Good afternoon. Thank you very much for joining the earnings conference call. We will now start the 2022 third quarter earnings conference call of Samsung Electro-Mechanics. We will start with a presentation by the company, followed by a Q&A session. If you have a question, please press star one on your phone. Now we will start the company's presentation. Good afternoon. This is Tae-young Kim, Head of IR and the Planning Team at Samsung Electro-Mechanics. Thank you for joining our 2022 third quarter earnings conference call. On today's call, I'm joined by EVP Sungjin Kim, the CFO, EVP Wontaek Kim, Head of Sales Team and Strategic Marketing Center, Kyu-Taek Park, Head of Support Team, Component Division, Chang-Won Lee, Head of Support Team, Optics and Communication Solution Division, and VP Jungwoon Nam, Head of Support Team, Package Solution Division.
We will start with a presentation of our third quarter company and division level business results, followed by market trends and outlook by product before taking your questions. First, our third quarter results. In third quarter, our revenue was KRW 2.3837 trillion, which is approximately a 3% decrease QoQ and a 6% decrease YoY. The details regarding revenue increase and decrease factor by division will be explained later on during the divisional results. Third quarter operating profit was KRW 311 billion, an approximately 14% decrease QoQ and 32% decrease YoY. Pre-tax profit in third quarter was KRW 380 billion. Net profit was KRW 271.7 billion after deduction of corporate income tax.
Next, in terms of financials, as of end of September 2022, total assets was KRW 11.2008 trillion, which is about a 5% increase from the end of the second quarter. For major financial indicators, liability to equity was 43%, debt to equity 18%, a slight QoQ decrease. Equity ratio was 70%, slightly increase in QoQ. Next are the divisional results and future outlook. First, the components division. The components division's third quarter revenue was KRW 929.8 billion, which is a roughly 18% decrease QoQ and a 30% decrease YoY. Divisional revenue decreased due to decreased supply, particularly to Chinese IT customers such as smartphone and PC OEMs, driven by weak IT sector demand and component inventory adjustments.
However, high-value automotive MLCC revenue continued to grow, benefiting from growth in ADAS, autonomous driving and EV. In fourth quarter, while IT demand uncertainty is expected to continue, automotive demand is expected to continue solid growth. Therefore, we will focus on capturing IT demand around high-value, ultra-small and ultra-high capacitance MLCCs for flagship smartphones. For automotive MLCCs, focus on further diversifying the customer base and increase supply of high-reliability MLCC, such as the 150 degrees Celsius guaranteed high-temperature products and 200 volt plus high-voltage products to continue to maintain faster than market revenue growth. Next is the optics and communication solution division. The division's third quarter revenue was KRW 901.4 billion, which is a 16% increase QoQ and 14% increase YoY.
In third quarter, high-spec slim camera module supply increased for the strategic customers' foldable phone and supply of a folded zoom-based triple camera module for the overseas customer reached full scale. Such increased supply of high-performance camera modules for new flagships of key Korean and overseas customers drove revenue growth. In addition, supply of high-reliability camera modules also increased, driven by greater automotive demand. In fourth quarter, the camera module market is expected to see slow demand for mobile camera modules due to year-end seasonality. We will focus on preparing our high-pixel camera modules to capture demand from the new flagship smartphones scheduled for release early 2023 to offset the impact of seasonal weak demand.
At the same time, given that automotive camera module market is expected to continue growth driven by advances in ADAS and autonomous driving, we will focus on securing market leadership by increasing our supply of high-pixel camera modules. Lastly, the package solution division. Third quarter revenue was KRW 552.5 billion, which is roughly a 3% increase QoQ and a 26% increase YoY. Despite demand slowdown in certain applications such as smartphones and PCs, divisional revenue increased, thanks to solid demand from 5G network and automotive products. BGA supply increased for 5G antenna and ARM processor applications. For Flip-Chip BGA, while supply for PC substrates decreased, supply increased for network and automotive applications.
