Samsung Electro-Mechanics Co Ltd

KRX:009150

Earnings Call Transcript 2024-Q1

[Tae-young Kim, executive]

[Interpreted] Good afternoon. This is Taiyoung Kim, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining our 2024 first quarter earnings conference call.

On today's call, I am joined by our CFO, Sung Jin Kim; EVP KwangWook Bae, the team leader of Marketing team; VP JG Park, Head of Supporting Components division; [ Sung Jin ] Kim, Head of Supporting Optics & Communication Solution division; and VP Hyung Jin Kim, Head of Support Team Packaged Solutions division. We will start with a presentation on our Q1 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 2.6243 trillion, which is an approximately 14% increase Q-o-Q and a roughly 30% increase Y-o-Y. The details regarding our revenue increase-decrease factors by division will be explained later during the divisional results.

In Q1, operating profit was KRW 180.3 billion, which is approximately a 63% increase Q-o-Q and 29% increase Y-o-Y. Pretax profit in Q1 was KRW 290.5 billion. Net profit was KRW183.1 billion.

Next, in terms of our financials, as of end of Q1, total assets was JPY 12.1799 trillion, which is a roughly 4% increase from end of Q4. In terms of major financial indicators, liability to equity was 48%, debt-to-equity 22%, which is a slight increase Q-o-Q. Equity ratio was 67%, which is a slight decrease from Q4.

Next are the divisional results and future outlook. First, the Component division. The Component division's Q1 revenue was KRW 1.029 trillion, which is a roughly 5% increase Q-o-Q and about a 24% increase Y-o-Y.

In Q1, while overall set demand was weak due to seasonality, supply of industrial MLCC such as for AI servers and power equipment increased. Also, automotive MLCC demand for hybrid vehicles in ADAS remain solid, driving increase in our supply. This improved our product mix towards higher-end products and driving revenue growth.

In Q2, the component market is expected to see increased MLCC demand driven by moderate growth of set demand. Accordingly, SEMCO will focus on responding timely to high-end MLCC demand, such as small size and high capacitors, MLCCs for IT applications, and further increasing revenue of industrial and automotive MLCCs include areas such as AI servers and ADAS.

Next, the Optics & Communication Solutions division. The division's Q1 revenue was KRW 1.1733 trillion, which is a 32% increase Q-o-Q and 47% increase Y-o-Y. In Q1, IT camera motor revenue increased Q-o-Q with the increase in supply of the 200M pixel cameras and high image quality slim folded zoom to strategic customers, combined with the full-scale mass production of high-spec camera modules with multi-step IRIS for Chinese customers, which resulted in overall increase in flagship camera module demand for key customers. Revenue of automotive camera modules also increased thanks to increased supply to overseas customers.

In Q2, while camera module market is expected to be affected by IT camera seasonality and slowdown in auto OEMs' EV shipment growth rates, demand for differentiating camera modules is expected to grow, supported by flagship smartphones and advances in automotive camera technology. Accordingly, we will respond on time with high-performance camera modules for the new flagships of Korean and overseas customers scheduled to launch in the second half. And for automotive camera modules, we will increase supply of high-pixel camera modules and strengthen our specialty technology-based product lineup.

Lastly, for the Packaged Solutions division, Q1 revenue was KRW 428 billion, a roughly 3% decrease Q-o-Q, but a 8% increase Y-o-Y. Demand in certain applications, including mobile and PC, slowed down, which resulted in Q-o-Q decrease in revenue. For BGA, despite increased supply of ARM processor substrates to overseas customers, the supply of AP substrates decreased, resulting in a slight decrease in revenue. For Flip-Chip BGA, while supply of high-end automotive substrates related with ADAS and autonomous driving increased, the sluggish demand in certain set markets, including PC, resulted in a drop in substrate supply and revenue.

In Q2, in the package substrate market, downstream set markets, including PC and server, are expected to see gradual recovery of demand, and we will focus on increasing supply mainly around products expected to show demand increase, such as Flip-Chip BGA for PC and server CPUs, as well as BGA substrates for memory. Furthermore, demand for high-end, high-performance package substrates, such as for servers and AI accelerators, is expected to continue growth, and we will prepare our capabilities for a timely response by stabilizing the operation and mass production of the new plant in Vietnam.

