Samsung Elect Ltd

Welcome, everyone. This is Ben Seo from Investor Relations. Thank you for joining our third 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 today, I'm joined by the following representatives from each business unit. EVP Hanjin Man, representing memory, VP Han Kyuhan for System LSI, EVP Kang Munsoo for Foundry, EVP Choi Geonyoung for Samsung Display Corp, which I will call display in the presentation, VP Kim Sunggu for mobile experience, and VP Kim Youngmu 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, first I want to confirm the third 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 it will be paid in mid-November. Now I will move on to the results for the third quarter. Despite a challenging business environment marked by global inflation and sluggish demand, we still delivered our highest ever third quarter revenue of 76.8 trillion won. We have set new records for total revenue in a respective quarter in each quarter so far this year, and we expect annual revenue to surpass the all-time high mark that we set last year. While memory business revenue declined as customer inventory adjustments caused our bid growth to fall short of guidance, each of the foundry and mobile panel businesses delivered a new quarterly record for revenue. Sales of flagship smartphones were solid, helping drive our overall revenue performance. Gross profit decreased by 2.2 trillion won sequentially to 28.7 trillion won, mainly due to the impacts of a significant price decline in memory. Gross margin decreased by 2.7 percentage points. SG&A expenses increased 1 trillion won quarter-on-quarter to 17.9 trillion won as we continued to actively invest in R&D and increased advertising and promotional spending. As a percentage of sales, they increased by 1.4 percentage points. Operating profit declined 3.2 trillion won sequentially to 10.9 trillion won. Display set a new record for quarterly profit led by increased demand for major customers' new products, and MX improved its profit thanks to solid flagship sales. However, the gains were overshadowed by weak results in the memory business. Operating margin also decreased, falling 4.1 percentage points to 14.1%. I will now briefly review the results for each business unit. For the DS division in memory, Results declined quarter-on-quarter as customers' inventory adjustments exceeded market expectations, and demand for consumer products remained sluggish, including for mobile products in China. In system semiconductors, profits decreased amid weak demand for mobile and TV, but foundry delivered a record result with ongoing yield improvements in advanced nodes and increased revenue contributions from derivative processes of mature nodes. For display, results in the mobile and panel business significantly improved both quarter-on-quarter and year-on-year with the release of major customers' new products, including foldables. Also, our differentiated technology drove increased share in a major customer's new flagship smartphones. Losses in the large panel business continued amid weak TV and monitor markets. The MX business recorded solid profitability driven mainly by strong sales of flagship smartphones, including foldables, as well as new wearable products. MX also benefited from effective resource management in the face of continued foreign exchange headwinds. The network business delivered improved results, led by its overseas businesses, and it secured a deal with Comcast in the United States, a testament to our continued pursuit of new opportunities. In VD, Profits declined amid a combination of decreased demand and increased costs, but still, we reinforced our leadership position by expanding sales of premium products. In digital appliances, despite an enhanced product mix, persistent materials and logistics challenges, along with sluggish consumer demand, affected our performance. Harman delivered a record high quarterly profit driven by strong demand for connected car technologies and solutions, and also by strong sales of consumer audio products. Regarding currency effects against the Korean won for this quarter, the positive impacts of a strong US dollar on component businesses surpassed the adverse impacts of the DX division, resulting in an approximately 1 trillion won company-wide gain in operating profit compared to the previous quarter. Next, I would like to share our business outlooks. In the fourth quarter, while global IT demand and the memory market look to remain weak, we plan to keep improving earnings in foundry and display and continue our efforts to secure profitability in the DX division. Now for each business unit's outlook. In memory, even though we expect fundamental server demand to remain, backed by continued investments in core infrastructure, impacts of inventory adjustments are likely to persist. We will actively address the demand for high-density products and, at the same time, continue to place a priority on DRAM profitability by transitioning our product mix towards a more cost-competitive lineup. For System LSI, we expect our SOC revenue to grow following the launches of new products from our mobile customers and we will work to expand sales of 200-megapixel sensor products. For Foundry, we anticipate that demand from our global customers will remain solid and that additional yield enhancements will help maintain earnings momentum. For display, the mobile panel business is expected to continue to grow on the back of strong smartphone demand for premium OLED panels, in which we have a clear competitive advantage. The large panel business will expand the presence of QD OLED by capitalizing on year-end seasonality and growing our customer base. For the MX business, we will continue to