Good afternoon. This is Song Jae-hyuk, the Head of Finance and Head of IR at Samsung Electro-Mechanics. Thank you for joining our 2018 Q1 earnings conference call. Before going into the presentation, I would like to introduce the management who are participating in today's call. We have Lee Byoung-jun, the CFO, Senior Vice President Chul Sung Ka, Head of Support Team from the Component Solution division, VP Bo Yoon Jung, Head of Support Team, Substrate Solution division, General Manager Hyun-Suk Seo, Head of Support Team, Module Solution division, VP KwangWook Bae, Head of Planning, as well as Kook-hwan Cho, Head of Marketing. We will start with a presentation of our Q1 business results, followed by divisional results and outlook before we take your questions. First, our Q1 results.
In Q1 2018, total revenue recorded KRW 2 trillion, 18.8 billion, which is an 18% Q-on-Q increase, and a 29% increase year-on-year. To break down major revenue increase and decrease factor on a Q-on-Q basis, the Substrate Solution division revenue decreased by about 18% due to decreased sales of OLED RF PCBs. The Module Solution division revenue increased by 55% thanks to increased camera module supply to a strategic customer, and contributed to the company-level revenue growth. The Component Solution division revenue increased by about 8% Q-on-Q, with improved MLCC market situations, resulting in total company level revenue growth about 18% Q-on-Q in Q1. Q1 operating profit was KRW 154 billion, which is a 44% increase Q-on-Q, and our operating margin improved to 7.6%.
Even though such sales by overseas customer was weaker than expected, and the strong won had a negative impact on profitability, increased volume in high-end camera module sales and increased high-end MLCC sales helped improved overall profitability. Pre-tax profit was KRW 152.3 billion, with about KRW 1.7 billion in non-operating expenses, including financial expenses. Net income after corporate tax was KRW 111.2 billion. In terms of financials, as of end of March 2018, total assets was KRW 8,224.8 billion, which is a 6% increase Q-on-Q. Assets increased mainly due to increased accounts receivables as a result of increased Q-on-Q sales, facility investments for improved productivity, and increased available-for-sale financial assets due to increased stock price of stock holdings, including Samsung C&T. All major financial indicators remain strong, with debt equity 83%, net debt to equity 46%, and shareholders' equity ratio 55%.
Next is the results and future outlook by each business division. First, the Module Solution division. The Module Solution division's Q1 revenue was KRW 899.8 billion, which is a Q-on-Q 55% increase and YOY 16% increase. This is mainly due to increase in supply of high-end camera modules to the strategic customer that adopted new features for the first time, such as variable aperture and high picture quality lenses. Also, in terms of automotive cameras, new customer acquisitions have further diversified our customer base and also strengthened our revenue base. In Q2, camera module supply is expected to weaken due to weak seasonality of the smartphone market. However, we plan to offset such seasonality by increasing supply of new dual-camera module models with OIS to Chinese customers.
For camera modules for automotive applications with greater adoption of ADAS by the auto industry and acceleration in autonomous driving platform development, we will leverage our edge in core technologies for IT cameras to offer differentiated solutions for automotive applications. Next is the Component Solution division. The Component Solution division's Q1 revenue was KRW 753 billion, which is an 8% growth quarter-on-quarter and 54% growth year-on-year. For IT application, sales of high-end MLCCs, including small size and high capacitance, increased, while sales of high-reliability MLCCs for base stations and global automotive Tier 1s also increased. Q2 passive component market is expected to see solid demand growth, especially around mobile, industrial, and automotive applications.
As the end device performance is further enhanced with adoption of new features such as AR and AI, adoption of high-end passive components is expected to significantly increase, we will increase sales of ultra small and high capacitance new products. With greater adoption of electronic content in automobiles, we will expand our automotive MLCC lineup, meeting greater quality and reliability requirements. Our Substrate Solutions. Q1 revenue of the Substrate Solution division was KRW 357.1 billion, which is an 18% Q-on-Q decrease, but a 22% YOY increase. Even though sales of mobile AP package substrates increased for the strategic customers model, the decreased supply of OLED RF-PCBs resulted in overall division revenue decreasing a Q-on-Q. We expect the OLED RF-PCB sales to remain weak until Q2 due to the continued decreased demand from the overseas customer.
