Samsung Electro-Mechanics Co Ltd

KRX:009150

Earnings Call Transcript 2023-Q3

[Tae-young Kim, executive]

Good morning. This is Taiyoung Kim, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining our 2023 Third Quarter Earnings Conference Call.

On today's call, I am joined by our CFO, Sungjin Kim; EVP, Won-Taek Kim, who is Head of Strategic Marketing; [ Jun-taek ] Park, Head of Support Team, Components division; Jung Won Lee, Head of the Support Team, Optics & Communication Solutions division; and VP [ Jeong Hoon Ahn ], Head of Support Team, Package Solutions division.

We will start with a presentation on our third quarter company level and divisional business results, followed by market trends and outlook by product before taking your questions.

First, our 2023 third quarter results. In third quarter, our revenue was KRW 2,368.9 billion, which is approximately 6% increase Q-o-Q, but roughly 1% decrease Y-o-Y. The details regarding revenue increase/decrease factors by division will be explained later on during the divisional results. Third quarter operating profit was KRW 184 billion, which is approximately 10% decrease Q-o-Q and around 41% decrease Y-o-Y. Pretax profit in Q3 was KRW 191.8 billion, net profit KRW 155.5 billion.

Next, in terms of financial, as of end of September 2023, total asset was KRW 11,496.1 billion, which is roughly a 3% increase from end of Q2. For major financial indicators, liability-to-equity was 43% similar Q-o-Q; debt-to-equity was 18%, which is a slight decrease Q-o-Q; and equity ratio was 70%, similar to Q2.

Next are the divisional results and future outlook. First, the Component division. The Component division's Q3 revenue was KRW 1,959 billion, which is roughly a 9% increase Q-o-Q and an 18% increase Y-o-Y. Global new smartphone launches and other seasonality increased demand for IT MLCC and solid demand continued for xEV, ADAS and servers, leading to increase in industrial and automotive MLCC supply.

Overall, we saw increase in revenue across all applications including IT, industrial and automotive. In Q4, Component market demand is expected to slow down due to continued market uncertainties and year-end inventory adjustments. We will focus on capturing high-end opportunities, such as small size, high-capacitant MLCCs for IT applications; and on increasing supply of high-reliability MLCCs, including high-temperature, high-voltage products, particularly to xEV customers.

Next is the Optics & Communication Solutions division. The division's Q3 revenue was KRW 825.4 billion, a roughly 6% increase Q-o-Q, but an 8% decrease Y-o-Y. In Q3, our supply of camera modules for foldable phones increased to the strategic customer and Chinese customers and our supply of differentiating products such as high-spec triple camera modules to other overseas customers increased scale -- reached scale. This led to a Q-o-Q increase in revenue.

In Q4, while IT camera modules are expected to see soft demand due to seasonality, we will focus on offsetting this by adding supply of camera modules for flagship phones such as high pixel folded zoom. Also advances in autonomous driving technology is calling for higher pixel camera modules and automobiles, and we plan to increase supply of high pixel modules such as the 5 meg and diversify our automotive customer base.

Lastly, for the Packaged Solution division. Q3 revenue was KRW 439.6 billion, which is roughly a 1% increase Q-o-Q, but a 20% decrease Y-o-Y. For BGA supply of substrates for 5G antennas and mobile memory increased with the launch of new smartphones by major customers. For flip chip BGA, while PC-related substrate revenue decreased due to continued weak PC demand, server substrate revenue increased.

In Q4, our BGA demand is expected to decrease slightly Q-o-Q due to year-end seasonality, but we will focus on actively increasing supply around applications with strong demand growth such as ARM processors. Also for flip chip BGA, while PC substrate demand is likely to remain stagnant, demand for high-end package substrates for servers and network equipment is expected to remain solid and we will focus on developing differentiated products and increasing supply to new customers in this area.

