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, 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, that is star N1 on your phone during the Q&A. For cancellation, please press star 2, that is star N2 on your phone. Now we shall commence the presentation on the fiscal year 2022, second quarter earnings results by Samsung Electronics.

Welcome everyone. This is Ben Seo from Investor Relations. Thank you for joining our second 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 .samsung.com slash global slash IR. On the call today, I am joined by the following representatives from each business unit. EVP Han Jin Man representing memory, EVP Pi Jae Geol for System LSI, EVP Kang Moon Soo for Foundry, EVP Choi Geon Young for Samsung Display, which I will call display in the presentation, VP Kim Sung Gu for Mobile Experience, and VP Kim Young Mu for Visual Display. I want 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. 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 reviewing our quarterly results, I want to confirm the second 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 quarterly payout is 2.45 trillion won and will be paid in mid-August. Now I will move on to the results for the second quarter. Despite a highly challenging business environment marked by inflationary and supply chain issues, we recorded the company's second highest quarterly revenue and a new all-time high for a second quarter at 77.2 trillion won. The DS division led such performance with a new quarterly revenue record for a second quarter in a row by actively adjusting the product mix to meet solid server demand and increasing the supply of system semiconductors. In addition, the DX division posted significant -on-year growth on solid sales of premium smartphones along with strong sales of seasonal digital appliances such as air conditioners. Growth profit increased by 0.2 trillion won sequentially to 30.9 trillion won mainly due to profit-focused memory sales and yield improvement in foundry. Growth margin also increased slightly to 40.1 percent. SG&A expenses increased 0.2 trillion won -to-quarter to 16.8 trillion won and the gross profit as our continued investments in R&D outpaced reductions in advertising and promotional spending. As a percentage of sales, they were also up slightly. Although profits in the DX division declined due to macro issues such as increased material and logistics costs and currency effects, we delivered a similar operating profit -on-quarter at 14.1 trillion won. Operating margin improved moderately thanks to -the-board improvements in the DX division. On a -on-year basis, operating profit increased by 12 percent or 1.5 trillion won also led by the DX division. I will now briefly review the results of each business unit. In memory, although bit gross came in below guidance due to weaker than expected mobile and PC demand, results improved both -on-quarter and -on-year as we maintained ASP by preemptively shifting our focus to meet solid server demand and by maintaining our disciplined sales strategy. The positive effects of a strong dollar also contributed. In system semiconductors, operating profits were up 61 percent -on-quarter, achieving a record high as system LSI expanded sales of DDIs and volume zone SOCs and foundry yields entered our targeted trajectory also for advanced nodes as we increased supply to global customers. In addition, we further improved our technology competitiveness through the world's first mass production of the GAA process and supply of 200 megapixel image sensors. For display, the mobile panel business delivered its highest ever second quarter revenue and operating profit thanks to continued solid demand by our major customers for their flagship models despite weak seasonality for smartphones. The large panel business surpassed its yield target for QD display, but its results still weakened due to initial ramp-up costs of QD display and a decline in LCD ASP. For the MX business, earnings decreased sequentially due to elevated operating costs mainly in material and logistics and adverse currency effects, but revenue rose -on-year as an improved component supply enabled increased sales of new premium models such as the Galaxy S22 and Tab S8 series. In addition, the new network business saw its revenue growth slightly compared to the previous quarter with consistent sales as it also continued to pursue new opportunities highlighted by the addition of DISH network as our newest U.S. customer. In VD, earnings decreased due to a decline in revenue caused by sluggish global TV demand and a rise in sales costs, but we reinforced our market leadership by focusing on the premium segment including QLED and super big TVs. Digital appliances saw its profits decline due to lingering cost burden issues, but it achieved record high quarterly revenue for a second consecutive quarter thanks to the increasing global expansion of bespoke products and a strong start of seasonal air conditioner sales. Regarding currency effects relative to the Korean won, the component business benefited from the strong dollar resulting in an approximately 1.3 trillion won company-wide gain in operating profit compared to the previous quarter. The DX division, however, experienced