Samsung Elect Ltd

Good morning and good evening, everyone, and welcome to the Samsung Electronics 2024 First Quarter Financial Results Conference call. I'll be your coordinator. At this time, all participants are in a listen-only mode until we conduct a question-and-answer session following the presentation. As a reminder, this call is being recorded. Now I'd like to turn the conference over to Daniel Oh, EVP and Head of Investor Relations. Please go ahead.

Thank you, Coordinator. Greetings, everyone, and welcome to Samsung Electronics' 2024 First Quarter Earnings Call. Thank you for joining us today. For today's call, the following representatives from business units are participating. Starting with EVP Jaejun Kim, representing memory. VP Tommy Kwon for system LSI. Joining the call for the first time, for Foundry, VP Taejong Song. For Samsung Display Corp, EVP Charles Hur, for the mobile experience business VP Daniel Araujo and last but not least for VP visual display VP Kale Rowe. We also have other business representatives joining the call to answer any questions if necessary for the Q&A session later. Please also note that on Samsung electronics investor relations website at www.samsung.com backslash global backslash IR, you can find our earnings press release and presentation deck which are intended to supplement our prepared remarks during today's call. I want to remind you that some of the statements we'll be making during today's call are forward-looking based on environment we currently see. They are subject to certain risks and uncertainties that may cause our actual outcomes to differ materially from those expressed in today's discussion. A webcast of this call will be also archived on our website, and the information we are giving you on today's call is as of today's date. First, I will start with our 2024 first quarter consolidated financial performance. Our revenue came in at $71.9 trillion of 6% quarter-on-quarter thanks to strong sales of flagship Galaxy S24 smartphone series and the effects of higher ASPs in memory led by improved memory market conditions. Our gross profit was $26 trillion of $4.4 trillion sequentially attributable mainly to improvements in the cost of goods sold in memory and the smartphone mix in the MX business. Gross margin was up 4.2 percentage points to 36.2%. SG&A expenses increased 0.6 trillion won quarter on quarter to 19.4 trillion won as R&D expenses increased. However, as a percentage of sales, SG&A expenses decreased by 0.8 percentage points to 27% due to the increase in sales. Operating profit increased $3.8 trillion sequentially to $6.6 trillion, mainly thanks to improving IT market conditions. And operating margin increased by 5 percentage points quarter on quarter to 9.2%. We attribute the gains mainly to the memory business returning to profit as it achieved strong growth by addressing the demand for high value-added products such as LPDDR5X and Enterprise SSD, and to the MX business booking higher profits driven by robust sales of flagship smartphones. In addition, the visual display and digital appliances businesses recorded higher profitability, while displays saw profit decline quarter-on-quarter due to week seasonality. Regarding currency effect, the Korean won showed overall weakness against major currencies during the quarter, resulting in approximately 0.3 trillion won of consolidated operating profit compared to the previous quarter. Now moving on to capital expenditures. CapEx in the first quarter increased by 0.6 trillion won from the same period last year to 11.3 trillion won, of which $9.7 trillion was invested in the DS division and $1.1 trillion was invested in display. For memory, we continue to invest in R&D to solidify our technological leadership. In the quarter, our investments focused on facilities and packaging technology to address the demand for HBM DDR5 and other advanced products. For foundry, investment focused on establishing the infrastructure to meet medium to long-term demand and on advanced R&D while we adjusted facility investment in line with the market conditions. In display, we continue to invest in preparations for IT OLED products and advancing technology and flexible displays. I will now share some of our key activities in sustainability management. First, Samsung Electronics earned an overall rating of AA in the MSCI ESG ratings during this quarter, the highest level among peers in the Korean ICT industry. We improved our overall rating by one notch as our commitment to sustainability management led to improvements in the social and governance categories. Specifically, we made substantial gains in the areas of human capital development, raw material sourcing, and corporate governance. Second, regarding our water resource management, and building on last year's achievement at the Hwasong Campus, our manufacturing site in Kiheung, Pyeongtaek, Suwon, Gumi, and Gwangju, along with Xi'an in China achieved platinum certification from the Alliance for Water Stewardship, which is a testament to our standing water stewardship. Furthermore, we continue to progress on numerous other fronts in water resource management, including signing MOUs with government agencies and local governments. to achieve zero increase in DS Division's water intake and restore water 100% for the amount used by DX Division by 2030. As a responsible corporation to our stakeholders, we maintain committed to strengthening sustainability management and expanding ESG initiatives throughout our business. Next, I would like to address the first quarter dividend. Today, the Board of Directors approved a quarterly dividend of Korean Won 361 per share for both common and preferred stock. Based on current dividend policy, the total quarterly payout is 2.45 trillion won, which will be paid toward the end of May. Now, without any further ado, I will turn the conference call over to the representatives of each business unit to present first quarter performances and outlooks for their respective business segments in more detail. The memory business will start the next session, followed by system LSI, foundry, Samsung display, mobile experience, and visual display. 