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

[Won-Taek Kim, executive]

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

First, let's look at the MLCC market. In third quarter, demand slightly increased around applications where MLCC market inventory had been consumed more by application, while IT MLCC demand increased Q-o-Q due to seasonal demand increase around certain set products such as smartphones and PCs. The size of demand increase was relatively modest. For automotive applications, even though xEV growth rate has slowed down somewhat versus the start of the year, demand still remains relatively solid and MLCC demand continued its upward trend.

In terms of fourth quarter MLCC market outlook, first, for IT MLCCs, even with the full effect of North American mobile customers' new model launch, it appears difficult to expect a Q-o-Q demand increase for IT MLCCs due to weak consumer sentiment and year-end inventory adjustments. For automotive MLCC, while automotive set demand remains solid and the share of xEV is likely to grow, demand is expected to temporarily slow down as certain customers place priority on year-end inventory consumption.

Given such market outlook, we will actually capture demand for the small size, high-capacitant IT MLCC in connection with new smartphones launched by key customers. And for automotive MLCCs, focus on winning new projects with U.S. and European customers and increasing sales to Chinese xEV customers around large-sized high ASP products. Also, we will focus on winning new contracts for the next year, including ultra-high capacitance MLCC for ADAS.

Furthermore, we will continue on -- continue to focus on expanding supply to high-end products such as high-temperature, ultra-high capacitance products for new platforms targeting industrial power equipment and servers, while also continuing to develop new growth markets, including solar energy, AI servers and satellite Internet.

Next is the camera module market. In Q3, camera module demand increased slightly Q-o-Q, thanks to the new flagship models launched by the strategic customer and global customers and the increase of mass production models by Chinese customers in the second half. In Q4, while major customer smartphone demand is expected to decrease Q-o-Q due to seasonality, some of the decrease is likely to be offset by the strategic customer demand to produce its new smartphone scheduled for launch in early 2024. Going forward, we will continue to concentrate on attacking the high-end market, in line with the trend of spec upgrades such as high pixel, big sensors and aperture wide cameras and the high-power folded zoom for telescopic cameras.

In automotive cameras, advances in ADAS has increased demand for high pixel sensing cameras such as 5 meg or 8 meg and we will focus on strengthening our high-precision, high-reliability timer development and manufacturing capabilities to be the first in next-generation production and gain the upper hand in design and competition. Also, in addition to our existing global xEV customers, we will focus on diversifying our customer base by actively pursuing new projects from conventional auto OEMs.

Lastly is the substrates market. In Q3, BGA demand increased Q-o-Q, mainly around the 5G antenna and mobile memory substrates, thanks to the launch of new models by major customers and seasonal increase in demand. For flip chip BGA, despite the seasonality of downstream markets such as PC and servers, substrate demand slightly decreased Q-o-Q due to customers' inventory adjustment of the PC CPU substrates.

Fourth quarter BGA demand is expected to slightly decrease Q-o-Q due to year-end inventory adjustments of key customers despite the launch of new smartphones and gradual recovery of the memory market. The flip chip BGA market is expected to maintain solid demand from servers and automotive applications. However, due to year-end inventory adjustments continuing by key customers, especially PCs, overall demand is expected to slightly decrease versus third quarter.

Accordingly, we will focus on timely qualification and supply increase of BGA for smartphones and APs -- smartphone APs and memory and strengthen co-development to work with key customers based on technology leadership, such as IC and passive component-embedded substrates to continuously expand new applications and customer base.

For flip chip BGA, we will actively focus on winning new orders and diversifying customers around high-performance server and network substrates, expected to deliver mid- to long-term growth as well as the automotive segment, where xEV and autonomous driving continues to grow. Also, we will continue to develop new applications such as AI accelerators and new customers to build the foundation for mid- to long-term growth of the substrate business.

[Operator]

[Interpreted] The first question will be presented by Kangho Park from Daishin Securities.

[John Park, analyst]

[Interpreted] My first question is an MLCC question. Can you share with us some of the key data points for third quarter, such as your shipments, inventory and ASP for Q3? Also, can you give us some guidance on key data points for MLCC fourth quarter given the uncertainties that we are expecting in the downstream industry?

