Samsung Elect Ltd

Good evening and good evening. Thank you all for joining this conference call. And now we will begin the conference start of Fast Career 2021 Second 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, Star N1 on your phone during the Q&A. For cancellation, please press Star 2, Star N2. Now we shall commence the presentation on the Fast Career 2021 second quarter earnings results by Samsung Electronics.

Welcome, everyone. This is Ben Seo from Investor Relations. Thank you for joining our earnings call for the second quarter of 2021. For additional details regarding our quarterly results, please refer to the earnings presentation, which is available on our IR website, at www.samsung.com slash global slash IR. On the call with me today representing each of the business units are EVP Hanjin Man representing memory, VP Cho Jang-ho for system OSI, SVP Han Seung-hoon for foundry, SVP Choi Geon-young for Samsung display, VP Kim Sung-gu for IT and mobile, and VP Song Won-joon for visual display. In addition, VP Kang Tae-kyu 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 present our quarterly results, let me first address the second quarter dividend. Today, the Board of Directors approved a quarterly dividend of 361.1 per share for both common and preferred stock. The total payout for the second quarter is the same as it was for the first quarter, which is 2.45 trillion won, or one-fourth of the 2021 annual total of 9.8 trillion won, in accordance with the shareholder return policy we announced in January. The dividend will be paid in mid-August. Now I would like to present the results for the second quarter. Total revenue in the second quarter came in at 63.7 trillion won, down slightly sequentially, mainly due to lower smartphone sales amid seasonally weak demand and component supply shortages. However, we achieved a new all-time high for revenue in a respective quarter for the second quarter in a row, where our active response to server-led memory demand and the solid performance of premium home appliances led such results. Compared to the same period last year, revenue increased by 20.2%, mainly due to strong sales of memory, TVs, and digital appliances. Gross profit increased by $2.7 trillion sequentially to $26.6 trillion as a significant increase in contributions from the component business led by migration-enabled cost reductions in memory more than offset declines in the IM division that were mainly due to disruptions in smartphone production. Gross margin grew considerably to 41.8% with improvement across all of our businesses, especially in the semiconductor business. SG&A expenses came in at $14.1 trillion, down slightly quarter-on-quarter and also as a percentage of sales, largely due to a reduction in advertising and promotional costs. Operating profit increased by $3.2 trillion quarter-on-quarter to $12.6 trillion as market conditions improved in the memory market, operations normalized at the Austin foundry fab, and as a one-off gain and price increases lifted profits in the display business. Our finished product businesses also contributed to the strong results, maintaining solid profitability by effectively managing our global supply chain amid strong headwinds such as component supply shortages. Operating margin increased considerably to 19.7%. On a year-on-year basis, both operating profit and operating margin increased with improvement in all of our business units. I will now briefly review the results of each business unit. For the DS division, results improved significantly both quarter-on-quarter and year-on-year. In memory, bid shipments surpassed bid gross guidance, price increases exceeded forecasts, And we also improved our cost competitiveness. Profits in system semiconductors increased as production normalized at the Austin Fab. In display, earnings improved quarter on quarter despite weak seasonality for mobile products, primarily due to a one-off gain as well as an increase in overall ASP. For the mobile business, sales declined sequentially, influenced by a component supply shortage and COVID-19 related production disruptions amid weak seasonality. However, we secured solid profitability by effectively managing our global supply chain capabilities, improving our cost structure and marketing efficiency, and with another quarter of solid contributions from tablets and wearables. The CE division once again generated strong results by expanding sales of premium products AMID A CONTINUATION OF PENT UP DEMAND. REGARDING CURRENCY EFFECTS, SLIGHT STRENGTH IN THE U.S. DOLLAR, THE EURO, AND MAJOR EMERGING CURRENCIES AGAINST THE KOREAN ONE POSITIVELY AFFECTED BOTH THE COMPONENT AND FINISHED PRODUCT BUSINESSES WITH A COMBINED EFFECT OF APPROXIMATELY 200 BILLION WON TO OPERATING PROFIT WHEN COMPARED TO THE PREVIOUS QUARTER. Next, I would like to share our business outlook for the second half of the year. We expect to see favorable overall market conditions in the component business, and we will focus on enhancing our leadership position