We will start the Samsung Electro-Mechanics first quarter 2019 earnings conference call. The call will start with a company presentation, followed by a Q&A session. Please press star one to request for question opportunities. We will now start the company's presentation.
Good afternoon. This is Kwang Wook Bae, VP and Head of Planning Team, Head of IR at SEMCO. Thank you for joining our first quarter earnings conference call. Before going into the presentation, I would like to introduce the management who are present. We have Byoung Jun Lee , the CFO, SVP Kook Hwan Jo, Head of Strategic Marketing, SVP Chul Soon Kah, Head of Support Team, Component Solution Division, General Manager Hyun Wook Seo, Module Division, and VP Bo Yoon Chung of the Substrate Solution Division.
From this quarter, in addition to the company-wide and divisional presentation, we will have a separate presentation from the Head of Strategic Marketing on market trends and outlook for each product. We will start from the first quarter business results, by division, market trends, before we take your questions. The first quarter results at the company level.
First quarter revenue was KRW 2,130.5 billion, which is an approximately 7% Q-on-Q increase and a 6% year-on-year increase. The key reasons for the revenue increase and decrease by division will be explained later on during the divisional presentation. Even though first quarter operating profit decreased by about 25% Q-on-Q, it increased by about 24% year-on-year to operating profit of KRW 190.3 billion. OP margin was 8.9%. Pre-tax profit in Q1 was KRW 171.9 billion, with about KRW 18.4 billion in non-operating expenses, including financial expenses.
Net income after tax was KRW 129.8 billion. In terms of financials, as of end of March 2019, total assets was KRW 9,000, 500 million, which is a 4% growth from end of Q4. Debt to equity and net debt to equity increased slightly Q-on-Q to 78% and 29% respectively. Shareholders' equity decreased slightly to 56%. Next is results and outlook by each division. First, the Component Solution Division. Component Solution Division's Q1 revenue was KRW 836.3 billion, which is a 7% decrease Q-on-Q, but a 11% increase year-on-year. Even though sales to Chinese PC and mobile applications decreased due to delay in IT demand pickup and effects of inventory adjustments, as a result of our ongoing efforts to expand automotive and industrial business, we were able to achieve meaningful Q-on-Q revenue growth.
In Q2, while the demand for mid to low-end IT applications is expected to remain sluggish, the supply on the high-end side is likely to remain tight. We will focus on increasing supply for IT high-end products such as ultra-high capacitance and MLCC. With demand for automotive, industrial high reliability products expected to grow, we will continue to convert our IT capacity to industrial and automotive applications to increase our market responsiveness, expand our lineup for high reliability products, and increase sales to major customers. The Module Solution Division. The Module Solution Division Q1 revenue was KRW 951.2 billion, which is a 38% Q-on-Q increase and a 6% Y-O-Y increase.
This is because despite the decrease in overall IT set demand for Chinese customers, the launch of the new flagship by the strategic customer helped drive demand for high performance multi-cameras, including dual, triple, and quad with wide angle lenses. Also, in the case of communication modules, we started supply of Wi-Fi 11ax modules for the new flagship of the strategic customer, which helped drive significant Q-on-Q revenue increase. In Q2, the demand for the strategic customer's flagship is expected to decrease, but we will cover this effect by focusing on increased supply to Chinese customers with a 48 meg level ultra-high pixel, high-powered zoom triple cameras with our technology strengths in actuators and lenses. For communication modules, we will leverage our technology advantage, such as ultra small 5G antenna modules with excellent heat dissipation and alignment with customers. Last, the Substrate Solutions Division.
Q1 revenue was KRW 328.9 billion, which is a 14% decrease Q-on-Q, an 8% decrease Y-O-Y. Despite the increase in the exclusive supply of AP Flip Chip CSPs for the strategic customer's flagship, an increase in supply of PC CPU Flip Chip BGAs for overseas customer with a continued decrease in mobile phone demand, revenue of RFPCB for OLED decreased, which led to a quarter-over-quarter decrease for the entire division. In Q2, even though revenue for OLED RFPCB is expected to continue a decline, we will focus on diversifying our revenue structure by expanding our product lineup, targeting Chinese customers and camera modules. In the case of the package substrates, we're expected to increase in revenue by diversifying our customer base by using our superior quality and yield compared to our competitors. That completes the presentation on first quarter results.
