Samsung Elect Ltd

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2021 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 Start 1, that is, Start N1 on your 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 fourth quarter earnings results by Samsung Electronics.

Welcome, everyone. This is Ben Seo from Investor Relations. Thank you for joining our fourth quarter 2021 earnings call. For additional details regarding our quarterly results, please refer to our earnings presentation, which is available on our IR website at www.samsung.com. On the call with me today representing each of our business units are EVP representing memory, VP for system OSI, EVP for foundry, EVP for Samsung display, VP for mobile experience or MX, which is a previous mobile division, and VP for digital appliances. 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. Also, please note that last December, we merged the IM and CE divisions to form the DX division. However, as this was just announced in December, We have maintained the IM&C distinction in our earnings call materials as well as in portions of this presentation for consistency with our Q1 to Q3 results. With that, I would first like to present the results for the fourth quarter. I'm pleased to report that we once again delivered record results by leveraging our differentiated products and technology leadership despite the challenging macro environment. Total revenue in the fourth quarter grew 3.5% sequentially to $76.6 trillion, setting a consecutive all-time quarterly high driven mainly by our finished product businesses. We expanded sales of premium smartphones, including photoables, as well as TVs and home appliances amid year-end peak seasonality. We set records for total revenue in a respective quarter for each quarter in 2021, resulting in a record annual revenue of 280 trillion won. Gross profit increased by 0.5 trillion won sequentially to 31.6 trillion won, led by expanded sales of premium smartphones, but gross margin decreased slightly, primarily due to a decline in memory prices. SG&A expenses were up 2.5 trillion won quarter-on-quarter to 17.8 trillion won, mainly due to increased spending on R&D and advertising and promotional activities. As a percentage of sales, they increased by 2.6 percentage points. Operating profit was 13.9 trillion won down from the previous quarter due to a special bonus payment to employees a decline in memory prices, and a seasonal rise in marketing costs for smartphones. On a year-on-year basis, however, both operating profit and operating margin increased substantially, driven by our semiconductor businesses. I will now briefly review the results of each business unit. In memory, results declined versus the prior quarter as ASP edged lower. Bit gross for the quarter came in below guidance as, considering our low inventory levels and the market outlook, we refrain from excessive bit shipment efforts. Compared to last year, results improved significantly, driven by solid demand across overall applications, as well as increases in our advanced node portion and ASP. In Foundry, Even though increased overall supply resulted in a new high for revenue, profitability decreased slightly quarter-on-quarter due to a rise in costs associated with advanced processes. On a year-on-year basis, results improved due to the start of operations at the S5 fab in conjunction with price adjustments. In display, earnings continued to improve for the mobile panel business, driven by a continuation of solid demand from key customers' new smartphones and increased sales in new application areas. However, the large panel business saw its losses widen considerably due to declines in LCD ASPs and initial costs related to QD display. For the MX business, revenue increased slightly, led by expanded sales of premium products such as foldables, and solid sales of device ecosystem products. Profit decreased quarter-on-quarter due to an increase in year-end marketing costs, including for foldables, but increased year-on-year. For network, results improved sequentially as revenue grew both at home and abroad. In the CE business, composed of visual display and digital appliances, we delivered record high quarterly revenue on the back of strong sales of premium products during year-end seasonality, but profits declined slightly quarter-on-quarter amid rising costs, including for logistics. Regarding currency effects, negatives from overall weakness in major emerging currencies against the Korean won, mainly affecting the finished product businesses, were eclipsed by positives from a strong dollar, which mainly affects the DS divisions. The net result was a positive impact of approximately $300 billion won on operating profit compared to the previous quarter. Next, I would like to share our business outlook. In the first quarter for semiconductor businesses, memory will actively address a projected recovery of demand, and Foundry will push to stabilize yield and increase supply of key components for flagship products. Our finished product businesses will focus on maintaining solid profitability by strengthening leadership in premium segments with launches of new smartphones and TVs. In memory, although there are lingering uncertainties, we will concentrate on optimizing our business portfolio, including through increased sales of advanced node products to support the server and PC demand recovery. and also via sales growth of high-value ad products. For System LSI, we will focus on supplying essential SOCs and CISs for our key customers' flagship products. And for Foundry, we will continue to prioritize expanding supply by improving production and yield at advanced processes. In display, despite weak seasonality for smartphones, we expect the mobile panel business to deliver improved results year on year, driven by releases of new smartphones by major customers and an expansion of the foldable display customer base. In the large panel business, losses are likely to be partially mitigated with the mass production of QD display. In the MX business, despite supply constraints, we expect to deliver revenue and profit growth as well as solid margin led by releases of new flagship models, expanded sales of 5G smartphones for the mass market, and increased sales of tablets and wearables. For network, we target to win new opportunities from European and other global customers. For C businesses, amid weak seasonality for TVs and a projected dip in demand for home appliances, We will endeavor to improve profitability by focusing on sales of premium products, expanding our new category product lineup, and increasing the portion of online sales. Now let's move on to the outlook for 2022. Under expectations of a recovery in global IT demand, our component businesses will increase their