in both products and technology. As for our finished product businesses, we aim to keep profitability at a solid level by strengthening our leadership and lineups in the premium segment. However, risks of continued disruptions in the component supply and uncertainties related to COVID-19 are likely to persist. From memory, we expect continued demand growth from server and mobile, propelled respectively by rising adoption of a new CPU and releases of new smartphones by major customers. We will improve our market leadership with bit growth driven from our accelerated migration to 15 nanometer DRAM and 6th generation VNAND, and by expanding the application of EUV in our DRAM production. In system semiconductors, we expect demand for system LSI products to increase as we enter strong seasonality for smartphones. And Foundry will accelerate growth by expanding Pyeongtaek S5 line capacity and by adjusting pricing to enable future investment cycles. For display, we expect the mobile panel business to improve its performance as major customers launch new flagship models. And we will focus on finalizing the mass production process for QD display to enable product shipments to start within the year. In the mobile businesses, we will target achieving solid revenue and profits by boosting the competitiveness of our smartphone lineup with the launch of greatly enhanced foldable models and the expansion of our mass market 5G models. We will also continue to grow sales of our Galaxy ecosystem lineup. For network, we will drive revenue growth in our key markets, including North America, and continue to explore new opportunities in Europe and other parts of the world. In the CE division, we will solidify our leadership in the premium TV market by expanding sales of high-value products, such as Nail QLED and Super Big TVs. We also aim to increase DA revenue by bolstering global sales of our bespoke product line. Let me now move on to capital expenditures. CapEx in the second quarter was 13.6 trillion won with 12.5 trillion won invested in semiconductor and 0.6 trillion won in display. The cumulative total for the first half of the year was 23.3 trillion won with 20.9 trillion won in semiconductor and 1.4 trillion won in display. Memory investments concentrated on addressing growing future demand via capacity expansions and process migrations, including to 15-nanometer DRAM and 128-layer VNAND in Pyeongtaek and Xi'an. Foundry investments focused on capacity expansions for advanced processes such as 5-nanometer EUV to respond to customer demand. Finally, I would like to share some of our activities and key achievements in sustainability management. First, the board of directors today approved to reorganize the governance committee into the sustainability committee. The new committee, through its increased duties, will strengthen the board's role and responsibility in sustainability management. The sustainability committee will assume the roles of the governance committee, which include practicing corporate social responsibilities and enhancing shareholder value. In addition, the committee will also address a broad range of ESG issues, including climate change, the circular economy, labor and human rights, diversity and inclusion, supply chain, and ethical management, thus setting the direction for and monitoring the progress of the company's sustainability management. The committee will be composed entirely of independent directors to ensure its independence and will also receive reports on the main issues discussed at the Sustainability Council, a company-wide consultative body. The Sustainability Committee connects sustainability management throughout the company from each business unit right through to the Board of Directors, advancing our goal of making sustainability an inherent part of our business. Next, I will brief you on the key takeaways from our 2021 Sustainability Report released in June. We actively pursued company-wide initiatives to strengthen the sustainability of our products and services, including programs such as Galaxy Upcycling and the Samsung Global Gold Campaign in the IM Division, the use of eco-packaging in the SEA Division, and our commitment to increase energy efficiency of products in the DS division. We were recognized by the UK's Carbon Trust for our management of water use at the Hwaseong campus, and we received zero waste to landfill validation of gold level or above for all of our semiconductor sites. The sustainability report also summarizes our responses to COVID-19 and our commitment to our employees partners, customers, and communities, including our efforts through various partner support programs. For more details, the report is available on our IR website in the sustainability reports section. Our company will continue to promote sustainability management and transparently communicate our direction and achievements with our stakeholders. 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 segment. We will start with the memory business. Thank you.

