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

[Interpreted] Good afternoon. This is Dong Woo Lee, Head of IR and Planning Team at Samsung Electro-Mechanics. Thank you for joining our 2024 Fourth Quarter Earnings Call. On today's call, I'm joined by our CFO, Sung Jin Kim; EVP Taegon Lee, Head of Strategic Marketing; VP [ Kyu-Taeck Park ], Head of Support Team, Component division; [ Sung Hyung Cho ], Head of the Support team, Package Solution division; [ Hung Jin Kim ], Head of Support team, Optics Solution division; and VP Taiyoung Kim of the Planning team. We will start with a presentation on our Q4 company level and divisional business results, followed by market trends and outlook by product before taking your questions. First, our 2024 Q4 results. Q4 revenue was KRW 2.4923 trillion, which is approximately 5% decrease Q-o-Q but 8% increase Y-o-Y. The details regarding revenue increase/ decrease factors by division will be explained later during the divisional results. Q4 operating profit was KRW 115 billion and approximately 49% decrease Q-o-Q but around 1% increase Y-o-Y. Pretax profit in Q4 was KRW 198.2 billion; net profit, KRW 208.4 billion. Next, in terms of financials. As of end of Q4, total assets was KRW 12.7924 trillion, roughly 1% Q-o-Q increase. For major financial indicators, liability to equity decreased to 42% and debt to equity was 17%, a decrease from 23% in Q3. Equity ratio was around 70%, a slight increase Q-on-Q. Next are the divisional results and future outlook. First, the Component division. The Component division's Q4 revenue was KRW 1.0818 trillion, a roughly 10% decrease Q-o-Q but 11% increase Y-o-Y. In Q4 due to seasonality, including customer year-end inventory adjustments, revenue for IT and industrial applications such as mobile, PC and consumer electronics decreased. However, automotive revenue continued the upward trend supported by EV and hybrid demand growth and increased adoption of ADAS. In 2025, within the MLCC market, the industrial and automotive segments are expected to continue high growth, mainly around AI server and xEV. SEMCO will expand its high-end product lineup, including the high-temperature, high-capacitance products for AI servers and high-temperature, high-voltage MLCC for EV powertrain to capture demand. For IT MLCC, we will focus on increasing supply around ultra-small size high-capacitance high-end MLCCs to capture the low-power, high-efficiency trends in smartphone and PCs. Next, the Package Solution division. Q4 revenue was KRW 549.3 billion, a roughly 2% decrease Q-o-Q but a 24% increase Y-o-Y. For BGA, revenue decreased due to soft demand tied to year-end smartphone inventory adjustments affecting smartphone AP and memory. But for FCBGA, revenue increased in Q4 with increased high-end substrate demand, including server network FCBGA substrate for global customers. This year, the package substrate market is expected to see improved demand in certain applications such as smartphone and PC, while the high-end package substrates for AI and servers are expected to continue strong growth. We will focus on increasing high-end substrate supply for ARM CPU, server and network equipment using our differentiating technologies, such as embedding structures and fine-pitch circuitry and also focus on larger scale mass production and customer diversification in the flip chip BGA for AI accelerators. Lastly, the Optic Solution division. The division's Q4 revenue was KRW 861.2 billion, which is up 0.1% increase Q-o-Q but a 2% decrease Y-o-Y. IT camera module revenue increased, thanks to start of mass production of camera modules for the strategic customer's new model and increased supply of high-end camera modules for Chinese customers. For automotive, we started supply to a Korean OEM and new mass production of all-weather camera modules for a global EV maker. This year, the IT camera module market is expected to see continued demand for higher performance as a way of differentiating flagship smartphones, and we will respond with timely mass production of high-spec, high-powered zoom camera modules, including high-image-quality slim camera modules and more powerful zoom features. The automotive camera module market is expected to continue growth driven by advances in autonomous driving, including driver monitoring features, and we will increase automotive camera supply and actively tap growth markets, including all-weather camera modules and in-cabin cameras. That completes the presentation on our Q4 results. And now, Taegon Lee, our Head of Strategic Marketing, will talk about market trends and outlook by key product group.

