Good afternoon. Thank you very much for joining today's conference call. We will start the 2018 second quarter earnings conference call of Samsung Electro-Mechanics. The conference call will start with a presentation by the company, followed by a Q&A session with the investors. Those who have questions, please press star one. We will start with the company's presentation.
Good afternoon. This is Jae-Kook Song, Head of Finance & IR Team at Samsung Electro-Mechanics. Thank you for joining our 2018 second-quarter earnings conference call. Before I go into the presentation, I would like to introduce the management who are present.
We have Byoung Jun Lee, the CFO, Senior Vice President Chol-soon Kang, head of support team from the Component Solution Division, Vice President Bo-young Jung, head of support team from the Substrate Solution Division, General Manager Jung-wook Seo, head of the Module Solution Division, and Vice President Kwang-wook Bae, head of planning, as well as Jung-geun Jo of marketing. We will start with a presentation of our second-quarter business results, followed by divisional results and outlook before taking your questions. First, our second-quarter results. In Q2 2018, revenue recorded KRW 1,809.8 billion, which is a 10% Q-on-Q decrease, but a 6% increase on a year-on-year basis. To break down the major revenue increase and decrease factors on a Q-on-Q basis, the Component Division revenue increased by about 15% driven by increase in sales of high-end MLCCs.
The Module and Substrate Solution Division revenue decreased by 32% and 16% respectively due to decreased demand from smartphones. Overall, company-level Q2 revenue decreased by about 10% Q- on- Q. Second quarter operating profit was KRW 206.8 billion, which is a 34% increase Q- on- Q, and our operating margin also improved to 11.4%. Even though revenue from module and substrates businesses decreased due to weak demand from the flagship models of major customers, the increase in high margin, high-end MLCCs helped improve profitability. Pre-tax profit was KRW 181.7 billion, with about KRW 25.1 billion in non-operating expenses, including financial expenses. Net income after corporate tax was KRW 122 billion. In terms of financials, as of end of June 2018, total asset was KRW 8, 230 billion, similar to the end of the previous quarter.
While liabilities decreased due to repayment of borrowings, total capital increased slightly due to increase in net profits. All major financial indicators remain strong, with debt to equity 81%, net debt to equity 47%, and shareholders' equity 55%. Next is the results and future outlook of each division. First, the Module Solution Division. The Module Solution Division's Q2 revenue was KRW 611.9 billion, which is a Q- on- Q 32% decrease and a Y- on- Y 27% decrease. This is mainly due to impact from decreasing camera module revenue due to weak demand from major customers' flagship models, as well as decrease in supply of mobile Wi-Fi and wireless charging modules. We also started mass production of new dual-camera modules with OIS for the handsets of the newly launched Chinese customer models, and we were also able to further strengthen our new revenue base in China.
In the second half, smartphone makers are expected to continue upgrading their smartphone camera specifications as a way of differentiating their new handsets, we will actively respond to such market demand by leading the development of next-generation camera modules with high pixel and triple cameras. In the case of communication modules, new module demand is expected to be generated with the opening of the next-generation communications market, we actively will respond to the new specifications and conversion of demand to high-end, high Wi-Fi modules. Next is the Component Solution Division. The Component Solution Division's Q2 revenue was KRW 868.6 billion, which is a 15% increase Q- on- Q and a roughly 16% increase Y- on- Y.
For IT applications, revenue of high capacitance MLCC for overseas customers increased, and for industrial and automotive applications, supply of high reliability MLCC increased, in particular for network base stations and global automotive Tier 1s. In the second half, component demand is expected to continue to increase, especially around IT high-end and automotive components. In particular, increased levels of features at the set level with introduction of AI and other applications, the content of high-end MLCC is expected to further increase, and we will continue to expand sales of differentiated products such as small size and high capacitance MLCC. As adoption of electronics and automobiles accelerate, we will expand the lineup of high reliability products for automotive applications. Lastly, our substrate solutions. In Q2, the revenue of the Substrate Solution Division was KRW 299.5 billion, which is a 16% Q-on-Q decrease and a 6% year-on-year decrease.
Decrease in demand from major customers resulted in decrease of HDI substrates and RFPCB revenue. Package board revenue also decreased Q-on-Q due to decrease of demand for PC and mobile substrates. In Q3, high-end SLP and OLED RFPCB supply is expected to increase with the launch of new models by major customers. Meanwhile, demand for high-end package boards for new applications such as AI, automotive, and 5G is expected to grow in the future. We will be actively responding to such new market demand. This completes the presentation of our Q2 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.
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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 the MLCC demand and supply situation that you expect in the second half. The market is expecting that this supply will remain tight in the second half. How do you see it and how do you plan to respond? The second question is more for the mobile side with perhaps the adoption of a foldable phone and maybe 5G technology. What do you think will happen in terms of the component level? What changes do you expect at the component level due to these new technologies, and how are you planning to respond?
