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

[Interpreted] Good morning. This is EVP Dong Woo Lee, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you very much for joining our 2025 Q1 Earnings Conference Call. On today's call, I am joined by CFO, Sung Jin Kim; EVP Taegon Lee, Head of Strategic Marketing, VP [ Kyu-Taeck Park ], Head of Support Team, Component division; [indiscernible], Head of Support Team, Package Solutions Division; Sungjin Kim, Head of Support Team, Optics Solution Division; and VP Taiyoung Kim of the planning team. We will start with a presentation on our Q1 company and division level business results, followed by market trends and outlook by product before taking your questions. First, our 2025 Q1 results. Q1 revenue was KRW 2.7386 trillion, an approximately 10% increase Q-o-Q and 5% increase Y-o-Y. The details regarding revenue increase and decrease factors by division will be explained later on during the divisional results. Q1 operating profit was KRW 200.5 billion, an approximately 74% increase Q-o-Q and around 9% increase Y-o-Y. Pretax profit in Q1 was KRW 173.8 billion, net profit was KRW 133.7 billion. Next, in terms of financials. As of Q1, total assets was KRW 13,292.5 billion, a roughly 4% Q-o-Q increase. For the major financial indicators, liability to equity increased to 47% from Q4's 42% and debt to equity was 22%, which is an increase from 17% in Q4. Equity ratio was around 68%, a slight decrease Q-o-Q. Next are the division results and future outlook. First is a look at the component division. The Component division's Q1 revenue was KRW 1,216.3 billion, a roughly 12% increase Q-o-Q and about 19% increase Y-o-Y. In Q1, supply of IT MLCC increase supported by the strategic customer's new smartphone launch and industrial automotive MLCC supply also increased tied to the AI server and ADAS. As a result, revenue increased across all applications. In Q2, Industrial and Automotive MLCC demand is expected to remain solid, supported by strong AI server demand and wider adoption of ADAS. We will focus on increasing revenue around high temperature, high voltage MLCC for AI servers on capturing demand for ultra-high capacitance MLCC needs for ADAS and on diversifying our automotive MLCC production sites. Next, the Package Solutions division. Q1 revenue was KRW 499.4 billion roughly 9% decrease Q-o-Q, but a 17% increase Y-o-Y. BGA revenue increased as mobile AP and memories substrate supply increase tied to the strategic customer's new smartphone launch. However, flip chip BGA revenue decreased Q-o-Q due to seasonally weak demand of certain applications, such as PCs. In Q2, solid BGA demand is expected, including substrates for ARM processors and memory and flip chip BGA demand is expected to increase mainly around server and AI accelerators. We will focus on increasing substrate supply for applications with growing demand, such as ARM CPU and on scaling supply of substrates for overseas customers AI accelerator and on timely development of next-generation large-area, high multilayer substrates for further expanding the Package Solution business. Lastly, the Optics Solutions division. Q1 revenue was KRW 1,023 billion, a 19% Q-o-Q but a 12% decrease Y-o-Y. Revenue of IT camera modules increased with full-scale mass production of high-performance camera modules, including the 200 megapixel, high-image quality folded zoom tied to the new flagship smartphone launch by Korean overseas customers. Automotive camera motor revenue also increased with the expanded supply of all-weather camera modules to the global EV customers. In Q2, IT camera module market is likely to show seasonal soft demand, but demand for differentiating cameras for flagship smartphones is expected to continue. We plan to expand our high-performance camera module lineup, including more differentiating slim camera modules for IT applications. For automotive cameras, demand is likely to grow with advances in autonomous driving, and we will focus on increasing supply of all weather camera modules and on newly mass producing hybrid lens to timely capture demand for cameras specialized for automotive applications. That completes my presentation on our Q1 results, and Taegon Lee, Head of our Strategic Marketing, will talk about market trends and outlook by key products.

