Samsung Elect Ltd

Welcome everyone. This is Ben Seo, head of investor relations. Thank you for joining Samsung Electronics' third quarter 2023 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. Joining me today on the call are EVP Jaejun Kim, representing memory, VP Hyukman Kwon for System LSI, EVP Kibong Jung for Foundry, EVP Casey Choi for Samsung Display, 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 statements based on the environment as we currently see it. They are subject to certain risks and uncertainties that may cause our actual results to materially differ from those expressed in today's discussion. I will start with our results for the third quarter of 2023. Our consolidated revenue increased .3% sequentially to $67.4 trillion one, with the release of new smartphone models and increased sales of premium display products being the main contributors. Consolidated growth profit increased .2% of $2.4 trillion one to $20.8 trillion one, led by improved product mixes from both MX and display. Growth margin also increased slightly to .8% from .6% in the previous quarter. SG&A expenses grew $0.7 trillion one quarter on quarter to $18.4 trillion one, as advertising and promotional spending increased with the release of new smartphone models, while we continued our large-scale commitment to R&D for future growth. However, as a percentage of sales, SG&A expenses decreased by 2.3 percentage points to 27.2%. Operating profit was $2.4 trillion one of $1.8 trillion one sequentially, driven by strong sales of flagship models in MX, increased demand in display thanks to strong demand for major clients' new products, and DS division's narrowed losses compared to the previous quarter. I will now provide high-level overviews of our performance and outlooks, and representatives of the business units will provide more details following my presentation. For the DS division, memory reduced its losses quarter on quarter, mainly due to sales growth of high-value added products and a rise in ASP. For our system semiconductor businesses, results remained subdued with a delayed demand recovery in major applications. However, in foundry, new backlog from design wins reached a new quarterly high. In display, the mobile panel business recorded a significant increase in profit thanks to the release of new flagship models by its major customers, while the large panel business reduced its losses as it saw improvements in both yields and cost efficiencies. The DX division, again, posted solid quarterly results despite a highly competitive market as it delivered strong sales growth of premium smartphones and TVs. In the network business, sales decreased in major overseas markets, including North America, as mobile carriers scaled back their investments. The digital appliances business reported similar earnings year on year in a period of weaker seasonality. Harman notched a new high for quarterly operating profit, led by sales growth in car audio products, amid an overall increase in orders from automotive customers and also consumer audio products such as portable speakers. Regarding currency effects, average exchange rates of major currencies such as the US dollar and the euro had just minor fluctuations in the third quarter and as a result did not have any significant effect on our consolidated operating profit when compared to the previous quarter. Now I would like to share our business outlook. In the fourth quarter, under prospects of a gradual recovery of global IT demand, the DS division will focus on sales of high value added products such as HBM and bolstering technology leadership. Display and DX, meanwhile, will remain committed to maintaining solid profitability via enhanced strategies focusing on premium markets. For the DS division, we expect demand from PC and mobile to improve as customer inventories have generally reached normal levels. The memory business will actively address the growing demand for new interfaces while expanding the portion of advanced nodes and HPM3 sales should start to expand meaningfully. In our systems semiconductor businesses, we expect to deliver improved results thanks to shipment starts for a major mobile customer's new products which will also lead to demand growth for foundry. In display, we expect the mobile panel business to maintain its strong performance on the back of continued robust demand for premium OLED smartphone displays. The large panel business will expand its QD OLED sales driven by strong year-end seasonality. The DX division will strive to maintain solid profitability by reinforcing strategies for flagship smartphones, expanding sales of premium tablets and wearables, and capturing strong seasonal demand for high value added TVs. Networks will seek to obtain additional wins in overseas markets and digital appliances will focus on securing profitability while strengthening our sales mix centering on premium products. Harmon will push for another strong quarter by expanding sales of audio products during year-end seasonality amid ongoing and favorable trends in automotive product orders. In 2024, while certain macro uncertainties seem likely to persist, we expect to see a recovery in memory market conditions and IT demand. Accordingly, our component businesses will focus on expanding sales of high-performance advanced node products and continuing to win new orders. DX will strengthen its product competitiveness, focusing on premium segments as it continues to prepare for future growth. The DS division, expecting that normalized inventory levels to continue as well as the trend of higher density adoption, will lead to a recovery in memory demand. We'll strive to expand the sales of advanced node products. We also plan to meet the demand for high-performance, high-bandwidth products by increasing our portion of HBM3 and HBM3e sales by leveraging the highest HBM production capacity in the industry. For Foundry, we will work to narrow the gap with the lead competitor by entering mass production of our second generation 3 nanometer GAA process and by starting operations of the Taylor Fab. System LSI will continue to strengthen the competitiveness of its SOC offerings. In the advanced packaging business, which has been garnering keen attention recently, we have received orders from multiple domestic and overseas HPC customers, including orders for our one-stop turnkey service, which encompasses logic, HBM, and HBM. In 2024, we expect to start mass production and expand the business. For Display, the mobile panel business will actively address rising demand in new application areas and leverage its technological leadership to further strengthen its position in the smartphone market. In the large panel business, we will strengthen our position in the premium market and improve