That completes the presentation on our 2024 first quarter results. And now KwangWook Bae, the head of our Marketing team, will talk about marketing -- market trends and outlook by key product group.

[KwangWook Bae, executive]

[Interpreted] Good morning. This is KwangWook Bae, the head of the Marketing team. I would like to share the current update and outlook for MLCC, camera modules and substrate markets, respectively.

For MLCC, in Q1, component demand continued to remain sluggish due to overall slow set demand tied to seasonality. However, SEMCO continued to increase customer qualifications and supply, particularly around industrial and automotive high-end products, with relatively higher demand and achieved a moderate revenue increase Q-o-Q.

Looking at Q1, MLCC demand by application, first, for IT MLCC, despite the effect of flagship phone launched by strategic customer, IT MLCC demand continued to remain weak following the Q4, due to seasonal weak demand of North American smartphone and PCs. On the other hand, thanks to growth in AI server and industrial power demand, industrial and MLCC demand increased Q-o-Q.

For automotive, despite decrease in demand for finished vehicles, the trend of increasing electronic content per vehicle drove growth in automotive MLCC demand. In Q2, with a gradual recovery expected in set demand, MLCC demand is expected to slightly increase.

By application, IT MLCC demand is expected to increase, supported by the launch of new Chinese smartphone models and introduction of new platform-based AI PCs, and the continued growth of AI servers and industrial power is expected to increase industrial MLCC demand.

For automotive, even though EV growth rates have been decreasing, hybrid vehicle sales is increasing and the trends of more electronic content per vehicle are likely to keep automotive MLCC demand growing. SEMCO will increase small-sized, high-capacity MLCCs for IT applications, ultra-high-capacity MLCCs for AI servers and high-temperature high-voltage MSCC for power applications while are also developing new applications, such as satellite Internet and factory automation.

For automotive, our focus will be on increasing high-end MLCCs such as high-voltage MLCC for powertrain and small-size, high-capacitance MLCC for ADAS.

Now, for camera modules, in Q1, within the IT camera module market, demand relevant to SEMCO increased thanks to launch of new flagships by major customers and increased adoption of folded zoom. In automotive camera module, demand for our products increased driven by continued adoption of ADAS on vehicles and launch of new models by global EV customers.

In Q2, camera demand is expected to decrease as sales of flash smartphones launched in Q1 level off. Accordingly, we will continue to extend the high-volume camera market with a timely response to new flagship launches planned in the second half by the strategic customer and global customers.

Also, in line with the recent customer needs to strengthen [ tele ] cameras, we will provide specialized solutions, including [ lens-first ] and [ super-macro ] to strengthen our dominance in the high-end camera module market.

For automotive cameras, we will focus on increasing our customer base by leading the development and promotion of next-generation new products and technology needed for advanced automotive autonomous driving, such as heating cameras for always on-sensing and hybrid-lens water-repellent coating and heat dissipation technology. Furthermore, in line with the trend of stricter driving monitoring regulations, we will use our high-pixel ultra-high angle [ hybrid ] cameras to win markets.

Lastly, for substrates, in Q1, BGA demand for ARM processor increased thanks to launch of new ARM processor. However, overall BGA market decreased Q-o-Q due to seasonality. And Flip-Chip BGA demand for automotive AI servers remain solid, but demand tied to PC was weak due to seasonality.

In Q2, despite the demand of new substrate products such as ARM processors related with new laptops and tablets, substrates for AP and memory BGA demand is expected to remain flat versus Q1 while Flip-Chip BGA demand for PC applications is expected to gradually recover as the second half Windows replacement demand kicked in and AI PCs are launched. With the demand of regular servers and AI servers continue to increase related with Flip-Chip BGA, demand is expected to increase versus Q1. Accordingly, in BGA, we will focus on actively booking BGA orders for high-end ARM CPUs and flagship APs as well as memory substrates while also continuing to participate in next-generation products based on technology leadership to preemptively build out our revenue base.

