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Edited Transcript of 009150.KS earnings conference call or presentation 30-Apr-19 7:00am GMT

Q1 2019 Samsung Electro-Mechanics Co Ltd Earnings Call

Greonggi-do May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung Electro-Mechanics Co Ltd earnings conference call or presentation Tuesday, April 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Byoung Jun Lee

Samsung Electro-Mechanics Co., Ltd. - Senior VP, Head of Corporate Business Support Team & Director

* KwangWook Bae

Samsung Electro-Mechanics Co., Ltd. - VP and Head of Corporate Strategy & Planning Team

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Conference Call Participants

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* Dongwon Kim

KB Securities Co., Ltd., Research Division - Analyst

* Gang Ho Park

Daishin Securities Co. Ltd., Research Division - Research Analyst

* Ji-San Kim

Kiwoom Securities Co., Ltd., Research Division - Team Leader and Electric & Electronic Analyst

* S. K. Kim

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Sohyun Kim

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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[Interpreted] Good afternoon. Thank you very much for joining this conference call. We will start the Samsung Electro-Mechanics First Quarter 2019 Earnings Conference Call. The call will start with a company presentation, followed by a Q&A session. (Operator Instructions). We will now start the company's presentation.

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KwangWook Bae, Samsung Electro-Mechanics Co., Ltd. - VP and Head of Corporate Strategy & Planning Team [2]

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[Interpreted] Good afternoon. This is KwangWook Bae, VP and Head of Planning Team, Head of IR at SEMCO. Thank you for joining our first quarter earnings conference call. Before going into the presentation, I would like to introduce the management who are present. We have Byoung-Jun Lee, the CFO; SVP [Hu Kwanjo], Head of Strategic Marketing; SVP Cheol-Soon Ga, Head of Support Team, Component Solutions division; General Manager [Hyun Eukseo], Module division; and VP Bo Yun Jung of the Substrate Solution division.

From this quarter, in addition to the company-wide and divisional presentation, we will have a separate presentation from the Head of Strategic Marketing on market trends and outlook for each product. We will start, first of all, from the first quarter business results by division, market trends, before we take your questions.

First, the first quarter results at the company level. Our first quarter revenue was KRW 2.1305 trillion, which is an approximately 7% Q-on-Q increase and a 6% year-on-year increase. The key reasons are for the revenue increase, and decrease by division will be explained later on during the divisional presentation.

Even though first quarter operating profit decreased by about 25% Q-on-Q, it increased by about 24% year-on-year to operating profit of KRW 190.3 billion, OP margin was 8.9%. Pretax profit in Q1 was KRW 171.9 billion with about KRW 18.4 billion in nonoperating expenses, including financial expenses. Net income after tax was KRW 129.8 billion.

In terms of financials, as of end of March 2019, total asset was KRW 9.0005 trillion, which is a 4% growth from end of Q4. Debt to equity and net debt to equity increased slightly Q-on-Q to 78% and 29%, respectively. Shareholders' equity decreased slightly to 56%.

Next is results and outlook by each division. First, the Component Solution division. Component Solution division's Q1 revenue was KRW 836.3 billion, which is a 7% decrease Q-on-Q, but a 11% increase year-on-year. Even though sales to Chinese PC and mobile applications decreased due to delay in IT demand pickup and effective inventory adjustment as a result of our ongoing efforts to expand automotive and industrial business, we were able to achieve meaningful Q-on-Q revenue growth.

In Q2, while the demand for mid- to low-end IT applications is expected to remain sluggish, the supply on the high-end side is likely to remain tight. Therefore, we will focus on increasing supply for IT high-end products, such as ultra-high capacitance MLCC. Also with demand for automotive, industrial high-reliability products expected to grow, we will continue to convert our IT capacity to industrial and automotive applications to increase our market responsiveness, expand our lineup for high-reliability products and increase sales to major customers.

