Samsung Elect Ltd

Welcome, everyone. This is Ben Seo from Investor Relations. Thank you for joining Samsung Electronics' fourth 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. On today's earnings call, other than for display, I am joined by new representatives from each business unit due to our reorg at the end of last year. We have EVP Jaejun Kim representing memory, VP Hyukman Kwon for system LSI, EVP Gibong Chung for foundry, EVP Casey Choi for Samsung Display Corporation, which I will refer to as display during today's call, VP Daniel Araujo for mobile experience and VP Kale Rowe 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 and are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today's discussion. I will start with the results for the fourth quarter of 2022. The business environment deteriorated significantly in the fourth quarter, showing weak demand amid an economic slowdown triggered by global macro and geopolitical issues. As a result, our consolidated quarterly revenue declined sequentially by 8.2% to 70.5 trillion won. However, we delivered a second straight record for annual revenue thanks to our performance in this year's first three quarters. Although the memory business revenue declined due to extremely challenging market conditions, foundry business reported record quarterly revenue. Gross profit decreased by 6.9 trillion won sequentially to 21.8 trillion won mainly due to the impacts of a significant price decline and an inventory valuation loss in memory, coupled with weak sales of smartphones. Gross margin also decreased by 6.4 percentage points to 31%. SG&A expenses declined by 0.3 trillion won quarter-on-quarter to 17.5 trillion won, primarily due to reduced advertising and promotional spending. However, as a percentage of sales, they increased by 1.6 percentage points. R&D expenses reached a record high as we continue to invest in the future. Operating profit declined 6.5 trillion won sequentially to 4.3 trillion won as memory profit dropped significantly due to the aforementioned issues and as MX profit decreased due to softened new product effects. Operating margin also fell 8 percentage points to 6.1%. I will now briefly review the results of each business unit. Please note that all results mentioned refer to sequential quarter-on-quarter changes unless otherwise specified. For the DS division, in memory, results were down sharply due to a large ASP decline as customers continued to adjust inventory and there was also a significant inventory valuation loss. In System LSI, earnings decreased as sales of key products were weighed down by customers' inventory adjustments. Foundry delivered record high quarterly revenue thanks to increased sales to its major customers. Profit increased year-on-year based on expanded advanced node capacity as well as a diversification of the customer base and application areas. For display, the mobile panel business earnings declined due to reduced demand from smartphones. Nonetheless, the business delivered unrivaled results among industry peers through its strategic focus on the high-end segment. The large panel business narrowed its losses as sales of QD OLED for TV grew amid strong year-end seasonality. and as the business fully depleted its LCD inventory. For the MX business, both revenue and profit declined due to the waning launch effects of new products and weak demand in the mid- to low-end segment. The network business recorded revenue growth led by domestic demand for 5G installations and business expansion overseas, including in North America. In VD, Both revenue and operating profit grew as we actively addressed year-end seasonal demand and increased sales centering on premium products, including Neo QLED and SuperBig TVs. In digital appliances, profit decreased as market conditions further deteriorated, while material and shipping costs remained high and competition intensified. Harman delivered a record high quarterly profit for the second consecutive quarter, driven by increased revenue in the automotive business and solid sales of consumer audio products. Regarding currency effects against the Korean won in the fourth quarter, the positive impacts of a strong U.S. dollar on our component businesses had the effect of a company-wide gain of approximately 0.5 trillion won in operating profit when compared to the previous quarter. Regarding our corporate tax rate, Korea recently reformed several tax measures, including the introduction of dividends received exclusion for dividends from subsidiaries. Under this new exclusion measure, our corporate tax for the fourth quarter decreased, resulting in a net income of $23.8 trillion won for the fourth quarter. Previously, the company conservatively deferred corporate tax liabilities under the assumption that the entire earnings of our subsidiaries would repatriate in the form of dividends. The recent reform that prevents the double taxation on subsidiaries' dividends eliminated the need for such deferrals. As a result, the corporate tax rate expense for the fourth quarter became a negative number under the Korean International Financial Reporting Standards. Please note this is a one-time consequence of the recent tax law changes. It does not mean that the company received a corporate tax refund, nor is it related to the company's actual tax payments. Next, I would like to share an overview of our business outlooks. In the first quarter, we expect global IT demand and the memory market to remain weak. DS will minimize adverse impacts by addressing the demand for high-end products such as DDR5, LPDDR5X, and 200MP