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 second quarter earnings research by Samsung Electronics. This conference will start with a presentation followed by a Q&A session. If you have a question, please press star one, that is star and one on your phone during the Q&A. For cancellation, please press star two, that is star and two on your phone. Now we shall commence the presentation on the fiscal year 2020 second quarter earnings results by Samsung Electronics.

Good morning. This is Ben Seo from Investor Relations. Thank you for joining our earnings call for the second 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 LSI Marketing Team, Mr. Han Seung-hoon, Senior Vice President of the Foundry Marketing Team, Mr. Choi Geon-young, Vice President of Samsung Display, Mr. Lee Jong-min, Vice President of the 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. We began the second quarter amid strong headwinds. COVID-19 was declared a pandemic in March, and started to spread rapidly across the globe in April. This stifled demand and caused closures or slowdowns at production sites and stores for our key products. We have responded to this pandemic from its onset with a wide range of timely and effective measures to keep the health and safety of our employees with our top priority. In addition, we actively managed to differentiate managed our differentiated global supply chain to ensure customers have reliable access to our products and services. And we did our utmost to minimize impacts of COVID-19 through efficient cost execution and by strengthening our online sales channels. These efforts to overcome the unprecedented challenges, along with a partial demand recovery from gradual reopening of the global economy starting in May, were behind our solid earnings performance in the quarter. I would like to thank our employees, partners, and customers for their incredible contributions and support in such a difficult environment. Now let's move on to the second quarter results. Total revenue in the quarter was $53 trillion, a 4.3% decrease quarter on quarter. Although memory revenue increased due to solid demand from data centers and PCs, Some key set products, such as smartphones, recorded weaker results due to COVID-19. For similar reasons, total revenue also declined on a year-on-year basis by 5.6%. Despite the revenue decline, gross profit increased sequentially by $0.5 trillion to $21.1 trillion, led by process migration-related cost reductions in memory. Accordingly, gross margin increased by 2.7 percentage points to 39.8%. STNA expenses decreased by 1.2 trillion won or approximately one percentage point as a percent of sales compared to the last quarter due to enhanced cost efficiency that included a reduction in marketing costs. Amid the global pandemic, Operating profit totaled $8.1 trillion, up $1.7 trillion sequentially, mainly due to improved memory profitability, a one-off gain in the display business, and strong seasonality for home appliances. Operating margin improved significantly to 15.4%. Our set business outperformed market expectations due to a quicker than anticipated demand recovery efficient response measures utilizing our global supply chain management infrastructure, and cost reduction efforts. Operating profit and operating margin also improved year on year, led by higher profitability in memory and efficient cost management in the set business. I will now briefly review the performance of each business unit. In the memory business, earnings improvement was mainly driven by a solid increase in demand from data centers and PCs. Our NAND bit growth, however, was below market due to weak mobile demand and also due to an inability to fulfill demand in some application areas. System LSI saw its earnings decline with sluggish demand from mobile applications, but Foundry improved its performance thanks to a partial recovery in customer demand. In display, Mobile panel earnings grew quarter-on-quarter on the back of a one-off gain despite weaker smartphone demand. In the large panel business, rising monitor sales helped overcome weaker TV demand to slightly narrow the business's loss. For the mobile business, smartphone shipments and sales softened sequentially as COVID-19 suppressed demand. However, we managed to maintain solid profitability via efficient cost execution, which included a reduction in marketing and other costs. For the CE division, earnings improved quarter on quarter thanks to seasonal growth in sales of air conditioners and dryers, an improved product mix led by premium TVs, including QLED models, and enhanced operational efficiency. Harman's operating loss continued due to an unfavorable environment in the global automotive industry, even though demand for customer products started to recover. Regarding currency effects, a strong U.S. dollar against the Korean won in the second quarter had a positive effect on operating profit, mainly in the component business. But the overall effects were offset by negatives in the set business, caused by significant weakness in currencies of some of our major emerging markets against the Korean won. CapEx in the second quarter was 9.8 trillion won with 8.6 trillion won allocated to semiconductor and 0.8 trillion won to display. The cumulative total for the first half of the year was 17.1 trillion won with 14.7 trillion won allocated to semiconductor and 1.6 trillion won to display. For memory, we invested mainly in equipment for