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Edited Transcript of 009150.KS earnings conference call or presentation 24-Jul-19 7:00am GMT

Q2 2019 Samsung Electro-Mechanics Co Ltd Earnings Call

Greonggi-do Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung Electro-Mechanics Co Ltd earnings conference call or presentation Wednesday, July 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cheol-Soon Ga

Samsung Electro-Mechanics Co., Ltd. - MD

* 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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* Gang Ho Park

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

* Giuni Lee

Goldman Sachs Group Inc., Research Division - Research Analyst

* Kim Rok-ho;Hana Financial Investment;Analyst

* Kim Woon-ho;IBK Investment and Securities;Analyst

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Presentation

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KwangWook Bae, Samsung Electro-Mechanics Co., Ltd. - VP and Head of Corporate Strategy & Planning Team [1]

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[Interpreted] Good afternoon. I am KwangWook Bae, VP and Head of the Planning Team, Head of IR at Samsung Electro-Mechanics. Thank you for joining our 2019 Q2 Earnings Conference Call.

Before going into the presentation, I'd like to introduce the management who are present. We have Byoung Jun Lee, the CFO; SVP [Hu Kwanjo], Head of Strategic Marketing Center; SVP Cheol-Soon Ga, Head of Support Team, Component Solution division; General Manager [Hyun Eukseo], Head of Support Team, Module Solution division; and VP Bo Yun Jung, Head of Support Team, Substrate Solution division.

Today's call will proceed in the order of, first, the company-wide business results and respective divisional performance, followed by the market trend and outlook for each product and conclude with a Q&A.

Let me first go over the company's earnings overview for Q2 2019. The company's total sales for the second quarter amounted to KRW 1.9577 trillion, down 8% Q-o-Q, but up 8% Y-o-Y. The changes in revenue and relevant information by each business unit will be explained in further detail during the division business results presentation.

The operating profit for Q2 decreased by 40% Q-o-Q to KRW 145.2 billion. Pretax profit in Q2 stood at KRW 119.2 billion, taking into account KRW 26 billion of nonoperating cost, inclusive of financial expenses. The net income for Q2 was KRW 303.6 billion. Adjusted and reflected into the P&L account for discontinued operations were KRW 251.2 billion, taking note of KRW 362.5 billion of gain on sale of PLP business and KRW 66.7 billion of corporate tax expenses. Please refer to the appendix regarding changes in the income statement due to the PLP business sell-off.

Moving on to the financial status. As of June end, the total assets stood at KRW 8.7764 trillion, an approximate 2% decrease Q-o-Q. Some of the proceeds from the PLP sell-off was used in paying back debt, bringing down the net debt by 32% Q-o-Q. As a result, that ratio decreased Q-o-Q to 63% and net debt ratio, likewise, to 19%. Equity ratio increased to 61%, strengthening financial soundness.

Let me now go over the business results by each division. First, Component Solution division. Q2 sales decreased 7% Q-o-Q and by 10% Y-o-Y to KRW 781.6 billion. Due to slowing demand and delay in market inventory digestion, sales of mid- to low-end IT MLCC and industrial MLCC decreased. However, with the large-sized high-capacitance product supply increasing toward Tier 1 customers, automotive MLCC continued its sales growth. In the second half, it is expected that the IT set will recover the seasonal demand momentum, and the industry's inventory will be digested.

In an effort to respond strategically, the company will accelerate the digestion of the mid- and low-end inventory, increased market share and increased supply more geared toward high-end product. We believe that the demand for high-reliability automotive products will continue. As a result, we will reinforce the high-reliability product lineup and expand supply, focusing on our Tier 1 customers.

Next, the Module Solution division. Q2 sales were KRW 811.2 billion, down by 15% Q-o-Q, but up by 33% Y-o-Y. The reason why sales slipped over the previous quarter is due to a decreased supply of camera and communication modules for the flagship model because of the strategic customers' seasonality factor. However, sales toward the major Chinese customers increased Q-o-Q due to the start of mass production of 5x optical zoom camera and supply increase of high-pixel multicamera.

In the second half, it is expected that the Camera Module will become more advanced in its specifications to differentiate the smart code. As a result, the company will differentiate ourselves further based on our core capability in lens and actuator. At the same time, we will respond to the market demand for high-pixel and next-generation optical zoom of above 5x so that we may lead the high value-add camera module market.

In the Communication Module, the 5G next-gen communication module market is expected to grow steadily. So by developing ultrasmall, but high-performance antenna module, the company will secure the market leadership in advance.

