Good afternoon. This is Ho-Ik Lee , Vice President of Finance and Accounting at Samsung Electro-Mechanics. Thank you for joining our fourth quarter 2016 earnings conference call. Today, SEMCO CFO, Kwang-young Chung, and key executives of each business division and marketing have also joined us. Please note that the comments and data presented during this conference call contain forward-looking statements that could differ significantly based on changes in the macroeconomic environment and market conditions. First, we will look at the fourth quarter results and financials before going into detail results and future strategies of each business division. Q4 revenue was KRW 1 trillion 345 billion, which is an 8% quarter-on-quarter and 1% year-on-year decrease. In Q4, operating loss was KRW 46.5 billion.
Despite increase in revenue from camera module and MLCC supply to Chinese handset makers, as well as memory package substrates, and further positive effects from the exchange rate movements, operating performance in Q4 deteriorated significantly on a quarter-on-quarter basis due to decrease in demand for high-end components, due to the discontinuation of the flagship model by our strategic customer and fallen ASP. Pre-tax loss was KRW 59 billion. Net loss was KRW 35.3 billion in Q4. For the full year 2016, revenue was KRW 6,033 billion, which is a slight year-on-year decrease, and operating profit was KRW 24.4 billion, which is a significant decrease year-on-year, mainly explained by the decrease in demand from the strategic customer and expenses related with various initiatives to improve business efficiency. Next, our financials.
As of end of 2016, SEMCO's total assets was KRW 7,662.2 billion, and liabilities, KRW 3,325 billion. Our financial structure remains strong with debt equity ratio of 77% and capital adequacy ratio of 57%. Now the results and strategy of each business. First, the DM business. DM's Q4 revenue was KRW 582 billion, which is a 12% decrease quarter-on-quarter for a slight increase year-on-year. In Q4, in terms of camera modules, sales of high-end modules such as dual cameras and 16 mega OIS increased, particularly towards Chinese major handset makers. Modules supplied to the overseas auto industry also expanded. Decrease in demand caused by discontinuation of the flagship model by our strategic customer resulted in a quarter-on-quarter revenue decrease. The major strategy of the camera module business is to first secure leadership in dual cameras in the Chinese market and also to increase revenue from our major customers.
To this end, we plan to leverage our internal capabilities in core camera components such as lens and actuators to have more customer project design in our differentiated dual solutions and to build a stable local production base in China. By doing so, we'll further solidify SEMCO's position as the dominant source of camera modules for flagship models of major Chinese customers. At the same time, we will continue to expand supply with on-time development and qualification of camera modules for the strategy customers' new handset models, as well as maintaining reliable mass production. In camera modules for automotive applications, we will increase revenue by offering a wider range of products to our existing customer and also expand our product lineup by developing system modules such as for surround view monitoring systems. Next, about communication module business.
In Q4, sales of Wi-Fi modules and wireless charging modules to the strategy customer decreased, resulting in a drop in revenue on a quarter-on-quarter basis. In terms of future strategy, for Wi-Fi modules, we will focus on the development of next generation products using the new wireless standard and continue to secure key technologies such as ultra-slim packaging and high-performance IC. For wireless charging modules, we will increase the range of models supplied to the strategic customer by leveraging our differentiating technologies such as ultra-slim packaging and high-speed charging. Next, our LCR business. Even though Q4 revenue was KRW 447 billion, a slight decrease quarter-on-quarter, this was a 1% increase on a year-on-year basis. MLCC revenue decreased mainly due to deterioration of product mix resulting from the strategic customers' decreased demand for high-end MLCC.
However, increase in production volume by Chinese handset makers has driven up demand for small size and high capacity MLCC. In particular, strong sales of high-end products to major customers has helped increase MLCC revenue on quarter-on-quarter basis. Future MLCC strategy is the key strategic focus for MLCC is first to further increase sales of high-end products to Chinese and other overseas customers. To this end, the new production facility in the Philippines and China will be used to respond to increase in demand for high quality and high-performance products. In particular, we'll expand our supply to the next generation high-end handset models by qualifying for new models of overseas customers.
Also, we'll expand sales of MLCC to industrial and automotive applications. To expand sales to network equipment, power equipment, and servers, we will develop differentiated MLCC that responded to latest IT technology demand, such as smaller flexible electrodes, also acquire a wider automotive customer base by increasing our lineup with product that offer excellent characteristics in terms of temperature and [banding strength. The next, EMC business. In Q4, the strategic customers demand for power inductor decreased, resulting in decrease of EMC revenue on quarter-on-quarter basis regarding EMC we will expand sales of different product such as high-capacity, high reliability power inductor focus on restoring power inductors supply turn oersees customer. Also, we will prepare mass production capabilities for frequency inductors and strengthen the new product lineup, including these, to continue to expand the size of the EMC business. Lastly, ACI business.