process migration and capacity expansion to address anticipated future demand. For foundry, investment focused on capacity expansions for 5 and 8 nanometer to respond to customer demand for advanced process nodes. Next, I would like to share our business outlook. In the second half of 2020, that demand is forecast to recover gradually, although ongoing uncertainties related to COVID-19 and intense industry competition will remain risk factors. However, given the currently solid set demand, we are focusing on our global supply chain management capabilities to ensure timely supply to our customers. For memory, Mobile and graphic demand is expected to recover, mainly driven by the launch of new smartphone models and game consoles. Considering the market situation, we will maintain flexibility in our investments and adjust product mix to account for supply-demand dynamics in each application area, while also considering inventory levels and investment strategies at major customers, including data centers. We will also bolster our technology and cost competitiveness by enhancing leadership in node migration and accelerating the shift toward the EUV processes. System semiconductors will focus on expanding sales of products, including and relating to high resolution sensors, 5G SOCs, and GPUs. For display, mobile panel will work to boost profitability by actively addressing demand from product launches by major customers. However, we expect our performance to improve mainly in the fourth quarter as market recovery in the third quarter is likely to center on mass market models. The large panel business will fully support customer demand this year while also accelerating development of QD display products. The mobile business will launch flagship models such as Galaxy Note and Galaxy Fold and expand sales of mid to low-end models while also seeking to improve profitability. However, with a gradual recovery in demand, competition is also expected to intensify. For the network business, we will continue to explore new business opportunities for future growth. Consumer electronics will remain focused on enhancing profitability during the period of strong seasonality by expanding sales of premium products such as QLED TVs and bespoke appliances, and by implementing efficient marketing and promotional activities. Harman's earnings are likely to pick up as the automotive industry recovers and consumer audio sales grow. Along with our pursuit of financial achievements, we remain committed to creating environmental and social value to support sustainable growth and to communicating transparently with our shareholders on ESG issues. As part of such efforts, our sustainability report 2019 disclosed our actions on climate-related issues based on the TCFD framework for the first time. And we enhanced this disclosure in the 2020 report published in June by consolidating the information in a more structured manner in the climate actions chapter. I would like to add that as of 2019, 92% of the electricity used in our sites in the United States, Europe, and China was generated by renewable sources, and we are well on our way to achieving the target of 100% by the end of this year, a goal we announced in June of 2018. In our 2020 sustainability report, we included SASB standards to share our actions and achievements in each SASB sustainable management category. On another front, our smart factory support program has provided innovative manufacturing technologies and know-how to more than 2,000 SMEs since its launch in 2015. As we mentioned in our previous earnings call, Samsung's help in the first half of the year also included engaging mask manufacturing companies at home and abroad to boost productivity and output amid the global pandemic. We will continue to strengthen communications with our investors to form a common understanding on issues related to sustainable management. And we will also continue to carry out our management philosophy of devoting our human resources and technology to contribute to a better global society. Finally, I would like to address the second quarter dividend. Today, the Board of Directors approved a quarterly dividend of 354.1 for both common and preferred stock. The total amount of payout is the same as the first quarter, which is 2.4 trillion won, one fourth of the planned annual total of 9.6 trillion won. The company's management and employees have focused on overcoming the many challenges brought on by COVID-19. And as a result, our operations are currently running at nearly normalized levels. That said, we are still facing significant uncertainties as the global number of confirmed new COVID-19 cases are still setting daily records. Samsung Electronics will continue to stay abreast of the situation work to ensure the safety of our employees, and deliver high-quality products and services to our customers. Amid the challenges, we are looking ahead to the post-pandemic world, preparing to secure future growth and address changes in society and the economy alike. We will continue our investments to boost competitiveness in key businesses such as semiconductor, display, and smartphone, and will develop technologies in emerging areas, including AI, 5G, software, and automotive applications. I will now turn the conference call over to the gentlemen from each business unit to present second quarter performances and outlooks for their corresponding business segments. First, we will start with the memory business.

