Samsung Elect Ltd

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference out of fiscal year 2021, third quarter earnings exerted by Samsung Electronics. This conference will start with a presentation, followed by a divisional Q&A session. If you have a question, please press Start 1, that is, Start N1 on the phone during the Q&A. For cancellation, please press Start 2, that is, Start N2 on your phone. Now we shall commence the presentation on the fiscal year 2021 third quarter earnings results by Samsung Electronics.

Welcome, everyone. This is Ben Seo from Investor Relations. Thank you for joining our third quarter 2021 earnings call. For additional details regarding our quarterly results, please refer to our earnings presentation, which is available on our IR website, 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 LSI, SVP Han Seung Hun for foundry, SVP Choi Kwon Young for Samsung display, VP Kim Sung Goo for IT and mobile, and VP Song Won Joon for visual display. In addition, VP 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 present our quarterly results, let me first address the third 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 third quarter is the same as it was for the first and second quarters, 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-November. Now I would like to present the results for the third quarter. Despite numerous macro uncertainties in the third quarter, such as global supply chain issues and persistent effects of COVID-19, by actively leveraging our leading technology, outstanding product competitiveness, and differentiated global SCM capabilities, we once again delivered record results. Total revenue for the quarter was 74 trillion won, up 16.2% sequentially, with all of our major businesses seeing revenue growth, highlighted by solid sales of foldables and other smartphones, as well as increases in both memory shipments and OLED sales. We have set new records for total revenue in a respective quarter for three quarters in a row, and we expect that annual revenue will be well above the previous all-time mark set in 2018. Compared to last year's result, which was our previous all-time high for any quarter, revenue grew 10.5%, driven mainly by memory and OLED. Gross profit increased by $4.5 trillion sequentially to $31.1 trillion on the back of cost reductions in memory mainly from advanced process migrations. There was also a slight rise in gross margin. SG&A expenses came in at $15.3 trillion of $1.2 trillion quarter-on-quarter, primarily due to an increase in advertising and promotional costs. As a percentage of sales, however, they declined by 1.4 percentage points as sales significantly outgrew the SG&A increase. Operating profit increased by 3.3 trillion won quarter-on-quarter to 15.8 trillion won, our second highest total ever, as the component business improved significantly backed by continued favorable conditions in the memory market and robust sales in the foundry and DP businesses. Our finished product businesses also delivered solid results. Operating margin improved by 1.6 percentage points. On a year-on-year basis, both operating profit and operating margin increased substantially, propelled by our component businesses. I will now briefly review the results of each business unit. For memory, results improved significantly as we actively addressed customer demand, which led to record quarterly bid shipment as well as the second highest ever revenue for DRAM. Also, costs were reduced by expanding sales of 15 nanometer DRAM and 128 layer VNAND. In foundry, results improved backed by strong demand from our global customers. In display, mobile panel earnings improved sequentially on effects of product launches by major smartphone customers. However, the large panel business continued to post losses mainly due to declines in LCD For the mobile business, results improved sequentially thanks to expanded sales of our new foldable models and low to mid-range smartphones, along with sales growth of products in the device ecosystem lineup. For network, we expanded our business overseas, including in North America and Japan, as we continued to address 5G network demand in the domestic market as well. In the C division, Despite the strong expansion of our premium TV and bespoke lineups, profitability declined due to rising material and logistics costs. Regarding currency effects, strength in most major currencies against the Korean won, especially the U.S. dollar, had a positive effect on the component business, in particular, with a combined impact of approximately 800 billion won on our operating profit compared to the previous quarter. Next, I would like to share our business outlook. In the fourth quarter, we will focus on actively meeting demand for memory and system semiconductors, although component shortages at some customers may have an effect. We will also maintain solid profitability in our finished product businesses by strengthening our leadership and lineups in the premium segment. For memory, there may be increased demand risk due to longer than expected component supply issues, but we will actively address strong fundamental demand for servers