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.

I have two questions, one each for NAN and DRAM. The first question is about the NAN market. We see that the NAND market recently has been seeing increased demand for high capacity storage SSD led by enterprise SSD. What does the company believe are the main reasons for the higher demand for high density SSD and what is the strategic direction for NAND products? And the second question is that all memory companies recently are focusing on HBM capacity expansion, which will inevitably affect existing memory capacity. What is the likelihood of non-HBM shortage occurring in the second half of the year?

The increase in demand for high-capacity enterprise SSDs is mainly due to the increase in demand for on-premise AI data centers based on the expansion of the AI market.

Regarding the first question about the demand for the high-density ESSD, it appears that the demand spike for the high-density ESSD appears to be primarily driven by the demand coming from on-prem AI data center customers as the AI market continues to expand.

The AI technology is moving from training to inference, and individual companies that want to use AI

To be more specific, we see that AI technology is shifting from training more to inference with many individual companies now tapping into AI and seeking to build on-premise AI servers for reasons of technological security and customization.

As a result, in order to deal with the heavy workload of non-formatted data, high-capacity NAND solutions that are fast and low-consumption compared to existing storage solutions such as HEDD are attractive from the point of view of TCA, and it seems that related demand is increasing.

This has led to growing demand for high-density NAND solutions that are faster than existing storage solutions, as they need to process heavy workload, which is characteristic to unstructured data. They also consume less power, which offers better TCO attractiveness.

The exchange demand is a new demand that occurs due to the expansion of the AI market, and it can be a structural change. This is a positive development for NAND vendors as it is new demand created by the expanding AI market and may be a sign of structural change. 계속 현실화되고 있는 것으로 판단됩니다.

And for the longer term, the growth of AI and its use by individual enterprises appears to be leading to real demand for high-performance, low-power storage solutions that highlight the advantages of non-storage.

이러한 빠른 속도와 전력 절감 외에도 데이터 센터 공간 제약을 해결하고자 하는 고객 니즈가 있으며 And in addition to such high speed and power savings, there are also customer demands to address data center space constraints

which is driving demand for much, much higher density ESSD than existing products for 30TB and even 60TB to 128TB.

In order to implement this ultra-high capacity enterprise SSD, we need QLC-based products rather than TLC, which is the mainstream in the market, and we need QLC-based products

And such ultra-high density ESSD deployment requires QLC-based products rather than what is the mainstream today or the TLC-based. So we plan to address the upside demand with a 60TB or higher

density ESSD solution based on QLC, which is unique to Solidigm.

Just as we have demonstrated our technology and competitiveness in HBM and high-density DRAM products, we will do the same in ultra-high-density ESSD, working with our customers to strengthen our position as a memory leader. And moving on to the second question about the DRAM supply and demand in the second half of the year.

While strong AI-driven demand continues this year,

Demand for existing applications is also expected to improve overall year-over-year, but it is likely to be concentrated in the second half of the year.

In terms of supply, suppliers are gradually recovering their operating rate, but demand is increasing and increasing. Also, we are prioritizing CAPA for HBM production with high demand.

And at the same time, on the supply side, suppliers are gradually normalizing utilization, but are prioritizing capacity for HBM, for which demand is surging and visibility is high.

Especially, since HBM is about two times larger than the general DRAM, we need more wafer CAPA than the general DRAM. Therefore, the wafer CAPA that is used for the production of the general DRAM this year 제약이 있을 것으로 보입니다.

But for the HBM, it requires more wafer capacity than regular DRAM because its die size is roughly doubled that of regular DRAM. Thus, the wafer capacity for regular DRAM this year is expected to be limited.

또한 하반기에 PC나 스마트폰 그리고 일반 서버와 같은 기존 응용처에서 수요 개선이 이루어질 경우에는 And if demand improves in conventional applications like PC, smartphone, and general servers in the second half of the year, customers and memory vendors could sell down their inventory

And if demand exceeds expectations, there may be supply shortage for these products.

Yes, please ask the next question. The next question will be presented by Sungkyu Kim from Daiwa Securities.

