SAMSUNG ELECTRO-MECHANIC (OTC:SMSGF) Q1 2021 Earnings Conference Call April 28, 2021 2:00 AM ET
Taiyoung Kim - Head, IR
Kook Cho - Head of Strategic Marketing
Conference Call Participants
Rok Kim - Hana Financial Investment Co., Ltd
SK Kim - Daiwa Securities
H Kwon - JPMorgan Chase & Co
Hyung Park - Shinhan Investment
Giuni Lee - Goldman Sachs
Gang Park - Daishin Securities Co. Ltd
Dong Lee - SK Securities Co
Jong Lee - Samsung Securities
Good afternoon. This is Taiyoung Kim, Head of IR and Planning Team at Samsung Electro-Mechanics. Thank you for joining our 2021 First Quarter Earnings Conference Call. On today's call, I am joined by EVP, Bongyong Kang of the Business Support Team; SVP, Kook-hwan Cho. Head of strategic marketing; Teutak Park, Head of Support Team Component Division; Jung Won Lee, Head of Support Team, Module division; and Bom Park, Head of Support Team, Substrate division.
We will start with a presentation on our first quarter company level and divisional business results followed by market trends and outlook by products before taking your questions. Now first, our first quarter results. In Q1, our revenue was KRW 2,371.9 billion which is an approximately 14% increase Q-o-Q, mainly attributed to the growth of component and module divisions which offsets a decrease in subscription revenue. On a year-on-year basis, even though the module division revenues decrease, revenue increase from the component and substrate divisions and overall year-on-year revenue growth was about 11%.
The details regarding revenue increase and decrease factors by division will be explained later on during the divisional results. Q1 operating profit was KRW 331.5 billion which is about a 31% increase Q-o-Q and roughly doubles the operating profit in first quarter last year. Pretax profit in Q1 was KRW 333.8 billion net profit after corporate income tax was KRW 233.2 billion.
Next, in terms of financials as of end of March 2021, total assets was KRW 9,681.5 billion which is about a 5% increase from the end of the fourth quarter. For the major financial indicators, debt-to-equity was 57% which is a one percentage point increase Q-o-Q reflecting a slight increase in short term liabilities and net debt-to-equity was 5% which is a slight decrease Q-o-Q. Equity to asset was 64% remaining flat.
Next are the results and future outlook of each division. Firstly, components division. The components division's first quarter revenue was KRW 1, 88.4 billion which is a roughly 13% increase Q-o-Q and a 27% increase Y-o-Y. Revenue increase was driven by increase in MLCC supply including increased levels of small size and high capacitance MLCC for mobile applications and MLCC for PCs as well. Increased supply of automotive MLCCs with the recovery of automotive demand. Profitability also improved with continued gains in manufacturing efficiency particularly better yield and productivity in our overseas production. In Q2, we expect to see continued demand from IT applications including smartphone MPC and plan to focus on responding to market demand by expanding our supply capabilities in small size and high-capacity high end MLCCs.
For automotive MLCCs demand growth is expected as automotive demand recovers and we will focus on expanding our high reliability MLCC lineup and diversifying our customer base.
Next is the module division. The module division's Q1 revenue was KRW 841.3 billion which is roughly a 49% increase in Q-o-Q, but a 6% decrease Y-o-Y. The strategic customers new flagship launch resulted in a Q-o-Q revenue increase, but revenue slightly decrease on a year-on-year basis as products were supplied earlier than usual due to the earlier launch of the customer's flagship. Also in Q1, camera modules for the upper mass-tier smartphones went into full scale mass production, which increased revenue of the related camera modules. For the camera module market second quarter has traditionally been a slow season but we expect demand to decrease.
Accordingly, our module division revenue is expected to decrease on a quarter-on-quarter basis but we will focus on revenue recovering by expanding suppliers high performance camera modules for flagship smartphones, for example to Chinese customers and continue to expand supply of camera modules for mass-tier.
Last the substrate division. Q1 revenue was KRW 442.2 billion, which is roughly a 21% decrease Q-o-Q but a 15% increase year-over-year. For package substrates revenue increase thanks to increase supply of BGA for mobile AP and flip chip BGA for this CPUS in laptop. On the other hand, PCB revenue decreases due to a large drop in OLED RFPCB supply caused by the seasonal weak demand of the overseas customer. As a result on divisional level revenue decreased quarter-over-quarter.