resulting from increased investments by major IT companies. For system semiconductors, we expect to increase supply of SOCs and related products for mobile phones slated for launch in 2022. And for foundry, we expect results to improve considerably as we aggressively address demand for advanced processes. For display, we expect the mobile panel business to achieve solid results backed by steady demand for smartphones and expanded sales in new applications. In the large panel business, we are on track to begin mass production of QD display as planned, but we expect losses to continue due to price declines in LCD panels. In the mobile business, we aim to secure robust profitability by expanding sales of premium products such as foldables, actively targeting replacement demand with expanded sales of low- to mid-range 5G smartphones, and increasing sales of tablets and wearables. In the CE division, we will endeavor to expand sales with a focus on promotion of premium products amid seasonally strong year-end demand. Now let's move on to our outlook for 2022. Amid anticipation that global IT demand will recover, the component business will focus on expanding the advanced node portion of production and enhancing our leadership in next generation products and technology. In the finished product business, we will prioritize achieving solid profitability by continuing to strengthen our leadership and lineups in the premium segment. However, there are likely to be uncertainties related to component supply disruptions and the living with COVID-19 transition as more people are vaccinated. For the memory business, we will strive to boost cost competitiveness with volume production of 14 nanometer DRAM and seventh generation VNAND, and also enhance market leadership by expanding mass production of next-generation products based on our industry-leading EUV technology. SystemLSI will expand its business by reinforcing its lineup of SOCs, including for models in the volume zone. And we expect Foundry to continue to deliver strong improvement in results by addressing growing customer demand through active investments and by technology leadership, such as bringing to production the industry's first 3-nanometer gate all-around process. For display, in the mobile panel business, we expect OLED portion of the market to increase with a rising penetration of 5G amid a recovery of smartphone demand. And we will closely monitor the supply of some components, such as DDIs. The large panel business will strive to secure a position in the premium TV segment with QD display. The mobile business will pursue sales growth and profitability improvements by strengthening its presence in the premium market with expanded sales of our flagship lineup, including our increasingly popular foldables, as well as via an enhanced lineup of 5G smartphones for the mass market. At the same time, we'll keep fostering the tablet and wearable businesses while also continuing to develop industry-leading technologies. For network, we will continue to enhance our hardware with custom 5G chips and strengthen software-based virtualization solutions for future growth. And we will also pursue continued expansion overseas. For C, overall demand is likely to soften as the world transitions to living with COVID-19, but we will focus on proactively capturing growing demand from premium TVs, and increasing global sales of bespoke products. Let me now move on to capital expenditures. CapEx in the third quarter was 10.2 trillion won with 9.1 trillion won invested in semiconductor and 0.7 trillion won in display. The cumulative total as of the end of the third quarter is 33.5 trillion won with 30 trillion won in semiconductor and 2.1 trillion won in display. Looking at each business up to the end of the third quarter, memory concentrated its investments on expected 22 demand growth and readiness for next-gen products such as DDR5 with capacity expansions and process migrations at our fabs in Pyeongtaek and Xi'an. And it also invested in longer-term readiness such as infrastructure at P3. Our foundry investments focused on capacity expansion for advanced UV nodes in Pyeongtaek. Display investments centered on accelerating the transition to new technology through expanding capacity for QD display as well as mobile modules. We are maintaining our policy to invest flexibly in line with market conditions, and given growing uncertainties, including those over component supply, we are carefully reviewing fourth quarter capex, and as such, we will not be providing a forecast for annual capex for 2021 at this earnings call. Finally, I would like to share some of our key activities and achievements in sustainability management. On October 20th, the leading brand consultant, Interbrand, announced its list of the 100 best global brands, and our company ranked fifth for the second consecutive year. Our brand was valued at $74.6 billion, a 20% increase compared to last year. We ranked the highest and saw the biggest growth among non-U.S. companies, and we also far surpassed the list average growth rate. Our reorganization to a customer-centric management system, sustainability activities, and releases