Good afternoon. Thank you very much for joining our earnings conference call. We will start the 2017 third quarter earnings conference call of Samsung Electro-Mechanics. First, we will start off with a presentation by the company, followed by a Q&A session. If you want to ask a question, please press star one. Now we will hear the presentation by Samsung Electro-Mechanics.
Good afternoon. This is Kang Heon Hur, Vice President of Finance Accounting at Samsung Electro-Mechanics. Thank you for joining our third quarter earnings conference call for 2017. Today, we have our CFO, Kwang-young Chung, and key executives of each business division, business planning, and marketing. Please note that comments and data presented during this conference call contain forward-looking statements that could differ significantly based on changes in macroeconomic environment and market conditions.
First, we will look at Q3 results and financials before going into detail, results, and future strategies of each business division. Q3 revenue was KRW 1,841.1 billion, which is an 8% Q-on-Q increase and a 26% year-on-year increase. Operating profit was KRW 103.2 billion, an improvement of 46% Q-on-Q and improvement of 706% year-on-year. Compared to Q2, supply of dual cameras and main board substrates increased with full mass production of the strategic customer's new model. Our sales of new RF PCBs increased. Increase in high-end and industrial automotive MLCC sales improved our product mix. In Q3, there was increased utilization and cost reduction, which also are reasons for stronger operating performance versus Q2. Pre-tax profit was KRW 98.5 billion, net profit KRW 71.9 billion in Q3. Next, our financials.
As of end of September 2017, SEMCO's total asset was KRW 8 trillion, 185.5 billion, liabilities, KRW 3 trillion, 727.1 billion, and capital, KRW 4 trillion, 458.4 billion. Our financial structure remains strong, with a debt equity ratio of 84% and capital adequacy ratio of 55%. Now the results and strategies of each of our business divisions. First, the DM division. DM's Q3 revenue was KRW 822 billion, which is a 2% decrease Q2 and a 25% increase year-on-year. In Q3, camera module revenue increased, mainly benefiting from the strategic customer's first adoption of dual cameras in its flagship handset, to which SEMCO has been supplying dual OIS and optical 2x zoom dual cameras. Sales of automotive camera modules also increased, thanks to new supply of surround view monitoring modules and increase of supply volume to existing automotive customers.
Our future strategy for camera modules is, first of all, to strengthen design in activity by offering camera modules with new differentiated functions to continue our technology advantage in the global market. We will continue to participate in the leading development and mass production preparation efforts of new modules for the strategic customer to strengthen our position as the main supplier for the strategic customer's new modules, while at the same time, we will continue to increase our sales to China by supplying customized and differentiated products to Chinese handset makers. Also, we will actively respond to customer needs, such as ultra-slim and low power modules by leveraging our internal component expertise in lenses and actuators.
This means not only development of smaller and cost-saving modules that use internally produced parts such as ultra-slim lenses and ball screw-driven actuators, but also technically preparing for adoption of dual cameras in the mass handset segment, which is expected to expand very soon. Next, about the communication module business. In Q3, revenue from Wi-Fi module supply to the strategic customer's flagship model decreased, but we will focus on securing foundation technologies for new products, especially for new wireless standards emerging in the next generation Wi-Fi and 5G space. Specifically, we will focus on developing key basic technologies such as ultra-high frequency material, heat dissipation, and small packaging. Next, the LCR division. Q3 revenue was KRW 608 billion, which is a 12% increase Q-on-Q and a significant increase year-on-year.
First, in MLCC supply of small size and high capacitance, new products of overseas customers increased, and we were able to timely respond to increase of high-end MLCC demand in China, which helped revenue growth Q-on-Q . Also, supply of high-end MLCCs for network-based stations, which is a high-growth market, entry into new global automotive customers, and obtaining approval as high reliability products have helped increase industrial and automotive MLCC revenue. In the future, we will strengthen design-in activities for high capacitance, high reliability MLCCs for industrial and automotive applications, continue to expand our MLCC lineup and diversify our customer base, especially in China and in Korea. Meanwhile, we will continue to strengthen high-end MLCC supply capacity by improving quality and production efficiency through manufacturing innovation in overseas plants.
