Samsung Elect Ltd

Hello, everyone, and welcome to Samsung Electronics' 2024 Third Quarter Financial Research Conference Call. I'll be your coordinator. All 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 to those here in Korea, in Asia, and good evening to those in the Americas and Europe. I am Daniel Oh, Head of Investor Relations. Welcome to Samsung Electronics Earnings Call for the third quarter of 2024. Before getting into details of our performance, I want to inform you that presentation deck and other supplementary information can be found on Samsung Electronics Investor Relations website at www.samsung.com. backslash global, backslash IR. And a webcast of today's call will also be available on the website. Today's discussion will include four looking statements based on current environment. These statements are subject to certain risks and uncertainties, and actual outcomes may differ materially from the views expressed in today's call. Please note that information we are giving you on this call is as of today's date. I will start with an overview of our third quarter performance and outlook for the fourth quarter and 2025. We will then discuss CapEx, quarterly dividends, sustainability management, and other current topics. Afterward, we will turn the call over to executive team members who will comment on their respective business areas before starting the Q&A session. For today's call, I'm joined by following executives EVP Jae-Joon Kim representing memory. VP Tommy Kwon for system LSI. VP Tae-Jung Song for Foundry. EVP Charles Hur for Samsung Display Corp. EVP Jong-Min Lee from the CXMDE Center. VP Daniel Araujo for the mobile experience business. And finally, VP K.L. Rowe for visual display. We also have other executives attending today's call for the Q&A session. Let's start with the consolidated financial performance. During this call, we will refer to device solutions division to DS and device experience to DX. In the third quarter, company-wide revenue increased by 7% sequentially to $79.1 trillion. The MX business recorded 13% growth led by the launching effects of new smartphone models, DS revenue was up 3% thanks to increased sales of high-end memory products. And display booked a 5% increase driven by major customers launching of new products. Gross profit increased slightly quarter on quarter to $30 trillion, mainly due to the MX business's improved sales performance centered on flagship products. However, gross margin came in at 37.9%, down 2% to percentage points sequentially due to the effects of a significant decline in the value of inventory valuation reversals and the impacts of depleting aging inventories. SG&A expenses increased sequentially by 1.5 trillion won to 20.8 trillion won, with R&D expenses rising to a new high once again, as we continue to invest in advancing our technological competitiveness. As G&A expenses as a percentage of sales moved up to 26.3%. Operating profit declined by 1.3 trillion won quarter on quarter to 9.2 trillion won, mainly due to one off cost, including the provisioning for incentives in the DS division. In perspective, the one-time cost in the DS division were more significant than the gap between companies operating profit and consensus estimates. Operating margin decreased by 2.5 percentage points to 11.6% compared to the previous quarter. In terms of currency effects, the Korean won showed strength against the U.S. dollar and major emerging currencies, adversely impacting our operating profit by approximately $0.5 trillion. The impact mainly felt in our component businesses, where a significant portion of our transactions are in U.S. dollars. Now, I will share our business outlook. Please note that our business representatives will provide more detailed information in their presentations during this call. In the fourth quarter, we expect the semiconductor business to deliver improved results, although relatively lackluster performances in finished goods may constrain overall growth. Within this context, we are prioritizing sales of high-value-added products and reinforcing the technological leadership of our component businesses. We are also continuing to promote sales growth in premium segments and advancing our AI strategy for finished products. In the DS division, growth in AI and the data it creates should keep memory demand robust while we expect to encounter softness in mobile and PC. Considering these dynamics, we will concentrate on driving sales growth of HBM and high density products and fulfilling the demand for server SSD. In Foundry, We are committed to increasing our order volume by enhancing and maximizing the competitiveness of our advanced technologies, particularly our GAA2 nano process. For display, we expect demand for major customers' new smartphone models to continue and IT and auto sales to grow. However, due to rising competition, we have a conservative outlook toward performance improvements. In the DX division, while our commitment to robust growth in premium segments