Next, the Module Solution division. The Module Solution division Q1 revenue was KRW 951.2 billion, which is a 38% Q-on-Q increase and a 6% Y-o-Y increase. This is because despite the decrease in overall IT set demand from Chinese customers, the launch of the new flagship by the strategic customer help drive demand for high-performance multi-cameras, including dual, triple and quad with wide-angle lenses. Also in the case of communication modules, we started supply of WiFi 11ax module for the new flagship of the strategic customer, which helped drive significant Q-on-Q revenue increase.

In Q2, the demand for the strategic customer's flagship is expected to decrease, but we will cover this effect by focusing on increase supply to; Chinese customers with a 48-meg level ultra-high pixel, high-power zoom, triple cameras with our technology strings and actuators and lenses.

For Communication Modules, we will leverage our technology advantage, such as ultra-small 5G antenna modules with excellent heat dissipation and alignment with customers.

Last, the Substrate Solution's division. Q1 revenue was KRW 328.9 billion, which is a 14% decrease Q-on-Q and a 8% decrease Y-O-Y. Despite the increase in the exclusive supply of AP Flip Chip CSPs for the strategic customer's flagship and increase in supply of PC CPU Flip Chip BGAs for overseas customer with the continued decrease in mobile phone demand, revenue of RFPCB for OLED decreased, which led to a Q-on-Q decrease for the entire division.

In Q2, even though revenue for OLED RFPCB is expected to continue a decline, we will focus on diversifying our revenue structure by expanding our product lineup, targeting Chinese customers and camera modules.

In the case of a package substrate, we are expected to increase in revenue by a diversifying our customer base by using our superior quality and yield compared to our competitors.

That completes the presentation on first quarter results, and now we will hear from the Head of Strategic Marketing, who will share with you the market trends and outlook by product.

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Unidentified Company Representative, [3]

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[Interpreted] Good afternoon. This is [Hu Kwanjo], SVP and Head of Strategic Marketing Center. I would like to give you an update as well as outlook for the MLCC camera modules and substrate.

First, the MLCC market trends and future outlook. For the IT application MLCC market, we said during the Q4 earnings call that overall demand is expected for IT applications from second quarter as customer launch new models and also run through existing inventory. However, at this point, market recovery is expected to be somewhat delayed given that U.S.-China trade dispute is not yet resolved, and set demand for all major applications remain weak.

We expect the sluggish IT demand to continue at least for second quarter due to excessive channel inventory, but start to gradually improve from third quarter due to launch of new products by the U.S. smartphone maker. However, in the case of industrial and automotive applications, even though supply situation eased for low-end products, supply continues to remain tight for high temperature, high voltage and large-sized products given the limited number of suppliers that can increase supply in the short term.

A more detailed breakdown of future demand outlook by application. First of all, for smartphones, set demand is expected to be 1.37 billion units this year, which is a 4% year-on-year decrease, by first quarter -- by quarter first quarter will be 320 million units, which is an 8% year-on-year decrease and 15% Q-on-Q decrease. Smartphone demand is expected to rebound from the bottom of the first quarter to 340 million units in Q2 and 350 million in Q3 and 370 million in Q4, which is a 5% growth.

So first half will be a difficult time for IT industry with decrease sales by the large U.S. customer and weak Chinese domestic demand. However, from second half, we expect the market situation to gradually improve, with events such as Black Friday and Singles' Day in Q4 as well as major handset launches in Q3.

Our IT application MLCC sales is also expected to show a weak first half and a strong second half pattern. The PC market is expected to be 250 million units this year, which is similar to recent years. There was a CPU supply shortage that has continued since Q4. Even though the timing is not yet clear, we cautiously hope for a gradual MLCC demand recovery from the latter part of the second half once the CPU supply shortage is resolved.

Also the launch of the 5G service has increased rollout of 5G network base stations this year, and with 5G smartphones to be launched in full scale from 2020, we expect steep increase in both industrial and IT high-end MLCC demand.