sensors. However, concerns over continued customer inventory adjustments do persist. Display will actively engage to meet the demand for our major customers' new products. And DX will increase revenue and profits by expanding our leadership in the premium segment via Galaxy S23, for example, and improving operational efficiency. I will now brief you on the outlooks for businesses that are not covered by separate speeches, as those will follow shortly. Network will focus on expanding our domestic and overseas businesses, including North America, and address new opportunities. Digital Appliances aims to increase sales in the premium segment by launching new models such as Bespoke Infinite Line despite continued earnings pressure due to the poor economic conditions. For Harman, we expect earnings to decrease mainly affected by weak seasonality for consumer audio products. Now let's move on to our outlook for 2023. Although macro uncertainties are expected to remain high, we anticipate demand to start to recover in the second half, following continued weakness in the short term. DS will further reinforce its market and technology leadership as we optimize our line operations to strengthen future competitiveness, while also expanding the proportion of its advanced nodes and products, such as DDR5, LPDDR5X, and gate all-around technology. Display's mobile panel business is expected to deliver solid earnings based on its competitiveness, and the large panel business will focus on growing the QD or LED business and improving profitability. EX will enhance its competitiveness by leveraging our technology leadership to strengthen the premium lineups. And the division will further expand the SmartSings ecosystem based on differentiated technologies and diverse partnerships that will provide customized hyper-connected experiences. As for the businesses not covered later, NETWORK will sustain revenue growth momentum by actively responding to major opportunities, particularly in our overseas business. And we will reinforce our technology leadership in 5G core chips and virtualized radio access networks. For digital appliances, we will continue to lead the market in providing hyper-connected experiences by further enabling our products with smart things. And at the same time, we will enhance the competitive edge of our premium products centered on bespoke. Moreover, we will accelerate the growth of high-margin products such as system air conditioners, and expand B2B and online sales in order to promote revenue growth. For Harman, both the automotive and consumer audio markets are projected to grow slightly in 2023. The audio business will strive to increase both on- and offline sales based on the competitiveness of our differentiated products and brands. and the automotive business will push to increase its sales in digital cockpits and car audio products. Turning to capital expenditures, CAPEX in the fourth quarter was $20.2 trillion won, of which $18.8 trillion won was invested in the DS division and $0.4 trillion won in display. Memory Capex concentrated on preparations for advanced technologies, which included investing in P3 and P4 infrastructure to provide readiness for mid- to long-term bid supply, as well as in EUV to further bolster future competitiveness. We also invested in securing infrastructure for future generation R&D. Foundry investments focused on expanding the production capacity of advanced nodes at our Pyeongtaek site, as well as on initial capacity for 3 nanometer and infrastructure for our Taylor site to address future demand. Display investments covered flexible display production capacity expansion, as well as facility improvements and infrastructure. The annual capex was 53.1 trillion won, with $47.9 trillion invested in DS and $2.5 trillion in display. Although the CAPEX plan for 2023 has not been finalized, I can share some high-level directions. In memory, we will continue to invest for the mid- to long-term to prepare for future demand and further enhance technology leadership. In addition to continuing with our EUV differentiation, our midterm plan includes investments for the transition to advanced technology nodes to address the markets for high-performance, high-density DDR5, LPDDR5X products, which are expected to be in high demand starting in the second half of 2023. For the longer term, we will also invest in infrastructure for P4 and multiple R&D capabilities including a new dedicated semiconductor R&D fab, as well as in capacity for the development of future generation processes. Foundry investments will continue to center on expanding the production capability at our Taylor and Pyeongtaek sites to address the demand for advanced processes, which is in line with our Shell First strategy that enables us to respond swiftly and flexibly to customer demand. Next, I would like to address shareholder returns. Today, the Board of Directors approved a quarterly dividend of $361 per share for common stock and $362 per share for preferred stock. Based on the annual dividend payout under the current dividend policy, the total quarterly dividend payout is $2.45 trillion and it will be paid after final approval at the annual general meeting of shareholders. As we close out the results for 2022, I would also like to share that the annual free cash flow was $9.8 trillion won, and the shareholder return pool at 50% of the free cash flow is approximately $4.9 trillion won. Considering the projected annual dividend for 2022, is 9.8 trillion won, there was no additional pool for an earlier return. In 2023, as we set out to implement