advanced node portion of production and enhance leadership in next-generation products and technology. And in the finished product businesses, we will continue to strengthen our leadership and lineups in premium segments as we strive to create new user experiences by enhancing connectivity and synergies between our devices. However, challenges associated with supply issues and COVID-19 are likely to persist. During this year, We will also promote partnerships, secure technology, and execute investments to gain leadership in future growth areas such as 5G, AI, cloud, IoT, and the metaverse. For the memory business, we expect demand to increase as enterprises ramp up IT investments, though there are uncertainties such as the extent to which supply issues will ease. In accordance, we will continue to enhance our leadership by expanding supply of high-performance products and increasing application of our industry-leading EUV technology. System LSI will grow its business by reinforcing its lineup of SOCs, including models targeting the 5G volume zone. And Foundry aims to outpace market growth by extending our technology leadership with mass production of the first-generation GAA process, along with increasing supply to global customers. For display, in the mobile panel business, we expect demand for OLED to continue to increase based on rising penetration of 5G and growth of the foldable market. And we will further strengthen the foundation for stable growth by expanding OLED into new application areas as well. The large panel business will work to secure technology leadership in the premium segment with QD display while it closes the LCD lines as planned. The MX business targets increasing market share by concentrating on innovations in flagship products, further differentiating user experiences, and also expanding our mass market 5G smartphone lineup. Moreover, we will seek to grow sales of device ecosystem products by enhancing the value delivered to customers. For network, we will focus on capturing 5G network demand and winning new global customers. all as we continue to further strengthen our technologies, including custom development of core 5G chips. For CE businesses, we will further solidify our market leadership and pursue growth by continuing to expand sales of premium product lines, such as Neo QLED and Bespoke, and by diversifying the overall lineup with lifestyle and new home appliance products. Next, I would like to share some of our key activities and achievements in sustainability management. At the CES keynote address on January 4th, we outlined our eco-friendly initiatives for a sustainable future. We believe that consumers and companies together can contribute to a better future by embracing sustainable products. To this end, we unveiled a range of ambitious eco-friendly activities. For example, in manufacturing displays, including for TVs, we are using 30 times more recycled plastic this year than we did last year. And we are moving toward incorporating recycled materials in all mobile products and home appliances by 2025. In addition, our company ranked fourth in the digital inclusion benchmark as announced in December by the World Benchmarking Alliance, a global alliance dedicated to sustainability management. We earned this accolade thanks to our strong support for the technology innovation ecosystem through C-Lab Outside, an initiative aimed at nurturing startups in Korea, as well as disclosing our AI ethics principles centering on equity, transparency, and responsibility. Furthermore, we participated in a pilot project organized by Korea's Ministry of Environment to reduce worksite waste. And on December 31st, our Jihun campus received top honors for its efforts, which included strengthening recycling programs and offices, establishing a standard for minimizing the packaging for raw and semi-processed materials, and expanding recycling of waste materials. Our work in this area demonstrates our commitment to creating environmental and social value in addition to achieving growth. And we will continue to strengthen our ESG management by fulfilling our social responsibility as a leading global company. Let me now move on to capital expenditures. The annual capex for 2021 was 48.2 trillion won. with $43.6 trillion invested in semiconductor and $2.6 trillion in display. By business, memory concentrated its investments on capacity expansions and process migrations at fabs in Pyeongtaek and Xi'an to address demand for advanced nodes, including EUV-based 15-nanometer DRAM and six-generation VNAND, as well as on infrastructure at P3. Investments in memory increased year on year as we are at the lead of an inflection point in technology and are thus preemptively investing in application of next-generation technologies such as EUV. We are executing the investments with a focus on technology leadership, and as a result, we can maintain an efficient investment level when considering our bid share from a mid- to long-term perspective. For Foundry, Investments concentrated on capacity expansions for advanced 5-nanometer EUV nodes in Pyeongtaek. Display investments centered on mobile modules and QD display. Finally, let me address the shareholder return. The Board of Directors today approved a quarterly dividend of $361 per share for common stock, and 362 won per share for preferred stock. The total payout for the fourth quarter is approximately 2.45 trillion won, which is in line with the totals in 2021's previous quarters. This represents one-fourth of the annual total of 9.8 trillion won in accordance with the current shareholder return policy. The dividend will be paid after final approval at the annual general meeting of shareholders. When we announced the current three-year shareholder return policy in January of last year, we said that we will disclose the annual free cash flow each year to enhance clarity on the shareholder return pool. And if 50 percent of the free cash flow significantly exceeds the annual dividend, we would consider an earlier return. The total free cash flow for 2021 was 19.6 trillion won, 50 percent of which is approximately 9.8 trillion won. Considering the annual projected annual dividend for 2021 is also 9.8 trillion won, there was no additional pull for an earlier return. While we achieved solid results in 2021, as I mentioned earlier, we required a considerable amount of capex to accelerate migration to next generation technologies in memory and to secure competitiveness in foundry. And there were also impacts of increased working capital, such as a need to secure additional inventory amid uncertainties of component supply. Although we did not generate a surplus in 2021, we believe our efforts will lead to significant future growth and contribute to increasing shareholder value. In 