Lastly, the Substrate Solution division. Q2 sales were KRW 346.8 billion, up 5% Q-o-Q and up 16% Y-o-Y. Supply of HDI substrate for the flagship model and RFPCB for OLED decreased due to a decrease in major customer set products. However, by increasing the market share of thin-core Flip Chip BGA for a CPU for the overseas customers and increasing the supply of Flip Chip CSP for the mobile AP for the strategic customer, the Substrate Solution division's total sales increased Q-o-Q.

In the second half, a higher demand is expected for the high-specification package substrate for 5G, GPU and auto. We will differentiate ourselves on multilayer stacking and fine-patterning technologies and increase sales of new products. We expect higher demand for RFPCB for OLED with the launch of our new smartphone by our major customer. With that in mind, the company will continue to maintain higher supply position toward the overseas customers and also diversify our customer base.

This concludes the Q2 business results presentation. And now the Head of Strategic Marketing Center will discuss the market trend and outlook by product.

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Unidentified Company Representative, [2]

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[Interpreted] Good afternoon. This is SVP [Hu Kwanjo], Head of Strategic Marketing Center. I'd like to share with you the market status and the second half outlook for MLCC, Camera Module and Substrate.

First about the current MLCC market and its outlook. During the Q1 earnings presentation, we had mentioned that we will bottom out in Q2, and the overall demand for MLCC will pick up in Q3, considering that there will be improved demand for IT applications, including smartphones, and the customers' inventory will have been digested. However, because of unexpected market factors such as consumer sentiments gone sour due to the U.S.-China trade dispute and the company age issue, the MLCC inventory digestion speed is slower than expected.

The market turnaround is expected to come later than we had forecasted in the previous quarter. For the industrial and automotive markets, there was a change in the sales volume because companies reduce their infrastructure investment and Chinese government scaled back EV subsidies. This led to easing the tight supply of some low-end products.

As for the market outlook. IT MLCC will see a slight recovery in demand on the back of new flagship smartphone launch in Q3 and seasonal demand increase in PC TV, leading to an increase in set production. And the overall inventory level will gradually improve. However, due to the market uncertainties coming from the U.S.-China trade dispute, et cetera, it seems challenging to regain the normal inventory level in the second half of this year.

On the other hand, as for the automotive MLCC, the growth of car sales has slowed down a bit, but we expect a steady increase in demand due to car manufacturers' efforts to improve performance such as autonomous driving function and higher penetration of ADAS. We also expect higher demand for industrial MLCC as companies will be making proactive infrastructure investment to secure a significant position in the 5G market by the second half of 2020. Our strength lies in our broad spectrum of MLCC lineup covering IT, industrial and automotive. Based on the long-term supply contract with our strategic customers, we are continuing to secure stable mid- to long-term volume and working hard to increase our respective market share.

In the industrial segment, by securing the newly approved models, we are working to expand our market share with our major players in preparation for the full-fledged 5G era. We are expanding the entry products, including high-temperature MLCC for the servers as well as the high-voltage products for industrial and lighting to diversify the applications.

In the automotive segment, in order to get ready for higher penetration of ADAS and higher demand for EVs in the long run, we are gearing up for increased production capacity. We're also seeking approval from major customers and also discovering new regions, applications and customers.

Next, about the Camera Module trend and the company's strategy. In the previous quarter, we had mentioned the higher adoption rate of multicameras. For example, triple camera on the flagship and dual camera on the mass-tier models. As such, the Camera Module is emphasized as a marketing differentiator on the smartphone. In the flagship models, we are employing high pixel on the main camera and applying ultrawide-angle lens and zoom function on the subcamera in order to expand the camera functionality on the smartphone.

In the second half of this year, there is the uncertainty factor involving the U.S.-China trade dispute and company age issues. However, our strategic customer is expected to launch a new flagship model. We will engage in the design and activities of our unique technology and apply it to the high-specification camera to be included in the new flagship model to push for higher revenues.

The market is expected to favor such differentiation through the camera. For example, high-functionality and high-pixel sensors. With this in mind, we will continue to reinforce our strength in lens and actuator insourcing, increase the supply of triple and quad camera product lineup as well as folded zoom product so that we can expand our market influence in the high value-added segment of the market. Lastly, about the substrate market status and outlook. First, about the package substrate market. Despite the weak semiconductor demand in Q2, there was an increase in demand and market share for smartphone AP from the strategic customer, thus increasing our revenue.

In the second half of the year, we will respond actively to initial supply of AP for the new smartphone and growth in substrate volume for 5G RF so that we may gain market leadership and increase our revenue. The supply situation is tight for Flip Chip BGA because there is higher demand for the server application, the number of layers has increased and also the size has increased. In the second half, we will continue to increase sales based on stable quality.

In terms of RFPCB. Because of the sluggish sales of smartphones, there was a change in the demand for RFPCB that is used in the OLED display, thus impacting Q2 business performance. However, in the second half, we will respond proactively to higher demand for RFPCB for OLED in line with the new model launch, thus contributing to better business results.