large investments for our future growth and differentiation, amid a challenging business environment, we will be especially more conscious about continuing to enhance our capital management efficiency. Next, I would like to share some of our key activities in sustainability management. First, as we recently showcased at CES 2023, we are committed to enhancing resource circularity throughout our products' lifecycle and improving their energy efficiency, such that using Samsung products contributes to a low-carbon and sustainable future. As prime examples of everyday sustainability, our SmartThings energy service allows users to effectively manage the energy use of all devices linked through this service. And through collaboration with Patagonia, we have developed and introduced a laundry cycle that can reduce microplastic release by up to 54% based on results from the European market. Finally, we applied innovative technologies to transform discarded fishing nets into recycled plastic components for use in our smartphones. Through these recycling efforts, we were honored with the SEAL Sustainable Product Award, an acknowledgement of our commitment to a sustainable future. Moreover, we are joining forces with like-minded global partners to create ecosystems that enhance sustainability. For example, we are working together with Carbon Trust and other industry leaders to establish an industry standard to measure and reduce carbon emissions, in the use stage of connected devices. Moreover, as part of our advocacy efforts to increase the supply of renewable energy in Asia, we are participating in the Asia Clean Energy Coalition as a member of the steering committee. Last but not least, to address the challenges faced by the semiconductor industry, we have joined the Semiconductor Climate Consortium as one of its founding members and have also been elected as a member of the Governing Committee. Furthermore, Samsung Global Goals, an application on Galaxy smartphones, raised more than $10 million to contribute to the United Nations Development Program's efforts to implement the Sustainable Development Goals. Meanwhile, Samsung ranked fifth for the third consecutive year in Interbrand's Best Global Brands, achieving the highest growth in ranking among non-US companies. We will continue our efforts to enhance sustainability in all aspects of our businesses going forward. I will now turn the conference call over to the representatives from each business unit to present fourth quarter performance and outlooks for the respective business segments in more detail. We will start with EVP Jaejun Kim of the memory business.

Thank you. Good morning. This is Jaejun Kim from the memory global sales and marketing. For the memory market in the fourth quarter, demand weakened as customer continued to adjust inventory. under increased uncertainties in the external environment. Our big growth outgrew the market by expanding sales focusing on server applications, aided by the base effect of coming in on the market last quarter. However, memory price fell further as deepening macro issues eroded consumer sentiment. Additionally, with the impact of meaningful loss from the valuation of inventory, our result decreased significantly compared to the previous quarter. In DRAM, for server, as you know, component supply issues gradually eased. However, demand growth was limited because of decline in SEP build caused by economic uncertainties and customers' stance to maintain their inventory adjustments. For mobile and PC, it seems that demand was muted because of continued inventory adjustment at major customers and a reduction in set bills. Amid its shrink, consumer sentiment coming from concerns over an economic slowdown. While the decline in demand was steepening across the overall industry, we expanded a portion of cutting-edge nodes by optimizing our product portfolio. In addition, we actively responded to demand for high-density products, focusing on major data centers and sub-OEM customers, and our quarter-on-quarter big growth exceeded markets. Next, I will talk about the NAND market. For server SSD, despite continued growth in contents per box, customers continued to delay purchases because of their inventory adjustments and demand was somewhat stagnant. As for mobile, while consumer sentiment remained weak due to the economic slowdown, Demand was sluggish, especially in China, because of zero-COVID policy until early December, and production disruption at some customers. Also, for client SSD, with the reduction of set build at some customers, the burden of inventory adjustment increased, and demand for memory purchase somewhat slowed. As demand continues to weaken due to macro issues, we actively address demand for high-density products across all applications and diversify our product and customer portfolios. As a result, QoQo Big Growth exceeded market. Now let's move to the outlook for the first quarter. For DRAM, In server, as economic uncertainties continue, customers have maintained their stance on inventory adjustment so far. Thus, under concerns over weakening momentum for demand recovery in the short term, we should monitor if demand will improve in accordance with macro variables such as interest rate policies. And for mobile and PC, under the effect of slow seasonality and a weakened consumer sentiment due to concerns over a deepening economic slowdown, there is a possibility that demand will shrink. However, we need to keep watching for signs of demand recovery, along with developments in China's COVID-19 recovery situation and economic stimulus packages. As