Samsung Electro-Mechanics Co Ltd

KRX:009150

Earnings Call Transcript 2024-Q3

[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 Q3 Earnings Conference Call.

On today's call, I am joined by our CFO, Sung Jin Kim; EVP Won-taek Kim, Head of Strategic Marketing; VP, [ Koo-taek Park ], head of support team, components division; [ Sung Jung Kim ], head of support team, optics and communication solution division; and VP [ Hung Jing Kim ], head of support team, packaged solution division.

We will start with a presentation on our Q3 company-level and divisional business results, followed by market trends and outlook by product, before taking your questions.

First, let's go to our 2024 Q3 results. In Q3, our financial results continued an upward trend both Q-on-Q and Y-o-Y despite some challenges posed externally, including slowdown of demand in key downstream industries and a stronger Korean won. Q3 revenue was KRW 2.6153 trillion, an approximately 2% increase Q-o-Q and 11% increase Y-o-Y. The details regarding revenue increase, decrease factor by division will be explained later on during the divisional results.

Q3 operating profit was KRW 224.9 billion, which is about a 6% increase Q-o-Q and around a 20% increase Y-o-Y. Pretax profit in Q3 was KRW 142.8 billion, net profit KRW 115.2 billion.

Next in terms of the financials. As of end of Q3, total assets was KRW 12.6039 trillion, which is roughly 1% Q-o-Q decreased. For the major financial indicators: Liability-to-equity decreased to 47%. And debt-to-equity was 23%, a slight decrease Q-o-Q. Our equity ratio was 68%, which is a slight increase Q-o-Q.

Next are the divisional results and future outlook.

First, the components division. The component division's Q3 revenue was KRW 1.197 trillion, a roughly 3% increase Q-o-Q and about a 9% increase Y-o-Y. In Q3, our supply to key industrial applications, including AI, server, network and power equipment, increased. And also our automotive revenue also increased, supported by the trend of greater electronics in vehicles, resulting in increase of revenue across all applications, particularly industrial and automotive.

Regarding Q4. While MLCC market demand is expected to slow down due to factors [ including year-end ] component inventory adjustments, demand for automotive MLCC is expected to maintain its upward momentum, driven by increasing electronic content, so we will respond with stronger promotion of our small-sized, high-capacitance MLCC for IT applications; and high-temperature, high-capacitance MLCC for industrial applications. We're also working on design-in of new automotive high-temperature, high-voltage, high-capacitance MLCCs. For electronic components, we will also focus on increasing supply to overseas smartphone customers.

Next, in the optics and communication solution division, Q3 revenue was KRW 860.1 billion, a roughly 6% decrease Q-o-Q but 5% increase Y-o-Y. In Q3, our automotive camera module revenue to global EV customers increased, but for IT camera modules, despite the full mass production of high-spec camera modules for the strategic customer's flagship, supply to overseas IT customers decreased, resulting in a Q-o-Q fall of the division's revenue.

In Q4, for the IT camera module market, demand for higher-performing camera modules for new flagship smartphones such as high-pixel folded zoom cameras is expected to continue. And we will focus on timely mass production of differentiating camera modules for key Korean and global customers. Also, for automotive camera modules, we will focus on expanding our lineup, including supply of all-weather camera modules, to capture demand for the advance in ADAS and EV market; and also on diversifying our customer base, including breaking into Korean traditional auto OEMs.

Lastly, the packaged solution division. Q3 revenue was KRW 558.2 billion, which is a roughly 12% increase Q-o-Q and a 27% increase Y-o-Y. BGA supply increased mainly around high-end products, including the Arm CPU substrates to overseas customers. And flip chip BGA supply also increased around high-end large-sized, high -- multilayer substrates for server, AI and automotive ADAS applications, driving Q-o-Q revenue growth for us.