Hello. First of all, congratulations on your good performance. I have two questions for you. The first question is, as you just said, according to the current application, How much is the stock level of the company and the customers? And when do you think the normalization is expected? The second question is, in preparation for the increasing demand, the company seems to lack a clean room. The M15X you announced yesterday, the Yongin Fab, the 양산 시점, I would appreciate it if you could tell me how much the production size is. And you said that the product to be produced at the Indiana post-production facility is the next-generation HBM. Is it possible for TSMC to act with the American factory that is being built now? I would appreciate it if you could tell me such a medium-term plan. That's all.

First of all, congratulations on the good performance. I also have two questions. First is, this was briefly mentioned earlier, but about the inventory level. So, what is the current inventory level of customers and the company by application? And when does the company believe would be the timeline for normalization of the inventory level? And the second question is, now we see that the demand recently is rapidly growing. But compared to this, there seems to be not enough clean room space. So this was also announced yesterday about the M15X, but what is the timeline and scale of mass production at M15X and Yongin Fab? And also during the presentation, it was mentioned that the Indiana Advanced Packaging Facility will be producing next-generation HBMs.

And is there any possibility of connecting with the TSMC's US plants? Now, first of all, about the inventory level.

The memory inventory levels that have been built up during the downturns of 2022 and 2023 have been shrinking since the second half of 2023 due to aggressive production cuts by suppliers.

Also, the supply capacity of general memory products is limited due to the demand for AI-related products such as HPMs that are revealed this year. In addition, supply of general or conventional memory products will be limited this year as we respond to increased demand for AI-related products such as HBM.

As a result, customers are believed to be strategically managing their inventory in light of current memory inventory level and expected demand improvement in the second half of the year.

In the first half of the year, we responded based on actual demand in the seasonal demand situation. Accordingly, we believe that there will be no major changes in the first half of the year. In Q1, we responded to real demand amidst the weak seasonality.

As a result, customer inventory at the end of Q1 appears to be little changed from the previous quarter. But inventory might have slightly fallen for ESSD products as demand began to pick up.

In preparation for the continued price increase in memory and the decrease in supply of legacy products, demand for stock accumulation has occurred. So, until the first half of the year, it seems that the decrease in customer stock will be limited, but as the second half of the year goes on, the demand for customer build, that is, the demand for parts to make their finished products, will improve, and the stock level in the entire industry is expected to normalize.

And customers' inventory reduction is likely to be limited in the first half of the year due to continued memory price increase and demand for inventory build-up in preparation against shrinking supply of legacy products. But customer build demand, which is the demand for parts for finished products, the customer build demand will improve moving into the second half of the year, which is likely to normalize industry-wide inventory level. Our finished memory product inventory at the end of Q1 was down for both DRAM and NAND as sales continued to outpace production despite conservative sales in Q1.

Even that there will be production ramp-up mainly for leading-edge technology products this year, inventory of legacy products

which currently account for the bulk of inventory, will start decreasing at a faster pace in the second half of the year, likely to fall to a tight level by year end. Thank you for your question, and I would like to respond to the second part of your question.

Now the company decided that additional clean room space was necessary to keep up with the rapidly growing demand for AI memory and conventional DRAM as well.

The decision was made to invest in m15x to maintain our current position in the AI memory market and to proactively address the growing demand for DRAM.

We believe that we can secure clean room at M15X relatively quickly.

because we can utilize the existing infrastructure at the Cheongju site. So if construction begins now, the company could potentially open the FAB by the end of 2025.

In addition, M15X has the advantage of being able to optimize the production of HBM by approaching M15X, which is currently expanding the TSB KEPA.

And also the M15X has the advantage of being adjacent to M15, where we are expanding the TSV capacity, allowing the M15X to optimize production of HBM.

At Yongin, Site preparation work is currently underway and is on track to open the first FAB in 2027. And about the Indiana Advanced Packaging Facility that will be built in the mainland U.S.

where the majority of AI clients are located and when there is robust R&D on advanced packaging technology. The purpose is to strengthen our AI semiconductor technology leadership and customer collaboration base, and it is targeted to start production in the second half of 2028.