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To answer your first question, yes, regarding the second half outlook of the MLCC market, we expect the supply situation to remain tight even in the second half, as we expect the major smartphone flagship models to be launched in the second half. We expect more demand for MLCC from the Chinese mobile companies. There will be more demand in the second half from the automotive application. All of this points to a continued tight supply of MLCC in the second half.
Regarding this situation, we plan to focus especially on the IT high-end MLCCs and the automotive MLCCs. We will continue to squeeze out more productivity so that we are able to increase our revenue, especially around our major customers.
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Regarding your second question about the changes at the component level as new technologies such as foldable phones or 5G communication is adopted at the mobile level, we are currently underway with technology development in line with such new technology trends at the set level. Regarding the foldable phones, we expect with foldable technology, the smartphones would now adopt bigger screen sizes.
We're focusing on the design in the substrates for these larger screen sizes. We're expecting the foldable phones to have higher consumption of power, which will lead to greater demand of MLCC. We are preparing for that as well. Regarding 5G technologies, because with 5G, the handsets would have to support a Faster than LTE speed communication. They will have to have the modules to support these higher mobile technologies. Currently on the board itself, there isn't enough space, and so we are focused on developing the ultra-small size packaging to support the limited space within the current handset.
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The next question will be provided by Ms. Caroline Kim from Deutsche Securities. Please go ahead, ma'am.
Hi, this is Caroline Kim from Deutsche Bank. Congratulations on a great quarter, and thank you for taking my questions. My first question is, how do you see SEMCO's business opportunity in RFPCB for OLED regarding new iPhone launch in second half this year? Secondly, how's the company preparing for new camera trends, such as triple camera or 3D sensing? Thank you.
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Yes. To take your first question, yes, as you mentioned, there is the scheduled launch of the new flagship by the overseas customer. There are other models out in the market that are adopting OLED. Overall, we expect the RFPCB for OLED demand in the second half to be strong, and we expect we will be able to improve our performance versus the first half of the year. We have been participating in the development of new RFPCBs for OLEDs since end of 2017. In Q2, we were able to receive approval in all of these models, currently we are in mass production. Because compared to competitors, we have the advantage in terms of quality as well as productivity, we plan to use this as an opportunity to improve not only our market share, but profitability as well.
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To answer your second question about the new trends in the camera module, the 3D sensing as well as triple cameras. Yes. As more and more handsets are now adopting dual-camera, it seems adopting a higher spec camera is a major way of differentiating handsets. Especially as the major global player adopted triple cameras and 3D sensing in its latest smartphone, we expect this to increase market demand for such products, triple cameras and 3D sensors. SEMCO is preparing for such a change in technology quite agilely by cooperating with its suppliers as well as customers. We are participating in the development phase early on for the high-performance camera modules with our customers. SEMCO has the ability of internally manufacturing the key components to these camera modules and have the integrated capability of covering the entire process, from designing to manufacturing of these camera modules.
Leveraging these strengths that we have, we are focused on securing the technologies that are necessary for the camera modules demanded by the major set companies early on. In the case of 3D sensors, we are in close collaboration with the major sensor companies, and we will be implementing the performance stably so that we'll be able to actively respond to the 3D sensing module demand in the future.
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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. The first question is about the PLP technology. Actually, there was a recent media report about your PLP new technology and mass production. Can you give us an update on where you stand regarding PLP and production, and also your future development roadmap for PLP? The second question actually goes to the CFO. Can you share with us what you expect to see in terms of market in the third quarter, as well as your company performance?
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To answer your first question, yes, we were able to go into first mass production of FOPLP during the second quarter at Cheonan. Currently the product is being supplied smoothly without any issues. We plan to expand to other products going into mass production in the second half. We will start out with such products that do have a high level of technical requirements and difficulties this year. We will build on that experience to move on to the more high-end side of the market, such as small size ICs and high-end IC packaging. Ultimately, we believe that we will be able to move up to more sophisticated applications such as 5G mobile, AR, VR, and AI-related products that require smaller sizes, high functionality, multiple functionality, and high performance. Ultimately, we will be evolving into a SiP module business based on our fan-out packaging technology.
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Regarding the third quarter, as you know, the strategic customer is planning its flagship launch in the second half. We're expecting increase in demand for our camera modules, passive components, as well as substrates. From the Chinese side, there are Chinese customers that are planning their flagship launches in the second half. That will drive up demand for our dual cameras and MLCCs. The U.S. strategic customer, major customer, we're expecting to be able to increase our sales in terms of RFPCBs and high-end MLCCs, such as these high-end components to the U.S. customer. Given the fact that the MLCC market is currently in a very strong or tight supply situation. Combining all of these factors, we expect to continue a fair performance in the third quarter.
