Good afternoon. Thank you for joining the second quarter earnings conference call of Samsung Electro-Mechanics. We will now start the conference call. The call will start with a presentation by the company, followed by a Q&A session with the attending executives. Please press star one to queue for questions. We will now hear the presentation from Samsung Electro-Mechanics.
Good afternoon. This is Ho-Ik Lee, Vice President of Finance and Accounting at SEMCO. Thank you for joining our 2017 Q2 earnings conference call. Today, SEMCO's CFO, Kwang-young Chung, and key executives of each business division, marketing and new business, have also joined us. Please note that the comments and data presented during this conference call contain forward-looking statements that could differ significantly based on changes in the macroeconomic environment and market conditions.
We will look at Q2 results and financials before going into detailed results and future strategies of each business division. Q2 revenue was KRW 1,709.8 billion, which is a 9% QoQ increase and a 6% YoY increase. Operating profit was KRW 70.7 billion, a significant improvement both QoQ and YoY. Compared to Q1, supply of camera modules, HDI substrates, and high-end MLCC all increased, thanks to increased production for Galaxy S8 for the strategic customer. Dual camera sales to Chinese customers also increased. Fall in the exchange rate did have a negative impact on profitability but Improved product mix and cost savings from higher utilization and lower fixed costs have delivered significant increase in operating profit QoQ. Pre-tax profit was KRW 64 billion, net profit KRW 33.3 billion in Q2.
Next, our financials. As of end of June 2017, SEMCO's total asset was KRW 8,052.4 billion. Liability was KRW 3,644.6 billion. Our financial structure remains strong, with a debt equity ratio of 83% and capital adequacy ratio of 55%. We will look at results as well as strategies of each business division. First, the DM division. DM's Q2 revenue was KRW 835.5 billion, which is 8% increase Q o Q and 14% increase Yo Y. In Q2, sales of camera modules with improved reliability and better low light level characteristics have increased for the new flagship model of the strategic customer. Dual cameras with optical 2x zoom started new supply for the new flagship model of a Chinese major customer, which also contributed to major increase in sales Qo Q.
The future strategy for camera modules is to continue securing our competitive advantage in terms of technology, based on internal supply of core components. We will increase the flexibility of module design and develop form factors that are small and cost-saving by adopting key internalized components, such as ultra slim lens and ball guide actuators. We will continue to lead the dual camera market by developing on-time optimal solutions that provide rich user experiences, such as image fusion and zoom. We will also expand automotive camera module product lineup. The automotive camera module will be diversified from the current focus on rear cameras for Korean and European customers to sensing camera modules for vehicle front and side, replacement of side mirrors, and driver monitoring solutions. We plan to expand revenue from automotive camera modules by starting supply of Surround View Monitoring modules for ADAS. Next, about the communication module business.
In Q2, revenue increased for both Wi-Fi and wireless charging modules, thanks to increase in supply for the new flagship model of the strategic customer. The future strategy of the wireless charging module is to supply on time for flagship models in the second half and to increase market share as the main supplier to the strategic customer and to leverage our design capabilities, such as ultra slim and express charging. For Wi-Fi modules, our focus is on securing fundamental technology for new wireless communication products such as 5G and Wi-Fi. Next, the LCR division. Q2 revenue was KRW 542.4 billion, which is 11% increase QoQ and a 7% increase YoY.
For MLCC, sales increased from Q1 as a result of increased supply of high reliability products with excellent withstanding voltage characteristics as well as solution products such as stronger bending strength and decreased noise. To meet greater demand for higher reliability parts by the flagship handset of the strategic customer, MLCC sales from Chinese major mobile customers have also increased significantly, thanks to our timely supply of high-value MLCCs in response to spec upgrade by Chinese handsets. Future MLCC strategy is first to expand high-reliability products by increasing design in activities for industrial and automotive applications. In the case of industrial application, we will focus on early development and increased sales of high reliability, high withstanding voltage products for base station applications such as network, power, and servers.