[Interpreted] Good morning. This is Taegon Lee, Head of Strategic Marketing at SEMCO, and I would like to go over the current market situation and outlook for MLCC, substrates and camera modules, respectively. First MLCC, in Q1 despite seasonal soft demand in key applications and weaker consumer sentiment reflecting global economic uncertainty, MLCC demand remained similar to Q4, thanks to effects of China's old-for-new stimulus policy and preemptive demand in anticipation of U.S. tariffs. SEMCO MLCC revenue outpaced market growth and increased Q-o-Q, thanks to the strategic customer's new smartphone launch and increased supply of industrial and automotive MLCC. By application demand for IT MLCC weakened Q-o-Q due to softer demand and seasonal demand decrease of the North American smartphone company. However, there are also some positive factors, including the smartphone launch of the Korean strategic customer, effects of the Chinese stimulus policy and certain preemptive demand tied to U.S. tariffs. Industrial MLCC increased Q-o-Q as strong AI server-related demand continued. Automotive MLCC growth also continued with a wider adoption of ADAS by Chinese OEMs. For the Q2 outlook, the MLCC market demand is expected to increase Q-o-Q supported by seasonal demand recovery of key applications, AI server and ADAS-related demand and effects of Chinese stimulus policy continuing. That said, the U.S. tariff remains a source of demand uncertainty. IT MLCC market demand is expected to be similar to Q1 despite recovery of set demand, including Chinese smartphones and AI PC, given the demand uncertainty in the aftermath of tariff-related preemptive supply that occurred in Q1. Industrial MLCC demand is expected to increase, particularly around high-end MLCC driven by the increase in network and power-related demand, demand tied to the new AI server GPUs and the need triggered by DeepSeek to build independent AI systems. For Automotive MLCC, despite uncertainty in vehicle demand posed by U.S. tariffs, the automotive MLCC market is expected to continue its growth trend as Chinese EV OEMs adopt more advanced autonomous driving systems and ADAS. And for IT applications, SEMCO's focus will be on increasing customer certification of specialty MLCCs such as new low profile and low acoustic noise MLCC for ultra slim and foldable phones, as well as X6S high-temperature MLCC for next-generation memory. We will also focus on small-sized high-capacity MLCC demand tied to AIPCs as well as mid-voltage MLCC needed for high-power output laptops and game devices. For Industrial MLCC in addition to the MLCC for growing AI servers, we will drive revenue growth around the 220 mega microfarad and above ultra-high capacitant MLCC for network equipment and high-voltage, high temperature products for the 12,000-watt high-power output equipment. For Automotive, we will focus on ultra-high capacitant, MLCC needed for wider adoption of ADAS and increased customer certification of cutting edge high voltage MLCC for EV powertrain. Now for substrates in Q1, despite the seasonal weak set demand, including for the North American smartphone company, BGA demand remained similar to Q4, supported by factors including the strategic customer's flagship smartphone launch. FCBGA demand also was similar to Q4 despite seasonally soft PC demand as AI server-related demand, including accelerators, remain strong. Q2 BGA demand is expected to increase Q-o-Q, supported by solid BGA demand tied to memory and ARM CPU but we will continue to monitor changes in customer demand, given uncertainties tied to the U.S. tariff policies. In Q2, flip chip BGA demand is expected to increase Q-o-Q as AI accelerator demand continued strong growth and PC-related demand also recovers. That said, PC-related flip chip BGA demand is slightly more sensitive to U.S. tariff issues and warrants continuous monitoring. For BGA, we plan on increasing supply of BGA for memory and ARM CPU and push for a timely customer certification of our high-end BGA featuring cordless and fine pitch technology scheduled for launch in the second half of this year. For FCBGA, we aim to increase share of high end products by starting full-scale supply for AI accelerators and by increasing supply of flip chip BGA for server GPUs. From the mid- to long-term perspective, we will focus on securing a foundation for revenue growth, by diversifying AI customers using our leading technology, including the component embedded technology. Lastly, our camera modules in Q1, demand for IT cameras relevant to SEMCO increased Q-o-Q, thanks to the strategic customer's flagship smartphone launch. For automotive, demand relevant to SEMCO also increased Q-o-Q as key customers resumed new model production following the year-end inventory adjustments that have been carried out ahead of the new model launch. In Q2, demand for smartphone cameras is expected to decrease Q-o-Q due to seasonality, but automotive demand is expected to grow as supply of new vehicle models increases. For smartphone cameras, SEMCO will propose innovative technology for high-performance cameras such as continuous zoom, lens lead forward zoom, super macro and iris while also supplying ultra thin modules for ultra slim, foldable phones to further increase our high-end product revenue. For automotive cameras, we will focus on increasing supply of all weather cameras and on new mass production of hybrid lens while also developing new customers for -- as a driver of -- for driver monitoring interior cameras. Furthermore, we will also actively seek out new customers and new applications such as humanoid robots and that completes my presentation. Thank you.

