Good morning. Thank you very much for joining today's conference call. We will now start the 2020 first quarter earnings conference call of Samsung Electro-Mechanics. We will start the conference call with a presentation by the company before taking your questions. If you have any questions, please press star one on your phone. We will start the presentation by Samsung Electro-Mechanics.
Good morning. This is KwangWook Bae, VP and Head of Planning Team and IR at Samsung Electro-Mechanics. Thank you for joining our 2020 first quarter earnings conference call. Before going into the presentation, I would like to introduce the management who are present.
We have EVP Bong Yong Kang, Head of Business Support Team, SVP Kwang-hwun Cho , Head of Strategic Marketing, Jung-h oon Ahn, Head of Support Team, Component Solution Division, Jang Won Lee, Head of Support Team, Module Solution Division, and Won Wook Choi, Head of Support Team, Substrate Solution Division. We will start with a presentation of our first quarter business results and divisional results, followed by market trends and outlook by product before taking your questions. First, our Q1 business results. SEMCO's revenue in Q1 was KRW 2,224.5 billion, which is an increase of about 21% QoQ and about 8% year-on-year. The detailed breakdown of the increase and decrease factors by division will be explained shortly while addressing each division. In Q1, operating profit was KRW 164.6 billion and approximately 19% QoQ increase, but a roughly 32% decrease year-on-year.
Pre-tax profit in Q1 was KRW 156.7 billion, including a total of KRW 7.8 billion in non-operating expenses, including equity method losses, despite improved foreign currency-related gains. Net income after corporate tax was KRW 132.1 billion. In terms of financials, as of end of March 2020, total assets was KRW 9,484.5 billion, which is a 9% increase from end of the previous quarter. For our major financial indicators, debt to equity was 72%, net debt to equity 22%, both increasing versus the previous quarter, and shareholder equity decreased quarter-on-quarter to 58%. Is the results and future outlook of each division. The Component Solution Division. The Component Solution Division's Q1 revenue was KRW 857.6 billion, which is an 11% increase QoQ and a roughly 2% increase YoY.
Even though automotive MLCC revenue from OEMs and Tier 1 suppliers decreased due to the overall weak demand in the auto market, there was an increase in the sales of high capacitance MLCCs to the strategic customer and MLCCs for IT applications such as PCs and game devices. Also, we saw an increase in supply of industrial high-end MLCCs for servers and power equipment, which helped increase divisional revenue versus the previous quarter. During Q2, MLCC market is expected to see solid demand in applications such as PC servers and networks as people continue to work and study from home due to COVID-19. We will focus on winning new design-ins from global customers to increase our supply.
Demand for MLCCs for mobile and automotive applications is expected to remain weak even into Q2, and we will be responding flexibly to changes in market demand by monitoring changes in order and sales trends and operating our production flexibly. The Module Solution Division. In Q1 revenue was KRW 983.2 billion, which is roughly 53% increase QoQ, about 4% increase YoY. Major contributors to revenue growth versus the previous quarter includes the increase in supply of high-performance camera modules, including the folded zoom and Wi-Fi modules for the launch of the new flagship smartphone by the strategic customer. Our supply of 100 meg+ ultra-high pixel camera module to Chinese customers also increased. In Q2, camera module market is expected to see decrease in demand due to seasonality in COVID-19.
Accordingly, we will focus on making up for lost revenue by winning new opportunities in Chinese handset markets with our high-performance camera modules, such as the folded zoom. Also, in the case of communication modules, because 5G communication module market is expected to gradually increase, we will be ready for the 5G antenna technology and prepare for mass production. Lastly, our Substrate Solution Division. Q1 revenue was KRW 383.7 billion, which is roughly an 11% decrease QoQ, but a roughly 37% increase YoY. For package substrates, even though revenue of substrates for mobile memory somewhat decreased, supply of 5G antenna substrates and RF front-end SiP increased, and the supply of Flip-Chip BGAs for thin CPUs also increased, driven by strong PC demand. As a result, our package substrate revenue increased.