For Flip-Chip BGA, our focus will be on actively capturing the rebound demand for AI PC and other related products and to gradually ramp up our Vietnam new plant to expand our supply. Thank you.

[Tae-young Kim, executive]

[Foreign Language]

[Operator]

[Foreign Language] The first question will be presented by Sung Kyo Kim from Daiwa.

[S. K. Kim, analyst]

[Interpreted] I have 2 questions. My first question is about the MLCC business. Can you share with us the shipments, inventory and ASP of your MLCC business in Q1 and also what you expect to see in the second quarter?

Second question is about your Flip-Chip BGA business. I think, currently, in the market, there are concerns of oversupply and worsening competition around Flip-Chip BGA as the overall PC and general-purpose server markets remained sluggish. Can you give us your outlook on the Flip-Chip BGA market?

[Unknown Executive]

[Interpreted] To answer your first question about our Q1 MLCC shipments inventory ASP and second quarter outlook, in Q1, our MLCC shipments remained flat, similar to the previous quarter. However, our revenue grew versus the previous quarters thanks to the increase in revenue of our industrial MLCCs related with AI and also the solid automotive MLCC revenue. On a blended basis, our ASP improved as our product mix improved with the increase in share of industrial and automotive MLCCs. Also, as a result of increased revenue, our inventory days also slightly decreased.

Looking towards the second quarter, we expect there to be continuous growth factors, including the launch of new smartphones by major customers and also the increase -- continued increased growth in revenue of automotive and AI-related industrial MLCCs. And we expect our second quarter shipments to increase versus the first quarter.

To answer your second question about our outlook of the Flip-Chip BGA business this year, as you mentioned, there is a continuing oversupply in Flip-Chip BGAs caused by adjustments in the component inventory of key set customers, including PC and server customers, and also seasonal weakness in demand. This has caused supply competition to worsen.

And regarding the first half, we expect our business performance to remain weak. However, looking towards the second half, we are expecting there to be a gradual recovery of substrate demand related with not only AI PCs, but also the demand for replacing PCs preemptively before the end of Windows 10 support scheduled next year.

Also, at the cloud industry level, the existing server installed base is aging and there is expectations that there will be an increase in server replacement demand to replace the existing server base with new server base. And this is expected to also improve the demand for server CPU substrates. Accordingly, we will actively focus on increasing supply of PC, server and other high-end substrates and also work with various customers to pursue AI accelerator substrate supply so that we will be able to grow our flip-Chip BGA business this year.

[Operator]

[Foreign Language] The next question will be presented by Guini Lee from Goldman Sachs.

[Giuni Lee, analyst]

[Interpreted] I have 2 questions. The first question is related with AI. In the market, there is quite a lot of interest regarding not only generative AI, but also on-device AI. I'm wondering what kind of benefits SEMCO is expecting to enjoy from the AI trend. For example, related with AI, are you expecting there to be increase in content? Or what kind of market growth are you expecting? And currently, what kind of customer promotions are you engaging in?

Second question is related with the automotive MLCC side. If we look at the end markets, even though the demand for EVs is slowing down, hybrid vehicle sales appear to be going, continuing very well. Given the situation, what kind of impact do you think this will have on the automotive MLCC market? And do you have any changes in your growth outlook regarding your automotive MLCC business?

[Unknown Executive]

[Interpreted] To answer your question about AI, when we look towards possible AI application, in addition to AI servers, we think that AI will be adopted onto different -- a larger number of applications, including smartphones, PCs, TVs and wearable devices going forward. And with these applications adopting high-performance AI CPUs and MPUs, this will naturally lead to an increase in ultra small-size, ultra-high-capacity MLCC as well as high multilayer large-size package demand. Especially the -- we believe that, this year, the market size for MLCC and Flip-Chip BGA for AI servers would more than double versus 2023, respectively.

In the case of MLCC for AI servers, we're in the process of expanding our customer base around ultra-high capacitance MLCCs. In the case of Flip-Chip BGA for AI servers, we're focusing on increasing supply and diversifying customers around the large-sized, high multilayer Flip-chip BGAs. Also, we are in the process of technology development and promotion with the aim of entering key CSP companies that are planning to adopt their own AI chips.