In fourth quarter, BGA demand is expected to slow down in certain applications due to seasonality, and so we will focus on products with stronger demand, such as substrates for high-performance ARM processors. For Flip-Chip BGA, while demand for PC substrates is expected to remain weak, demand for high-end products such as server, network, and automotive applications are likely to continue growth. Accordingly, we will focus on starting mass production of server substrates and securing a foundation for mid to long-term sales growth by increasing supply of network and automotive substrates. That ends my presentation on our third quarter results. Now EVP Wontaek Kim, Head of the Strategic Marketing Center, will go over the market trends and outlook for each key product group.
Good afternoon. This is Wontaek Kim, of the Strategic Marketing Center at SEMCO.
I would like to share the update and outlook for MLCC, camera module, and substrate markets respectively. First, MLCC. During third quarter, set demand decreased due to weaker consumer sentiment affected by deteriorating macroeconomic indicators, worsening global inflation, and rapid interest rate increases. For MLCC, while automotive MLCC demand remained solid, IT MLCC demand for applications such as smartphone, PC, and TV was slow due to sluggish demand and component inventory adjustments. In particular, MLCC demand for Chinese smartphone and PCs, which account for a large part of SEMCO's MLCC revenue, decreased in third quarter, resulting in a somewhat negative impact on our third quarter results.
Even though the soft IT demand and continuing inventory reduction is expected to pose challenges in fourth quarter, demand for certain MLCC, such as small-size, high-capacitance MLCC for flagship smartphones, high-temperature, high-capacitance MLCC for industrial applications, and high-voltage, high-reliability MLCC for automotive applications are expected to continue growth. We plan to drive revenue growth by focusing our development resources and increasing supply capabilities around the high-end MLCCs for IT, industrial, and automotive applications where demand growth is expected in the future. Next, camera modules. In third quarter, camera module demand for Chinese smartphones remained slow, which posed some challenges. However, camera module demand in our key segments actually increased QoQ, thanks to launch of new models such as foldable smartphones by strategic customer and the strong demand continuing for automotive camera modules.
In Q4, while we expect overall camera module demand to be slow due to year-end inventory adjustments by customers, we expect to offset some of this by producing camera modules for the strategic customer's new smartphone model scheduled for launch in early 2023. The flagship smartphones are likely to continue to demand camera modules that are differentiated by higher specifications such as high pixel, high power zoom, and high performance. We also expect growth to continue for slim cameras, as foldable smartphone continues to expand, particularly driven by the strategic customer. Furthermore, even for mass tier smartphones, demand for flagship-like camera specifications such as high pixel and OIS is continuing to grow. Also, the demand for automotive camera modules is expected to continue to increase with the advances in autonomous driving technology.
We will focus on fully capturing the opportunities created by demand for higher specification and slimmer camera modules for flagship and foldable phones, and also continue to expand share in the mass tier smartphone segment that continues to adopt OIS. We will also increase supply of automotive camera modules to gain leadership in this growing market segment. Lastly, substrates. In third quarter, while BGA demand for smartphones decreased, demand for high-spec substrates, such as for 5G antennas and ARM processor applications, remained solid. For Flip-Chip BGA, demand for high multilayer and large body substrates for server, network, and automotive applications increased, which continued to eat up more production capacity. Despite this, the supply and demand condition temporarily eased up in third quarter due to decrease in demand from certain applications, especially PCs.
In fourth quarter, for BGA demand for high-end BGAs, such as for 5G antenna and ARM processors, is expected to remain solid. Overall BGA demand is expected to slow down somewhat due to decrease in memory substrate demand and the component inventory adjustment by certain customers. For Flip-Chip BGA, while the impact of weaker PC substrate demand is expected to continue for some time, demand for high multilayer and large body substrates, such as for server, network, and automotive applications, is expected to continue growth. Accordingly, we will focus on expanding the share of high-spec, high-end products such as 5G antenna and ARM processor, where market demand is expected to remain solid in order to preemptively capture changes in customer demand and stay on top of the latest set development trends.
Also, our mass production of server Flip-Chip BGA is expected to further diversify our application and provide an additional revenue growth opportunity. Thank you.
Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone. The first question will be provided by Jisan Kim from KB Securities. Please go ahead with your question.
I have two questions. First question is, can you share with us your results of the MLCC third quarter shipments, inventory and ASP and also provide guidance on these, metrics for fourth quarter? Second question is regarding your Flip-Chip BGA business. There's talk in the market that the launch of the new server CPU would be delayed. Would that have any changes on your schedule to mass produce server substrates?