We are preparing to gain greater share of the OLED RF-PCBs for the new model that will be launched in the second half by strengthening our development and quality competitiveness. Meanwhile, in the package substrate market, we expect demand growth in new applications such as automotive, network equipment, and blockchains, and we will expand our substrate lineup to actively respond to new emerging market demand. Now, this completes the presentation on our Q1 earnings. Now we will take your questions.
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. Kim Ji-san from Kiwoom Securities. Please go ahead, sir.
I have two questions. The first question is about the MLCC. What was the supply and demand situation in the MLCC market like in Q1? What is your outlook on demand supply situation, and how do you plan to respond? Second question is about the RF-PCB supply. What was the actual supply experience in Q1 to the overseas customer, and what do you expect in the future? To answer your first question, in Q1, as there was strong sales, especially in the high-end segment of the MLCC market around the ultra-high capacitance for IT applications, as well as small and high capacitance applications MLCCs. There was strong demand from automotive as well as industrial applications.
Looking forward to Q2, even though MLCC companies are preparing to add capacity, given the technical difficulty of IT as well as automotive high-end MLCCs and the high drain that it takes on capacity, we think that the supply will continue to remain short in Q2 and onward. Regarding our responses, given this market outlook, in terms of the MLCCs for IT applications, we will leverage the manufacturing competitiveness that we have to continue to improve our productivity and also to increase the offerings that we have in the differentiated high-end MLCC segments for IT applications. Also, given the fact that there's new demand growing from the automotive side, we will expand our automotive MLCC lineup and also increase the qualifications that we gain from Tier 1 customers so that we gain a broader supply base and also increase revenue towards the automotive applications.
1분기는 해외 거래선의 플래그십 모델 판매 부진으로 인해서 가동률이 떨어졌습니다. 이에 따라서 OLED용 RF-PCB의 매출이 전분기 대비 감소했으며, 2분기까지는 아마도 고객 수요 감소의 영향이 계속해서 지속될 것으로 전망이 됩니다. 이에 저희 회사에서는 18년도 하반기 신규로 출시되는 OLED용 RF-PCB의 현재 전 모델의 개발 참여를 하였고, 향후 OLED의 채용 모델 수가 증가됨에 따라서 증가되는 수요 확대에 적극적으로 대응을 할 예정이며, 두 번째로 경쟁사 대비 수율 및 품질 우위의 현재 보유 중인 제조 경쟁력을 바탕으로 해서 제품 및 거래선을 다변화함으로써 성장이 지속될 수 있도록 하겠습니다.
Your second question was of the RF-PCB substrate sales. As in Q1, the flagship sales of the overseas customer was weaker than expected. As a result, our utilization has decreased. Also, the RF-PCB for OLED sales have on a quarter-on-quarter basis, decreased. We think that this effect will continue at least until Q2. We're looking more towards the second half of this year. We are participating in all of the new OLED models that are being developed for the second half launch for the supply of RF-PCBs. We're expecting more models to adopt the OLED display, and we are prepared to actively respond to such increased demand for OLED RF-PCBs in the second half and onward.
Especially, we will be leveraging the manufacturing competitiveness that we have, the edge that we have in terms of yield as well as quality, so that we are able to diversify our product offering and also diversify our customers in the future.
다음 질문 받아주십시오.
다음으로 질문해 주실 분은 Goldman Sachs의 Joonhee Lee입니다.
The next questions will be presented by Mr. Joonhee Lee from Goldman Sachs. Please go ahead with your question.
Congratulations on the good results. I have two questions, one on camera module and another on PLP. My first question is, how does your camera module business fare in 1Q, especially in the high-end product supply to your strategic customer? What is your strategy going forward with that particular customer? My second question is, from my understanding, you have been developing PLP technology for some time, but could you provide any visibility on your mass production timing and revenue target for this year? Thank you.
두 가지 질문이 있습니다. 첫 번째는 카메라 모듈과 관련해서 1분기 성과를 조금 자세하게 소개를 해주시고, 특히 전략 거래선향 하이엔드 카메라 모듈의 공급에 대해서 성과와 향후의 전략 거래선에 대한 카메라 모듈 공급 전략을 자세하게 소개를 해주시면 감사하겠고요. 두 번째 질문은 PLP 관련 질문입니다. PLP 기술 개발을 오랫동안 해오신 걸로 알고 있는데요. PLP의 양산 시점 및 올해 매출 목표를 알려주시면 감사하겠습니다.