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KwangWook Bae, Samsung Electro-Mechanics Co., Ltd. - VP and Head of Corporate Strategy & Planning Team [3]

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[Interpreted] We will now begin the Q&A. Please follow the instructions of the operator to pose your questions.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) The first questions will be presented by Mr. Kim Woon-ho from IBK Investment and Securities.

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Kim Woon-ho;IBK Investment and Securities;Analyst, [2]

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[Interpreted] I have 2. First is about the MLCC. You talked about how the inventory situation for MLCC was not favorable. And I was wondering about the current inventory status and the utilization rate for MLCC and how that is going to change in the second half. And my second question has to do with RFPCB. I'd like to know about how the supply situation for RFPCB is going to improve in the second half and profitability outlook.

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Cheol-Soon Ga, Samsung Electro-Mechanics Co., Ltd. - MD [3]

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[Interpreted] Thank you for the question. This is SVP Cheol-Soon Ga, Head of Support Team, Component Solution division. Let me answer your question about the MLCC utilization, inventory for Q2 and future outlook.

In Q2, because of a downturn in global demand and delay in customer inventory digestion, we adjusted the MLCC production for the purpose of inventory management. Utilization was lower than the previous quarter at around 70% level. And the inventory level is maintained at 60 days, which is 10 days less than Q1 through a production adjustment and increase in sales volume compared to the first quarter.

In Q3, driven by the launch of new IT MLCC for major customer and responding to higher demand for automotive MLCC, we expect the utilization rate to increase slightly. By proactively engaging in sales increase activities and gaining market share, we will try to gradually bring down the inventory level.

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Unidentified Company Representative, [4]

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[Interpreted] Let me answer the question about the RFPCB supply plan and profitability outlook for the second half. In the first half, RFPCB utilization rate was low because of reduced demand for set products from the overseas customers. However, we expect higher utilization and a large increase in sales starting in Q3 with the increased supply that goes into the new 2019 model.

As a result of our effort to diversify our customer base, we will be increasing the OLED RFPCB supply to the Chinese and global customers expecting to contribute to sales increase in second half. Based on the increased supply of new OLED RFPCB products, we will work hard so that the Substrate business as a whole can make a profitability turnaround in the second half.

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Operator [5]

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(foreign language) The next questions will be presented by Mr. Kim Rok-ho from Hana Financial Investment.

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Kim Rok-ho;Hana Financial Investment;Analyst, [6]

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[Interpreted] I have 2 as well. The first question has do with MLCC. I'd like to know the ASP of MLCC in the second quarter and its directionality in the second half. And my second question is about the Camera Module. I'd like to know about the current status and future plans for folded zoom.

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Unidentified Company Representative, [7]

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[Interpreted] Yes, as to the first question. In Q2, in the MLCC market with the global macro environment dampening, customer inventory digestion was slower than expected. We're continuing to see excess supply in IT MLCC. We implemented sales increase in response to higher demand for automotive MLCC, but because of the reduced demand for high-specification IT MLCC, the ASP fell by more than 10% Q-o-Q.

In Q3 and in the second half of the year, there will be seasonal demand recovery for IT MLCC, and inventory will be digested gradually, so we expect the IT ASP to fall by a smaller margin than the previous quarter. We anticipate that there will be continued demand for high-reliability automotive MLCC and that it will be possible to maintain a stable ASP for automotive.

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Unidentified Company Representative, [8]

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[Interpreted] Yes. So that's the current status and future plans for folded zoom. In Q2 2019, we started supplying to major Chinese customers, the periscope-type optical 5x zoom camera without the camera module protrusion. Folded zoom using the periscope-like structure is a new technology that is expected to be more widely adopted in the premium phones.

With this in mind, we are getting ready for the next-generation products with additional enhancement to the zoom function and at the same time, we are working on improving the cost competitiveness. Through this, we plan to reinforce our market leadership in the folded zoom segment.

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Operator [9]

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

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Giuni Lee, Goldman Sachs Group Inc., Research Division - Research Analyst [10]

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I have 2 questions: one on MLCC and one on camera modules. So from my understanding, your auto MLCC business has been growing at a rapid pace in the last few years. And you also mentioned earlier that it continued to grow in Q2 '19, so wanted to get an idea of how the business is currently tracking and the outlook of the business to the point you're able to provide.

My second question is on camera modules. As you mentioned earlier in the call, we are seeing increasing adoption of multicameras in smartphones and also camera modules with enhanced specifications, functionalities and so on. So it seems like the demand for high-performance camera modules is rapidly increasing. So would like to know against this backdrop how are you planning to position yourself, not only in the near term, but also your mid- to long-term strategies.