a new CPU launches, we will work to prepare for expected fast-growing DDR5 demand for server and PC. And in mobile application, we will actively address demand for high-density LPDDR5X for high-end products. For NAND, in Server SSD, there is a possibility that demand will drop significantly, slightly compared to previous quarter as customers continue to adjust their inventory due to set bills constrained under concerns over a deepening economic slowdown. However, considering the hybrid cloud trends of enterprise area can positively influence demand, and we need to monitor detailed impacts. For mobile, although we expect continued high density trends based on price elasticity, We expect demand to be weak as customer sentiment continues to be sluggish because of inflation and interest rate hikes. Also for client SSD, even though demand for high density products is expected to increase steadily, purchase activities are projected to be delayed as OEM customers deplete their accumulated set inventories. Based on our cost competitiveness, we plan to expand the sales portion of high-value-added products by addressing demand for high-density server SSDs. Also, we will actively accommodate the high-density trends of smartphones and PCs to strengthen our market leadership. Now let's move on to the outlook for 2023. While the industry's overall inventory level has increased due to the lowest ever demand big growth last year, customers are likely to maintain their stance on inventory adjustment in the near term. We expect customer purchasing sentiment to recover after inventory adjustments are complete, but it's necessary to monitor whether change in economic conditions and consumer sentiment result in improved demand. Looking at by each application, first of all, for server, for the time being, customers are expected to keep adjusting inventories due to economic uncertainties. However, we expect fundamental demand to remain solid given the investment in core infrastructure such as for AI and machine learning. In particular, demand for DDR5 is projected to increase in earnest in the second half of the year thanks to increasing contents per box and the launch of new CPUs. For mobile, consumer sentiment is likely to keep muted due to various macro issues. However, demand may recover relatively in the second half of the year thanks to the high density trends and the spread of new form factors in smartphones. Considering the numerous variables affecting demands, such as inflation and interest rate trends, as well as China's easing COVID-19 policy and economic stimulus packages, we will continue to observe market conditions for variable scenarios. For PCs similar to mobile, the surge in sales induced by COVID-19 is likely to cause the replacement cycle to take some time, and shipments are forecast to weaken for the time being. However, we will continue to watch for factors that positively affect demand, such as the launch of new CPUs and increased adoption of high-density products. While actively addressing to the demand for DDR5, with the rising adoption of new CPUs, we will respond to demand growth in a timely manner, focusing on high-density products for server and mobile by optimizing our product mix. Moreover, to strengthen our future competitiveness, we are going to optimize line operations. In addition, we will increase the portion of essential R&D investments, including the expansion of engineering run for further process stabilization. And we believe that it will bring us enhanced market and technology leadership. Furthermore, under the market uncertainties, we will carefully keep monitoring the market demand changes from both short- and mid- to long-term perspective. Thank you.

Good morning. This is Hyungman Kwon from the system LSI business. In the first quarter, system LSI earnings declined due to sluggish sales caused by inventory adjustment in the industry and a decrease in sales for major components. However, Even under difficult conditions, the mobile SOC business achieved its highest ever full-year revenues, and it has continued to increase market share by expanding sales of volume zone products. Furthermore, the automotive SOC business has solidified its mid- to long-term growth base by supplying an initial sample on schedule for a European market. premium OEM, and by signing a MOU for product development with autonomous driving solution company in the U.S. Additionally, our fingerprint authentication card product won the Fast Turbo Innovation Award at CES 2023. In the first quarter, impact of slow EC demand and inventory adjustments are expected to continue for the time being. and it may be difficult to avoid weak sales of major components such as SoCs and sensors. In order to minimize the drop in earnings, we will strive to expand sales of low- to mid-priced volume zone SoCs and 200MP image sensors. And for automotive SoCs, we will try to sustain growth momentum through additional orders from European premium OEMs and for self-driving products. For 2023, we expect the impact of the economic downturns to continue for the time being. However, analysis of smartphone purchase patterns suggests that demand will continue to polarize between premium and low-priced mobile phones. In order to respond to this divided market for SOCs, we will expand the sales in the volume zone while also reinforcing the position of our product for flagship devices. Furthermore, we will ensure our major smartphone OEM customers successfully launch flagship models by smoothly supplying and expanding the line of our differentiated 200-megapixel sensors. Thank you.