Revenue in Q4 was KRW 297.9 billion, which is a 9% decrease quarter-on-quarter, 17% decrease year-on-year. In the case of CPU package for flip chip BGA, revenue dropped as PC shipments decreased due to inventory adjustment by overseas customers. Revenue of substrates for memory increased quarter-on-quarter as demand for ultra-thin CSPs and fan-out wafer increased as a result of strong semiconductor industry performance. In terms of future package substrate strategies, we will expand participation of our memory boards in high-end new memory products to increase market share with on-time response to customer demand and enhance our memory board supply capabilities, both based on our standing manufacturing technology and differentiated quality guarantee system.
For mobile AP packaging, we will enhance our cost competitiveness through improved yield and process efficiency and expand our market shares through greater participation in new products and on-time qualifications, which will further enhance our global competitive advantage. In the case of HDI, revenue dropped quarter-on-quarter due to decrease in sales of main boards and rigid flexible boards due to weak demand by the strategy customer. The key strategy of HDI boards is to enhance our cost competitiveness by stabilizing production overseas and by developing Vietnam into a production base specializing in the strategy customers' flagship model to expand our market share. We'll focus on expanding supply of RF PCBs for next generation display devices based on our strength in rigid PCB technology and start development of high density HDI boards using microcircuit technology to continue transition. That ends our presentation. We ask for your continued support for SEMCO.
Now we'll take your questions.
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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.
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The first question will be provided by Woo-Hyung Cho from HSBC Securities. Please go ahead, sir.
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I have two questions. The first question is regarding the LCR business. Can you give us your plans of how to recover the profitability and market share of the MLCC business, which recently has been declining, especially with a focus on the high value add MLCC? Second question is about the boards. The PLP business is receiving a lot of attention as a new business possibility. Can you give us a bit more detail on the production capabilities as well as CapEx and revenue outlook for PLP?
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To answer your first question regarding the MLCC business profitability as its market share. Last year, yes, our revenue declined slightly, and our market share also declined about 2%-3% last year. Given the fact that in the MLCC business, material costs account for a relatively small portion scale does have a large impact on the profitability of the overall MLCC business. Last year, the decreased market share that we experienced did have an impact on our profitability. Looking towards 2017, we do notice that the set makers, our customers do have major issues. One is that they are experiencing that their sets, the handsets themselves are becoming more high specification, requiring components with higher reliability. We have foreseen this trend and therefore we have prepared to this customers demand for higher reliability components.
Because we are well prepared, we believe that we can take advantage of this to increase, especially the high value add component business that we have. Second, this year, we have already started to fully operate the new manufacturing facilities that we have in China and the Philippines. This will increase the scale of our supply. We will use this increased supply to respond to not only the demand, but also this will give us an advantage in terms of cost. This would also improve our profitability this year.
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Regarding your second question about the PLP business. As you know, we have executed investments last year for the development as well as preparing the infrastructure for the PLP business. As of end of last year, we have completed the receiving of the equipment for the one pass line. We currently almost have completed the setup of the process, and we are currently in the process of optimizing the one pass line that we have almost set up. In terms of the current yield, actually, we are getting a yield that is beyond what we had originally planned. That's very encouraging. The current one pass line is ready to produce small size ICs, and the volume would be enough to supply to a major or large size customer.
In order to produce PLPs for memory or AP, which we plan to start in the second half, this would require additional CapEx at a level similar to the CapEx that we spent last year.
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The following question will be presented by Keon Han from Credit Suisse. Please go ahead, sir.
Okay. Thank you. Good afternoon. I have two questions. First is on your China business. I think you've been trying to penetrate more into Chinese customers for past few years, especially on both camera modules and MLCC. Can you let us know about to what extent China represents of your, say, MLCC revenue or camera module revenue? How you see the Chinese dual camera products developing in terms of project numbers for rest of the year? I'll follow up with the second question.
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As of Q4 2016, the share of our revenue from the Chinese customers as of Q4 last year actually exceeded what we had provided to the market. Our target that we announced to the market was that about 20% of our revenue would be coming from the Chinese customers. Actually, in the fourth quarter, we had overachieved that level, especially because of major high-end components, including dual cameras being supplied to Chinese customers. This year, we plan to continue to increase our sales towards Chinese customers, especially the major Chinese customers, not only for camera modules for MLCCs, but we also, this year, plan to expand our sales towards China in EMC as well as substrates.
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To supplement that answer with details about the dual camera, even though it's a bit difficult to give you the number of projects that are currently underway. To give you a feel of the overall market situation, as you know, we did start supply of our dual cameras to a Tier 1 last year. We were able to do this because of our differentiated dual camera solution. We have been supplying this stably. Looking at the current market situation as well as where we stand in the market, we believe that we will be able to continue this stable supply of our differentiated dual cameras this year.
