Samsung Electro-Mechanics Co Ltd

KRX:009150

Earnings Call Transcript 2023-Q2

[Operator]

[Interpreted] Good afternoon. Thank you very much for joining the conference call. We will now start the 2023 Second Quarter Earnings Conference Call of Samsung Electro-Mechanics. The conference call will start by a presentation from the company followed by a Q&A session. [Operator Instructions]

Now we will start the presentation by the company.

[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 2023 second quarter earnings conference call. On today's call, I am joined by our CFO, [ Sungjin Kim ]; EVP, Won-taek Kim, Head of Strategic Marketing; Teutak Park, Head of Support Team Component division; Jung Won Lee, Head of Support Team, Optics and Communication Solution division; and VP [ Chong won Han ], Head of Support Team Package Solutions division. We will start with a presentation on our second quarter company level and divisional business results followed by market trends and outlook by product before taking your questions.

First, our second quarter results for year 2023. In Q2, our revenue was KRW 2,220.5 billion, which is approximately 10% increase Q-o-Q, but a roughly 10% decrease Y-o-Y. The details regarding revenue increase, decrease factors by division will be explained later on during the divisional results. Q2 operating profit was KRW 205.0 billion, which is an approximately 46% increase Q-o-Q, but around a 43% decrease Y-o-Y. Pretax profit in Q1 was KRW 145.7 billion and net profit was KRW 112.6 billion. Next in terms of financial. As of end of June 2023, total asset was KRW 11,186.6 billion, which is roughly 2% increase from the end of Q1. For the major financial indicators: liability to equity was 43%, a slight increase Q-o-Q and debt to equity was 19%, similar to Q1; equity ratio was 70%, a slight decrease Q-o-Q.

Next are the divisional results and future outlook. First, the Component division. The Component division's second quarter revenue was KRW 1,006.5 billion, which is roughly 22% increase Q-o-Q, but a 12% decrease Y-o-Y. IT application demand increased tied to the increase in smartphone shipments driven by launch of new Chinese smartphones and automotive industrial markets such as xEV and ADAS as well as servers remained solid driving revenue growth for the company across all applications, including IT, automotive and industrial. During Q3, the component market is expected to see a seasonal increase in IT market demand supported by new smartphone launches as well as continued growth in automotive demand. In response, SEMCO will focus on timely supply of ultra-small ultra-high capacitance MLCC for flagship smartphones and high reliability MLCC for automotive applications.

Next is the Optics & Communication Solution division. The division's second quarter revenue was KRW 776.6 billion, which is roughly 3% decrease Q-o-Q and a 0.3% decrease Y-o-Y. In Q2 even though supply of new flagship camera modules increased such as variable aperture and high pixel folded zoom camera modules for the Chinese OEMs, the low seasonality of the main customer resulted in a slight decrease in overall revenue Q-o-Q. On the other hand, automotive camera module revenue increased driven by growing supply to overseas customers. In Q3, key camera module customers in Korea and overseas have been demanding more differentiating camera module technology for their new flagships preparing to launch in the second half and we will focus on continuing to lead the market by unveiling differentiated products such as the newly designed variable aperture and folded zoom camera modules.

For automotive camera modules, advances in ADAS as well as autonomous driving is expected to keep market growing. Accordingly, we will focus on strengthening our growth potential by designing, getting designs in more models and diversifying the customer base. Lastly, for the Package Solution division. Q2 revenue was KRW 437.4 billion, which is a roughly 10% increase Q-o-Q, but an 18% decrease Y-o-Y. For BGA, substrate demand improved as some key OEMs used up their existing BGA component inventory to launch new models and overall impact of inventory adjustments eased. Supply of substrates for mobile AP, memory and ARM processors increased. For flip chip BGA even though the PC substrate revenue decreased, server and automotive high end substrate revenue increased.