This will enable SEMCO to respond to the increasing level of technical difficulty required by higher specifications adopted at the end device level, and continue to increase ultra-small and ultra-high capacitance MLCC revenue, while at the same time prepare us for timely entry into new markets such as 5G and electric vehicles. Next, EMC business. In Q3, revenue increased Q-on-Q thanks to increased supply of power inductors to the new flagship model of an overseas customer. In the future, in EMC, while actively responding to high-performance power inductor demand by the strategic customer, we will strengthen design-in activity of our high withstanding voltage products and ultra-slim products, targeting the specific needs of Chinese and other overseas customers, which will help us diversify our EMC customer base. Lastly, the ACI division.
Revenue in Q3 was KRW 399.6 billion, which is a 25% QoQ increase and a 22% YoY increase. Revenue for PCBs increased Q-on-Q thanks to full mass production of the RFPCB and increased supply of high-end off-stack IVH boards for the strategic customer's new flagship. Future strategy for PCB is to continue stable operation of the Vietnam lines for RFPCBs, to gain greater quality and production yield, and to continuously improve profitability through production at full capacity and increased supply. For next generation HDIs, we will focus on securing line yield and manufacturing quality to expand market share, and leverage our packaged board mass production experience and technology to lead the next generation high-end main board market.
In Q3, while supply of Flip Chip BGAs for thin CPUs increased, demand for Flip Chip CSPs for APs decreased from the overseas customer, resulting in slight decrease in overall revenue Q- on- Q. Future strategies for the package board business is first, in terms of the mobile AP boards, to continue to secure the upper hand in supply as the global first vendor, using our strengths in manufacturing excellence, such as higher quality and yield compared to the competitors. For Flip Chip BGAs, to secure new sources of revenue by diversifying our product lineup to break into new applications such as network equipment, automotive applications to diversify the revenue structure, which currently is more dependent on PC CPUs and chipsets. That ends our presentation. We ask for your continued support for SEMCO. Thank you.
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 questions will be presented by Mr. Gun Lee from Goldman Sachs. Please go ahead, sir.
Well, first of all, congratulations on the solid earnings in the third quarter. I have two questions, one on MLCC and another on camera module. First, could you share what you are expecting in regards to the fourth quarter MLCC supply and demand, especially in the high end? What would be the industry pricing trend, as well as SEMCO strategy regarding pricing? My second question is: How did the dual camera that you're supplying to the Note 8 fare in the third quarter, and what are you expecting in the fourth quarter?
[Non-English content] MLCC [Non-English content] blended ASP[Non-English content] flagship [Non-English content] MLCC [Non-English content].
To answer your first question regarding MLCC, at least currently, the MLCC market, as you mentioned, there is increase in demand, especially driven by handsets, high-end handsets, as well as automotive applications, whereas the supply side remains tight, especially as MLCC on the high-end becomes more high spec, the manufacturing difficulty increases, and that is contributing to the tighter supply side. This has resulted, as you would have noticed, an increase in blended ASP in overall MLCCs. Looking forward to the fourth quarter, there are major new flagship handsets launches scheduled by the Chinese handset makers as well as overseas handset makers. These new flagships will require more passive component content. This is both expected to drive up further MLCC demand in the fourth quarter.
In expectation of such market outlook, SEMCO's strategy is to further increase the efficiency of our new plants and also to meet these demands on a timely manner. Whereas in terms of prices, we will flexibly respond to the market situation in order to maximize our profitability.
[Non-English content] flagship [Non-English content] flagship[Non-English content] .
Regarding the dual camera, as you mentioned, our dual camera, the high-end dual cameras, have been adopted by the new flagship of our strategic customer, and that has contributed to increase of our dual-camera revenue on a quarter-on-quarter basis. Looking forward, our strategy is to continue to differentiate our dual camera modules in terms of functionality and features, while also at the same time try to gain a greater cost advantage by reducing costs, so that we will be prepared to supply towards the mass handset market, which we expect will start to adopt dual cameras in the future.
[Non-English content]
[Non-English content] .
The next questions will be presented by Mr. Kim Ji-san from Kiwoom Securities. Please go ahead, sir.
[Non-English content] 3D [Non-English content] . 3D sensing module [Non-English content] Capa [Non-English content] .
