Samsung Electro-Mechanics Co Ltd

KRX:009150

Earnings Call Analysis

Samsung Electro-Mechanics Reports Strong Yearly Revenue Growth and Positive Q3 Outlook

In Q2, Samsung Electro-Mechanics generated KRW 2,580.1 billion in revenue, reflecting a 16% year-over-year rise despite a 2% quarterly decline. Operating profit improved by 15% QoQ, reaching KRW 208.1 billion. The Component division saw a 13% QoQ revenue increase, driven by rising IT and automotive demand. Looking ahead, Q3 is expected to benefit from seasonal demand, with projections for MLCCs to grow due to smartphone launches and ongoing automotive needs. The company anticipates at least a double-digit revenue growth in its automotive MLCC segment and a gradual recovery in camera module demand, despite challenges from stagnant EV market growth.

Strong Year-on-Year Performance Amidst Seasonal Challenges

Samsung Electro-Mechanics (SEMCO) reported its Q2 2024 revenue at KRW 2,580.1 billion, marking a remarkable 16% increase year-on-year (Y-o-Y), although it reflected a 2% decrease compared to the previous quarter (Q-o-Q). The operational profits also showed a slight improvement with an operating profit of KRW 208.1 billion, up 15% Q-o-Q and 2% Y-o-Y. This indicates a resilience in the company's core business despite seasonal fluctuations and market challenges.

Divided Success: Component Division Leading the Charge

The Component division was a standout performer, achieving a Q2 revenue of KRW 1,160.3 billion, which represented a 15% increase Y-o-Y and a 13% ramp-up Q-o-Q. This success was attributed to solid demand across IT and industrial MLCC products, particularly in automotive applications, which benefited from the rising integration of advanced electronic content like ADAS in vehicles. Looking ahead, SEMCO expects continued growth in Q3, buoyed by seasonal demands and the anticipated launch of new smartphones.

Optics and Communication Facing Headwinds

Conversely, the Optics & Communication Solution division reported a revenue of KRW 920.7 billion, reflecting a significant 22% decrease Q-o-Q, although it was a 19% increase Y-o-Y. The downturn Q-o-Q was attributed to lower sales in camera modules due to the seasonality of flagship phone launches. However, the company anticipates a recovery in Q3, driven by the launch of high-spec camera modules as competitive mobile manufacturers opt for higher performance and advanced optics in their devices.

Solid Gains in Package Solutions Amidst a Growing Market

The Package Solution division also reported robust growth, with Q2 revenues reaching KRW 499.1 billion, showing a notable 17% increase Q-o-Q and a 14% growth Y-o-Y. This increase was primarily due to high demand for substrates used in ARM processors and mobile memory applications. For Q3, SEMCO projects that the package substrate market will benefit from growing opportunities related to AI PCs and upcoming smartphone product launches.

Strategic Views Highlighting Growth Potential

In terms of future guidance, SEMCO’s executives expressed a confident outlook, expecting Q3 revenue enhancement driven by recovering demand from smartphones, PCs, and servers. In particular, MLCC revenue is projected to rise Q-o-Q due to the anticipated seasonal demand peak. They also noted that high-end products will play a critical role in capturing market share, particularly as manufacturers increasingly incorporate advanced features in consumer electronics.

Automotive Sector Anticipating Continued Growth

Despite a slowing growth rate in the electric vehicle (EV) market, SEMCO's automotive MLCC segment continues to thrive, forecasting at least double-digit sales growth in H2 2024. This is underpinned by the increasing electronic content demand in traditional vehicles as well as hybrids, helping to stabilize the automotive segment amid fluctuating EV trends.

Challenges Remain but Prospects are Bright

While SEMCO faces challenges, such as slow demand recovery in the EV sector and oversupply in the flip chip BGA market, its strategic focus on high-end technology and product development indicates a proactive approach to navigate these hurdles. Investments in capacity expansion, particularly in Vietnam for flip chip BGA production, are expected to enhance margins through improved operational efficiencies and product differentiation.

