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Edited Transcript of 009150.KS earnings conference call or presentation 24-Oct-19 6:30am GMT

Q3 2019 Samsung Electro-Mechanics Co Ltd Earnings Call

Greonggi-do Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung Electro-Mechanics Co Ltd earnings conference call or presentation Thursday, October 24, 2019 at 6:30:00am 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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* S. K. Kim

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

* Taewoo Lee

UBS Investment Bank, Research Division - Non-Publishing 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 Third Quarter Earnings Conference Call of Samsung Electro-Mechanics. (Operator Instructions) Now we will hear the presentation of Samsung Electro-Mechanics.

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

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Good afternoon. This is KwangWook Bae, VP, Head of Planning as well as IR at Samsung Electro-Mechanics. Thank you for joining our 2019 third quarter earnings conference call.

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

We will start via presentation on our third quarter business results as well as divisional results followed by a presentation on the market trends and outlook by product before taking your questions.

First, our third quarter business results. In third quarter 2019, revenue recorded KRW 2.2721 trillion, which is a 16% quarter-on-quarter increase, but approximately 4% decrease year-on-year. The details regarding the revenue increase and detail by division will be explained later on during the divisional results.

Q3 operating profit was KRW 180.2 billion, which is an approximately 24% Q-on-Q increase. Pretax profit in Q3 was KRW 162.3 billion, which is about KRW 17.9 billion in nonoperating expenses, including financial expenses. Net income after corporate tax was KRW 103.5 billion.

In terms of financial, as of end of September 2019, total assets was KRW 9.0834 trillion, which is a 3% growth from the end of Q2. Our major financial indicators include debt to equity, which was 65%, which is a slight increase Q-on-Q. Net debt to equity decreased slightly Q-on-Q to 18%. Shareholders equity remained the same at 61%.

Next is our results as well as future outlook for each of our divisions. First, we will look at the Component Solution division. The Component Solution Division's third quarter revenue was KRW 820.1 billion, which was a 4% increase Q-on-Q but roughly a 20% decrease year-on-year. Revenue of the Component Solution division increased quarter-on-quarter with seasonal demand improvement, increased sales of new models and increased supply of MLCCs for IT applications such as mobile and high-end PC -- TVs as well as increase of electronic components.

MLCC market is expected to continuously see increased demand in major IT applications and decrease in inventory. Therefore, we will actively respond to such demand growth, especially focusing on the high-end products.

The rollout of 5G is expected to drive IT in industrial demand while the automotive market is also expected to maintain solid growth in the mid- to long term for applications such as ADAS, autonomous driving and xEV. Accordingly, we will expand our response to the 5G smartphone network markets and server products and continue to expand our high reliability lineup to address the automotive Tier 1s in Korean customers.

Next is our Module Solutions division. Module Solution division's Q3 revenue was KRW 941.0 billion, which is a 14% Q-on-Q increase and a 5% year-on-year increase. The Q-on-Q revenue increase is mainly explained by the increased supply of high-spec camera modules such as triple and quad camera modules for the new flagships of the strategic customer. During Q3, we also started supply of 48 meg plus ultrahigh pixel multicameras to a major Chinese customer.

In the future, the smartphone market is expected to see greater adoption of these ultrahigh pixel and 5x-plus power zoom cameras as a point of differentiation. We will continue to lead customers and the high-end camera market -- camera module market, leveraging our differentiation in core components, such as lens and actuators. Demand for 5G communication modules is also expected to increase steadily, so we will focus on gaining early leadership by securing the high-performance antenna technology.

Last is our Substrate Solution division. Q3 revenue for the Substrate division was KRW 511 billion, which is a 47% Q-on-Q increase and a 17% year-on-year increase. During Q3, the division's revenue increased, thanks to increased supply of OLED RFPCBs for the newly launched models of overseas and Chinese customers as well as increased supply of 10-nano thin fcBGA for CPUs and BGAs for mobile DRAMs.

