Sk Hynix Inc S/Gdr 144A

Good morning, afternoon, and evening. This is Park Sung Hwan, Head of IR at SK Hynix. Welcome to SK Hynix 2024 First Quarter Earnings Release Conference Call. Allow me to introduce the executives present here today. We are joined by CFO Kim Woo Hyun, Head of DRAM Marketing Kim Kyu Hyun, and Head of NAND Marketing Kim Seok. Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we will now begin the SK Hynix Earnings Release Conference Call for Q1 2024. Mr. Kim will first present the earnings, followed by the company's future plans and market outlooks, and a Q&A session with the attending executives. Good morning, everyone. Allow me to first introduce the company's performance for the first quarter of 2024. In the first quarter, while demand was relatively soft from PC and mobile, AI server continued to see strong demand, driving improvement in memory market. DRAM and NAND prices rose more than what we have expected in the beginning of the quarter, which makes us to believe that memory market is clearly entering into a full recovery phase. As a result, our first quarter revenue reached $12.4 trillion, an increase of 10% sequentially and 144% year-on-year. DRAM bit shipments decreased by mid-10% sequentially, which is in line with our guidance. as product sales increased for AI servers, while conventional DRAM sales saw seasonal weakness. ASP increased by over 20% compared to the previous quarter, with prices rising across all product lines for two consecutive quarters. While NAND also was impacted by seasonality, bid shipment was maintained at a similar level compared to the previous quarter, with expanding sales of ESSD that is improving in demand. ASP increased by over 30% sequentially, driven by significant price increases across all products. Operating profit in the first quarter was 2.89 trillion won, a 2.54 trillion won improvement from the previous quarter, with operating margin of 23%. The performance was driven by increased sales from rapid price improvement, sales strategy focusing on profitability, ongoing cost-cutting efforts, and reversal effect of previously recorded inventory valuation losses. Particularly notable was non-profits, which turned into profits thanks to higher mix of premium ESSD products as well as steep ASP increases since fourth quarter last year. Following DRAM's turnaround in the third quarter of last year, we believe that this quarter's NAND turnaround marks the beginning of a full-fledged growth phase of our performance. Depreciation and amortization expenses for the first quarter was 3.19 trillion won, slightly lower compared to the previous quarter due to reduced investment in the previous year. EBITDA was 6.07 trillion won and the EBITDA margin was 49%. Non-operating loss net of gain in the first quarter was 0.51 trillion won. This includes net interest expense of 0.32 trillion won and net foreign currency related loss of 0.22 trillion won including translation laws of foreign currency-denominated debts due to the rise in U.S. dollar. As a result, our net pre-tax loss was 2.37 trillion won, net profit was 1.92 trillion won, and the net profit margin was 15%. Consolidated cash balance at the end of first quarter was 10.3 trillion won, up by 1.4 trillion won from year and last year. Interest bearing debt was 29.5 trillion won, remaining at a similar level to data previous quarter. Debt to equity ratio and net debt to equity ratio at the end of first quarter was 53% and 35% respectively, both improving from previous quarters level. Next, I will discuss market outlook and our company plans. The memory market is now believed to enter a full recovery cycle with improving profitability in the industry due to strong AI demand and a favorable supply demand environment. In the second half of the year, Demand from traditional applications such as PCs, mobile devices, and general servers is expected to improve, leading to stable growth in memory demand. Meanwhile, despite the gradual utilization recovery in the industry, prioritization of premium products like HBM will lead to a production limitation on general DRAM products which will eventually accelerate inventory depletion across the industry once the demand for conventional market improves. Favorable pricing environment is expected to continue throughout the year, and thus the memory market in 2024 is projected to reach the revenue size comparable to that of past peak cycles. Looking at specific applications, the PC market was somewhat soft in the first half of the year, but demand is expected to recover toward the second half, with the end of Windows 10 support and the introduction of AI PCs propelling replacement demand, especially from enterprises. Additionally, the need for high-performance, high-density memory support for Windows upgrades and AI PCs is expected to drive continued growth in memory content. The smartphone market exhibited a slower demand recovery than expected with only some new flagship products with AI capabilities seen growth. However, the introduction of new AI features along with upcoming product launches in the second half of the year is expected to stimulate consumer replacement demand driving overall unit and content growth of smartphones. For the server market, the strong demand for AI servers is expected to continue as generative AI is advancing from generating text-based responses to generating images and videos, and the focus of AI technology is shifting from training to inferencing. Furthermore, gradual replacement demand is expected to arise for servers in cloud data centers that were heavily invested in during 2017 and 2018, considering the depreciable time for servers. In NAND, which has seen relatively weaker impacts from AI demand, demand recently started growing for high-density ESSDs. The advantages of NAND as a storage solution, such as faster data transfer speed, lower power consumption, and the ability to store large capacities in small physical spaces are gaining traction in the AI market. As a result, demand for high-performance, high-density NAND is increasing. and we anticipate further adoption of high-density ESSDs in AI servers and data centers going forward. In the second