Samsung Elect Ltd

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of fiscal year 2023 fourth quarter earnings results by Samsung Electronics. This conference will start with a presentation followed by a Q&A session. If you have a question, please press Start 1, that is, Start N1 on your phone during the Q&A. For cancellation, please press Start 2, that is, Start N2 on your phone. Now we shall commence the presentation on the fiscal year 2023 fourth quarter earnings results by Samsung Electronics.

Good morning, everyone, for those in Asia, and good evening to those in Europe and the Americas. Thank you so much for joining Samsung Electronics 2023 fourth quarter earnings call. I am Daniel Oh, leading the investor relations team at Samsung Electronics. For today's call, additional information can be found in our earnings presentation at our IR website, www.samsung.com backslash global backslash IR. And joining me today on this call are EVP Jae-Jun Kim, representing memory, joining the call for the first time, VP Tommy Kwon for system LSI, for foundry, EVP Ki-Bong Chung. Also for the first time joining the call, EVP Charles Ho for Samsung Display Corp, which I'll refer to as display during today's call. For the mobile experience business, VP Daniel Araujo, and the last but not least for visual display VPKL role. I want to remind you that some of the statements we'll be making today are forward-looking, based on the environment we currently see. They are subject to certain risks and uncertainties that may cause our actual results to differ materially from those expressed in today's discussions. First, I will start with our 2023 fourth quarter consolidated financial performances. Consolidated revenue came in at 67.8 trillion won, up 0.6% sequentially, thanks to higher memory prices, above-market big growth, and continued strength in sales of premium display products, even though smartphone shipments declined due to rising competition during year and seasonality. Consolidated gross profit was 21.7 trillion won, up 0.9 trillion won quarter-on-quarter, mainly due to increased sales of high-value memory products such as DDR5 and LPDDR5X. The gross margin was 32% up by 1.1 percentage point. SG&A expenses increased $0.5 trillion one quarter on quarter to $18.8 trillion one as R&D expenses reached a record high under our commitment to future growth. As a percentage of sales, they increased by 0.6 percentage point to 27.8%. All in all, consolidated operating profit increased 0.4 trillion won sequentially to 2.8 trillion won as the effects of memory significantly improved performance and display sustained strength outweighed the negatives for intensifying competition in consumer goods and fading launch effects of flagship smartphones. Operating margin increased by 0.6 percentage points to 4.2%. Regarding currency effects, the average exchange rates of the U.S. dollar, the euro, and major emerging currencies were relatively stable and had no material effects on our consolidated operating profit compared to the previous quarter. Now moving on to capital expenditures. CapEx in the fourth quarter was $16.4 trillion, of which $14.9 trillion was invested in the DS division and $0.8 trillion in display. Annual CapEx stayed steady at $53.1 trillion, with $48.4 trillion invested in DS and $2.4 trillion in display. For memory, we continue to build out infrastructure and Pyeongtaek preparing clean rooms for mid to long-term demand, and we increased R&D portion of investments as a part of our commitment to extending our technology leadership. In particular, we invested in expanding the production capacity of HBM, DDR5, and other advanced nodes, and in line with our investment principles, we adjusted investment in wafer fabrication equipment to balance our needs with the recent market conditions. In foundry, the annual capex increased due to capacity expansions for advanced EUV nodes of five nanometer and below, and for infrastructure investment at the Taylor Fab to address future demand. In display, investment focused on preparing for IT OLED products and advancing technology in flexible displays. Now I will share some of our key activities in sustainability management. Samsung Electronics has ranked fifth in Interbrand's Best Global Brands Top 100 for the last four years and remained the top non-U.S. company on the list. According to the Interbrand, several factors influenced the evaluation. Consistent company-wide improvements in customer experiences, unparalleled connectivity, and enhanced gaming experiences via our wide-ranging portfolio and smart things, our leadership in the future innovative technologies such as AI, automotive, 6G, AR, and VR, and consistent efforts to strengthen ESG leadership by enhancing sustainability across our products. Second, we recently joined the Energy Collaborative and Carbon-Free Alliance, initiatives aimed at expanding renewable and carbon-free energy resources. We believe our work as part of these initiatives will increase the use of efficient energy resources in the semiconductor ecosystem and also contribute to laying the foundation for carbon neutrality in the Asia-Pacific region. Finally, we expanded the use of recycled materials in our recently launched Galaxy S24 series. The batteries of S24 Ultra and S24 Plus contain a minimum of 50% recycled cobalt, and speakers in all models use 100% recycled rare earth elements and a minimum of 40% recycled steel. Overall, we remain committed to strengthening sustainability management and expanding ES&G initiatives throughout our businesses. Now turning to shareholder returns. The board of directors today approved a quarterly per share dividend of 361 Korean won for common stock and 362 won for preferred stock. Based on our current policy, the total quarterly payout is 2.45 trillion won, which will be paid after final approval at the annual general meeting of shareholders in March. This is the final quarterly dividend under the policy covering 2021 to 2023. through which we pledge to return 9.8 trillion won annually in regular dividends as a part of our total return of 50% of free cash flow. Over the past three years, we generate a free cash flow of 18.8 trillion won, creating a shareholder return pool of approximately 9.4 trillion won based on the policy. Including today's declared dividend, we will have returned capital to our shareholders worth 29.4 trillion won equivalent to 157% of free cash flow and 313% of shareholder return pool. We are pleased that we have faithfully executed our shareholder return policy despite the significant pressure on our cash flow from the memory market's significant downturn and myriad uncertainties in the global economy. Regarding our next shareholder return policy, the Board of Directors and top management comprehensively evaluated the current projected business environment, our investment strategies, and financial structure, ways to enhance shareholder value, and many other variables that could affect our business. However, the market rapidly changed during this process, causing our earnings to severely weaken and our cash holdings to fall. Moreover, the overall business environment still faces several persistent risks, After long deliberation, the board approved or maintained the terms of previous shareholder return policy. Samsung Electronics will pay an annual regular dividend of $9.8 trillion as part of total shareholder returns of 50% of free cash flow for the period covering 2024 to 2026. At the close of each year, we will consider executing an early return of capital beyond regular dividends if we forecast there is a potential for significant surplus. We will consider implementing a new policy flexibly before the expiration of the proposed one in consideration of M&A activities and cash positions. I will now summarize our outlook for the first quarter in 2024. Please note that more details will be included in the speeches from our business units. In the first quarter, with the IT market environment recovering gradually, we will focus on increasing sales of high-valued products to improve profitability. For our component businesses, we'll capture the rising demand for advanced products and those aimed at generative AI, even under weak seasonality. Meanwhile, DX will emphasize strengthening AI functionality in smartphones and other products while increasing strategic product sales. In 2024, we expect memory market conditions and IT demand to keep recovering, even though a number of macroeconomic risks are likely to remain elevated. Samsung Electronics will fully respond to the demand for AI-used semiconductors while striving to establish early strongholds in markets for AI-enabled consumer products. Also, we will fortify our leadership in premium products and competitiveness in advanced nodes while we continue to prepare for future technologies. In the near future, we expect high macroeconomic risk to continue to wait on the business environment, and thus expect our results to see moderate improvements in the first half and more significant improvements in the second half, with a pace of recovery to differ by business and product. For additional details on the results and outlooks for our businesses, as mentioned earlier, please refer to the slides from our website and the following presentation. Now, without any further ado, I will turn the conference call over to the representatives from each business unit to present fourth quarter performances and outlooks for their respective business segments in more detail. We will start with EVP Jae Joon Kim of the memory business.

