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]