Also, the automotive MLCC that we have been focusing on recently is expected to continue growth with wider adoption of ADAS, an increase demand for EEVs. We have continued to build our capabilities to minimize the impact of market changes by securing an MLCC full lineup, covering IT, industrial and automotive and operating production lines that can easily switch over capacity to other applications.

We have also secured stable mid- to long-term demand base on long-term supply contracts with major customers that we have closely engaged during the past supply and demand imbalance period. Particularly, we are aggressively increasing market share of existing industrial and automotive customers, and we are also preparing for growth in automotive MLCC business driven by automotive -- autonomous vehicles and EV by optimizing our MLCC product mix.

Next is the Camera Module and set trend as well as our response plan. In the Camera Module market, demand for multi-cameras' expected to continue growth as flagships adopt triple/quad cameras, and dual cameras are adopted even in the mass segment. Also, the camera module will continue to be the point of differentiation for the handset itself with wider adoption of existing high-pixel cameras, big-sized sensors, the [6P, 7P,] multipiece lenses and [wire] stabilization. Also, high-power optical zoom with folded structure have started mass production for the Chinese customer from second quarter.

Because high component specifications and reliability is essential to take advantage of this camera trend, SEMCO's advantage in differentiated component technology and in-house production in a wide range of parts, including lens and actuators is actually generating new business opportunities for us in the Camera Module market. For example, with the customized solutions and design in using lenses and actuators for high-end cameras for flagship, we will be focusing on gaining both revenue and profitability for these flagships of Chinese makers as well as the strategic customer to be launched in Q2. We will continue to strengthen technical cooperation with strategic customers and strengthen our differentiation for core technology and component technology, also propose customized solutions to customer demand to achieve growth in both quantity and quality.

Lastly, the supply and demand situation for Substrate Solution division. First, the update on the PCB market. In Q1, demand for OLED RFPCB decreased significantly due to the weak set sales of the U.S. smartphone customer, resulting in decrease of our revenue.

HDI. Because HDI is mainly a very cost-sensitive market given the nature of the industry, it has a low value add, and overall, the industry is facing challenges. Meanwhile, even the package substrate market is experiencing difficulty in increasing the sales for RF SiPs due to increase in sales of the U.S. smartphone customer -- decrease in the sales of the U.S. smartphone customer, however, we were able to increase supply for AP Flip Chip CSP for flagship and mass model for strategic customer and win additional orders for our CPU Flip Chip BGAs for the overseas customer.

However, because of weak demand on PCBs as we mentioned earlier, the substrate market overall is expected to remain difficult in Q2. But in Q3, when the OLED RFPCBs for the new models of the overseas customer starts, we are hoping to see a turnaround in business results. We will also strengthen our customer and product portfolio to lessen the seasonality of our business.

To summarize, even though there were some difficulties in Q1 due to decrease in set demand, we were able to achieve improved outcome year-on-year thanks to our efforts to build stronger business fundamentals, such as better productivity and quality and decreased dependence on the strategic customer by increasing the share of our automotive MLCC business. In Q2, the positive effect of a launch of new camera module for the strategic customer would disappear and a single-digit revenue decrease is expected Q-on-Q.

However, in Q3, given that smartphone customers in U.S. and China as well as the strategic customer are preparing for new flagship launches, we expect results to improve. With revenue growth driven by the opening of the 5G market and acceleration of the shift to automotive MLCC with the operation of the Tianjin new plant, we'll focus on self-building a solid business foundation. Thank you very much.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) (foreign language)

The first questions were presented by Mr. Kim Ji-san from Kiwoom Securities.

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Ji-San Kim, Kiwoom Securities Co., Ltd., Research Division - Team Leader and Electric & Electronic Analyst [2]

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[Interpreted] I have 2 questions. The first question is about MLCC. I think many people would be wondering what was the utilization as well as the inventory levels for MLCC in the first quarter. And can you also give us some direction that -- in terms of future outlook? Second question is the -- about the RFPCB. You said that revenue in first quarter decreased mainly due to this weaker demand by the overseas customer. What was the utilization for RFPCBs in Q1? And when do you think that the business could be turned around to profitability?