In terms of profitability, the substrate division recorded better profitability on a year-over-year basis leads to the strong performance of package substrates but profitability decrease on a Q-o-Q basis due to decrease in PCB revenue. In Q2, strong demand for high end package substrates for mobile MPC applications is expected to continue. Accordingly, we will focus on increasing supply of high-performance package substrates for AP 5G antenna and this CPUs, while at the same time increasing capacity around high-end products and improving our product mix.
That ends my presentation on our first quarter results and now, the Head of Strategic Marketing will go over the market trends and outlook for each of our major product groups.
Good afternoon, this is Kook-hwan Cho, Head of Strategic Marketing at SEMCO. I would like to share with you the market update and outlook for MLCC camera module and substrates. First the MLCC, even though Q1 is usually a slow season for MLCC, this year, first quarter demand was strong especially around PC and TV applications attributed to the so-called untapped demand. With smartphone production remaining strong and pent-up demand recovery in automobiles, MLCC was solid overall in terms of demand. We expect this trend to continue in the second quarter. Regarding the implication of the recent semiconductor shortage on MLCC demand, even though the semiconductor shortage that started in automotive has spread to some IT devices raising concerns of a lot of possible production disruption at set levels and even in turn decrease in MLCC demand. What we have seen is that the lack of visibility in components supply has rather heightened the need to build up inventory for all components including MLCC.
Also, the semiconductor situation is expected to stabilize gradually from the second half. So impact on full year MLCC demand is expected to be limited. As of end of March, MLCC channel inventory appears to have slightly increase versus the end of last year, but still remain within balanced levels. Perhaps due to the experience of the recent semiconductor shortage, we are sensing some movement in the market by companies seeking to preemptively claim capacity for their next year's demand in order to gain stable supply.
Looking forward to the second half, even though some uncertainties such as possible resurgence of COVID-19 remain, expectations of a global economic recovery is building up as vaccinations continue, and key institutions including IMF and OECD have been upward revising their economic outlook. The expectations of improved the semiconductor supplier, launch of new flagship smartphones and positive seasonality by applications such as PCs, TV and game devices are all supportive of a positive outlook for MLCC demand. Accordingly, we will strategically operate our product mix across each application while preemptively sensing market demand and focus on boosting MLCC revenue by increasing our production capacity step by step.
In particular, we will focus on securing supply capacity in high growth markets including small size, high capacities MLCCs for IT applications, and high reliability MLCC for industrial and automotive applications to achieve customer satisfaction.
Next about the camera modules. In Q1, smartphone camera module demand increase year-on-year driven by pent-up demand and greater penetration of 5G smartphones. In particular, demand for high spec camera modules which is our key focus area saw a strong increase from the previous quarter thanks to the full effect of the strategic customers' flagship launch and adoption of high spec camera modules on mass-tier model. In Q2, camera module demand may be a bit soft given seasonality. But we also expect that demand for mass-tier model camera modules will actually grow with you recovering consumer sentiment and also the launch of new models by Chinese OEMs. Also, in the second half, we expect high end camera module demand to expand with the launch of new flagships including new foldable models.
Accordingly, we will actively respond to the flagship of the strategic customer and Chinese OEMs. While also focusing on expanding our position in mass tier. We will leverage our technology advantage in internalized key components such as lens and actuators to show technology differentiation in the flagship models, and also focus on winning the mass tier especially the higher end of the mass market where high feature, high pixel and high-power zoom camera modules are gaining greater penetration. Semiconductor supply has been a major issue and aggravated by earthquakes, fires and power outages, and some manufacturers have to lock down due to COVID-19. So we will make sure that our camera module business avoids any obstacles to its growth by preemptively checking key risks associated with customers and a supply chain.
Lastly is the substrate business; in Q1, BGA demand grew especially around smartphone applications such as 5G antenna AP and memory. While supply remains tight with a supplier experiencing production issues due to fire. Flip chip BGA demand for PCs remained strong in first quarter and demand for server and network also continued with growth in various online services and greater adoption of 5G. At the same time, the demand for more server and network performance has resulted in the introduction of new SOCCs with higher performance spec and adoption of more semiconductors, which in turn drives greater substrate demand and called for package substrates with more layers and larger sizes.
