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Edited Transcript of 009150.KS earnings conference call or presentation 29-Jan-20 6:00am GMT

Q4 2019 Samsung Electro-Mechanics Co Ltd Earnings Call

Greonggi-do Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Samsung Electro-Mechanics Co Ltd earnings conference call or presentation Wednesday, January 29, 2020 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kook-hwan Cho

Samsung Electro-Mechanics Co., Ltd. - Head of Strategic Marketing

* 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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* Giuni Lee

Goldman Sachs Group Inc., Research Division - Research Analyst

* H. Kwon

JP Morgan Chase & Co, Research Division - Analyst

* Ji-San Kim

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

* Jong Wook Lee

Samsung Securities Co. Ltd., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. Thank you very much for joining our conference call. We will now start the 2019 Fourth Quarter Earnings Conference Call of Samsung Electro-Mechanics. This call will start with a presentation by the company followed by a Q&A session. (Operator Instructions)

Now we will 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 and IR at Samsung Electro-Mechanics. Thank you for joining our 2019 fourth quarter earnings conference call.

Before going into the presentation, I would like to introduce the management who are present. We have SVP, Kook-hwan Cho, of the Head of Strategic Marketing; Team Leader, Cheol-Soon Ga, Head of Support Team Component Solution Division; Team Leader, [Chung-Sok Sah], Head of Support Team Module Solution Division; and Team Leader, [Bo Yun Jung], Head of Support Team Substrate Solution Division.

We will start with a presentation of our fourth quarter earnings and division results, and marketing trends and outlook by product before taking your questions.

First, our fourth quarter results. In fourth quarter 2019, our revenue was KRW 1,845.6 billion, which is an approximately 17% Q-on-Q decrease and an approximately 5% year-on-year decrease. The details regarding revenue increase and decrease by divisions will be explained later on during the divisional results.

Fourth quarter operating profit was KRW 138.7 billion, which is approximately 27% Q-on-Q decrease.

Pretax profit in Q4 was KRW 148.7 billion, with about KRW 10 billion in nonoperating income, including equity method gains.

Q4 recorded a net loss of KRW 22.6 billion with a total of KRW 254.2 billion of one-off expenses, adjusted and reflected to the discontinued operation earnings account, including the tangible asset impairment loss due to the discontinuation of the Kunshan HDI business. The discontinuation of Kunshan HDI was already disclosed in December and has been carried out to improve the efficiency of our substrate business, and we expect to improve our profit structure through this move.

Next, in terms of financials. As of end of December, total asset was KRW 8,674.2 billion, which is a 5% decrease from the end of the previous quarter.

In terms of major financial indicators, debt-to-equity was 60%, which is a slight decrease Q-on-Q. Net debt-to-equity and shareholders' equity increased slightly Q-on-Q to 21% and 63%, respectively.

Next is our future outlook for each division. For the Component Solution division. The Component Solution division's Q4 revenue was KRW 775 billion, which is a 5% decrease Q-on-Q and a roughly 12% decrease year-on-year.

Even though the MLCC supply to global customers IT applications, including China and supply for industrial and automotive applications increased, overall, divisional revenue decreased Q-on-Q due to decreased demand of products to the strategic customer's flagship as a result of year-end inventory adjustment.

The 2020 MLCC market is expected to see increased demand from industrial applications, such as IT and base stations with a greater rollout of 5G smartphones. Accordingly, we will expand supply with a focus on high-spec products, such as small size or high capacitors, MLCC for mobile applications and network and server applications.

Also, the automotive market is expected to continue mid- to long-term growth, including for ADAS and xEVs. In response, we will expand our high-reliability product lineup, such as high-temperature and high-voltage and strengthen our supply capability with increased capacity, while at the same time, focusing on increasing sales to Tier 1s in Europe and the U.S. and diversifying our customer base.

