Samsung Electro-Mechanics Co Ltd

KRX:009150

Earnings Call Transcript 2023-Q4

[Tae-young Kim, executive]

Now we will start the presentation by Samsung Electro-Mechanics. Good afternoon. This is Taiyoung Kim, Head of IR and Planning team at Samsung Electro-Mechanics. Thank you for joining our 2023 fourth quarter earnings conference call. On today's call, I am joined by our CFO, Sungjin Kim; EVP, Won-Taek Kim, Head of Strategic Marketing; VP [indiscernible], Head of Support Team of Component division; [indiscernible], Head of Support Team, Optics and Communication Solutions division; and VP, [ Hong Jin Kim ], Head of Support Team Package Solutions Division.

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

First, our 2023 fourth quarter company level results. In Q4, our revenue was KRW 2,306.2 trillion, which is approximately a 2% decrease Q-o-Q, but a roughly 17% increase Y-o-Y. The details regarding revenue increase and decrease factors by division will be explained later on during the divisional results. Q4 operating profit was KRW 110.4 billion, which is approximately 40% decrease Q-o-Q and around a 9% increase Y-o-Y. Pre-tax profit in Q4 was KRW 62.7 billion. Net profit was KRW 43.4 billion.

Next, in terms of financials, as of end of 2023, our total asset was KRW 11,657.9 trillion, which is roughly a 1% increase from end of Q3. For major financial indicators, liability to equity was 45%, debt-to-equity was 19%, which is a slight increase Q-o-Q. Equity ratio was 69%, a slight decrease from Q3.

Next are the divisional results and future outlook. First the Components division. The Component division's Q4 revenue was KRW 975.1 billion, which is roughly 11% decrease Q-o-Q, but a 17% increase Y-o-Y. In Q4, MLCC supply decreased overall in applications such as PC, TV and home appliances due to seasonality, including year-end inventory adjustments, but MLCC revenue for smartphone applications increased driven by the positive effect of the new product launches by key overseas customers.

In 2024, the component market is expected to grow around IT and industrial applications as demand is expected to recover in applications such as smartphone, PC and server this year. Accordingly, we will focus on capturing high-end MLCC demand, such as small size high [ capacitant ] MLCC and also expand into growing industrial markets, including AI servers.

This year, automotive MLCC demand is expected to increase with continued growth in xEV and autonomous driving market and easing of inventory adjustments. SEMCO will focus on increasing our MLCC supply to global EV and Tier 1 customers using our high-reliability products with superior high-temperature and high-voltage performance.

Next is the Optics and Communication Solutions division. The division's Q4 revenue was KRW 888.4 billion, which is a 8% increase Q-o-Q and 36% increase Y-o-Y. In Q4, for IT camera modules, we started mass production of high-performance camera modules, including the high picture quality folded zoom with a new structural design used on the latest flagship phones of Korean and overseas customers. For automotive camera modules, our supply to overseas customers increased in Q4, driving overall Q-o-Q revenue increase.

This year, the IT camera module customers are expected to continue to seek out high-spec camera modules to differentiate flagship smartphones, and we will focus on developing and increasing supply of high-performance products with differentiating features, such as the new structure folded zoom and multi-step iris.

In '24, the automotive camera module market is expected to see wider penetration of high-pixel camera modules for autonomous driving and greater technology differentiation, and we will focus on increasing supply of high-pixel camera modules to key customers, while diversifying our customer base and also strengthen our lineup of differentiating products with higher reliability performance.

Lastly, the Package Solutions division. Q4 revenue was KRW 442.7 billion, which is a 1% increase Q-o-Q, but 8% decrease Y-o-Y. In Q4, BGA revenue increased with growing supply of high-end flip-chip CSPs, including substrates for overseas customers' AP and ARM processors. Revenue of the flip-chip BGA decreased due to decrease in PC substrate supply from weak downstream demand, including year-end inventory adjustments, even though supply of server and network equipment substrates increased in Q4.