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Unidentified Company Representative, [11]

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[Interpreted] Thank you for the questions. First, about the automotive MLCC business status and future outlook. In Q2, automotive MLCC supply was increased, focusing on the Tier 1 customers, raising the revenue slightly Q-o-Q. In the second half, the demand for high-reliability automotive MLCC is expected to continue to which we will respond by product lineup reinforcement and supply increase.

As to the new plant in Tianjin, China to prepare for 2020 and beyond, everything is going according to schedule. Discussions are underway with the existing customer about the long-term supply beyond 2020, and we are also talking with new customers about the new product development schedule in detail. Through these efforts, we will confirm the 2020 sales plan for automotive MLCC early on and make necessary preparations.

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Unidentified Company Representative, [12]

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[Interpreted] Yes, about the higher demand for a high-spec camera module and our strategy. Camera modules' main functions are emphasized as a point of differentiator on the smartphone. There is a wider adoption of high-specification camera modules on the smartphones such as multicameras like the triple and quad cameras, higher resolution and folded zoom function. To meet the need for higher picture quality, image sensor size is increasing, and the optical components are getting heavier and thicker.

In response to these trends, we are supplying the 7P slim lens and ball structure actuator known for lower power consumption and shock resistance. We are accommodating customers' different needs appropriately, for example, by applying the larger apertures and brighter lens with low F-numbers to improve the low light performance with higher megapixel count.

At the same time, in order to lead the folded zoom market, we are developing the next-generation camera with above 5x zoom. We're applying differentiated Prism technology, deep-cut slim lens as well as the ball structure actuator technology for optical zoom, which can extend the focal length. As such, based on consistent design and differentiated manufacturing capability from core component to the whole module, we will continue to expand the High-specification Camera business.

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Operator [13]

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

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Gang Ho Park, Daishin Securities Co. Ltd., Research Division - Research Analyst [14]

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[Interpreted] This is Park Gang Ho from Daishin Securities. I also have 2 questions. One has to do with package. And my second question goes to the CFO. As for the sell-off of PLP business, I was wondering what is your business outlook and company strategy for the Package Substrate business. And as you did mention, in the second half, we are still having this U.S.-China trade dispute issue and the Huawei issue, which is going to lead to weaker demand. So the Q2 results were not as satisfactory as we had expected. And what do you think is going to be the market outlook for Q3 and the rest of the year?

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Unidentified Company Representative, [15]

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[Interpreted] Yes, about the current status and future plans for the Package Substrate business. With higher demand for high-specification substrates for 5G servers, automobile and network, the industry supply situation remains tight. Along with this trend, our company's Package Substrate division achieved 10% higher revenue Q-o-Q, thanks to higher demand for smartphone AP and communication SIP substrates and full utilization due to increased supply of CPU substrates.

The business direction in the second half for package substrates is as follows: For DTA, we will maintain the sole supplier status for flagship AP substrate and diversify product portfolio by increasing SIP substrate for the 5G antenna. For Flip Chip BGA, we will provide timely supply of high-end 10-nanometer CPU substrate as well as multilayer substrate for GPU, automotive and network so that we can lay the foundation for high-growth going forward.

AI and 5G will require high-performance semiconductors, and we believe the package substrate demand will only grow. Against this backdrop, we will develop differentiated technology and diversify our product and customers so that we can increase revenue and secure stable profit.

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Unidentified Company Representative, [16]

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[Interpreted] About the outlook for Q3 and the rest of the year. Yes, I do agree that Q3 will not be an easy quarter. And as was mentioned by the Head of Strategic Marketing, there will be seasonal demand, however, recovered in Q3, and we expect a slight increase in revenue Q-o-Q.

By product, there are a couple of revenue growth factors such as supply starts and increased volume of RFPCB into the U.S. market and Camera Module going into new Korean model.

It remains to be seen exactly when the MLCC demand will recover. But as the inventory digestion progresses, we expect increased supply for some high-end MLCC for smartphones and automotive MLCC.

We had mentioned earlier in the year that the annual sales in 2019 will be 10% higher Y-o-Y. But looking at the market from the current perspective, the revenue growth this year is expected to be insignificant due to the slowdown in global economy due to macroeconomic factors such as U.S.-China trade dispute and sluggish set market.

I know the market conditions are not supportive, but we will do our best not to lose our market competitiveness, so we will do -- we will try to maximize business efficiency by, for example, enhancing competitive edge in quality and manufacturing and cost competitiveness and enhancing efficient management of resources. Thank you.

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Unidentified Company Representative, [17]

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[Interpreted] This concludes the 2019 Q2 earnings release. Thank you for your participation. Please contact the IR team for any additional questions. Thank you.

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