Supply of RFPCB substrates to overseas customers decreased significantly due to seasonality, resulting in revenue of the overall division falling. In Q2, even though mobile-related demand will remain weak due to COVID-19, package substrate demand for PC applications is expected to remain relatively solid. We will focus on increasing market share with new customers for our PC memory substrates, including those for GDDR, and increase supply of Flip-Chip BGAs for laptop thin CPUs where there is increased demand, and for automotive and network applications. This completes my presentation on Q1 results, and now the Head of Strategic Marketing will provide an update on market trends and outlook by product.
Good morning. This is SVP, Kwang-hyun Cho, Head of Strategic Marketing. I would like to share our updates on the market situation and outlook for MLCC camera modules and substrates. First, MLCCs.
During the first quarter, the impact of COVID-19 differed by application and by region. In terms of demand, with the global adoption of social distancing and even lockdown in some countries, the smartphone market underwent contraction, leading to weak demand for smartphone-related MLCCs. Automotive MLCC also saw a decrease in demand due to shutdown of automotive plants in many countries. On the other hand, the pandemic led to wider adoption of new lifestyles, such as online schooling and working from home, which helped keep MLCC demand for applications such as PCs and servers and game devices relatively solid. If we look at the example of demand in China, there has been an increase in orders during March and April to make up for production disruptions suffered during January and February, and some MLCCs for PCs are even experiencing some shortages.
In terms of supply, due to COVID-19, customers were concerned of possible drop in utilization in MLCC plants in China and the Philippines' lockdown possibly causing MLCC supply issues. Such concerns were reflected in MLCC demand, which helped us maintain solid business results for MLCC in Q1. In Q2, major set sales, including smartphones, are expected to remain weak as the impact of COVID-19 spreads globally to markets including U.S., Europe and Latin America. In greater China, set makers have started to call workers back to work and line utilization is starting to rebound. PC demand is expected to remain solid, thanks to increase in online schooling and working from home. We will focus on increasing our revenue by actively responding to the needs of our key customers.
Looking towards the second half, major set demand, including smartphone demand, may differ greatly depending on whether COVID-19 calms down or not. There is still a lot of uncertainty about MLCC demand, but we are continuing to win orders for server applications which are tied to the newly emerging so-called untact lifestyle. New 5G smartphone launches are also an area for us, as well as increased network infrastructure investments are being planned. We expect MLCC demand for these applications to remain solid. Uncertainty for the second half is increasing, but we will focus on closely monitoring the changes in demand and supply by each application and area and concentrate on meeting customer needs by increasing our product responsiveness. Next, about camera modules. In the smartphone camera market, the wider adoption of multi-camera continues, and high pixel camera modules up to 108 MP are starting to increase.
We are also seeing trends such as wider adoption of big size image sensors, such as the 1/1.3-inch for superior low light picture quality, as well as the 5x+ high power optical zoom. During Q1, build demand increased due to the new flagship launch by the strategic customer and new demand for 48 meg and above camera modules increased from Chinese customers. In Q2, on top of the usual seasonality of the strategic customer, overall smartphone sales is expected to be limited due to major cities in the U.S. and Europe remaining in lockdown due to COVID-19, which is likely to have a significant impact on camera module demand. During Q2, we are focusing on winning design-ins for new flagship models scheduled for launch in the second half.
COVID-19 has limited our face-to-face communication with customers, but we have found ways of continuing close collaboration with customers in order to recover revenue in the second half. We will focus on increasing our market share at strategic customers, as well as being adopted on the new phones of the Chinese customers to drive up our revenue. Lastly, about our substrates. Weak smartphone demand brought about by COVID-19 has led to overall decrease in demand for related substrates such as mobile APs and mobile displays. Demand for some applications remains strong, such as antenna modules for 5G smartphones, which became a new source of BGA demand as well as RF front-end SiP demand. Also, growth of the BGA SSD market for PCs has driven up demand for related substrates.
