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

Thank you very much for joining our conference call. We will now start the 2023 First Quarter Earnings. Good afternoon. This is Taiyoung Kim, Head of IR and the Planning team at Samsung Electro-Mechanics. Thank you for joining our 2023 first quarter earnings conference call. On today's call, I am joined by CFO, [ DongJin Kim ], EVP, [ Won-Taek Kim ], who is the Head of Strategic Marketing; [indiscernible], Head of Support Team Component Division; [ Jung Won Lee ], Head of Support Team, Optics and Communication Solution Division; and VP, [ Jeong-hoon Ahn ], Head of Support Team, Package Solution 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 2023 first quarter result. In Q1, our revenue was KRW 2,021.8 billion, which is an approximately 3% increase Q-o-Q, but roughly 23% decrease Y-o-Y. The details regarding revenue increase, decrease factors by division will be explained later on during the divisional results. Q1 operating profit was KRW 14.1 billion, which is an approximately 38% increase Q-o-Q, but around a 66% decrease Y-o-Y. Pre-tax profit in Q1 was KRW 143 billion. Net profit was KRW 111.4 billion. Next, in terms of financials. As of end of March 2023, total asset was KRW [ 11,100 billion ], a slight increase from end of Q4. Major financial indicators, liability to equity was 42%, a slight decrease Q-on-Q, and debt to equity was 18%, similar to Q4. Equity ratio was 71%, a slight increase Q-o-Q. Next are the divisional results and also future outlook. First, the Component Division. The Component Division's Q1 revenue was KRW 825.5 billion, which is roughly a 1% decrease Q-o-Q and a 33% decrease Y-o-Y. While the overall MLCC shipment increased, particularly to China, as customers ease their inventory adjustments, our revenue remained stagnant due to the fall in the U.S. dollar to Korean Won exchange rate. Automotive MLCC continued to report solid performance with increased vehicle electronic content, such as ADAS and autonomous driving. And we expanded our lineup in high-capacitance, high-temperature, high-voltage MLCC, which is a foundation for future business performance. In Q2, the Component market is expected to see solid demand continue from automotive applications and also see a gradual recovery of demand for IT and industrial applications. We will focus on continuously increasing supply to global EV and Tier-1 and also respond timely to high-end product demand, such as small-size/ultra high-capacities MLCC and focus on breaking into new growth markets, such as AI and automation robots. Next is the Optics and Communication Solution Division. The Division's Q1 revenue was KRW 798.6 billion, which is roughly 22% increase Q-o-Q, but an 8% decrease Y-o-Y. During Q1, supply of our 2-megapixel camera module with enhanced stabilization for the strategic customer increase to full volume and the supply of high-performance camera modules, including the 10x folded zoom also increased, resulting in overall revenue increase Q-o-Q. Automotive camera modules reported solid revenue with increase in supply of high-performance products. In Q2, even though smartphone camera module demand is expected to decrease due to seasonality, we will focus on timely supply of differentiated camera modules for the new flagship smartphones scheduled for launch in the second half to offset soft market demand. For automotive time modules, market growth is likely to continue, driven by advances in autonomous driving technology. Accordingly, we will focus on leveraging our internal capabilities to diversify our automotive customer base and expand our product lineup. Lastly, for the Package Solution Division. Q1 revenue was KRW 397.6 billion, a roughly 17% decrease Q-o-Q and a 23% decrease Y-o-Y. The Division's revenue decreased, reflecting weak set demand for smartphones and PCs affected by the global economic slowdown. BGA supply decreased in applications such as mobile AP, 5G antenna and memory substrates. For flip chip BGA, while demand for PC substrate decreased, business for large-sized, high multilayer server substrate is continuing to make significant progress to a full-fledged business. In Q2, the package substrate market is expected to see increased demand around certain BGA products, and we will focus on increasing our supply around demand growth applications such as mobile AP, memory and ARM processors. For flip chip BGA, while PC-related demand is likely to see another weak quarter. The demand for high package substrates is expected to continue growth. Accordingly, we will focus on increasing supply of high-end products such as flip chip BGA for server and automotive applications. That ends my presentation for our Q1 results, and now EVP, Won-Taek Kim of our Strategic Marketing Center will go over the market trends and outlook for each product group.

