Samsung Elect Ltd

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference out of fiscal year 2023, 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 star and 1 on your phone during the Q&A. For cancellation, please press start 2, that is star and 2 on your phone. Now we shall commence the presentation on the Fiscal Year 2023 First Quarter Earnings Research by Samsung Electronics.

Welcome, everyone. This is Ben Seo, Head of Investor Relations. Thank you for joining Samsung Electronics' First Quarter 2023 Earnings Call. For additional details regarding our quarterly results, please refer to our earnings presentation which has a new format and is available on our IR website at www.samsung.com slash global slash IR. Joining me on the call today are EVP Jaejun Kim, representing memory, VP Hyukman Kwon for system LSI, EVP Gibong Jung for foundry, EVP Casey Choi for Samsung Display Corp, which I will refer to as display during today's call, VP Daniel Araujo for mobile experience, VP Kale Rowe for visual display, and VP Sangyoon Kim for digital appliances. 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 discussions. I will start with the results for the first quarter of 2023. The business environment in the first quarter continued to deteriorate with overall consumer sentiment weakening due to rising concerns over an economic slowdown amid persistent global macro uncertainties and geopolitical issues. As a result, our consolidated revenue for the quarter declined by 9.5% sequentially to 63.7 trillion won. Although revenue for the memory business and other component businesses declined considerably due to the repercussions of decreased demand, the DX division increased revenue on the back of strong sales of new flagship smartphone models. Our consolidated gross profit decreased by 4.1 trillion won, sequentially to 17.7 trillion won, mainly due to the continued price decline and inventory valuation loss in memory. Gross margin also decreased by 3.2 percentage points to 27.8%. SG&A expenses declined by 0.4 trillion won quarter-on-quarter to 17.1 trillion won, primarily due to reduced advertising and promotional spending. However, as a percentage of sales, they increased by 1.9 percentage points to 26.8% due to the decline in sales. R&D expenses exceeded last quarter's record amount and reached a new high as we continue to invest in the future. Operating profit in the DX division increased thanks to gains in the MX business, but operating profit declined significantly in our component businesses amidst sluggish demand, causing our consolidated operating profit to fall 3.7 trillion won sequentially to 0.6 trillion won. Operating margin also fell 5.1 percentage points to 1%. For the following results and outlook sections, I will provide brief overviews for DS, Display, and DX, and include specific business unit results only for those that are not covered in separate speeches. For the DS division in the first quarter, profits decreased considerably quarter-on-quarter due to an increased inventory valuation loss in memory, which newly included DRAM, a decline in utilization at Foundry, and continued overall impacts of weak demand and customer inventory adjustments. For display, while the mobile panel business recorded a decline in earnings amid a market contraction, the large panel business slightly narrowed its losses. The DX division delivered improved results thanks to strong sales of premium S23 models and enhanced sales mix focusing on premium TVs and improved operational efficiency. The network business saw its revenue decrease due to weakness in major overseas markets such as North America and Southwest Asia. The digital appliances business reported similar earnings sequentially amid still sluggish demand and continued cost burdens. Regarding currency effects in the first quarter, the Korean won strengthened against the U.S. dollar, euro, and most major emerging currencies. The relative weakness of the U.S. dollar had the effect of a company-wide quarter-on-quarter operating profit reduction of approximately 0.7 trillion won, centering on our component businesses, which are more sensitive to the U.S. dollar. Next, I would like to share our business outlooks. In the second quarter, under expectations of continued weakness in demand, DS will remain committed to boosting our technological competitiveness, including the two-nanometer gate all-around process, while meeting the demand for DDR5 and LPDDR5X and other high-end products. For display in the seasonally weak second quarter, the mobile panel business will focus on preparing for second-half demand and the large panel business is expected to increase its sales. DX will maintain solid profitability by expanding sales of A-series smartphones and new TV models while fully preparing for strong seasonality of digital appliances and improving cost efficiencies. The network will keep solidifying its business foundation, particularly in North America and Korea, as it explores new business opportunities. Digital appliances will focus on securing profitability by improving its sales structure and cost efficiency, while continuing the global expansion of bespoke products as we enter a seasonal upcycle. In the second half of 2023, there is a general expectation for market conditions to gradually recover amid projections for a rebound in global demand. ES will stay on top of the demand for high-capacity server and mobile products and continue to reinforce its leadership in