I have two questions. The first question is about the 3D camera, which is becoming the newest point of differentiation, especially on the smartphone handsets. Does this give you any changes in terms of your business strategies regarding sensing modules, 3D sensing modules? Also, can you give us an update on your technology development status related with 3D sensing modules or 3D cameras? The second question is about your board business. Can you give us an update on capacity of the Vietnam and Kunshan plants? Also, can you give us your capacity plans and revenue plans going forward?
3D sensing [Non-English content] DM [Non-English content] ACI [Non-English content] .
[Non-English content] 3D sensing [Non-English content] 3D [Non-English content] 3D sensing [Non-English content] .
Regarding the 3D sensing modules, we have been carefully monitoring the technology as well as industry adoption trends, especially as we search for the next growth driver that would follow the dual camera business. We are currently in a technical cooperation, collaboration with a company that develops the 3D solution algorithms. Our plan going forward is to continue to prepare the technologies that are required essentially in the 3D sensing technology roadmap and to meet customers' demands when they mature.
[Non-English content] 16 [Non-English content] SLP [Non-English content] RFPCB [Non-English content] RFPCB [Non-English content] Capa [Non-English content] .
Regarding our overseas board capacity. As you know, we have specialized centers overseas for specific products. First noteworthy in our overseas board production is that there was a significant increase in the portion of overseas production between 2016 and 2017. Looking forward to next year, we also plan to continue to increase the share of overseas production by more than two digits versus 2017. By increasing the share of overseas production, we expect to enjoy not only improvements in cost, but also at the same time improve our production yield. Kunshan, as you mentioned, is specializing in the next generation high-density main boards and will also be focusing on the SLP production that will be the main line for our SLP production. Vietnam, on the other hand, focuses on RFPCBs, so that will be the main production center for the RFPCBs.
We are planning to increase our mass production in Vietnam and depending on the future demand and supply situation, we're even preparing for additional capacity, but dependent upon future demand and supply situation.
[Non-English content] .
[Non-English content] Daishin Securities [Non-English content] .
The following questions will be presented by Mr. Sung-Sik Kim from Daishin Securities. Please go ahead, sir.
[Non-English content] CFO [Non-English content] 4[Non-English content] 4 [Non-English content] MLCC [Non-English content], RFPCB [Non-English content] . 4 [Non-English content] MLCC [Non-English content] , 3 [Non-English content] . MLCC 3 [Non-English content] .
I have two questions. The first question is actually, I would like to ask the CFO to share with us his outlook for the fourth quarter performance, a guidance for fourth quarter. The reason I'm asking is usually in usual years, SEMCO's fourth quarter is a relatively weak quarter, mainly given the fact that the strategic customer goes into inventory adjustments during the fourth quarter. However, maybe this year will be an exception. In 2017, as you mentioned, the MLCC market is very positive. Also, perhaps we can expect increase of supply volume in the RFPCB as well in the fourth quarter. Do you think this would actually weaken the seasonality that SEMCO has usually gone through each year? Second question is about the MLCC business. I'm expecting MLCC prices would have been very good, very positive, and strong in the third quarter.
Can you give us an update in terms of MLCC profitability, profit margins, as well as your utilization in the third quarter?
[Non-English content] CFO[Non-English content] OLED [Non-English content] RFPCB [Non-English content] Full Capa [Non-English content] High-End MLCC [Non-English content] ASP [Non-English content] 4 [Non-English content] .
To first of all give you a brief outlook on the fourth quarter. As you mentioned, usually during the fourth quarter, each of the vendors go through inventory adjustments, the customers go through inventory adjustments, and that has resulted usually in decreased demand. However, as you mentioned, we expect that fourth quarter this year may draw a different pattern from the usual years. Mainly given the fact that the RFPCBs for OLEDs are running at full production. There is a turnaround of the entire HDI business that's expected, and especially there's very strong market situations unfolding at the high-end MLCC business, which we expect all of these will contribute to further increase of ASPs in the fourth quarter, and we will strategically respond to the supply and demand situation.
MLCC [Non-English content] ASP [Non-English content] .