of innovative products were highly valued as we reaffirmed our position as a global top five brand. On October 12th, Forbes released its annual list of the world's best employers, and our company took the top position for a second consecutive year. We believe this achievement recognizes our numerous positives, including the company's prioritization of employees' health and safety in our COVID-19 response, outstanding performance, strengthened ESG activities, healthy corporate culture, and professional development opportunities. In August, we unveiled Galaxy for the Planet, the mobile business's sustainability vision for the Galaxy ecosystem. The vision outlines a set of initial goals that we aim to reach by 2025, including incorporating recycled materials into all of our new Galaxy products, and also achieving zero waste to landfill at our mobile work sites around the world. Galaxy for Planet is a continuation of our efforts to create a sustainable future across the lifespan of our products, from production to usage to disposal, as well as throughout our overall business operations to tackle climate change. Moreover, we aim to spearhead the transition to a circular economy through the reuse and recycling of resources. In August of 2021, the Ministry of Environment gave us, incorporating companies, final approval for a new process to be defined as recycling technology under domestic law. This new technology involves the reuse of wastewater sludge generated during the semiconductor manufacturing to produce supplementary material in the steelmaking process. Cooperative efforts between Samsung, Hyundai Steel, and Post Ceramics began in August 2020 with the signing of a technology agreement and resulted in the successful production of steel in April 2021 at Hyundai Steel's Dangjin site by using 30 tons of fluoride alternative products. This new technology was approved after it was reviewed by the National Institute of Environmental Research. And because the technology enables replacing a mineral that cannot be sourced domestically, it is recognized as the most exemplary case of ESG commitment towards resource circulation since the Ministry of Environment established its recycling environmental assessment system in 2016. In September, Samsung received product carbon footprint label certification for four of our new flagship system LSI products, joining previously certified memory chips from the UK's Carbon Trust. We now have certifications for 14 semiconductor products. Semiconductor manufacturing has a particularly challenging road to certification, due to its numerous complex processes and need for large quantities of various types of raw materials. However, we passed the strict international assessment standards backed by results of our various efforts to reduce carbon emissions. We will continue to strive to minimize carbon emissions with initiatives such as reducing the amount of gas required in our semiconductor manufacturing process enhancing the efficiency of greenhouse gas treatment equipment, and applying solutions to reduce energy consumption throughout the manufacturing process. I will now turn the conference call over to gentlemen from each business unit to present third 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. Third quarter, the price situation remained favorable, and demand, centering on server, stayed strong. We improved our performance significantly compared to the previous quarter by actively addressing customer demand and reducing costs by expanding the portion of production using cutting-edge processes. In the case of DRAM for server, demand continued to grow as adoption of a new high-core CPU that was released in the first half of the year expanded. Demand from set builds stayed solid, and content per box increased. For mobile, despite effects on set builds related to supply issues of some components, such as application processors, demand recovery has become more feasible thanks to releases of new products by major manufacturers, at the base effect of the second quarter, which was affected by somewhat weak demand. For PC, demand from end users has also been robust due to changes such as workplaces opting for hybrid work patterns alongside strong seasonal effects. However, that build growth has been limited by supply constraints and logistics issues for some components. In graphics, Memory demand expanded on the rise in demand for graphics cards due to a revitalization of crypto mining and the continuing strong demand from game console, which is in peak season. Despite a resurgence of COVID-19 in major production countries and component supply issues that led to disruptions in set bills, along with weakening demand from customer PCs, we actively responded to demand by flexibly operating our product mix. We set a new record for quarterly DRAM shipments, backed in particular by significant growth in server sales, and we met our original guidance, not to mention the enhancement we made to cost competitiveness by increasing the 15-nano portion of production. Next, I will talk about the net market. Our server SSDs, along with increased investments by major server customers, enterprise demand