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

Good afternoon. Thank you for joining us at the 2022 Fourth Quarter Earnings Conference Call for Samsung Electro-Mechanics. Today, we will proceed first with a presentation by SEMCO, followed by a Q&A session with everyone joining our call. [Operator Instructions] Now that we will start with a presentation by SEMCO.

[Interpreted] Good afternoon. This is Taiyoung Kim, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining us today at the 2022 Fourth Quarter Earnings Conference Call. Today, I'm joined by EVP, Sungjin Kim, CFO; EVP, [indiscernible], Head of the Strategic Marketing Center; [indiscernible], Head of the Support Team at the Component Division; [indiscernible], Head of the Support Team at the Optics and Communication Solution Division; and VP; [indiscernible], Head of the Support team at the Package Solution Division. We will start with a presentation of our fourth quarter business results at the company and divisional level, followed by market trends and outlook by product before moving on to the Q&A session at the end. First, our fourth quarter results. In the fourth quarter, revenue recorded KRW 1,968.4 billion, which is approximately a 17% decrease Q-on-Q and a 19% decrease Y-o-Y. Further details regarding revenue movements will be explained later by division when we cover the divisional results. Fourth quarter operating profit was KRW 101.2 billion, approximately a 67% decrease Q-on-Q and a 68% decrease Y-o-Y. Pretax profit in the fourth quarter was minus KRW 5.4 billion, and net profit was KRW 112.2 billion. Next onto financials. As of the end of 2022, total assets recorded KRW 10.997.2 billion, which is about a 2% decrease Q-on-Q. Looking at key financial indicators, our liability to equity ratio recorded 43%, debt to equity 18% and equity ratio 70%, same as in the third quarter. Next are our business results for each of the divisions and future business outlook. First, the Component division. The Component division's fourth quarter revenue was KRW 833.1 billion, which is down roughly 10% Q-on-Q and around 29% Y-o-Y. Divisional revenue decreased as we saw reduced supply of MLCC for IT and industrial applications due to the delayed recovery in IT set demand from the economic slowdown as well as continued inventory adjustments by customers. However, automotive MLCC for EV and Tier 1 customers saw continued revenue growth, driven by an increase in high-value MLCC shipments due to growth of ADAS and EV. In terms of our outlook for 2023 in the MLCC market, although IT demand remains uncertain, MLCC for automotive applications is expected to continue growth. Based on this outlook, we will focus on enhancing profitability by improving productivity and operational efficiency while expanding our automotive lineup to include 150-degree Celsius guaranteed high-temperature products and 200-volt plus high-voltage products to achieve continued revenue growth exceeding the rate of market growth. For electronic components, we plan to expand business centered around power inductors for DDR5. Next, moving on to our Optics & Communication Solutions division. Fourth quarter revenue was KRW 655.5 billion, which is around a 27% decrease Q-on-Q, a 16% decrease Y-o-Y. As shipments to key Korean and overseas customers declined due to smartphone camera seasonality, the division recorded overall decline in revenue despite the starting up of mass production of high-performance camera modules for new flagships for strategic customers. However, automotive camera modules recorded solid sales driven by an increase in supply to overseas customers. Looking out to 2023, the camera module market is expected to see continued demand for differentiation driven primarily by flagship smartphones and we will focus on developing high-performance camera modules, applying the latest advanced technologies and continue to expand available supply. The automotive camera module market is expected to see continued growth momentum driven by advances in ADAS and autonomous driving technologies. We will continue to adopt differentiated new technologies while proactively diversifying our customer base to drive ongoing business expansion. Lastly, for our Packaged Solutions division, fourth quarter revenue was KRW 479.8 billion, which is roughly a 13% decrease Q-on-Q and a 0.2% increase year-on-year. For BGA, despite the increase in supply for ARM processors, revenue decreased Q-on-Q, reflecting a slowdown in demand from smartphones, which resulted in a decrease in substrate supply for mobile AP, AP memory and 5G Internet application. Meanwhile, the flip chip BGA while supply for PC substrates decreased, supply increased for network and automotive applications resulting in revenue similar to third quarter levels. In 2023, while the package substrate market is expected to see weakened demand in certain applications such as smartphones and PCs, demand for high-end package substrate is expected to continue growth. As such, we'll focus on expanding supply for high-end applications such as ARM processors, servers, networks and automotive, while building up new overseas production capacity in a timely manner to stabilize mass production. That ends my presentation on fourth quarter results. And now I will pass it on to EVP [indiscernible], Head of the Strategic Marketing Center to take us through market trends and outlook for each key product group.