Q4 package substrate market is expected to see some seasonal weakness in smartphone and PC demand, but demand for high-end flip chip BGA for server, AI, network and automotive applications is expected to remain solid in Q4, so we will focus on expanding supply of high-end substrates for server, AI, network and automotive to key Korean and global customers; and also increasing our production volume, leveraging the stabilized mass production of our new overseas plant.

That completes the presentation on our Q3 results. And now Won-taek Kim, our head of strategic marketing, will talk about the market trends and outlook by key product group.

[Won-Taek Kim, executive]

[Interpreted] Good afternoon. This is Won-taek Kim, head of strategic marketing. I will go over the current market situation and outlook for our MLCC, camera modules and substrates, respectively.

First, MLCC. In Q3, MLCC demand continued another quarter of growth across all applications, including IT, industrial and automotive. IT MLCC demand increased Q-o-Q, driven by the new model launch by key Korean and overseas smartphone customers, combined with solid commercial PC demand. Industrial MLCC demand also continued to grow, supported by growth of AI servers. Automotive MLCC demand also continued to increase, as electronic content in vehicles such as ADAS and infotainment continue to grow.

That said, in Q4, despite the seasonal demand drivers such as U.S. Black Friday and Chinese Singles' Day, MLCC demand is expected to somewhat decrease versus Q3 due to delay in recovery of consumer sentiment and year-end component inventory adjustments. Despite overall softness, demand for automotive MLCC is expected to continue growth even in Q4, supported by the seasonal demand increase of finished vehicles, including xEVs; and increasing electronics per vehicle. We will focus on therefore improving product mix around high-end products and new products such as small-size high-capacitance MLCC, low-ESL MLCC; and continue to increase share of the automotive revenue.

For IT MLCC, we will focus on design-in of new products, especially our cutting-edge small-size, high-capacitance MLCC for mobile; low-ESL MLCC; and high-voltage MLCC for PC applications which are in greater demand, as AI features require higher specifications at set levels. For industrial MLCC, we will focus on stronger promotion of higher-temperature MLCCs, including the 100-microfarad ultra-high capacitance, to capture the growth in AI servers; and focus on increasing high-end MLCC revenue, including the 100-volt high-capacitance MLCC for high-speed data communication and small-size ultra-high capacitance for power modules.

For automotive MLCC, we will focus on customer design-in of new products, especially the high-temperature, high-capacitance MLCC for ADAS and infotainment; and high-voltage MLCC for electronic powertrains, in order to be designed-in into more new projects of major OEMs and Tier 1s.

Next is camera modules. During Q3, despite the launch of foldable phones by the strategic customer, the Chinese camera market mainly grew around the mass tier products. And demand relevant to SEMCO slightly decreased on a Q-o-Q basis. For automotive camera modules, demand relevant to SEMCO increased as finished car sales volume improved Q-o-Q for major customers. In Q4, demand is expected to decrease Q-o-Q due to seasonality and customer year-end inventory adjustments.

Now we will aim to increase revenue around high-end products by focusing on early preparation for the new flagship models of key Korean and global customers for next year; and offering innovative technologies such as Slim OIS, continuous zoom, [ lens lead ] folded zoom and super macro to capture the ultra-slim high-performance telescopic needs of IT camera customers. For automotive cameras, we will focus on increasing revenue by starting mass production within the year of [ hidden ] cameras for always-on sensing and interior cameras for driver monitoring needed for improved autonomous driving performance and leverage our track record for stronger promotions to break into new OEM accounts.

Lastly, our substrates. In Q3, BGA demand decreased slightly Q-o-Q due to a fall in memory demand despite the continued demand for Arm CPU and launch of new products for premium AP. Flip chip BGA demand continued to grow, driven by demand for server CPU, AI accelerators and GPU. Looking towards Q4, given overall seasonality, BGA demand is expected to decrease Q-o-Q mainly around commodity-grade products, including memory substrates. For Flip chip BGA, demand for PC substrates is expected to fall slightly Q-o-Q due to customers' year-end inventory adjustments despite the launch of new CPUs for AI PCs. However, demand for high-end substrates such as AI servers and network applications is expected to continue growth on a Q-o-Q basis.