In Q3 for the BGA market, the strategic customer and overseas OEMs are planning new model launches and we will focus on increasing substrates for mobile memory and 5G antenna. For flip chip BGA while demand for PC substrate is expected to remain soft, demand for server and network high end substrates is expected to continue growth. So we will focus on increasing supply of large size, high multilayer substrates for server and network equipment and also actively work on getting designed in for the next generation models.

That completes the presentation on our second quarter results. And now our Head of Strategic Marketing, Won-taek Kim, will talk about market trends and outlook by key product group.

[Won-Taek Kim, executive]

[Interpreted] Good afternoon. This is an Won-taek Kim, Head of Strategic Marketing at SEMCO. I would like to share the current update and outlook for MLCC, camera module and substrate markets. First, MLCC. During Q2, the MLCC market while overall set demand growth remained sluggish, MLCC purchasing demand increased Q-o-Q supported by lower component inventory levels. By application, automotive MLCC saw an increase in demand Q-o-Q driven by solid growth of xEVs and IT MLCC also saw demand growth around some Chinese smartphone and PC applications that had lower inventory levels. In Q3, MLCC market demand is expected to recover around actual demand given the seasonality of applications. By application, IT MLCC demand is expected to grow Q-o-Q driven by the launch of new smartphone models by major customers and automotive MLCC demand is also expected to continue growth in Q3 around xEV demand.

SEMCO will focus on increasing supply of small size, high capacitance MLCC for smartphones and also actively responding to mass production projects of key automotive customers scheduled for second half to aim on delivering higher than market revenue growth. At the same time, we will focus on building mid- to long-term revenue streams by breaking into future growth sectors such as factory automation, medical, robotics and solar energy; and building our business capabilities to actively respond to newly emerging demand such as high temperature, high voltage MLCC for generative AI servers. Next the camera modules. In Q2 overall set demand increased Q-o-Q driven by new smartphone models launched by global and Chinese OEMs. However, the effect of the main customer's flagship launch weakened in Q2 resulting in a slight decrease in camera module demand.

In Q3 while camera module market is expected to remain soft, the strategic customer's new foldable phone launch and the new smartphone launches scheduled by the global and Chinese OEMs combined with the solid automotive camera demand are expected to keep overall camera module demand similar to last quarter. SEMCO will focus on expanding supply of ultra slim cameras for the strategic customers' foldable smartphone and the foldable zoom cameras for the global and Chinese OEMs to further strengthen our position in the high end flagship smartphone camera market. For the automotive cameras, we will focus on growing demand for high pixel sensing cameras needed by the latest ADAS to drive business growth and to provide new experiences to customers.

Lastly, substrates. In Q2, BGA saw increase in component demand tied to launch of new smartphone models by Chinese OEMs and also a partial rebound in demand after a round of customer inventory adjustments. In flip chip BGA, overall market demand is slow due to weak PC demand and customer inventory adjustments, but demand remains solid for server and automotive substrates which underwent a significant switch in substrate form factors in terms of high multilayer and larger sizes. In Q3, BGA demand is expected to increase Q-o-Q driven by seasonal increase in smartphone demand, recovery of the memory market and in particular, launch of new models by key customers. Meanwhile for flip chip BGA market that are relevant to SEMCO while the PC substrate demand is likely to remain weak thanks to solid server and automotive demand, we expect overall flip chip BGA demand to be similar to Q2.

Accordingly, we will focus on timely supply of BGA for the customers' new smartphone launches and continue to increase substrates for the next generation ARM processors. For flip chip BGA while thoroughly preparing for the mass production of our new Vietnam plant, we will focus on increasing the share of high end flip chip BGA for growth applications such as high performance server and network and also automotive applications. Also we will focus on developing new markets such as AI and ADAS and developing new customers to support the mid- to long-term growth of our substrate business. Thank you.

[Operator]

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

[Ji-San Kim, analyst]

[Interpreted] I have 2 questions. The first question is about MLCC. Can you share with us the second quarter MLCC shipments, inventory levels, ASP trends and also your outlook for these data points in the third quarter? Second question is about the flip chip BGA. Even though there is overall soft demand from the PC side, SEMCO's flip chip BGA business seems to be faring better than expected. Can you give us some more color and background to your better than expected performance?