Going forward, the package substrate market is expected to see gradual increase in demand from mobile APs and the 5G rollout in the case of BGAs. Accordingly, we will continue to maintain the upper hand in the AP FCCSP, while at the same time, increase our market dominance in the 5G antenna SiP market. Also for the Flip Chip BGAs, supply is expected to remain tight with greater demand from servers, networks and automotive applications. We will focus on diversifying our Flip Chip BGA customers and applications by increasing our CPU ultrathin substrates and expanding supply of automotive and GPU products to global customers.

That completes my presentation on Q3 results. And now the Head of Strategic Marketing will take you through the market outlook by product.

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

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Good afternoon. This is Kook-hwan Cho, Head of Strategic Marketing. I would like to share with you our outlook for MLCC, camera modules and substrate markets. First, the current MLCC market and future outlook.

In Q3, the overall MLCC market remains somewhat muted, as we explained during the last conference call. However, production volume of major set makers increased thanks to the postponed U.S. tariffs on Chinese exports and launch of new flagship smartphones. Also, there was increased demand for PC and TV applications, which resulted in a steady decrease in the supply chain inventory. The MLCC market is expected to see additional demand growth from major IT applications, given the seasonality such as Black Friday. And market inventory is expected to, therefore, recover normal levels. We even expect some customers calling for urgent supply/demand to meet some upside volumes.

In particular, in 2020, major smartphone OEMs are expected to increase their 5G smartphone supply, which is expected to drive up new demand for high-end MLCC sizes 0603 and smaller. This is expected to result in demand being concentrated on a few suppliers with a wider adoption of 5G as well as AI and IoT. Business infrastructure investments would also increase, which is likely to increase demand for industrial MLCCs for applications such as network equipment and servers.

Even though global automotive sales growth rates have been decreasing, the demand for automotive MLCCs is expected to continue growth with greater penetration of ADAS and efforts by OEMs to improve autonomous driving performance. SEMCO has the advantage of already possessing an MLCC lineup that covers the key areas of growth, including IT, industrial and automotive applications.

For the IT market, we will continue to improve our product mix with a focus on small size and high-capacitance high-end products. For the industrial market, we will expand supply of newly approved 10 microfarad-plus products to meet our customers to prepare for increased 5G base station demand.

For servers, we will continue to diversify our application range by adding new products such as high-temperature MLCCs for servers and high-voltage products for solar and lighting applications. For automotive market, we continue to build those in long-term supply stability with LTA-based supply agreements while we also add on new customers at the same time.

Next are the camera module trends and our response strategy. In the camera modules, the adoption of multicameras, such as triple and quad cameras in flagships, and triple and dual camera modules in lab segments continues. In the market, with the adoption of the high-pixel 108 mega modules and increase in image sensor sizes, we're seeing an increased demand for 7P and other multi-element lenses and large-aperture lenses.

Adoption of IOS actuators for stabilization of 5x-plus zoom and 10x optical zoom are becoming a mainstream trend in the high-end smartphone segment. With such camera module trends, high-specification components as well as high reliability have become essential requirements for camera modules. We expect to further strengthen our position in the premium camera module market by leveraging our technological edge in internalized components, such as the slim and large-aperture lenses and well-structured actuators.

For example, we were able to increase revenue quarter-on-quarter by supplying our high-end camera modules that use the precision lens technology and high-performance actuators for the flagship smartphone model launched by the strategic customer in Q3.

Looking forward [in Q by] the weak seasonality and possible decrease in demand from the strategic customer, we will increase sales to new Chinese models and focus on early design work and preparation for the mass production of products targeting the new smartphones scheduled for Q1, so that we will be able to maintain growth in 2020.

Lastly, the substrate market situation and outlook. First, in the Flip Chip BGA market, we expect to see increase in the PC Flip Chip BGA demand with the launch of the new CPUs, including the 10 nano node CPU for the overseas strategic customer.

Supply for Flip Chip BGAs is expected to maintain -- remain tight even next year, given the -- given the increase in layers and size for data center server applications and increased demand for network products. For BGA substrate, demand for mobile memory boards remain solid, especially from premium and high-end APs.