Now we will hear from the Head of Strategic Marketing, who will share with you the market trends and outlook by product.
A good afternoon. This is Kook Hwan Jo, SVP and Head of Strategic Marketing Center. I would like to give you an update, as well as outlook for the MLCC camera modules and substrates. First, the MLCC market trends and future outlook. For the IT application MLCC market, we said during the Q4 earnings call that overall demand is expected for IT applications from second quarter as customer launch new models and also run through existing inventory. At this point, market recovery is expected to be somewhat delayed given that U.S.-China trade dispute is not yet resolved and net demand for all major applications remain weak.
We expect the sluggish IT demand to continue at least for second quarter due to excessive channel inventory, but start to gradually improve from third quarter due to launch of new products by the U.S. smartphone maker. However, in the case of industrial and automotive applications, even though supply situation eased for low-end products, supply continues to remain tight for high temperature, high voltage, and large size products, given the limited number of suppliers that can increase supply in the short term. A more detailed breakdown of future demand outlook by application. First of all, for smartphones, set demand is expected to be 1.37 billion units this year, which is a 4% year-on-year decrease. By quarter, first quarter will be 320 million units, which is an 8% year-on-year decrease and 15% Q-on-Q decrease.
Smartphone demand is expected to rebound from the bottom of the first quarter to 340 million units in Q2, and 350 million in Q3, and 370 million in Q4, which is a 5% growth. First half will be a difficult time for IT industry with decreased sales by the large U.S. customer and weak Chinese domestic demand. However, from second half, we expect the market situation to gradually improve with events such as Black Friday and Singles' Day in Q4, as well as major handset launches in Q3. Our IT application MLCC sales is also expected to show a weak first half and a strong second half pattern. The PC market is expected to be 250 million units this year, which is similar to recent years. There was a CPU supply shortage that has continued since Q4.
Even though the timing is not yet clear, we cautiously hope for a gradual MLCC demand recovery from the latter part of the second half once the CPU supply shortage is resolved. The launch of the 5G service has increased rollout of 5G network base stations this year. With 5G smartphones to be launched in full scale from 2020, we expect steep increase in both industrial and IT high-end MLCC demand. The automotive MLCC that we have been focusing on recently is expected to continue growth with wider adoption of ADAS and increased demand for EVs. We have continued to build our capabilities to minimize the impact of market changes by securing an MLCC full lineup covering IT, industrial and automotive, and operating production lines that can easily switch over capacity to other applications.
We have also secured stable mid to long-term demand base on long-term supply contracts with major customers that we have closely engaged during the past supply and demand imbalance period. Particularly, we are aggressively increasing market share of existing industrial and automotive customers, and we are also preparing for growth in automotive MLCC business, driven by automotive autonomous vehicles and EV by optimizing our MLCC product mix. The camera module and set trends as well as our response plans. In the camera module market, demand for multi-camera is expected to continue growth as flagships adopt triple quad cameras and dual cameras are adopted even in the mass segment. The camera module will continue to be the point of differentiation for the handset itself with wider adoption of existing high pixel cameras, big size sensors, 6P, 7P multi-piece lenses, and OIS stabilization.
Also, high power optical zoom with folded structure started mass production for the Chinese customer from second quarter. Because high component specifications and reliability is essential to take advantage of this camera trend, SEMCO's advantage in differentiated component technology and in-house production in a wide range of parts, including lens and actuators, is actually generating new business opportunities for us in the camera module market. For example, with the customized solutions and design in using lenses and actuators for high-end cameras for flagships, we will be focusing on gaining both revenue and profitability for these flagships of Chinese makers as well as the strategic customer to be launched in Q2. We will continue to strengthen technical cooperation with strategic customers and strengthen our differentiation for core technology and component technology, also propose customized solutions to customer demands to achieve growth in both quantity and quality.
