Sk Hynix Inc S/Gdr 144A

Good afternoon and evening. This is Park Sung Hwan, head of IR at SK Hynix. Welcome to the SK Hynix 2024 Second 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. All outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we'll now begin the SK Hynix earnings release conference call for second quarter 2024. Mr. Kim Se-ho will first present the earnings, followed by the company's future plans and market outlook, and a Q&A session with the attending executives. Good morning, everyone. Allow me to first introduce the company's performance for the second quarter of 2024. In the second quarter, AI memory product demand continued to hold very strong, while demand for conventional memory products also grew as customers tried to build inventory ahead of potential tightness in the future, which led to another quarter of meaningful price increase for both DRAM and NAND. As a result, our second quarter revenue reached 16.4 trillion won, an increase of 32% sequentially, and 125% year-on-year, marking the highest quarterly revenue in our company's history. DRAM saw a significant increase in sales of general server products, along with the expansion of HBM3e sales, leading to bid growth of low 20% sequentially above guidance of mid-10%. ASP rose mid-10% sequentially due to higher mix of premium products such as HBM and ServerDRAM, while prices rose across all products for three consecutive quarters. Particularly notable was HBM sales which drove overall revenue growth by growing over 80% from the previous quarter and over 250% year-on-year. For NAND, although sales of enterprise SSD and mobile products increased, total bid shipments decreased by low single digits sequentially due to reduction in sales of discrete products and client SSDs, where demand recovery remains relatively muted. Meanwhile, ASP increased by mid to high 10% as prices rose across all products. Due to revenue expansion from rising memory prices, higher mix of value added products, and favorable FX impacts, operating profit for the second quarter increased by 2.58 trillion won from the previous quarter to 5.47 trillion won, with an operating profit margin of 33%, up 10 percentage points from the previous quarter. Amidst rapid improvements of conventional DRAM profitability due to rising prices, the significant increase in sales of HBM3 products contributed to the growth in DRAM profits And margins also improved as a result of continuing ASB increases since fourth quarter of last year, expanded sales of enterprise SSDs, and ongoing focus on profit-oriented management. Depreciation and amortization expenses for the second quarter amounted to 3.12 trillion won, with sequential decline continuing due to reduced capital spending last year, EBITDA reached 8.59 trillion won, with an EBITDA margin of 52%. Non-operating loss net of gain for the second quarter was 0.42 trillion won, including net interest expense of 0.28 trillion won, and net foreign currency related loss of 0.6%. 0.16 trillion won. As a result, net pre-tax income was 5.05 trillion won and net profit for the quarter was 4.12 trillion won and net profit margin was 25%. Consolidated cash and cash equivalents, including short-term investments, at the end of second quarter was 9.7 trillion won, down 0.6 trillion won from the end of previous quarter. Meanwhile, interest bearing debt was 25.2 trillion won, down 4.3 trillion won from a quarter ago. As a result, debt to equity and net debt to equity ratio recorded 42% and 26% respectively, meaningfully improving compared to a quarter ago. Next, I'll discuss market outlook. Continuing from last year, demand for AI memory products is seeing another year of growth. Along with HBM, demand for high density server DRAM and enterprise SD are also rising. An increase in contents for PC and smartphone is also expected in order to support AI features on the device. Although memory suppliers are increasing production utilization this year, they are prioritizing to support HBM and enterprise SSD, which are showing faster demand growth than conventional memory products. In particular, When memory suppliers allocate more wafer capacity for HBM, production capabilities for other DRAM products can be constrained as HBM consumes more wafer capacity due to larger die size. As a result, DRAM prices are increasing continuously when demand for traditional end markets has not yet fully recovered. In the second half of this year, Strong demand from AI servers are expected to continue, as well as gradual recovery in conventional markets with the launch of AI-enabled PC and mobile devices. Looking at demand by application, the demand recovery in the PC market is trending relatively weaker than initial expectations. High inflation and cost burden due to rising memory prices are impacting not only downstream demand, but also product lineups. Customers are preparing for the launch of high spec products with AI features to create new demand, while also responding to the divergent demand trends by offering more affordable low spec products. As a result, high spec devices are expected to drive memory demand in the second half And in the longer term, increase in memory content and wider adoption of low power memory are expected to support optimal operation of AI PCs. Similarly, the smartphone market also showed more moderate demand recovery in the first half, but the release of new AI enabled flagship and foldable phones are expected to help improve that demand in the back half of the year. Smartphones adopting AI functions require higher content than existing high-end models. The further releases of these products that are scheduled in the second half to next year are expected to drive demand. In the server market, AI servers are driving demand growth with exponential increase in workload needs, as generative AI evolved to multimodal models, and also with the ever-increasing AI-related spending from big tech