For BGAs, we expect the trend of increasing layers and focus on high-end BGAs to continue, driven by factors such as increased number of IOs necessary to support higher performance semiconductor ICs. The supply of Flip-Chip BGA remains tight, driven by increased demand from servers and increased Flip-Chip BGA layers and sizes needed for PCs with the introduction of higher performance PC CPUs. Flip-Chip BGA demand for PC is expected to remain solid for the time being, thanks to increase in PC demand due to online schooling and remote working. Uncertainty for Q2 and second half continues to increase due to the economic difficulties brought on by COVID-19. However, we will focus on increasing our sales by capturing customer demand in areas where there is growth by leveraging our differentiated technology, quality and reliability in higher layer substrates and by increasing our productivity. Thank you.
We will now start the Q&A session. 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 presented by Jisan Kim from Kiwoom Securities. Please go ahead with your question.
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I have two questions. The first question is you've delivered results in the first quarter that is above market consensus. Can you break down some of the major factors contributing to that performance? Second question is, what is the impact on your profitability due to the recent increase in the Korean Won Dollar exchange rate
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To answer your first question, we were able to deliver performance at slightly above the market consensus in Q1. Some of the major factors behind that would be our Module Solution Division increasing its high-end camera module revenue, thanks to the effects of our strategic customer launching its new flagship smartphone. The Component Solution Division was able to deliver solid business results, especially around the MLCCs for PC and server applications. With all of our business divisions delivering a performance result that's better or fair compared to expectations, we were able to deliver above market consensus.
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Regarding your second question of the impact on our profitability to higher Korean won-dollar exchange rate, given the relatively higher share of U.S. dollar revenue that we record, an increasing exchange rate that's a stronger dollar actually has a positive effect on our profitability. If we take the example of Q1, due to the increase in exchange rate versus Q4, there was about a KRW 10 billion plus effect on operating profits.
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The next question will be presented by Taewoo Lee from UBS. Please go ahead with your question.
Hi, thanks for taking my question. I got two questions, both COVID-19 related. First one is on production. Overall production in China seems to be on recovery, but wanted to get more color for the Philippines and Vietnam. As you mentioned here, we have production sites for MLCCs and camera modules, and there have been some lockdown measures from the government as well. Would appreciate if you could comment on the impact we've seen on this front. Second question is on pricing. With everything that has happened with COVID-19 and the demand, how is that influencing your MLCC pricing outlook? Interested to see if the company is also seeing potential upside to your overall IT MLCC pricing. Thank you.
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To answer your first question, to give you the update of our Philippine operation, first of all, the impact of the Philippine government's lockdown on our MLCC production in the Philippines. To give you an update, currently about less than 50% of our workers are coming to work in our Philippine local company. This does impact and has been decreasing our utilization in the Philippines. In the short term, we have not been able to meet 100% of the customer's upside demand.
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In the long- term, we have the inventory that we can use to respond to the market demand. Also we will be focusing on expanding the operation of our alternative sites, the Tianjin and the Busan sites, in order to make up for any shortfall from the Philippine production, so that in the long- term we will be having no problems in meeting the customers' demands.
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You've also asked about our Vietnamese plant, which is the camera module operation. To answer that question, actually our Vietnamese plant or our local company is operating its production without any disruption currently.
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Even though there are still some potential risk of, for example, future travel restrictions due to COVID-19, we have established response plans for any possible scenario. We will focus on minimizing any potential impact on our business performance due to such risks.
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You've also asked about MLCC pricing, especially about the possibility being talked about in the market about a price increase on the IT MLCCs. To answer that question, with utilization in major production sites, for example, in China and Southeast Asia and the industry decreasing, there are market concerns of a possible supply disruption. This is leading to what you've mentioned as a possibility of an increase in prices of some IT MLCCs. We do see that there is a possibility of price changes in the market depending on the market situation. Our basic approach is to focus on building a stable business in the mid to long- term based on strong trust relationships with our customers.
