Samsung Elect Ltd

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2020 first quarter earnings results by Samsung Electronics. This conference will start with a presentation followed by a divisional Q&A session. If you have a question, please press star 1, that is star N1 on your phone during the Q&A. For cancellation, please press star 2, that is star N2 on your phone. Now we shall commence the presentation on the fiscal year 2019 first quarter earnings results by Samsung Electronics.

Good morning. This is Ben Seo from Investor Relations. Thank you for joining our earnings call for the first quarter of 2020. With me representing each of the business units are Mr. Hanjin Man, Senior Vice President of the Memory Marketing Team, Mr. Shindong Ho, Senior Vice President of the System of Assigned Marketing Team, Mr. Han Seung-hoon, Senior Vice President of the Foundry Marketing Team, Mr. Choi Kwon-young, Vice President of Samsung Display, Mr. Lee Jong-min, Vice President of IT and Mobile Business, and Mr. Kim Won-hee, Vice President of the Visual Display Business. In addition, Mr. Kang Tae-gyu from Investor Relations is present on this call as well. I would like to remind you that some of the statements we will be making today are forward-looking, based on the environment as we currently see it. And all such statements are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today's discussion. Before we start our normal review of quarterly results, I would like to address a topic on everybody's mind, the COVID-19 pandemic. COVID-19 has created unprecedented challenges for the global community. At this point, it is impossible to determine how big of an impact it will have or how long it will affect our society and economy, leading to a period of extremely heightened uncertainty. For our part, Samsung Electronics is doing everything we can to carry out our vital roles, taking care of our employees, supporting our customers, and helping affected communities at home and abroad. First and foremost, the health and safety of our employees and their families is our top priority. We launched regional response teams around the globe to provide our employees with timely and up-to-date information and resources based on the latest guidelines from local health authorities. We have restricted business travel, have strongly advised global employees to work from home where possible, and have closed some of our facilities to support social distancing efforts where necessary. In our operating facilities, we have implemented additional safeguards by mandating health screenings and temperature checks to enter our offices or facilities, which are disinfected on a frequent and regular basis. Also, we are providing masks to our employees at such facilities. Next, we are closely collaborating and sharing information with our key partners to jointly address problems this crisis may bring. And we are doing our utmost to ensure that our customers have reliable access to our products and services by flexibly managing operations across our global production and supply networks. For the global community, we are actively supporting governments and communities around the world in their relief efforts through financial contributions and donations of medical supplies and electronic devices, including products to help facilitate online education. In Korea, we provided a facility for use as a treatment center and offered the expertise of our engineers to improve the efficiency at mass manufacturing operations. Also, all employees at Samsung Electronics, via a company-wide initiative, are exploring ideas on how we can use our technologies and capabilities to further support those affected by COVID-19. In terms of financial performance, we delivered solid results in the first quarter despite this difficult environment. However, a surge in the number of cases of COVID-19 across the globe in March led to disruptions or shutdowns of our distribution and supply networks, offline stores, and manufacturing facilities, hurting production and sales amid lower demand. As a result, certain areas of the company, mainly our set businesses, will be under stress in the second quarter, and we expect uncertainties to continue into the second half of the year. We will keep monitoring the situation and based on our technology leadership and product competitiveness, respond quickly and flexibly to new developments to minimize impacts on our business and customers. In spite of the current challenges, we will continue to enhance the competitiveness of our core businesses and invest strategically in R&D in order to emerge from the pandemic well positioned for future growth. Finally, we would like to express gratitude and pay respect to everyone working to combat this crisis. From all of us at Samsung, we wish good health to you and all those close to you. Now let's move on to our first quarter results. Total revenue in the first quarter was 55.3 trillion won, a decrease of 7.6% from the previous quarter, mainly due to weak seasonality for our display business and CE division, and partially due to the effects of COVID-19. Year on year, revenue increased by 5.6% due to higher demand for memory and other components related to mobile. Gross profit fell 0.8 trillion won quarter on quarter to 20.5 trillion won, while gross margin was slightly higher at 37.1%. SG&A expenses decreased by 0.1 trillion won quarter on quarter, led by a reduction