[Interpreted] Good afternoon. This is [indiscernible] from the Strategic Marketing Center at SEMCO. I'd like to update you on the latest market developments and outlook for the MLCC, camera module and substrate markets, respectively. First, MLCC. In the fourth quarter, while automotive demand remains solid quarter-on-quarter, demand for IT applications, such as smartphone, PC and TV slowed down due to the global economic slowdown as well as the Chinese lockdown. Demand for industrial applications such as network and server was also weak due to component inventory drawdowns by customers. In the first quarter, we continue to see complex economic crisis conditions persists with continued downgrades to the global economic growth outlook and growing uncertainty overall with the recovery in demand, not very likely. By application, automotive is expected to continue growth, driven by an increase in MLCC demand as xEV and ADAS become more widely distributed. However, in contrast, IT applications are expected to see weakened demand due to poor seasonality and contraction in consumer sentiment. However, if consumer sentiment recovers following reopening of the Chinese economy, leading to a rebound in smartphone demand, this is expected to have a positive impact on the MLCC business outlook. Meanwhile, demand for industrial applications is expected to continue weak trends as global big tech firms make adjustments to their server and data center investment plans and also due to reduced network application demand from the Chinese market. With regard to MLCC market inventory, we expect it will gradually reach manageable levels as customers work to reduce their inventory and as suppliers reduce utilization. As such, we intend to engage in proactive market activities while reinforcing our relationship with customers so that we can respond preemptively to rapidly changing demand from the market. In particular, we will focus on design-in activities for high-end applications such as small-sized, high-capacitance IT products, high-temperature, high-capacity server products and high-voltage, high-reliability automotive products to secure a solid revenue base that can drive sustainable growth. Next on to camera modules. In the fourth quarter, camera module demand decreased quarter-on-quarter due to a slowdown in smartphone demand and also due to year-end inventory adjustment cycle. In Q1, while we expect smartphone demand to remain slow, we expect demand for our camera modules to grow quarter-on-quarter as strategic customers launched new smartphone models and also due to solid demand for automotive cameras. For camera modules, we are differentiating by adopting high resolution and multifunctional products. For example, applying 200-megapixel image sensors and 10x high-power optical zoom. For automotive camera module, demand is expected to continue growth as global automakers expand their electrification lineup and as advances in ADAS technology continues. In response, we will build on our technological strength in core components, such as large aperture lenses were used in big image sensors, ball guide actuators to tap the high-pixel, high-performance smartphone camera market head-on while continuing to launch differentiated products to maintain leadership in the high value-add camera module market. Also, as ADAS cameras become more advanced with higher pixel count, we will continue to build out our automotive camera offerings in line with these trends by adopting high value-add technologies acquired on the IT market. Lastly, the Packaged Solutions division, business and outlook. In the fourth quarter, BGA demand decreased for mobile apps, memory and 5G antenna on reduced IT set demand for smartphones and memory. This is largely due to the slowdown in the global economy and also inventory adjustments by customers. For fcBGA, despite solid demand for server and network applications and increased automotive demand driven by xEVs, supply-demand dynamics is as a result of reduced PC demand. In the first quarter, BGA is expected to continue to see a decline in demand as IT set demand for smartphone and memory applications weakens on concerns of a global recession and as customers are expected to continue to adjust their inventory downwards. For fcBGA, while we expect demand for high multilayer and large body substrates for server and network applications to continue growth as well as demand for automotive driven by growth in xEV and ADAS technology. So the impact of weaker PC demand is expected to continue for some time and overall market demand is likely to be similar to prior quarter levels. In response, we will build on the strength of our highly reliable, differentiated substrate technology such as high multilayer finer-pitch embedded passive components in packaged form, et cetera, to solidify our technological leadership on the market. At the same time, we will strengthen collaboration with market leaders to find new customers to expand our customer base. so that we can actively expand into the high-performance server network market. We'll continue to strengthen our competency in the package substrate space, expanding into the automotive market, which is expected to growth and securing a preemptive first-mover position in the ARM processor market, which demands a high degree of advanced technology. Thank you.