by delivering exceptional products is unchanged, we expect sales to decline slightly compared to the previous quarter. Now, looking ahead to 2025, although macroeconomic uncertainties are unlikely to ease, we see potential for market demand to trend positively in the coming year. We remain laser focused on enhancing our competitiveness in advanced technologies and consolidating leadership in premium segments and products featuring AI. Aiming to keep delivering new experiences to our customers and driving a long-term value, we'll continue to improve connectivity across products, field expansion of next generation businesses, and identify powerful new growth engines. Getting into more specific for 2025, in the DS division, shifting to a profitability-focused portfolio is essential to our strategy. We'll achieve this goal by addressing the demand for differentiated products based on advanced technologies and strong interest in high-value-added products such as HBM and server SSD. Furthermore, we leveraged the mass production of the two nano GIA process to pursue opportunities with the top tier clients. For display, we'll maintain our leadership in high-end products and discover new opportunities to broaden our portfolio. In the DX division, we'll continue to deliver exceptional customer experiences through innovations across our premium product lines, enhanced AI engagement, and product connectivity. Company-wide will ensure prompt and flexible responses to changing conditions by closely tracking the global economic situations and growth trends of real demand. Now, moving on to capital expenditures. CapEx in the third quarter increased by 0.3 trillion won sequentially to 12.4 trillion won. of which 10.7 trillion won was invested in the DS division and 1 trillion won was invested in display. Year-to-day, CapEx as of third quarter end declined 0.9 trillion won year-to-year to 35.8 trillion won, with 30.3 trillion won invested in DS and 3.9 trillion won invested in display. We expect annual capex to increase by approximately $3.6 trillion to $56.7 trillion, with DS investments down slightly to $47.9 trillion, while display investments increase to $5.6 trillion. As a reminder, the full year numbers are projections, and the actual figures may differ depending on future market conditions the timing of equipment deliveries, and other factors. For memory, while maintaining a flexible approach toward equipment investments, we are prioritizing investments in advanced technology to meet demand for high-value-added products such as HBM and DDR5. This, combined with investments in the backend process and for R&D, should result in similar annual capex to last year. For Foundry, investments are centered on tech migration on existing lines, considering market conditions and investment efficiency. Overall, we expect Foundry's annual CapEx to decline. In display, we expect annual CapEx to be higher than last year's total due to our proactive investment strategies. Specifically, we preemptively invested in new FAPs for mobile display and strategically invested in enhancing production lines to maintain our competitive advantages. Now, turning to third quarter dividend. Today, the board of directors approved a quarterly dividend of 361 Korean won per share for both common and preferred stocks. Based on current dividend policy, the total amount distributed for this year will be 9.8 trillion won Accordingly, the payout for the third quarter is 2.45 trillion won, which will be paid near the end of November. I will now cover our sustainability management achievements and other current topics. I'm pleased to say that Samsung Electronics has taken the number five position in Interbrand's top 100 best global brands for the fifth consecutive year and is still highest ranked non-US company. Over the past year, our brand value grew by 10% to reach $100.8 billion, breaking through the $100 billion threshold for the first time. Interbrands cited several factors behind this achievement, including our early presence in the mobile AI market, expanded offerings of products featuring AI, strengthened connectivity experiences that provide meaningful benefits, and enhanced sustainability policies and actions in sustainable management. Overall, our dedication to expanding and strengthening sustainability activities throughout our business is stronger than ever. Finally, our management recognized a significant interest in the value of program and its importance to our stakeholders. Given the highly uncertain business environment, We are conducting a thorough review of all our options as we speak and plan to share specific details when they become available. Let's move forward and invite the executives from each business segment to present more detailed information regarding each business third quarter performance and outlook. We will divide the following section into two, the DS division including display and the DX division. For the first section, we'll start with EVP Jae-Joon Kim from Memory Business.