With the growth in demand for AI, demand for ultra-high-performance memory such as HBM is increasing, and as the importance of advanced packaging has increased, we will continue to As demand continues to grow for ultra-high performance memory like HBM on the back of AI-driven growth,

and the importance of advanced packaging growth, the company will continue to strengthen collaboration with not only key customers, but also with the various partners across the supply chain to maintain our differentiated competitiveness in the next generation customized HBM market, so as to defend our leadership in the AI memory solution market.

At the moment,

To make sure that the company responds to the changing demand in a timely manner, we will be basing the decisions on our investment timeline, size, as well as the mass production scale and speed, on our demand forecast.

The next question will be presented by Soobin Lee from CGSI Securities. When do you expect the certification and improvement of the 12 products? This year, you will also proceed with the supply and price agreement for HBM-3E. I wonder if the high benefit rate of HBM-3 can be maintained from HBM-2 in a situation where competition is getting worse. The second question is, I am curious about the plan to expand HBM-CAPA in 2025. Competitors recently announced that most of the CAPA Also, congratulations on the good performance.

I also have two questions. Now, first is that the company earlier mentioned that the supply of HBM3E will be expanded. So is it going to be mainly for the 8-liter product? What is the timeline for qualification and mass production of the 12-layer product? And negotiations for HBM3E volume and price are presumably underway this year. And can the high margin that we saw in HBM3 be sustained in HBM3E in the face of increasing competition? And the second question is about the capacity. Now, what is the company's plan for the HBM capacity expansion in 2025? Your competitor has already mentioned that they have received orders for most of their capacity in their last earning call. I wonder whether the company is in a similar situation. And is there a possibility that the HBM supply is going to outpace demand after 2025 because of the competitive capacity expansion?

Thank you for the questions.

This is my response to the first question about the HBM-3E.

HBM-3E products are mainly 8-stage products. HBM-3E 12-stage products have been developed in three stages this year according to the customer request schedule,

The customer demand for the HBM-3E this year is primarily for the 8-layer. We are getting ready to complete the 12-layer HBM-3E development in the third quarter of this year and go through customer qualification afterwards to meet the customer's required timeline. We will then be ready to ensure reliable supply next year in time for a growing demand.

And for the HBM3e price,

It reflects a premium over HBM3 due to higher performance, higher density, and increased cost.

And ramp-up for mass production of HBM3E is also underway as planned.

Thanks to our industry-leading EUV productivity and maturity of the 1B nanometer technology that is breaking records all around.

Given the current progress, it seems that we can achieve a similar level of efficiency within a short time. Therefore, we are promoting rapid stabilization in terms of cost.

So overall, the progress so far indicates that we could reach the level of yield comparable to HBM-3 in the near future, which will also help quickly stabilize the cost.

HBM-3E is an advanced investment that is raising our production capacity, and we are focusing on the potential of HBM-3E by promoting productivity improvement activities such as yield and quality improvement.

In terms of profitability, HBM3E is expected to be a more competitive product in terms of profitability thanks to the company-wide commitment to build up production capacity with proactive investment and undertake productivity enhancement such as yield and quality improvement.

Now, let me move on to the second part of your question, which was on the plan for HBM capacity expansion in 2025.

It was explained in our earnings call last October that we already sold out on this year's increased HBM capacity as the decision itself was made in consultation with our customers.

Also, from a medium-term perspective, various AI players and potential customers are discussing expanding their business areas.

And we had also revealed that we are in discussion with various AI players and potential customers to expand our business areas for the mid- to long-term.

HBM's demand for additional demand for AI service quality improvement has increased significantly.

And what we are seeing recently is that there is investment increase by CSPs in AI servers and also there is additional demand to improve AI service quality. And we see that they are fast driving HBM demand and as a result, demand visibility in HBM is becoming clearer than it was just half a year ago.

Due to the expansion of CAPA by suppliers, I would like to talk about some of the concerns that the HBM market may face in the future. After 24 years, the HBM market still needs to improve its parameters to improve AI performance, And regarding the concerns that the HBM market may face oversupply as vendors expand their capacity,

Well, the HBM market is set to keep rapidly growing in 2024 and beyond as data and model sizes grow for reasons such as increasing parameters and modalities and also the growing use cases among end users. So there is need for a higher AI performance and more AI service providers also appearing.

Based on our product competitiveness and large-scale mass production experience, we are now in discussion about long-term projects through 2025 and beyond

with quite a number of existing and potential customers.