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

[Interpreted] Yes, I would like to wish everybody a very happy New Year. And I have 2 questions for you today. First, regarding MLCC results in the fourth quarter including shipments, inventory and ASP and also if you could share your guidance on these metrics for the first quarter. Second question is regarding fcBGA. Recently in December, certain Taiwanese substrate suppliers downgraded their guidance for fcBGA CapEx. Previously, at your last quarterly earnings call, you projected tight fcBGA supply conditions over the mid- to long term. Are there any changes to your views?

[Interpreted] Yes, first, to answer your question about fourth quarter MLCC shipment inventory and ASP as well as Q1 outlook. Well, during the fourth quarter, although automotive MLCC shipments increased, there was a delayed recovery in smartphone, PC, TV and other IT applications as well as some seasonality from end of the year inventory adjustments by customers, which led to the overall decrease in MLCC shipments quarter-on-quarter. In Q4, although there was some downward pressure on pricing from Chinese customers, we managed to keep blended ASP similar to Q3 levels as automotive sales increased as a percentage of our revenue mix. Also, as demand declined, we adjusted capacity utilization in a flexible manner, which resulted in a slight decrease in inventory Q-on-Q. In the first quarter, although making accurate demand projection is challenged due to uncertainties surrounding the business outlook, we do believe shipments should see a slight increase versus the fourth quarter due to the low comparison base following inventory adjustments by customers at the end of last year.

[Interpreted] Yes, let me address your question about our mid- to long-term outlook for flip chip BGA supply dynamics. With the end of the PC market upside from the COVID pandemic, there were concerns about fcBGA type supply conditions becoming eased following a decline in IT set shipments starting from 2022. However, our mid- to long-term growth outlook for high value-added package substrates for server, network and automotive applications remain unchanged from before. As we have shared our view with you in our previous communications with [The Street, ] we have received requests from our global customers for an expansion in supply and are now doing capacity expansions for next generation, high value-add products such as server and network applications together in consultation with our customers. Therefore, we are not considering any adjustments to our CapEx plans on account of short-term weakness in the market.

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

I have one on MLCC and another one on camera module. On MLCC, it seems like your utilization rate has fallen again quite a bit during Q4. So I would like to know when we can expect the recovery? Can we expect the recovery during Q1 of this year? And on camera module, we haven't been able to see growth in the smartphone market for a while, but wanted to know if we will be able to see upgrades in camera sophistications this year. Along with this, can we expect a margin improvement in your camera module business on the back of any potential ASP increases coming from the specification upgrades?

[Interpreted] Yes, let me answer your first question on MLCC utilization. Well, in the first quarter, utilization is expected to partially improve, thanks to an increase in shipment volume. Also if reopening of the Chinese economy leads to improved consumer sentiment, this could have a positive impact on the MLCC business environment, which is why we are expecting a gradual improvement in market conditions after the second quarter. If demand improves, we can expect utilization rates to also go up. However, again, given uncertainty surrounding demand forecasting, we will be managing our production operations in a flexible manner based on ongoing monitoring.

[Interpreted] Yes, let me address your second question on our outlook for a possible spec upgrade to camera modules in 2023 and potential improvement in profitability. Amid ongoing bipolarization within the smartphone market, our set customers have been strategically looking to improve their profitability through product differentiation, mostly of their flagship model. Key differentiation highlights for smartphone this year will likely include high pixel count, high-resolution picture quality features, applying 200-megapixel sensors or special aperture technologies, also slimmer models with advanced video and power zoom functionality, et cetera, which will all require continued upgrades to the camera module spec for implementation. In response, we intend to strengthen our design in efforts for more differentiated, high-value add camera modules based on our core competencies in lens and actuator technologies while also working consistently to improve our profitability by responding to our customer needs on a timely basis and expanding available supply.

[Foreign Language] The following question will be presented by [indiscernible] Capital Market.