Conclusion: A Balanced View with Growth Catalysts Ahead

In conclusion, while SEMCO faces short-term challenges primarily due to seasonal impacts and external market pressures, its strategic initiatives in high-margin sectors, along with projected recovery in demand across multiple segments (notably automotive and AI-related applications), position the company well for continued success in the near future. Investors should monitor the execution of these strategies closely, particularly in the context of upcoming technological advancements and seasonal dynamics in the IT and automotive industries.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning and good afternoon. Thank you very much for attending the conference call of Samsung Electro-Mechanics.

We will first start with the presentation by the company followed by a Q&A session. [Operator Instructions]

Now we will start the 2024 second quarter earnings presentation by Samsung Electro-Mechanics.

[Tae-young Kim, executive]

Good afternoon. This is Taiyoung Kim, Head of IR & Planning Team at Samsung Electro-Mechanics. Thank you for joining our 2024 Q2 earnings conference call.

On today's call, I am joined by CFO, Sung Jin Kim; EVP, Won-taek Kim, Head of Strategic Marketing; VP [ Jun-taek Park ], Head of Support Team, Component division; Kim Sungjin, Head of Support Team, Optics & Communication Solution division; and VP, Hong Jin Kim, Head of Support team of the Package Solution 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 we take your questions.

First, our 2024 Q2 results. In Q2, our revenue was KRW 2,580.1 billion, which is approximately a 2% decrease Q-o-Q, but a roughly 16% increase Y-o-Y. The details regarding our revenue increase/decrease factors by division will be explained later during the divisional results.

Q2 operating profit was KRW 208.1 billion, which is about 15% increase Q-o-Q and around a 2% increase Y-o-Y. Pre-tax profit in Q2 was KRW 231.1 billion; net profit KRW 172.4 billion.

Next, in terms of the financials, as of end of Q2, total assets was KRW 12,744.5 billion, a roughly 5% Q-o-Q increase. Liability to equity was 50%. Debt to equity was 23%, which is a slight increase Q-o-Q. Equity ratio in Q2 was 67%, similar to the previous quarter.

Next are the divisional results and future outlook. First, we will look at the Component division. The Component division's Q2 revenue was KRW 1,160.3 billion, which is roughly 13% increase Q-o-Q and about 15% increase Y-o-Y. In Q2, IT and industrial MLCC revenue for PC, TV, home appliance and server increased, while automotive sales also increased, supported by increased electronic content such as ADAS and increased sales of hybrid vehicles, resulting in higher revenue across all applications of IT, industrial and automotive.

Q3 Component market is expected to see seasonal demand growth, including launch of new smartphones combined with continued growth of industrial and automotive demand. Accordingly, we will focus on timely support of high-end MLCCs such as small sized, high-capacitance for the IT applications and specialty MLCCs and increasing sales in growing industrial markets, including AI servers.

In Q3, we will also prepare pilot mass production of automotive MLCCs in the Philippines and pursue diversification of our automotive customer base.

Next is the Optics & Communication Solution division. The division's Q2 revenue was KRW 920.7 billion, which is roughly 22% decrease Q-o-Q, but a 19% increase Y-o-Y. In Q2 for IT camera modules, supply of high-spec modules, such as high pixel super macro modules for Chinese OEMs and high-performance folded zoom for overseas customers increased.

However, due to negative seasonality, supply of camera modules for major customers' flagship phone decreased, and automotive camera module sales also decreased due to weak EV demand. As a result, the division's Q2 revenue decreased on a Q-o-Q basis.

In Q3, the IT camera module market is expected to see wider adoption of high-spec camera modules, such as folded zoom among the new flagship models to be launched by key customers. Accordingly, we will emphasize our technology differentiation, such as high pixel, slim and super macro modules and strengthen our product lineup for each customer.

For automotive camera modules, we will focus on preparing mass production of all-season, all-weather automotive camera modules to meet demands of advancing autonomous driving technology and also focus on breaking into conventional auto OEM accounts.

Lastly, the Package Solution division. Q2 revenue was KRW 499.1 billion, which is roughly 17% increase Q-o-Q and 14% increase Y-o-Y. For BGA supply of substrates for ARM processors and smartphone AP and memory increased. For flip chip BGA, supply increased mainly around server and automotive substrates. Stronger demand for high-end substrates for mobile and servers drove the Q-o-Q revenue growth.

