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 out of fiscal year 2020 third quarter earnings results by Samsung Electronics. The conference will start with a presentation followed by a divisional Q&A session. If you have a question, please press start one, that is start anyone on your phone during the Q&A. For cancellation, please press star 2, that is star and 2, on your phone. Now we shall commence the presentation on the Fiscal Year 2020 Third Quarter Earnings Results by Samsung Electronics.

Good morning. This is Ben Seo from Investor Relations. Thank you for joining our earnings call for the third quarter of 2020. With me representing each of the business units are Mr. Hanjin Man, Senior Vice President of the Memory Marketing Team, Mr. Shin Dongho, Senior Vice President of the System and Assign Marketing Team, Mr. Han Seunghoon, Senior Vice President of the Foundry Marketing Team, Mr. Choi Beonyoung, Vice President of Samsung Display, Mr. Lee Jongmin, Vice President of the IT and Mobile Business, and Mr. Kim Wonhee, Vice President of the Visual Display Business. In addition, Mr. Kang Taegyu 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 begin, and with great sadness, I would like to take a moment to reflect on our chairman, Connie Lee, who passed away on October 25th with his family at his side. Chairman Lee was a true visionary who drove the historic transformation of Samsung from a relatively small electronics company into the global IT leader that we are today. In particular, his new management initiative in 1993 was the driving force behind his vision of delivering the best technology to help advance global society. All of us at Samsung will cherish his memory and everlasting legacy. With that, I would like to discuss the results for the third quarter. Today is our third earnings call after the COVID-19 pandemic started. And unfortunately, its effects are still being felt heavily around the globe. As we continue to keep our employees' health as our top priority, the company's management and employees are also focused on overcoming challenges to ensure that we meet our customers' needs, even under difficult-to-predict market conditions. This readiness has helped us achieve our highest-ever quarterly revenue and our performance to exceed market expectations. Total revenue in the quarter was 67 trillion won, a 26.4 percent quarter-on-quarter increase. Demand for consumer products was much stronger than expected, and timely responses utilizing our global supply chain management capabilities were the key factor for the significant increase in sales. A recovery in component demand in the mobile segment also contributed to the gain. On a year-on-year basis, total revenue grew 8% on the back of sales performances of multiple key products. Gross profit increased 5.9 trillion won sequentially to 27 trillion won led by the mobile business and C division and gross margin grew slightly to 40.3%. Both gross profit and gross margin also improved substantially year on year. SG&A expenses increased as a significant rise in sales resulted in higher marketing and other expenses. As a percentage of sales, however, they declined 2.5 percentage points to 21.9% due to efficient cost execution. Operating profit totaled 12.4 trillion won of 4.2 trillion won quarter on quarter due to the dramatic revenue increase as well as thorough cost management efforts. Operating margin improved considerably to 18.4 percent. On a year-on-year basis, both operating profit and operating margin increased sharply, backed by an improved environment for the memory business and strong sales of consumer products. I will now briefly review the results for each business unit. The memory business performed well despite a decline in ASP with shipments exceeding prior guidance thanks to solid mobile and PC demand and a continuation of cost improvements. System semiconductor earnings grew as demand improved for major mobile components for system LSI. and orders increased from foundry customers for HPC and other products. In display, earnings improved sequentially with growing sales of mobile panels for customers' newly launched products and an improved supply and demand environment for large panels. On a year-on-year basis, however, profits declined due to a later-than-usual launch of new smartphone models by a major customer. In the mobile business, earnings grew considerably quarter-on-quarter as a nearly 50 percent increase in smartphone sales, which included flagship models, resulted in a significant economy of scale advantage on top of profitability gains from efficient cost management. The CE division also improved its earnings markedly both quarter-on-quarter and year-on-year as sales of premium TVs and digital appliances increased sharply. we were able to respond effectively to this surge in demand using our leading global supply chain management capabilities. Regarding currency effects, a weak U.S. dollar and strong euro against the Korean won was positive for the IM and CE divisions, but negative for the component business, resulting in a net neutral position. Next, I would like to share our business outlook. In the fourth quarter, we expect overall profitability to decline due to intensifying competition in the mobile business and C division, alongside a continuation of soft demand from server customers. For memory, despite an increase in node process migration and solid demand for mobile and notebook PCs, we expect profitability to decline due to weak pricing in the server segment as customers continue to adjust inventory. And there will also be initial cost increases associated with the ramp up of our new lines. In system semiconductor, system LSI will start mass shipment of 5 nanometer 5G SOCs, while for foundry, HPC and mobile SOC customer orders are expected to increase. For display, mobile panel earnings should improve as we expect to see a significant quarter on quarter increase in sales. The large panel business will continue QD display preparations as planned, as it also fully addresses LCD demand. We expect mobile