samsung electronics 1q earnings callirsvc.teletogether.com/sec/pdf/2019q1_script_eng.pdf ·...

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【Samsung Electronics 1Q Earnings Call】

Robert M. Yi

Good morning.

This is Robert Yi from Investor Relations

Thank you for joining our earnings call for the first quarter of 2019.

With me,

representing each of the business units, are

Mr. Se Won Chun, Executive Vice President of the Memory Marketing Team,

Mr. Ben Hur, Senior Vice President of the System LSI Marketing Team,

Mr. Sang Hyun Lee, Vice President of the Foundry Marketing Team,

Mr. Kwon Young Choi, Vice President of Samsung Display,

Mr. Jong Min Lee, Vice President of the IT and Mobile Business,

Mr. Louis Kim, Vice President of the Visual Display Business,

and Mr. Ben Suh, Senior Vice President and Mr. Tae Gyu Kang, Vice President of

Investor Relations.

I would like to remind you that some of the statements we will be making

today are forward-looking, based on the environment as we currently see it,

and all such statements are subject to certain risks and uncertainties that may

cause our actual results to be materially different from those expressed in

today’s discussion.

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Before we go over the results, I would like to address the first quarter dividend.

The Board of Directors today approved a first quarter dividend of 354 won per

share to be paid in May for both common and preferred stocks.

As announced in October 2017, our shareholder return policy covering 2018–

2020 promises annual dividends of 9.6 trillion won. Accordingly, the payout for

the first quarter is 2.4 trillion won, or one-fourth of the annual total.

With that, I would like to move on to our results.

During our 4Q18 earnings call and in our March earnings disclosure, we had

shared our concerns regarding unfavorable memory market conditions and

display business challenges in 1Q19. These concerns are the main causes for

the weak performance in the earnings result that I am presenting today.

Total revenue in the first quarter decreased 14% year-on-year to 52.4 trillion

won, the decline primarily due to weaker demand and prices for memory and

display products.

Gross profit contracted approximately 9 trillion won year-on-year to 19.6

trillion won with a corresponding decrease in gross margin.

SG&A expenses remained similar compared to the same quarter last year.

Operating profit in the first quarter was 6.2 trillion won, a significant year-on-

year decrease, mainly due to challenges in the memory business. Operating

margin decreased to 11.9%.

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Financial impact from foreign currency exchange movements were minimal as

weakness in the US dollar and euro were mainly offset by strength in emerging

market currencies.

I will now briefly review the performance of each business unit.

In the semiconductor business,

Memory prices declined considerably due to weak demand caused by a continuation

of inventory adjustments at major data centers, which began in 4Q18.

On the mobile memory side, we actively responded to increased demand for

high density products in new flagship smartphones. In the System LSI and

Foundry businesses, earnings improved quarter-on-quarter as we addressed

demand for APs used in flagship smartphone products.

The display business recorded a loss due to low utilization and price declines

for flexible products in the mobile display segment as well as unfavorable

supply and demand conditions in the large display business.

In the IM Division, despite solid sales of the Galaxy S10, profitability in the

mobile business declined as competition intensified in the low-to-mid-range

segment; in addition, the process of revamping of our mass-market lineup

amid softer overall smartphone demand led to a year-on-year decrease in sales

volume.

In the Network Business, earnings grew due to accelerated commercialization

of 5G networks in Korea.

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For the CE Division, sales growth of premium TVs, which include our QLED and

ultra-large-screen models, resulted in year on year earnings improvement.

Next, I would like to share our second quarter business outlook.

In the component business, even though memory demand from major

applications such as mobile may start to recover, such improvements are likely

to be dampened by continued price declines and weak seasonality.

In the non-memory businesses, we expect AP and CIS demand to continue to

improve. For the OLED business, increased demand of our infinity display rigid

panels is expected to help improve results.

In the Set business, we bolstered our flagship leadership by introducing the

world’s first 5G smartphone; and in the mass market, we will continue to

enhance specs in areas such as camera and display to differentiate our lineup in

an extremely competitive environment.

The network business will keep growing its presence in global 5G and LTE

network installations.