전략 거래선향 카메라 모듈 1분기 공급 실적과 18년 전망에 대해서 답변드리겠습니다. 1분기 전략 거래선향 매출 실적은 플래그십용 신제품 출시로 전분기 대비 크게 성장했습니다. 특히 금번 플래그십용으로 공급한 카메라 모듈은 가변 조리개와 F1.5 렌즈가 스마트폰에 최초로 적용된 고사양 제품으로써 ASP 상승 효과도 수반되었습니다. 향후에도 전략 거래선의 플래그십 모델에 채용되는 카메라 모듈은 기술적 난이도가 지속적으로 증가할 것으로 예상되어서 차별화 기술과 양산 수율 확보가 경쟁력을 정할 것으로 전망됩니다. 이에 따라서 당사는 모듈과 핵심 부품의 내재화 설계 및 해외 제조 거점의 안정적 제조 역량을 기반으로 고객 니즈에 적극 대응해서 매출 확대를 추진하도록 하겠습니다.
Regarding the first question of our results of supplying camera modules to the strategic customer in Q1 and the 2018 full year outlook. As our revenue regarding camera module supply for the strategic customers flagship model increased significantly on a quarter-on-quarter basis. Especially the camera module that we supplied for the strategic customers flagship model was the first smartphone camera module to have, for example, many important features such as the variable aperture and the F number 1.5 lens. This also had the effect of increasing the overall ASPs. Going forward, given the fact that we expect our strategic customer to continue to demand the sophisticated level of technology in terms of camera modules, we think that it is critical that we are able to deliver in terms of differentiated technology as well as high mass production yield.
In order to do that, we will continue to design our camera modules with internalized components and also stabilize our overseas production so that we are able to continue to generate sales or strong revenue from our strategic customer.
예, FOPLP 관련한 질문에 대해서 말씀드리도록 하겠습니다. 당사는 18년을 PLP 사업 개시의 원년으로 삼고 전력 관리 반도체 등 소형 IC에 우선 진입할 계획이며, 이후 기술 개발 확대로 high-end IC 패키징 및 차세대 패키지 기술 기반의 Fan-out SiP 모듈 사업에 참여하고자 합니다. 하지만 양산 및
매출 발생 시점 등 이런 부분은 고객사의 제품 양산 일정에 따라 유동적이며, 고객과의 협의 및 수급 상황에 따라 변동될 수 있습니다.
Regarding your second question of the PLP, we are targeting to make 2018 the first year of our PLP business. We are planning to start from the smaller applications. For example, the power controller ICs, and then scale out to the higher-end chips and other applications, and ultimately go to the FO, the Fan-out SiP applications. In terms of exact timing of mass production and when we will start to see actual revenue, that is dependent upon the market situation as well as plans of our customers.
네, 다음 질문 받아주십시오.
다음으로 질문해 주실 분은 KB증권의 김동원 님입니다.
The next question will be presented by Mr. Kim Dong-won from KB Securities. Please go ahead, sir.
네, 질문 기회 감사드립니다. 저는 먼저 CFO분께 여쭤보겠습니다. 2분기와 하반기에 전반적인 부품 시장 전망을 어떻게 보고 계시고, 이에 따른 대응 방향과 실적 예상은 어떠하신지 답변 부탁드리겠습니다. 두 번째 질문은 MLCC입니다. 1분기 MLCC 가동률과 향후 판가 전망에 대해서 말씀 부탁드리겠습니다. 감사합니다.
I have two questions. The first question I would like to ask the CFO, what is your overall component market outlook for Q2 as well as the second half? How are you planning to respond, and what kind of earnings results are you expecting in the remainder of the year? My second question is an MLCC question. Can you give us your utilization on MLCC in Q1 as well as future ASP outlook?