About the capacity for 2025,

It is currently under discussion with our customers, taking into account the lead time for equipment, and we will be ready to grow with our customers in line with the AI market growth through timely investment and capacity expansion.

The next question will be presented by Sunwoo Kim from Merit Securities.

Following the previous question, I will ask one question related to HBM, which our company is doing an overwhelming job, and then I will ask the second question related to this performance. The first is, there was a media report saying that the next-generation HBM stack height will be reduced based on generation. If this is true, I am curious about what impact it will have on our technology roadmap. I would like to ask about what kind of situation our company is in and when it will be applied. In the case of the second question, the performance of the first quarter was very good. I am curious about the size and size of the return in the market. In addition, I would like to know how much money is left for the remaining child evaluation. As you mentioned earlier, the price of NAND is rising sharply. I think it will continue for the time being in the second quarter. If the price of NAND rises in the second quarter, will it be possible to add it? Lastly, if we remove the one-time factors such as square evaluation losses in recent performance trends, to maintain profitability in the NAND business? Thank you.

Thank you very much for taking my questions. And as a follow-up to the previous question, I have a question about HBM, where the company is currently displaying overwhelming performance, and another question regarding the recent financial performance. Now, the first question about the HBM, There have been press reports that the next generation HBM configurations would be relaxed. So if this is true, then how will this affect the company's future technology roadmap? And also, can the company provide us with an update on the hybrid bonding development? What is the timeline for the application of this technology? And the second question is, we see that the financial performance in Q1 was outstanding. And what was the size of the reversal of inventory valuation loss in Q1? And also, what is the current outstanding balance in the valuation provision? And also, it is true that we have seen rapid price increase for NAND in the previous quarter. and it appears as if that there will be further rounds of significant increase in NAN prices in Q2 as well. So then, following that, what would be the likelihood of further reversal in the inventory valuation loss? And also, even without such one-off factors as the reversals, is it still possible to maintain NAN profitability? I do realize that these are a lot of questions, but I ask for understanding.

Thank you for your question.

First, I will answer about next-generation HBM package technology.

If the standard of HBM package height is lowered, it is expected that the application of hybrid bonding technology will be delayed. If the packaging height configuration for HBM is relaxed,

then we do expect the adoption of hybrid bonding technology to be pushed back. Given the complexity of the technology, there may be some productivity and quality issues, especially in the early days of adoption. And for the sake of reliable supply and cost of HBM, it would be better to wait until the technology reaches sufficient maturity.

Our company is planning to apply the advanced MR-MUF process, which is proven to be competitive, to 16-stage HBM products. We believe that we will be able to continue to produce high-performance and competitive products.

The company will continue to apply the proven and competitive advanced MR-MUF process to our 16-stack HBM products, which will allow uninterrupted supply of efficient and competitive products.

However, in China, the hybrid bonding technology is high-capacity, high-level, Having said that, it is also true that the hybrid bonding is believed to be an important packaging technology to enable high-density, high-stack HBM products.

and the company is committed to proactively acquiring this technology to maintain our HBA market leadership.

Hybrid bonding technology has a very high technical difficulty in terms of the flatness and contact strength of the bonding layer, and we have to calculate particle control to nanometer level, so our company is working hard to ensure We are also conducting multidirectional collaboration research on metrology and inspection.

Again, the hybrid bonding technology is highly complex, requiring control of the flatness of the bonding layer and the bonding strength, and particle control also needs to be done at the nanometer level. So, to ensure robust quality, we are conducting collaborative research in various fields such as metrology and inspection.

Once again, thank you very much for your question.

So allow me to respond to the question about the reversal of inventory valuation loss and the NAND profitability.

This was also mentioned in the previous quarter, but as was the case in the previous quarter,

There was reversal of inventory valuation provision mainly for NAND products, following a sharp rise in ASP. And the total reversal was approximately 900 billion won, which is slightly higher than the previous quarter.

As the price of memory ASP continues to rise, and as the supply is expected to decrease in part,

and looking ahead as memory asp continues to rise and inventories are expected to decline we expect further reversals to be recognized but to a gradually lesser extent

In the first quarter, NAN returned to profitability amidst soft demand, driven by an improved product mix led by ESSD products,

faster-than-expected price rise, and a reversal from inventory valuation loss.