In the CE Division, we expect earnings improvements due to strong seasonality

for products such as air conditioners as well as positive response to our new

premium TV lineup.

In the second half of this year, demand for high-density memory products is

expected to increase in most market segments, however, global

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macroeconomic uncertainties may persist. In the display business, earnings are

expected to improve as multiple companies release new smartphones utilizing

flexible OLED displays, including key flagship products by our major customers.

In the set business, we will focus on maintaining our leadership by increasing

sales of premium products amid a challenging environment caused by growing

competition in a stagnant market for TVs and smartphones.

In the mid- to long-term, we aim to strengthen competitiveness of our key

businesses by diversifying applications and continuously delivering innovations

in component technology and set form factor. We will also continue to enhance

the capabilities of our emerging business areas: for automotive solutions, by

expanding the synergies between our component technology and Harman’s

capabilities; and for AI, by expanding the Bixby-based service platform to

solidify its foundation.

Now, I will address capital expenditures.

Capex in the first quarter was approximately 4.5 trillion won, with 3.6 trillion

won allocated to semiconductor and 0.3 trillion won to display.

We will continue our capital expenditure strategy of investing flexibly with the

changes in market conditions.

As we previously mentioned, we expect our investments in memory equipment

to decline significantly in 2019. However, we will continue to make

infrastructure investments to address mid-to long-term demand.

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Before we move on to presentations from each business unit, I would like to

share several data points in key business areas.

Q1, our DRAM bit growth was flat Q-on-Q with about mid-20% ASP decline.

And for the second quarter, we expect the market demand to grow low teens,

and we expect our bit growth to be similar.

For 2019, annual demand DRAM bit growth is expected to be roughly mid-

teens, and we may come in slightly over that.

For NAND flash, in Q1, our bit growth was mid-single digit with about mid-20%

ASP decline. For the second quarter, our -- we expect the market demand

NAND bit growth to be mid-teens, and we will grow our bits in line with the

market. For 2019 annually, we expect NAND demand bit growth to be low 30%,

and we expect our bit growth to be slightly over that.

For the display panel business, the revenue mix pertaining to OLED was about

mid-70%.

For our Mobile business, our total handset sales in Q1 was 78 million units, and

we sold about 5 million tablets. The blended ASP for our Handset division was

about high $240, and the mix of smartphone within our total handset was low

90%. For second quarter for total Handset shipment, we expect slight increase

over first quarter. We will -- we expect a similar level of shipment for tablets in

second quarter. We expect slight decline in blended ASP for our handsets in

second quarter, and the mix of smartphone within total Handset will remain at

low 90%.

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In Q1 this year, our TV set sales declined by mid-20%, and we expect mid-

single-digit decline in second quarter. But for the year, we expect mid-single-

digit increase of TV shipments this year.

Now I'll turn the call over to the gentlemen from each business units starting

with the Memory.

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Good morning, This is Sewon Chun from the Memory Marketing Team.

In the first quarter, demand from major applications weakened steadily under

high macro uncertainties.

For NAND, Overall demand was soft because of seasonality and inventory

adjustments by server companies, However, demand for high-density eStorage

remained solid thanks to the launch of Flagship smartphones alongside server

transitions from HDD to SSD.

However, increasing supply of 64-Layer OEM Solution Products and expanding

supply in the channel market led NAND ASP to decline continuously, especially

in the Channel market,

As a result, we proactively addressed demand for 128GB and higher eStorage

that focused on us and the growing demand for high-end, high density SSD.

For DRAM, demand from overall applications weakened and ASP showed a

sharp decline due to seasonal effects.

For server, in particular, inventory adjustments by datacenter firms caused

demand to slow continuously, while a CPU shortage and seasonally weak Set-

build reduced PC demand.

For mobile, however, launches of new models, growing adoption of high-density

products, and a strengthening trend toward high-density memory from Chinese

major customers partially offset the decline in Set demand, similar to the case for NAND.

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Our company actively addressed rising demand for high-density mobile

products, which led sales to beat our previous expectations.