네, 먼저 2분기 및 하반기 시장과 실적 전망에 대해서 간략하게 말씀드리겠습니다. 1분기는 지난 2월 실적 설명회 때 말씀드렸었는데, 전략 거래선의 신모델이 출시되면서 관련 부품 매출이 많이 늘어났고요. MLCC 시장도 견조하게 성장해서 개선된 실적을 달성했습니다. 2분기는 스마트폰 시장의 계절적 요인으로 인해서 모듈과 그 기판 사업군의 매출 감소가 예상이 됩니다만, MLCC의 시황 개선에 따른 판매 호조로 Component 사업부의 매출 증가는 계속될 것으로 전망되고 있습니다. 하반기 시장 전망에 대해서는 거래선 신모델 출시로 관련 부품 수요가 늘어날 전망이고, 자동차 시장도 전장화 및 EV화에 따른 고신뢰성 부품의 수요 증가가 예상됩니다. 한편, MLCC 시장 호조가 2분기에도 지속되고 현재의 공급 부족 상황이 계속될 것으로 전망됩니다. 당사는 생산성, 수율 등 제조 경쟁력을 강화하고 거래선의 하반기 신모델 향으로 부품 공급을 늘려 나가면서 전략적으로 MLCC 시장 대응을 통해서 지속적으로 실적 개선을 확보할 수 있도록 해나가겠습니다. 감사합니다.
Regarding the market outlook as well as our earnings outlook for the remainder of the year. As we mentioned in our conference call last January, in Q1 there was a significant increase in the supply of our components due to the launch of the new model by our strategic customer. Also, the overall MLCC market has been positive. However, in Q2, it is a weak season, so there's seasonality to the smartphone market. This would have an impact on the Module as well as Substrate divisions. However, given the fact that MLCC market is expected to remain strong, we believe that even in Q2, our Component divisions performance will continue to improve. Looking towards the second half, the handset companies have new models they're planning to launch.
Also, we expect greater demand from automotive applications as the adoption of electric vehicles and more electronic content in the vehicles increase. Therefore, we also think that the MLCC market will remain strong and the shortage of MLCCs will continue to the second half of this year. Given this outlook, we will focus on leveraging the manufacturing competitiveness that we have to improve the productivity as well as yield, to supply components on time to the customers, and also continue to improve our MLCC performance leveraging the positive market situation.
네, 1분기 MLCC 가동률 현황하고 향후 판가 전망에 대해서 말씀을 드리겠습니다. 저희들 1분기 가동률은 MLCC 시장의 공급 부족이 심화되는 영향 등으로 인해서 풀 가동 체제를 유지 중에 있고, 이런 기조는 가동 체제는 계속 가동률이 높을 것으로 전망됩니다. 1분기의 ASP는 하이엔드 제품의 수요 확대에 따라서 다른 제품 믹스가 개선되는 영향으로 전분기 대비 상승하였습니다. 향후의 판가 전망에 대해서도 세트의 고성능화, 그리고 전기차 보급 확대가 지속됨에 따라 전장용과 모바일용 하이엔드 제품 중심으로 수요 확대가 지속 예상되어서 ASP의 상승 추세는 계속될 것으로 전망됩니다.
Regarding your second question of our Q1 MLCC utilization and ASP outlook. As the MLCC supply shortage continued, our utilization is at full utilization. We're expecting that to continue for the time being. Q1 ASPs for MLCCs increase on a quarter-on-quarter basis, mainly driven by improved product mix as demand for especially the higher end of the MLCC market was stronger, especially in the future as the sets become more high featured and high specifications. As there is greater adoption of electric vehicles, we think that there will be still very strong demand from both automotive and mobile applications for high-end MLCCs. Based on this, we expect the increasing trend of ASPs to continue. The next questions will be presented by Mr. Park Gang-ho from Daishin Securities. Please go ahead, sir. I have two questions.
First of all, it's related with whether you have plans of selling the Samsung C&T stock that you have, given the fact that Samsung SDI recently sold its holdings in Samsung C&T as a part of the way of resolving the circular ownership among affiliated companies. First question is, do you have plans of selling your Samsung C&T stock? Second question is to the substrate business division. I've heard that the SLP substrates were supplied to the strategic customer for the first time in Q1. Can you give us a better picture of the level of revenue that's generated from that supply as well as future demand and investment plans related with the SLP substrates?
To answer your first question, the company's plan is to also resolve the circular ownership structure among affiliates using an appropriate method which is in line with the government policy. However, we have not yet decided the exact timing or the method. Regarding your second question, yes, we have supplied to the flagship model of the strategic customer on a mass production basis, and therefore our SLP sales have significantly increased. Especially given the fact that this supply has seen no quality issues at all, we are expecting that we will also be participating in the demand for the new flagship coming up in the second half.