In 2024, the package substrate market is expected to see a recovery of demand as PC, smartphone and other IT set businesses recover. Accordingly, we will focus on increasing supply around areas of demand growth such as substrates for memory and ARM processors.

Demand for high-spec package substrates such as servers or autonomous driving is expected to remain solid, and we will actively increase supply of high-end package substrates for applications such as server, AI, network and automotive by developing next-generation leading technologies to produce thinner and finer pitch substrates.

Now that completes the presentation on our Q4 results, and now our Head of Strategic Marketing, Won-taek Kim, will take you through the market trends and outlook by key product group.

[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 modules and substrate markets. First is the MLCC. In Q4, despite positive seasonal factors such as the U.S. Black Friday and China single stay, purchasing demand by our MLCC customers decreased Q-o-Q as they went through their year-end inventory adjustments. By key application, MLCC demand for smartphones remained solid, thanks to the launch of the new flagship by the North American customer and new model launches in China.

However, outside smartphones, the growth rate of other IT set products was below expectation and MLCC demand overall was slower than the previous quarter. For automotive MLCCs, while vehicle production growth rates were maintained, the growth rate of EV sales slowed down due to cut back on EV subsidies and weaker consumer sentiment. This means that inventory adjustments and weak demand for automotive MLCCs.

In Q1 this year, despite Q1 being a seasonally low demand period, we're expecting demand to be similar to Q4, considering positive factors such as the new smartphone launch by the strategic customer.

Now by application, the positive factors for IT is the launch of the new flagship smartphone models and adoption of on-device AI, which is expected to support solid demand for the higher-end MLCCs.

On the industrial side, we're expecting demand growth from areas such as industrial power applications. For automotive MLCC, while EV sales is expected to slow down, increase in hybrid vehicle sales and increase in the overall electronic content of internal combustion vehicles was likely to keep automotive MLCC demand growing. Accordingly, we will focus on expanding our small-size high-capacitance, cutting-edge products for flagship smartphones and actively respond to high-end automotive needs, such as the high-capacitance and high-voltage MLCC to achieve revenue growth above market growth rates.

We will also focus on growing areas of industrial applications such as AI, server, industrial power and factory automation, while also adding new applications and customers in the automotive space.

Next is the camera modules. In Q4, demand for high-spec camera modules, which is a key segment for SEMCO, increased slightly, unlike the usual Q4 seasonality, thanks to the recovery of flagship smartphone sales of Chinese customers and the start-up production of the strategic customers' new model for the launch in early 2024. In Q1, overall market demand for smartphone applications is expected to be slow, but demand in segments relevant to SEMCO is expected to continue another quarter of growth, driven by the effect of the new flagship launches by the strategic customer and Chinese customers and growth in automotive camera modules.

We will focus on capturing the smartphone customers' needs for differentiating camera modules and continue to grow in the high-end camera module market with wide camera technology such as multi-step Iris and slim OIS for foldable phones and folded zoom specialized solutions, including the Lens [ League ] and Super Macro.

Now for automotive cameras, we will continue to add on new customers by expanding our 5 [ mega ]-plus high-pixel camera lineup and maintaining our lead in developing new next-generation products using our high-precision, high reliability technology that we have gained in the IT camera market. We will also work on developing new applications to capture opportunities in growth markets such as robots.

Next is the substrates. In Q4, BGA demand for smartphones increased, thanks to the new product launch by a major North American customer and a strategic customer's early flagship launch. However, customers still underwent year-end inventory adjustments. And so overall BGA demand decreased Q-o-Q. In flip-chip BGA, inventory adjustment continued for PC CPU substrates and demand for servers -- conventional servers, unlike AI servers decreased, resulting in an overall demand decrease for flip-chip PGA.