In the second quarter of 2019, the market is likely to remain slow due to

seasonality, yet we expect overall demand for applications to recover gradually.

For NAND, the high-density trend and HDD replacement demand seems to be

expanding continuously as prices decrease.

Demand for high-density server SSD is increasing in overall market, and we

expect the All-Flash-Array replacement trend to continue especially in the

Enterprise market.

For Client, we also expect price declines to boost the attach ratio, and to

strengthen the trend toward high-density.

For Mobile, we expect the high-density trend to continue as price softens.

Also, launches of high-end smartphones that adopt more than 256GB storage

will keep demand steady.

For each application, our company will closely monitor demand changes

triggered by price declines, and with our competitiveness in solutions products,

we will actively address demand for high value-added products such as server

SSD and high-density eStorage.

Moreover, we are currently mass-producing 5th generation V-NAND for Brand

SSD as planned.

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By accelerating expansion deeper into server and mobile, we will continue to

enhance our product competitiveness and strengthen market leadership.

For DRAM, We expect a demand recovery in server from the end of the 2nd

quarter, mainly from datacenter companies as their inventory adjustment

process completes.

Also, we expect PC demand to grow due to an increase in contents per box,

while set build is likely to show a decline as a CPU shortage is expected to

persist in the 2nd quarter.

For Mobile, we expect the overall high-density trend, along with the newly

launched smartphones from Chinese companies, will lead demand.

We will actively address demand for high-end differentiated products, such as

LPDDR4X.

On the other hand, we will also focus on the transition to 1Ynm in major

applications, based on our technology leadership.

Now, I’m going to talk about the second half of 2019.

For NAND, Although the situation that the supply surpass the demand is likely

to continue throughout the year, the demand from most applications is

expected to increase as prices soften.

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For SSD, we expect to see increasing high-density SAS portion in Enterprise.

And for Client SSD, we expect attach-rate to grow, and steady demand growth

mainly from NVMe.

For mobile, although overall set demand is likely to be slow, launches of high-

density Flagship models by major customers will drive demand growth.

We will actively generate new demand while responding to high-density memory

demand based on our customers’ need to differentiate their products and services.

At the same time, we will strengthen our cost competitiveness by expanding

supply of 5th generation V-NAND.

For DRAM, the macro environment has created overall industry uncertainty, yet,

we expect demand to grow because of seasonality.

For server, due to expanded adoption of new CPUs by datacenter companies,

demand mainly for high-density products is likely to be solid.

For mobile, Although set volume for smartphones is expected to be stagnant,

we expect demand to increase solidly across all segments.

In the High-end and above segments, adoption of over 8GB high-density

mobile DRAM is expanding.

And in the mid-range and below segments, the trend toward high-density is

strengthening.

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We will continue to monitoring changes in market demand, caused by

uncertainties, and flexibly manage our investments and capacity.

We will also actively react to rising demand mainly for differentiated, high-

density products, and make every effort to generate a sustainable profit.

Moreover, as a leader in technology while enhancing the quality of cutting-

edge products, we will focus on ramping-up production of 1Y nm products and

mass production of 1Z nm products.

Thank you.

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Good morning, this is Ben Hur from the System LSI Business.

In the first quarter, despite slowing demand for image sensors related to the

Chinese smartphone market entering weak seasonality, overall earnings

improved thanks to increased supply of APs and modems adopted by a key

customer’s 2019 flagship model.

Notably, we secured technological leadership by commercializing the world’s

first 5G chipset solution, offering modem chips, radio frequency chips, and

power management chips.

In the second quarter, our earnings are expected to improve slightly as demand

for mobile image sensors and DDIs is expected to recover slightly thanks to

seasonality. In addition, demand for 5G chipset solutions is also expected to

rise on the back of increasing sales of 5G enabled smartphones.

In this quarter, we will seek to secure new multiple customers in the US and

China for 5G chipset solutions and commercialize them in a timely manner. We

also concentrate on developing the next 5G chipset solution by integrating an

application processor and a 5G modem into one single chip.

