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 2022 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 star one, that is star N1 on your phone during the Q&A. For cancellation, please press star two, that is star N2 on your phone. Now, we shall commence the presentation on the fiscal year 2022 first quarter earnings results by Samsung Electronics.

Welcome, everyone. This is Ben Seo from Investor Relations. Thank you for joining our first quarter 2022 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 slash global slash IR. On the call with me today are the following representatives from each business unit. We have EVP Hanjin Man representing memory, VP Han Kyuhan for system LSI, EVP Kang Mansu for foundry, EVP Choi Geon Young for Samsung display, VP Kim Sung Goo for mobile experience, and VP Kim Young-moo for visual display. I want to remind you that some of the statements we'll 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, the earnings call materials provided today are based on the business structure before the reorganization to prevent investor confusion regarding our results. Before reviewing our quarterly results, I would like to address the first quarter dividend. Today, the Board of Directors approved a quarterly dividend of 361.1 per share for both common and preferred stock. Based on the annual dividend payout under the current dividend policy, the total payout for the first quarter is 2.45 trillion won, or one-fourth the annual total for 2022. It will be paid in mid-May. With that, I would like to present the results for the first quarter. We once again delivered record results despite a highly challenging external environment. thanks to the hard work and dedication of our employees and strong cooperation with our partners to deliver the products in demand by our customers. Total revenue in the first quarter grew 1.6% sequentially to $77.8 trillion, setting a new all-time quarterly high for the third consecutive quarter. We raised the bar again by delivering solid growth across all our businesses, with the DX Division registering its highest revenue since 2013, thanks to our premium focus strategies, and the DS Division setting a historical high for quarterly revenue by actively meeting strong server memory demand. On a year-on-year basis, revenue grew 19%, driven mainly by the memory and visual display businesses. And I would also like to highlight that there was at least 10% growth in all of our business units, except for large panels in which we are ramping down LCDs. Gross profit decreased by 0.9 trillion won sequentially to 30.7 trillion won, mainly due to increased material and logistics costs affected by macro issues. Gross margin also declined slightly compared to last quarter, falling 1.8 percentage points to 39.5%. SG&A expenses were lower by 1.2 trillion won quarter-on-quarter to 16.6 trillion won, mainly due to a reduction in R&D combined with more efficient advertising and promotional spending. As a percentage of sales, they declined by 1.9 percentage points. Although R&D was down sequentially, this was due to the record levels set in the previous quarter, and R&D spending reached an all-time high for a first quarter as we continue to invest in future growth. Both operating profit and operating margin increased quarter on quarter, with operating profit reaching $1.4 trillion due to solid sales of S22, the new flagship smartphone, and premium TVs, despite a decline in memory ASP. On a year-on-year basis, both operating profit and operating margin increased substantially, rising by 51%, and 3.8 percentage points to 14.1 trillion won and 18.2% respectively. I will now briefly review the results of each business unit. In memory, we outperformed market expectations amid a milder than expected price decline. We also achieved record high quarterly sales for server due to an active portfolio shift to meet solid demand from server and PC. In System LSI, the results improved sequentially as positive impacts from favorable exchange rates and higher ASP outweighed the effects of a decline in SOC and CIS supply amid a weak mobile season. In Foundry, demand was solid across all applications. Despite concerns around delivery issues, we increased our advanced process portion of production and were able to align on a stable yield trajectory. For the display segment, the mobile panel business delivered historically high results for a first quarter, driven by strong sales at major smartphone customers and increased sales in new application areas such as gaming. In the large panel business, the production yield of QD displays improved faster than projected, and monitors featuring QD display were released during the quarter. For the MX business, Although we faced component shortages, geopolitical issues, and adverse currency effects, we delivered sequential increases in both revenue and profitability. This was mainly due to strong sales centered on S22 Ultra, which integrates specialties of the note, positive responses to new mass market 5G models that offer flagship experiences, and solid sales of device ecosystem products, such as premium tablets and watches. The network business expanded its sales overseas while meeting domestic 5G expansion needs. In VD, revenue and profit grew year on year, even amid declining