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Unidentified Company Representative, [3]

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[Interpreted] To answer your first question of the MLCC utilization and in future outlook, in first quarter, our MLCC utilization was at around 80% mainly due to the fact that there was a decrease in production volume by the delay in the recovery of IT demand and also because of our conversion over to a large-sized product mix, which has the effect of affecting our volume of quantity-based capacity.

Our inventory is around 70 days' worth. It is an increase versus last quarter, but we believe that with increase of sales during second quarter, we will be able to consume our inventory down to appropriate levels.

Second quarter utilization, we're expecting that to be similar to first quarter level as we continue our capacity conversion over to automotive/industrial application and also the continued adjustments of IT application production volume, but we believe that the inventory level will decrease versus the first quarter. In the second half, we will continue to maintain appropriate inventory levels by operating our production flexibly, depending on the market situation and also enhance our profitability by focusing enhanced productivity around automotive/industrial applications and also further enhancing our internal efficiency. Especially in terms of MLCC, there is the Tianjin new plant that we're preparing, dedicated to automotive applications. We will focus on bringing that online earlier so that it can start contributing to our business from year 2020.

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Unidentified Company Representative, [4]

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[Interpreted] To answer your second question of the RFPCB utilization and when we expect it to turnaround to profitability, it is true that in first quarter, our RFPCB utilization was very low. It was below 50%, mainly due to the decreased demand for the flagship model of the overseas customer. Second quarter utilization appears to be similar to what we saw in first quarter, however, from third quarter, once supply to the new models, 2019 new models start, we expect that the RFPCB utilization will recover to full level from third quarter. In order to enhance the utilization as well as to address the profitability of our RFPCB business, we have been diversifying both our product portfolio as well as customers, and we think that the results from these efforts will start to show from the second quarter.

In terms of product diversification, we have been increasing our RFPCB supply for 5G antennas and camera modules. Also, in terms of diversifying customers for OLED RFPCBs, we have been designed into Chinese as well as global customers' new models from second quarter and plan to go into mass production. So through these efforts to diversify our revenue base, we will try to dampen the effects of seasonality in our product sales, improve our profitability, so that we are expecting to turnaround to profitability in third quarter.

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Operator [5]

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(foreign language) The next questions were presented by Ms. Kim Sohyun from Deutsche Bank.

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Sohyun Kim, Deutsche Bank AG, Research Division - Research Associate [6]

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I have 2 questions. First of all, your camera module sales has increased significantly on a Q-on-Q basis in the first quarter. Would you provide more color on this and also regarding your second quarter outlook? And my second question was MLCC ASP in the first quarter? And how do you see it going forward?

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Unidentified Company Representative, [7]

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[Interpreted] To answer your first question about the camera module, in 2019 first quarter, our camera module revenue grew by about 30% quarter-on-quarter. This is mainly thanks to the mass production of the high-spec multi-cameras for the flagship of our strategic customer. In the second quarter, we have some positive outlook. For example, we are expecting to increase our supply of triple cameras to the new model of the Chinese customers and also go into mass production of a camera module that has our high-power optical zoom technology, based on our differentiated component technology base. However, second quarter, we do expect this set demand from our strategic customer to weaken due to seasonality. And so in second quarter, our revenue outlook is that it was decreased slightly on a Q-on-Q basis. But starting from third quarter, we are expecting revenue to rebound again, especially as we supply the products for the new flagship model of the strategic customer, and we will maximize our revenue by thoroughly preparing for this mass production.

To answer your second question about the MLCC ASP. MLCC ASP in the first quarter on a blended basis at our level actually increased by about 20% quarter-on-quarter, mainly thanks to improvement in product mix as the share of automotive and industrial MLCC revenue increased, even though at a product-to-product level ASPs did not change much. In terms of application, there was the increase of high-capacitance MLCCs for IT and also the large-sized products increase for industrial and automotive applications, which helped the overall increase of the ASP.