In Q1, BGA demand is expected to decrease Q-o-Q due to seasonality. But even in Q1, demand tied to the new ARM processor is expected to increase. Now for flip-chip BGA with the inventory adjustment for PC CPU substrates coming to an end, PC-related demand is expected to recover. And with automotive, AI demand also expected to grow, overall flip-chip PGA demand is likely to gradually turn around towards growth. We will focus on timely customer certification and supply growth of key new models for smartphone AP, ARM processors and memory in order to maximize our revenue.

Also, we will use our technology leadership in these smaller pitch sizes and passive component embedding to participate in the key customers' future projects and expand into new applications other than smartphones, such as satellite antennas and automotive. Flip-chip BGA is planning to meaningfully increase supply of server substrates to key North American customers. Another focus is the continued development of high multilayer large-sized low-power technology, which we will use to actively develop opportunities in the growing AI accelerator application. Thank you.

[Operator]

[Operator Instructions] The first question will be provided by Hyung Wou Park from SK Securities.

[Hyung Wou Park, analyst]

My first question is about the MLCC. Can you share with us some updates about the fourth quarter MLCC shipment, inventory level and ASP? And can you also give us your guidance for those data points for Q1?

Second question is about the camera module. Can you give us some updates of the customers' adoption of folded zoom camera modules and what you expect from that business going forward?

[Won-Taek Kim, executive]

To answer your first question about our Q4 MLCC shipment inventory ASP and the first quarter guidance. In Q4, our MLCC shipment decreased quarter-on-quarter due to seasonality, including the customers' year-end inventory adjustments. Our blended ASP also slightly decreased. But in the case of our server MLCC, we have seen an increase in the high-value, high-temperature MLCCs as there is the continued switch of the platform. Also, in the automotive MLCC, we have seen an improvement in the product mix as the share of the high ASP customers increase. And so, overall, our ASP decline size continues to decrease.

You've also asked about [ a ] number of inventory days. Through a flexible production operation, our inventory remained similar to the previous quarter.

Looking towards Q1, we are looking very much forward to the demand for high-end MLCCs from the new growth industrial applications, including AI servers, also the increase of hybrid demand and also the solid demand for automotive MLCCs as there is an increase in the electronic content of vehicles. So, considering all of that, we expect our blended ASP and revenue to increase in Q1.

Your second question was about our folded zoom customer adoption. As you know, SEMCO started supply of its first folded zoom product for the 2019 flagship smartphones and ever since we have been the supplier of high-performance folded zoom cameras to keep customers in Korea and overseas. Even though the market situation for smartphones remain difficult with the smartphone market moving on to 2 extremes of the spectrum, and also competition becoming more fierce, global smartphone OEMs are actually continuing to use the folded camera module as a key differentiating point for their flagship smartphones.

And actually, we are expecting [ better ] demands for specification upgrades such as higher picture quality and slimmer camera modules to continue. Especially the folded zoom demand is gradually increasing around the Chinese market, and we will focus on increasing supply of high-performance products that meet customer needs with our unique technology edge such as the improved lens brightness with the new structure and stronger zoom performance.

[Operator]

The following question will be presented by Jay Hyun Kwon from JPMorgan.

[H. Kwon, analyst]

My first question is about the MLCC. I think overall, the market is expecting this key set markets to actually recover in terms of demand compared to last year. Do you expect your MLCC utilization this year to increase versus last year? And do you have any plans of increasing your capacity this year?

Second question is on the substrate side. I think last year despite the difficulties or server, high-end flip-chip BGA recorded good growth. This year can you share your outlook for your substrate business? Given the fact that many of your downstream industries such as PC and cloud -- it appears to be resuming investments. Considering that, what kind of outlook do you have for your flip-chip BGA business this year?

[Unknown Executive]

Your first question was about this year's MLCC utilization outlook and whether we have capacity increase plans. As you mentioned, many market sources are saying that unlike last year where set growth was rather sluggish, this year the demand for major applications would be recovering. Considering that outlook, we're also expecting that the MLCC market itself would turnaround this year. Especially, we're looking forward to new sources, new applications driving growth, such as the AI servers.