recovered. And based on the high-capacity trend spurred by new CPU adoptions, demand was strong from data centers for high-capacity products. In the case of mobile, demand has been solid due to the launch of new models and increases in content per box by major customers as we enter strong seasonality. The client's SSD and demand was strong due to a resumption of office work, but memory demand was weak due to a disruption in set bills caused by component supply issues and inventory adjustment by some customers. In response to growing demand for sub-SSDs, we expanded sales of high-capacity products of 8 terabytes and above and increased our production portion of 128-layer products which relate to another quarter of growth. Next, let me tell you about our fourth quarter outlook. In the case of DRAM, we expect fundamental demand for server to stay strong, thanks to the new CPU adoption and expansion of data center investment. However, we need to keep monitoring impacts of the longer than expected component supply issues on set bills. For mobile, Manufacturers are likely to continue to launch new 5G models, but there are chances that growth of purchasing demand could be limited due to inventory adjustment of some customers, along with impacts of supply chain issues. For PCs, we expect set bill growth to stay similar compared to the last quarter, given ongoing uncertainties over the supply of some components and impacts of weakening demand from consumer PCs. We will actively address fundamental demand from major server customers and aim for full-fledged sales to PCs adopting new CPUs and lead the formation of a market ecosystem that is based on mass production of DDR5 for high-end gaming. In addition, we will continue to strengthen our cost competitiveness by maximizing the portion of production using cutting-edge technologies, such as 50 nanoprocess. In case of NAND, for Server SSD, as business activities normalize alongside increasing vaccination rates and continued growth in enterprise IT budgets, we expect a high capacity trend for Server SSDs to continue and demand to be robust. However, we should keep an eye on the component supply issues. For mobile, demand is likely to be solid based on 5G market expansions and a high-capacity trend with the spread of new models. We also need to monitor impacts of supply chain disruptions on the set field. In the PC market, more and more companies are expected to resume office work in the second half, so we expect replacement demand for enterprise PCs to pick up. The demand for memory purchases may slow slightly due to the impact of inventory adjustment and some customers. We will secure a stable supply chain based on our strong SEM management system and maintain our differentiation strategy by continuously expanding our portion of high-value products while actively responding to overall server demand and also expanding our lineup of mobile products. Now let's move on to the outlook for next year. Considering macro uncertainties, such as the timing of mitigating component supply issues, influences of living with COVID policies amid increasing vaccination rates, and raw material pricing issues, we ask for your understanding in that it is difficult to provide specific prospect or guidance. Therefore, I'd like to provide a rough outline of the market based on our present forecast. Although the mentioned uncertainties may impact demand in the memory market next year, the pandemic led global consumers to experience more online-based social activities and lifestyles, which has been called the new normal. We think most of the demand in the new normal will persist as a part of our lives. For server and PC, under those social shifts, we expect fundamental demand to be robust with the trend toward high capacity following the expanding new CPU adoption and continued growth of enterprise IT investment. For mobile, we expect shipment growth and high capacity trend to continue with the increase in low to mid-priced 5G models and also as manufacturers launch products with new form factors. However, since almost all applications are feeling effects of the longer-than-expected component supply issue, the timing of resolving such issue is the key to increasing feasibility of fundamental demand in each application. Furthermore, we expect demand for consumer and graphic segment also to be robust, as the Beijing Winter Olympics have potential for increased penetration of premium TVs and the move to high capacity. while demand is likely to be strong for VGA in high-end PCs for AI accelerators in the HV market. As we continue to expand the portion of 15-nano DRAM and 128-layer VNAND based on preemptive product mix management that is aligned with market situation, we will proactively address the server market, where demand is likely to grow thanks to new adoptions of DDR5 with rising penetration of a high-quality CPU. and we will also preemptively secure demand for NAND solution products. Moreover, while expanding mass production of 14-nm D-ETM and 176-layer 3-NAND, we will continue to strengthen our market competitiveness based on stable cost reduction through next-generation processes and products. Thank you.