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 memory market in the first quarter, we saw customers' overall purchase demand was strong. due to market expectations that price will keep rising. For server and storage, the demand for generative AI showed solid trend, and the demand for DDR5 and high-density SSD stayed strong following the previous quarter. In particular, the high-density SSD linked with generative AI showed additional demand growth as customers' upside demand surged. In the case of PC and mobile, contents per box continue to grow for both DRAM and N. Furthermore, demand remains strong following the previous quarter, thanks to an active selling mainly driven by Chinese mobile OEM customers. Along with the increase in ASP, we achieved a qualitative growth of the business by addressing the demand, focusing on high-value-added products such as HBM, DDR5, sub-SSD, and UFS 4.0, and so on. As a result, our memory business returned to profit. Now let's move to the outlook for the second quarter. We expect the industry recovery trend to continue throughout the quarter, mainly led by the demand for generative AI. In particular, the continuous increasing supply of AI servers and subsequent expansion of associated cloud services should increase the demand for not only HBM, which is directly linked with AI, but also conventional servers and storage in parallel. Therefore, we expect overall server-related demand to remain strong. And for mobile, as the selling drive mainly led by Chinese OEM customers continues, demand is expected to be stable in the second quarter as well. However, for PC, under the effects of slow seasonality, it appears that in the second quarter, customers are likely to temporarily adjust their finished goods inventory in the distribution channels, in preparation for new product launches focused on on-device AI in the second half of the year. Thus, in the second quarter, it is expected that the demand centering on server and storage products will be getting strong. And in addition to this, as supply constraints for cutting-edge products are expected in the second half of the year, The overall increase of market price is predicted, although there might be differences by application. In this market environment, in order to optimize our business portfolio, we plan to allocate production more to server and storage-related products, such as HBM, DDR5, and high-density SSD, than to PC and mobile products. From a product deployment standpoint, we started mass production of HBM3e 8i this month to address the demand for generative AI, and we plan to mass produce 12i products within the second quarter. Also, in the second quarter, we plan to strengthen our leadership in the server market by mass producing 128GB products based on 1B nanometer 32 gigabit DDR5 and shipping it to customers. Also for NAND, we plan to expand SSD sales for server and timely response to AI demand by developing and providing samples of ultra high density 64 terabyte SSD during the second quarter. In addition, we will enhance our sustainable technology leadership by mass producing for the first time in the industry. Now I'll share our outlook for the market in the second half of the year. We expect business condition to stay positive despite some volatility related to macroeconomic trends, geopolitical issues, and so on. As industry supply of HBM improves in the second half, We expect the spread of AI servers to accelerate, and thanks to this, associated cloud services are also expected to expand further. Sequentially, this should lead to increased demand from not only AI servers, but also conventional servers and storage, and we expect this virtual circle to clearly occur. As for PC, replacement cycle of some products that showed significant sales growth during the pandemic is expected to be approaching. In addition, we expect to see positive impact on session month and contents per box, thanks to growth in the number of on-device AI feature models, which will be newly launched in the second half. For mobile, we expect the demand in terms of contents per box to be robust with the spread of on-device AI. But there are chances that growth in set demand will be limited in the second half as customers' inventory in distribution channels have increased somewhat due to the customers' active selling in the first half of the year. Likewise, we expect memory demand to stay strong in the second half, mainly around generative AI. However, on the supply side, we expect to see constraints in overall bit production as capacity concentrates on HVM in DRAM, and industry's limited execution of CAPEX in NAND has continued since last year. Therefore, we plan to flexibly adjust our product mix in accordance to demand for each application and actively respond to demand for high-value-added products for AI. In the case of HBM, we will continue increasing supply and expanding our capacity in order to respond to growing demand for generative AI. In addition, we also plan to accelerate the ramp-up of our industry-first developed HBM3E 12 high product in line with the increasing needs for high-density products in the industry. In DRAM, we plan to accelerate a 1B nanometer-based 32 gigabit DDR5 supply with faster ramp-up speed and further strengthen our competitiveness in the high-density DR5 module market, which is linked with the AI servers. In NAND as well, with the growth of AI demand, we will improve our profitability by proactively addressing the demand for high-value added server products, such as V8-based Gen5 SSD, high-density V7 QLC SSD, and so on. In addition, based on our industry-first experience entering the UF 3.1 market with QLC technology, we plan to introduce a QLC solution further to the UFS 4.0 market in the second half, thereby strengthening our product competitiveness in the mobile market. For V9, following the industry-first mass production of QLC in the second quarter, We plan to further enhance our technology leadership by mass-producing QAC in the third quarter. We will continue to strengthen our market leadership based on leading-edge technology and timely execution of investment. Thank you.