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The next question will be provided by Jong Wook Lee from Samsung Securities. Please go ahead with your question.
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I have two questions. First question is a general MLCC question. Can you give us an update on what the MLCC prices or your shipment was in the first quarter and your outlook for second quarter? Second question is about the camera module demand. Given the expected weak demand at the handset set level, what is your outlook in terms of camera modules going forward? Do you think that there's a possibility of your earnings profitability decreasing versus last year on your camera module business?
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To answer your first question about our MLCC. In the first quarter, our MLCC shipment increased slightly versus Q4, thanks to the effects of our strategic customer launching its flagship handset and also increase in sales of PC and game application MLCCs. Also, in terms of prices, the price declining trend started to show signs of stabilizing, and so our blended ASP in Q1 was similar to the previous quarter.
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You've also asked about our second quarter outlook. Even though we're expecting the demand from automotive applications to remain weak in Q2, we do expect solid demand from other applications, such as PCs and servers. As of now, we think that our ASP as well as shipments for MLCC in Q2 would remain similar to the previous quarter. That being said, we would like to wait until around end of May to get better visibility of our Q2 outlook.
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You've asked also about the camera module outlook. The second quarter, given the seasonality of the Q2 being a slow season for smartphones, and also on top of that, with the decrease of set demand due to COVID-19, we think that it will be inevitable to see camera module revenue decrease in Q2 versus Q1.
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In the second half, we are looking forward to recovering our revenue by increasing the supply of our high-end, high-performance camera modules, as many of our key customers, both domestic and global, launch their new flagship models.
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You've also asked about our full- year profitability. We do expect COVID-19 to have some downward pressure on our profitability. Given the extremely high level of revenue volatility that we're seeing currently, I think it's difficult for us to provide you with any detailed guidance at this point, and would have to come back to you at a later time.
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The next question will be presented by Chul-hee Cho from Korea Investment & Securities. Please go ahead with your question.
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I have two questions. First question is a follow-up on the MLCC. Can you also provide with us your utilization and inventory situation for MLCC in Q1, as well as your outlook for these in the second quarter for MLCC? Also, the Substrate Solution Division performance, can you give us some of the detailed breakdown of the factors that contributed to the performance in Q1, and also your outlook for second quarter as well as full- year?
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To answer your first question about our MLCC in Q1, our MLCC inventory was at similar level to the previous quarter as we saw an increase in shipments of MLCC to applications such as industrial applications and also the high capacitance MLCCs for IT applications. Our utilization in Q1 was at mid 80%, which is an increase versus Q4.
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Looking towards the second quarter, there will be impact on the utilization of our Philippine plant due to the Philippine government's lockdown, we will focus on making up for any loss using our Tianjin and Busan factories. We expect our overall utilization for Q2 to be under 80%. We will be actually using our inventory to make up for the loss in utilization. At the end of second quarter, we're expecting our inventory to be decreased versus end of first quarter.
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To answer your question about our substrate business, the detail factors behind our first quarter performance and full- year as well as second quarter outlook. You know, due to COVID-19, the supply of our substrates for mobile memory decreased. On the other hand, there was a strong demand for PC package substrates as well as 5G-related communication module substrates. For first quarter, our Substrate Business Division recorded a profit.
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For the full- year, despite the apparent uncertainties in the global markets due to COVID-19, for the substrate business itself, we expect profitability in 2020 to improve versus 2019 as we expand our market share in the high-end package substrates, such as for 5G and thin CPU applications.
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The next question will be presented by SK Kim from Daiwa Capital Markets . Please go ahead with your question.
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I have two questions. First question is on the component side. Due to COVID-19, I think one of the major decreases that we're seeing is on the automotive side. Automotive MLCC demand has been decreasing quite significantly. Do you think that that will give you a cause to delay or postpone the operation of your Tianjin MLCC plant? Second question is about your CapEx guidance. I think during the previous call, you said that already for 2020, your CapEx is going to be less than what you spent in previous years. Do you think that there's room for additional decrease in CapEx given the current situation, the weak demand? In that context, can you give us just an overall CapEx guidance update for this year?