For BGA, we will focus on on-time design-in and increase supply of new products for the Arm CPU and premium AP, where demand is expected to grow. For flip chip BGA, we will focus on increasing supply of server CPU substrate while also breaking into AI accelerator market and diversifying our customer base to increase the share of high-end products. Key cloud service customers have been asking for new technologies such as multilayer core and silicon cap embedding for their next-generation projects. These are technologies where SEMCO already has a strength, and we will prepare thoroughly to win these new projects early on.

Thank you.

[Unknown Attendee]

[Foreign Language]

[Operator]

[Foreign Language] The first question will be presented by Rok-ho Kim from Hana Securities.

[Rok-ho Kim, analyst]

[Interpreted] I have 2 questions on MLCC. First question is can you share with us your shipments, inventory level and ASP results for Q3; and also share your outlook for Q4 on MLCC. Second question is if you look at this year. Due to the strong industrial and automotive MLCC business, both your utilization and business performance on MLCC seems to have improved on a year-on-year basis. Now we're looking towards next year. Can you give us some outlook for next year's utilization for MLCC and some outlook by application?

[Unknown Executive]

[Interpreted] To answer your first question, about third quarter MLCC shipment, inventory, ASP; and also fourth quarter outlook. In Q3, our MLCC shipment increased slightly on a quarter-on-quarter basis, thanks to the new product launch by the global smartphone customer and also solid demand across key industrial applications such as AI and server as well as automotive demand. Inventory number of days for MLCC remained similar to Q2. Blended ASP in Q3 increased due to the increased share of our industrial and automotive MLCC. Looking towards Q4, high-end demand, including automotive MLCC, is expected to remain solid in Q4, but overall shipment is likely to slightly decrease, reflecting seasonality, including customers' year-end inventory adjustments.

Your second question was about MLCC utilization outlook for next year and also outlook by applications. Actually, when we look at -- compared to last year, 2023, this year, our MLCC utilization has been improving, as our shipment volume increase is supported by gradual IT market recovery and also the continued growth in industrial and automotive markets. Looking forward to next year, in 2025, in the IT sector, in addition to the moderate growth of key products such as smartphone and PC, MLCC content per box is expected to increase with higher performance required at the set level, led by AI devices. For industrial, set-level growth is expected mainly around the AI/server side. And in automotive MLCC, the increase in electronic content and electrification of vehicles is likely to continue. Given that our MLCC revenue growth has been continuing to outpace market growth, we expect our utilization next year to be higher than this year.

[Unknown Attendee]

[Foreign Language]

[Operator]

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

[Giuni Lee, analyst]

[Interpreted] I have 2 questions. [ First ] question is about the level of revenue that you have been generating in connection with AI servers, so that would cover your MLCC and also your flip chip BGA business. How much is that currently? And how much do you think that could grow next year? Second question is related with the new Vietnam plant that you've started to operate from Q2. In connection with that, can you give us an update on your flip chip BGA business and outlook, including other server substrates?

[Unknown Executive]

[Interpreted] To answer first your question about our businesses related with AI servers. In the case of MLCC for servers, this year, our MLCC-for-server revenue is expected to more than double that of last year. And most of this appears to be for AI, server related. In terms of sale, we understand this to be industrial top-tier level. Currently we think that it is possible for our AI, server related revenue to repeat the significant growth again next year. And we will actively capture this growing market using our high-end MLCC products to achieve our revenue targets. For flip chip BGA for servers and AI, this year, we expect our revenue to roughly double mainly around CPU substrates. We also plan to start mass production of flip chip BGA for AI accelerators. So looking towards next year, with the server [ CPU ] flip chip BGAs continuing to grow, together with the AI accelerator products in mass production, we expect significant year-on-year growth next year from our flip chip BGA for server and AI applications. We will concentrate on ensuring stable supply of products and also to actively get designed-in on future projects by adopting the next-generation technologies that customers are asking for.