In Q4, we expect market demand to continue, especially around APs and mobile package substrate demand. We will continue to lead the current package substrate market by focusing on smartphone APs and next-generation memory by leveraging our scalable circuit technology and multilayer product reliability while also gaining the early leadership in the new 5G AP and antenna applications to fuel future growth.

This completes the market update by product. 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 will be presented by Mr. SK Kim from Daiwa Capital Market.

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S. K. Kim, Daiwa Securities Co. Ltd., Research Division - Research Analyst [2]

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[Interpreted] I have two questions. First question is an MLCC question. You said that the inventory levels of MLCC is decreasing. In that context, can you share with us the third quarter MLCC utilization as well as the inventory situation that you saw in the third quarter? And going forward, what is your expectations outlook for the fourth quarter and beyond for MLCC?

Second question is related with the 5G. I think there is, overall in the market, quite a lot of expectations -- positive expectations for demand growth driven by this 5G rollout and increase in IT-related demand. From SEMCO's perspective, looking on to next year, what kind of opportunities would the 5G rollout present? And what is your strategy in tapping that to deliver business growth?

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Unidentified Company Representative, [3]

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[Interpreted] To answer your first question about our MLCC utilization and inventory and future outlook, as we mentioned in the third quarter, there was an increase of both orders as well as shipments in MLCCs. This was mainly explained by increased demand driven by Chinese smartphones and PCs as well as decreasing customer inventory. Our utilization in third quarter was around 75%, which is a quarter-on-quarter increase, and our inventory levels are also approaching normal levels.

Looking towards Q4, we will actively respond to the deflection points that we're seeing, driven by 5G rollout as well as the demand from automotive applications. We will also further increase our utilization in fourth quarter by adding on new product approvals and also adding on new customers.

Well, to take your second question about the 5G-related opportunities, if we look at this year, this year, mainly, markets are growing around China and Korea around, for example, sub-6 smartphones and base station-related equipment demand. We think that the demand-related 5G will actually accelerate in growth from 2020. According to external sources, they're expecting millimeter waves to also be adopted, especially around the premium smartphone segment starting from year 2020. So we think that, from next year, 5G-related demand will actually grow faster than original expectations.

If we look at detailed component demand driven by 5G, in the MLCC side compared to the existing smartphones, the 5G smartphones would actually require smaller as well as high-capacitance MLCCs. So we're expecting that in terms of MLCC capacitance, 5G handsets would require about 30% more capacitance. Also, 5G base stations will also require content growth.

In terms of substrates, high 5G handsets would require higher layer -- higher count layer substrates, for example, 12 layers plus compared to the existing 4 to 6 layers. Also, the communication modules for 5G is expected to use millimeter waves -- around 3 millimeter wave antenna modules. So given all of this, we're expecting that 5G rollout will bring new business opportunities by both increasing the content per unit and also converting the components to a higher-end component level.

So regarding these opportunities, we're actually already -- we've already developed and we are already supplying, for example, the small-size, high-capacitance MLCCs and the high-layer package substrates, such as 12 layers and plus. Also, regarding the millimeter wave antenna modules, we're currently focusing on securing the technology for that so that we will, in the next year, get new customer approvals and start mass production of these key components for 5G.

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Operator [4]

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(foreign language)

The next questions will be presented by Mr. [Lo Koh Ki] from [Hana Financial Investment].

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Unidentified Analyst, [5]

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[Interpreted] I have two questions. The first question is an MLCC question, sort of a follow-up to the utilization and inventory-level question. Can you also share with us the third quarter ASP as well as shipments? What kind of trends did you see on a quarter-on-quarter basis in Q3? And also, can you give us some guidance on MLCC ASP and shipments for fourth quarter and going forward?

Second question is about the Camera Module business. Can you give us an update on your supply to these China -- Chinese customers or how much of the Chinese customers -- are they accounting in the overall Camera Module revenue for you? And also, can you share with us your camera module guidance for fourth quarter and next year?