market demand, with increased sales of premium, high-value strategic products, such as Neo QLED and SuperBig TVs. In digital appliances, we achieved record high quarterly revenue based on growth trends across our entire premium lineup centering on bespoke, despite an increased cost burden. Regarding currency effects relative to the Korean won, positives related to the strong dollar for the component businesses outweighed adverse impacts from a strong dollar and weakness in some emerging currencies for the finished product businesses. All in all, the net result was positive, resulting in an approximately $300 billion gain for operating profit compared to the previous quarter. Next, I want to share our business outlooks. In the second quarter, we expect that macro uncertainties and logistics issues will persist. For a company-wide business outlook, DS will work to meet expected solid demand and DX will focus on securing profitability by expanding sales of new smartphone and TV products, while strengthening its leadership position in the premium segments. Now, for each business unit's outlook, in memory, we will focus on meeting expected solid demand centering on server, while maximizing the quality of our portfolio by expanding sales of high value-added products, leveraging our market-leading technologies. For system LSI, we will mainly focus on maximizing the supply of key components such as SOCs and image sensors. For foundry, we will solidify our technology leadership position with the world's first mass production of the three nanometer gate all around process and prioritize increasing supply to our global customers. We also expect to continue to win new business opportunities and new customers. For the display segment, in the mobile panel business, despite macro uncertainties, we expect to maintain solid results compared to last year thanks to continued solid demand from major customers for their flagship smartphones and demand for gaming and other applications. In the large panel business, we expect revenue to increase with the release of TVs featuring QD display and losses to narrow. LCD production will be ramped down as planned. In the MX business, amid improved availability of key components, we expect solid sales of S22 and expanded sales of new 5G models for the mass market to fuel significant year-on-year revenue growth. And we expect to achieve solid profitability despite macro impacts by utilizing our global supply chain management capabilities. For network, we will deliver a stable supply of products to our telecommunications customers and also work to win new business opportunities. For VD, we will focus on selling new models, including Neo QLED and the Freestyle, and capture demand for premium products to help counter an expected market slowdown. For digital appliances, we expect to increase revenue and profitability by improving the product mix with increased availability of bespoke premium products in the global market and by expanding sales of air conditioners amid strong seasonality. Now let's move on to our outlook for the second half of the year. For a company-wide business outlook, as we project uncertainties related to the macro environment and geopolitical issues to persist, our component businesses will prioritize increasing the portion of our advanced processes and expanding into new application areas. New products introduced in the market should help conditions to improve during this period. In the DX Division, we will continue to strengthen our premium lineup leadership position while working to enhance multi-device experiences via seamless connectivity between different products that encompass home, including TVs and digital appliances, mobile, and automotive. We aim to create customer experiences on a level that only Samsung can provide. Now for each business unit's outlook, for the memory business, we expect server demand to remain solid backed by an accelerating shift to high-core CPUs. We also anticipate a recovery in mobile demand on effects of new model launches later this year. Thus, we plan to extend our leadership position by increasing sales of next-generation interfaces, such as DDR5 and LPDDR5X, and by focusing on a high-value added product portfolio. System LSI will focus on reinforcing its lineup of SOC models targeting the volume zone. For Foundry, we will push to outperform the market and also achieve meaningful profit by raising the yield and increasing the portion of our advanced processes. Meanwhile, we will adopt pricing strategies to enable continued investments and solidify technology leadership in the GAA process. For display, in the mobile panel business, we expect sales to increase, driven by expansion of foldable products and the accelerated adoption of OLED in new application areas such as IT, gaming, and automotive. The large panel business will establish its leadership position in the premium segment and narrow losses with QD display. The MX business will target to maintain a solid level of profitability. First, we will expand our premium user base by improving flagship experiences. Second, we will maximize sales of new foldable products via strengthened cooperation with our partners and offer an undisrupted supply to meet the market demand. Lastly, we will increase sales of new device