T o answer your question about third quarter MLCC shipment inventory ASP and fourth quarter outlook. During third quarter, even though the sales of automotive MLCC remained solid thanks to growth in EV, there was some impact from inventory adjustments by customers, and this led to a decrease in sales of IT and industrial application MLCC. Overall, during third quarter, our MLCC shipment decreased quarter-over-quarter.
Third quarter ASP, there was some decline in ASP, especially around the MLCC for Chinese customers due to price competition among MLCC vendors as there was soft demand. However, because in the case of us, the share of automotive MLCC revenue in our entire MLCC sales increased, we were able to defend our blended ASP at levels similar to the second quarter ASP levels. Our inventory during third quarter slightly decreased versus the second quarter inventory levels. Regarding the fourth quarter, we do expect demand to remain solid, especially around the ultra small size, ultra high capacitance and for flagship smartphones and also solid demand is expected for automotive MLCC. However, we do expect there to be continuous impact by the channel inventory adjustments for IT MLCCs.
In terms of shipments fourth quarter, we're expecting there to be a slight decrease versus third quarter.
The following question will be presented by Rok-ho Kim from Hana Securities. Please go ahead with your question.
Yeah.
My first question is about the Flip-Chip BGA. As you mentioned during the presentation, the demand in the downstream PC set side is not very good. Considering that actually PC Flip-Chip BGA accounts for a larger part of our Flip-Chip BGA business, do you think that you will be able to continue to deliver revenue growth next year? Second question is about the camera module business. I think there are a lot of expectations in the market that next year there will be a dramatic improvement in the pixel count number at the image sensor level. Do you think that your camera modules will be prepared to support this higher pixel count at the image sensor?
Yeah.
To answer your first question about PC demand decrease and whether we can deliver Flip-Chip BGA revenue growth next year, to put the PC market into context, during the past two years, the PC market, as you recall, went through very rapid growth, thanks to the new demand of remote working and online learning that was the result of the pandemic. Recently, with the economic downturn and weaker consumer sentiment, there are forecasts that PC shipments will probably contract going forward. With a contracting PC market, the demand for PC Flip-Chip BGA is also expected to decrease. However, we expect there to be different market situations for other applications, such as the high multilayer Flip-Chip BGA that is used for server, network and automotive applications.
The demand for these high multilayer Flip-Chip BGA is continuing to grow, and we expect that in that market segment, in the mid to long term, a tight supply situation would be maintained. We are increasing our product presence in these growth markets, such as server, network and automotive applications, in order to minimize the impact of a PC market slowdown. We plan to continue to deliver revenue growth in 2023. Regarding your question about the higher spec image sensors and outlook for smartphone camera modules next year. Looking towards the camera module demand for the flagship smartphones scheduled for launch next year, we think that the specification would be focused on especially a better video performance and also higher pixel count camera module technology.
A larger image sensor in order to deliver better, higher picture quality, would also result in a larger camera module. We expect markets to continue to demand technology solutions that would reduce the camera module size. As you know, we have already developed a 200-megapixel OIS camera module and have already start to supply this to the overseas customer. Also, we are continuing to develop technologies that would reduce the camera module size to fit higher pixel camera modules into the foldable phone segment, which is continuing to expand. In order to maintain our first mover position in camera modules, we will continue to develop core technologies that satisfy the market needs on time.
The following question will be presented by Choi, Soon Young from Hankuk Investment & Securities. Please go ahead with your question.
첫 번째는 MLCC 가동률 관련인데요. 시장 재고 조정이 이루어지고 있고, 이에 따라서 MLCC 가동률이 하락하고 있는데, 4분기에는 가동률 반등이 가능할지 궁금합니다. 두 번째는 투자와 관련된 건데, 세트 수요 둔화로 가동률이 전방위적으로 하락하고 있고, 고객사들의 출하량 전망치가 하향되고 있는 것으로 보입니다. 이로 인해서 투자 연기나 혹은 취소 계획이 있는지 알려주시면 감사하겠습니다.