Second question is a flip chip BGA question. As you know, the PC flip chip BGA is still quite soft, but you have been rapidly increasing your revenue for the server applications. Can you give us an update on your server flip chip BGA business? And also, how much of a revenue increase you're expecting next year on a year-on-year basis?

[Unknown Executive]

[Foreign Language] [Interpreted] Can I take your first question about the MLCC third quarter data points and fourth quarter outlook. In third quarter, there were some seasonal increased factors in demand, including the launch of the new smartphones by the global smartphone customers. And also, there was quite a lot of the MLCC market inventory being worked through. As a result, we saw MLCC shipments increase quarter-over-quarter. And as a result, our inventory days have decreased quarter-over-quarter.

Regarding third quarter MLCC ASP, even though the share of industrial and automotive MLCC revenue within our total revenue slightly increased quarter-on-quarter. The price competition of IT MLCCs intensified in Q3. And as a result, on a blended basis, our ASP decreased quarter-over-quarter.

Looking towards the fourth quarter, as you know, usually, fourth quarter is when there is a decrease in shipments tied to customers going through year-end inventory adjustments. And we think that a similar trend will happen this year, fourth quarter as well.

[Interpreted] So I think your second question about the server flip chip BGA business, as you know, at the end of last year, we were the first in Korea to mass produce server flip chip BGA. Throughout this year, we have been earning the recognition and trust from our customers as a stable supply partner by very smoothly responding to customers requesting for additional volume versus their original orders. Also, in third quarter this year, we increased our flip chip BGA -- server flip chip BGA supply to new customers. And this has helped us somewhat make up for the relatively soft and weak demand on the PC flip chip BGA side.

Looking towards next year, at the market level, we expect the high-end flip chip BGA market, such as for server CPUs or AI accelerators to continue growth, given the increase of AI and cloud services. And so to capture this opportunity, we plan to continue to increase our server flip chip BGA revenue by enhancing -- further enhancing our yield and also stably operating our production lines.

[Operator]

[Interpreted] Your next question will be presented by Rok-ho Kim from Hana Securities.

[Rok-ho Kim, analyst]

[Interpreted] My first question is an MLCC question. It sort of builds on the previous question that was just answered. It's about utilization. My information is that your utilization has continued to increase quarter-over-quarter until third quarter. Do you think this increase in utilization will continue, especially up till next year on a full year basis, even though there may be a slight decrease in fourth quarter due to year-end inventory adjustments?

My second question is a camera module question. You announced in September the signing of a supply contract with an American OEM. Considering all of that, can you give us some guidance and outlook on your camera module -- automotive camera module revenue and profitability?

[Unknown Executive]

[Interpreted] To answer your first question about MLCC utilization. As you mentioned, our MLCC utilization has been increasing throughout the year on a quarter-on-quarter basis. Looking towards the fourth quarter, there is going to be impact by year-end component inventory adjustment and there is a possibility of our utilization being adjusted.

You've also asked for next year outlook. Next year, we think that the MLCC market inventory will complete -- will be worked out that consumption will be completed. Also, there will be solid growth expected from the industries that we focus on, such as automotive and AI server markets. And also, we will continue to diversify our applications to industries such as solar energy or satellite Internet. And given all of that, we are looking forward to our utilization on a full year basis to improve next year.

[Interpreted] Your second question was about the automotive camera module outlook. The market itself for automotive cameras is expected to continue to increase in market size as there will be a greater need for higher-spec, higher-precision camera modules tied to the advances in automotive driving technology -- autonomous driving technology and increase of EVs.

Accordingly, we will continue to focus on increasing our volume by, not only winning new models and increasing supply to existing EV customers, but also to diversify our customer base to the conventional OEMs. Also, we will leverage the optics-related technology we have accumulated from our supply of IT camera modules, apply that to automotive camera modules and also develop differentiated technology focused on automotive applications such as water repellent coated lenses and heating technology. At the same time, we will focus on further enhancing our profitability by building greater cost competitiveness, by internalizing our core processes and components.