some adverse currency impacts. Next, I would like to share our business outlooks for the second half of the year. Under expectations that macro uncertainties are unlikely to dissipate, we will actively monitor demand trends to respond swiftly and flexibly. DS will focus on operating a high value added portfolio, expanding advanced nodes, and adopting new applications. DX will continually reinforce our leadership and lineups in premium segments. And we have started full-fledged expansion of multi-device experiences based on SmartThings, which has a global user base of 230 million. Now, for each business unit's outlook, in memory, we expect fundamental server demand to remain solid, but macro issues are likely to cause continued weakness in PC and mobile demand. While closely monitoring impacts on the demand side, such as releases of new mobile products by our major customers, we will continue to focus on our high value added and high density portfolios. For SystemLSI, we plan to further increase our Volume Zone SOC business and strengthen our leadership position in image sensors by expanding our customer base for 200 megapixel products. For Foundry, we aim to exceed market growth by adding new global clients, while we continue to reinforce our technological competitiveness, including through the development of the second generation GAA process and by evolving derivative processes of existing nodes. For Display, in the mobile panel business, we anticipate that earnings will grow, driven by new smartphone launches and increased entry into new application areas, such as automotive and gaming. In the large panel business, we expect earnings to improve with the shutdown of LCD production and increasing demand for QD display. The SystemX business will work to secure solid profitability on multiple fronts. We will target sales of foldable products to surpass those of the Galaxy Note series as we fully mainstream the segment by delivering a differentiated consumer experience enabled with global partnerships. We will also expand the Galaxy ecosystem through successful launches of wearable products and boost overall operational efficiency. For Network, we plan to maintain revenue growth momentum by actively expanding our overseas businesses and by meeting domestic needs for 5G installations in a timely manner. We will also continue to reinforce our technology leadership in 5G core chips and virtualized radio access networks. For VD, we aim to increase to capture demand in the premium market during strong seasonality by expanding sales of strategic products such as Neo QLED, SuperBig and Lifestyle lines. For digital appliances, we will focus on improving profitability by increasing sales of premium products, strengthening the B2B and online sales and working to further enhance cost efficiencies. Now turning to capital expenditures, CAPEX in the second quarter was $12.3 trillion won with $10.9 trillion won invested in the DS division and $0.8 trillion won in display. CAPEX in the first half of the year totaled $20.3 trillion won with $17.6 trillion won invested in DS and $1.5 trillion won in display. Similar to last quarter, memory investments concentrated on infrastructure at P3 and on capacity expansions and process migrations at FABS in Hwasong, Pyeongtaek and Xi'an to address future demand. Foundry investments focused on increasing production capacity of advanced processes of 5 nanometer and below. Next, I would like to share some of our key activities in sustainability management. To start, in June, we published our 2022 sustainability report which includes our key activities and achievements for the past year such as the reinforcement of the board's oversight function of sustainability management, expansion of sustainability management activities by businesses, and our joining of the UN Global Compact or UNGC. For more details, please refer to the sustainability report which is available via our website. Meanwhile, in recognition of the award, we were honored at the beginning of May with our ninth sustained excellence award for product brand owner, the highest level of recognition in the manufacturing sector in the U.S. Environmental Protection Agency's Energy Star Awards. And we also received the partner of the year award for energy management, the highest level of EPA recognition. In addition, 11 models of our new TV products for 2022, including our Neo QLED 8K, earned reducing CO2 certification as part of the carbon trust carbon footprint labeling. The DS Division achieved a waste recycling rate of .5% through its multi-pronged approach towards recycling. It received global recycling standard certification by developing eco-friendly clean room garments using waste plastic bottles. And it brought two more of its work sites to the platinum level for zero waste to landfill. Additionally, to reduce GHG emissions, we developed and then installed process gas treatment equipment at our domestic work sites. We expect to reduce greenhouse gas emissions by approximately 190,000 tons monthly through this in-house technology. Along with such activities, we are currently establishing a comprehensive mid to long term environmental strategy that includes a climate change response, and we expect to be able to share detailed