My first question is about MLCC utilization. The market is going through an inventory adjustment, and that is also showing up in lower utilization of your MLCC capacity. Do you expect there to be a turnaround in your MLCC capacity sometime during the fourth quarter? Second question is about your CapEx plans. As we were talking about, there is a decrease in set demand, also a decrease in utilization, and even the downstream customers are downward adjusting their volume expectations. Does that mean that you have any plans of delaying or canceling existing CapEx plans?
질문 주신 가동률 전망에 대하여 답변드리도록 하겠습니다. 사분기 가동률은 앞서 말씀드린 바와 같이 시장 내 IT용 유통재고 조정 역량 지속 등으로 삼분기 대비해서 감소될 것으로 예상됩니다. 당사는 성장 시장인 전장, 서버, 네트워크용 고신뢰성 제품과 IT용 고부가 하이엔드 제품 등 수요 증가가 예상되는 응용처를 중심으로 사업 역량을 집중하고 있습니다만, 시황 불확실성으로 향후 가동률 반등 시점을 예측하기는 어려운 상황입니다.
To answer your question about fourth quarter utilization outlook. In fourth quarter, we are expecting our utilization to decrease versus third quarter given especially the continuing inventory adjustments for IT MLCCs in the channel. We are concentrating our business capabilities around the growth and a solid demand applications such as the high reliability MLCC for automotive server and network applications, as well as the high-end IT MLCCs. However, given the market uncertainty that currently exists, it is difficult at this point to foresee when our utilization might bounce back.
네, 질문하신 투자 계획 관련하여 답변드리겠습니다. 올해 투자는 업황 둔화로 인해 당초 계획 대비 투자 규모가 소폭 감소될 것으로 전망됩니다. 내년 투자는 아직 투자 계획을 수립 중인 상황이라서 구체적인 내용을 말씀드리기가 어렵지만, 올해보다는 투자 규모가 다소 감소될 것으로 전망하고 있습니다. 앞으로도 당사는 전장, AI, 클라우드 서버 등 고성장 고부가 분야를 중심으로 고객사 수요와 얼라인된 투자 계획을 수립하고 실행을 통해 투자 효율성을 높일 수 있도록 최선을 다하겠습니다.
To answer your second question about our CapEx. Yes, this year's CapEx we are expecting to be slightly smaller than originally planned given the slowdown in overall industry environment. Regarding next year's CapEx plan, we're still in the process of drafting that up, and so we are not able to share detailed investment plans for next year. Currently it appears that next year's investment size budget will probably be somewhat smaller than what we had budgeted for this year. As we have always done, our CapEx policy is to plan and execute investments that are well aligned with customer demand and focus on high growth and high value add areas such as automotive, AI, cloud, and server to further improve our investment efficiency.
네, 다음 질문 받아주시기 바랍니다.
다음으로 질문해 주실 분은 IBK 투자증권의 김운호 님입니다. The following question will be presented by Un-ho Kim from IBK Investment & Securities. Please go ahead with your question.
질문 기회 감사드립니다. 두 가지 질문 드리겠습니다. 먼저 MLCC인데요. 말씀하신 대로 이제 저희 전장 쪽 비중이 계속 늘어나고 있는데 현재 그 고객사 현황, 전장용 MLCC의 고객사 현황하고 향후 전망에 대해서 좀 말씀을 좀 부탁드립니다. 그리고 IT하고 비교했을 때 수익성이 어느 정도인지에 대해서 잠깐 코멘트 부탁드리고요. 두 번째 질문은 전장용 카메라 모듈에 대한 질문인데요. 역시 이 부분도 이제 비중이 계속 늘어나고 있고 앞으로도 더 커질 것 같은데, 향후 매출액 그리고 이제 이익 증가에 대한 CapEx 비전이 어떠신지 좀 궁금하고요. 그리고 수익성도 같이 설명을 좀 부탁드립니다. 감사합니다.
I have two questions. The first question is about automotive MLCC. As you mentioned, the automotive MLCCs share in your MLCC business is increasing. I'm wondering what your customer profile looks like. Can you share with us some details about what are your MLCC, automotive MLCC customers, and what kind of a future outlook do you have of your MLCC, automotive MLCC business? And can you also share with us very briefly the profitability of automotive MLCC versus your IT MLCC? Second question is also about automotive, but this time automotive camera modules. This is also an area where you have been increasing in terms of share. Can you give us some details of what you expect in terms of future automotive camera module revenue and profit increases, and also what kind of profitability outlook do you have?