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The next questions will be presented by Mr. Giuni Lee from Goldman Sachs. Please go ahead, sir.
Another great result. Thank you for taking my questions. I have two questions as well. My first question relates to auto MLCC. Understand that while current exposure is not too large, SEMCO has been trying to grasp another opportunity of MLCC business growth from the auto segment. What would be your outlook for the auto MLCC market in the next few years? How does SEMCO specifically plan to benefit from this market growth? My second question is on your Substrate division. How do you plan to improve the profitability of each business within the division? PCB and package substrates in order to turn around the division down the road? Thank you.
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Regarding the automotive MLCCs. As you know, existing vehicles are also adopting more and more electronic components. More and more vehicles are adopting, for example, ADAS systems. That is driving up MLCC demand even before we go to autonomous vehicles or EVs. With more and more adoption of autonomous vehicles and EVs, we expect that the increase in demand for automotive MLCCs would be a mid to long term trend, that it would remain strong next year and for several years to come. SEMCO plans to leverage this opportunity to develop its business and increase profits by increasing supply of MLCCs for these automotive-related customers. We are expanding our automotive MLCC lineup, also increasing approvals from Tier 1s, so that we are able to increase our market position in the automotive MLCC market.
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Regarding your second question of how we plan to improve the profitability of our substrate business. First of all, in terms of the PCBs, the circuit boards, especially around Kunshan and Vietnam, these overseas plants, we first of all plan to increase the supply of SLPs for main boards and RFPCBs for OLEDs, so that the business structure itself is converted to a higher-end focused structure. At the same time, we are continuing to diversify the product as well as the customer base for our circuit board business. On the package side, we have the advantage in terms of manufacturing. We have the yield as well as the quality advantages. We will leverage this so that in the short term, we're able to increase our market share, especially in the high-end AP packaging.
Then in the long term, we will be focusing on participating in the co-development of next generation packaging solutions for automotive 5G as well as AI applications, so that we will be able to build in the base for future growth. Through these efforts, we expect that our substrate business results in the second half will improve versus second quarter.
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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. First question is about the MLCC business. Overall, it seems that there will be even more demand for MLCCs in the market in the second half versus first half. My first question is, do you actually have more headroom in your utilization to increase your utilization in the second half given the expected higher demand, or are you already at the cap max of your utilization? In that context, even in the long term, not only in the second half but looking towards 2019, there will probably be a very tight supply situation for MLCCs because there will be more demand from, for example, 5G, IoT, or foldable phones. Given all of that, do you have plans of any CapEx on your MLCC business? If so, how much of an increase would CapEx be on a year-on-year basis?
Second question is about your automotive component business, which you have been driving to increase for several years now. Where are you in that process, and how much does automotive components account for entire company revenue? How much do you think it would be next year in 2019?
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Regarding your first question of our MLCC utilization and capacity. As you know, there has been a shortage of supply from second quarter, and so we are at full utilization. We will continue to be in full utilization in the second half as well. There are, especially in the Korean plants, some bottlenecks that we can remove through partial process investments. There are bottleneck processes that we can invest in to improve productivity and further room to squeeze out additional productivity in the Korean plants, especially around the high-end IT MLCCs and automotive MLCCs to increase some production. In the overseas plant, because there is this cost competitiveness, we will be leveraging that to focus on IT and industrial MLCC supply.
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Regarding your second question of the automotive component revenue. In the second quarter, our automotive revenue did increase on a year-on-year basis, especially as there was more demand from European and U.S. Tier 1 for MLCCs. Also we were able to add new customers on the automotive side. That's for the MLCCs. For camera modules, there was also increase of supply to North American OEMs regarding camera modules. Looking forward to the second half, we expect there to be increase in camera module and MLCC supply to new OEMs and Tier 1s, and therefore we expect there to be a year-on-year growth in the second half for camera modules and MLCC as well.
We've also been noticing that there has been some changes in the supply chain, especially around the finished car makers, the OEMs, whereas they're actually now purchasing not only from Tier 1s in terms of ADAS and cameras for automotive driving, but also they're directly purchasing from Tier 2 companies as well. That share of direct purchase from Tier 2 is increasing. Witnessing this change in the value chain of the OEMs, we're also developing products that are differentiated from our competitors for the automotive camera market and also trying to build new relationships by directly cooperating and collaborating with the global OEMs as well. We will be, as we mentioned, continuing to expand our automotive high-end lineup, which are the areas where there is the main request coming from customers.
We have European and Chinese Tier 1 customers that we plan to newly supply from the second half, and we will be supplying that without any issues.
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Since there are no further questions, we will be ending the conference call here. Thank you very much, and please forward any additional questions to our IR team.