Lastly, the supply and demand situation for Substrate Solution Division. First, the update on the PCB market. In Q1, demand for OLED RFPCB decreased significantly due to the weak set sales of the U.S. smartphone customer, resulting in decrease of our revenue. HDI, because HDI is mainly a very cost sensitive market, given the nature of the industry, it has a low value add and overall the industry is facing challenges. Meanwhile, even the package substrate market is experiencing difficulty in increasing the sales for RF SIPs due to decrease in the sales of the U.S. smartphone customer. However, we were able to increase supply for AP flip chip CSPs for flagship and mass models for strategic customer and win additional orders for CPU flip chip BGAs for the overseas customer.
Because of weak demand on PCBs, as we mentioned earlier, the substrate market overall is expected to remain difficult in Q2. In Q3, when the OLED RFPCBs for the new models of the overseas customer starts, we are hoping to see a turnaround in business results. We will also strengthen our customer and product portfolio to lessen the seasonality of our business. To summarize, even though there were some difficulties in Q1 due to decrease in set demand, we were able to achieve improved outcome year-on-year, thanks to our efforts to build stronger business fundamentals such as better productivity and quality, and decrease dependence on the strategic customer by increasing the share of our automotive MLCC business. In Q2, the positive effect of the launch of new camera modules for the strategic customer would disappear and a single digit revenue decrease is expected Q-on-Q.
In Q3, given that smartphone customers in the U.S. and China as well as the strategic customer are preparing for new flagship launches, we expect results to improve. With revenue growth driven by the opening of the 5G market and acceleration of the shift to automotive MLCCs with the operation of the Tianjin new plant, we will focus on building a solid business foundation. Thank you very much.
[Non-English content] 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. [Non-English content] The first questions will be presented by Mr. Kim Ji-san from Kiwoom Securities. Please go ahead, sir.
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I have two questions. The first question is about MLCC. I think many people would be wondering what was the utilization as well as the inventory levels for MLCC in first quarter, and can you also give us some direction in terms of future outlook? Second question is about the RFPCB. You said that revenue in first quarter decreased mainly due to the weaker demand by the overseas customer. What was the utilization for RFPCBs in Q1, and when do you think that the business could be turned around to profitability?
To answer your first question of the MLCC utilization and future outlook.
In first quarter, our MLCC utilization was at around 80%, mainly due to the fact that there was a decrease in production volume by the delay in the recovery of IT demand, and also because of our conversion over to a large size product mix, which has the effect of affecting our volume, our quantity-based capacity. Our inventory is around 70 days worth. It is an increase versus last quarter, but we believe that with increase of sales during second quarter, we will be able to consume our inventory down to appropriate levels. Second quarter utilization, we're expecting that to be similar to first quarter levels as we continue our capacity conversion over to automotive industrial applications and also the continued adjustment of IT application production volumes. We believe that the inventory level will decrease versus the first quarter.
In the second half, we will continue to maintain appropriate inventory levels by operating our production flexibly depending on the market situation, and also enhance our profitability by focusing enhanced productivity around automotive industrial applications and also further enhancing our internal efficiency, especially in terms of MLCC. There is the Tianjin new plant that we're preparing dedicated to automotive applications. We will focus on bringing that online earlier so that it can start contributing to our business from year 2020.
To answer your second question of the RFPCB utilization and when we expect it to turn around to profitability. It is true that in first quarter, our RFPCB utilization was very low. It was below 50%, mainly due to the decreased demand for the flagship model of the overseas customer. Second quarter utilization appears to be similar to what we saw in first quarter.
From third quarter, once supply to the new model, 2019 new model starts, we expect that the RFPCB utilization will recover to full levels from third quarter. In order to enhance the utilization as well as to address the profitability of our RFPCB business, we have been diversifying both our product portfolio as well as customers, and we think that the results from these efforts will start to show from the second quarter. In terms of product diversification, we have been increasing our RFPCB supply for 5G antennas and camera modules. In terms of diversifying customers for OLED RFPCBs, we have been designed into Chinese as well as global customers' new models from second quarter and plan to go into mass production.
Through these efforts to diversify our revenue base, we will try to dampen the effects of seasonality in our product sales, improve our profitability so that we are expecting to turn around to profitability in third quarter.
[Non-English content] The next questions will be presented by Ms. Kim Sohyun from Deutsche Bank. Please go ahead, ma'am.