focus on sales of premium smartphones and expand the sales of tablets and wearables. And we expect the sales volume to grow after releasing new mass model smartphones. Even though macro uncertainties are likely to persist, we will continue to focus on profitability. The network will continue to expand overseas businesses, including in the North America and Japan regions. For VD, our priorities are capturing demand in the premium market during strong seasonality and enhancing profitability through improving cost efficiency. Digital Appliances aims to expand revenue by increasing sales in the premium segment and online channels during the year and seasonality, focusing on our bespoke lineup. Now let's move on to our outlook for 2023. We expect demand to recover partially, but macro uncertainties are unlikely to dissipate. The DS Division will actively address the demand for high value-added products expand the advanced node portion of production, and increase adoption into new application areas. The DX division will continue to reinforce our leadership and expand lineups in premium segments, while enhancing user experiences by expanding multi-device connectivity for mobile, TVs, home appliances, and others based on smart things. For the memory business, Although geopolitical uncertainties are likely to dampen demand in the first half, we expect demand to rebound, centering on server, driven by resumed expansion of data centers. We will align our supply strategy with our midterm outlook, taking into account the limited overall production growth in the industry. In addition, we will reinforce market leadership by actively addressing the demand for new interfaces, including DDR5 and LPDDR5X, and the rising demand for high-density products. System LSI, through the reorganization of its SOC business, will be in position to bolster its competitiveness and solidify the position of our flagship products. And in Foundry, we will establish a foothold to narrow the gap with our lead competitor by reinforcing technology leadership in advanced nodes and increasing new orders in HPC and automotives, among others. For display, in the mobile panel business, we will continue to focus on expected strong demand from premium smartphones and on expanding into new application areas such as IT and gaming. The large panel business will increase sales of QD OLED by expanding our lineup and further enhancing performance while also working towards profitability. The MX business will seek to grow revenue by enhancing the product mix and expanding the sales of flagship products based on the high growth of foldable devices and increased sales of the S-Series. Furthermore, We will secure a solid profit margin through our efforts to continue upgrading premium large screen tablets, sustain high growth of wearables, and enhance operational efficiency. For network, we will pursue continued revenue growth with timely responses to major overseas business expansion opportunities and reinforce our technology leadership in 5G core chips and virtualized radio access networks. BD should continue to lead the ultra-large screen and premium market segments. We will continue solidifying our industry-leading position by enhancing user experiences as we link more products seamlessly to our screens. For digital appliances, we will keep innovating highly efficient, eco-friendly products and aim to achieve revenue growth centering on the premium segment through global expansion of our bespoke lineups. Now turning to capital expenditures, capex in the third quarter was 12.7 trillion won, of which 11.5 trillion won was invested in the DS division and 0.5 trillion won in display. The cumulative total capex at the end of the third quarter is 33 trillion won, with 29.1 trillion won invested in DS and 2.1 trillion won in display. We expect full-year CapEx to reach approximately $54 trillion, with $47.7 trillion allocated to the DS division and $3 trillion to display. As a reminder, the full-year numbers are projections, and the actual figures may differ depending on factors such as future market conditions and the timing of equipment deliveries. We expect memory investments to concentrate on infrastructure at P3 and P4, as well as on advanced technologies such as EUV to enhance our market competitiveness. Foundry investments will center on expanding the production capability of our Taylor and Pyeongtaek sites to address the demand for advanced processes using EUV. This is in line with our shell-first strategy that enables swift and flexible responses to customer demand. Display will expand the capacity of flexible displays for mobile products and enhance the efficiency of large QD OLED panel production. Next, I would like to share some of our key activities in sustainability management. First, I would like to recap the September announcement of our new environmental strategy. This strategy contains our commitment to combating the climate crisis and our ambition to achieve net zero carbon emissions by 2050. as the world's largest IT manufacturing company. More specifically, we target reaching net zero carbon emissions by 2030 for the DX division, and by 2050 for all global operations, including the DS division, though we will strive to achieve this earlier. In conjunction, we also joined the global RE100 initiative, under which we will run all operations outside Korea, as well as DX division, on renewable energy within five years and aim to match electric power needs with renewable energy by 2050 for all operations globally. Furthermore, we will reduce power consumption in the product use stage through the development of innovative ultra-low power consumption technologies, and we will bolster resource circularity throughout the entire