In the second quarter, there is a high demand for high-capacity ESSD products with excellent price environment and our company's competitiveness. It is expected that it will continue even if it eliminates any one-off factors such as re-arrangement and re-entry. In particular, in the case of Solidaim, where the performance is improving rapidly, we are judging that it will continue to improve the performance as much as the high-capacity ESSD sales increase effect.

And in the second quarter, on anticipation of the favorable pricing environment and strong demand growth for our competitive high-density ESSD products to continue, we expect profitability to continue, even excluding such one-time factors as reversals from inventory valuation loss. And in particular, we see that performance from Solidigm is fast improving. And also, this is driving further growth in the revenue for the high-density ESSD. So we believe that overall, the NAND performance is going to continue to improve.

The next question will be presented by Nicola Godoa from UBS.

Good morning, and thanks for taking my questions. First one is, could you clarify when you expect to return to full capacity utilization rates from a wafer-zine perspective for both DRM and NAND, and would that be with wafer capacity broadly comparable to those of H222, or in fact lower due to process tech migration? And second question is, there have been some discussions about floating gate technology that you are running in the Dalian Fab, reaching its limits at 144 layers, which you currently have. What are the options in that case going forward? And have you started moving solid-dime SSD products to your original shard-strap technology? Thank you.

My first question is, from the perspective of wafer input, when do you expect DRAM and NAND to reach the full Kappa operation rate? And because of tech migration, even if it recovers 100% of the operation rate, is it not difficult to reach the peak level of Kappa in the second half of 2022? And the second question is, Mr. Kodowa, thank you for your question. First of all, thank you very much, Mr. Goodwin, for your questions.

I will respond to the first part of your question.

Over the past two years, all memory providers, I would say, have undergone bold investment cuts and aggressive capacity cuts in response to the downturn, and they are now gradually restoring utilization to meet the growing demand for new products.

As you would know, DRAM and NAND are different in terms of the demand and supply dynamics coming from AI, which warrant a different approach to utilization rate as well. First, for DRAM, we are working to expand supply, mainly with the high demand HBM.

which is showing strong demand. But due to the HBM's large chip size, the increase in finished product production is highly limited despite the increase in wafer input.

Therefore, it seems that the speed of operation will be restored a little faster than the previous plan at a time when the performance improvement of the general DLM product is clearer in the second half of the year.

So the expectation now is that utilization rate will recover at a slightly faster pace than planned in the second half of the year, when improved demand for conventional DRAM products becomes more apparent.

As you said, even if the operation rate recovers 100%, it is inevitable that the production capacity of the wafer will decrease in the transition process.

However, as you have rightly pointed out, even if we do go back to 100% utilization, wafer production capacity is bound to decrease as we migrate to higher-level technology. This means that capacity in the DRAM industry will not is not likely to reach the historical peak by the end of this year.

In comparison to DRAM, it is expected to receive a certain amount of demand from AI, but the demand improvement of general applications is not yet significant. Considering that there are no restrictions on supply such as HPM,

And for NAND, it is also expected to benefit from AI, but we have yet to see meaningful improvement in demand for general applications. And given that it does not have the same supply constraint as HBM, we will be more cautious in deciding on utilization recovery.

In our case, we are increasing the operation rate to expand the production center, which is clearly improved with high-capacity ESSDs. Accordingly, the cost burden of producing the product is expected to be reduced gradually.

And for the company, we are focusing on products with clearly improving demand, like high-capacity ESSDs, in our decisions for increasing utilization and production. This hopefully will gradually bring down the production cut-induced cost burden at the fabs making the high-demand products.

Yes, regarding the second Solidaim, as I just mentioned, The demand for high-capacity Enterprise SSDs is gradually recovering due to the improvement in demand. We plan to respond to the high-capacity Enterprise SSD demand upside by continuing to mass-produce 144 and 192 products.

And as was just mentioned, we also intend to respond to the rapidly growing demand for high-density ESSDs from the Solidarm side. And we are also gradually restoring utilization for products where demand is improving, like the high-density ESSDs, which has led to increased utilization for the 144 layers.