Regarding the second question about an update on MLCC profitability and utilization. It's difficult for me to give you a specific number in terms of the profitability, but as was alluded before, ASPs for MLCCs has continued to increase throughout the third quarter. Compared to the second quarter, I can describe that third quarter profitability of MLCC has improved considerably, significantly. In terms of utilization, basically we're running at full capacity.
[Non-English content] .
[Non-English content] Nomura Securities [Non-English content] Chris Chung [Non-English content].
The next questions will be presented by Mr. Chris Chung from Nomura Securities. Please go ahead, sir.
Hi, thanks for taking my questions. I have two questions. The first question is about the ACI business. The overall loss amount seems to have improved a lot, I think mainly on the back of the RFPCB. Just wondering if we can expect a possible turnaround for the entire ACI business in 4Q, and if that trend can also continue into the next year. My second question is about the overall debt level. I think our net debt equity ratio right now is fairly high at around 48%. If you can comment on that trend going forward and if there's a range that we can sort of target to manage, I think that would be helpful. Thank you.
[Non-English content] HDI [Non-English content] HDI [Non-English content] RFPCB [Non-English content] HDI [Non-English content] net debt to equity ratio, [Non-English content] net debt to equity [Non-English content] 48% [Non-English content] .
[Non-English content] HDI [Non-English content] ACI [Non-English content] .
4[Non-English content] HDI [Non-English content] HDI [Non-English content] RFPCB [Non-English content] flagship[Non-English content] 3 [Non-English content] BEP[Non-English content] , 4 [Non-English content] HDI [Non-English content] , RFPCB [Non-English content] .
Regarding our HDI business, the key efforts, the key points of focus in terms of turning around the HDI business currently is stabilizing the production of our RFPCBs in Vietnam, and also increasing the utilization of Kunshan, which does the main boards for the high-end flagship. Actually, during the third quarter, we were able to break even on a monthly basis. In the fourth quarter, therefore, our focus of effort is to achieve a BEP, surpass BEP on a quarterly basis and to maintain that profitability. Next year, our main plan in terms of preparation is to continue to prepare the leading technologies for the next generation boards next year, and also in the RFPCBs to continue to maintain our advantages to maintain our turnaround, to maintain our profitability, and also to focus on entering into new markets for the RFPCB applications.
[Non-English content] 9 [Non-English content] 83.6% [Non-English content] 0.9% [Non-English content] . 83.6% [Non-English content] 100% [Non-English content].
Our debt ratios as of end of September was at 83.6%, which indeed is an increase by 0.9 percentage points versus end of June. We think that 83.6% is below 100% and is still quite a stable level of leverage and debt for the company, and is within the range that the company targets to manage. In the fourth quarter, we are expecting our debt ratios to improve versus the third quarter.
[Non-English content] .
[Non-English content] .
The next question will be presented by Mr. Park Kang-ho from Daishin Securities. Please go ahead, sir.
[Non-English content] 3 [Non-English content] . 2018 [Non-English content] MSAP [Non-English content] SLP [Non-English content] SLP [Non-English content] HDI [Non-English content] MLCC [Non-English content] Capa [Non-English content] IT[Non-English content] .
I actually have three questions. The first question, once again, is regarding the board business. Many are expecting that your strategic customer in Korea will adopt SLP in its handsets in 2018. In that context, can you give us an update on where SEMCO stands in terms of SLP supply? What is your technology roadmap, and how well prepared or where are you in terms of preparing to supply SLPs to your strategic customer? If we assume that the HDIs will become pure SLP-based, when do you think in terms of timing, your SLP supply will be able to hit breakeven point? The second question is about the MLCC business, which has been emphasized many times as being in a very favorable situation that you're running at full capacity. The natural next question would be, do you have any capacity expansion plans?
The question is, especially for IT or automotive applications, do you have plans and schedules to expand your MLCC capacity? The third question is regarding the share of your strategic customers revenue, or revenue from your strategic customer in your overall revenue. We do notice that your sales or revenue generation from supply to your domestic strategic customer has done very well in the third quarter. Can you give us how much your strategic customer accounts for in your overall revenue and what you expect that share to be in the fourth quarter?
[Non-English content] , HDI [Non-English content] HDI [Non-English content] . MLCC Capa [Non-English content] LCR [Non-English content] .