in marketing costs. However, they increased as a percentage of sales. Operating profit was lower by 0.7 trillion won quarter-on-quarter to 6.4 trillion won, affected by the same factors that weighed on revenue, with a corresponding decrease in operating margin, even though memory earnings were higher. Year-on-year operating profit increased by 0.2 trillion won, with an improved product mix in the mobile business, and additional diversification of our customer base in mobile OLED. Foreign exchange movements had little effect on our overall operating profit in the quarter, as positives from a strong US dollar and euro against the one felt mainly in the component business were offset by weakness in currencies in major emerging markets. I will now briefly review the performance of each business unit. In the memory business, profits improved sequentially amid solid demand, primarily from server and PC, as well as steady demand from mobile. For system semiconductors, earnings rose due to an increased supply of mobile components to our major customers, while profits for foundry declined slightly due to lower high-performance computing demand from China. In the display business, mobile panel earnings decreased quarter-on-quarter amid weak seasonality and a reduction in sales in China due to COVID-19-related shutdowns. The large panel business recorded a narrower loss as smaller declines in the market price were more than offset by other factors. Mobile earnings grew quarter-on-quarter and year-on-year despite COVID-19-related weakening sales toward the end of the quarter due to an improved product mix with the launch of S20 flagship devices and efficient execution of marketing costs. The CE division recorded weaker results sequentially due to seasonality as well as early effects of COVID-19. Earnings in the TV business dipped year on year amid aggressive price competition, but the home appliance business improved its performance backed by strong sales of new premium products. Harman's results were affected by significant one-off costs related to the relocation of a European manufacturing plant. Next, I would like to share our business outlook. In the second quarter of 2020, while we expect memory earnings to remain solid, our overall earnings are likely to fall quarter on quarter due to a sharp increase in the impact of COVID-19 that will affect demand for several of our core products. For the component business, memory demand is forecast to remain solid for server and PC as more people work from home, but possibly slip from mobile. OLED earnings are likely to be weaker due to a stagnant smartphone market. In the set business, many of our key products are expected to see a significant drop in sales and profits due to shrinking demand related to COVID-19 and also store and plant closures around the globe. To address this, we will leverage our global production flexibility and supply networks while also strengthening our online sales capabilities. Harman earnings will remain soft due to temporary shutdowns of automotive plants globally, which are also due to COVID-19. In the second half, uncertainty levels are expected to remain high given the unknown duration of the pandemic and its effects. Considering this, we will flexibly respond to changes in demand and focus on optimizing resource allocation in the short term while continuing to strengthen semiconductor technology leadership and develop innovative set products for accelerated growth post COVID-19. For the component business, in memory, we will add to our technology leadership and cost competitiveness via node process migration while staying agile to changes in the market with flexible investments and product mix adjustments. In OIL-ED, we will actively address demand for new product releases and also expand our presence in new application areas such as foldables and IT devices. For the SET business, we will continue to develop leading products that will take consumer experiences to the next level. Mobile will strengthen its lineup by introducing new premium models and expanding offerings of 5G models for the mass market. Network will focus on developing technologies and enhancing global competencies to reinforce the 5G business. TE will efficiently execute marketing and promotional programs tailored to conditions in each country, and will work to expand sales of innovative products like micro-LED and 8K TVs, along with our new lifestyle offerings in the second half. Now I will address capital expenditures. CapEx in the first quarter was approximately $7.3 trillion, with $6 trillion allocated to semiconductor and $0.8 trillion to display. For memory, we are continuing expansion in our production sites and investment in node migrations as planned. In Foundry, investments are focused on expanding capacity of advanced EUV process nodes. Finally, I would like to address the first quarter dividend. Today, the Board of Directors approved a quarterly dividend of 354.1 for both common and preferred stock. Even though we expect to face challenging business environment in the second quarter, mainly in the set businesses, as more effects of the COVID-19 pandemic take hold, first quarter dividends will continue to be based on our current dividend schedule. I will now turn the conference call over to the gentlemen from each business unit to present first quarter performances and outlooks for the corresponding business segments. Thank you.