In Q3, package substrate market is expected to benefit from demand growth related with new AI PCs and smartphone launches, and we will focus on increasing supply of BGA substrates in demand growing applications, such as ARM processors and memory substrates.

The flip chip BGA market is expected to see greater demand for large-sized, high multilayer substrates, and we will focus on increasing supply for server and network equipment of key overseas customers such as AMD.

That completes the presentation on '24 second quarter results and Won-taek Kim, our Head of Strategic Marketing, will talk about market trends and outlook by our key product groups.

[Won-Taek Kim, executive]

Good afternoon. This is Won-taek Kim, Head of Strategic Marketing. I would like to share the current update and outlook for MLCC, camera module and substrate markets, respectively.

First, let's start with MLCC. In Q2, MLCC demand increased across all applications, including IT, industrial and automotive. IT MLCC demand slightly increased Q-o-Q, thanks to increased demand from PC and display applications, despite weaker demand from smartphones, particularly the flagship segment.

Industrial MLCC demand also grew Q-o-Q with acceleration of AI server penetration and automotive MLCC demand also increased Q-o-Q, supported by continued increase in vehicle electronic content. Q3 MLCC demand is expected to benefit from peak seasonality of major applications and maintain a growth momentum.

By application, IT MLCC demand is expected to continue growth driven by the new smartphone launch by the North American customer and new platform-based on-device AI PCs.

In industrial, the high-capacitance, high-voltage MLCC demand is expected to gradually increase, supported by AI server and industrial power equipment demand.

In automotive, even though EV growth rates are stagnant, MLCC demand is expected to maintain growth, driven by increased electronics in the form of ADAS and infotainment in the internal combustion engine vehicles, including hybrid cars.

Accordingly, we will focus on capturing growing demand for IT of high-capacitance MLCC during IT peak season and actively pursuing design in -- of high-end products such as small sized, high-capacitance MLCC for high-density mounting and 3 terminal specialty MLCC.

For industrial, we will focus on increasing volume of 105-degree Celsius and above high temperature and 100 microfarad and above ultra high-capacitance MLCC for AI servers and high-voltage MLCCs for the 48-volt power equipment, which is adopting -- being adopted more for better power efficiency.

For automotive, we will focus on expanding business in China and on qualification of new MLCCs such as for ADAS and powertrain and on new high-capacitance, high-voltage MLCC in order to add new customers for continued growth.

Next is the camera module business. In Q2, IT camera demand decreased Q-o-Q as sales of flagship smartphones launched in Q1 seasonally decreased. But automotive camera demand was also slightly affected by the slowdown of the global EV growth outside China, resulting in a slight decrease in demand for our camera modules overall.

In Q3, we expect to see the effect of the [ key ] customers' foldable launch and also wider adoption of high-spec camera modules, such as the folded zoom by Chinese OEMs. However, given that the Chinese smartphone growth is mainly around the mass segment, growth in demand relevant to SEMCO is expected to be limited.

However, automotive camera module demand is also to be -- expected to be similar to Q2 as the global EV growth remains stagnant. Accordingly, we will focus on strengthening our high-end lineup targeting flagship phones, including ultra slim cameras for foldable phones, lens [ lead ] folded zoom and super macro. We will also focus on increasing folded zoom adoption in mass segment to drive continuous revenue growth.

In automotive cameras, our focus will be on increasing collaboration with autonomous driving platform companies and starting mass production of [ heating ] cameras were always on sensing within the year to further our global technology leadership in EV and autonomous driving segment.

Lastly, the substrate business. Q2 BGA demand increased slightly, thanks to launch of the new ARM processor-based products and stronger demand from mobile memory and AP applications. Flip chip BGA demand also slightly increased Q-o-Q, supported by PC, AI accelerator and GPU demand growth.

Q3 BGA demand is expected to benefit from continued solid demand related with ARM processors and new product demand for premium APs. However, demand for certain mobile segments, such as mid-end AP is likely to be stagnant, and we expect demand relevant to our BGA business to be similar to Q2.

Flip chip BGA demand is expected to gradually recover in Q3, driven by seasonal recovery of PC demand, including AI PCs and continued growth of server CPU and AI accelerator-related demand such as CSPs continuing their AI server investments.