For automotive applications, we will strengthen design and activity of high-end products such as ultra-high capacitance MLCC and high bending strength products, and we will also focus on diversifying our customer base. We will also increase our industrial and automotive MLCC operation by improving our quality and customer response to the exclusive dedicated MLCC line in Busan. Meanwhile, we will strengthen the responsiveness of our global production hubs to actively respond to increasing demand for high-end MLCC. We will strengthen the high-end production capacity in overseas plants, including Philippines, in response to the expected tight supply situation in MLCC, while also work on timely supply of next-generation high-end MLCC to continue to gain greater global market share. Next, the EMC business. In Q2, revenue increased QoQ, thanks to increased supply of thin film and coil power inductors for the strategic customer's flagship model.
In the future, we will continue on developing new customers in China and the U.S. for our new products, such as the high reliability power inductors and thin -film beads, while also strengthening design and activity of high efficiency, high frequency inductors to actively add new supply opportunities. Lastly, the ACI division. Revenue in Q2 was KRW 319.5 billion, a 9% QoQ increase and a 7% year-on-year decrease. Revenue of package substrates increased QoQ, thanks to increased supply of Flip -Chip CSP for APs used on strategic customer flagship model, and increased supply of 3rd -generation Flip -Chip BGA for new CPUs of an overseas customer. In the future, we will increase revenue of SiP boards for communication modules of an overseas new customer based on our technology, which improved heat dissipation characteristics and lead time competitiveness.
For Flip -Chip CSP, supply to premium and mass APs of major customers will be expanded to continue gain in market share and revenue. In Q2, revenue for HDI increased, thanks to increased supply for main boards of the strategic customer's new flagship and increased supply for sub-board RF PCBs. In the future, we will focus on turning around the HDI business by starting mass production of RF PCBs for high-end OLEDs based on our manufacturing capabilities and high quality. Also, we will increase supply of high-end all stack ALIVH and rigid flexible substrates for the new flagship model of the strategic customer in the second half. In particular, in order to preemptively respond to the expected inflection point in next generation HDIs, we will focus on developing new products through co-work with customers and prepare mass production within the next year to lead the new high-end main board market.
That ends our presentation. We ask for your continued support for SEMCO. 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 question will be provided by S.K. Kim from Daiwa Capital Markets. Please go ahead, sir.
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I have two questions. First question is regarding the strong performance that you have shown in the second quarter. Can you give us the share of revenue that you generated from Samsung Electronics, considering that probably that increase did contribute significantly to your strong performance? There were some concerns of demand slowing down as we approach the end of the second quarter. Can you give us your outlook for the third quarter? Can you give us your new product launch plan for the second half? The second question regards the 3D sensing module, which many people are very interested in. This will be laser-based 3D sensing modules. Is SEMCO also preparing such products? If so, can you give us your plans?
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If I answer the second question first, regarding the 3D sensing modules, we are not planning such a product at this point, but we are closely watching the market situation. If we see that this is an opportunity for us to enter, that it's a good timing, similar to what happened in the camera module, we can enter the market at any time. Currently, we have no specific plans.
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Regarding the second quarter business that we recorded with Samsung Electronics, from the marketing perspective, if we give you the answer, in the second quarter, we have recorded revenue from Samsung Electronics according to our plans. It was in line with our original plans as we successfully designed in and supplied to the flagship model of the strategic customer, especially focusing on high-end camera modules and solution MLCCs. In the second half, we will continue to focus on providing stable supply and also try to expand our supply to not only the flagship but also mass market models in order to achieve beyond the current plans in terms of revenue.
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The following question will be presented by Shawn Kim from Morgan Stanley. Please go ahead, sir.
Yes, thank you. I have two questions. One is, could you talk about the high-end MLCC pricing? There's a lot of talk about mid to low-end pricing having been raised recently. Just wondering what the trend would be for high-end MLCC, as well as the current utilization ratio at SEMCO, and also what you see this market outlook in the second half. The second question would be on the expansion the auto-related businesses, if you can maybe provide some outlooks on anything that you have meaningfully growing besides the auto MLCC or camera module. Thank you.