Good morning. This is Jae Joon Kim from Memory Global Sales and Marketing. In the fourth quarter, the memory market showed a recovery trend compared to the previous quarter. For PC and mobile, contents per box continued to grow with the normalization of customers' finished goods inventory. And for mobile particularly, the demand environment has improved as selling competition in Chinese smartphone market intensified. For server, as investment in generative AI have expanded across the IT industry, the related demand has remained strong. And coupled with the nearly normalized inventory level at conventional server customer side, the demand showed sign of recovery. Moreover, as the perception of price increase spread in the market, it was observed that Demand for inventory builds up also occurred across all applications in addition to fundamental demand increases. In this situation, focusing on expanding the high-value-added products to improve business performance as early as possible, we significantly increased the sales of cutting-edge products such as HBM DDR5, LPDDR5X, UFS 4.0, and so on. As a result, our big growth exceeded the market level, and inventory depletion of both DRAM and NAND accelerated due to impact of production discipline. In particular, our DRAM inventory improved even more significantly, and the DRAM business became profitable thanks to ASP increase. Now let's move to the outlook for the first quarter. Recovery of PCM mobile demand has already been witnessed last quarter, and it is expected that the demand recovery trend will continue following the previous quarter. In the case of servers and storage, while the demand that had been relatively sluggish for quite some time has shown signs of recovery, it seems that maybe we need to wait one or two more quarters to see whether there would be a full recovery in demand or not. Meanwhile, in terms of industry supply, the big growth of cutting-edge product is expected to be constrained. Therefore, the customer's demand for cutting-edge product is likely to stay strong, and we also forecast the demand for inventory builds-up to continue to occur. In this market environment, while focusing on responding to the demand for cutting-edge products, we plan to focus on improving profitability by actively addressing the demand for HVM server SSDs related to generative AI. And accordingly, our memory business is expected to return to profit in the first quarter. However, as the overall big growth of memory production is expected to be constrained across the overall industry, we will focus on responding to the true demand over demand for inventory builds up. Now let's move on to the outlook for 2024. We expect the memory business to continue to recover despite volatility aligned with various factors such as future interest rate policies, geopolitical risk, and so on. For PC and mobile, due to the impact of the adoption of on-device AI, contents per box is expected to grow mainly in commercial PCs and flagship smartphones. In addition, there would be a positive effect on set shipment trends coupled with approaching replacement cycles of some products sold during the early stage of the pandemic. For server, in the trends of continuing solid demand for AI, we expect the demand to gradually recover as several replacements which have been postponed on the last year's tightened budget proceed in conjunction with the transition to a new platform. In this situation, we plan to continue to focus on profitability based on the competitiveness of our cutting-edge node. Despite worsened business conditions in 2023, We have been striving to maintain CAPEX for long-term competitiveness. As a result, we expect the supply competitiveness of our advanced node to expand further as last year's investment will take effect this year. Thus, we plan to actively address the demand for premium products based on leading-edge nodes and pursue profitability for sustainable growth. For D-Lab, we aim to enhance our leadership in the high-density DDR5 market by introducing the industry's highest capacity 32 gigabit DDR5 based on 1B nanometer, which was developed for the first time in the industry. While market needs for advanced HVM performance and capacity are ever-growing with the spread of generative AI, Leveraging the competitiveness of TSV capacity, we plan to proactively solidify our competitiveness as a leading HVM company by ramping up our mass volume business for next generation HVM3E in a timely manner and accelerating the transition to 3E12 high in the second half of the year. Also for NAT, by penetrating into the mobile QAC market for the first time in the industry, we will actively respond to customers' needs for high-density mobile storage, and we will strengthen market leadership by leading the early market for Gen5 SSD in the generative AI era. Thank you.