profitability to decline due to a decrease in smartphone sales, coupled with an increase in marketing costs in the upcoming seasonally competitive quarter. In CE, we anticipate seeing solid demand backed by strong year-end seasonality. However, profitability is likely to decrease due to increased competition and costs. Now let's move on to our outlook for 2021. Global demand is forecast to increase year-on-year, but uncertainties are unlikely to ease given the possibility of additional waves of the pandemic. The component business will focus on strengthening market leadership through next-generation node processes and timely investments. We believe there may be some risks regarding mobile inventory adjustment as a result of overlapping component demand from multiple customers that started at the end of the third quarter. We will continue to monitor this carefully. For the memory business, we will enhance market leadership by expanding node migrations and by flexibly adjusting our product mix. For investments, we will continue to adhere to our strategy to be ready to meet mid- to long-term demand while maintaining flexibility regarding near-term demand. System LSI will actively address the growing demand for 5G SOCs and high-resolution sensors by offering differentiated products. And Foundry will accelerate growth by expanding into new applications within HPC and other areas, as well as by attracting additional large customers. For display, the mobile panel business will work to improve earnings by leveraging our differentiated technologies and cost competitiveness. The large panel business will focus on successfully launching QD display. For the mobile and CE products, we will strive to improve profitability by further strengthening premium lineups and operational efficiency. On top of the above, the mobile business will expand its foldable and 5G smartphone offerings in an effort to increase sales and enhance profitability. The network business will strengthen its global business foundation by continuing to expand 5G commercialization and explore new business opportunities. PE will strive to sustain growth by expanding its premium lineup and strengthening its online and B2B businesses. Now I will address capital expenditures. Third quarter capex was 8.4 trillion won with 6.6 trillion won allocated to semiconductor and 1.5 trillion won to display. The cumulative total for this year as of the end of the third quarter is 25.5 trillion won with 21.3 trillion won allocated to semiconductor and 3.1 trillion won to display. We expect full year capex to reach approximately 35.2 trillion won with 28.9 trillion won allocated to semiconductor and 4.3 trillion won to display. As a reminder, the full year numbers are projections, and the actual figures may differ depending on factors such as market conditions and the timing of equipment deliveries. For the memory business, capex should exceed last year's total due to investments in node migrations and capacity expansions to address future demand. Foundry CapEx will increase year on year as we expand capacity, including for 5 nanometer EUV. Display investments will also increase, mainly for QD display capacity and new technological processes for mobile panels. Next, I would like to address the third quarter dividend. The Board of Directors today approved a quarterly dividend of 354.1 for both common and preferred stock. The total payout is the same as it was in the first and second quarters, which is 2.4 trillion won, or one-fourth of the planned annual total of 9.6 trillion won. In closing, let me share some updates in our sustainability management. Samsung Electronics believes water management is the first step in environmental protection at our sites and is an integral part of a manufacturer's management activities. For more than 10 years, we have committed to water management by focusing on the three Rs, reduce, reuse, and recycle, and by including water reduction as a performance indicator. On September 22nd, Samsung Electronics was recognized for such endeavors, achieving another first in the semiconductor industry. Our Hwasong campus earned a water footprint certification from Carbon Trust, a UK-based entity that recognizes eco-friendly organizations or products. The certification is given to an organization based on a comprehensive evaluation of water use and management over a three-year period. Next, I will address our activities over the past year regarding Cobalt for Development, an initiative to improve the living and working environment for communities involved with the artisanal cobalt mines in the Democratic Republic of Congo. Cobalt is a key component in the production of batteries for electronic devices and electric vehicles, and we are working to minimize the negative impacts that artisanal mining in Congo has on society and the environment, including human rights violations and environmental issues. After launching in September 2019 as a joint project between Samsung Electronics, the German Society for International Cooperation, Samsung SDI, BMW, and BASF, Cobalt for Development has reached out to and helped more than 1,800 people in the communities by providing new learning facilities and a wide range of educational programs. We will continue to support the initiative to improve access to education on human rights, the environment, and safety for the minors. On a separate note, Interbrand announced their best global brand list on October 20th, and our estimated brand value reached a new high of $62.3 billion. We are in the top five for the first time after having ascended to the sixth spot in 2017. Interbrand cited our rapid response to COVID-19 as well as our sustainability management activities as some of the factors that played a critical role in the growth of the Samsung brand. We will continue our efforts in sustainability management and will be sure to keep you updated. I will now turn the conference call over to the gentlemen from each business unit to present third quarter performances and outlooks for their corresponding business segments. Thank you.