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Looking at the MLCC market in the second half, first of all, we do see that there will be increase in demand, and that supply will remain tight in the second half, especially as major handset makers launch new models and the penetration and adoption of UHD TVs increase. Given that market situation, we will leverage our strength, which is in the small size, high capacitance MLCC market to increase our supply not only to IT applications, but industrial and automotive. In the more long-term, we see that MLCC demand would further increase, especially as the 5G technology and electronic vehicles become more widely adopted in the market, and we will leverage our competitiveness to continue to increase our market share.
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Regarding the second question about the automotive applications.
In the field of ADAS, we believe that major segments would be ADAS/ EV connectivity and security would be the major large segments of automotive-related businesses. Of that, we are currently focusing on the communication module business, where the MLCC and camera modules are expected to record rapid growth from. Especially in the U.S. and European markets, the governments have passed regulations that require a mandatory adoption of such communication modules on vehicles. This has triggered quite a lot of activity, both collaborative as well as competitive among Tier 1, as well as chipset and module suppliers. Given this market situation, our position is that we will try to leverage the relationship with Harman, which is a leader in the infotainment and telematics area. We are currently in process of talking with Harman. It's difficult for us to give you details, given the confidential nature of that discussion.
In addition to the communication modules, we are also very closely watching our wireless charging business, which we believe could be easily and relatively quickly spread to the automotive side as an application. There has been a request for collaboration from an OEM, and that is why we will search for opportunities to develop that further.
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The following question will be presented by Ji-San Kim from Kiwoom Securities. Please go ahead, sir.
I have two questions. The first question is about the dual camera business. Can you give us the detailed impact that you expect in the dual camera business for its ASP as well as profitability margins, by being adopted in the flagship model that will be coming out from the strategic customer in the second half? Can you give us more detail about the size of revenue you're expecting from dual camera modules from your Chinese customers? The second question is about the MLCC. You just mentioned that you're expecting tight supply situations to continue. You also appear to be close to full utilization in your MLCC capacity. One question is, do you have plans of adding new capacity? What are your plans about increasing your revenue further?
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First, for the dual cameras, yes, in the second quarter, our dual camera revenue has increased compared to the first quarter, especially thanks to adoption in the major flagship model of our major Chinese customer and also overall increased supply. We're expecting this trend to continue in the future and our revenue for dual camera modules to continue to grow as more and more handsets, not only flagship, but also even mass models are adopting dual cameras.
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Regarding the MLCC, yes, as you mentioned, supply is very tight, especially around the ultra-high capacitance MLCCs. In response, first of all, we are actively pursuing ways of increasing the production capacity of the existing Philippine line. We are preparing our overall system to supply the high-end MLCCs on time. At the same time, we are continuing to enhance the efficiency of our domestic production bases and also save costs in order to further enhance our cost competitiveness despite the market situation.
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The following question will be presented by Kang-Ho Park from Daishin Securities. Please go ahead, sir.
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Thank you. I have two questions. First of all is actually given the high likability of you adding new customers in the third quarter, there's quite a lot of expectation for your business results for the third quarter. At this point, can you give us your outlook on third quarter overall performance? The second question is there's also news that you will probably start supplying RF-PCB for OLEDs to Apple from the third quarter. Can you give us an update on that currently, and also what you expect to see from that supply in 2018?
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Regarding the third quarter outlook, first of all, in the third quarter, we will focus on maximizing our supply for the second half flagship model of the strategic customer, which will cover all of our major product lines, including camera module, LCR, and our HDI business. Second, also we will in the third quarter continue to increase our revenue from our Chinese major customers in camera modules, MLCCs, and EMCs. In the third quarter, we will start mass production of the RF-PCB for the U.S. customer. This will help us not only meet our second half revenue targets, but also help us in our efforts to turn around the HDI business overall. As you can see, we are expecting our performance to continue to improve from second quarter to third quarter on.
