We will now start the 2018 Third Quarter Earnings Conference Call of Samsung Electro-Mechanics. We will start with a presentation by the company, followed by a Q&A session to take your questions. To ask your questions, please press star one, star one on your phone. We will now start the presentation by Samsung Electro-Mechanics.
Good afternoon. This is Jae-Kook Song, Head of Finance and Investor Relations at Samsung Electro-Mechanics. Thank you for joining our 2018 third quarter earnings conference call. Before going into the presentation, I would like to introduce the management who have joined us for this call.
We have Dong-woo Lee, our CFO; Senior Vice President Sung-wook Choi, Head of Support Team, Component Solution Division; Vice President Bo-Yoon Jung, Head of Support Team, Substrate Solution Division; General Manager Hyun-Suk Cho, Head of Support, Module Solution Division; Vice President Chiwon Hwang, Head of Planning; as well as Heo Cheol Park, Head of Sales. We will start with a presentation on our third quarter business results, followed by divisional results and outlook before taking your questions. First, our third quarter results. In third quarter 2018, revenue recorded KRW 2,366.3 billion, which is an approximately 31% QoQ increase and an approximately 29% year-on-year increase. To break down major revenue increase factors on a quarter basis, Component Solution Division revenue increased by about 18%, thanks to increase in high-end MLCC sales.
Module and Substrate Solution division revenue also increased by 45% and 44% respectively due to increase of high-end component supply tied to the launch of new models by our major customers. Overall, Q3 company revenue increased by 31% QoQ. Q3 operating profit was KRW 405 billion, which is an approximately 96% increase QoQ and approximately 292% increase year-on-year. OP margin also significantly improved to 17.1%. This is mainly explained by positive MLCC market conditions, as well as effects of improved product mix continuing from the previous quarter, and higher utilization in both the Module and Substrate divisions, especially around high-end component supply. Pre-tax profit was KRW 368.7 billion with about KRW 36.3 billion in non-operating expenses, including financial expenses. Net income after corporate tax was KRW 237.7 billion.
In terms of financials, as of end of September 2018, total assets was 8,613.2 billion Korean won, which is an approximately 5% growth from the end of Q2. The asset increase is mainly attributed to cash inflow from sales of Samsung C&T shares and increased profits, as well as increased accounts receivable tied to increased sales. All major financial indicators are maintained at healthy levels, with debt-to-equity at 80% and net debt-to-equity falling to 26% due to various factors, including cash proceeds from sales of Samsung C&T shares. Capital adequacy ratio also improved to 56%. Next is the results and future outlook for each of our divisions. First, the Component Solution Division. The Component Solution Division's Q3 revenue was 1,026.8 billion Korean won, which is an 18% increase QoQ and roughly 69% increase year-on-year.
For IT applications, revenue of small size and ultra-high capacitance MLCCs for overseas customers increased, and for industrial and automotive applications, supply of high reliability MLCC increased, resulting in a stronger and more diversified MLCC revenue structure. Going forward, the passive component market is expected to continue growth, especially around automotive, industrial, and IT high-end applications. In particular, in order to respond to automotive MLCC demand, where continued supply shortage is expected due to future explosive demand growth, we will strengthen our responsiveness to automotive Tier 1 customers. Also, adoption of IT high-end MLCC is expected to increase as density continues to increase at the end device level, and we will actively respond to demand for differentiated new products such as small size and high capacitance MLCCs. Next, the Module Solution division.
The Module Solution division's Q3 revenue was KRW 885.1 billion, which is a 45% QoQ increase and an 8% increase year-on-year. The main reason for the increase was the increased supply of dual cameras and communication modules tied to the launch of the new flagship by the strategic customer. Increased demand by major Chinese customers resulted in increased sales of new dual cameras with OIS, resulting in higher revenue versus Q2. Going forward, demand is expected to grow, especially around multi-cameras, such as triple or quad cameras, as well as high-feature modules, such as high-power zoom and 3D modules. We will actively pursue early development of differentiated technology and increase our supply of new products. In the case of communication modules, demand for 5G and new spec modules is expected in the future, and we will focus on developing foundation technologies and actively responding to customer demand.
Lastly, our Substrate Solution Division. Q3 revenue of the substrate solutions was KRW 432.4 billion, which is a 44% QoQ increase and an 8% year-on-year increase. The launch of new models by the major customer resulted in increased sales of RFPCB for OLED and high-end main boards. Increased demand from PC and mobile applications also resulted in higher package substrate sales versus Q2. Going forward, given that increased demand for RFPCB is expected because of greater adoption of OLEDs, we will focus on increasing supply to existing customers and also adding on new customers actively. We also expect increased demand for high-spec package substrates for automotive applications and network equipment, and we will actively respond to market demand by securing new customers through design-in with related leading technology. This completes the presentation on our Q3 earnings, and now we will 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. The first question will be presented by Mr. Cho Cheol-heui from Korea Investment & Securities. Please go ahead, sir.