From a long-term perspective, utilization plan for the Italian FAB is to be determined based on a comprehensive set of factors

such as ESSD demand, geopolitical situation, and fab space operation plan at the headquarter.

Regarding the self-propelled CTF NAND application of the SOLIDIME SSD, we are preparing an Enterprise SSD product that combines SK Hynix's own NAND technology and SOLIDIME's Enterprise SSD solution capacity after the acquisition of SOLIDIME. And per your question on whether SK Hynix CTF NAND is going to be used for Solidaim SSD products, what we can tell you is that since the acquisition,

We have been preparing enterprise SSD products that combine SK Hynix's unique NAND technology with Solid DIME's ESSD solution capabilities. So, Solid DIME is expected to supply charge-trap-based ESSD in addition to floating-gate-based ESSD to flexibly respond to customer demand.

The last question will be presented by Donghee Han from SK Securities.

Hello, I'm Donghee Han from SK Securities. Thank you for the question. There are three questions in total. There are two questions about finance, one about investment, and one about HVM. This year, KPEX has been will increase, but it is expected to increase more this year. And as the price of memory increases higher than expected, it seems that our free cash flow will increase considerably this year, so please share with us to see how much our difference in income will be. Finally, the reason why there is a need for custom HBM and our future product strategy sharing

Thank you for taking my questions. I have three, one on finance, another on investment, and the third one is on HBM. So then it was mentioned that the capex will increase this year compared to the plan at the start of the year. So what is the expected increment for the year? And also it appears as if the free cash flow is expected to increase significantly this year despite the increased investment due to higher than expected price growth. So then what does the company believe will be the extent that you will be able to reduce borrowings as a result of this? And another question is about the custom HBM. So why is there such a need for custom HBM and what is the company's product strategy going forward? Thank you very much for your questions and this is my response to your first question about finance. Now, to ensure that we flexibly respond to rapidly changing markets, we hold regular meetings regarding market situation to review our production and investment plans.

More recently, we continued to revisit the size of our investment in light of the improved demand for HBM since the beginning of the year,

and decided to make additional FAB investment to ensure flexibility in our medium-term utilization.

For this reason, as I mentioned in the actual announcement, I think the investment in 2024 will increase rather than the initial plan. However, the increase And as a result, as was explained during the presentation, investment in 2024 will be slightly higher than planned at the start of the year.

But the increment investment will be mostly for expanding production of high-margin products with clear demand visibility and for securing infrastructure for the medium term, meaning that any impact on the near-term supply and demand of conventional products will be limited.

The second is based on competitive products. We will prioritize our investment decisions

around our competitive products, focusing on essential investment needed to maintain market leadership and respond to new opportunities. And we will also balance investing in the future, investing in future growth with ensuring financial soundness given our current level of cash generation. Thank you, and allow me to respond to the second part of your question about custom HBM.

Custom HBM is a high-performance AI system that requires customers to use the best HBM to maximize product efficiency.

Now, the needs for custom HBM are mainly driven by customer demand to utilize optimum HBM to maximize product utility in AI systems that demand very high performance.

Custom HBM is connected to GPU or ASIC at the bottom of the HBM package, Custom HBM is characterized by differentiation of the base die.

The base die connects to the GPU or ASIC at the bottom of the HBM package To control the HBM, we plan to supply differentiated HBM by adapting the base die and packaging technology to meet a wide range of customer needs.

As we announced recently, we have established TSMC, HBM4 development, and MOU for next-generation packaging technology cooperation.

So this end, we recently announced that we have signed an MOU with TSMC, which has state-of-the-art foundry process capabilities to develop HBM4 and collaborate on next-generation packaging technologies. We believe that this will help enable us to deliver a range of custom HBM products.

In addition to differentiated product preparation, order-based product supply is also spreading, so we plan to position it as a total AI memory provider that optimizes some business operations to effectively respond to customer needs.

In addition to preparing differentiated products, we also plan to optimize some of our business operations as order-based supply becomes more prevalent to position ourselves as a total AI memory provider that responds effectively to customer needs. Thank you very much. With that we conclude the earnings conference call for the first quarter of 2024. Thank you very much.