[Operator]

[Interpreted] The next question will be presented by Chulhee Cho from Korea Investment & Securities.

[Chulhee Cho, analyst]

[Interpreted] I have one question. It's related with how the automotive sets' demand, the growth rate of it is starting to slow down recently. Tied to that, can you give us your opinion regarding the automotive MLCC outlook? And also, how you plan to diversify your applications to drive continuous growth?

[Unknown Executive]

[Interpreted] To answer your question, first of all, in the automotive MLCC side, we also do agree that there are, in the near term, some factors that may slow down the growth for EVs in general. However, for ADAS, Level 2 and plus ADAS adaption is continuing to increase. And also, when you look at the absolute sales volume of xEVs, EVs generally having around 3x MLCC content versus the ICE vehicles. The absolute xEV sales volume next year is expected to increase versus this year.

And so overall, we expect solid growth from the automotive MLCC market to continue next year. Based on that, we will focus on continuing to expand our automotive MLCC lineup, including high-temperature and high-voltage products and also further enhance our supply stability by increasing the overseas automotive production hub so that like we did this year, our goal next year is to achieve revenue that outgrows the market growth rate.

[Interpreted] You've also asked about some other applications that we're looking in to diversify into. Within the industrial MLCC market, we're looking at applications such as AI servers, robots and solar energy as well as satellite Internet. Even though right now, these markets, in terms of size, are not large, they are expected to record high growth rates of a CAGR of 10% or more. And so regarding new applications, we are acquiring new customers and increasing our sales by leveraging the very wide product lineup that we have covering the small size, high capacitance that we have for IT applications as well as the high-reliability MLCCs that we offer for automotive applications.

Also, we are developing specialty MLCCs that have special characteristics in terms of bending strength or noise to actively meet the customer requirements in these applications. The revenue from these industrial applications next year is expected to be very high. That would be above our overall industrial MLCC revenue growth rates and we will continue to develop new customers in this area by enhancing our product competitiveness and lineup.

[Operator]

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

[Hyung Wou Park, analyst]

[Interpreted] My first question is about the Optical and Communication Solutions division. I think during your presentation and Q&A, you mentioned that in the fourth quarter, given the weak mobile demand, there will be some soft demand for camera modules. Now looking towards the mid- to long term, what kind of growth driver do you expect to see in the camera module? And how do you plan to ensure profitability of your camera module business?

Second question is about the packaging business. Recently, there has been growing interest in the industry about next-generation advanced packaging technologies, such as chiplets or the new TSMC technology. I'm wondering if SEMCO is preparing or has something similar or that can respond to this? What kind of advanced next-generation packaging technology are you preparing?

[Unknown Executive]

[Interpreted] To answer your question about how we plan to drive growth and secure profitability of our mobile camera module business going forward, as you know, mobile demand has remained soft for quite some time, and this has caused competition between companies to intensify. However, the camera module still remains the core differentiating point for flagship smartphone and this has continued the increase in the need for high-quality slim upgraded camera modules.

And so we are focusing, for example, on developing a new structure folded zoom that will bring better image quality and also developing even slimmer camera modules for foldable form factors to further strengthen the leadership that we already have in the folded zoom and foldable markets.

We're also strengthening the performance of our camera module apertures that are necessary in the main camera to deliver even higher picture quality. These are examples of how we are focusing on increasing the supply of our high-end camera modules through tech differentiation. At the same time, we are focusing also on further enhancing our cost competitiveness by internalizing some key components to further improve our profitability.

[Interpreted] Your second question was about next-generation packaging market and technology. As you've mentioned, there is a greater role and attention being placed on the backend packaging technology as a way of enhancing semiconductor performance as the semiconductor node migration is hitting somewhat of a limit. Also, there are changes in the industry paradigm around servers and networks. That's also increasing the demand for development of new and a wider variety of packaging platforms.