ecosystem products that will enhance customer experiences. For network, we intend to maintain our growth momentum by meeting domestic needs for 5G installations in a timely manner and actively expanding our business in overseas markets. We will also continue to reinforce our leadership position in VRAN, or Virtualized Radio Access Network, technology. For VD, we will strengthen our premium market position by expanding sales of our differentiated strategic products, such as Nail QLED 8K and lifestyle products, during a seasonally strong period, and by sales of innovative products, such as MicroLED and Odyssey Arc. For digital appliances, as issues related to material costs and logistics are likely to persist, we will continue to focus on increasing sales of premium products and enhancing local production capabilities of our global manufacturing base. Now turning to capital expenditures, CapEx in the first quarter was $7.9 trillion won, with $6.7 trillion won invested in semiconductor and $0.7 trillion won in display. Memory investments concentrated on infrastructure at P3 and on process migrations at FABs in Hwaseong, Pyeongtaek, and Xi'an to address growing future demand. Boundary investments focused on developing and establishing the production capacity of advanced processes under 5 nanometers. Next, I would like to share some of our key activities in sustainability management. In the first quarter of this year, we released the Galaxy S22 series, which features specific components made from high-quality recycled plastic created from discarded fishing nets. We are committed to preserving the environment. By 2025, all new Galaxy products will use recycled materials, and single-use plastics will no longer be used in packaging. Meanwhile, the memory business's portable SSD T7 acquired a low carbon product certificate as it reduces carbon emissions. In particular, it uses eco-friendly pulp rather than plastic for the tray in the packaging material and consumes less energy in the usage stage. We will strive to achieve low carbon product certification in our subsequent products and add to our certified green low-carbon product portfolio. Next in February, Samsung joined forces with the Ministry of Small and Medium Enterprises and Startups to alleviate a domestic shortage of COVID-19 self-diagnostic testing kits by supporting a local kit manufacturer. Our collaboration helped improve production by early stabilization of new facilities and by supporting logistics firms and partners to improve the local response to COVID-19. We are committed to finding new ways to strengthen ESG management and incorporating them into our business. To learn more about our latest ESG initiatives and priorities, please visit our corporate sustainability website. I will now turn the conference call over to the representatives from each business unit to present first quarter performances and outlooks for the corresponding business segment. We will start with the memory business. Thank you.

Good morning. This is Hanjin Ma from the Memory Global Sales and Marketing Office. The fourth quarter, price declines in memory are modest relative to market expectations thanks to solid demand mainly from server and PC. As a result, but performance exceeded market forecasts. However, results declined slightly quarter on quarter due to a one-off special incentive and mild seasonality in some applications. In DRAM, overall server demand continued to show a favorable trend thanks to increased DRAM content related to rising adoption of high-core CPUs alongside still strong demand from data centers. Starting in the fourth quarter of last year, set build momentum for enterprise PC has been recovering thanks to improvements in component shortages. And demand for high-end products has been solid, which have impacts of weak seasonality to a degree. Mobile demand was somewhat tepid as launches of new models by major manufacturers were weighed on by effects of the crisis in Ukraine and China's lockdown in major cities amid weak seasonality. We preemptively identified shifts in demand through our own machine learning-based market system and actively responded to server demand. As a result, we exceeded our big growth guidance and achieved record high quarterly sales per server. Next, I will talk about the NAND market. Demand for server SSD from data centers remained solid thanks to pent-up demand from last quarter, in which said build was partially influenced by disruptions in IC component shortages. While server OEMs contributed to strong demand for server SSD related to increased investments in new IT infrastructure. The demand trend for client SSD was solid, backed by robust demand for enterprise PCs. as companies increasingly follow back-to-office trend and expand hybrid work models, and by increasing SSE penetration in conjunction with growing adoption of high-end PCs. In mobile, despite ongoing partial improvement of supply for low-to-mid-price APs and events such as launches of flagship models from major manufacturers, memory demand slowed somewhat. due to weak seasonality and inventory adjustment by some customers. Considering the limited inventory situation and future market conditions, we have maintained our business strategy, which is to refrain from excessive expansion of sales and