In the second quarter, there will be an increase though, of the IT MLCCs for Chinese customers, and so we expect the blended ASP in second quarter to slightly decrease versus first quarter while overall revenue will grow on a quarter-on-quarter basis. In the second half, we expect the IT industry demand to recover, so that the demand -- supply and demand situation would improve in the second half. And also, we will continue to improve our product mix, so that we're expecting in the second half our ASPs will be maintained at first half levels, but overall revenue will increase versus first half.

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Operator [8]

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(foreign language) The next questions were presented by Mr. Gang Ho Park from Daishin Securities.

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Gang Ho Park, Daishin Securities Co. Ltd., Research Division - Research Analyst [9]

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[Interpreted] I have 2 questions. The first question is about the PLP transfer deal that was announced today. With that transfer of the PLP business to Samsung Electronics, I'm assuming that would have an impact in terms of your packaging portfolio. Can you share with us your thoughts about what you plan for your packaging portfolio in the future? Second question is about the Camera Module business. We do notice that triple cameras are being adopted in more and more smartphones, which means that triple cameras won't be much of a differentiating factor anymore. So in that sense, how is SEMCO planning to maintain its differentiation in the Camera Module business?

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Unidentified Company Representative, [10]

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[Interpreted] To answer your first question about package substrate business, actually, the impact of the PLP business is minimal in terms of our package substrate business. Our package substrate business, as you know, has been recognized by our customers in terms of excellent quality and yield during the past several years. And that has helped us actually increase our market share gradually and continuously, despite the very difficult market situation. In the BGA area, we have the sole supplier status in the flagship AP substrate, and we are operating our BGA at full capacity in the second quarter following on from utilization from first quarter.

Also to prepare for the future, we are preparing to diversify our product portfolio beyond the AP. For example, by developing high-count multi-layer SiPs for 5G antennas. For the Flip Chip BGAs, we expect the supply situation to remain tight, especially with a higher demand for the high-count, multi-layer BGAs for servers or automotive and network applications. Also in the second half, even though timing is not yet clear, we expect that during the second half, there will be a migration of CPU new products from the 14 nano to 10 nano. And therefore, we are preparing a high-end 10-nano CPU package substrate to be supplied timely, in time for this migration of -- at the CPU level. Also at the same time, we have been pursuing quite -- co-development with a global major customer from 2018 for GPU automotive and network applications. We will have a mass production supply of new products that will help us secure profitability.

On your second question about how we mean -- how we plan to maintain our differentiation in the Camera Module business. Actually, it's all based on the technology, the technical competitiveness that we have in the key components of the camera modules. That's actuators and the lenses.

First, in terms of the actuator, unlike most of the other competitors that use a spring-type actuator, we've always been differentiating our actuators with a ball structure, which is actually becoming more and more appreciated as the image sensors become larger and the optical parts become heavier, so that it's difficult to sustain the weight with a spring-type actuator. On the other hand, the ball structure actuator has the advantages in terms of the sustainable weight. And so more and more customers are showing interest into the ball structure actuators that we have.

Also in terms of the lenses, as you know, we were the first to use the 7P F#1.5 lens on the flagship model of our strategic customer from 2018. Also from the second quarter, we've been supplying on a mass production basis, a high-power optical zoom folded structure module for a Chinese customer. We think that there will be an increase of this supply, and therefore, the strengths that we have in terms of the deep cut structure lens that actually minimizes the module's thickness and also the competitiveness that we have with the ball structure actuator is going to be highlighted as we move forward in the camera module evolution. Therefore, we will increase and strengthen our lens supply capabilities to actively respond to market demand, and also enhance our manufacturing competitiveness in terms of quality and production yield to continue our leadership in the high-end camera module market.

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Operator [11]

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(foreign language) The next question will be presented by Mr. Sung Kyu Kim from Daiwa Capital Market.