Good morning. This is Jae-Joon Kim from Memory Global Sales and Marketing. In the memory market in the third quarter, for server, as major data center and tech companies continue to invest, demand for AI and conventional servers was strong. However, in the case of mobile segment, demand was relatively soft due to inventory adjustments by some customers, and the supply-demand situation was impacted somewhat by the increasing supply of legacy products in China market. Thus, in the third quarter, as demand focus on server application and cutting-edge products was strong, The market decoupling by each application and product seemed to be intensified. In this situation, we focused on adjusting the business portfolio mainly toward cutting-edge and high-value-added products, aiming to strengthen our business fundamentals. To accomplish this, we focused on depleting aging inventories mainly consisting of legacy products to further improve our inventory level and mix. On the other hand, in the case of cutting edge products, we actively responded to the demand for high profitable products for AI and servers. Thus, compared to the previous quarter, we achieved sales revenue growth of over 70% for HBM, the mid-teens for Server DDR5, and the mid-30s for Server SSD. As a result, compared to the previous quarter, despite the impact of depleting aging inventory, both DRAM and NAND ASPs increased by a high single digit, and sales increased by a mid-single digit in dollar terms thanks to the sales of high profitable products. However, our performance decreased due to reduced reversal of inventory valuation loss compared to the previous quarter, one-time charges such as incentive provisioning, and currency effect due to a weak dollar. Now let's move on to our look for the fourth quarter. In the memory market, we expect the trends experienced in the third quarter to continue in the fourth quarter. Specifically, while demand for AI is likely to remain strong, we expect some mobile customers to continue adjusting inventory following the previous quarters. On the other hand, we will continue to monitor factors that influence demand, such as geopolitical issues and interest rate and stimulus package in key countries. In the fourth quarter, as this market decoupling trend remains, we plan to continue improving our business portfolio focusing on profitability. On top of that, we are flexibly lowering down our production for some legacy DLMN land products, in line with market demand in order to accelerate the conversion of cutting-edge nodes in legacy lines. In addition, following the previous quarter, we aim to strengthen our business fundamentals by completing the normalization of inventory level and mix by the end of the year. For D-Lab, we plan to expand sales in line with the increase in HBM capacity accelerate the transition to 1B nano for server DDR5, and actively expand the Sage portion of high-density module based on 32GB DDR5. In addition, we will secure leadership on high-value added products with mass volume business of 10.7Gbps LPDDR5X and GDDR7, which are developed for the first time in the industry. For NAND, while server SSD demand continues to stay strong, we will actively respond to the demand for TLC SSDs, which account for the main portion of the market, and further expand the sales of V8-based PCIe Gen5. Especially for QLC market that has high growth potential, we plan to mass produce the 64TB product and sample the 128TB product in this quarter. Therefore, by the first half of next year, we expect to mass produce up to 128TB in QH SSD lineup. Now let's move on to the outlook for 2025. For server, data center and enterprise investments are likely to remain strong in association with AI, and build demand for conventional server as well as AI servers is expected to be strong and stable. In particular, we are anticipating that the size of generative AI data will dramatically increase, and the trends toward high density in HBM, DDR5, and server SSDs will be consequently accelerated. For mobile, as major customers launch more and more on-device AI smartphones and the higher specs are required, mainly in the flagship segment, we expect memory contents per box to increase. And also for PC, we expect a gross momentum in demand due to the discontinuation of Windows 10 services and the arrival of the replacement cycle for PCs that were sold during the early period of pandemic. But we will continue to monitor some uncertainties such as the macroeconomic recovery trend and potential for the launch of killer application for device AI. Likewise, although demand in 2025 is forecast to be robust overall, we expect the demand increase to be driven primarily by high-density and high-end products based on cutting-edge nodes rather than legacy products. Therefore, in the next year, we plan to accelerate to process conversion of our existing lines to reduce the portion of legacy products and to expand the portion of cutting-edge nodes. Considering the bill loss during the conversion process, we expect production big growth to be limited for both EDEM and NAND, But we will focus on the portion of differentiated product based on advanced node rather than short-term B shares, preparing for a competitive business portfolio focused on profitability. For DRAM, we plan to further expand the sales of HBM3E, and we are scheduled to develop and mass-produce HBM4 in the second half of the year. In addition, by accelerating the transition to 1B nano in the legacy lines, we plan to reduce the portion of DDR4 and LPDDR4 products based on legacy process that are seeing intensifying competition and to expand the portion of high-end products such as 128GB or higher DDR5 server modules and LPDDR5X for mobile PC server and so on. For that, while expanding server SSD sales, we will proactively respond to the high-density trend based on QH products, including 64TB and 128TB SSDs. Also, we will solidify our leadership in the PCIe Gen 5 market by accelerating the tech migration from V6 to V8. Focusing on improving our portfolio towards cutting-edge products, and strengthening our business structure, we will secure sustainable business competitiveness. Thank you.