In the second half of this year, even amid a likely stagnant smartphone market,

set makers are expected to continue to adopt high-spec components amid a

shift toward 5G and increased adoption of multiple cameras and high-

resolution sensors, and we expect these environment have positive impact on

our business.

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Looking ahead, we plan to expand our line-up of 5G chipset solutions and

image sensors to address demand for high-specs in the smartphone market;

and we will also expand our mid- to long-term business scope by diversifying

our product offerings through the development of 3D/FOD sensors and

automotive/IoT chips.

Thank you.

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Good morning, this is Sanghyun Ryan Lee from the Foundry Business.

In the first quarter, Foundry earnings were stagnant quarter-on-quarter due to

sluggish global foundry market conditions as well as slowing mobile demand

related to the start of weak seasonality in the smartphone market in China.

Positively, we firstly started mass production of mobile products for 5G and IoT

products adopting the eMRAM process. In addition, we secured new orders for

computing chipsets from a major customer by promoting our Finfet based 8-

nano process. By doing so, we have diversified our business areas into

computing, AR, VR, 5G, and automotives.

In the second quarter, even if mobile demand recovers slightly as expected,

Foundry earnings are likely to remain mostly flat under soft overall demand for

semiconductors.

However, in this quarter, we started shipping EUV 7-nano process based mobile

products to major customers. In addition, we will continue to strengthen our

process competitiveness through the tape-out of EUV 6-nano process and by

completing the development of the 5-nano process.

In the second half of this year, based on our successful mass production of the

EUV 7-nano process, we will concentrate on developing the EUV 4-nano

process and gate-all-around architecture, which is anticipated to overcome

physical scaling and performance limitations of FinFET architecture.

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By leveraging our EUV process leadership, we will focus on increasing advanced

node customer bases in mobile and high performance computing.

In addition, we will use our specialty processes, including FD-SOI and 8-inch,

and advanced nodes to take leadership in newly emerging areas such as 5G, AR,

and automotive technology.

Thank you.

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Good Morning. This is Kwonyoung Choi from the planning department of

Samsung Display.

In the 1st Quarter, overall Display business units posted an operating loss due

to worsened profitability in both the Mobile display and the Large display

business.

Specifically, earnings in the Mobile display business fell into the red due to a

slowdown in demand from major customers alongside a continued slide in

panel ASP caused by heightened competition with LTPS LCD.

In addition, under weak seasonality the Large display business recorded a

deficit due to a continued ASPs decline of LCD panels caused by capacity

expansions for 10.5th-generation large panels in China.

Looking ahead to the 2nd quarter, in the Mobile display business, we expect

any improvements in profitability to be limited, due to a soft demand for

flexible displays.

Under these circumstances, we will strive to improve profitability by increasing

sales of Rigid OLED products as well as reinforcing our products and customer

portfolio leveraging our cutting edge technology such as fingerprint on display

and infinity display.

In the Large display business, although we are concerned about imbalance

between supply and demand, we also expect demand to keep growing for high-

value-added products such as ones used in High-Resolution and Ultra-large TVs.

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In preparation for such conditions, we will work to improve profitability by

actively addressing demand for core products, as well as enhancing our cost

structure and reinforcing technical differentiation.

Now I would like to present our display market outlook and core strategies for

the 2nd half 2019.

For the Mobile display business, we expect OLED panels for smartphone to see

a rebound in demand bolstered by a launching new products of our major

customers.

However, at the same time, we are concerned about continuous ASP pressure

on OLED panels caused by fierce competition with LTPS LCD.

Against this backdrop, we will work to enlarge the OLED panel market through

actively addressing demand for new products of our major customers as well as

launching new applications such as IT and Foldable.

For the Large display business, we are concerned about growing uncertainties

caused by capacity expansions in the LCD industry.

However, since we expect to see continued growth in demand for Premium TV

panels, such as UHD, 8K and Ultra-large ones, we will strive to improve

profitability by focusing on high-value-added products.

Thank you.

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Good morning. I am Jongmin Lee from the Mobile Communications Business.

I would like to share our 1st quarter results and the outlook for the IM Division.

For the Mobile Business, overall market demand for smartphones decreased

QoQ as we moved into a seasonally weak period.