Good morning. This is Hanjin Man from the Memory Marketing team. In the first quarter, despite weak seasonality and effects of the spread of COVID-19, purchasing demand for overall applications remained solid. backed by demand from cloud applications resulting from an increase in remote working and online education and continued investment in 5G infrastructure. For DRAM, demand was solid from data centers, centering on cloud services, as the stay-at-home economy has expanded usage of online shopping and streaming services, among others. For mobile, even though set demand decreased due to effects of COVID-19 and seasonality. Related negatives were offset by rising demand from the ongoing trend toward high density in new products and major customers, and growing concerns over supply stability in the second half. For PC, the closure of some manufacturing sites had an impact on set bills, but overall demand remained steady thanks to a growing reliance on virtual meetings related to social distancing policies, and also because of the mentioned concerns over the stability of supply in the second half. In the quarter, we used our product mix flexibility to actively address upside demand from major customers, such as PC and server, enabling us to exceed our previous bid growth guidance. We have also increased our product competitiveness by expanding the sales portion of high density server products based on 16 gigabit and accelerating process migration for one wide nano products. Next, I will talk about the NAND market. For mobile, even though macro uncertainties weighed on demand, especially from set makers in China, demand for mobile memory overall was relatively solid due to wider adoption of high-density storage with more than 128 GB in major customers' products. For SSDs, demand for server SSDs keeps growing, mainly for data centers, alongside rising demand for high-volume content. For client SSDs, although set production at the beginning of the quarter was partially affected by a drop in utilization at ODMs due to COVID-19, Utilization recovered at the end of the quarter and propped up purchasing demand to an extent. We actively addressed demand for high-value-added server SSD focusing on data centers. We also improved our profits by enhancing cost competitiveness via increased migration to fifth-generation VNAND. Next, I'd like to talk about the second quarter outlook. For DRAM, We expect demand to remain firm across all applications, despite a likely continuation of weakened consumer confidence related to the worldwide pandemic. Specifically, the rapid rise in the number of people working from home relying on online education and using streaming services is likely to create robust growth in demand from server, while that for PCs is expected to remain steady. For mobile, however, We expect that demand to stay highly uncertain amid soft consumer confidence and considering characteristics of the mobile market, which include a high offline portion of sales. We will flexibly manage our product mix to align with changes in demand with a particular focus on growing demand from server. Also, we will strengthen our cost competitiveness by expanding technology migration. In the NAND market, as is the case for DRAM, there will be impacts from a decrease in smartphone set demand. These effects, however, will be offset by growing demand for SSD. So we expect the overall NAND demand to continue to grow. In color, demand for video content has accelerated due to social distancing policies. And demand for server SSD is expected to keep rising. as data centers work to support various high-definition content more reliably. We will focus on expanding demand for high-density, high-value-added server SSD above 2 terabytes, while continuing to extend migration to fifth-generation VNAN to secure cost competitiveness. Next, I will talk about the prospects for the second half. In the memory industry, mobile demand has been most affected by COVID-19, and any recovery will depend on factors such as the containment of the pandemic, as well as the rate consumers in major countries regain confidence. Given the high uncertainties related to the virus and other macro factors, it is difficult to provide annual guidance at this time. However, even as such uncertainties persist, Overall conditions in the memory industry are likely to be favorable due to server and PC demand related to supplying a faster and more reliable cloud service experience. If COVID-19 persists in the longer term, there are risks that demand may further decline for overall applications, including server. However, in this case, even in this case, Chances of sudden market fluctuations are likely limited by possible impact on supply as due to factors such as delays in equipment procurement. Despite these unexpected challenges, the recent digital transformation trend is likely to accelerate further in the mid to long term as a new lifestyle based on online services quickens its spread throughout people's daily lives. As a result, Demand for high-end, high-performance memory will continue to grow. We will maintain a flexible product mix and investment approach based on market changes, while focusing on increasing sales of differentiated products such as mobile LPDDR5, GDDR6, and high-density server SSD, along with accelerating the conversion to cutting-edge products such as 1Z Nano DRAM and 6th Generation Green Ant. Additionally, the recent two to three years have highlighted that rapid price fluctuations in the short term can result in significant negative effects on the stability of growth, not only for memory suppliers, but also for the IT industry as a whole. Thus, we are preparing for numerous scenarios, including ones where the COVID-19 crisis is prolonged or even ends early. and are actively utilizing previous market sensing data and our SEM strength to ensure we can satisfy customer demand, which can change rapidly in an uncertain environment. Moreover, as we announced in March, we are actively expanding our use of EUV and preparing to adopt a process in earnest for 1A nano DRAM in the low 14 nano range as planned. We believe the adoption of EUV is not just another means to reduce size, but rather a critical transition to break through technological barriers. Despite these unprecedented uncertainties in the market, we as a leading company will do our best to contribute to stable growth of our customers and the IT industry as a whole by continuous development and innovation of new technology alongside timely and sustainable investment with a view to the mid-to-long term. Thank you.