lifecycle of our products, from raw materials to disposal. For semiconductors, We will secure ultra-low power technology by 2025 to significantly reduce the power needs of memory products used in data centers and mobile devices. Moreover, we will apply low power technologies in major models of seven consumer products with the goal of lowering power consumption by an average of 30% by 2030 versus comparable models released in 2019. To enhance water resource efficiency, we will endeavor to maximize water reuse to keep actual water withdrawals in 2030 to 2021 levels, despite the growing number of production lines at domestic semiconductor worksites. Further, we will actively develop carbon capture and utilization technologies to help tackle global environmental challenges and reduce particulate matter. Next, on October 11th, 2022, Samsung Electronics topped the Forbes list of the world's best employers for the third consecutive year. To compile the ranking, Forbes surveyed 150,000 workers from 57 countries. This is a meaningful and proud achievement, the recognition of our efforts on social responsibility, product and services improvements for our customers, and corporate culture enhancements for our employees. Last but not least, In September, we received the highest ranking on the 2021 evaluation from the Korea Commission for Corporate Partnership for the 11th consecutive year, an unprecedented achievement among Korean companies. It is a recognition of our ceaseless efforts to foster win-win partnerships, not only with our primary, secondary, and tertiary partners, but also with non-partner SMEs also. We will continue to reinforce ESG management going forward. I will now turn the conference call over to the gentlemen from each business unit to present third quarter performances and outlooks for their respective business segments. We will start with EDB Hanjin Man of 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 third quarter, under continued micro uncertainties, the scale of customers' inventory adjustment exceeded market expectations, and demand for consumer products continued to slow down. As a result, DRAM and BIT growth were both below guidance, and our performance declined compared to the previous quarter. In DRAM, overall demand for servers decreased as customers reduced their purchasing budgets and strictly managed inventory levels, while some components' supply issues remained. For mobile, consumer sentiment worsened amid ongoing macro issues such as inflation and COVID-19 lockdowns, and demand declined due to high inventory levels at customers. And for PC, while overall purchasing sentiment weakened because of the economic slowdown, Demand decreased due to inventory adjustment at major OEM customers. In the face of a worsening slowdown in demand across the industry, we maintained a disciplined sales strategy focused on profitability, and our inventory levels increased. Consequently, big growth was below guidance due to impacts of weak demand across the market. Next, I will talk about the net market. For server SSD, overall demand slowed due to component supply issues starting last year and expanding stance of customers' inventory adjustment triggered by increased macro uncertainties. For mobile, although the high density portion of products kept increasing, consumer sentiment shrank due to macro issues and demand weakened because of factors such as COVID-19 lockdowns. For client SSD, despite a continuously increasing need for high-density products, memory demand decreased, asset shipments weakened, and customer inventory increased. We strengthened our product portfolio by consistently increasing the high-density portion in mobile and server OEM applications, but our overall big growth was below guidance due to high inventory levels at major customers and weak set demand, mainly in mobile customers. which accounts for a significant portion of our sales. Now let's move to the outlook for the fourth quarter. We expect the impact of various macro issues to continue until the end of this year, and that our customers will maintain their stance toward inventory adjustment. Even under these market conditions, we aim to deliver bid growth that exceeds market for both DRAM and NAND mainly due to base effect, focusing on high density, high performance products in line with the needs of our customers. For DRAM, we will maintain our strategy of prioritizing profitability by considering cost competitiveness in determining product mix. Additionally, compared to last year, CAPEX for the year is likely to increase slightly as we plan to preemptively invest in infrastructure and leading technologies to ensure readiness to meet long-term demand and strengthen our technological competitiveness. I will now go over the outlook by each product. For DRAM in-server, while the shortage of some components is easing gradually, we expect fundamental server demand to remain steady. given key infrastructure investment in AI and 5G, etc. However, our customer stance on inventory adjustment is likely to remain until the end of this year due to economic uncertainties. For mobile, we expect memory demand to pick up thanks to the mass production of new flagship and high-end models by major manufacturers. And if the economy recovers progressively toward the end of the year, we may see a rebound in demand, although we should keep checking on uncertainties such as the potential for additional COVID-19 lockdowns. For PC, while consumer sentiment continues to slow, customers are likely to remain conservative on spending as OEM companies are increasingly burdened with inventory adjustment. However, we need to observe how companies' end-of-the-year promotions affect consumption. We will keep strengthening