[Unknown Executive]

[Interpreted] Your second question was regarding our flip chip BGA business current status and outlook. Regarding our Vietnam plant, our Vietnam plant has been successfully performing design-in and mass production of high-end products in line with customer demand, resulting in double-digit Q-o-Q growth of our flip chip BGA revenue in Q3. Going forward, market demand for high-end package substrates which require significant technology expertise is expected to remain solid. SEMCO will focus on maintaining stable supply of our high-end products to key customers and also engaging in co-development projects with various customers, also securing differentiated technology in order to drive the continued growth of our flip chip BGA business.

[Unknown Attendee]

[Foreign Language]

[Operator]

[Foreign Language] The next question will be presented by Sung Kyu Kim from Daiwa.

[S. K. Kim, analyst]

[Interpreted] I also have 2 MLCC-related questions. First question is whether this rapid growth of the server, especially by the AI, server growth, has had any changes to your MLCC strategy. Recently, while EV market growth has been leveling off, we're seeing very strong growth from servers, specifically the AI, server. Has this changed your MLCC strategy. Second question is about the semiconductor related with [ MLCC ] channel inventory. Currently there's talk in the capital markets that there is increasing share of commodity-grade semiconductor inventory. Previously you've mentioned that your MLCC inventory is flat on a Q-o-Q basis. Can you give us some sense and update on the channel MLCC inventory that you're seeing?

[Unknown Executive]

[Interpreted] Well, I'll answer your first question by addressing the automotive market. As you mentioned during your question, the automotive -- in the automotive market, EV growth rate is expected to fall somewhat versus last year. That said, the hybrid vehicle sales continue to grow and there's wider penetration of ADAS, so considering all of that, the automotive MLCC market overall is expected to record mid-single-digit level growth. Accordingly, we will remain focused on our existing automotive MLCC strategy, which is to drive revenue growth that outpaces market by adding new automotive [indiscernible] and also winning new design-ins. We are currently strengthening our competitiveness across both the development and manufacturing side by expanding our automotive high-temperature, high-voltage lineup; and also by diversifying our production network and improving yields and increasing our production capacity.

Regarding AI servers. AI servers require more GPUs and also have significantly higher power consumption. This is expected to bring significant increase in MLCC requirements, especially for small-size ultra-high-capacitance, high-temperature MLCCs. SEMCO already has the technology for small-size ultra-high-capacitance MLCC from our IT MLCC business and also the high-reliability technology from our automotive MLCC business, which we have been leveraging to grow revenue in line with market growth. Going forward, we will focus on our capabilities on seizing the leadership over these growing markets.

[Unknown Executive]

[Interpreted] Your second question was about MLCC channel inventory. Considering the solid demand for stock of the AI, server related high-end MLCC; and also the solid level of demand for automotive MLCC continuing, the current inventory level across the supply chain is believed to be similar to last quarter and also at healthy levels. We do expect a routine level of year-end inventory adjustments and some revenue decline tied to this revenue -- tied to this inventory adjustment, but MLCC demand growth is expected [ to continue ] next year, driven by the AI and automotive demand. And inventory levels are expected to remain stable next year. We will continue to carefully monitor market situation and our inventory levels while we continue to respond to customer demand.

[Unknown Attendee]

[Foreign Language]

[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 automotive camera module business. Even though the EV market growth rate has been declining, in Q3, your automotive camera module business seems to have grown. Can you give us an update and outlook of your camera module business, including automotive cameras? Second question is about your new business development. It seems that your new business development works are starting to deliver some visible results. Can you give us some updates on where your new business development projects are currently at?