We've already established a very well trusting relationship with our major customer in China, and we have built a very strong reputation as a major supplier and therefore, we believe that we will be seeing stable supply of our dual camera solutions this year as well.
Okay. Just a follow-up on the MLCC business. I think the auto-related MLCC has been talked about for a while. Can you give us an idea about how much auto MLCC will represent your revenues by end of this year? Also, if you can be a little bit more detailed in terms of which customers have qualified your product or plan to qualify your product, I suppose.
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Even though it's difficult for us to release specific names of these customers due to compliance issues, I can say that we are involved in the process with all of the four major Tier 1 companies in terms of global market share. In terms of portion of automotive MLCC within our MLCC revenue, currently it stands at about 4%, but I think after this year we will be able to double that share. Also worth noting is the fact that a lot of the automotive MLCCs are also used for industrial applications. If you combine the automotive as well as industrial applications, we believe that after this year we will be able to increase our market share significantly.
Thank you.
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The following question will be presented by Jaeyoon Lee from Yuanta Securities. Please go ahead, sir.
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The first question is about CapEx. CapEx outlook for this year. You mentioned that you will be expanding the dual camera, also you anticipated additional investment for the PLP business. Also, according to what we have confirmed there, you plan to also start the RFPCB operation for OLED. Given all of this, can you break down your CapEx versus last year for each of the business divisions?
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Regarding our CapEx, even though it's difficult for me to give you a specific CapEx number for this year here, you would recall that during 2016, as well as before that, 2015, we went through a phase of expanding our manufacturing facilities. We don't have that. That phase has been completed. This year, since we do not have large scale new plans going in, actually in terms of CapEx, we will see a decrease on a year-on-year basis.
The CapEx that we will spend this year will be focused on developing our capabilities in the high-end products, and we will do this, flexibly, depending on the market situation.
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The second follow-up question is actually about the OLED RFPCB. Can you give us some more specifics about your investment plans related with the RFPCB and how much revenue we can expect this year?
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To answer your question of the RFPCB, as you know, RFPCB is an area where we have the strongest competitive advantage in terms of both quality as well as technology. We believe that through the recent investment, we will be able to further widen the gap that we have versus us and the competitor. Even though it's difficult to announce the exact number of the investment, we believe that through this investment, we will be able to massively increase the revenue.
We have already been the first supplier for the RFPCBs for tablets and PC application for the past five years, and based on that track record, we have built quite a solid reputation. The investments have already been executed and will be completed during the first half of this year. Through this additional investment, we believe that we will be able to increase our revenue this year by at least two-fold, and as much as three-fold versus the revenue that we recorded in 2016, which will also help us normalize the HDI business overall.
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One last question is about the initiatives to improve your business efficiency that you executed last year. You went through a lot of that last year. Can you give us a breakdown of how much benefit, how much effect that we will be realizing on a quarter breakdown this year?
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As you know, there were some one-off expenses that were recognized last year as a part of our efforts to improve the business efficiency. Therefore, the benefit of that will be realized immediately, starting from January this year, and we expect to have more benefits realized this year versus the expenses that we had recognized last year.
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The following question will be presented by Harry Kim from CLSA. Please go ahead, sir.
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My question is about the camera. The dual camera module, actually. Actually, when we look back until about November last year, there was a lot of anticipation of dual cameras being adopted by the new flagship model, the Galaxy, of your strategic customer, which has not happened. There's a lot of speculation in the market as to why that has not happened. Can you explain whether this decision to not adopt the dual camera in the Galaxy S was because of any technology issues, especially, for example, hardware or software needing more time to be prepared for adoption? Or was the technology in terms of both the hardware and software already prepared and ready to go, but the customer decided not to adopt based on other non-technology issues such as cost?
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As to the reason why the customer did not adopt the dual camera in the new Galaxy flagship model, that's actually a customer's decision on what specifications to put into its product. We cannot comment on that. What we can offer as a response is the fact that we are already supplying our dual cameras to a major Chinese handset maker. That product is already on the market. We are ready to supply dual cameras to the strategic customer whenever they need it.
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The following question will be presented by Sung-Ryul Kwon from Dongbu Securities. Please go ahead, sir.
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I have two questions. The first question is regarding the board business, the substrate business. The sluggish performance is actually continuing for more than longer than we expected. The size of the decrease is getting wider despite the fact that the company has gone through many efforts, including the opening of the Vietnam production. When do you think this will turn around and the business will become normalized? Second question is regarding the automotive components. You have been, as a company, emphasizing that as a potential business for quite some time. As an investor as well as analyst, the difficulty that we face is the fact that the company has not provided any specific reference points that we can use to actually confirm how much of that business is growing.