Accordingly, we will focus on increasing our BGA supply capabilities for ARM CPU and premium APs and continue to strengthen our market dominance by quickly securing key technologies targeting customers' future products.

For flip chip BGA, we plan to follow up on ramp-up of large size, high multilayer substrates for server CPUs in Q2 by mass producing server-class AI substrates in the second half to continue the expansion of our high-end offering. And for AI accelerators, we will target major cloud service providers planning to use our own AI chips to further diversify our customer base. Thank you.

Now, we will start the Q&A session. If you have any questions, please ask questions as the operator has instructed.

[Operator]

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

[S. K. Kim, analyst]

[Interpreted] I have 2 questions. First question is, can you share with us the MLCC shipment inventory level and ASP, second quarter actual and the third quarter guidance?

Second question is actually related with the growth in AI-related applications in markets that you had emphasized during the last call, and we do actually see a visible growth in AI-related servers and PCs. In that context, can you share with us a bit more detail of the constant growth in MLCC and package substrates that you are seeing related with this growth in AI and how you strategically plan to increase revenue, taking advantage of these opportunities?

[Unknown Executive]

[Interpreted] I'll answer your first question, which was about our second quarter MLCC shipment inventory, ASP actual and also third quarter guidance. In Q2, our MLCC shipments increased across all applications, including double-digit shipment growth in industrial and automotive MLCC.

In the industrial MLCC, the major driver of shipment growth were server MLCC demand increasing. For automotive, it was the increase in ADAS and also increase in sales of hybrid vehicles that drove MLCC shipment growth.

For the IT MLCC, the major drivers of shipment growth was the solid demand we continue to see from overseas smartphone customers and also the PC market.

In terms of inventory number of days, second quarter inventory days slightly decreased as a result of increased shipments. Blended ASP in Q2 improved -- increased mainly due to product mix improvements as we saw increased share of high ASP industrial MLCCs, including the high-temperature MLCCs for server applications and also increased share of ultra high-capacitance MLCCs for IT applications.

Regarding third quarter outlook, we are expecting MLCC revenue to increase on a Q-o-Q basis in Q3 as we expect to see some seasonal demand growth in Q3 as well as the fact that the global smartphone customers are planning to launch new products during Q3 and also the automotive and server-related demand is expected to continue its growth.

Your second question was about the implications of the growth in AI PC and servers on our MLCC and package substrate business and our strategy for increasing our revenue. First of all, in terms of AI PCs, they use higher-performance chipsets and also have more memory content, which causes the need to improve noise that occurs in the high-frequency area. In order to do this, AI PCs would need to use low ESL 3 terminal MLCCs.

Also because the higher number of GPUs and NPUs that are adopted and also because of the increase of power consumption caused by the GPUs and NPUs, MLCC content increases in AI PCs by at least a double-digit versus regular PC.

In the case of AI servers, the power consumption increases exponentially due to the increase in larger number of GPUs that are used, which is expected to cause a significant increase in MLCC capacitance and quantity per box versus regular servers, especially around the MLCCs with small-size, ultra-high-capacitance and high-temperature characteristics.

In terms of the package substrates, in the case of processor packaging substrates used for AI PCs and servers, there is a growing need for higher specifications such as technology to scale down the circuits and bump pitches to cope with the increased I/Os that occur in the AI PCs and servers. And also, there is growing need for package technology to embed passive components which is necessary to stabilize power supply even at the higher power consumption that AI PCs and servers run at.

SEMCO has -- is preemptively responding to customer needs by leveraging its passive component embedding capabilities and by developing scaling down technology. Regarding our strategy to increase our revenue, we will focus on strengthening our promotion to PC server OEMs and the processor customers to continuously increase AI-related revenue of MLCC and package substrates and also keep the strong growth momentum going on to next year.

[Operator]

[Interpreted] The next question will be presented by Hyung Wou Park from SK Securities.

[Hyung Wou Park, analyst]

[Interpreted] I have 2 questions. First question is about the flip chip BGA business. Even though on one side, the market is expecting AI demand to improve the package substrate business situation in the second half. Personally, I am still concerned about the continuing oversupply of substrates. Given that I would like to hear what the company expects. So it's second half outlook for its flip chip BGA business and also its strategy.