To answer your first question about automotive MLCC, in terms of our customer profile, in the past, a large part of our automotive MLCC revenue came from tier one vendors. Recently we have been able to diversify our customer base, especially, sales directly to global EV companies. This diversification of customer base has been one of the reasons why we have been able to deliver revenue growth that is several times higher than the market growth rate. The share of our automotive MLCC in overall MLCC revenue has entered double digits this year and since then has continued to increase its share in our revenue quarter after quarter. This increase of high-end MLCCs and also the increase in overall revenue size has helped us improve the automotive MLCC profitability.
While there are many uncertainties in the market, the innovation trend in the automotive market remains very strong, such as EV and autonomous driving. That is why we have early on identified automotive as our future core business and have been concentrating our resources around MLCC development, especially on the high growth automotive MLCC. Our plan is to continue to add, for example, special material and production processes for high reliability MLCC and to increase our supply of supply capacity and capability in line with customer demand growth to continue our revenue growth. To answer your question about the automotive camera modules, with the further development of ADAS and also autonomous driving technology, the automotive camera module market is expected to record significant growth each year.
We have been continuously expanding our automotive camera module business by supplying differentiated camera module products and also diversifying our automotive camera module customers. We do expect our camera module, our automotive camera module contribution within our overall camera module revenue to gradually increase going forward. We will focus on improving our margins, not only by increasing the scale of our automotive camera module business, but also by focusing on raising the cost competitiveness of our camera modules by developing differentiated technologies and internalizing core components.
The following question will be presented by Park Kang-ho from Daishin Securities. Please go ahead with your question.
I have two questions. The first question is about your package substrate business. Expanding the business towards automotive applications seems to be an overall theme at a company level. Does that also apply to your substrate business? What is the current size of your substrate revenue that comes from automotive applications? And what kind of outlook and guidance do you have regarding future growth in automotive substrates? The second question is overall business guidance. Due to various uncertainties, your business performance seems to be slowing down recently. Can you give us some outlook regarding expected business results in the fourth quarter and also next year, 2023? To answer your first question about our automotive package substrate business, there is the continuous paradigm change in the automotive industry towards EV and also adoption of autonomous driving.
Because of this, we are seeing that even automotive substrates are now requiring high specifications, similar to or even above the substrate specifications that are required by PC. This is being driven by increase in the adoption and content of high performance semiconductors on automobiles for information processing purposes as autonomous driving functions become more advanced. We're seeing therefore an overall increase in demand of automotive substrates. Actually, SEMCO has been supplying automotive package substrates from 2018 by satisfying the automotive reliability requirements as well as the thermal shock resistance requirements by developing these core technologies early on. Currently, in our Flip-Chip BGA revenue, automotive accounts for more than double-digit share. Also the type of automotive applications we supply to has been changing.
Previously, our main application was infotainment units on vehicles, but now we're also supplying to higher performance ADAS, high multilayer, large size, high-end substrates. We will leverage this new business area to continue to deliver growth in our automotive substrates. To answer your second question about fourth quarter and next year business outlook. Looking towards fourth quarter, we do expect that our company level revenue would probably decrease versus third quarter, given the various uncertainties externally, and the slowdown in IT set demand, caused by the uncertainties as well as various year-end seasonal factors. Looking towards next year, we expect that the external business challenges will probably continue next year, and this would result in continued softness in demand for IT sets, such as smartphones and PCs.
However, we expect there to be relatively more solid demand around the key future growth markets that are related with SEMCO, such as 5G, server, network and automotive. Therefore, we plan to focus our capabilities around the related components such as industrial, automotive MLCC, automotive camera modules, and high-end package substrates to create opportunities of growth. Also, internally, we will continue to focus on maximizing our operational efficiency by further enhancing our productivity, raising our investment efficiency, and continuing to seek cost saving opportunities. Also, maintain a flexible operation of our business, such as increasing our capacity in line with customer demand, so that we'll be able to ensure sound free cash flow and risk management, so that we would be able to minimize volatility of our business performance regardless of heightened uncertainties next year.
That completes our third quarter earnings conference call. If you have any further questions, please forward them to our IR team. Thank you very much.