[Interpreted] Good afternoon. This is Taegon Lee, Head of Strategic Marketing. I will go over the current market situation and outlook for the MLCCs, substrates and camera modules, respectively. First, MLCC. Q4 MLCC demand decreased Q-o-Q due to overall weak set level demand and year-end inventory adjustments despite the seasonal demand tied to U.S. Black Friday and China's Single Day as well as the new model launch by the North American smartphone company. Our application demand for automotive MLCC continue to increase thanks to solid performance global Tier 1s and EV OEM customers. However, IT and industrial MLCC demand decreased due to stagnant demand in applications such as smartphone, PC and general purpose servers, and customer inventory adjustments, even though demand related with AI servers remain solid. Regarding the 2025 Q1 outlook, despite seasonal demand softness in key applications, MLCC market demand is expected to remain similar to Q4 as demand for high-end MLCC increases with the a flagship smartphone launch by the strategic customer and continued high growth of AI servers. While demand for IT MLCC is likely to slightly decrease Q-o-Q due to soft set demand, demand for high-end IT MLCC is expected to improve, thanks to launch of the new flagship smartphone by OEMs, including the strategic customer. Also, the [ old Four New ] initiative in China may benefit wider product groups, including smartphones and tablets, providing additional demand recovery. Demand for industrial MLCC is expected to grow Q-o-Q as AI server-related demand remains strong. For automotive MLCC, even though EV sales is expected to slow down, demand in SEMCO's addressable market is expected to record another quarter of growth, driven by a wider adoption of ADAS in finished vehicles. To capture opportunities from new model launches by major smartphone OEMS, we will focus on designing in of new high-end specialty MLCC such as the small-size high-capacitance, low-ESL, low-acoustic-noise MLCC and respond timely to small-size ultra-high capacitance needs coming from lower-power, higher-efficiency requirements of AI PCs. In Industrial, we will focus on promotion of high-temp, ultra-high capacitance, cutting-edge MLCC for AI server and power equipment. In automotive, we will focus on keeping the growth momentum strong by attracting new global customers and by designing in products such as the ultra-high capacitance 3-terminal MLCC for ADAS and high-voltage MLCC for onboard chargers. Next, substrates. Q4 BGA demand decreased Q-o-Q due to smartphone OEM year-end inventory adjustments and decrease in memory demand. Flip chip BGA demand slightly increased Q-o-Q, thanks to solid demand from server CPU, AI accelerators and automotive, despite the year-end inventory adjustments of PCs. In Q1, BGA demand is expected to slightly increase Q-o-Q, mainly around mobile AP and memory substrates tied to the strategic customer's new flagship launch as well as the ARM CPU substrate tied to the overseas customer's new product. In flip chip BGA, while demand for CPU and accelerator substrates is expected to continue growth supported by solid demand for AI servers, demand for PC substrates is likely to decrease Q-o-Q given seasonality. That said, PC substrate demand is expected to gradually recover in the future as seasonal demand is augmented by the Windows 10 replacement demand. For BGA, we will focus on on-time design-in and stable supply of new products for ARM CPU and premium AP, where demand growth is expected. For flip chip BGA, in addition to increasing our supply of server CPU substrates, we will break in further into the AI accelerator market and diversify our customer base using our technology edge to increase overall the share of high-end products. Lastly, camera modules. In Q4, demand for IT cameras that are relevant to SEMCO remains flat Q-o-Q with the launch of new flagships by major Chinese OEMs. However, automotive camera module demand relevant to SEMCO slightly decreased Q-o-Q due to year-end inventory adjustments by key customers in anticipation of new model launches. In Q1, overall smartphone demand is expected to remain slow, but demand for camera modules relevant to SEMCO is expected to increase given the strategic customer's new model launch and expectations of stronger smartphone sales supported by China's [ old Four New ] initiatives. Accordingly, we will focus on overcoming persistent stagnation of smartphone growth by proposing to customers ultra-thin modules specialized for slim smartphones and high-performance folded slim modules with continuous zoom lens [ fleet ], folded zoom and super macro to generate high value add with innovative products while also actively adding new customers and applications. For automotive cameras, new business opportunities for our heated camera, for always-on sensing and in-cabin camera for driver monitoring, which started mass production late 2024, continues to grow with stronger needs for autonomous driving performance, and we will use our track record to actively pursue new OEM relationships. Thank you.

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

[Interpreted] I have 2 questions. The first question is about your fourth quarter MLCC shipments, inventory in ASP. Can you share some of the data points? And also, can you share with us your first quarter outlook for the MLCC? Second question is about the substrates for AI accelerators. Recently, many of the global cloud service providers are developing their own ASIC chips, and this is increasing market interest and expectations for AI-accelerator-related substrates. Can you give us an update on SEMCO's AI accelerator substrate business and outlook?