As you know, over a long period of time, we have built up core substrate packaging technology, including micro-patterning, high multilayer, large size, large area and also embedded technology that would load components in the core itself. And so based on this, we are currently working with customers to develop some wide variety of next-generation packaging substrates, including the [ 2.ND ] structure substrate, which is similar to the CoAs as well as substrates that use new core materials.

Looking towards the mid- to long term, we also agreed that the world of package substrates will become more important as semiconductor performance also advances. And so we will be ready to actively capture the new market opportunities that emerge by developing next-generation packaging substrates.

[Operator]

[Interpreted] The next question will be presented Ji-San Kim from Kiwoom Securities.

[Ji-San Kim, analyst]

[Interpreted] I have 2 questions regarding CapEx and your earnings outlook. I think in the last conference call, you mentioned that the company plans to adjust its CapEx plan for this year considering the slowdown in market. Has there been any additional changes since? Also, can you give us some guidance on your next year CapEx plans?

The second question is, I look at your third quarter results and even though there was increase, on a top line basis, your operating profits have decreased. This does seem to reflect the slowdown in overall markets. What kind of guidance can you give us for your fourth quarter and next year?

[Unknown Executive]

[Interpreted] Regarding our CapEx, as I mentioned previously, this year's company level CapEx is expected to decrease somewhat versus last year. Now in the remaining fourth quarter, we will execute the investment by continuing to take into account the market situation.

Regarding next year CapEx, because our next year business plan has not yet been finalized, it's difficult for me to go into details. But if you consider how the large investment projects, such as the Package Substrate business for servers that we've been investing in for the past recent 2 years will come to an end this year, we expect that overall CapEx next year will probably be less than the CapEx this year. While there -- that will be -- while we expect that to happen, we will continue to make necessary investments in key areas such as industrial, automotive and specialty MLCCs and inductors.

Also going forward, we will continue to maintain our CapEx policy as we have already -- always done by focusing on high-growth areas such as industrial, automotive and network, execute our investments by taking into account changes in market and customer demand and focusing on achieving efficient investments.

[Interpreted] Now to answer your question about our next -- of our third -- third, fourth quarter earnings and next year's outlook. Looking towards the -- well, looking at third quarter, as you mentioned, we did have a revenue increase quarter-over-quarter, thanks to seasonal demand recovery of certain products. That said, still, the recovery of demand for the IT set products, especially smartphones are still below expectations.

And even the demand at, for example, the set growth for automotive, which has been growing solidly, the growth rate of that demand has been solved in the third quarter. Also, on top of that, there was competition to secure the seasonal demand increase and also the weaker yen was added, which intensified competition among suppliers and this has led to a decrease quarter-on-quarter basis of our operating profit. Now in the fourth quarter, we do expect that our company level revenue will be solved on a quarter-on-quarter basis, taking into account the weak consumer sentiment due to uncertainties in the external environment and also the seasonality of fourth quarter were component to demand decreases.

[Interpreted] Now looking towards next year, it expects to be another year where there are various challenges in the external environment, including the possibility of a slowdown in global economy triggered from China, the Russia-Ukraine situation as well as, for example, tension in the Middle East. And given all of that, it's difficult to give you a detailed specific outlook for next year.

But on the other hand, the demand for key set products such as PCs and smartphones are expected to bottom out this year and gradually turn around to a growth trend from next year. Also areas where we focus on, such as EV, servers and networks are expected to continue solid growth next year. And so based on that, we do expect that our next year's results would be year-over-year growth versus this year.

And so in order to deliver year-over-year improved results, we will focus on continuing to expand our business in the promising areas such as automotive and server and networks, also continue our innovation of business structure around high growth and high value-add products and also internally, continue to enhance our internal efficiencies through better productivity, better quality and cost savings.

[Tae-young Kim, executive]

[Interpreted] That completes our third quarter earnings conference call. If you have any further questions, please forward them to our IR team. Thank you very much.