[Unknown Executive]

[Interpreted] To answer your first question about second quarter MLCC shipment inventory ASP as well as third quarter outlook. In second quarter especially around the Chinese smartphone OEMs, there was an increase in set shipment. Also the automotive and industrial market demand remained solid in second quarter and because of that, during second quarter, our shipments for MLCC increased across all applications as IT, automotive and industrial on a quarter-on-quarter basis. As a result of increased shipments, our inventory levels in terms of number of days decreased quarter-over-quarter, but our blended ASP decreased slightly mainly due to product mix.

In other words, due to the increase in the share of IT application. Our outlook for the third quarter is that given that the major auto -- we are expecting our volume of new designs in MLCC supply to the key automotive customers to increase in Q3 and also global smartphone OEMs are planning to launch flagships during third quarter. And so based on that, we're expecting that our MLCC shipment in third quarter would increase continuously quarter-over-quarter. And based on that, we expect our blended ASP to slightly improve based on better product mix in third quarter and our inventory days is expected to decrease in Q3.

[Won-Taek Kim, executive]

[Interpreted] To answer your second question about our flip chip BGA business. As you mentioned, we are also seeing soft demand on the PC set side and also there are impact of the inventory adjustments at the PC side of the market. And so on a full year basis, market demand for flip chip BGA for PC applications is expected to decline on a year-on-year basis. Despite that soft PC demand, as we have been communicating with the market, we have our high end flip chip BGA for server applications which completed customer certification second half of last year. That has started supply and has been supplying at meaningful scale starting this year and this has helped minimize the impact of the weak PC market in terms of our flip chip BGA business. Going forward, our flip chip BGA business strategy is to strengthen our flip chip BGA promotion as well as developing new customers around our high performance, high end products in non-PC applications such as server, network and automotive in order to actively drive the PC BGA revenue growth.

[Operator]

[Interpreted] The following question will be presented by Eoyeon Hwang from Nomura Securities.

[Eoyeon Hwang, analyst]

[Interpreted] I have 2 questions. The first question is about your MLCC utilization. Can you give us an update on your MLCC utilization in second quarter? And also do you expect some additional upside on your MLCC utilization in the second half given that overall outlook and expectations of an IT industry recovery in the second half has weakened versus what was expected in the start of the year? Second question is about your outlook second half of the camera module business. In the second half there are some new foldable phones that are planned to be launched and other domestic and overseas OEMs are planning new model launches for their smartphones. Given that, what is your outlook for the camera module business in the second half?

[Won-Taek Kim, executive]

[Interpreted] To answer your question about the MLCC utilization. In the second quarter, our MLCC utilization increased quarter-over-quarter as our shipments also increased Q-o-Q. Regarding our third quarter utilization, as you mentioned, at least versus what the market expected in the start of the year, overall annual demand expectations for key IT devices such as smartphones and PCs are being downward adjusted and so uncertainty still appears to remain.

That said, we think that the projections that are made by key institutions that the major IT set markets would be bottoming out in the first half and rebounding in the second half. That outlook still appears to remain valid. And so in addition to the automotive demand that we described before, even in the server market in the second half there are expectations of a set demand growth in server market given the switch over to the new processor and also demands moving over to DDR5. So based on those factors, we expect that across all applications, MLCC demand would be increasing in the second half versus first half and based on that, we expect our utilization also to gradually increase during second half.

[Unknown Executive]

[Interpreted] Your second question was about the second half camera module business outlook. As you know, we're also noticing that there is a shift of the center of gravity in the smartphone market to be 2 extremes, the high end and the low end. And as a result of that, we're actually seeing OEMs in the market have a stronger demand for camera modules specification upgrades as a key point of differentiating their flagship phones. So our focus #1 in the second half would be to stably supply the light in smaller camera modules for the new foldable smartphone that will be launched -- scheduled for launch in the second half and also to secure the variable aperture technology, which is for big sensors to implement higher picture quality based on our internal capabilities in key components such as lens and actuators. And also to commercialize the newly designed folded zoom camera modules that would deliver better performance and also smaller sizes in order to continue to drive the revenue growth of our camera module business in the second half.