[Interpreted] To answer your first question about Q4 MLCC shipment inventory ASP results and Q1 outlook, in terms of shipments in Q4, automotive MLCC shipments increased by high single digit on a quarter-on-quarter basis. However, overall MLCC shipment decreased Q-o-Q due to year-end component inventory adjustments by IT and industrial customers. Inventory in Q4 slightly increased. Blended ASP in Q4 slightly increased due to factors including increased portion of our automotive MLCC business. Now looking towards first quarter. Shipment is expected to increase on a quarter-on-quarter basis, thanks to new smartphone launch by the strategic customer, high growth expected -- related with AI servers and also solid demand expected from automotive MLCC. To answer your second question about our AI accelerator substrate business, as you mentioned, global cloud service provider companies are increasing adoption of proprietary AI chips to achieve optimized AI performance. And this is expected to increase demand for substrates for AI accelerators in the mid- to long term. AI accelerators in terms of substrates to require low-loss, high-multilayer and large area technology equivalent to the existing server CPU substrates. And hence, very few companies are currently capable of supplying such substrates. We have already a strong record, having stably supplied server CPU substrates to key overseas customers as well as proven technology. And based on that, SEMCO has been rapidly expanding sales. We are currently participating in new AI accelerator substrate projects of several major customers and look forward to meaningful increase in the AI accelerator substrate revenue this year.

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

[Interpreted] I have 2 questions, both regarding the automotive business. First question is about your automotive MLCC business, which has performed quite well last year, especially it's a strong contrast to many of your competitors. How do you explain your successful performance in automotive MLCC last year? And what is your outlook this year? Second question is about automotive camera modules, which also delivered meaningful growth, while competitors have found the market to be quite challenging last year. Can you share with us your outlook for your automotive camera module business this year?

[Interpreted] To answer your first question about our automotive MLCC business. Last year, in 2024, we had expanded the entire product lineup including the high-capacitance MLCC for ADAS and also, the high-temperature, high-voltage MLCCs leveraging the technology we have acquired from the IT MLCC side. This enabled us to enter new accounts and also increase our share of wallet of major accounts and hence delivering Y-o-Y double-digit top line growth. Looking towards this year in 2025, autonomous driving-related big tech companies and also auto OEMs are expected to introduce ADAS and other electronic features to not only EVs but other vehicles in general, which will drive demand for small-size, high-capacitance MLCCs for infotainment and ADAS, and we are ready to capture this opportunity. We will also focus on design in and certification of new high-temperature, high-voltage MLCCs for EV powertrains to drive top line growth with a higher hit rate. At the same time, we'll be focusing on enhancing our manufacturing competitiveness, including the expansion of automotive MLCC production in overseas sites, better production, productivity in order to ensure that we have long-term supply stability. To answer your question over the automotive camera module business, in 2024, the automotive camera module revenue increased Y-o-Y, thanks to the timely supply to global EV customers, mass production of our new all-weather camera module and also breaking into Korean auto OEM. In 2025, the overall automotive camera module demand is expected to grow, driven by advances in autonomous driving technology and performance as well as regulations that would be requiring driver monitoring systems. Given this market outlook, our focus will be on increasing new design-ins with major customers using our differentiated technology such as all-weather camera modules and hybrid lens using our IT camera module technology. Also, we'll be focusing on actively developing new applications based on our technology know-how and track record of supplying high-reliability, high-pixel camera modules to make our automotive camera module business even stronger.

[Foreign Language] The following question will be presented by Junseo Park from Mirae Asset Securities.

[Interpreted] I have 2 questions. First question is about your 2025 outlook and strategy for the MLCC business. When we look at your MLCC business, 2024 last year was an important turning point in terms of the growth. And despite weak IT-related demand, you were able to deliver meaningful growth supported by the automotive and server-related MLCC demand. Can you give us a bit more color on what you expect to see in 2025 and your strategy for MLCC? Second question is about silicon capacitors. When we look at some of your new business ideas, silicon capacitor is probably going to be commercialized -- will be one of the first to be commercialized. And so can you share with us your update on promotion of your silicon capacitor and also future revenue outlook?

[Interpreted] To answer your question about our MLCC business strategy and outlook this year, in 2025, this year is expected to be another growth year for MLCC as a whole in the market. When we look at it by application, first, for IT MLCC, market growth is expected to continue, driven by Chinese demand stimulation policy and the Windows OS replacement demand. SEMCO will use our cutting-edge MLCC to capture growth markets and also further expand our dominance in the volume markets with improved yield and productivity. For industrial MLCC, market growth is expected to be focused around AI servers. AI servers require high-temperature, high-capacitance MLCC. And SEMCO has the high-capacitance technology from our IT MLCC business and high-temperature technology from our automotive business, which we will use to develop on-time products that customers need in order to drive our revenue growth. And then there's the automotive MLCC where the strongest growth is expected. And we are focusing, as we mentioned before, on the small-size, high-capacitance MLCC for infotainment and ADAS as well as the high-temperature, high-voltage MLCC for EV powertrain, and we will also continue to focus on securing long-term supply stability. And so with these applications, specific strategies, we are targeting another year of above-market revenue growth in 2025. To answer your second question about silicon capacitors, capacitors, as you know, are components that store and release electrical energy. And because silicon capacitors are made with silicon wafers instead of the conventional ceramic, they can be very small, down to a micrometer scale, enabling smaller and thinner semiconductor package designs. This reduces the distance between the substrate and chip, which improves electrical characteristics including less parasitic impedance and also enables fast AI computation with less heat and power. Therefore, silicon capacitors are considered essential components for high-performance system semiconductors. SEMCO is currently promoting our silicon capacitors to strategic customers and global fabless customers for the smartphone AP and AI server applications. So for our silicon capacitor business, this year, the focus is to achieve stable supply and successful customer experience to build the basis for mid- to long-term revenue growth.