Good afternoon. This is [ Won-Taek Kim ], EVP of Strategic Marketing at SEMCO. I would like to share our market update and outlook for MLCC, camera module and substrates respectively. First, MLCC. In Q1, IT and industrial MLCC demand continue to remain soft overall due to several factors, including weaker-than-expected upside effect of the China reopening on consumption and investment, sluggish consumption of IT devices, such as smartphone and PC due to the global economic slowdown and temporary investment cuts by so-called big tech companies. However, in the case of Chinese demand, we saw signs of demand recovery, including an increase in demand for certain customers, as inventory adjustments started to ease. As a result, our MLCC shipment increased Q-o-Q. For automotive MLCCs, despite the effect of seasonally weak vehicle demand, automotive MLCC demand continued to remain solid, driven by increased electronic content in ICE vehicles and wider penetration of battery EVs. With MLCC inventory adjustments already completed to a certain degree and considering factors, such as the gradual recovery of set demand, launch of new smartphones in China and inventory demand in anticipation of [ Q3 ] peak seasonality, MLCC demand in Q2 is expected to increase quarter-on-quarter. In particular, the demand for automotive MLCC is expected to continue growth driven by growth in ex-EV penetration, which creates greater demand for high-end products, such as high-temperature and high-voltage, high-capacitance MLCC and also driven by increase in MLCC content per vehicle. Accordingly, through active market [ sensing ], we will focus on the Chinese smartphone market, where demand is expected to recover in order to drive IT MLCC revenue growth in Q2. For automotive MLCC, we will focus on increasing our automotive supply capabilities by preparing a product lineup that meets the needs of the automotive customers and focus on increasing our automotive market coverage by adding new customers among the rapidly growing new EV companies and Tier-1 vendors. Next is the camera modules. In Q1, demand for our camera modules increased Q-o-Q, thanks to the effects of the strategic customer's new flagship smartphone and solid demand for automotive cameras. In Q2, even though the effects of the strategic customer's flagship launch is likely to gradually wear off, demand from Chinese and global customers for high-spec camera modules is expected to increase. And overall, in Q2, we expect demand for the camera modules to be more solid than usual years. In the second half, key smartphone customers, including strategic customers are expected to continue to emphasize the high pixel, high picture quality and high-power zoom cameras in their new flagship. And so furthermore, the [ increase in ] foldable smartphones is expected to drive slim camera module growth. For automotive camera modules, the increase in global OEMs electronics adoption, strengthened safety regulations and advances in ADAS technology are expected to continuously increase the number of camera modules per vehicle, which will be an additional driver behind strong automotive camera demand. We will focus on new designing activity for new flagship smartphone projects of the strategic customer, Chinese customers and global OEMs and actively respond to foldable phone demand to further increase our dominance in the high-end camera motor market. At the same time, we will also focus on growing our automotive camera module business, but continuously proposing differentiated camera modules to key automotive customers to capture the increase in demand for high pixel camera modules for sensing applications created by advances in ADAS. Lastly, the substrate. In Q1, BGA demand overall decreased, as major customers increased inventory adjustments in the face of sluggish smartphone and other IT device demand and decrease in memory demand. For flip chip BGA, while demand for server and automotive applications remained solid due to the effect of the larger size and high multilayer. Demand for PC flip chip BGA, which accounts for the larger share of total demand decreased significantly, resulting in an overall soft demand. In Q2, even though overall BGA demand is expected to remain sluggish versus last year, considering that some BGA products for smartphones have completed inventory adjustments and that memory market situation is expected to recover in Q3, demand for related substrates is expected to recover compared to Q1. Meanwhile, for flip chip BGA, market demand is expected to fall in Q2, as PC-related demand is likely to remain sluggish. Despite such market outlook, we will focus on developing new customers by leveraging our differentiated technology and quality, including our high multilayer and passive component embedding technology. We will also focus on actively increasing the share of high-end products targeting growth applications, such as high-performance server network equipment, automotive and ARM processors in order to diversify our revenue structure. Thank you.

Now, we will start the Q&A session.

[Operator Instructions] The first question will be provided by Chulhee Cho from Korea Investment & Securities.

I have 2 questions. The first question is about MLCC. Can you share with us the first quarter shipment, inventory days and ASP for your MLCC? And also share some outlook for your MLCC key performance metrics in the second quarter? Second question is about the substrate business. With the global economic slowdown, many of the cloud companies are expected to cut their investment sizes, what kind of implication do you think that would have on your flip chip BGA for server? And can you share with us your outlook for the server flip chip BGA supply for SEMCO?

To answer your first question about our first quarter MLCC shipment inventory, ASP and second quarter MLCC outlook. Compared to the fourth quarter, first quarter of this year, we did see an increase of MLCC shipment quarter-on-quarter, especially around the Chinese mobile customers. So overall MLCC shipments did increase Q-o-Q, and our inventory days have decreased Q-o-Q. Our blended ASP, however, did slightly decrease Q-o-Q, and this is mainly due to the fact that our MLCC shipment increased mainly around our mobile MLCCs. In terms of revenue, our revenue in dollar -- U.S. dollar terms did increase quarter-on-quarter, but because during the first quarter, the U.S. dollar to Korean Won exchange rate decreased. In terms of Korean Won denominated revenue, we saw a slight decrease quarter-on-quarter. You've also asked about the second quarter outlook, given the fact that the inventory adjustment in the market has taken place to a certain extent, and considering that going forward, we expect Chinese, smartphone, new products to be launched and automotive MLCC demand to remain solid, we expect that in the second quarter, we will see another quarter-on-quarter increase in MLCC shipments.