differentiated technology, which includes preparing for next-generation flagship mobile SOCs and increasing orders for our leading GAA processes. Display's mobile panel business will maintain its unparalleled position in the high-end market based on its differentiated technology. and the large panel business will push to expand its presence in the premium market and improve profitability. EX will further solidify its leadership in the premium segment, which includes foldables and NAIL QLED. At the same time, it will increase its market share by cooperating with partners and enhance profitability by continuing to improve operational efficiency. Network will pursue revenue growth through its major overseas contracts by promptly addressing customer needs and winning new orders, all while reinforcing our technology leadership in 5G core chips and virtualized radio access networks. With digital appliances, we will boost our product competitiveness via smart things while pursuing growth by increasing sales of high-value products and further promoting package sales. Now moving on to capital expenditures. CapEx in the first quarter was 10.7 trillion won with 9.8 trillion won invested in the DS division and 0.3 trillion won in display. Memory CapEx concentrated on facilities in Pyeongtaek, which included completing P3 infrastructure and P4 framework progress for mid to long-term supply. and also on equipment to prepare for advanced node demand. In addition, we continued our R&D and back-end investments to further bolster future competitiveness. Foundry investments continued to focus on Taylor Texas and Pyeongtaek to address the demand for advanced nodes, while display investments focused on infrastructure and module production enhancements. Next, I would like to address the shareholder returns. Today, the Board of Directors approved a quarterly dividend of $361.1 per share for both common and preferred stocks. Based on the annual dividend payout under the current dividend policy, which applies until the end of this year, the total quarterly payout is $2.45 trillion and it will be paid in May. Finally, I would like to share some of our key activities in sustainability management. First, by applying innovative technologies, we have continued our efforts to ensure that using our products and services contributes to a low-carbon and sustainable future. As prime examples of our everyday sustainability, we increased the adoption of recycled materials in our products, especially in our latest Galaxy S23 phones. We have also enhanced the energy efficiency of the key components used in our large digital appliance models, which contributed to 75% of our new models in Korea, achieving top energy efficiency ratings. And we have further enabled energy savings through the AI energy mode in our SmartThings energy service. Finally, following a successful release in Europe last year, we introduced the microplastic reduction cycle in the Korean market, The bespoke Grande AI model, developed in collaboration with Patagonia, can reduce microplastic release by up to 60% compared to a regular cycle. On another front, we announced Samsung's Global Human Rights Principles, a policy based on international standards such as the UN Guiding Principles on Business and Human Rights in February. This announcement forms part of Samsung's ongoing efforts to respect and promote the labor and human rights of employees at Samsung Electronics and its partners in all aspects of our business. The principles comprehensively encompass all of Samsung's pre-existing policies related to human rights, such as our child labor prohibition policy, anti-discrimination and harassment policy, to name a few. Meanwhile, Samsung Electronics ranked seventh in the 2023 Digital Inclusion Benchmark, as measured by the World Benchmarking Alliance, a global alliance for sustainability management. We achieved the highest ranking among Asian companies, garnering this special recognition for our efforts to support open source, lead standardization in the industry, and foster an ecosystem for tech start-ups. Last but not least, the Alliance for Water Stewardship awarded our Hwaseong campus with certified platinum status, the organization's highest certification level for water resource management. This is the first such recognition in Korea, and the award recognizes the outstanding water management systems at our semiconductor sites. We will continue our efforts to enhance sustainability in all aspects of our business. I will now turn the conference call over to the representatives from each business unit to present first quarter performances and outlooks for their 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 Memory Global Sales and Marketing at Samsung Electronics. In the memory market of the first quarter, while the macroeconomic continued to slow down and customer purchasing sentiment was weakened, overall demand decreased as many customers continued inventory adjustments to improve their financial health. As a result, our performance fell significantly compared to the previous quarter. If you look at each product in D-Lab, while customer inventory is still at a high level for servers, the demand for servers was sluggish with inventory adjustments by customers, mainly hyperscalers, affected by shrinking IT spending of many enterprises under economic uncertainties. For mobile and PC applications, although customer inventories of finished goods in distribution channels are relatively