Our goal regarding the AI business is to more than double our AI-related revenue, including AI servers, each year, and we are actively working to diversify our customer base.

Your second question was about our outlook on automotive MLCC growth. And as you mentioned, EV growth rates are expected to slow down versus the past, but even still, in 2024, EV is likely to remain in double-digit high-growth levels. Also, our hybrid vehicles, which have been consistently maintaining high growth rates, require as much as 2x the MLCC versus an internal combustion engine vehicle. And therefore, hybrid vehicles is expected to have a positive impact on automotive MLCC demand.

ADAS penetration continues to increase. And in 2024, Level 2 and above ADAS adoption rates are expected to exceed 40%. Therefore, the overall automotive MLCC market high growth rate outlook remains unchanged. With that outlook in place, SEMCO will continue to secure a strong automotive lineup, including high-capacitance MLCCs for ADAS and high-temperature, high-voltage MLCC, which happen are development-focused. This is to -- and our goal is to deliver above-market revenue growth.

We will also increase production volume of overseas plants to improve our supply stability to strengthen the foundation for growth going forward.

[Operator]

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

[Junseo Park, analyst]

[Interpreted] I have 2 questions. First question is about the automotive camera module business. Recently, Tesla and other EV OEMs, their shipment growth rates are leveling off. With that in mind, what kind of outlook do you have for your automotive camera module business?

Second question is about the MLCC business. During the last call, you mentioned possibilities of diversifying the applications for the MLCC business, including the iServer. Since the last call, has there been any changes? Can you give us updates and also further outlook?

[Unknown Executive]

[Interpreted] To answer your first question about the automotive camera module outlook of SEMCO, in the EV market, vehicle demand may have some near-term setbacks due to weak consumption driven by the slowdown of the global economy and also changes in the environment, including reduction of the various subsidies that are offered by each country governments. However, that said, autonomous driving and also ADAS technology continues to evolve, and this is driving demand for high-performance camera modules.

Leveraging the technology that we have accumulated and the capabilities that we have built from our IT camera module business, we have been developing automotive specialized technologies, such as the all-season, all-weather, high-reliability camera modules, as well as the hybrid lens. And also, we have been driving the business growth through increasing supply of the existing 5M-plus high-pixel cameras and customer diversification. Particularly this year, we're expecting to expand our customer base to include even the conventional auto OEMs and expect to deliver automotive camera module business results that are better than last year.

Now to answer your question about diversifying our MLCC applications, some applications that we can think of would include AI servers, factory automation robots and satellite Internet. These are applications that are expected to grow at high rates of above 10% CAGR and to become key applications within the industrial MLCC market.

Especially if we look at AI servers, which is a growth market within the industrial MLCC, the AI servers are operated at higher temperatures versus existing IT devices. And therefore, it requires high-temperature, high-capacitance MLCCs.

In the case of factory automation robots, because they are using more autonomous operations and are adopting high-voltage motors, it requires high-capacitance, high-voltage MLCCs. As you know, SEMCO has the high-capacitance, ultra-high capacitance MLCC technology that we have acquired for IT applications and also the high-reliability technology that we use for our automotive MLCC applications. And therefore, by leveraging what we existingly have, we have been actively developing the industrial growth markets. For example, we already have been achieving visible results, including being -- participating into various projects of key customers in various areas. And in the first quarter, the market revenue of these markets has been showing higher growth versus the previous year. And going forward, we will continue to diversify our customer base and increase our market share.

[Operator]

[Foreign Language] The next question will be presented by Eoyeon Hwang from Nomura.

[Eoyeon Hwang, analyst]

[Interpreted] I have 2 questions. First question is about your Vietnam package plant that you have been investing quite sizably during the past 2 years. Can you give us an update of your Vietnam plant operation this year? And do you have plans of additional expansions in Vietnam?

Second question is just the overall CapEx plan question. Do you have any changes in your CapEx plan this year? If there are any new business areas that you would be investing in, can you share with some details?