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Unidentified Company Representative, [6]

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[Interpreted] To answer your first question about the MLCC ASP and shipments third quarter and guidance, in third quarter, our MLCC shipments increased by about 15% Q-on-Q, mainly driven by the new -- the launch of new products by the major mobile customers and also inventory decreases, customers, especially the Chinese channels and OEM inventory. ASP in third quarter, however, decreased on a blended ASP basis despite the increase of supply of high-end products for the new IT applications. There was actually weaker demand, especially around the channels for automotive and industrial applications, which were the rather higher-priced products where there was mainly an increase of volume of counts around the mid-end Chinese customers, resulting in a decrease of blended ASP. Looking forward, the MLCC market, we expect will, first of all, benefit from the inventory levels being stabilized in the channel. So the demand and supply will continue to remain stable in the MLCC market going forward. And we think that the MLCC price decrease pace will return to normal levels. And at the same time, we will see an increased demand of the high-end, high-ASP products for applications such as base stations around 5G, mobile demand, automotive and servers so that we expect both shipments as well as ASPs for MLCC to improve.

To answer your second question regarding our Camera Module business to the Chinese handset-makers, as you know, the Chinese handset-makers have a characteristic of being very active in adopting the next generation, the new technologies for camera modules, such as high pixel count or high zoom technology as a way of differentiating their smartphones. We think that this trend of these Chinese customers will continue to expand next year in 2020. We have been leading this next-generation camera module trend by leveraging our core components and key technologies in the lenses and actuators, and we will continue to do so. For example, we have started the pilot production of 48 meg-plus high-pixel camera module that uses the 7P-plus high-aperture multi-element lens as well as the ball structure actuator in order to actively respond to this high-pixel trend. At the same time, we are developing a product that uses the Decut slim lens and the optical zoom actuator technology in order to respond preemptively to the folded zoom demand that we expect will grow in the future. So looking forward to next year, we do think that there will be fierce competition, especially around technology targeting the Chinese market, but we will maintain our technology leadership by supplying these cutting-edge products in the Camera Module segment beforehand and also continue to build in the strong fundamentals of our Camera Module business.

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Operator [7]

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(foreign language) The next question will be presented by Mr. Taewoo Lee from UBS.

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Taewoo Lee, UBS Investment Bank, Research Division - Non-Publishing Analyst [8]

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This is Taewoo Lee at UBS. My first one is on the substrates business. I mean, share revenue growth this quarter was quite strong, so it will be great if you could provide color as to how the profitability was in third quarter and what the outlook is for the remainder of the year? And the second question is on the new Tianjin MLCC fab, so could you help share the latest status as well as your updated plans for the ramp into 2020?

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Unidentified Company Representative, [9]

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[Interpreted] To answer your first question regarding the substrate division's third quarter results and guidance going forward, as you've heard, the revenue in the third quarter for substrates increased quarter-on-quarter basis, mainly driven by the launch of new flagships by our major customer as well as increase in supply of the higher-end substrates, especially driven by increased demand for the package substrates. And we were able to, in the third quarter, record a profit in the substrate division. If we look at the detailed demand, especially for the package substrates, there was an increase of the Flip Chip BGAs for CPUs, the high-end CPUs at 10 nano. And also there was an increase in supply of BGAs for mobile DRAMS. But there was also increase in the circuit -- substrate circuit boards, especially as the overseas customer launched its new product. This increased the supply of our RFPCBs for OLEDs, which also contributed in growth of both revenue and profitability improvements. If we look at full year 2019, despite the rather weak circuit board performance in the first half, thanks to the very strong performance of the higher-end package substrates improved market demand, we think that, for the full year 2019, the loss will definitely decrease compared to the loss we recorded last year. Regarding our strategy going forward, our focus for the substrate division will be on improving the profitability of the business unit by increasing the supply of our higher-end products and also continuing to diversify our customer base.

To answer your second question on the update of our Tianjin plant. As you know, the Tianjin new plant is being developed as -- in response to the increased automotive business demand that we're expecting. It is -- the plant is being constructed. It's in schedule, progressing as we expect, and the target is to complete the construction late 2019 this year. Also, at the same time, processes such as test production, verification, approvals by customers, all of this necessary for the ramp-up of the plant is also moving ahead without issues smoothly. Going forward for the Tianjin new plant, our basic approach is to increase our sales to the Tier 1 customers, at the same time, accelerate the approvals for the Chinese new customers so that we're able to build this Tianjin plant as a major source of not only local response but also our key manufacturing base with the highest level of efficiency.