Next is the Module Solution division. The Module Solution division's Q4 revenue was KRW 641.8 billion, which is roughly a 32% Q-on-Q decrease and a 9% year-on-year decrease. The Q-on-Q decrease is mainly explained by the seasonality of the strategic customer, which led to decreased supply of camera modules and communication modules for the flagship. However, revenue from major Chinese customers has increased Q-on-Q, thanks to increased supply of 100 M class pixel camera modules and supply of optical 5x zoom to a new customer. In 2020, demand for high-performance camera modules is expected to continue to increase as the differentiating feature of smartphones. In response, we will strengthen our folded zoom and high-pixel product lineup and also diversify our customer base. Also, in the case of Communication Module, we will focus on developing new spec WiFi module products and 5G high-performance antenna technology in response to the expected increase in next-generation module markets.

And lastly Substrate Solution division. Q4 revenue was KRW 428.8 billion, which is a 6% Q-on-Q decrease but an 18% year-on-year increase. In Q4, even though supply of SiP substrates for 5G antennas and FCBGAs for new customers, CPU and GPU applications increased, overall revenue of the division decreased Q-on-Q due to decreased supply of RFPCBs for the overseas customers OLED.

In the future, demand for high-end package substrates with multilayered and advanced node circuits for 5G and network applications is expected to increase. Therefore, we will actively respond to the [tight] supply segments by expanding our capacity for package substrates such as SiPs and fcBGAs.

Also, for circuit boards, we will focus on diversifying our customer base for OLED RFPCBs and expand our lineup for other applications such as wearables.

That completes our presentation on Q4 results and now our Head of Strategic Marketing, will take you through the market trends and outlook by product.

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Kook-hwan Cho, Samsung Electro-Mechanics Co., Ltd. - Head of Strategic Marketing [3]

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[Interpreted] Good afternoon. This is Kook-hwan Cho, Head of Strategic Marketing. I would like to touch upon the current market situation and future outlook for MLCC camera modules and the substrate markets.

First, the MLCC market situation and future outlook. In Q4, MLCC demand overall remains solid, driven by the seasonal increase from major applications including smartphones, PCs and TVs and also the build-up demand by set makers in anticipation of the Chinese Lunar New Year season.

However, in December, the industry once again went through its traditional inventory adjustment.

In 2020, the MLCC market is expected to see a recovery of MLCC demand for IT applications, and further expansion of industrial and automotive applications, driven by acceleration of the 5G smartphone adoption, network rollout and increased electronic content on vehicles.

First, in the IT segment, existing demand growth trends for smartphones, PCs and TVs is expected to be maintained with increased demand, particularly for high-end MLCC as major handset makers expand their 5G lineup.

In particular, MLCC demand for 5G smartphones are expected to increase by around 30%. In the Industrial segment, industrial MLCC capacitance is expected to grow around network and server applications as companies increase infrastructure investments to implement 5G, AI, IoT solutions.

For automotive, despite the decrease in the growth of vehicle sales, we expect automotive MLCCs to continue steady growth as a result of acceleration of electronic content on vehicles and expansion of the xEV market and greater penetration of ADAS.

Accordingly, even though Q1 is a slow season at the set level, our MLCC results for Q1 in 2020 is expected to improve versus the fourth quarter.

In particular, with 5G handset-related demand concentrated mainly in the second half of 2020, supply is likely to become tight, not only in the IT applications but also for industrial and automotive segments.

We expect that under such circumstances, differentiation in terms of responsiveness among suppliers will become more evident and we have been preparing the supply capacity to meet 5G-related demand growth as well as to catch any upside demand driven by a market recovery.

Lastly, we continue to focus on diversifying the applications for our new MLCC products, such as high-temperature MLCCs for servers or high-voltage MLCCs for solar and lighting applications. Even in the case of automotive MLCCS, we are focusing on enhancing our stable supply capacity to prepare for the long-term demand growth driven by ADAS adoption and EV demand while also adding on new regions and customer approvals.

Next, about camera module trends and our response strategy. The major trends in the smartphones camera market are the increase in multicamera adoptions, including triple and quad cameras. Also, there is the increased demand for 100 M class high pixel modules, the increased adoption of big sensors to improve the low light picture quality and the increased adoption of high-power optical zoom.

Due to such camera trends, using a high-spec part with high reliability in the camera module has become an essential. We expect to maintain our leading position in the premium camera module market by meeting the demand for large aperture lens driven by the adoption of big sensors and leveraging our differentiated component competitiveness such as the ball type actuators.