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To answer your first question about the MLCC Tianjin, the new plant and the operational timing. Actually, due to the Chinese government's policies in response to COVID-19, some of the finishing work that was scheduled for the Tianjin new plant got postponed or suspended, this has ended up delaying all of the follow-up work, including the equipment setup. Due to this, the original timing of the Tianjin plant operation, which was scheduled for second half, we expect that to be delayed. The exact timing of when the new plant will go into operation, we will communicate that to the market in the future.
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Your second question was about our CapEx guidance. As you mentioned, originally, our CapEx guidance was that it will be less than versus the previous year. Our investment items, what we want to invest in, still stands despite the changes. Considering various volatilities, including the possible economic weaknesses brought on by COVID-19 and possible weakness in demand from downstream, we are currently revisiting the investment timing of our CapEx plans. Our basic approach towards CapEx is that we will be increasing our capacity when supported by customer demand and to execute our investments with maximum efficiency.
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The next question will be presented by Rok-ho Kim from Hana Financial Investment. Please go ahead with your question.
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I have two questions. First question is, can you give us an update on the Flip-Chip BGA, the FC-BGA utilization and supply situation for first quarter, and share with us your outlook for second quarter and full- year? Second question is about the MLCC. While we see some changes on the application side, the demand side, there's also the impact due to the lockdown in the Philippines. Given these both demand and supply factors, do you see room for your capacity operation plans for MLCC to change, in 2020?
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To answer your first question about our Flip-Chip BGAs, Flip-Chip BGAs in general are continuing to see a tight supply situation, our utilization is being maintained at full utilization levels. We think that despite COVID-19, the demand for Flip-Chip BGA major applications such as PCs and servers will remain strong.
The tight situation will probably continue, is what we're expecting. Thanks to our capacity expansion effects, we are expecting to continue revenue growth and secure stable profitability from our Flip-Chip BGAs. You've asked about our MLCC capacity operation plan for this year. Our basic approach to MLCC capacity operation is to expand our supply capacity beyond market growth, but also at the same time, operate our capacity flexibly, depending on how the market situation changes. For our automotive output MLCCs, given the uncertainty around automotive MLCC demand, we are currently revisiting the timing of when to exactly expand our automotive MLCC capacity. For IT and industrial MLCCs, we are currently focusing on increasing our supply capabilities through productivity enhancements and gaining efficiency in manufacturing operations.
The next question will be presented by Giuni Lee from Goldman Sachs. Please go ahead with your question.
Thank you for taking my questions. I have two questions. First, on 5G-related demand, how is your package substrate business coping with this demand currently? Would be keen to know your outlook as well. Second one is on camera module. In the last one year or so, there have been few launches of foldable smartphones, which we've been able to see the ongoing changes in the form factor of smartphones. I guess in this backdrop, how do you expect this will impact your camera module business? Thank you.
First of all, you've asked about the 5G-related package substrate, and I think two key areas of substrate demand related with 5G would be the antenna substrates for 5G smartphones and also the RF front-end SiP substrates. In both of these areas, we are currently mass producing and based on our strong package technology capabilities, we are maintaining high market share in these two major applications. Looking forward to the second half, we expect to start supply to new overseas customers' smartphones. We expect our 5G-related substrate revenue to continue to grow in the second half.
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Your second question was about the impact of the foldable form factor on doing a camera module business. As you can imagine, the foldable phones have a challenge. It's technology-wise very challenging for camera modules given the need to lower the height of the camera module. In other words, to get more slimmer camera modules. We have had an advantage in producing slim camera modules technology-wise, also we have a very strong manufacturing competitiveness. Thanks to these two advantages, we have been supplying a large share to these strategic customers' foldable phones.