improved, the demand situation was sluggish with purchasing delays and set build reductions as consumer sentiment has not recovered yet. Under this market environment, we preemptively responded to demand for high density mobile products which was boosted by strong sales of new smartphones by major mobile customers. As for server applications, while customers continue to adjust their component inventories, we focus on capturing DDR5 server demand in line with the adoption of new CPUs. As a result, though price fell less than the market forecast, due to our focusing on selling high-value-added ISA products, but Big Growth couldn't meet this previous guidance. Next, I will talk about the ISA land market. The slowdown in demand for server and storage applications has been more clearly observed compared to the other applications. And as I previously mentioned for DLAC, our analysis revealed that the demand sluggishness is linked with reduced enterprise IT spending. Actually, in addition to this, server SSD demand showed further contraction due to customer inventory adjustment. For mobile and client SSD, the demand continued to remain sluggish as well. Because the sell-out recovery was not feasible, as overall consumer sentiment has not recovered yet, despite China's reopening. In spite of this weak demand, we actively responded to the trends toward high density across overall applications, such as e-storage of 512GB and above for major mobile customers, and client assets is over one terabyte and above for PC OEMs. As a result, our big growth exceeded each of the previous guidance. Moving on to the outlook for the second quarter. First of all, let me tell you about the market by applications. As major hyperscalers are conservatively investing in servers and customers are continuing to adjust inventories, Demand recovery is expected to be continuously limited following the first quarter. For mobile and PC, customer inventories for component and finished goods are expected to be healthy, but consumer sentiment trends seem to be important variables for set demand due to macroeconomic conditions. That includes China's reopening and the follow-up economic stimulus packages. On the other hand, the transition trend to high density products based on price elasticity is expected to continue. In DRAM case, in order to align with this market situation, we will timely respond to the increasing demand for DDR5 and high density modules. led by the launch of new CPUs for servers and increased demand for AI. And we will also actively respond to LPDDR5X demand for mobile high-end products, such as new compact smartphones. For NAND, based on cost competitiveness, we plan to actively address demand for high-density products across all applications, while responding to customers' need for high-density storages by creating its mobile QAC market and diversifying product portfolios. Moreover, as we announced in our preliminary first quarter result, we have already started lowering down our productions. Therefore, our inventory levels are expected to start to decline from the second quarter and such reduction is expected to expand in the second half. Now let me tell you about the outlook for the second half of the year. Demand is expected to gradually recover in the second half of this year as customer inventory levels will have declined due to inventory adjustments that have been occurring since last year. This demand recovery is expected to begin with consumer products such as mobile and PC, for which inventory adjustments by customer began earlier than they did for commercial applications such as software and storage. First of all, for mobile and PC, with finished good inventory level decreasing in comparison with the first half, SEP build demand is expected to improve with the launch of new smartphone and PC promotion in the second half of the year. In addition, the trends toward high density based on overall price elasticity is expected to continue. Thus, we are expecting to see a demand pattern of weak in the first half and strong in the second half. For server, the timing of demand recovery may be later than for PC and mobile, since customers' inventory adjustments started relatively late. However, the portion of DDR5 is expected to increase due to the expansion of new CPU adoption, and contents per box will continue to grow as the transition to high-core CPUs will accelerate. Demand will continue to recover in the second half of the year, but it is expected to grow mainly with new memory products due to factors such as CPU platform convergence scheduled for the second half of the year and the customer inventory adjustment trend. Therefore, we are lowering its production mainly for legacy nodes products for which demand is expected to be relatively sluggish, while responding to the market with an increased portion of cutting-edge nodes and high-value added products. From a product standpoint, for DRAM, we plan to accelerate the conversion of cutting-edge nodes for DDR5 and NPDDR5X, and actively respond to the strong market demand for HBM3, 8-high, and 12-high. For NAN, we are going to strengthen supply operations focusing on products that consumers need by creating a mobile QAC market and expanding the portion of cutting-edge nodes such as V7 and V8. Under these trends, we will maintain a similar level of CAPEX compared to last year and continue to expand infrastructure and R&D portion of investment to secure mid- to long-term competitiveness. Thank you.