companies. Request from customers for additional HBM supply this year, and efforts to expand COAS capacity in the supply chain, also indicate strong demand for AI servers. In addition, general purpose server demand is also expected to gradually improve along with the impending replacement cycle for data center servers that were invested six to seven years ago, especially with growing needs to adopt new energy efficient platforms. Now, I'll discuss our plans. Third quarter DRAM bid shipment is expected to grow by low single digit percent sequentially, driven by further expansion of our HBM sales volume, where strong demand is evident. NAND bid shipment is expected to decrease by mid single digit percent sequentially, despite increase in ESSD sales volume, given yet soft end demand in conventional applications and relatively high customers' inventory. Net revenue growth, however, is expected to continue with rising prices and optimized product mix. HBM3 sales increased significantly in the second quarter as demand gained momentum. In the third quarter, HBM3e bid shipments are expected to be greater than that of HBM3, resulting in HBM3e accounting for more than half of total HBM sales volume this year. HBM3e 12 high product samples have already been shipped to major customers. and is on track to start mass production in this quarter, involving shipping to customers by fourth quarter. With a full product portfolio ranging from HBM2E to HBM3E 12 high products, we plan to maintain our competitive advantage in the HBM market. Our DDR5 products have been successful in securing early market leadership with stable technology and quality since first generation products. Currently, we are the sole supplier in the industry offering two 56 gigabyte products, maintaining our leadership of DDR5 products. In the second half of the year, We are planning to release 32 gigabit DDR5-based high-density server DRAM, as well as MCR-DIMM, which offers superior bandwidth compared to existing RDIMM to target high-performance computing market. We're closely collaborating with major server companies to successfully launch products that satisfy customers' requirements. For NAND, we achieved notable results in terms of revenue and profitability in the second quarter. We are planning to focus more on strengthening product mix and availability of product lineups for future improvement. We are currently expanding sales of high-density enterprise SSDs, where demand is increasing, and we are also raising production utilization for some of our NAND fabs to support growing demand. With the demand increase for enterprise SSDs this year, we have increased our enterprise SSD sales by 50% in the second quarter compared to previous quarter, and we expect our annual ESSD sales to grow by nearly four times compared that of last year. We plan to leave the market in the second half of the year with 60 terabyte ESSD, the only available ultra-high density product in the industry. We also plan to release 128TB enterprise SSDs in the beginning of next year to maintain our continued edge in the ultra-high density eSSD market. In addition, we plan to support upcoming AIPC demand by offering high performance and low power PCIe Gen5 client SSD that was developed in June. Construction for M15x, which was recently decided to support the growing demand for AI memory, as well as Yongin Cluster, which will be our next generation production site, is progressing as planned. Amid increasing infrastructure investment compared to past years, investment needs are also rising to meet demand of conventional DRAM as well as HBM, which requires more wafer capacity than regular DRAM. Therefore, this year's CAPEX level is expected to be higher than what we expected in the beginning of the year. Nonetheless, Our investment plans will be prudently decided based on end demand and profitability, and will be executed within the generated operating cash flow. We will continue to pursue financial soundness by executing investments efficiently, and this quarter's meaningful reduction in debt levels was in line with these efforts. Next, let me share our ESG management activities and performance. We issued sustainable report 2024, highlighting our ESG management activities and achievements during the year of 2023, as well as future commitments. In 2023, We achieved company-wide renewable electricity adoption rate of 30% level for the second consecutive year. Also, we received international standard certifications from the British Standards Institution for our compliance and anti-bribery management system based on our compliance framework. These certifications recognize our achievements in complying with domestic and international standards and proactive prevention of related risks. This quarter, we announced a joint declaration for greenhouse gas reduction with 28 members of the ECHO Alliance, composed of material component equipment suppliers. The greenhouse gas emissions of the participating companies account for approximately 50% of our Scope 3 emissions from purchased raw materials last year. We plan to implement various collaboration programs such as operating ESG funds and participating in government supported renewable energy projects to support our partners in achieving their greenhouse gas reduction targets. Thank you. With that, we are now ready to take your questions.

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

Yes, good morning and thanks for taking my question. You commented earlier on having seen some upside for conventional server DRAM demand. And I think we've seen the same in terms of factual server builds downstream. How did you see this translating into server DRAM demand upside on your side? Could you effectively quantify it versus what we expected earlier? And if we look at non-HBM server DRAM bid demand growth, could you quantify this as well for your expectations for 2024 and your initial view for 2025? Thanks.