[Unknown Executive]

[Interpreted] To answer your first question, about our automotive camera module. In Q3, our automotive camera module revenue increased Q-o-Q, thanks to active response to global EV customers' requirements and also on-time supply, using our stable quality, competitiveness and our supply capabilities. With advances in autonomous driving technology and expansion of EV, there is a growing need for higher-specification, higher-precision and high-reliability camera modules. And we have been continuing to strengthen our automotive camera solutions and products such as all-weather camera modules and hybrid lenses. We will continue to expand our automotive camera module business by expanding the supply of the 5-meg-plus high-pixel camera modules; and also diversifying the customer base by adding on new accounts, including Korean traditional auto OEMs.

[Unknown Executive]

[Interpreted] To answer your question about our new businesses. As mentioned during -- earlier this year, we have selected core components of future industry, including silicon capacitors, hybrid lens for automotive cameras and small-size all-solid-state batteries for mobile devices, as our new businesses, which we have been successfully developing. For silicon capacitors, we have been starting mass production, from Q4, for a global semiconductor company mainly in connection with package substrates for high-performance semiconductors, for example, for AI applications. And from 2025, next year, we plan to expand supply to Korean and global customers. For hybrid lens, which is a differentiating solution for automotive cameras that provide maximum design flexibility and also price competitiveness, we are preparing for mass production and business development next year, in 2025. In the case of all-solid-state batteries, this uses solid oxide electrolytes, unlike the conventional lithium-ion batteries, providing better stability. Also it can be designed into various form factors, including both prismatic and cylindrical. We have been leveraging our technology advantage, including the core MLCC layering technology, and are currently in customer testing using an ultra-small battery test product for wearables. Our mass production target is in 2026.

Glass substrates and other new business projects are also making progress in technology and product development as planned. And we will keep you updated on future developments in our new business pipeline.

[Unknown Attendee]

[Foreign Language]

[Operator]

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

[John Park, analyst]

[Interpreted] I have one question. It's an enterprise-level question about your Q4 and also next year outlook. There are uncertainties continuing in Q4. Also Q4 traditionally is a slow season in terms of seasonality. And combining those factors, I think the market is expecting your performance in Q4 to be less than what you have delivered in Q3. I would like to ask, if possible, for you to share your outlook for Q4 and some guidance for 2025.

[Unknown Executive]

[Interpreted] I'll answer your question, first, by recapping Q3 results. In Q3, despite some challenges in business environment such as slower-than-expected downstream demand recovery and also [ sort of ] stronger Korean won, our Q3 results improved both on Q-o-Q and Y-o-Y basis, thanks to the strong sales of high-end products tied to AI, server and automotive demand such as our MLCC and flip chip BGA tied to the AI and server demand and also our MLCC and camera modules related with automotive. In Q4, it is likely that there will be weaker than Q3 given continued soft IT set demand due to external uncertainties and the usual year-end component inventory adjustments. However, we continue to increase our supply of high-end MLCC and flip chip BGAs related to -- with growth markets that are focused such as the automotive, AI and servers, so we expect our growth trend in high-end products to continue in Q4. Looking towards next year, 2025, even though it is difficult at this point to share specific outlook given the external uncertainties such as global trade disputes, geopolitical risk and foreign exchange volatility, we expect revenue of products related with AI, such as MLCC and substrates, to expand next year, as AI and servers are expected to continue high growth. And also on-device AI is expected to expand across PC and smartphones. Given that our automotive product business, [ including ] automotive MLCC, is also expected to continue growth, overall, I expect our business to grow in 2025 versus this year.

We will continue to focus on securing the core technologies in material, equipment and manufacturing process to actively meet customer requirements and also to further widen the technology edge that differentiates us. Also we will increase our supply capacity in demand-growing areas to further expand our presence in growing markets such as AI, server and automotive. Furthermore, we will concentrate on improving our internal efficiency through better productivity, stable quality and cost savings to build in a stable profit structure. Thank you.

[Unknown Attendee]

[Interpreted] That completes our Earnings Conference Call for Third Quarter 2024. Thank you for attending. And if you have any additional questions, please forward them to the IR team.

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