For example, a competitor would offer new orders or order backlog or revenue growth trends or case as reference points so that we can get a better feel of the automotive business that the competitor is operating. Is it possible, as a request, to provide that sort of information to us as well?
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Regarding how to improve the profitability of the HDI business, as you know, we have been transferring manufacturing over the past two years, and the last manufacturing capability onshore in Korea will be transferred to Vietnam within the first half. From the second half of this year, there will be more performance being delivered based on the overseas production. We have been investing quite a lot in Vietnam as a part of this transfer, and we expect the revenue from Vietnam in 2017 will be five times the revenue of Vietnam in 2016. Therefore, as more revenue is generated based on the Vietnam plant, this will help improve our cost competitiveness. The third point is that as we mentioned before, we will be expanding our RFPCB business, which will help boost up our ASP.
We will, in the second half of 2017, definitely achieve revenue that will put us at break-even point.
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Regarding the automotive business, SEMCO started its automotive component business in 2013. Between 2013 and 2016, last year, our automotive-related revenue grew by fourfold. Some in the market may feel that this is too slow in terms of pace, but because of the way we approach a new business, that we try to leverage our competitive advantage, we think that that was the reason why it took that pace. In 2016, you will recall that we started supply to a Tier 1 OEM, and we plan to increase our growth in 2017 by further leveraging our advantages. Our target this year is to achieve a revenue of $100 million. You've asked about the backlog that we have. Currently, our backlog is $420 million, and by the end of this year, we're expecting that to increase to about $600 million.
As you know, last year we were able to become a first vendor in a North American auto OEM, and we were able to start business with a global OEM as well. This year, we're expecting this to further increase as more and more cars adopt the ADAS and the overall need for cameras and other components increase. Our cameras that are currently being supplied to the automotive application are mainly used for viewing applications, but we believe that this will also be expanded to sensing-related cameras, which require a higher level of reliability. Therefore, this would also open up businesses for MLCC that provide higher reliability and high capacity. Ultimately, we will try to use this as leverage to move into the self-driving car applications.
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The last question will be presented by Jong-Uk Lee from Samsung Securities. Please go ahead, sir.
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I have three brief questions. First of all, as you know, Samsung Electronics acquired Harman. Do you think that this will actually present a synergy effect or synergy opportunity for SEMCO? Second is, can you give us a bit more detail of your first quarter outlook, especially given the fact that Samsung Electronics flagship model launch, which usually happens this time of the year, is going to be later, it seems, this year. Would that have an impact on your first quarter results? Third question is about the HDI turnaround. You mentioned that a lot of the capacity has been transferred to overseas. What happens to Busan after that transfer is completed? Also, would additional investments in the RFPCB imply a decrease in your HDI capacity?
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Even though we would have to wait until the actual deal closes to give you a bit more detail of any synergy effects or opportunities due to the acquisition of Harman by Samsung Electronics, we are already, according to the schedule, preparing the themes or our plans of cooperating on our own. Internally, we are preparing major topics or themes on which we can collaborate with Harman once the deal is closed. As you know Harman either global Top Tier 1. Initially, we would like to suggest ideas related with our automotive MLCCs, cameras, as well as connectivity solutions. Then in the long term, expand that to our systems offerings or FOPLPs, and other applications. We do welcome this because as a result of this acquisition, we now have a global Top Tier 1 as a part of our captive market.
This will help us, we believe, break into the automotive industry and also shorten the time that we need to build up the automotive business.
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Regarding the first quarter outlook, we, first of all, plan to maximize the increase of component supply towards the new model of our strategic customer. We will do this by qualifying our major components on time according to the customer schedule, and also to have more of our components adopted based on our differentiated features. Also, we will respond to the needs by producing on time so that our supply of these initial products are done without any disruption. At the same time, in the first quarter, we will be focusing also on increasing the supply towards Chinese major customers, especially our dual camera or the 16-meg high-spec cameras. Also, we will increase our supply of MLCCs to high capacity and high value-add MLCCs, and we plan to turn around the business in the first quarter based on these two major initiatives.
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To answer your third question, once the transfer is completed, we plan to use the existing HDI line that we have in Korea as a mother line. Convert that to a mother line which focuses on developing next generation new models. Of course, in this conversion process, we will minimize the resources that are necessary for that conversion. Also for the RFPCB, we also have a plant number two in Vietnam that is under construction that will be completed soon. By leveraging Vietnam plant number two, we will be able to add RFPCB capacity without having to decrease our existing HDI capacity. This year, we are planning to increase the revenue of RFPCBs at least three-fold versus last year.
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Thank you very much. This completes the conference call.