In 2020, with the wider adoption of 5G smartphones, OEMs are expected to compete more fiercely and continue to use cameras as a point of differentiation at the handset level.

We will actively respond to the product demands of the strategic customer and increased demand from Chinese customers for folded camera modules and also continue to lead the premium flagship module market using our technology to respond to the emerging trends of big sensors and slimmer modules.

Next is the market situation and outlook for substrates.

First, for BGA. With the 5G rollout, we expect demand to grow, particularly around the multilayer substrates for antenna modules and SiPs for RF front-end. Growth is also expected from memory substrates driven by the recovery of the semiconductor cycle. In terms of technology, we are seeing greater demand for multilayer SiP substrates for 5G antenna modules, as well as greater demand for larger substrates and advanced nodes to meet the needs of this smartphone AP, which now needs to support 5G and AI. This is eating up more capacity and making supply tighter for multilayer and high reliability substrates.

In Q4, solid growth continued, especially around package substrates for APs and mobile memory.

In Q1, we plan to increase sales from premium AP applications and RF front-end substrates while also increasing the scale of mass production for the 5G-related multilayer substrates.

We will prepare for a demand growth around multilayer and high reliability substrates by strengthening our strategic collaboration with key customers and preemptively responding to their requirements.

Our objective is to solidify our leading position in the 5G multilayer SiP market and to grow our business around the high-end AP and memory BGA.

For the Flip Chip BGAs, the market is moving towards the increased Flip Chip BGA layers and sizes in response to the adoption of a 10-nano PC CPU. Also the increased demand from server and network applications and slim laptop PCs are also driving up demand for [thin boards], which we are already supplying.

In 2020, we expect the Flip Chip BGA market demand to remain solid. And we will focus on increasing new revenue by diversifying overseas customers and adding new markets other than PCs, such as network products. Thank you.

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Questions and Answers

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Operator [1]

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(foreign language) Now Q&A session will begin. (Operator Instructions)

(foreign language) The first question's represented by Mr. Lee Jong Wook from Samsung Securities.

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Jong Wook Lee, Samsung Securities Co. Ltd., Research Division - Analyst [2]

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[Interpreted] Yes, I have 2 questions. My first question is about your fourth quarter MLCC. Can you share with us your utilization, your shipment and ASP in fourth quarter? And also, can you share with us your outlook for the first half of 2020 for your MLCC operation?

Second question is about your plans for 2020 full year on how you plan to manage and operate your MLCC capacity? And was there any impact due to the Philippine volcano explosion?

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Unidentified Company Representative, [3]

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[Interpreted] Now to answer your first question. In fourth quarter, our MLCC shipment actually increased mid-single digits versus the previous quarter, thanks to increase in supply of mid-end MLCCs around the Chinese distributors and OEMs and also as we satisfy the flagship demand for the U.S. IT -- flat IT customer.

Also, thanks to this, our utilization for MLCCs in fourth quarter improved to around above 80% from around 75% of Q4.

Even though overall industry, the price decline is stabilizing, our blended ASP in fourth quarter decreased quarter-on-quarter. This is mainly due to the decreased demand of the strategic customer's flagship, which is a result of the fourth quarter year-end inventory adjustment. And also the increase of mid-end product share to our Chinese customers.

Looking towards this year, 2020, we see possibilities of there being a tight supply in the second half as the demand from new products, from not only 5G mobile but also service and networks all kick in. And in anticipation of this tight supply situation in the second half, we have started early development of high-end products to meet the 5G demand. And also, we're focusing on building up our supply capabilities to meet the expected increase in demand from industrial and automotive applications.

Regarding the outlook for the first half of 2020 that you've asked, we expect that in the first half, our shipments and utilization would improve versus the second half of last year, while our ASP remains similar to what we saw last year.

Regarding your second question of our MLCC capacity operation plans for year 2020. First of all, for the IT application MLCCS, this year we'll be focusing on responding to the demand growth by improving our productivity by working on expanding our work sizes and also enhancing our production efficiency rather than making any investments in the equipment itself. Also regarding the automotive MLCCS, we are continuing to focus on meeting the mid- to long-term demand of automotive MLCCS. So our Tianjin new plant is currently moving ahead, moving as scheduled, while we also work on expanding our high reliability product lineup and also continue to talk on long-term supply arrangements with major customers.