Thank you for taking my questions. I have two questions. First of all, your camera module sales has increased significantly on a Q-on-Q basis in the first quarter. Would you provide more color on this and also regarding your second quarter outlook? My second question is, how was MLCC ASP in the first quarter and how do you see it going forward? Thank you.
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To answer your first question about the camera module. In 2019, first quarter, our camera module revenue grew by about 30% quarter-on-quarter. This is mainly thanks to the mass production of the high-spec multi-cameras for the flagship of our strategic customer. In the second quarter, we have some positive outlook. For example, we are expecting to increase our supply of triple cameras to the new model of the Chinese customers, and also go into mass production of a camera module that has our high-power optical zoom technology based on our differentiated component technology base. However, second quarter, we do expect a set demand from our strategic customer to weaken due to seasonality. In second quarter, our revenue outlook is that it would decrease slightly on a Q-on- Q basis.
Starting from third quarter, we are expecting revenue to rebound again, especially as we supply the products for the new flagship model of the strategic customer, and we will maximize our revenue by thoroughly preparing for this mass production.
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To answer your second question about the MLCC ASP. MLCC ASP in the first quarter on a blended basis at our level actually increased by about 20% quarter-on-quarter, mainly thanks to improvement in product mix as the share of automotive and industrial MLCC revenue increased. Even though at a product to product level, ASPs did not change much. In terms of application, there was the increase of high capacitance MLCCs for IT and also the large size products increased for industrial and automotive applications, which helped the overall increase of the ASP. In the second quarter, there will be an increase, though, of the IT MLCCs for Chinese customers, and so we expect the blended ASP in second quarter to slightly decrease versus first quarter, while overall revenue will grow on a quarter-on-quarter basis.
In the second half, we expect the IT industry demand to recover so that the supply and demand situation would improve in the second half. We will continue to improve our product mix so that we're expecting in the second half our ASPs will be maintained at first half levels, but overall revenue will increase versus first half.
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[Non-English content ] The next question will be presented by Mr. Park Kang-ho from Daishin Securities. Please go ahead, sir.
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I have two questions. The first question is about the PLP transfer deal that was announced today. With that transfer of the PLP business to Samsung Electronics, I'm assuming that would have an impact in terms of your packaging portfolio. Can you share with us your thoughts about what you plan for your packaging portfolio in the future? Second question is about the camera module business. We do notice that triple cameras are being adopted in more and more smartphones, which means that triple cameras won't be much of a differentiating factor anymore. In that sense, how is SEMCO planning to maintain its differentiation in the camera module business?
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To answer your first question about package substrate business. Actually, the impact of the PLP business is minimal in terms of our package substrate business. Our package substrate business, as you know, has been recognized by our customers in terms of excellent quality and yield during the past several years. That has helped us actually increase our market share gradually and continuously, despite the very difficult market situation. In the BGA area, we have the sole supplier status in the flagship AP substrate. We are operating our BGA at full capacity in the second quarter, following on from full utilization from first quarter. To prepare for the future, we are preparing to diversify our product portfolio beyond the AP. For example, by developing high count multilayer SIPs for 5G antennas.
For the Flip Chip BGAs, we expect the supply situation to remain tight, especially with a higher demand for the high count multilayer BGAs for servers or automotive and network applications. In the second half, even though timing is not yet clear, we expect that during the second half, there will be a migration of CPU new products from the 14 nano to 10 nano. Therefore, we are preparing a high-end 10 nano CPU package substrate to be supplied timely in time for this migration at the CPU level. At the same time, we have been pursuing co-development with a global major customer from 2018 for GPU, automotive, and network applications. We will have a mass production supply of new products that will help us secure profitability.
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Your second question about how we plan to maintain our differentiation in the camera module business. Actually, it's all based on the technology, the technical competitiveness that we have in the key components of the camera modules, that's actuators and the lenses. In terms of the actuator, unlike most of the other competitors that use a spring type actuator, we've always been differentiating our actuators with a ball structure, which is actually becoming more and more appreciated as the image sensors become larger and the optical parts become heavier so that it's difficult to sustain the weight with a spring type actuator. The ball structure actuator has the advantages in terms of the sustainable weight, more and more customers are showing interest into the ball structure actuators that we have.