Hi. I have two questions. The first question is about the current supply and demand trends in the MLCC market, as well as your market outlook going forward. Second question is about the Substrate Solution division. Can you share with us the revenue of RFPCBs in Q3 as well as your strategies of how you will increase your business in the future? To first answer your question about the MLCC situation, we do know that there's various rumors as well as speculations in the market regarding MLCC supply and demand situation, but we think that the concern is a bit too exaggerated. First of all, because if you look at the demand side, we are thinking that in 2019, on the mid to low end side of the market, there will be still a mid-single-digit growth. On the high-end MLCC side, we're expecting about 10%, mid-teen growth next year.
Especially in the large capacitance, large size, high reliability products, such as for industrial and automotive applications, we're expecting actually there will be demand growth in the mid 20% of very significant growth continuing next year. On the other hand, if you look at the supply side, even though some companies have announced plans of increasing their capacity, we think that in order for this capacity to come online, it would be at the earliest, late 2019 or early 2020. Also, there will be some time necessary for the equipment companies to procure the high-precision movement parts that would actually take about a year or more. Given all of this, actually, the operation of these new lines and ramp up may take longer than what the market expects.
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To add, actually, we would like to highlight that the supply and demand situation will be different depending on which part of the MLCC market you're looking into. For example, if you look at the mid to low-end MLCCs, mainly for IT applications that are mainly supplied by Taiwanese companies, even though the demand growth rate is not high, there will be additional capacity and improvements in productivity. In that segment, we actually think that the supply situation may ease going forward. However, in the high-end products for IT applications, there is, first of all, a limited number of companies that can actually add on new capacity. That's basically us or the Japanese companies. Also, these companies have been managing their capacity quite conservatively and focusing on enhancing the productivity of their existing lines.
In the high-end MLCCs for IT applications, we're expecting the supply situation to remain quite tight, especially because we're expecting explosive demand growth in industrial and automotive applications. Even if we assume that the industry adds on capacity at about 10% each year, at least for the next five years, there will still be a 5%-10% shortage in terms of supply. Therefore, I think it's a bit unreasonable to generalize the easing supply situation, mainly in the mid to low-end, low capacitance markets to the entire MLCC market. For example, whereas there is an oversupply already in the 1005 0.1 microfarad MLCCs, which are mainly general purpose products that are supplied by Taiwanese companies. On the other end of the market, such as the high-end 0603 1 microfarad, these industrial automotive large capacitance products, there's still quite a supply shortage going on.
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We are also aware that the market is concerned of possible decline in MLCC ASP, but that also we think is limited to the commodity side of the MLCC market and for high capacitance or industrial automotive MLCCs, we actually think that the ASP increasing trend will be maintained and continue. We have established a differentiated business strategy that focuses our resources on the high-end products and high reliability products, and therefore the impact on us from any easing of supply in the mid to low-end of the market will be very limited. In terms of our distribution structure, because we mainly supply directly to large customers and also have long-term supply contracts, we have already secured quite a stable supply base. Next year, there are some concerns. For example, the trade dispute between the U.S. and China may lead to some weakening of demand from China.
However, our target product groups, which are mainly in the applications of 5G, AI, industrial, automotive, as well as electric vehicle applications, because MLCC adoption will be increasing in these key target applications, even next year, we're expecting our MLCC business to continue growth. In 2019, our MLCC business will maintain a very solid growth trend.
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To answer your second question about our revenue of RFPCB in Q3 as well as future business strategy. As you mentioned, thanks to the launch of a new flagship model by our overseas customer during Q3, our high-end RFPCB supply increased and our revenue also increased significantly quarter-on-quarter. We expect that the adoption of OLED display will increase going forward as more and more smartphones pursue a premium strategy and therefore our RFPCB supply and demand will also continue to increase. We will continue to expand our business by preparing our capacity flexibly and also diversifying our customer base.
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The next question will be presented by Mr. SK Kim from Daiwa Capital Markets. Please go ahead, sir.
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I have two questions. First question is, can you give us a bit more detail of your ASP as well as revenue outlook for MLCCs in fourth quarter? As an answer to the previous question, you gave us a very detailed outlook on next year's market situation, but specifically, what do you think will happen to MLCC ASP as well as revenue in fourth quarter, given the fact that the market still remains concerned of continued ASP drop? Second question is about Chinese camera module demand. From your end, are you seeing camera module demand from Chinese customers decreasing or becoming weaker? Many are saying that the smartphone sales in China, that rate will decrease in the future. Do you see that showing up in camera module demand? If this actually happens, how are you planning to respond to less camera module demand from China?