And so, this year we are going to focus on not only increasing revenue in our existing strong markets, but also increasing coverage of the new growth industrial applications such as industrial power and AI servers as a way of driving our revenue growth. And so we plan to continuously increase our utilization rates this year and also pursue timely capacity expansion aligned with market demand to secure new opportunities early on.

[Unknown Executive]

Your second question was about our outlook for the flip-chip BGA business this year. As you know, in 2023, even though the server substrate business grew, we still had a difficult year due to the oversupply brought on by the drop in PC demand. Even though the risk of flip-chip BGA oversupply and resulting ASP decline still remains this year, we think that with downstream demand, including PC and server expected to turn around, there is a possibility that the substrate oversupply may ease throughout this year.

On the automotive side, increase in electronic content in vehicles, such as autonomous driving and ADAS is also expected to drive continued solid growth for the automotive substrates. And we will focus on timely capture of key customer demand recovery by carefully watching the market and also closely communicating with customers. In particular, we will continue to increase the high-end product supply, including servers and automotive substrates.

At the same time, we're also continuing to develop differentiating substrate technology for the next-generation future products. For example, we are developing the [ 2.ND ] structure substrates, which can replace the silicon interposers and also a glass -- core glass substrate. These new technologies will continue to be developed so that we will be able to further strengthen our technology leadership and competitiveness in the flip-chip BGA market.

[Operator]

The following question will be presented by Woon Ho Kim from IBK Investment and Securities.

[Woon Ho Kim, analyst]

My first question is about the automotive side. I think overall, the market is expecting the automotive market growth rate to decrease in 2024. This will probably mean that competition in the automotive MLCC space would increase this year. In that context, what is your business outlook and strategy for the automotive MLCC?

The same goes for the camera modules. Your camera module -- automotive camera module business has been growing, but I do notice that it is rather dependent on a large customer. And so, can you give us some more color on how you plan to diversify your automotive camera module customer base and increase your revenue?

The second question is about some of the new business and commercialization projects that you have. They were highlighted during the recent CES. Can you give us some more details about what kind of future businesses you are working on?

[Unknown Executive]

To answer your first question about our automotive MLCC, with the high interest rates and reduction of EV subsidies, there are expectations that EV growth rates may decrease this year. But that said, we do notice that customers have been going through a considerable level of inventory consumption. And so, overall, we think that this year the automotive MLCC market would grow at a level that is higher than what we saw last year.

Regarding this market outlook, SEMCO's strategy for automotive MLCC is to maintain the leadership and the comparable level that we have in the high-capacitance MLCC for ADAS based on our IT technology, and also add on to that our high-temperature and high-voltage MLCCs so that we are -- this year, our goal is to also secure a high-voltage, high-temperature MLCC lineup that is comparable to industry level by utilizing our existing technology in high-temperature material and also 1,000-volt class high-voltage element technology.

Also, another focus this year will be to improve our supply stability. We are going to focus on increasing our automotive MLCC production capacity and also diversifying our production base to improve our supply stability and overall deliver revenue growth that outpaces the market.

[Unknown Executive]

You've also asked about our automotive camera modules. And as you know, last year, we started supply of high-pixel camera module for autonomous driving, high pixel being more than 5 meg to a key customer. And we are expecting to see an increase in demand for high-performance automotive camera modules as ADAS and autonomous driving technology themselves become more advanced. We are currently -- we do have a high revenue share from a specific customer. However, we are looking forward to generated revenue from new customers this year, including conventional OEMs, based on our technology know-how, quality and performance stability and other track records.

At the same time, we will be driving the growth of our autonomous camera module business through new offerings such as in automotive hybrid lens that applies our IT lens technology and also high reliability differentiating camera module products that address customer pain points.