Good morning. This is Hanjin Ma from the memory marketing team. In the second quarter, on the continuing impacts of COVID-19, mobile sales were relatively weak. The cloud memory demand remained robust due to an increase in the number of people working and studying at home. For DRAM, server demand increased mainly for data centers based on cloud demand since the first quarter from the booming staying at home economy, which encompasses video conferencing and online activities to name a few. In mobile, on top of weak seasonality, demand was slow due to ongoing impacts of COVID-19, such as lockdowns in the United States, India, and other parts of the world. For PC, as effects of closures of some manufacturing sites in the first quarter dissipated from the second quarter, set bills increased and demand stayed solid, centering on low-end laptops as more people worked and studied from home. For graphics, overall demand was strong despite seasonality, thanks to a boom in graphics card sales and rising demand for HBM, mainly from data centers. Despite the uncertainties, such as persisting COVID-19, we exceeded bid guidance for the quarter by actively responding to demand from major customers and by leveraging our product mix flexibility according to market conditions. Next, I will talk about the NAND market. For server, SSD demand continued to increase thanks to the release of new services mainly by U.S. data centers and the expansion of demand for remote services by Chinese companies and a surge in SNS usage overall. On the other hand, in mobile, prolonged effects of COVID-19, such as an extension of the lockdown in India, delayed the recovery of consumer sentiment throughout the overall mobile market. Under these circumstances, the share of low-end to mid-range products in the market has expanded and mobile demand has weakened as a result. For client SSD, demand was strong due to an increase in set bills mainly for low to mid-price laptops, thanks to a significant rise in remote activities as well as demand for the last quarter that was pushed into the second quarter by COVID-19. On top of weak mobile demand, which accounts for a high portion of our sales, our shipments decreased as we were temporarily unable to meet all demand in some applications. Yet we improved our profits by expanding migration to fifth-generation VNAT. Next, let's talk about the outlook for the second half. In the case of DRAM, for mobile, under continuing impacts of COVID-19, Although there are still remaining issues like the possibility of delayed rate of increase in content per box and the geopolitical issues like trade conflicts, we expect demand to pick up centering on the low to mid-price segments in newly launched smartphones. For server, basically stay-at-home demand is likely to stay solid in the second half. However, increased demand in the first half, primarily from major customers, was partly attributable to inventory build-ups, so customers' inventory level has risen. And since there still remains uncertainty around COVID-19 as to whether it will be contained, we should keep a close eye on inventory and investment strategies as server customers, as well as developments regarding COVID-19. For PC, because companies are focusing IT budgets on infrastructure investments, desktop demand is expected to be slow. On the other hand, demand for low-end laptops for studying at home should be robust. For graphics, new game consoles slated to launch in the second half should increase both set shipments and content per box, leading to strong demand growth. In NAND, the situation is similar for mobile. Despite continuing uncertainties such as the lockdown in India and escalating trade conflicts, growth in low to mid-price set demand should lead a demand recovery. For Server SSD, demand is expected to remain strong for stay-at-home activities such as high-capacity, high-quality streaming. We will also check the effects on demand of increased inventory levels at customers. Client SSD is expected to decline because of weak desktop demand, but it is possible that content per box will grow until the end of this year, and the market will show some signs of a recovery. Moreover, newly launched game consoles will increase set shipments and probably have a positive effect on SSD demand. In 2020 thus far, COVID-19 has disrupted our lives and has led to some tragic results. Yet this year may also be remembered as an inflection point for technological and social trends around the world. The online presence and activities of governments, businesses, and educational institutions, which have taken off in earnest this year, is a new trend that will keep expanding. and the corresponding demand for memory for cloud and various IT devices should keep growing solidly. In addition, along with the establishment of 5G infrastructure, the expansion of next generation applications such as AI and autonomous cars implies memory will become increasingly important to advance the IT industry. As a result, We will focus on maintaining flexibility in our product mix and investment, considering demand forecast for each application. For DRAM, not only will we establish mass production system with EUV and conduct sampling for large customers in the second half, we will also strengthen our technological leadership by enhancing related technologies, such as development of high-sensitive, high-performance photo resist. And for NAND, We will focus on bolstering our cost competitiveness with differentiated single-stack technical advantage while accelerating node migrations to sixth-generation Freenet. Thank you.