plans in the near future. We will continue to systematically promote sustainability management and are committed to transparently communicating our ESG direction and achievements with our customers. I will now turn the conference call over to the representatives 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. For the memory market in the second quarter, server demand remains solid, but demand for consumer products such as mobile weakened due to a widening impact of macro issues. As a result, DRAM and NAND shipments were below big guidance. However, our performance improved both year on year and quarter on quarter as ASP stayed at a better than expected level thanks to our disciplined sales strategy to meet the market demand and also the benefits of a strong dollar. In DRAM, for server there were some disruptions in set bills due to supply issues for certain components, but continued expansion of the proportion of high core CPUs kept fundamental end demand on a solid trend and memory demand on an upswing. Inventories increased at major PCOM companies due to low sale out amid intensifying macro issues such as inflation and demand weakened accordingly. Mobile experienced weak demand trend as well as consumer sentiment worsened due to lockdowns in China and price instability caused by the prolonged Russian-Ukraine war. We achieved the highest sales of server products in the industry for any quarter by optimizing our portfolio and actively responding to solid demand centering on servers. However, we missed guidance for total big growth due to weak demand for consumer products such as PCs and mobile devices. Next, I will talk about the NAND market. The server SSD along with continuously rising demand for high density products thanks to investment by data center customers, demand extended to low density products as customers beat to minimize set bill disruptions caused by a shortage of active passive components. For client SSD, set shipments were flat due to weak purchase demand for PCs attributable to macro issues such as inflation, but SSD content per box and attach rate kept growing thanks to the rising proportion of high end products. For mobile, despite the continued trend toward high density, demand weakened as overall consumer sentiment deteriorated due to the persisting Russian-Ukraine war and lockdowns of major cities in China. We continued to expand the proportion of high density products of 512 gigabit and higher for server SSD and actively responded to the high density trend in client and client SSD and mobile, helping us maintain a decent ASP. However, overall big growth came in below guidance as mobile demand was much weaker than expected. Now, let's move on to the outlook for the second half. For server, even though server demand and macro issues show a relatively weak correlation, there is a possibility of customers temporal inventory adjustment amid some IC component supply problems, as well as a concern over widespread economic recession and geopolitical issues. However, centering on major data center companies, investment in core infrastructure and new growth areas such as AI and 5G are expected to keep expanding so fundamental demand should stay solid. On the other hand, consumer products like PC and mobile are more sensitive to macro factors than servers are and current forecast indicates that related demand is likely to weaken in the second half of the year. And for PC, it is possible that the risk may spread to enterprise segments that are expected to remain relatively solid. But we cannot rule out chances of positive effects on consumer demand during the year-end promotional season. For mobile, chances of a recovery in consumer sentiment toward the end of the year are likely to depend on various factors such as economic policies of major countries and the stabilization of commodity prices. In addition, high density adoption is expected to continue given launches of new mobile products by major customers. Amid the highly volatile market situation, we are planning to maintain our stance of operating an optimized portfolio that centers on high density, high value added solutions based on supply flexibility in accordance with market conditions and customer needs. For product specific strategies, as always, we will improve the quality of its business by staying disciplined against excessive expansion of sales and flexibly managing supply in line with demand. Then we will focus on creating demand mainly for high density products while considering characteristics of high price elasticity. And we will continue to strengthen our market leadership by actively responding to demand based on our excellent cost competitiveness. Finally, as an industry leader, we are sustaining our efforts to reinforce ESG management. For example, based on our accumulated product technology as a leading memory company, we are working to establish a recycling business model that will produce a virtual cycle and streamline resource use. Moreover, as our customer's business pattern shifts from ownership to usage-based, we will make great efforts to develop business models that reinforce our customer's agility and flexibility and also improve the future investment efficiency of our memory business. Thank you.