profitability by expanding our product lines and improving yields. The DX division will strengthen its competitiveness with a focus on premium segments by increasing smartphone sales centering on flagship models, continue introducing innovative TV products, and leading the market for super large TVs. DX will also thoroughly prepare for growth by expanding the application of AI technology, providing tailored hyper-connected experiences via smart things, and securing technologies in new growth areas such as XR. Networks will strive to grow revenue by actively seeking new overseas business opportunities while simultaneously expanding existing relationships. It will also reinforce its technology leadership in core 5G chips and VRAM. Digital appliances will strengthen its leadership in premium segments via simultaneous global launches of home appliances with AI features. Meanwhile, we will continue to advance interconnection experiences between smart things-based digital appliances and other devices while also continuing to improve profitability through increased sales of higher margin products such as system air conditioners. Our department is expected to increase its presence in new areas, including automotive display, as it continues to upgrade the in-vehicle experiences and to enhance responsiveness to high-growth product demand such as home audio. Moreover, it will further differentiate its products and expand sales through synergistic collaborations with Samsung Electronics. Moving on to capital expenditures, CAPEX in the third quarter was $11.4 trillion-1, of which $10.2 trillion-1 was invested by the DS Division in $0.7 trillion-1 by display. The total CAPEX up to the third quarter of this year is $36.7 trillion-1, with $33.4 trillion-1 invested by DS and $1.6 trillion-1 by display. We expect full-year CAPEX to be approximately $53.7 trillion-1, with $47.5 trillion-1 allocated to DS and $3.1 trillion-1 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. Memory investments are ongoing in Pyeongtaek infrastructure, which include the completion of P3 and progress of P4 framework, all to prepare for -long-term demand. The investment portion for R&D is likely to increase due to our strong commitment to technology leadership. Just as a reminder, we dynamically adjust our capacity investments in accordance with market conditions. Nonetheless, we remain committed to investing in new technologies such as securing industry-leading HBM production capacity and process upgrades. For Foundry, investments will center on expanding production capabilities at Pyeongtaek to address the demand for advanced processes in accordance with our principle of responding swiftly and flexibly to customer demand. Foundry will also expand investments for our TaylorFab infrastructure to ensure longer-term readiness. As a result, we expect Foundry to expand its CapEx to increase compared to last year. In display, investments will primarily focus on preparing for IT OLD products and flexible displays. Next, I would like to address the third quarter dividend. Today, the Board of Directors approved a quarterly dividend of 361 won per share for both common and preferred stocks. Based on the current annual dividend policy, the quarterly payout total for this quarter will be $2.45 trillion won and will be paid in mid-November. Finally, I will share some of our key activities in sustainability management. First, our company once again ranked top in Forbes' 2023 list of world's best employers, our fourth consecutive year and number one. To compile the list, Forbes surveyed over 170,000 employees in over 50 countries working for various multinationals. Evaluation criteria included talent development, working conditions, benefits, diversity, and pride in the company's products and or services. And we were the only Asian company in the top 20. Next, in September, we received the highest ranking in the Korea Commission for Corporate Partnerships' Win-Win Growth Index for the 12th consecutive year. Such recognition reflects our efforts and achievements in partnerships with our supply chain, which have included support via a fund for partners' R&D facility investments, free manufacturing, quality innovation consulting to over 1800 companies in the past decade, and support for SMEs to build smart factories to enhance their competitiveness. And finally, Samsung Electronics has further embraced environmentally responsible production by incorporating recycled materials in a combined total of 15 internal and external components of our new foldable phones, Galaxy Z Flip 5 and Z Fold 5. The materials include plastics sourced not only from discarded materials, but also from fishing nets and water barrels, which were also featured in the previous models, but also pet bottles and aluminum and waste glass byproducts generated during the manufacturing process. We will continue our efforts to enhance sustainability in all aspects of our business. I will now turn the conference call over to representatives from each business unit to present third quarter performances and outlooks for their respective business segments in more detail. We will start with EVP Jae-Joon Kim of the Memory Business. Thank you.

Good morning. This is Jae-Joon Kim from Memory

Global Sales and Marketing. In the third quarter, the memory market somewhat recovered compared to the previous quarter. For PC and mobile, increasing adoption of high-density products in both DLM and NAND and the completion of customers' inventory adjustments led to improvements in the demand environment. For server, demand was relatively sluggish in conventional servers as IT investments by customers were limited on the macroeconomic uncertainties. But demand for generative AI oriented high-end products remained strong. In addition, we received a number of purchase inquiries from customers seeking to secure component inventory. And it's based upon widening awareness that the industry reached the bottom while the industry goes through production cuts. Focusing on profitability improvement in normalizing industry conditions, we continued to expand the sales of advanced node products such as HBM, DDR5, LPDDR5X, and UFS 4.0. At the same time, for products with relatively high inventory levels, we strive to reduce inventory level by production adjustment rather than by aggressive sales expansion. As a result, big growth came in under guidance, but ASP of both DLM and NAND saw some decent increase compared to the previous quarter. Now let's move to the outlook for the fourth quarter. Considering the normalization of industry inventory level, we expect the recovery trend in the memory market to accelerate. In PC and mobile applications, M8 is normalizing finished goods inventory at customers. Our component demand is likely to improve