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To answer your first question about fourth quarter MLCC ASP as well as revenue outlook. As we mentioned in third quarter, due to positive market conditions as well as improved product mix, our third quarter MLCC ASP increased significantly QoQ. We think that this will continue in the fourth quarter, given the fact that the supply situation still remains quite tight on the higher-end IT application, high-spec MLCCs as well as the industrial application MLCCs. Also, we believe that there will be continued revenue of high reliability products growing for automotive ADAS as well as powertrain applications. We think that in the fourth quarter, this ASP increasing trend will continue.
Going towards the revenue of fourth quarter, it is the same given the fact that we will be actively responding to IT high-spec products as well as industrial demand increase, and we will be focusing on increasing sales towards the automotive Tier 1 companies by increasing our automotive lineup. We expect our revenue in fourth quarter to continue its growth trend versus previous quarter.
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To answer your question about the Chinese camera module demand, as you mentioned during the third quarter, there was a significant increase in camera module sales to China. This was in line with the fact that high spec dual cameras went into mass production, and we've increased sales of this to the major customers. In the future, we're expecting this trend to continue as the Chinese handset makers continue to increase their adoption of multi-cameras, including triple cameras, especially around their flagship models. Also we're expecting greater demand from Chinese handset makers for these high feature modules, such as high power zoom, OIS, as well as aperture control.
In line with this trend, we will be leveraging this business opportunity of Chinese markets going towards the higher spec camera modules by increasing our technology development cooperation with our major customers through design-in activity using our differentiated technology, and also increase the supply to the major flagship models so that we will be able to continue to increase our revenue of camera modules to China.
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The next question will be presented by Mr. Chris Jang from Nomura Securities. Please go ahead, sir.
Hi, thank you for taking my questions. My first question is about the component business. I understand that Semco is seeing a meaningful pickup in demand from the auto application. Please share your strategy on this front and also some color in terms of the demand outlook and the product mix going forward. My second question is on the camera module business. Now that there's a growing penetration of tri-camera and even the quad-camera, what is our competitive edge and our overall strategy on this front? Can we expect a meaningful improvement in the profitability for this space for next year? Thank you.
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To answer your first question about the automotive MLCC revenue and future outlook. In the third quarter, especially with the increase of MLCCs to global Tier 1 automotive companies, our automotive MLCC revenue increased significantly. Looking into specific applications, this increase in demand for automotive MLCCs are mainly coming from the increased adoption of ADAS on automobiles, as well as greater progress in electronic content in automobiles. Looking forward in the mid to long term, as there's more progress in the autonomous driving and EV penetration, we think that this will drive actually a very dramatic increase in automotive MLCCs mid to long term. Given this outlook, we will be increasing our lineup, especially around the high voltage, high temperature, high reliability MLCCs, also gaining a differentiated competitive advantage.
In supplying to automotive in the future, the recently announced new plant for automotive MLCCs will play a very critical role that in us increasing our supply to our existing large automotive customers and also actively responding to the dramatic increase in market demand going forward.
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To answer your question about the multi-camera and the impact that would have on our profitability, as you mentioned, one of the main defining trends in the smartphone segment is to use the multi-camera to differentiate the handset. These multi-cameras are necessary to implement various features, including high resolution and optical zoom. Given this technical inflection point, our competitive advantage is that we have internal of key components, including the lens and actuator. These are key internal components that we supply. Also, our advantage is the fact that we have the manufacturing technology expertise that is based on automation, and this is why there is a lot of demand focused on our company for these multi-camera modules. Given this, we will continue to develop the key core components that are necessary for the high-power optical zoom actuators or high-resolution lenses.
Also, we will be preemptively responding to the differentiated technology needs of our key customers based on our position, assembly, competitiveness that we have already secured through our track record of producing the dual-camera modules. Because we're expecting demand for multi-cameras, including triple cameras, to increase significantly in the future, we will be strengthening our competitiveness in the high-value add, as well as new differentiated camera module supply, which will have a positive impact on our profitability.
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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 substrate business. Looking into your third quarter, I'm assuming that your revenue of RF PCBs to your overseas customer increased in third quarter, and also your SLP supply to your domestic customer would have also increased in the third quarter. Did this have any impact or change in the profitability of the Substrate Solution Division in third quarter? This morning, Samsung Electronics had its conference call and alluded that it has plans of launching 5G handsets as well as foldable handsets next year. I'm wondering whether this plan by Samsung Electronics would mean that this conversion or transition from HDI to SLP will accelerate at Semco's end, and that would improve your profitability. As the layers increase, would there be a quicker turnaround in the profitability of your substrate business? Second question is about the MLCC division.