So in terms of the automotive MLCC capacity for year 2020, we will continue to expand our preemptive supply capabilities, including the Tianjin new plant so that we are able to maintain the overall automotive MLCC growth trend.

You've also asked about the impact of the Philippine volcano explosion, which you would have seen through the media reports. Our Filipino operation is currently in normal operation. However, given that the risk is not completely resolved, we are -- we have established response plans for each possible scenario and are continuing to monitor the situations.

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Operator [4]

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(foreign language) The next questions were presented by Mr. Kwon Jay from JPMorgan.

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H. Kwon, JP Morgan Chase & Co, Research Division - Analyst [5]

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I have 2 sets of them. Firstly, could you share your capital expenditure plan for year 2020, preferably by division?

Secondly, provided the recent supply tightness at the substrate, especially for the semiconductor package, I'm interested in how you assess top line growth and margin trend for this year. Could you share your business outlook?

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Unidentified Company Representative, [6]

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[Interpreted] To answer your first question about our CapEx, you would have noticed that for the past several years, the company has been investing more than KRW 1 trillion each year in order to build up our mid- to long-term business foundation for our key businesses and also to develop new business opportunities. But I think this year, we will be focusing more on leveraging the business infrastructure that we have already secured through the past years of investments so that our investments will this year be more focused on our extensions or supplementary investments while we focus more on raising the production and operational efficiency of our assets.

So overall, this year, our CapEx possibly maybe less than what you have seen in previous years. In more detail, some of the key investment projects this year would be to finish the setup of the equipment for our Tianjin MLCC new plant, also expanding the capacity around the high end package substrates and also building a mass production line for the 5G antenna modules. These investments will help us strengthen our position in these respective markets, respond to market demand in a timely manner and also gain a leading position in the new emerging markets.

Your second question is -- was about the profitability for the substrate business this year. First of all, the large factor would be our Kunshan HDI business, which we discontinued as of December 2019. As you know, given that it was very difficult to gain any technology upper hand due to the staffing and technology side of the HDI, the Kunshan HDI continued to record large operating losses for several years and because we have discontinued that operation, we believe that we will be able to record a sure profitability in year 2020.

In the overall package substrate market, we are seeing a very strong industrial -- industry cycle. Also, there is the tight supply situation, and we have been maintaining a full utilization for our package substrates.

Also, we're seeing particularly strong demand coming from the 5G multilayer antenna substrates and the thin CPU and network substrates. And in order to preemptively respond to these strong demand areas, we are currently in the process of gaining more capacity.

We believe that given the situation and our preemptive response, we will be able to record revenue growth and also secure stable profitability this year.

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Operator [7]

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(foreign language) The next questions were presented by Mr. Lee Giuni from Goldman Sachs.

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Giuni Lee, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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I have 2 quick ones as well. The first one is, given the expectation for rapidly rising 5G-related demand, would be curious to know what your strategy is on MLCC supply expansion?

And my second question is on your camera module business. We saw substantial revenue growth from this business in the past several years, mainly led by ASP growth. How are you planning to continue to expand the revenue of the business in 2020?

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Unidentified Company Representative, [9]

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[Interpreted] To answer your first question about our response in terms of MLCC supply with the rollout of 5G. As you mentioned, as the acceleration of 5G rollout takes place especially around the Chinese and the U.S. markets, we expect from the MLCC side, there will be an increased demand for the ultra-thin, the high-capacitance, high-temperature or high-reliability products. This actually could be an opportunity for us, given that only a limited number of companies, including SEMCO are capable of supplying these products.

So given this opportunity, we are responding, first of all, by planning to increase the share of high-end MLCC supply, which would leverage the material technology that we have already obtained by supplying for the IT applications and also by using the thin techniques that we have been continuously applying for the 5G high-spec MLCCs. This will give us an early leadership in the MLCC for the 5G applications.

We're also noticing that these thin MLCC products are also gaining a lot of demand from the foldable phones and we are also, therefore, preemptively responding for the foldable phone demand for the thin MLCCs.