Good morning. This is Hanjin Man from the memory marketing team. In the third quarter, server demand weakened somewhat relative to the strength it showed in the first half. But overall demand was higher than expected as mobile demand started to recover, mainly in the low to mid-priced segments. For DRAM, demand for mobile increased as strong seasonability This novelty and improved consumer confidence helped drive an increase in sales that centered on low to mid-price smartphones, while effects of 5G expansion and Huawei's urgent orders also contributed to the rise. For server, demand was weak, mainly from OEMs, while major customers utilized their inventories. Overall demand was relatively solid backed by Huawei's inventory buildup. For PC, along with strong demand for laptops such as Chromebooks, demand increased led by set bills ahead of seasonal events like Black Friday. Graphic demand increased as on top of strong seasonal effects, demand from gaming expanded due to increased game access related to the stay-at-home trend and accelerated production of new game consoles. We expanded sales to mobile applications by preemptively converting our product mix. And we actively responded to PC demand, mainly for laptops, linked with an ongoing expansion of the number of people working from home and learning online. As a result, we exceeded our previous speed growth guidance. Next, I'll talk about demand. For mobile, as was the case for DRAM, demand was strong, bolstered by launches of new models by major manufacturers, the recovery of consumer confidence in Huawei's urgent orders. For server, demand declined due to inventory adjustment at major customers related to the increased purchasing in the first half. For client SSD, demand was strong for low to mid-price laptops as more people walk and study from home, while demand for SSDs for new game consoles also increased significantly. Our bid growth exceeded that of the market due to increased shipments for overall applications thanks to our active responses to strong mobile demand. which includes demand from the inventory buildup at Huawei and that related to expanded sales of SSDs for new game consoles. Next, let's talk about the outlook for the fourth quarter. For DRAM, mobile build demand is likely to see another quarter of growth, mainly led by Chinese manufacturers, due to the release of new smartphones and the recovery of domestic demand in China. While for server, We expect demand to remain weak as customers continue to adjust inventory. For PC, we expect to see solid demand for low to mid-price laptops such as Chromebooks, but desktop demand will probably stay soft due to conservative IT investment from enterprises. For graphic, we expect demand for graphics cards to appear with the release of new higher performance GPUs while demand for new game consoles should stay solid. In the face of continued uncertainties, we will actively address rising demand from major mobile customers by optimizing our product mix. And we will continue to strengthen our cost competitiveness through a stable production ramp-up and timely sales of 1G nanometer DRAM. For NAND, in the fourth quarter, Along with signals of an economic recovery, such as improving economic indicators, we expect demand from mobile to increase, mainly led by Chinese mobile manufacturers. For server SSD, we expect demand to remain soft due to ongoing inventory adjustment in customers and effects of conservative CAPEX in major customers caused by prolonged COVID-19, which should result in a slight decline in prices. For client SSD, we believe demand will be robust backed by continuing demand for low to mid-price laptops while content per box should increase. We will actively respond to increasing demand in the client SSD and mobile markets and continue to expand sixth generation VNN conversion to enhance technology leadership and cost competitiveness. Now let's move to the outlook for 2021. First of all, I would like to ask you to understand that it is difficult to provide a detailed forecast given the current number of uncertainties, which include possibilities of a prolonged pandemic as well as numerous geopolitical issues. However, I can provide a general outlook. For mobile, bill demand, which has increased thus far in this fourth quarter, is likely to stay solid throughout the first half of next year as more low-end to mid-range smartphones adopt 5G technology. On the other hand, for server, we believe demand, which has been weighed on by inventory adjustments at customers in the second half, is highly likely to turn around in the first half of next year, influenced by impacts of a newly released CPU and the recovery of previously shrinking investment on top of healthy inventory levels. In this volatile market for overall applications, we believe that it is very important to quickly detect changes and respond accordingly. Therefore, while concentrating on flexibility in our product mix to increase responsiveness to changes in demand, we will keep adding to competitiveness by accelerating conversion to 1Gnm DRAM and 6th generation VNET. In addition, We will continue to develop next-generation products such as EUV-based 1A nano DRAM and seventh-generation VNAND to strengthen competitiveness for a post-pandemic era in newly growing markets such as AI and edge computing. Thank you.