[Foreign Language] The following question will be presented by [ Soo-won Kim ] from [ Kim Securities ].

[Interpreted] Two questions. First question is about your Optic Solution business. The strategic customer is launching the Galaxy S25, and also, the Chinese mobile OEMs are also coming up with new flagships. Related with this, can you give us a bit more detail about your high-specification camera module supply expansion plan, including the folded zoom? Second question is about your Package Substrate business. Last year, you had many achievements, including the operation of the new Vietnam plant, growth of your ARM CPU and server substrate businesses. I'm wondering whether this momentum will continue in 2025 this year. In that context, can you give us a bit more details about your full year outlook for the Package Substrate business?

[Interpreted] To answer your first question about our plans of increasing supply of our high-specification camera modules, global smartphone OEMs continue to ask for telescopic zoom or slimmer camera modules as a way of differentiating their key handsets, and therefore, we expect camera module specifications to continue to advance. Leveraging our internalized capabilities in core components, such as lens and actuator technology, we will focus on increasing supply of high-performance camera modules that satisfy flagship smartphone customers, such as our new structure folded zoom that provides differentiation in terms of high pixel, ultra closeup and slimness. To answer your second question about the package substrate business outlook. In 2024, our revenue increased by double digits versus 2023, thanks to the operation of our Vietnam production line and also the increased supply of high-end substrates for server and ARM CPUs. In 2025, uncertainties still remain both domestically and globally but our target markets, that is server, AI, ARM CPUs, these substrates are expected to continued growth year. So we will aim to maintain the revenue growth momentum again in 2025 by developing next-generation technology with improved power and signal characteristics, build out a strong manufacturing competitiveness and increase new customers and new product design-ins to increase the supply of our high-end substrates, including those for ARM CPUs, server and AI.

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

[Interpreted] I have 2 questions. First question is about your 2025 CapEx. I'm expecting that there will be additional CapEx being made this year in order to increase market share in your existing businesses and accounts and also to win new customers in your new businesses. So can you give us your outlook on CapEx this year versus last year? Second question is about your outlook this year, full year as well as Q1. Even though there were many difficulties in 2024, the company made a record by achieving company-level revenue of above KRW 10 trillion full year and appears that all of your business units have grown throughout last year. This year, there are uncertainties. But can you give us a bit more color on what you expect for Q1 and full year?

[Interpreted] To answer your first question about CapEx, actually, what -- recall, in 2024, we had reduced CapEx versus our original plan in order to reflect delays in recovery of demand in major applications, including smartphones. In 2025, this year, CapEx is expected to increase versus last year as we execute investments that are aligned with customer demand, such as overseas capacity expansions for automotive MLCC and also development of next-generation substrate technology. CapEx will be executed this year focused on high-growth, high-value areas such as automotive, AI and server and will be executed flexibly considering changes in customer demand and with a focus on enhancing investment efficiency. To answer your question about our full year and first quarter comment or outlook, in Q1, despite seasonal softness in IT set demand, the strong -- the strategic customer is launching its new flagship smartphone. And AI server-related demand is also likely to remain strong in Q1. So overall, we expect our business performance in Q1 to improve Q-on-Q and also Y-o-Y. For the full year 2025, uncertainties still remain in the external environment in terms of global trade disputes and geopolitical risks, but AI demand is likely to remain strong this year, again, with strong AI server growth and also AI features being adopted on PCs and smartphones. Also, the electronic content in vehicles will continue to increase with continued penetration of autonomous driving and ADAS, and these are all business opportunities for us. We will strengthen our high-end product lineup, including the MLCC and package substrates targeting AI servers and also automotive MLCCs and camera modules to -- and also continue customer diversification and also supply expansion to further develop our AI and automotive-focused business structure and to deliver Y-o-Y revenue growth. We will also focus on timely commercialization of new businesses, including the silicon capacitor and the small-sized all solid-state batteries to lay out a strong foundation for mid- to long-term growth. At the same time, we will focus on productivity improvements through better equipment efficiency and manufacturing technology, and stronger fundamental cost competitiveness by delivering improvements in quality and yield in order to deliver improved results that are better than last year and meet market expectations.

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