This has aggravated the capacity erosion and is the main reason supply has continued to remain tight overall. In terms of market outlook for BGA, we think that demand growth will continue given the expected smartphone demand recovery and 5G adoptions in mass tier which will support solid demand and applications such as 5G antenna, AP RF modules and memory. On the other hand, substrate capacity expansions have been behind schedule as some suppliers experience production disruptions followed by delayed recoveries. And there were some issues with substrate production equipment supply so tight supply is likely to continue. While flip chip BGA demand is growing in several applications including PC and automotive, and large-scale investments are being discussed in server and network markets, flip chip BGA capacity increases likely to not keep up with a growth in downstream markets and subspace demand growth.
We are heard some customers voicing concerns of a possible flip chip BGA supply capacity shortage and expect flip chip BGA supply to remain tight for some time. Accordingly, we will focus on improving our product mix around high-end products such as microcircuits BGA for smartphones, AP, 5G antennas RF modules, SIP and thing flip BGA and respond to demand preemptively and flexibly including expanding capacity by watching market demand trends including outside requests from customers. Our goal is to drive revenue growth while maximizing customer satisfaction based on reliable quality and differentiated technology supported by stable supply capabilities. That completes my market overview. Thank you.
The first question will be provided by Rok-ho Kim from Hana Financial Investments.
I have two questions regarding MLCC. First question is can you share with us the first quarter MLCC shipment and ASP and also can you share with us your guidance for each of that for second quarter? Second question is about the MLCC price increased possibility; I think compared to other competitors' sample has been more conservative about increasing MLCC prices. Perhaps that's because of considerations of your relationship with the large customer. But does the company still believe that the possibility of MLCC price increase is low?
Unidentified Company Representative
To answer your first question about fourth quarter MLCC shipment ASP and second quarter guidance, in first quarter MLCC shipment increased by double digit quarter-on-quarter driven by strong demand from Chinese mobile OEMs. And also automotive demand recovering. Market price continues to remain stable and on a blended basis, blended ASP increased slightly versus the fourth quarter. In the second quarter, stable demand is expected to be maintained in all applications such as IT, industrial and automotive and shipment as well as ASP in second quarter is expected to be similar to the first quarter.
Your second question was about MLCC price increase possibilities. We are in the process of adjusting prices for certain products in order to improve our overall product mix. But we plan to respond flexibly in terms of price increases depending on future market demand and supply situation and also considering the mid to long-term business interest based on our relationship with customers.
The following question will be presented by S. K. Kim from Daiwa Securities.
I have two questions. The first question is about the substrate division. The market outlook for the package substrates appear to be very strong even going forward. And so in that context, can you share with us your revenue and profitability guidance for the second half versus first half? Do you see further upside in your package substrate business in the second half of this year? Second question is about the mid to long-term business strategy for your camera module business. The camera module business itself has very positive outlook but I think there were other opinions regarding the evaluation of the camera module business itself. Does the company have any thoughts for example diversifying its camera module business by commercializing the lens and actuator and other components businesses? Can you share with us your strategy and thoughts regarding the camera module business?
Unidentified Company Representative
Your first question about the second half package substrate outlook. As you know, due to the strong PC demand from video conferencing as well as remote work learning and working and also supply issues in substrates for mobile AP, the package substrate supply is expected to remain tight for some time. In order to respond to the customer demand we are in the process of increasing our package substrate supply capabilities. And we expect to achieve higher revenue and profitability in the second half versus the first half of this year. By also continuing our product mix improvement towards higher end and higher value substrates.
Your second question was about possibilities of diversifying our camera module business. As you know, securing a competitive advantage in core components, such as lens and actuators is a critical piece in maintaining leadership for camera module, especially for flagship smartphones. SEMCO has been able to develop proprietary differentiated technology in key components such as large aperture and D-cut lenses and slim lens and ball-guided actuators. The question of whether to develop our core component capabilities into a separate commercial business is a topic that we will be determining by considering various factors including the market environment.
The next question will be presented by H Kwon from JPMorgan.
Hi. And thanks for taking my questions. I have one question each for your MLCC and the camera module operations. The first one MLCC looks like your operation utilization continues to be at a full running rate. Is there realistically an upside to the utilization in the coming quarter? And if so, should we view the first quarter or upcoming second quarter to be the peak of their production at the SEMCO this here? Also if you could share your recent inventory status and outlook that would be great. Next quick question also on the camera module, there seems to be continuous spec upgrade ongoing that leads to higher BOM costs and pressure to your customer and SEMCO may face some price in the margin pressure more. So what would be the contingency plan and the strategy from SEMCO on this? Thank you.