We're also related with the 5G expecting market demand or demand growth from the network and server applications so we are also expanding our high reliability MLCC lineup for these applications as well and continuing to increase our customer approval rates.

Regarding our plans of expanding our camera module revenue this year, looking towards the 2020 camera module market, I think 2 major sources of demand growth this year will be the adoption of the big sensors on the camera modules in order to deliver the higher pixel and higher resolution. And also the demand for camera modules that support the folded optical zoom.

In response to these major trends, we have been developing new technologies in terms of the manufacturing technology side in order to secure the performance and the quality that's necessary for the large-aperture, multipiece lenses to meet the big sensors. And also, we have been further enhancing our shock resistance, which is one of the strengths of the ball structure actuators. These are the technologies and the products that will increase the supply of [our] camera modules in sync with the market trends.

In this context, the folded zoom camera, which was first adopted in the flagship smartphones in 2019 is a good example. This folded zoom camera uses our own proprietary folded actuator and the deep cut lens to deliver high-power zoom in a slim factor. The folded zoom, we believe can actually become another mainstream choice and we are developing new technologies and also diversifying our customers for the folded zoom camera modules to make this come true.

So once again, we will continue this year to drive up our revenue growth by focusing and leveraging on our core component capabilities and also delivering high spec, differentiated camera modules to our customers.

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Operator [10]

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(foreign language) The next question's represented 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 [11]

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[Interpreted] I have 2 questions. The first question is about the Flip Chip BGAs which is actually showing some strong demand. Can you share with us what your supply was like in the fourth quarter and maybe your first quarter outlook for year 2020?

My second question is, perhaps the company can share with us its guidance for -- in the short term, the first quarter and also the full year 2020?

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Unidentified Company Representative, [12]

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[Interpreted] To answer your first question about the Flip Chip BGAs. First of all, in the fourth quarter of 2019, we saw steady demand for our thin CPU substrates for the laptop PCs and also, we were able to increase our revenue for the CPU, GPU substrates, our new products by starting supply to the major U.S. customer. Thanks to this, our revenue in fourth quarter maintained similar levels to the third quarter of 2019.

When we look at the full year 2019, our revenue actually grew by about 50% year-on-year basis, and our profitability also improved.

Well looking towards first quarter of year 2020, we expect this growth trend to continue, especially we're looking forward to increase supply of the new customers [since] CPU and also the automotive and network substrates, and also, we expect that this -- in the first quarter, we'll see an increase of the supply of substrates to the new 10-nano CPUs. And therefore, in first quarter, we expect that these factors will drive even further revenue growth.

Also, we have been continuing to expand our capacity in response to the tight supply situation, which will help drive even further revenue growth going forward. So in 2020, our focus will be on securing stable profitability by continuing to develop differentiating technologies and also diversifying our customer base and applications.

To answer your second question about our first quarter and full year outlook. First of all, looking towards the first quarter, considering that there will be the flagship model launch effect of a key customer, we think that in terms of revenue, we could see around a 10% growth quarter-on-quarter.

Now looking towards the full year 2020, there are still a lot of uncertainty in the external environment. On top of the U.S.-China trade dispute continuing, there is the height of tension in the Middle East and the recent outbreak of the Coronavirus. However, looking towards the industry, we are seeing the supply situation overall improving as we see some new demand coming from the 5G-related smartphone and communication infrastructure and also the continued growth of the automotive application market. And so we think that, overall, in 2020, the market situation of the component industry would improve somewhat compared to last year.

We consider that this industry situation and market situation will enable us to finally leverage all of the technology capabilities that we have been internalizing in our core businesses, such as equipment, material and manufacturing techniques. And also, this will -- we will be able to leverage the efforts that we have been putting in -- in increasing the promotions to the global top tier customers, so that we will be able to increase our revenue share around our high-end products especially in terms of application, the 5G and automotive applications.

With this happening, we expect that it will be possible to turn around our revenue back to a growth trend and that we will be able to continue to secure growth and profitability by building in stronger and solid business fundamentals.

That completes our fourth quarter earnings conference call. Thank you very much for attending. Any further questions, please forward them to our IR team. Thank you.

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