[Unknown Executive]

You've also asked about details of the new businesses that we are working on. We have continuously been trying to develop and commercialize new business opportunities, leveraging the technologies that we have gained through our existing businesses at MLCC, camera module and package substrates.

Some of the items that I can introduce would include a silicon capacitor, a hybrid lens for automotive cameras, our glass substrates, small-sized all solid-state batteries for mobile applications and solid-state oxide water electrolysis batteries. These are new business opportunities that we have identified as having potential of becoming the core components for future industry and we are developing these opportunities from a mid to long-term perspective.

To share with you some key commercialization time lines. In the case of the silicon capacitor, we are planning to have it mass produced for high-performance computing package substrates, either late to this year or 2025, and then gradually expand applications and product lineups. Also, the hybrid lens, which will further enhance our technology competitiveness in automotive cameras, is being developed with the target of mass production in 2025.

We also have other products, such as the glass substrates, all solid-state batteries and water electrolysis batteries that are being delivered -- developed at the technology and product level with a goal of mass production in 2026 and after. As I've just introduced, the company will continue to uncover and develop new business opportunities as a way of ensuring future growth engines, and we will be happy to share updates with the market when they become available.

[Operator]

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

[S. K. Kim, analyst]

I have 2 questions. First question is about your CapEx plan this year. Can you share with us some details? Second question is about your Q1 and full year guidance. Last year your performance did contract, but I think that also provides an opportunity for your performance to rebound this year. So, what kind of performance and business outlook do you have for Q1 this year and full year?

[Unknown Executive]

Your first question was about our CapEx plan this year. First, to look back at last year, due to the decrease in downstream industry demand, such as smartphones and PC, you would recall that last year we ended up spending less CapEx than originally planned.

Now in 2024, if we look at the CapEx plan for the package substrates, given that our Vietnam expansion has already made significant progress, our package substrate CapEx would probably decrease versus last year. But on the MLCC side, we will increase investments for areas where we expect continuous growth such as automotive demand. And therefore, combining all of that, overall, this year we're expecting our CapEx at the company level to remain similar to what we saw last year.

Regarding CapEx, our policy remains the same. We will remain flexible considering industry situation and customer demand changes and continue to focus our CapEx in the high-growth areas such as automotive, server and AI.

[Unknown Executive]

You've also asked for the first quarter and full year performance guidance at the company level. First of all, looking into Q1, as you know, Q1 traditionally is a slow demand season for IT sets. But this year, considering the effect of the new flagship smartphone launches by key customers in both Korea and overseas, and also the increase in supply of industrial and automotive applications, we expect that our revenue at company level would record increase on a quarter-on-quarter basis.

Now looking towards the full year 2024, there are many factors that continue to pose challenges to SEMCO's business environment, including the slow-paced recovery of the global economy, also geopolitical risks between Russia, Ukraine and also Middle East and also the continued weakness of the Yen.

However, looking towards this year, there are expectations that in 2024, a demand for key set products such as PC, smartphones and servers, would recover versus last year. And also, there is expectation that the Generative AI will have a positive impact on not only servers, but also smartphones and PCs by increasing the requirements for higher specifications. Considering all of that, it appears that this year demand for high-end MLCCs and package substrates will be growing.

Also, when we look at the automotive market, even though many are expecting the EV growth rate to somewhat slow down this year, still there is the increase in electronic content of hybrid and internal combustion vehicles. And so, still, the automotive application is expected to continue higher growth rates versus other applications. So, given that demand increase is expected for automotive MLCCs, camera modules and package substrates, overall, the company is expecting to deliver higher performance this year versus last year.

Now in order to achieve this year's growth targets, we will be focusing on increasing our revenue in our traditional strength, such as automotive, server and AI, also focus on diversifying our customer base and also increasing our internal efficiencies through productivity improvements, cost savings and more efficient investments so that we would be able to further improve our business performance.

[Tae-young Kim, executive]

That completes our 2023 fourth quarter earnings conference call. If you have any additional questions, please forward them to our IR team. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]