Your second question was about the supply outlook for our server flip chip BGAs. When we look at the server market itself, in the near term, we do expect there to be some impact due to the economic slowdown, as big tech companies are likely to change their investment plans. That said, and still in the mid- to long term, if you look at the server market, continuous growth is expected, as there is a digital acceleration with the adoption of new technologies such as the large AI models exemplified by ChatGPT. In the case of server substrates, as you know, we started mass production of server substrates at the end of last year. Since then, customers have recognized us for a stable supply capability. They have been asking for additional volumes this year. So currently, we're supplying volumes higher than we had originally expected. We're also currently underway with investments in expanding our server dedicated substrate lines. That investment is going ahead smoothly as planned. And going forward, our decision is to either expand, make investments and expanding capacity will be reached flexibly in line with customer needs and market situation.

The following question will be presented by Rok-ho Kim from Hana Securities.

My first question is about your MLCC utilization, current update and forecast given that there is some expectation in the market that MLCC demand may recover with the effects of the Chinese reopening? Second question is about your camera module business. The smartphones that adopt the 200 meg pixel camera modules have been very well received in the market. Considering that going forward, do you have plans of increasing your supply of high-spec camera modules, such as the 2-megapixel or folded-zoom camera modules?

To answer your first question about our MLCC utilization, as our shipment, MLCC shipment increase in Q1, our utilization also increased. And in the second quarter, we expect utilization to continue gradual improvement. Looking towards the second half of this year, we expect there to be greater tangible effects of the Chinese reopening. Also, there is some upside in terms of increased demand, as major mobile customers launch new products. Also, as the set become more high performance, the MLCC count per box is increasing, which is another factor for increased demand and also automotive MLCC is expected to continue growth. And so based on these factors, we are anticipating there to be a gradual increase in our utilization going forward.

Well, your second question was about the high spec camera modules, as you know, major mobile customers, both in Korea and overseas do use these high spec camera modules, as a key point of differentiation in their flagship models. And that is why we expect the major mobile OEM to continue to demand for upgraded performance, for example, in picture quality or high-power zoom in camera modules. Leveraging the internal technology edge that we have in key parts such as lens and actuators, we will focus on developing differentiated products in line with market demand, such as 200 meg -- 200 meg pixel camera modules with enhanced stabilization, the slimmer and smaller camera modules in folded zoom and also improved the performance of zoom in order to develop and deliver differentiated products on time. And also, we will focus on increasing our supply to both domestic and overseas customers.

The following question will be presented by Yumi Cha from Mirae Asset Securities.

My first question is about your plans of pursuing new business opportunities during the General Meeting of Shareholders that was held in March, there was mentioned by the company of pursuing, for example, all solid batteries, so all solid state battery, as a future business opportunity, including all solid state batteries. Can you share with us some of the company's plans of pursuing new business opportunities? Second question is about the automotive MLCC business. We are hearing reports by the media that SEMCO is increasing its market share in automotive MLCC. So overall, in automotive MLCC, including, for example, MSCC for powertrains, can you give us your current MLCC supply update and plans of increasing -- expanding your automotive MLCC business going forward?

To answer your first question about our new business development, if you look at the key growth markets that have benefited us, served us in the past, from the past 10-year period, definitely, it was smartphones and PCs that have led the market growth. Going forward, looking towards the next 10 years, we think that possibly markets, such as electronic vehicles, autonomous driving, servers and networks would be the main source of our growth. And even beyond that period, we can think of, for example, new markets, such as robots, aerospace and green energy becoming a new growth source, as there is greater technology development in areas such as AI. Now regarding these new business opportunities and pursuit for new growth markets, SEMCO is currently studying various possibilities related with new businesses centered around the core technology SEMCO already has and energy-related items such as ultra small size, all solid state batteries for IoT applications will be one of those opportunities we're currently studying. The specifics of each new business item will be communicated to the market when each business idea is developed in greater detail.