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S. K. Kim, Daiwa Securities Co. Ltd., Research Division - Research Analyst [12]

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[Interpreted] I have 2 questions about that PLP business sale that were announced today. PLP was a business that SEMCO had been focusing on as one of its new businesses. Can you give us a bit more detail on the background to deciding to transfer that business to Samsung Electronics? Also I'm wondering what you plan to do with the proceeds from that transfer. According to what was announced, you would be receiving about KRW 785 billion in cash. Are you planning to use that, for example, in another new business?

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Unidentified Company Representative, [13]

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[Interpreted] To answer your first question, yes, as you have heard, there was the BOD meeting this morning at 11 that decided to transfer our PLP business to Samsung Electronics' semiconductor business at KRW 785 billion. After all of the legal proceedings, the plan is to complete -- close the transaction before June 1 this year. As you know, the PLP business was something that we've been developing as a part of our packaging technology development efforts. We were expecting a technology deflection point to come, and we've -- we're devoted to the PLP business from 2015. We also succeeded in world's first mass production in June of 2018.

However, we also realized that in order to dramatically grow the business, large investments were required. And also from the customer side, there was a very strong demand for a one-stop service where the chip and the packaging could be done together. Also at the same time, we were looking at other very attractive business opportunities, such as the automotive MLCC and 5G communication modules, which also required investments. So in this situation, Samsung Electronics first proposed that they would like to take over the PLP business. We gave very much thought as to where to focus more the PLP business or our other main [3] businesses, and we have decided that it would be strategically more beneficial to the company to focus on our main business after transferring the PLP business to Samsung Electronics.

About what we plan to do with the proceeds from that transfer, we will focus on strengthening these -- our business in -- strengthening our existing business, especially around those that have a strong growth potential, but also at the same time, develop new business opportunities. In terms of existing business, we will accelerate the expansion of our high margin automotive MLCC business. And for other existing businesses, we will strengthen our key technologies and components around the growth markets, especially, for example, 5G applications. Even though it's also a bit early to share the details, we are at the same time, identifying and developing new business opportunities to overall mix of company's fundamentals stronger.

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Operator [14]

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(foreign language) The next questions were presented by Mr. Dongwon Kim from KB Securities.

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Dongwon Kim, KB Securities Co., Ltd., Research Division - Analyst [15]

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[Interpreted] I have a question to the CFO. Can you share with us the strategical direction for SEMCO this year? And also, can you give us some outlook for second quarter as well as full year performance?

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Byoung Jun Lee, Samsung Electro-Mechanics Co., Ltd. - Senior VP, Head of Corporate Business Support Team & Director [16]

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[Interpreted] To answer your question, in first quarter, we recorded a operating profit of KRW 190.3 billion, which actually, considering the very challenging business environment, such as decrease in set demand and MLCC inventory adjustment was, we believe, quite a meaningful business result even though it may have been less than what the market had expected.

Looking forward to the second quarter, situation does not look easy either, even though, yes, MLCC, especially in the high-end IT applications will improve, there's still quite a lot of channeled inventory. Also from the second quarter, the demand for the flagship model of the strategic customer will decrease. And the overall revenue therefore, we think that in the second quarter may slightly decrease on a quarter-on-quarter basis, even though the top line may decrease slightly in terms of profits given the factors such as a better cost competitiveness and improved product mix as well as the PLP business transfer. We internally think that in terms of profit, second quarter may be higher than first quarter. Looking towards the rest of the year, third quarter, there will be the new product launches by these overseas customer as well as the strategic customer. So we think that from the third quarter, market situation we'll start to improve. So that for the full year 2019, we're expecting to report meaningful results not only in terms of revenue but also growth potential as well as profitability. And in order to achieve this, we will continue to enhance our internal efficiency and also continue our investments for new promising areas.

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Unidentified Company Representative, [17]

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[Interpreted] That completes our conference call. Thank you very much, and if you have any further questions, please forward them to our IR department.

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