Samsung Elect Ltd

Hello, everyone, and welcome to the Samsung Electronics 2024 Second Quarter Financial Research Conference call. Our viewer coordinator or participants will be in a listen-only mode until we open the question-and-answer session following the presentation. As a reminder, this call is being recorded. I would now like to turn the conference over to the investor relations team. Please go ahead.

Good morning, everyone. Thank you for joining us this morning. I am Daniel Oh, Head of Investor Relations at Samsung Electronics. I am pleased to have you all on today's call. I want to begin this call by introducing the following executives from our different business segments joining today's call, starting with EVP Jaejung Kim representing memory, VP Tommy Kwon for system LSI, VP Taejung Song for foundry, EVP Charles Hall for Samsung Display Corp VP Daniel Araujo for mobile experience business, and last but not least, VP Kale Rowe for visual display. The presentation deck and other materials, which are intended to supplement our prepared remarks for today's call, can be found on the Samsung Electronics Investor Relations website at www.samsung.com backslash global backslash IRR. Please note that a webcast of this call will be archived on our website. The following is our legal disclaimer for 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. The information we are giving you on this call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Now, I will start with a review of our consolidated financial performance for the second quarter of 2024. Total revenue reached $74.1 trillion, a 3% increase from the previous quarter. The DS division experienced 23% revenue growth, thanks to recovery of the memory business, while displaced revenue increased by 42% on the back of robust OLED sales. However, the MX division's revenue decreased by 19% because of a weak seasonal demand for smartphones. Gross profit was 29.8 trillion won, up 3.7 trillion won compared to last quarter. This was mainly due to strong demand for DDR5, HBM, and other high-value-added memory products. The strong showing by our component businesses, including memory, also contributed to our enhanced profitability. As a result, the gross profit margin expanded by four percentage points to reach 40.2 percent. Our SG&A expenses slightly improved from previous quarter, reaching $19.3 trillion attributed mainly to efficient advertising and promotion expenditure management. Despite reaching a new high in R&D expenses aimed at driving future growth, SG&A expenses as a percentage of sales decreased by 0.9 percentage points to 26.1%, reflecting the overall increase in revenue. Next. Our operating profit surged by 3.8 trillion won, sequentially to 10.4 trillion won, essentially fueled by higher average selling price, resulting from more opportune memory market conditions and robust demand from key OLED clients. We achieved this growth despite persistent cost pressures from rising component prices in our finished product businesses. As a result, our operating profit margin expanded by 4.9 percentage points, sequentially to 14.1%. With respect to foreign exchange impacts, the strengthening U.S. dollar positively impacted our consolidated operating profit by approximately 0.8 trillion won during the quarter. Now, moving on to capital expenditures. CapEx in the second quarter increased by 0.8 trillion won to $12.1 trillion, of which $9.9 trillion was invested in the DS division, and $1.8 trillion was invested in display. For memory, we continued our proactive investments to meet the demand for high-value edit products such as HPM and DDR5, along with ongoing investment in R&D and backend to enhance future competitiveness. For Foundry, although we remained committed to investing in R&D to strengthen our technology competitiveness, the second quarter capex decreased compared to the previous quarter due to adjustments to facilities and infrastructure investments based on market conditions. In Display, our investments were focused on IT or LED FABs with additional investment aimed at mobile panel production lines to maintain our technology advantage. Now, I will discuss the second quarter dividend. The Board of Directors just approved a quarterly dividend of 361 Korean won per share for both common and preferred stocks. According to our current dividend policy, the total amount distributed per quarter amounts to approximately 2.45 trillion won, which will be paid near the end of August. Now, let me turn to our sustainability management. Last month, we published our 2024 sustainability report, which provides detailed insights into our sustainability efforts. Here are some key achievements from last year. From an environmental perspective, as of the end of 2023, the DX division has achieved a renewable energy conversion rate of 93.4%, including a complete transition for major manufacturing facilities worldwide. This aligns with our objective of reaching net zero for scope one and two emissions by 2030. The DS division recorded an 11.6% decrease in greenhouse gas emissions in 2023 compared to the previous year. In pursuit of our long-term goal of net zero for scope one and two emissions by 2050, We increased the installation of regenerative catalytic systems to handle processed gases, and we also expanded the utilization of waste heat recovery systems to minimize the usage of liquidified natural gas. In terms of social responsibility, during the quarter, Samsung Electronics introduced a global grievance resolution policy to protect human rights and to enhance working conditions. Additionally, Recognizing the value of diversity in our workforce, we aim to significantly increase the proportion of female executives by 2030, targeting a minimum two-fold increase from the 2002 figure of 6.9%. Moreover, to boost our supply chain management, we conducted external audits on the work environments of second-tier suppliers in Asia during 2023. Regarding our products, we persistently broaden the application of recycled materials in our newest products. This is exemplified by the incorporation of nine recycled materials in the Samsung Galaxy Z Fold 6 and Z Flip 6 series, reflecting a substantial increase from the four materials utilized in the preceding series. Furthermore, we have enriched a variety of our recycled material portfolio by incorporating gold, and copper alongside pre-existing constituents. As a responsible corporate citizen, we are committed to expanding our sustainability management in all areas of our operations. Let's now move forward and invite the executives from each business segment to present more detailed information regarding the second quarter performance and second half of the year outlook of each business. To begin with, we have EVP Choi Joon Kim from the memory business.