In terms of the lenses, as you know, we were the first to use the 7P F1.5 lens on the flagship model of our strategic customer from 2018. From the second quarter, we've been supplying on a mass production basis, a high power optical zoom, folded structure module for a Chinese customer. We think that there will be an increase of this supply and therefore the strengths that we have in terms of the D-cut structure lens that actually minimizes the module's thickness and also the competitiveness that we have with the ball structure actuator is going to be highlighted as we move forward in the camera module evolution.
We will increase and strengthen our lens supply capabilities to actively respond to market demand and also enhance our manufacturing competitiveness in terms of quality and production yield to continue our leadership in the high-end camera module market.
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[Non-English content] . The next question will be presented by Mr. Sung Kyu Kim from Daiwa Capital Markets. Please go ahead, sir.
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I have two questions about that PLP business sales that were announced today. PLP was a business that SEMCO had been focusing on as one of its new businesses. Can you give us a bit more detail on the background to deciding to transfer that business to Samsung Electronics? I'm wondering what you plan to do with the proceeds from that transfer. According to what was announced, you would be receiving about KRW 785 billion in cash. Are you planning to use that, for example, in another new business?
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To answer your first question, yes. As you have heard, there was a BOD meeting this morning at 11:00 A.M. that decided to transfer our PLP business to Samsung Electronics Semiconductor business at KRW 785 billion. After all of the legal proceedings, the plan is to complete, close the transaction before June 1st this year. As you know, the PLP business was something that we've been developing as a part of our packaging technology development efforts. We were expecting a technology deflection point to come, we were devoted to the PLP business from 2015. We also succeeded in world's first mass production in June of 2018. However, we also realized that in order to dramatically grow the business, large investments were required. Also from the customer side, there was a very strong demand for a one-stop service where the chip and the packaging could be done together.
At the same time, we were looking at other very attractive business opportunities, such as automotive MLCC and 5G communication modules, which also required investments. In this situation, Samsung Electronics first proposed that they would like to take over the PLP business. We gave very much thought as to where to focus more: the PLP business or our other main three businesses. We have decided that it would be strategically more beneficial to the company to focus on our main business after transferring the PLP business to Samsung Electronics.
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About what we plan to do with the proceeds from that transfer, we will focus on strengthening our existing business, especially around those that have a strong growth potential, but also at the same time develop new business opportunities. In terms of existing business, we will accelerate the expansion of our high-margin automotive MLCC business, and for other existing businesses, we will strengthen our key technologies and components around the growth markets, especially, for example, 5G applications. Even though it's also a bit early to share the details, we are at the same time identifying and developing new business opportunities to overall make the company's fundamentals stronger.
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[Non-English content ] The next question will be presented by Mr. Kim Dong-won from KB Securities. Please go ahead, sir.
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I have a question to the CFO. Can you share with us the strategical direction for SEMCO this year? Can you give us some outlook for second quarter as well as full year performance?
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To answer your question, in first quarter, we recorded an operating profit of KRW 190.3 billion, which actually, considering the very challenging business environment such as decrease in set demand and MLCC inventory adjustments, was, we believe, quite a meaningful business result, even though it may have been less than what the market had expected. Looking forward to the second quarter, situation does not look easy either. Yes, MLCC, especially on the high-end IT applications will improve, there's still quite a lot of channel inventory. From the second quarter, the demand for the flagship model of the strategic customer will decrease and the overall revenue, therefore, we think that in the second quarter may slightly decrease on a quarter-on-quarter basis.
Even though the top line may decrease slightly in terms of profit, given the factors such as better cost competitiveness and improved product mix, as well as the PLP business transfer, we internally think that in terms of profit, second quarter may be higher than first quarter. Looking towards the rest of the year, third quarter, there will be the new product launches by these overseas customer as well as the strategic customer. We think that from the third quarter, market situation will start to improve, so that for the full year 2019, we're expecting to report meaningful results, not only in terms of revenue, but also growth potential as well as profitability. In order to achieve this, we will continue to enhance our internal efficiency and also continue our investments for new promising areas.
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That completes our conference call. Thank you very much. If you have any further questions, please forward them to our IR department.