2022, we will once again step up our efforts to improve our performance by extending our product and technology leadership, increasing cost competitiveness, and improving profitability while also enhancing capital management efficiency. I will now turn the conference call over to the gentlemen from each business unit to present fourth 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 Memory Global Sales and Marketing Office. The fourth quarter, memory demand centered on server remained solid, but our performance declined somewhat compared to the previous quarter due to a continuation of global supply chain issues, a slight drop in ASP, and payment of a one-off special incentive. We came in below initial bid growth guidance as we refrained from making excessive bid shipments in consideration of our limited inventory conditions and also the market outlook. In DRAM, impacts on set bill from global supply chain issues differed by degree but were felt throughout all applications. The server, however, remained strong thanks to an increase in DRAM content per box and increased adoption of high-core CPUs amid a continuation of solid-end demand. For graphics, graphics card supply shortage remained as demand stayed robust backed by strong demand for gaming PCs along with rising demand for cryptomining. PC and mobile have felt relatively more effects of said build disruptions caused by component supply issues. For PC, consumers continue their tendency to adjust inventory. In mobile, major smartphone manufacturers released new 5G models, but concurrent risk, such as the spread of a COVID variant, impacted memory demand to some extent. Based on preemptive product mix adjustment, We actively address an increase in server and graphics demand. And to enhance competitiveness, we continue to increase our cutting-edge portion of processes. Even so, we are below big growth guidance as we try to optimize supply plan, considering our inventory condition and market outlook. Next, I will talk about the NAND market. For Server SSD, fundamental demand from major data center customers was robust. but there were some market effects related to disruptions in the IC component supply chain. Demand for client SSD was somewhat stagnant because of inventory adjustment by some customers and set bill disruptions caused by component supply issues. In the case of mobile, supply and demand of APs were disrupted, and memory demand fell slightly. But the high-density trend continued thanks to impacts of peak end-year seasonality. We focused on optimizing sales, such as reducing wafer shipments, as well as strengthening high-value solution businesses in consideration of our inventory situation, while identifying impacts on production caused by changes in line operation due to the lockdown in Xi'an. In addition, we continue to strengthen our competitiveness By increasing our cutting-edge portion of processes and by expanding the server business, we are actively addressing growth in high-end, high-capacity demand. Now let me share the outlook for the fourth quarter. In the case of DRAM, some uncertainties are likely to persist, but we expect issues related to component supply and demand to dissipate gradually. And we are seeing signs of improvements and set bills mainly by server and PC. For server, we expect demand to remain strong thanks to the high density trend alongside increasing investment centering on data centers, while the high core CPU portion continues to increase. As demand for PC improves, mainly for corporate-oriented high-end laptops, demand will increase for cutting-edge products such as DDR5, And as some customers complete inventory adjustment, we think impacts of flow seasonality will partially ease. For mobile, we expect the demand base to be reasonably solid as major manufacturers launch products based on new form factors and increase the portion of LPDDR5. However, risks such as operation restrictions at some production sites due to the spread of COVID variant, need to be carefully monitored. We will keep working to maximize the quality of our business portfolio by selling products of our cutting-edge node and expanding sales of high-value products while actively addressing customer demand from overall applications. In the end, for server SSD, we expect demand for server builds to be robust thanks to continuing investment in many data centers we should keep an eye on corporate demand along with the spread of COVID variants. In the PC market, we think build demand will recover mainly for laptops along with gradual improvements in component supply issues. And for mobile, despite being amid slow seasonality, we expect a high density trend for storage to persist as manufacturers launch new 5G models. We plan to minimize risk of supply disruptions by securing a diverse product portfolio centered on high-value products while returning to normal production operation after the lockdown in Xi'an being lifted. Now let's move on to the full-year outlook. Under the risk of demand fluctuations, such as ones related to the pace of mitigation of component supply constraints, as well as chances of prolonged effects of a COVID-19 variant, We ask for your understanding in that it is difficult to provide specific annual bid growth guidance. Therefore, I'd like to share a view of the market situation for each application. First, for server, DM content per box is projected to keep rising thanks to the adoption of new CPUs supporting DDR5 and the expansion of AI-oriented servers centered on data centers. In addition, Coupled with the expansion of investment by major companies, set-bill demand deferred by last year's component issues should lead to solid set-bill growth. On the other hand, for PCs, we need to monitor detailed impacts on demand as a delayed return to daily life triggered by a new variant would impact demand from contactless services such as education, gaming, and others. A median expected increase in replacement demand and content per box due to the spread of a new OS. For mobile, with the resumption of 5G infrastructure investment by countries and strengthening of 5G lineups by manufacturers, content per box is likely to keep rising, focusing on major manufacturers. And set shipments centering on low to mid-price models are also anticipated to rise amid growth in emerging markets. Based on preemptively managing our product mix to align with market conditions, we will proactively address market demand by expanding our supply portion of high-performance products such as HPVM for graphic and cutting-edge interfaces like DDR5 and LPDDR5. Based on high value solution-oriented portfolio management and our industry-leading EUV capabilities, we will focus on qualitative growth through stable, continual cost reductions and strengthened market leadership.