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Operator [10]

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(foreign language) The next questions will be presented by Mr. (inaudible) from (inaudible) Securities.

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Unidentified Analyst, [11]

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[Interpreted] I have two questions. First question is about the substrate division, the Flip Chip BGA in particular. I think the Flip Chip BGA definitely contributed a lot in improved performance of the overall company in the third quarter. Your major Japanese competitors sort of shifted the focus to network and SEMCO, I think, as a result of that, is reaping the benefits, especially in the PC applications. As the PCs become more high end, the Flip Chip BGA demand is also shifting more towards the high end. So I think the overall market is expecting the Flip Chip BGA, especially the higher-end segment of it, the supply to remain tight next year. So in that context, what is your outlook for the Flip Chip BGAs and substrates in general for fourth quarter as well as next year guidance?

The second question is about your overall earnings guidance for fourth quarter and next year. We're in the fourth quarter. Seasonality-wise, fourth quarter is usually the weaker quarter, but if we look towards next year, especially with the actual benefits of the 5G rollout materializing, this may actually be a positive outlook for SEMCO overall. So can you give us your fourth quarter as well as next year outlook?

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Unidentified Company Representative, [12]

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[Interpreted] To answer your first question regarding the Flip Chip BGA substrate situation, the current situation and future outlook, as you've heard, there is a shortage of supply for Flip Chip BGAs. This is mainly driven by the increase of capacity load, which is a result of the increase of the substrate layers and also the growth in the body size -- larger body sizes being demanded by applications such as servers, 5G and automotive, which is the main source of demand growth for Flip Chip BGAs. This year, we were able to newly supply to a major global customer, and also, we were able to expand our supply of our Flip Chip BGAs for thin laptop CPUs. So we have, for the full year, been maintaining a full utilization operation, and we were able to also record double-digit growth in revenue, continuing in the third quarter. Looking towards the fourth quarter, we are currently working to get additional approval for our new 10-nano next-generation product of an overseas customer. This is some of the examples of how we, in the fourth quarter, plan to continue to expand the supply of our high-end products, which will help us build in a stable profitability in the business. Looking towards the future, we do expect the Flip Chip BGA market itself to continue to grow, driven by, for example, continued migration of semiconductor technology, increased server demand and also increased content in HBMs, so there will be especially growth around multilayer, higher layer, higher-sized substrates. Given this expectation, we will actively respond to market demand and market growth by leveraging our core technologies, such as the advanced node processes as well as the multilayer substrate technology and use this technology to not only diversify our customers but also add on and pioneer new markets.

To answer your question about fourth quarter as well as next year guidance, looking towards the fourth quarter, until October and November, we expect there actually will be continued growth in revenue driven by a strong component demand in anticipation of events such as Black Friday. But as you mentioned, December being the usual month when the overall industry goes through an inventory adjustment, we think that, overall for fourth quarter, there will be a revenue decrease similar to what we saw last year. Looking towards next year, even though the overall business environment is going to be challenging, given the continuing trade tensions between U.S. and China as well as the uncertainties around Brexit, we do think that, next year first quarter, we will be able to record growth in revenue, given the fact that there will be improved MLCC supply-and-demand situations as inventory levels have normalized. Also, there will be a stronger demand for high-end MLCCs as new 5G handsets roll out next year. Also, we expect there to be increased supply of the high-pixel multicameras to the new model of the strategic customer and also the solid performance of our package substrate division continuing.

So going forward next year, we will focus continuously on leading the market and accelerating our revenue growth by launching differentiated new products and also driving up stronger promotions of our products based on the technology capabilities that we have in the key growth areas such as 5G and automotive applications. At the same time, we will focus on maximizing our internal efficiency, driving improved productivity, improving our quality and yield and also continuing our efforts to reduce our cost base, so that, overall, we're able to improve the profitability of the business.

And this completes our third quarter earnings conference call. Thank you very much. If you have any further questions, please forward them to our IR team.

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