[Unknown Executive]

[Interpreted] To answer your question about the operation of our Vietnam new plant and future expansion plans, first of all, the new plant in Vietnam completed customer qualifications necessary for mass production earlier this year. It will start operation from Q2 this year. And therefore, we'll start to accrue revenue from Q2. We will operate the Vietnam plant in line with the customers' demand.

Now, regarding plans of additional capacity expansion for the package substrate business, we maintain our basic approach that our investments will be executed in line with the market and customer situation. But that said, this year, our main focus will be on improving the yields and also achieving the operational efficiency of our Vietnam production lines rather than on additional investments and expansions.

[Unknown Executive]

[Interpreted] To answer your second question about our CapEx plans, as I mentioned last time, this year, our company-level CapEx size is expected to be similar to last year,while we maintain focus of our investments into key areas where there is demand growth such as AI and automotive.

In terms of MLCC, we are planning to increase the capacity investments to respond to the automotive demand growth, which is expected to continue. Some investment highlights regarding new businesses would include securing the glass substrate pilot line. And these are examples of our investments that we are making to secure core technologies and also build out our business foundation.

Going forward, we will continue to maintain this approach of making the necessary capacity increase investments to further strengthen the market influence of our existing business and, at the same time, making investments to develop technology for our future growth in order to maintain a momentum of continuous growth.

[Operator]

[Foreign Language] The next question will be presented by Gan Ho Park from Daishin Securities.

[Gang Ho Park, analyst]

[Interpreted] I have 2 questions. First question is about the glass substrate business. There is, in the market, quite a lot of interest and talk about developing or launching new businesses related with glass substrates. SEMCO is also developing glass substrate business. Can you give us an update and also overall outlook going forward?

Second question is about your outlook for the business overall. Your first quarter results have come about significantly above market consensus in terms of both top line and operating profit. Do you think this trend can carry forward in the second quarter? Overall, can you give us your outlook on your business performance in the future?

[Unknown Executive]

[Interpreted] Your first question was about our development of the glass substrate business. Glass substrates, compared to the existing substrates, have advantages in terms of a finer pitch and also larger substrate sizes and, therefore, is expected to be effectively used in the high-specification semiconductors for AI or server applications. And that's why we have been working with not only the key material or equipment companies but also related companies to secure the source and core technologies necessary for developing glass substrates. We plan to build out our glass substrate pilot line this year. We're also developing products by reflecting the needs of global customers and will pursue the glass substrate business by preparing mass production after 2026, which is in line with the customer's road map.

Your second question was regarding our guidance, business guidance, going forward. Just looking back on the first quarter, despite there being demand decreasing factors in some markets such as the seasonal weakness of the PC and other IT devices, in Q1, flagship smartphone launches by smartphone OEMs, including the strategic customer, increased MLCC and camera module sales. Also, coupled with the increase in sales of our high-end MLCCs for -- or excuse me, coupled with the increase in sales of our camera modules and also the high-end MLCC sales tied in with the industrial and automotive applications, as we have mentioned, our Q1 results improved on a quarter-on-quarter basis.

Now, looking to our second quarter, the flagship smartphone launch effect is expected to decrease versus the previous quarter, but major applications, such as PCs and servers, are expected to show gradual demand recovery. Also, we expect sales of the high-end products, such as automotive MLCC and server Flip-Chip BGA, to continue to expand. And so overall, looking towards the second quarter, we expect to deliver solid performance.

Even though the increasing attention to geopolitical instability in the Middle East, the oil price increases and higher interest rates remaining longer are all contributing to higher levels of uncertainty in the business environment and the visibility and the business outlook remain limited, we will focus our capabilities on key areas, such as the industrial automotive MLCCs, automotive camera modules and high-end packaging substrates, to respond to the growing AI server and automotive markets in order to deliver improved business performance. In addition to this, our focus will be on minimizing the volatility of our business performance by strengthening our internal competitiveness such as yield, productivity and higher quality, and also nimbly responding to any market changes by continuously monitoring changes in the external business environment and customer demand. Thank you.

[Tae-young Kim, executive]

[Interpreted] And that completes our conference call for the 2024 first quarter. If you have any questions, please forward them to our IR team. Thank you.