[Foreign Language] [Operator Instructions] [Foreign Language]. The first question will be provided by S. K. Kim from Daiwa Securities.

[Interpreted] I have 2 questions regarding the Components division. First question, can you share with us the Q1 MLCC shipment inventory and ASP? As well as your outlook on these data points for Q2. Second question is tied to the old-for-new policy in China. What kind of magnitude of demand increase are you expecting from this policy in the smartphone and EV-related applications?

[Interpreted] I'll talk to your first question about Q1 MLCC shipment inventory and ASP, and second quarter outlook. In Q1, MLCC shipments increased across all of our applications. For the IT MLCCs, the new flagship smartphone launch and for the industrial and automotive MLCC solid AI server demand and ADAS adoption positively supported shipments. And on top of that, the increased sales to existing customers and development of new accounts supported the shipment increase both on a Q-o-Q and a Y-o-Y basis. On the back of such increased shipments, our days of inventory has decreased. Blended ASP in Q1 slightly decreased due to the product mix, including the increased volume of our mobile MLCCs. Looking towards the second quarter, in Q2, shipment and revenue is expected to continue increasing, supported by solid demand of industrial and automotive high-end products such as AI servers and ADAS.

[Interpreted] To answer your second question about the impact of the Chinese old-for-new, the stimulus policy. In Q1, China smartphone demand appears to have increased Y-o-Y as Chinese domestic demand increased with the old-for-new policy. And accordingly, MLCC demand has also increased. In Q2, we look forward to smartphone set demand increasing, given the old-for-new policy and also the 618 or 618 promotion. But taking into account tariffs and other uncertainties, we will continue to monitor and check customer demand situations and respond accordingly. In Chinese EVs, EVs also continues to grow strong Y-o-Y with the extension of the old-for-new policy leading to further EV purchases in China. The increase of ADAS by Chinese EV OEMs is also leading to increased MLCC content per vehicle and automotive MLCC demand is expected to continue for some time. Even though macro challenges continue, including the tariff uncertainties and concerns over possible economic slowdown. We will focus on actively capturing the growth opportunities that have emerged, such as the old-for-new policy in China and increased ADAS adoption by Chinese OEMs, EV OEMs to achieve revenue growth outpacing the market.

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

[Interpreted] My first question is on the adoption of ADAS by Chinese EV OEMs. Chinese EV OEMs have announced that they would be adopting ADAS across all of their models this is expected to have a positive impact on your MLCC business? Can you give us some more details about what kind of impact you're expecting and the outlook? Second question is on the camera module side. While the smartphone camera module market appears to continue to remain stagnant, there seems to be more opportunities expanding on the automotive and other applications. Can you give us more color on your camera module business direction given this market situation?

[Interpreted] To answer your first question, yes, as you mentioned, the trend of ADAS adoption is continuing, especially around the Chinese EV OEMs. ADAS adoption means automotive processors will need to support fast compute speed and consume more power. This leads to more MLCC content per vehicle, especially more demand for small size, high capacitance MLCCs which is expected to stimulate the overall automotive MLCC market growth even further. SEMCO has already built a very diverse automotive, high-capacitance MLCC lineup using our small-sized, high-capacitance technology accumulated from our IT MLCC business. And we have been continuously diversifying our automotive MLCC production sites to maintain stable supply capabilities. We will also focus on entering new projects of Tier 1 customers, and strengthened promotions, including the design in onto ADAS chip reference designs to deliver another year above-market revenue growth. To answer your second question about our camera module business. As you mentioned, the smartphone camera market appear somewhat stagnant. But within that market, customer needs or higher specification cameras is increasing in order to differentiate their smartphones with telescopic cameras and smaller-sized cameras. With our own core technology based on lens and actuator design and manufacturing capabilities, we will actively capture customer demand for the high image quality and folded zoom performance enhancements and lead the flagship camera technology by strengthening our differentiated product lineup. On the automotive side, advances in autonomous driving is expected to drive camera growth and our focus is on driving growth through increasing supply of the high reliability, all weather camera supply based on always on performance differentiation and newly supplying hybrid lenses using technology accumulated from our IT business to capture demand for the differentiated automotive cameras and diversify our customers. We are also currently working on developing new applications, such as robotics or XR using our small and slim camera technology which is based on our core component capabilities, including lens and actuators and we will focus on this to create new business opportunities through collaboration with key business partners.