Good morning. This is Hanjin Man from the Memory Global Sales and Marketing Office. In the second quarter, our shipments exceeded our bid guidance due to strong memory demand mainly from server and PC. Moreover, higher than expected increases in ASP for both DRAM and NAND combined with cost reductions from expanding the cutting edge portion of processes contributed to a significant improvement in our results. In the case of DRAM, mobile demand was affected somewhat in the short term by the spread of COVID-19 in major smartphone producing countries as well as by manufacturers' production disruptions caused by component supply issues. On the other hand, for servers, on top of recovering investment sentiment in enterprise, new set bills at OEMs have increased due to the release of a new CPU, and demand from data centers stayed strong backed by solid demand for cloud. In addition, a continuation of the stay-at-home trend kept PC demand at a strong level, while demand for Chromebooks for education has also increased ahead of a new semester. Consumer products such as TVs and set-top boxes also showed robust set demand, and the move toward high density has accelerated with the spread of 4K content and streaming trends. Demand in the graphics market has been strong, going to increase demand related to cryptocurrencies. And growing demand for graphic cards for gaming PCs is a byproduct of widespread home entertainment usage. Thus, the market for game consoles showed robust demand, backed by initial sales successes and launches of new titles. By preemptively adjusting our product mix, we actively addressed strong demand from the server and PC markets, and exceeded our previous speed growth guidance. Next, I'd like to talk about NAND. For mobile, the set bill growth was not significant due to component supply issues, but demand was solid from the high density trend centering on major customers. For server SSDs, demand for 8 terabyte and 16 terabyte products was strong thanks to increased server investment and high-density trend at major data center companies. Demand for client SSDs also stayed robust, primarily from laptops, as online activities such as remote working and education continued. We achieved shipments that exceeded our bid guidance. By actively addressing increasing demand for server SSDs and strong demand for mobile and client SSDs, while expanding the sales portion of 128-layer sixth-generation VNAND. Now let's move on to the outlook for the second half. The market view for the second half is a mix of concerns and expectations. The spread of variant COVID strains requires urgent attention, and supply issues of some non-memory chips are likely to persist. and various geopolitical issues escalating, all of which are risk factors to market demand. Positively, however, we expect the fundamentals of market demand to be robust. First of all, in the case of mobile, along with the high density trend for memory related to the expansion of 5G, launches of new models from major manufacturers bode well for demand. Furthermore, for servers, we expect enterprise investment sentiment to recover with the expansion of vaccine supply combined with economic stimuli. We expect server demand to be strong with the rising adoption of the new CPU alongside the ongoing trend toward high density. In the PC market, due to prolonged effects of COVID-19, we are witnessing fundamental changes in the way people buy and use their PCs. With the proliferation of a hybrid work model, we expect enterprise demand to be strong, while replacement demand should be solid, driven by the release of a new OS. On the other hand, our inventory has fallen to a substantially low level due to the impacts of our higher than expected shipments in the last quarter. In this situation, we will maintain our leading position in cost competitiveness while generating big growth by expanding migration and production of our main nodes, such as 15 nano DRAM and 128 layer VNAND. Moreover, amidst such uncertain market conditions, we are working to preemptively identify various issues that can affect customer demand, such as issues in the supply chain. Accordingly, we are flexibly managing our product mix to better meet market demand. Also, we are securing additional capabilities to stably supply our products in a timely manner, even amid demand fluctuations, by extending the range of our demand forecast for each application and by using big data to sharpen our own predictive tools. Furthermore, our 14-hour DRAM is the smallest design rule in the industry's 14-hour class. We will mass produce this product in the second half by applying EUV to five layers. In addition, our preparation is going smoothly for mass production of consumer SSD, which adopts double-stack 176-layer seventh-generation VNN technology. And we expect to start mass production in the second half as planned. We, as the leading company in comprehensive memory solutions, will spearhead the establishment of the next generation ecosystem of the IT industry. Thank you.