[Operator]

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

[Giuni Lee, analyst]

I have 2, one on MLCC and another on camera module. First, on MLCC. While the business used to have an outside exposure to IT applications such as smartphones, now I believe the exposure to automotive has increased meaningfully. So I would like to ask if you expect this trend to continue going forward and would appreciate some more color on your MLCC end market diversification strategy. Second one is on camera module. Given the rapidly growing EV and autonomous driving markets, would like to know your strategy in automotive camera module business. [Foreign Language]

[Won-Taek Kim, executive]

[Interpreted] Well, to answer your question about the MLCC breakdown by application. If you look back at 2021, automotive MLCC accounted for a high single digit in terms of our revenue. But since then, we have continuously expanded our MLCC lineup, been able to win new customers and also we have been increasing our share of wallet of the major Tier 1 and EV customers. Thanks to that, we have been able to deliver higher than market revenue growth each year and so as of today, our share of automotive MLCC revenue in terms of our revenue share has increased by more than double versus 2021. In terms of application, we expect that automotive MLCC market will continue to record high growth given the increases expected in xEV and ADAS penetration.

And so we will focus on further strengthening our high end MLCC lineup such as the high temperature and high voltage MLCC to continue to drive our revenue. But at the same time, we will be focusing on new growth opportunities, especially in the industrial side such as AI servers, satellite Internet and robotics as well as solar energy where our existing capabilities such as our small size and high capacitance MLCC for IT applications and the high reliability MLCC lineup that we have for automotive applications could be leveraged to make us to claim markets first and also to increase our market share in these new growth areas. At the same time in terms of the IT application, our focus will be to strengthen our core and essential technology in materials and equipment to continue to increase our competitive advantage in the high end IT markets where technology is key.

[Unknown Executive]

[Interpreted] Your second question was about our automotive camera module strategy. In the automotive camera module side with the increase in scale of EVs and also the advances in automotive driving technology, we're noticing some key trends. One being the increase of number of cameras per vehicle. Before there used to be cameras for the front and the rear, but now you have side as well as dash cameras inside the vehicle. So there's number one, an increase in camera numbers per vehicle. Also we're seeing a continuous need for higher specification cameras such as high pixel cameras being used to enhance and improve the sensing precision on vehicles.

Relevant to these key trends in terms of SEMCO is that we have differentiated high reliability automotive specific camera technology that delivers consistent performance regardless of external environments. Also we have our module and lens technology that is necessary for implementing high pixel and high pixel quality that we have developed from our IT camera business. So we will be actively leveraging these capabilities to capture new markets and customer needs and also continue to build the scale of our camera module business by increasing supply of high pixel camera modules to key customers and diversifying our customer base among the conventional OEMs.

[Operator]

[Interpreted] The following question will be presented by Jong Wook Lee from Samsung Securities.

[Jong Wook Lee, analyst]

[Interpreted] I have 2 questions. The first question is about your CapEx plans. I think the IT industry demand is remaining sluggish. Considering that, does the company have any plans of changing its CapEx plan for this year? Second question is about your BGA revenue. It appears that your BGA revenue has bottomed out in Q1 and has been recovering. Do you think that this [ outward ] trend in your BGA revenue could continue in the second half?

[Tae-young Kim, executive]

[Interpreted] To answer your first question about our CapEx plans this year. We're actually currently adjusting some investment plans to take into account some of the sluggish market situation. And so as we stand now, it appears that our CapEx plan would decrease versus what was originally planned at the start of this year. In terms of our investment strategy, we will continue to focus on the high growth areas such as automotive, server and AI and also make our investment execution in line with the market situation, including changes in customer demand in order to improve the efficiency of our investment.