Second question is about your camera module business. As you mentioned, many of the global mobile OEMs are preparing to launch flagships in the second half, given that, what is your outlook for your mobile camera module business in the second half?

[Unknown Executive]

[Interpreted] To answer your first question about the flip chip BGA situation. As you've mentioned, currently, there is a continuing oversupply in the overall flip chip BGA market. However, positively, the PC and server, the downstream demand is continuing to gradually improve.

Also within the flip chip BGA market, if you look at the high multilayer large-sized package substrates for applications such as server and AI applications, the technology entry barrier is quite high, and that's why only a small number of companies currently are supplying in this space, including us. And we believe that the supply and demand situation of the server and AI flip to BGA segment where we have been continuing to expand is relatively better off.

Using the technology that we have built over several years and also our track record of mass producing server products, SEMCO continues to expand the supply of substrates for server applications to global customers, and we are, at the same time, preparing the mass production of substrates, targeting AI accelerators of various CSP companies.

Going forward, SEMCO will continue to expand supply of high-end package substrates for server and AI applications by aligning with areas where customer demand is growing.

Your second question was about the second half outlook of our mobile camera module business. As you know, our focus within the camera modules is the flagship camera module segment. And we expect not only Korean but also overseas customers to continue to ask us for specialized camera module solutions to differentiate their products, such as the high pixel high-performance folded zoom cameras as well as the slim cameras used on the strategic customers' foldable model.

Therefore, we will focus on developing differentiating camera modules for flagship, leveraging our internalized lens and actuator technology such as a new structure folded zoom or even better pixel, super macro and slim characteristics to further raise our product competitiveness.

[Operator]

[Interpreted] The next question will be presented by Jay Kwon from JPMorgan.

[H. Kwon, analyst]

I have 2, one each for MLCC and substrate. On your MLCC operation, you mentioned MLCC utilization rate was about 80% in the last quarter, it looks like there was a recovery also in the second quarter. Q3 could be better given better outlook ahead. Can you elaborate your future utilization plan? And also what's the consequent capacity expansion plan, please?

Second, the company has begun Vietnam flip chip BGA alignment production recently in first half. What's the progress so far? I was curious how would you assess the cost structure given a fixed cost increase burden?

[Unknown Executive]

[Interpreted] To answer your first question about our MLCC utilization and future capacity plans, as you mentioned, our MLCC utilization has been continuing to increase since fourth quarter of last year, together with also increased shipments. Even in Q3, IT applications are expected to show seasonal demand growth and industrial and automotive market demand is expected to remain solid. So in Q3, shipments and utilization are both expected to continue this trending up.

Given the positive momentum in the business environment and also the mid to long-term growth expected from industrial and automotive markets, SEMCO is planning to continuously expand capacity in line with demand growth.

Your second question was an update on our Vietnam package plant operation. As we mentioned during the last conference call, the Vietnam new plant has started to contribute to revenue from Q2 and more products continue to pass qualification for supply to key customers. With the start of the Vietnam plant operation, depreciation has increased, but utilization is expected to improve in Vietnam as more products complete customer qualifications.

Also, the focus that we have in Vietnam on the higher-margin, high-end products would be able to make up for a large part of the increased depreciation, resulting in limited bottom line impact for the company. Going forward, our focus for the Vietnam plant is to carry out qualifications and mass production ramp up smoothly and to positively contribute to the flip chip BGA business performance in the second half.

[Operator]

[Interpreted] The next question will be presented by [ Sunghyun Yoon Bak ] from Korea Investment & Securities.

[Unknown Analyst]

[Interpreted] I have 2 questions, both related with the fact that the growth of the EV market -- the growth of -- growth rate of the EV market continues to slow down. On one hand, if we look at your automotive MLCC business, despite the slowdown of the EV growth rate, your automotive MLCC continues to grow. Can we expect this growth to continue in the second half?

Second question is about the automotive camera module market, which would also be impacted by the slowdown of the EV demand growth. Can you share with us some of the current update on your automotive camera module business and second half outlook?