Unidentified Company Representative
To answer your first question, MLCC as you mentioned, this has been operating at full utilization continuing in first quarter as it did in fourth quarter. We will be continuing to expand our supply capabilities through productivity gains and also manufacturing efficiency improvements that we have scheduled until the end of the year. At the same time, the capacity at Tianjin will be used to efficiently and flexibly respond to market demand. You've also asked about inventory, inventory remains similar to fourth quarter and is expected to remain within a sound level continuing in the second quarter.
And your second question about our camera module, SEMCO strategy in camera module remains focused on satisfying the needs of each customer by leveraging our differentiated technologies such as the 100 mega pixel ultra high pixel camera modules and folded zoom camera modules. Going forward, we will continue to lead the wave of introducing differentiated camera modules through continuous development of next generation technology and at the same time push forward initiatives to improve the cost competitiveness, such as yield improvement to maintain our camera module business that is sustainable and also competitive.
The following question will be presented by Hyung Wou Park from Shinhan Investment.
I have two questions. So first question is about the package substrate. I think many people have mentioned that the prospect outlook of package substrate is very bright and strong. In that context, does the company have plans of adding additional capacity for BGA and flip chip BGA respectively? Second question is about the financials. We do notice that your non-operating profits as well as the overall financial status condition of the company are continuing to improve since last year. Will the company maintain its position regarding its financial policies this year? And also in that context, can you share with us your guidance for CapEx this year?
Unidentified Company Representative
Your first question about capacity increases for package substrates. During our last conference call, we mentioned the plan to expand capacity continuing in 2021 especially around the high-end package substrates such as AP 5G antenna and substrate for the thin laptop CPUs to respond timely to the continued increase of package substrate demand. The capacity expansion is currently underway as scheduled and we will continue to carefully monitor the market situation to meet demand in a timely manner.
Your second question was about our financial policy this year and about CapEx guidance for this year. As mentioned during the last conference call this year, we are planning to increase our CapEx versus last year to capture the recovering demand in key downstream industries, such as smartphone, PC and automotive industries and also to capture the growth of component demand related with key promising sectors such as 5G and automotive. At this point, we are also considering whether to upward adjust our full year CapEx plan given the higher or the stronger than expected demand growth that we have seen year-to-date. Under the basic principle that high value businesses that are aligned with customer demand should be the focus of our investment. We will continue to work on maximizing our investment efficiency and cash flow soundness.
The next question will be presented by Giuni Lee from Goldman Sachs.
Congratulations on the strong results. And thank you for taking my questions. My first question is essentially an update on your auto MLCC business. Can you please update on the ramp up schedule of your Tianjin fab as well as the progress you're making in entering into the powertrain segment? And my second question is on camera modules. Understand that you have started to enter in full scale into the camera module market for the upper mass tier smartphone. So I would like to know the progress as well as the outlook of that. Thank you.
Unidentified Company Representative
To answer your first question about the automotive MLCC business, the Tianjin new plant is in the final stages of completing its pilot production which is the purpose of this is to prove that it is mass production ready and the Tianjin plant is therefore now preparing to go into full scale mass production depending on the market situation. Regarding the automotive MLCC business update, in the case of the high capacitance MLCCs which do account for the largest share of automotive MLCC demand. We have already completed a product lineup comparable to the competitors. In the case of high reliability MLCCs for powertrain applications that require high pressure and high temperature, we are planning to continuously expand our addressable market by expanding our lineup to align with the market demand on a step-by-step basis.
To answer your second question about the mass tier camera modules. Even the mass-tier smartphones have started to adapt multi camera modules and have a growing need for the technology such as high pixel and zoom previously associated mainly with the flagship category. We have been supplying mass-tier camera modules to the strategic customer from the first quarter and also, we started supplying to the Chinese OEMs mass-tier models which will help drive volume even further. So as mentioned during last quarter this year's revenue in mass-tier camera modules is likely to record significant growth versus last year.
The next question will be presented by Gang Park from Daishin Securities.
I have two questions. First question is about the substrates the semiconductor substrates the BGA substrates which I think we have already mentioned several times during the conference call. The supply is quite tight. I am wondering whether SEMCO has already increased its prices, effective prices for its BGA products or is not has plans of doing so in the future. Second question is about the financials, especially with a very efficient investment policy implemented last year. I do notice that your cash positions have increased quite a lot significantly. Also the company has gone through a wave of repaying its borrowings. And so I do wonder what plans the company has in terms of using its cash position on a long-term basis. Can you give us some direction regarding your plans of using the cash?