We will further gain our competitiveness, especially in terms of quality, by strengthening our system-based quality management and also upgrading the facilities. Also, we will leverage the know-how that we have acquired in terms of working with a fine circuit in the BGA and flip chip BGA area. We're currently in the process of completing a new differentiated manufacturing technique that would give us a further cost advantage, and we believe that this will give us a greater market share in future supply opportunities. We will continue to focus on increasing the supply of the main boards and also adopting advanced manufacturing techniques so that the supply of SLPs contribute to the overall profitability of the HDI business.
[Foreign language] The next question will be presented by Ms. Caroline Kim from Deutsche Securities. Please go ahead ma'am.
Thank you for the opportunity. My questions are, first of all, what's your market outlook on 3D sensing module? Would you share your strategy for the business? Second of all, how was your auto parts earnings for Q1? Would you also share your outlook and strategy for this year? Thank you.
네, 두 가지 질문이 있습니다. 3D 센싱 모듈과 관련해서는 어떠한 계획을 갖고 계시는지, 또 시장 전망은 어떻게 하고 계시는지 말씀해 주시면 좋겠고요. 1분기 전장 실적과 또 앞으로의 전망, 또 계획에 대해서 말씀해 주시면 감사하겠습니다.
3D 센싱 모듈 시장 전망과 대응 방향에 대해서 답변드리겠습니다. 글로벌 스마트폰 업체 3D 센싱 모듈 채용에 따라서 향후 시장 수요는 증가할 것으로 전망을 하고 있습니다. 이에 따라서 당사가 보유하고 있는 기술력을 활용하고, 관련 전문 업체와 협업하여 필요한 핵심 기술을 개발하고 있습니다. 현재 성능 검토 단계이고, 조기에 사업화할 수 있도록 하겠습니다.
To answer your first question, as more and more smartphone makers adopt the 3D sensing module onto their new models, we do expect there to be greater market demand for 3D sensing modules. That is why we are leveraging our own in-house technology and also actively working with third-party companies specializing in specific areas to develop the core technologies necessary. We're currently in the process of verifying the performance, and we will focus on commercializing the product in the near future.
1분기 전장 부품 매출 실적 및 2018년 전망에 대해서 말씀을 드리겠습니다. 1분기 전장 부품 사업은 전장용 MLCC의 수요 증가로 전 분기 대비 큰 폭으로 매출 규모가 증가하였으며, 카메라 모듈도 유럽 OEM향 신규 제품 판매 증가로 전년 동기 대비 매출이 성장하였습니다. 2018년 사업 전망에 대해서는 카메라 모듈은 신규 거래선 개척을 통해 매출 구조를 다각화하고, MLCC는 글로벌 Tier 1 고객사와 장기 물량 계약을 통해 당초 계획한 매출 목표를 초과 달성할 수 있을 것으로 예상됩니다. 이를 통해 2018년 전장 부품 매출 규모는 전년 대비 큰 폭으로 성장할 것으로 전망됩니다.
Regarding your second question of our automotive supply, there was a major increase in the demand for the automotive MLCCs, and that has driven up our automotive MLCC revenue on a significant basis on a quarter-on-quarter basis. Also for camera modules, we were able to add a new European OEM, and that has also helped increase camera module sales on a year-on-year basis. Looking forward to the rest of the year on the camera modules, we will continue to add new customers. On the MLCCs for automotive applications, we're planning to sign a long-term supply contract with a global Tier 1 that will help us overachieve on our annual targets. Therefore, for the full year 2018, we expect to see a significant increase of our automotive component supply on a year-on-year basis.
더 이상 질문이 없는 것 같습니다. 그래서 그럼 이것으로 2018년 1분기 실적 설명회를 모두 마치도록 하겠습니다. 참여해 주신 모든 분들께 감사의 말씀을 드리고요. 혹시 추가 질문이 있으시면 저희 IR 팀을 통해서 별도로 문의해 주시기 바랍니다. 감사합니다.
That completes the 2018 Q1 earnings conference call. If you have any further questions, please forward them to our IR team. Thank you very much.