SLP [Non-English content] . Set [Non-English content] MSAP [Non-English content] HDI [Non-English content] . RFPCB [Non-English content] MSAP [Non-English content] .
To answer the first question regarding our responses to the SLP opportunity, as we mentioned, as the sets become more dense and become more slimmer, there is a greater demand for smaller scale and thinner boards as well. Therefore, the SLP boards that use a thinner or more micro-scale circuits will be adopted and will be in need in the future. This is basically a peak packaging business which we have numerous vast experience in terms of mass producing. SEMCO believes that this is an area where we have a strength compared to our competitors, and therefore we will be able to differentiate ourselves in terms of both quality and technology, which will help us expand market share in the emerging SLP market. We are already preparing in advance to meet the customer needs.
Actually, we think that MSAP, together with the RF PCB business, will help us break even and continue to maintain profitability for the entire HDI business.
MLCC [Non-English content] MLCC [Non-English content] Busan [Non-English content].
Regarding the MLCC capacity expansion, as you know, there is more functions and features being put into smartphones that is driving up demand for especially high-end MLCCs as well as automotive applications. This has increased demand for high-end MLCCs. Overall, in the MLCC industry, there are additional capacities that are being added, but we noticed that more of the new capacities are for automotive applications rather than for IT applications. SEMCO's initial response is to first use its existing capacity to maximize its productivity to increase supply, rather than starting off with a mass scale or a large-scale investment. Then to flexibly invest in a new or additional equipment and facilities depending on how the market situation unfolds. In terms of industrial and automotive application MLCCs, we plan to expand our product lineup, especially in the high reliability MLCC segment.
SEMCO [Non-English content] flagship [Non-English content] .
Regarding our revenue in the third quarter, yes, the increase of especially high-end component supply to the strategic customers' flagship has contributed to us achieving revenue as planned. Especially the fact that we were able to supply the new dual camera to the new flagship in a stable manner has enabled us to achieve the revenue as planned. In the fourth quarter, we are expecting overall component demand to slightly decrease as the companies go through year-end, especially component inventory adjustments. We actually expect that in the fourth quarter, high-end component demand will be maintained. Therefore, especially in cameras, passives, and boards, we will respond by focusing on increasing our technology advantage as well as cost competitiveness.
[Non-English content] Q&A[Non-English content] .
We will take the last question before ending the conference call.
[Non-English content] .
The last question will be presented by Mr. Jong Wook Lee from Samsung Securities. Please go ahead, sir.
[Non-English content] . PLP [Non-English content] high-end AP [Non-English content] CapEx [Non-English content] high-end [Non-English content] .
I have two questions. The first question is about your PLP business. When do you think SEMCO will start to generate revenue from the PLP business, and when do you expect to enter into the high-end segment of the market? Also, for the PLP business, probably additional CapEx will be required over several years. Do you have any plans of how you will fund this CapEx need? The second question is about what you see in the camera module business in China in the future. Even though there's a lot of competition and attention around dual cameras, the handset itself, smartphone sales, unit sales for China next year is expected to remain stagnant. Given this backdrop of stagnant smartphone markets in China, is your strategy for growth more on focusing on the high-end segment, or are you going to be more of a volume player?
[Non-English content] ACI [Non-English content] .
PLP [Non-English content] AP [Non-English content] .
Regarding the PLP business, the timing of our pilot mass production is fully dependent on the scheduling and the situation of the customer and the customer's customer. The supply and demand situation as well as the customer's development schedule will decide our pilot mass production timing. The same would go for the AP. As you mentioned, that will be dependent on the development schedules for the end sets.
[Non-English content] flagship[Non-English content] high-end [Non-English content] high-end [Non-English content] .
Regarding the question about the Chinese camera module business in the future, there is a bit of seasonality. I think it's because we are between flagship launches. That will once again drive up demand and volume. We are currently still supplying dual cameras with quite a lot of interest, especially for the high-end handsets of the major customers in China. There is continuous demand. From our end, we actually think that whether to focus on the high-end or whether to focus on volume are not mutually exclusive. We're actually seeing a lot of volume being driven up in the high-end segment of the market.
[Non-English content] .
Thank you very much. This completes our third quarter earnings conference call.