Good morning. This is Jejoon Kim from Memory Global Sales and Marketing. The memory market in the second quarter continued to recover due to strong generative AI server demands. Furthermore, robust demand for not only HBM, but also conventional DRAM and SSD for server drove the market recovery, with contributions also coming from the expansion of AI investments by cloud service providers, and rising demand for AI in the enterprise on-premise server market. Meanwhile, demand for PC was relatively weak due to sluggish sell-out. However, demand for mobile remained solid thanks to increased overseas exports by Chinese OEM customers, And some demand for inventory buildups occurred in line with the prospect of price increases. While demand focusing on server application continued to show a favorable trend, our Q2 result improved significantly compared to the previous quarter, thanks to our active response to demand for high-value-added products for generative AI and to improved market prices overall. By product category, compared to the previous quarter, HVM sales increased by mid-50%, and Server DDR5 sales record mid-80% increases, thanks to increased shipment and ASPs. As for Server SSD, despite the base effect of high shipment in the previous quarter, sales revenue increased by mid-40%. In addition, we strengthened our leadership in the DDR5 market by starting mass volume business of 128 gigabyte product with customers based on 1B nanometer 32 gigabit DDR5, which was developed for the first time in the industry. Now let's move to the outlook for the second half of the year. For server, we expect a portion of AI servers in the market to continuously increase as major cloud service providers and general enterprises expand their AI investment in the second half. Considering that AI servers equipped with HVM also feature high contents per box in terms of conventional DRAM and SSD, strong demand is expected to continue across related products such as HVM, DDR5, sub-SSD, and so on. For PC and mobile, demand still has momentum thanks to the effect of peak seasonality and increased contents per box driven by the expansion of on-device AI-featured models. But considering the elevated customers' component inventories in the first half of the year, there might be some possibility that the growth in demand for the second half would be limited. In terms of industry supply, as capacity is being concentrated on HBM, server DRAM, and server SSD in response to AI server demand, it is expected that the conventional bit supply of cutting-edge products for PCM mobile application will be continuously constrained. To sum up, even though the range of market price increased by each application is forecasted to be decoupled, the environment memory business is projected to remain positive. In particular, we foresee a solid server demand led by generative AI to lead the strengths. Therefore, we also plan to actively respond to the demand for high-value-added products for AI in the second half. As for HBM, we will expand the portion of HBM3e sales with capacity expansion. And in the server, we will strengthen our market competitiveness based on high-density products such as 128 and 256 gigabyte modules based on 1B nanometer, 32 gigabyte DDR5. In addition, in mobile and graphic applications, we will strengthen our leadership in high-value-added product lines through safe penetration over 10.7 Gbps at GDDR5X, which has the industry's fastest operation speed and industry's first developed GDDR7. Also for NAND, We plan to further expand our sales by strengthening the supply for TLC SSDs, which are currently in high demand for AI servers. Furthermore, in QLC products, we plan to timely address customer demand based on our lineups, which is optimized for all applications such as server, PC, and mobile. And we also plan to start mass production of V9 QLC in the third quarter. With the industry-leading technology and supply competitiveness, we will keep enhancing our market leadership in the memory industry. Thank you.