As you mentioned, we think that this form factor will continue to increase, and we think that camera modules for foldable phones will not only require additional reduction in height, so slimmer camera modules for foldable phones, but also from now on, it will also be a game of high pixel counts and additional features on top of the slimness, which are areas that we have advantages in. We believe that actually the foldable phone factor will provide us with additional opportunities for the camera module business.
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The next question will be presented by Hyung-woo Park from Shinhan Investment. Please go ahead with your question.
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I have two questions about the substrate business. First of all, does the company have plans of possibly increasing its package substrate capacity? If so, what would be the potential applications or product groups, and what would be the potential size of a capacity increase? Second question is about the RF-PCBs. Can you share with us your business plans regarding RF-PCBs as well as your outlook?
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To answer your first question about package substrate capacity expansion plans, well, as you know, since last year, we've been focusing on increasing our production capacities for package substrates in anticipation of increased demand for package substrates and to respond to that timely. This year, we will continue to increase our capacity, focused on the areas where there is strong demand. For example, the 5G antenna substrates or the substrates for thin CPUs used on laptop computers. That will be a key areas of capacity increase this year.
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Your second question was about our RF-PCBs, our full- year, for example, outlook and business strategy. As you know, in first quarter, in terms of our RFPCB performance, our revenue decreased versus the fourth quarter last year, mainly due to the seasonality of our key overseas customers.
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Looking forward, given the impact of COVID-19, we do see that there could be an increase in the volatility of our supply to our overseas customers' new OLED-based model in the second half. We will focus on improving our revenue and profitability by diversifying our customers and applications, such as wearable devices of our strategic customer or increasing our supply for display applications to Chinese customers.
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The next question will be presented by Kangho Park from Daishin Securities. Please go ahead with your question.
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I have two questions. First question is actually about an update on your guidance for second quarter revenue as well as OPI, and possibly for the full- year, if that's possible, given the fact that demand overall across the board, probably in the second quarter will be weak, not only in IT devices but also in other applications, and that will probably bring a large decrease in your revenue, which will impact not only your camera modules, but MLCC and substrates. Can you give us an update on your revenue and OP profit guidance for Q2 as well as full- year, if possible? Second question is about your full- year CapEx. You've already planned in your CapEx for this year to be less than the previous year. Perhaps there's additional room for decrease in CapEx this year.
Given the fact that many companies are currently focusing on building up liquidity, can you give us, in that context, your expected depreciation for full- year 2020 as well as an update on your cash flow?
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To answer your first question about our second quarter full- year guidance. As we have talked about as far as up to Q1, thanks to solid demand from the set side for the sell-in demand, we were able to deliver performance that was not bad compared to market consensus. As you mentioned, second quarter will be slightly more difficult. We will see the impact of weakening economies due to COVID-19. For us, we're expecting our Q2 performance to slightly decrease versus our Q1 results. For the full- year, there is so much uncertainty around COVID-19 and its impact that it's difficult for us to share specific guidance for full- year at this point. We do think that we'll have better visibility for the second half when we approach perhaps end of May or early June, and we would like to share our guidance at that later point.
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To answer your second question about our depreciation in cash flow update. As you know, we have been investing above KRW 1 trillion each year for the past several years. Due to that effect, our depreciation will probably, for the time being, run around KRW 800 billion-KRW 900 billion for the time being. We do expect our depreciation to revenue ratio to gradually decrease due to various factors, including a possible adjustment of the investment timing to reflect the impact of COVID-19.
Our key focuses in terms of managing the company cash flow-wise, will be to focus on securing the soundness of our Free Cash Flow by executing CapEx within our investment capacity, and also enhancing our management efficiency while at the same time focusing on risk management, such as maintaining a sound level of operating capital and also managing our inventory and credits effectively in order to gradually increase our net cash holdings.
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That completes our earnings conference call. If you have any additional questions, please forward them to our IR team. Thank you very much.