our cost competitiveness and securing profitability by expanding cutting-edge node migration for several products, and we will also focus on preparing 16GB base products to cope with demand for high-density products of 64GB and higher. Moreover, we will continue to strengthen our market leadership by responding to LPDDR5X demand for new flagship mobile models. For NAND, we expect our customers to remain disciplined on inventory for Server SSD, at least until the fourth quarter amid worries of a global economic slowdown and geopolitical issues. On the other hand, demand is solid for Server OEM SSDs that are linked to the hybrid cloud trend, so we are monitoring demand relative to improvements in market conditions. For mobile, it seems that demand for high-density products of 256 GB and above will remain solid, driven by a combination of new smartphone launches in fourth quarter and a continued preference for high-end models. Also, there is potential for year-end promotions to spark a temporary rebound in demand, considering the fact that recovery of consumer sentiment for IT devices is a key to set shipments. However, we need to keep track of the scale of the effect. For client SSDs, as sluggish sell-out weighed on demand from PC, inventory adjustment at customers are likely to continue. As a result, we expect effects of peak seasonality in fourth quarter to be somewhat limited. However, in terms of storage, high density demand is projected to keep increasing. We will actively respond to the demand for high-performance and high-density products generated by customers who strive for securing growth momentum in the market, while also capitalizing on NAND's high price elasticity to steadily unlock new demand and continue to expand market leadership. Now let's move on to the outlook for 2023. Ongoing macro issues such as the war in Ukraine and austerity measures in various countries to deal with inflation are expected to partially impact demand in the first half of next year. Looking at each application, first for server, demand should improve gradually throughout the year as we expect the adoption of DDR5 for new CPUs to expand and high density trends to widen. Moreover, Cloud companies are projected to resume construction of data centers that were previously delayed. However, as various micro issues have weakened demand, we will keep preparing for various scenarios and observing market conditions. For mobile, it is highly likely that demand will remain slow in the first half of the year, with consumer sentiment expected to remain somewhat sluggish on top of effects of weak seasonality. On the other hand, As we enter the second half, we believe the adoption of high-density products in new models and the expansion of new form factors will partially help boost mobile demand, which has been suppressed. For PC, similar to mobile, set inventories that accumulated due to sluggish sell-out would be depleted in the first half of the year, but we are likely to see a dramatic recovery in demand. If the macroeconomy stabilizes as we move into the second half, we will continue to watch for signs of improving in demand. While striving to secure a reasonable level of strategic annual supply contract mainly with major customers, we plan to proactively address demand for products showing relatively higher demand growth, such as servers. Moreover, Through our ongoing efforts to optimize our portfolio, we will also address the growing and diversifying demand of our customers in various applications. Additionally, we will focus on planning to link our supply operations to our mid-term plans as we expect the recent increases in complexity of tech migration to cutting-edge nodes and growing lead times to constrain big growth across the industry. Also, by responding to rising demand for new interfaces such as DDR5 and LPDDR5 and LPDDR5X, as well as for high-density products, we will continue to secure our sustainable market leadership. Thank you.

Good morning. This is Kenny Han from the C7SI business. In the third quarter, C7SI earnings declined due to a decrease in demand for major components resulting from a slowdown in mobile, TV, and PC demand triggered by an economic downturn. However, associate revenue grew thanks to an increased portion of 5G and higher sales of products for use in premium segments. In addition, we signed a long-term supply agreement for modern products with a Tier 1 Android smartphone customers, and reinforce the basis for mid- to long-term growth for automotive SOCs by winning OEM orders from a number of premium European brands, including one in the UK, and by expanding strategic cooperation with them. In the fourth quarter, we expect sales in the SOC business to increase due to the effects of a new product launch by the a Tier 1 Android smartphone company. Furthermore, our new low-to-mid-price SoCs targeting smartphones are scheduled to start mass production, which will contribute significantly to their revenue in 2023. In addition, we expect image sensors to deliver improved earnings, with a number of smartphones featuring our 200-megapixel sensors being released in earnings. For 2023, feasibility in mobile, a major application, is becoming increasingly limited due to heightened economic uncertainties. However, analysis of smartphone purchase patterns suggest that demand will continue to polarize between premium and low-priced phones. In order to respond to this divided market, we will expand sales in the volume zone while also strengthening the competitiveness of flagship products. Furthermore, we will work closely with foundries in order to smoothly supply various 200 megapixel sensors, helping ensure our major customers successfully launch flagship models. Thank you.