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

[Interpreted] I have 2 questions regarding the substrate business. First is, I've been hearing that SEMCO will start supply of its substrates for AI accelerators at a larger scale this year. And this is expected to have a positive impact on your flip chip BGA business going forward. Can you give us more details about your plan and also an update on where that currently stands? Second question is about the glass substrates. I would also appreciate if you would give us an update on the business development and the technology development status of your glass substrate.

[Interpreted] To answer your first question about the substrates for AI accelerators, with the wider adoption of generative AI, major CSP companies are increasing adoption of their proprietary chips and this is driving demand for AI accelerators substrates. This demand is expected to continue to increase. SEMCO has been collaborating with key customers to prepare mass production of AI accelerator substrates and expect to see meaningful revenue starting from Q2, followed by gradual revenue increases going forward. SEMCO will focus on increasing revenue with not only scaling up the AI-related substrates, but also timely supply of next-generation new servers substrate. And also, we will focus on maintaining stable mass production from the new Vietnam plant that started operation last year. And our goal this year is to deliver another year of double-digit flip chip BGA revenue growth Y-o-Y. Your second question was about our glass substrate development. SEMCO has been closely collaborating with glass substrate related material, equipment companies as well as other Samsung affiliates and has been working on glass substrate business development, leveraging our flip chip BGA mass production experience. The glass substrate pilot line started operation in Q2, and we are currently actively engaged in glass substrate pilot product promotion targeting global big tech companies. We're also developing products that reflect global customer needs and will prepare our glass substrate business in sync with customer road maps.

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

[Interpreted] I have 2 questions. First question is that the reciprocal tariff issue is becoming a global issue. How much of an impact in terms of magnitude is SEMCO expecting from the tariff issue? And how are you preparing to cope and respond to this? Second question is your Q1 results is an improvement both on a Q-o-Q and a Y-o-Y basis. Given the rising uncertainty, including the tariff that was just mentioned, do you think that this improving trend can continue in Q2?

[Interpreted] To answer your first question about the impact of reciprocal tariffs. When we look at our products and exports, some of our MLCC and camera modules are directly exported to the U.S. But considering the scale of such exports, the direct impact is believed to be limited. However, higher tariffs may lead to inflation, weaker consumer sentiment and in turn, less component demand, more competition and so such indirect effects call for continuing monitoring and response. SEMCO is hedging the direct impact by securing various responses, including adjusting the logistics for our exports. And we will focus on expanding the high-end product sales tied to growing markets such as AI and automotive to minimize the impact of any policies, tariff policies on our business performance. And your second question was about our business performance outlook in Q2. In Q1, looking back on Q1, our results improved on a Q-o-Q basis, supported by the strategic customer's new flagship smartphone launch and the solid demand continuing from AI servers and ADAS, which drove increased supply of both our MLCC and camera modules. In Q2, the effects of the strategic customer's new mobile flagship would decrease, but we expect business results to improve with the growth of AI server and automotive MLCC, multi- high, multilayer large area substrates for AI applications and the automotive camera modules growing. The tariff-related uncertainty is limiting visibility of the overall market outlook but that said, we will focus on strengthening the ultra-high capacitance, high temperature, high voltage MLCC for AI servers and network equipment and the high output power equipment growth opportunities and increase the large area, high multilayer, high-end AI and server substrate supplies to capture the industrial and automotive growth opportunities. We will also focus our capabilities on the high-end products by strengthening cutting-edge MLCC lineup for ADAS and EV powertrain as well as the all-weather cameras and hybrid lenses on the camera module side. Also, we will execute on a timely manner, our business development of new products such as silicon capacitors and also timely execute our plans on next-generation technology development such as glass substrates. Lastly, to prepare against changes in the business environment such as economic recession, possibilities or low growth, we will concentrate on risk management based on careful analysis of customer demand and also rapid response system to minimize the impact of these external uncertainties on our business performance. Thank you.

[Interpreted] And that completes our Q1 earnings conference call. 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.]