Unidentified Company Representative
Your first question about package substrate price increases. As you know, the demand for package substrate has continued to grow driven by strong PC demand with more people working from home and also the wider adoption of high multilayer substrates for 5G APs. The demand for more layers and large size substrates has increased the capacity load resulting in tight supply. To reflect this market situation we did adjust prices for certain products after holding discussions with customers and going forward we will respond by considering both the market situation and the relationship with our customers.
To answer your second question about the cash, since the onset of COVID-19 in 2020, the cash flow management has been a particular focus for us. And as of end of first quarter this year, we hold a total of KRW 1,623.7 billion in cash and cash equivalent assets, which is about double the cash that we had at the end of 2019, which was KRW 803.8 billion. The cash will be used primarily in facility investments necessary to drive growth of our existing businesses and also to strengthen our competitiveness. On the other hand, our net cash position is still negative. So in the short term, we will focus on bolstering our net cash position before looking into new business initiatives including M&A ideas.
The next question will be presented by Dong Lee from SK Securities.
I have two questions. First question is about MLCC. I think there is some concern that with various commodity prices increasing that would increase the cost burden sold at SEMCO level for MLCC. Can you share with us whether you are expecting an impact on your MLCC business due to possible raw material price increases? Second question is about the package substrate. Can you give us an update on your server for chip BGA development status and when you expect to have some visibility in terms of mass production?
Unidentified Company Representative
To answer your first question about possible raw material price increases and the implications to our MLCC cost. As you mentioned with the recovery of the overall global economy and industry, there is a factor that this may cause increase in key commodities. However, we are continuing to work on cost improvement initiatives and will try to minimize any impact by expanding the volume of our operations by taking advantage of the market growth.
Your second question about server flip chip BGA. As you know flip chip BGA for servers is an area that is expected to continue to grow given the increase in demand of high-performance processors needed for cloud, AI and high-speed communication. Currently, our flip chip BGA business are mainly supplied for PCs such as for thin CPUs used in laptops, but we have also been developing key technologies needed for servers, such as large area and high multi-layer. Currently, we are working on the development of server flip chip BGA upon invitation by several companies and we'll do our best to enter the server flip chip BGA market soon.
The next question will be presented by Jong Lee from Samsung Securities.
My first question is about the folded zoom camera modules, which seems to be emerging as a mainstream trend in global mobile devices. But there are issues for example, the high price and the size requirements that may - some concerns with reduce or limit the spread of its adoption. In that context, can you share with us your outlook for the folders zoom market and how you plan to address this market? Second question is about the automotive MLCC which is expected to grow quite significantly. I'm wondering about the mid to long-term perspective SEMCO has for its automotive MLCC business. Can you share with us a range of your growth targets for the MLCC automotive MLCC business in the mid to long term?
Unidentified Company Representative
The first question about the folded zoom market outlook and our response plans. I think the latest trend and the strategy of OEMs in trying to differentiate their flagship smartphones is to adopt 4x to 8x continuous zoom camera modules. That seems to be the latest frontier in terms of optical zoom technology that the smartphone OEMs are adopting. This will inevitably drive the need to - for folded zoom camera modules. A simplest, currently supplying optical 10x zoom and other high spec folded zoom models Korean as well as overseas OEMs and has a competitive edge in the folded zoom market with our D-cut lens and actuator technology. We will continue to lead the market by developing next generation models including continuous zoom to differentiate flagship handset models and also supply a standard camera module model for master smartphones are to cover the entire market.
Your question about our mid to long-term automotive MLCC business. As you know, looking back last year in 2020, automobile vehicle shipments decreased due to COVID-19. However, this year vehicle shipments is rebounding. Semiconductor supply is expected to stabilize from the second half, the automotive MLCC demand is expected to continue this upward trajectory. Looking towards the mid to long term with the wider adoption of EVs as well as ADAS, the automotive MLCC growth is expected to significantly outpace overall MLCC growth rates. Given this outlook, we will focus on continuously expand our market share in automotive MLCCs by setting high growth targets that are above market growth rates and concentrating our business capabilities behind it to achieve our targets.
That completes our first quarter earnings conference call. Thank you very much for joining us. And if you have any questions, please call to our team. Thank you.