[Unknown Executive]

[Interpreted] To answer your first question, which was about the automotive MLCC business. As you mentioned, the growth rate of the EV market itself on a Y-o-Y basis has slowed down versus last year. But still, EV market is growing at double-digit rates. Also, if we look at the automotive MLCC market, the market inventory of automotive MLCC has improved on a Y-o-Y basis. And given these 2 factors, the automotive MLCC market is expected to continue to grow.

So SEMCO has been driving our MLCC -- automotive MLCC revenue growth by leveraging not only the growth of the automotive MLCC market but also by diversifying our customer base and also increasing revenue from our existing customers. That's why in Q2, our automotive MLCC revenue outgrew the market growth rates.

Looking towards the second half, we are expecting to see at least double-digit top line growth versus first half, and we will focus on increasing revenue by increasing the high temperature, high voltage lineup and diversifying our global production network to become even more competitive.

[Interpreted] Your second question was about the automotive camera module business, current update and second half outlook. In Q2, the automotive camera module revenue slightly decreased on a Q-o-Q basis due to the slowdown in EV demand. However, on a Y-o-Y basis, it continues to maintain a revenue growth trend.

In the second half, demand recovery is expected to be slow, but we are aiming to deliver at least double-digit growth on a full year basis by newly breaking into Korean auto OEM accounts and also mass producing all-weather, high-reliability camera modules for key customers.

Now going forward, demand for high-performance camera modules is expected to continuously grow, given that there are -- the advances of ADAS technology would make not only the EV makers but also conventional auto OEMs to require higher performance camera modules, such as the high reliability, high pixel sensing cameras. Therefore, we will continue to expand our automotive camera module business by strengthening our automotive specialized solution lineup and also diversifying our customer base.

[Operator]

[Interpreted] [Operator Instructions] The next question will be presented by Woon Ho Kim from IBK Investments & Securities.

[Woon Ho Kim, analyst]

[Interpreted] My question is about guidance of your business overall in third quarter. I think a consistent message that we've been getting during this call is that you're expecting better business performance in Q3, and that does make sense given the seasonality of the IT industry in Q3 and also the expected continued growth of AI server-related demand and also opportunities presented by PC and smartphone downstream markets. So in that context, can you give us a bit more color of the business outlook that you have for Q3?

[Unknown Executive]

[Interpreted] To answer your question first by recapping Q2, in Q2, due to decrease of the effects from the new smartphone launch by the strategic customer, there was a decrease in related product revenues such as camera modules. So overall, on a Q-o-Q basis, the company-wide revenue decreased in second quarter.

But in terms of operating profit, actually, there was an improvement in both Q-o-Q and Y-o-Y basis in Q2, thanks to the increase in AI device-related demand, such -- driven by the increased growth of AI server demand and the launch of new AI servers and also the increase in demand for auto-related products as the electronic content continues to increase in automotive and also the demand for high-voltage MLCC, large-area, high multilayer package substrates increased from the automotive and industrial applications. And so we were able to record an increase in operating profit at company-wide level on a Q-o-Q and a Y-o-Y basis.

You've asked about the third quarter guidance. And in third quarter, while EV growth rate is likely to remain sluggish, key applications, including smartphone, PC, server are likely to see demand recover. And AI growth would drive greater demand for high-end components, and this is expected to drive recovery of the overall component industry in Q3. If we look at MLCCs, the AI servers require significantly more MLCC quantities and capacitance versus regular servers.

For automotive MLCC, MLCC content per vehicle is increasing for not only electronic vehicles, but also other conventional vehicles and hybrid vehicles. We expect, therefore, demand for high temperature, high voltage and ultra-high-capacitance high-end MLCC to continue to grow from automotive applications.

In the case of package substrates, demand for large area, high multilayer and high-end substrates is expected to grow as AI server and network equipment require finer pitch sizes and also embedded passive components.

Accordingly, we will focus on delivering solid business performance by actively increasing the lineup of our high-end products, including MLCC for AI servers and automotive and also the high -- the large area, high multilayer package substrate. We will also focus on increasing product qualifications and actively increasing supply to customers. At the same time, we will do our best to minimize volatility in our overall business results by carefully monitoring external business environments, including international relations and trade disputes as well as downstream industries, such as smartphone, PC and automotive and by implementing appropriate response plan.

[Operator]

[Interpreted] [Operator Instructions] Now, this completes our second quarter earnings 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.]