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Regarding your second question about our RF-PCB for OLED production and the revenue outlook for the second half. As you know, our focus of the RF-PCB operation in the second half of this year will be placed on those for OLEDs. We have completed the expansion of our Vietnamese production capacity already during the first half. We have already received the mass production PO from the customer in July, we are currently in mass production. What we will focus on in the second half is further increase our productivity and also our yield so that we are able to gain additional capacity from these lines. We will therefore focus on continuing our high quality full production capacity in the remainder of the year.
Doing that, at the same time, we will increase the capacity with minimum investments within this year to preemptively respond to additional demand we're expecting in 2018. Overall, our plan is to use the RF-PCB for OLED as the foothold for enhancing the profitability of our overall HDI business. At the current date, we believe that that is a very highly likely outcome.
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The following question will be presented by Chris Chang from Nomura Securities. Please go ahead, sir.
Hi, thanks for taking my questions. I have two questions. The first question is regarding the PLP business. Just wondering how much we are planning to spend on the PLP business over the next couple of years. Please also, could you explain the overall roadmap in terms of the product application, such as AP? The second question is, do you guys have any plans to monetize your stake in Samsung C&T now that Samsung has decided not to pursue the holding company transition? Thank you.
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To answer your second question first, the current holdings that we have are not against any regulation, for example, of cross-share ownership. Currently, we have no plans of selling that holding. If there will be, there will be a decision taken by the BOD according to due process.
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As we have already announced publicly, we have executed KRW 263.2 billion of investment in Cheonan for the FO-PLP business. We have already completed the one-pass production system, and we have started from applications such as small size or small ICs, and then spreading to APs and all other areas where the fan-out PLP technology can be used. We are currently reviewing possibilities of additional investments necessary to obtain and develop leading technologies. There will be some additional investments related with using the FO-PLP technology for APs in 2018. We are currently co-working with a customer. The actual timing of any mass production, of course, will be dependent on the timing of when the customer needs the supply. This is the FO-PLP business, is an optimal business opportunity for SEMCO, which has knowledge and expertise in passive, as well as substrates and module businesses.
We will use this to develop SiPs for not only IT applications, but for memory, automotive, and IoT business. Investments regarding these development opportunities will be taken consecutively step by step.
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The last question will be presented by Sung- Ryul Kwon from Dongbu Securities. Please go ahead, sir.
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First question is sort of a follow-up question to the MLCC pricing outlook that was already asked, but I think you offered more of the boilerplate sort of an answer. Let me ask again, specifically, what is your outlook on MLCC prices for the second half? The second question is regarding the share of revenue that you're generating from your Chinese customers and some of the trends. For example, can you give us the share of Chinese customer revenue in your overall revenue in the second quarter? Is that on an increasing trend or not? Also, of your many product lines, which is the area that you're seeing most success from with your Chinese customers?
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Regarding your question about MLCC pricing outlook for the second half. As we mentioned before, we do see quite a lot of opportunity for further demand increases for MLCC, especially as handset makers launch their new high-end flagships, as well as also demand from automotive applications. We are also witnessing that some company is increasing prices within this situation. Our basic approach is that we will probably respond in line with overall market situations. We also think that there's further room for demand in MLCC, especially as the Chinese makers launch their flagship handset models, and especially with the OLED being adopted by the U.S. company. We are preparing to keep our MLCC supply on time, even if there's further increase in demand.
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Regarding the revenue generated from our Chinese customers, even though the overall Chinese smartphone market growth rate has slowed down year-on-year, we have been able to increase our revenue from our Chinese customers by doing very active design in activities with the major Chinese handset makers. Our revenue increase is focused on dual cameras and passive components. We have seen an increase of share of Chinese customers in our revenue in the second quarter, and we expect this trend to continue in the third quarter as well. More specifically, our target is to achieve 30% revenue from our Chinese customers within the second half, and we will exert our efforts to achieve that target.