[Unknown Executive]

[Interpreted] To answer your second question about whether our increase in BGA revenue would continue in the second half. As you mentioned, the BGA revenue was affected by the component inventory adjustments of the set OEMs such as smartphone and PC OEMs and so that resulted in the revenue bottoming in first quarter this year. In second quarter, the major customers prepared to launch new models scheduled for second half and also the impact of component inventory adjustment somewhat eased in second quarter. Also there was an improvement in substrate demand from ARM processor, AP and memory applications.

As a result of that, our BGA revenue increased in the second quarter. Even though demand visibility is still limited, we do expect that in the second half BGA demand is likely to increase versus first half driven by number one, the decreasing impact of the set inventory adjustments and also given the new model launches that are scheduled by our key customers. And so we are currently focused on thoroughly checking our production capacity and manufacturing capabilities to capture customer demand if and when a rebound materializes in the second half and we will remain focused on improving our BGA business performance by preparing thoroughly.

[Operator]

[Interpreted] The following question will be presented by Sung Kyu Kim from Daiwa Securities.

[S. K. Kim, analyst]

[Interpreted] I have 2 questions. The first question is about your business plans on the Electronic Components business. I recall that during the last earnings conference call, the company emphasized the growth potential of its Electronic Components business. Recently I've read in the media that you've started the mass production of your automotive power inductors. Given that, can you give us a bit more detail and color on how you plan to increase and expand your Electronics Components business?

Second question is about your third quarter guidance. When we look at the business outlook for third quarter, there are mixed signals. On one side, there's still concern of a global economic slowdown and sluggish downstream demand; but on the other hand, many are looking forward to a seasonal upturn of the industry demand. So also I think this reflects in the different guidance you have given by product group. And so considering all of these factors, what is your outlook and guidance for third quarter?

[Won-Taek Kim, executive]

[Interpreted] To answer your question about our Electronic Components business. In Q2, our Electronics Component business recorded another quarter-over-quarter revenue increase. In the second half, we will focus on diversifying our customers and also applications to keep this revenue growth momentum going. In the case of inductors, the focus is to get designed in various product groups of global IT customers to drive revenue growth in the second half.

In the case of automotive inductors, which is what you asked of, we have prepared an inductor lineup with better reliability and heat resistance characteristics. We're preparing mass production targeting global automotive customers. In the case of tantalum capacitors, our focus is to use SEMCO's proprietary process technology that delivers higher capacitance and higher reliability to diversify applications by adding on for example mobile and wearable applications in addition to the PC application and we plan to start supply to customers in the second half. And so overall, we aim to achieve double-digit top line growth in the second half versus first half in our Electronic Components business.

[Unknown Executive]

[Interpreted] To answer your second question about third quarter guidance. Looking into third quarter, as you mentioned, there is various external uncertainties continuing in the business environment including U.S.-China tension and the concern over global economic slowdown and such uncertainty appears to be delaying the recovery of demand in certain product groups. However, when we look at MLCC, given that the Chinese customers have been working through their inventory since second half of last year and also given some of the seasonal upside that's expected in the second half, we expect MLCC supply to increase. Also for package substrates and camera modules even though some markets like PCs still have some downside pressure, we actually see a possibility of slight quarter-on-quarter growth in the third quarter.

In the case of growth sectors, including automotive and servers, we will actively seek to increase supply of high end products including automotive MLCC, automotive power inductors as well as autonomous driving high pixel camera modules as well as the large area high multilayer package substrates for server and automotive applications to drive not only top line growth, but also profitability improvement and to secure a foundation for sustainable mid- and long-term growth for the company. Going forward, SEMCO will remain committed to strengthening its technology competitiveness by securing core and basic technologies and launching differentiating new products and internally raising efficiency through productivity gains, consistent quality and cost saving with the aim of delivering business performance that the market expects.

[Tae-young Kim, executive]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]