Your second question was about our automotive MLCC supply update and the future plans. If you look at some of the key market research firms, they are saying that EV sales would be increasing by more than 30% year-over-year and that around more than 30%, around 30% of newly delivered vehicles would be with ADAS Level 2 or above. This is all supporting the view that automotive MLCC market will continue to grow this year again. As you know, SEMCO has been consistently outgrowing the market in the automotive segment, and we plan another year of continuous revenue growth this year. Specifically, in order to achieve this, we will focus, number one, on increasing the market share that we have in areas such as ADAS and infotainment, which is currently the largest market in the automotive segment. At the same time, we will focus on further expanding our high-temperature, high-voltage MLCC product lineup for the EV powertrain applications, which is the area that has high growth potential. And by doing this, we aim to deliver higher than market revenue growth again.

The following question will be presented by Jung-woo Park from SK Securities.

First question is about the package substrate business. There are cautious and hopeful views in the market that perhaps PC demand may recover from the third quarter of this year. Considering such views, what is your outlook for your flip chip BGA business in the second half of this year, including those for the PC applications? Second question is about your electronics component business. I think there was a media report that SEMCO plans to develop and grow its electronics component business to something that's comparable to what it currently enjoys in MLCCs. With that in mind, can you give us an update on your electronic components business? What kind of product groups you are considering? And how you plan to grow the business?

To your first question about our second half flip chip BGA business outlook, when we look at the PC market itself, even though it enjoyed some special demand during COVID, that demand quickly decreased. There are market hope -- market outlook, as you mentioned, some in the market are hoping and anticipating that perhaps even though the PC inventory adjustment may continue until the first half of this year, that may be followed perhaps by an increase in PC shipments in the second half. That is what some in the market are thinking. However, our position is that still, it is difficult to confidently forecast a full-fledged demand recovery for PCs. And so based on that, we focus on increasing our high-end product supply, for example, for laptop PC CPUs. At the same time, we will focus on increasing the supply of our high-end substrate products, such as the high multilayer and large-size, high-end products for server and network and automotive applications in order to strive to deliver revenue growth in the second half versus first half despite the various challenges in the market.

Now your second question was about our electronics component business, if you look into the revenue of our Component Division, electronic components other than MLCC such as power inductors or tantalum capacitors account for about 10% of the Component Division's revenue. In the case of power inductors, as the smartphones become more high performance, their power consumption is increasing, and this is leading to a higher number of power inductors being necessary on the smartphone per box. This is a driver to continuous revenue growth of power inductors. Especially our power inductors embodies the technology edge of 2 Divisions, one is the substrate technology that comes from our Package Division, which is used to make the precision shaping of the coils; it also embodies the chip technology of our Component Division, especially the small-size, high-efficiency power inductors that are used for mobile applications are recognized to have technology that is global top level, and this technology edge is how we have been able to expand the market share. Also this year, in addition to our mobile power inductors, we are planning to add on automotive power inductor product lineup in order to develop our automotive power inductor business full-fledged. Going forward, using the technology edge we have in the small size and high-efficiency components, we will focus on further expanding the power inductor and tantalum capacitor product lineup and also grow the business further through additional and new customer design ins.

The following question will be presented by Woon Ho Kim from IBK Investment & Securities.

Look at the current economic situation, it is a very challenging also the macro situation is also quite challenging, but given such -- even under such external environment, when we look at your performance and what you have said today, it seems your MLCC inventory is reaching normal level, which is very good to see, and also other divisions have positive upside that they can look forward to. Considering that, can you share with us your guidance for second quarter and also future performance?

To answer your question about our outlook for second quarter and also the remainder of the year, in second quarter, while there are some downside factors for demand, especially related with the set demand such as the possible wearing off of the effects on the camera module business, the effects of the strategic customer's launch of the new flagship model and also the expected continued weakness of PC demand and that leading to continued weakness, softness in flip chip BGAs for PCs. In the second quarter, there's also some upside factors that we can expect for demand such as the automotive products, probably expected to maintain solid demand and also the key customers expecting planning to launch new products, and that would also have some positive effect on our MLCC demand. Considering both of the downside and upside, we think that overall in second quarter, we will be able to achieve quarter-on-quarter revenue growth. Beyond the second quarter, looking towards the second half of this year, even though business visibility still remains limited, there is some upside factors that we can expect on the demand side, such as more tangible results being delivered from Chinese reopening. Also, there would be the seasonal volume increase of IT products such as PCs and also the continued growth of the automotive-related markets. And so we will focus our capabilities on these areas, so that we're able to capture these opportunities and delivered improved business performance. Looking at the external environment, there is still quite a lot of business uncertainty and challenges. There is emergence of risk in the financial sector recently, and there's continued concerns of a global economic recession. That said, we will focus on, number one, creating new business opportunities by continuously pioneering growth markets such as automotive and servers, and also concentrate on creating greater competitiveness internally through productivity improvement, cost savings, better investment efficiency and better free cash flow generation to minimize volatility in our business performance going forward.

That completes our first quarter earnings conference call. If you have any further questions, please forward them to the IR team. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]