You've announced previously that you have plans of investing in an MLCC plant in China. Can you share with us the exact size of that investment? Also, given this is an automotive MLCC plant, what would be the capacity once this is in operation, your MLCC capacity? How much of the automotive MLCCs will account for in your total MLCC business once this plant is completed that how would your automotive MLCC share change versus this year and next year? How are you planning to run these two plants, the one in Busan and China? To answer your first question of our substrate business, third quarter, as you mentioned, yes, our Substrate Solution division revenue in third quarter increased significantly QoQ, mainly due to increase of high-end products as our major customers launched their flagship new models.
At the same time, we were able to enhance our utilization, which improves our profitability, and we were able to break even during the third quarter. In terms of circuit boards, especially around Kunshan and Vietnam, we were able to increase supply of SLPs for main boards and especially RFPCBs for OLEDs. In terms of the package boards, there was an increased demand for not only new flagship models, but also PC boards. We were able to contribute to profitability improvements as the only source of supply for the high-end products. Regarding the SLP boards, the model for the first half of next year, there is no change currently. For the second half SLP boards, we're currently in the process of discussion. I think it's become quite visible that the Chinese customers will also start to increase adoption of SLP boards in the future.
Given this outlook, we will on one hand increase the supply of high-end products to our major customers based on our yield quality as well as technology advantage, and also preemptively respond to diversified products such as for automotive and network applications, and also this technology inflection point that's happening in order to enhance the competitiveness of our substrate business. To answer your second question about the Chinese MLCC automotive, MLCC new plant. As we announced on September 22nd, we have plans of investing KRW 570 billion to build a new plant for automotive MLCCs in Tianjin, China, in order to respond to the increased demand for automotive MLCCs in the mid to long term. This Tianjin plant will be the production base to respond to the increased automotive business.
Our plans of operating the Busan plant versus the Chinese Tianjin plant, we'll be using the Busan plant mainly for developing new models as well as mass production of our high-spec MLCCs. While the Chinese plant, which we are targeting to complete by 2019, will be the base to respond to local customers as well as the main production base for automotive MLCCs.
The next question will be presented by Mr. Kim Dong-Won from KB Securities. Please go ahead, sir.
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I have two questions. First question is about your PLP. According to my information you started the mass production of fan-out FO PLP in third quarter. Can you give us an update on how that's going? Also, your plans of how you will increase this business in the future, the strategy. Second question I have, this question for the CFO. Can you share with us your market outlook for fourth quarter this year and next year, as well as your Semco company level guidance for 2019?
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To answer your first question about the FO PLP mass production update. We are currently using our FO PLP technology, which is a next generation package technology on the AP that's used on the Samsung Galaxy Watch that was launched last August. This product is actually a very high sophisticated technology product that combines the AP together with a power management chip, the PMIC. Actually we used a Back RDL technology in order to solder out the different ball pitches directly onto the memory. In terms of technology, it is recognized to be far superior to the previous product that was introduced by the Taiwanese company. By using the FO PLP technology, we were able to reduce the thickness by more than 20%, also improve the electric as well as thermal characteristics of the smart device itself, and also enhance the battery life of the device.
Also, in terms of production, we were able to achieve our target yield within a three-month span. Starting with the mass production of this first product, we will continue to further our FO PLP production by winning new orders and also expanding out to different products. Given the fact that new markets will be increasing, such as 5G, AI, and automotive applications such as autonomous driving, we believe that there will be continued demand for FO PLPs as devices become smaller and require higher performance. We will be leveraging our FO PLP technology actively to meet this demand.
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To answer your second question about fourth quarter, as well as 2019 market outlook and our guidance. First of all, fourth quarter, there is impact of seasonality. We think that still our Component Solution Division will continue to maintain its revenue growth trends even in the fourth quarter. Regarding 2019 market outlook, I guess one concern is the possible decrease of Chinese demand due to Chinese-U.S. trade disputes. We think that the market situation for MLCC, which is our current focus, will remain positive in 2019. The reason is that there will be continued adoption of small size, high capacitance MLCCs as devices become higher performance, including smartphones. Also, there is the strong demand growth for automotive and industrial applications, the high reliability product, which is also our target market. These markets are expected to have demand growth of above 20% per annum for the next five years.
Based on these two outlooks, we think that we will be able to continue a very high paced growth even in 2019. Despite the possible easing of supply, especially on the lower end of the market, we believe that our MLCC business will continue to maintain a very solid trend of growth next year. Also, looking on to next year, in terms of business strategy, we will be actively responding to new business opportunities emerging from 5G as well as AI related applications, and also focus our capabilities in driving up a technology-oriented business. Next year, we will further exert efforts to improve the profitability of our MLCC business as well as the board business, the substrate business, so that we will be able to achieve greater growth versus this year.
Since there's no further questions, we will end the third quarter earnings conference call here. If you have any additional questions, please forward them to our IR team. Thank you very much.