continue to increase our portion of high-density, high-value added products as we remain focused on improving the quality of our business Ultimately, we exceeded our bid growth guidance due to reasons above, including the base effect from last quarter. Now let's move on to the second quarter outlook. In DRAM, for servers, set bill will likely depend on the pace as to how quickly supply chain issues get resolved. Thus, we need to continue to monitor the situation meticulously. Meanwhile, we expect the server demand centering on high density products to be relatively solid, aided by continuous penetration of DDR4 8-channel CPU. As for PC, there are some demand uncertainties caused by inflation as well as economic slowdowns and reduced consumption influenced by the crisis in Ukraine. On the other hand, there is also potential for solid demand based on the continuing trend toward high density combined with the rising penetration of DDR5. In mobile, a surge in raw material prices caused by the Russian Ukraine war may add pressure to inflation and affect smartphone consumer sentiment, while supply chain issues also present risk factors. However, we see changes of a demand recovery, chances of a demand recovery, depending on the pace of reopening in some countries. So we need to monitor the situation carefully. Despite a variety of supply constraints, we will continue to pursue the highest quality portfolio by expanding sales of high-value added, high-density products, while actively responding to demand for applications that show the most growth potential In NAND, amid shortage in chip production provoked by external issues and impacts of short supply of active passive components, we expect server demand centering on high-density products to grow, based on the investment expansion mainly for data centers. However, we should keep an eye on possible demand changes, considering uncertainties, including macro issues. Meanwhile, due to various macro issues, we expect to see some effects on demand in consumer-oriented product lines. First, for client SSD, consumer PC demand is likely to shrink amid global inflation and effects of the crisis in Ukraine. Enterprise PC demand is likely to be solid, and the high density trend of SSDs backed by increased sales of high-end PCs will continue. We should ease some effects of weak demand. For mobile, the short-term market environment is unfavorable due to lockdowns in major Chinese cities amid slow seasonality. The consumer sentiment has potential to recover later in the quarter with the launch of new form factor models. With people spending more time outside, following gradual easing of quarantine regulations in some countries, and with the resumption of investment in 5G infrastructure. Amid impacts of shortages of active passive components, we will maintain our efforts to promptly address customer demand, including strong SEC demand for enterprise sector by our business competitiveness. Coming to the full year outlook, we will share our prospects for each application for the year. However, the situation requires continuous monitoring, as it is an immense challenge to predict the duration or market ripple effects of various macro issues, such as the Russian-Ukraine war and global inflation. Server demand is expected to be relatively solid compared to other applications, resulting from increased demand for DDR5 and high-density trend as high-core CPU transition grows. But the pace of improvement in component shortages, which can affect set build, needs attention. For PCs, demand for consumer-oriented products is projected to weaken somewhat due to macro issues and the base effect from last year. But enterprise demand should be relatively solid as companies normalize operations and expand hybrid working patterns. Moreover, Considering growth and changes in the utilization of PCs, rising portion of high-end products and growing content per box should help partially offset weak consumer demand. For mobile, it seems that the micro-issues mentioned previously will have a greater impact on mobile than on the other applications. However, as the visibility clears on the recovery of the issues, there is potential for a sooner-than-expected demand recovery. In particular, as major manufacturers are scheduled to release new products in peak seasonality in the second half, we anticipate that said build will recover. In addition, demand centered on high-density products and the LPDDR5X, which is a cutting-edge interface, is forecast to increase as manufacturers strengthen flagship lineups. Under the circumstances of extremely high uncertainties, continually upgrading our machine learning-based market sensing system, allocating more resources to improving the accuracy of our demand predictions in order to secure flexible supply capabilities linked to market conditions. By maintaining a product mix oriented towards server and high-end PCs, we will respond to new demand in a timely manner by expanding supply of cutting-edge interfaces such as DDR5 and LPDDR5X. In addition, while we closely observe changes in market demand, we'll center our portfolios on high-value-added and high-density solutions while steadily realizing cost reductions based on our industry-leading technologies and strengthening our market leadership. Thank you.