quarter, DRAM bit shipment is expected to grow by 18% sequentially, driven by the higher sales of HBM3e products. For NAND, while ESSD sales are expected to increase due to strong demand, Overall company's NAND bit growth is expected to be flat sequentially as we are planning to prepare for more evidence and demand improvement. In March, SK Hynix started best production and supply of HBM3e using the leading edge 1B nanometer process, maintaining our competitive edge as a leading player in the HBM market. Supply of HBM3E will increase according to customer demand this year, and we also plan to expand our customer base by leveraging the increased production capability compared to that of last year. SK Hynix has signed an MOU with TSMC for the development of the next generation HBM product, HBM4. and cooperation in next generation packaging technology. We will utilize TSMC's leading logic process to produce the base dye of HBM4, which is scheduled to start mass production in 2026, and supply customized HBM products that meet a wide range of customers' requirements, including performance and power efficiency. We will also cooperate to optimize the combination of our HBM and TSMC's CoWAS technology to strengthen our position as a total AI memory provider. In addition, our DDR5 products have been able to capture the early market growth backed by our stable technology and quality since the first-generation product. Already, over 45% of our PC bit sales and over 60% of our server bit sales are from DDR5 products. Our timely support of 128GB and higher density modules have also contributed to our strong DDR5 sales. In addition to our product lineup, we are also planning to introduce 32GB DDR5 products based on 1B nanometer process in the near future to support demand for high-density server DRAM. For NAND, which successfully turned into profit in the first quarter, we plan to focus on optimizing product mix and lineup to sustain this growth. Along with high-performance 16-channel ESSD that has contributed meaningfully to our Q1 sales, we plan to support growing demand for high-density ESSDs with industry-leading QLC-based ultra-high-density ESSD products provided by Solidigm. Going forward, we are also planning to proactively support demand for on-device AI solutions by launching PCIe Gen5 CSSD for PCs this year. Utilization rate is gradually recovering in the industry as demand is improving, driven by AI memory. However, as demand is focused on advanced node products, upgrade investments are essential in order to increase wafer production. This year, DRAM and NAND production growth is expected to be constrained as a result of conservative investments of last year as well as higher capacity allocation to HBM, which has meaningfully larger die size compared to that of conventional DRAM. As a move to proactively support growing AI memory demand, as well as conventional DRAM demand, we decided to invest in M15x as a new DRAM production facility with the target to open by end of 2025. the progress of establishing Yongin Semiconductor Cluster is also on track. M15X in Cheongju and the new facilities in Yongin, Korea will be the foundation of the company's need to long-term growth. Furthermore, we have decided to construct an advanced packaging production facility for AI memory in West Lafayette, Indiana, USA in order to strengthen our leadership in AI semiconductor technology and customer collaboration. We will also collaborate with local institutions for research and development. The establishment of the Indiana facility will involve an investment of about $3.87 billion, and we plan to mass produce next generation AI memory products, including HBM from 2028. Through these efforts, we will be able to supply a variety of customized member products that can meet the increasingly complex needs and expectations of customers and take a leading role in strengthening the global AI semiconductor supply chain. Due to rising needs to meet the rapidly growing demand for HBM, together with new investment decisions for M15X, The company's CAPEX this year is expected to be somewhat higher than the amount that was planned initially. However, these investment decisions were made to meet the elevated levels of customer demand to support not just DHPM products, but potentially for conventional DRAM. Therefore, we try to contribute to stable and sustainable growth of the memory market. We will continue to make prudent investment decisions focusing on investment efficiency and financial soundness. Next, let me share our ESG management activities and performance. In February, we signed a renewable power purchase agreement for a 100 megawatt renewable energy project based on solar power to comply with RE100. Through this agreement, we aim to expand the reduction of scope to greenhouse gas emissions and diversify our domestic renewable energy sources, which have been heavily focused on green premiums. We plan to continue collaborating with key players in the renewable energy ecosystem to secure competitive renewable energy sources in the future. Additionally, for the first time, For a semiconductor company, we announced a meet-to-long-term roadmap to utilize recycled materials in production. We aim to raise the weight proportion of recycled materials in our products to over 25% by 2025 and over 30% by 2030. To achieve this, we have developed strategies to increase the recycled portion of metals such as copper and tin, as well as plastic used in packaging to protect finished semiconductor products. We will strengthen the certification procedures and quality evaluation for recycled materials directly purchased by the company and also encourage our suppliers to join the efforts to obtain validation from publicly trusted external organizations to verify the use and proportion of recycled materials. We will continue our efforts in carbon reduction and various eco-friendly activities based on present the company's ESG initiatives to contribute to the transition to a carbon neutral society. Thank you.

With that, we are now ready to take your questions.

The first question will be presented by Dongwon Kim from KB Securities. Thank you very much for taking my questions.