Demand also decreased YoY due to a stagnant market trend.

We released the new Galaxy S10 series which celebrates the 10th Anniversary

of Galaxy innovations.

The S10 series is designed to deliver a practical and perfect mobile experience,

leveraging our accumulated innovations in technology, including Infinity-O

Display with ultrasonic fingerprint scanner, a camera that captures

professional-grade looking images, and wireless PowerShare.

Revenue in the 1st quarter increased considerably QoQ thanks to the sales

performance of the S10, which outperformed its predecessor, S9 backed by

high interest and a positive market response from its launch.

However, our shipments increased modestly QoQ due to a decrease in sales of

legacy models as a result of our lineup reorganization of mid-to-low end

models.

Moreover, profitability improvement was limited due to the trend of offering

higher-specs for new models, brand marketing for new flagship models and

expenses related to changing the mass-market lineup.

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Now, let me address the outlook for the 2nd quarter of this year.

Under continuing weak seasonality, market demand for smartphones is

expected to increase slightly QoQ but is likely to continue its declining trend on

a YoY basis.

For our Mobile Business, with a healthy sales trend of the S10 series, we expect

our smartphones shipments to grow slightly QoQ as the newly launched A

series is getting a positive feedback in the market.

To quickly respond to diverse customer needs in a rapidly changing market, we

refreshed the lineup by integrating the J series into the A series and introduced

a number of new A series which adopted innovative technology.

For the A series, in particular, along with its stylish design, we upgraded

essential features that are frequently used by our customers, offering an

enhanced camera experience, a powerful battery with Super-Fast charging, and

on-screen fingerprint scanner.

Now, new models boast stronger initial sales than its predecessors did.

In the 2nd Quarter, we will not only strive to drive solid sales of both the S10

and the new A series but also to enhance competitiveness of our overall

portfolio by expanding adoption of cutting-edge technology, as demonstrated

by the S10 5G and A80.

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For our Network Business, we will do our best to maintain our strong

performance through 5G commercialization and LTE expansion.

Finally, I will share our outlook for the second half of this year.

We forecast that market demand for smartphones in the 2nd Half will be flat

YoY. As we enter the period of strong seasonality, each competitor will expand

launches of new smartphones.

Market competition is expected to intensify.

Amid such conditions, we will strongly pursue sales growth by launching

competitive new models in all segments from the A series to the Galaxy Note.

First, we aim to strengthen our premium leadership and gain growth

momentum. For the new Galaxy Note, we will build on its own strengths which

include its large display and S Pen, while also increasing sales of innovative

products such as 5G models and foldable devices.

For the A series, we will actively respond to market competition and drive sales

growth by introducing cutting-edge technologies that meet customer needs.

Furthermore, we will strive to secure profitability through improving efficiency

of our operations as well as expenses.

For the Network business, we will maintain our leadership role by

strengthening our business foundation through continuing to expand LTE

networks into the overseas market and 5G equipment for initial markets such

as South Korea and the U.S. as well.

Thank you.

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Good Morning. I am Louis Kim, Vice President of Visual Display Sales and

Marketing Team at Samsung Electronics.

Let me start with current market conditions and our results for 2019 Q1.

The overall TV market in Q1 declined quarter-on-quarter as it entered a slow

season after end-year peak seasonality; and year-on-year due to weak demand

mainly in emerging markets.

For Samsung, sales of premium products increased, expanding our strategic-

product portion of sales. In addition, early adoption of new models led profits

to improve year-on-year.

In particular, boosted by an increase in the sales of premium models like QLED

and ultra-large products, Samsung expanded its market share year-on-year and

maintained the No.1 position in the ultra-large screen and 2,500 US dollar and

above segments, solidifying leadership in premium markets.

In addition, Samsung released its full QLED 8K TV lineup globally, offering models

ranging in size from 65 to 98 inches to pioneer the market for ultra-high picture quality.

QLED 8K TVs have been well received by the market thanks to our proprietary

picture quality processing engine and upscaling technologies.

For the Digital Appliances market in Q1, market demand decreased slightly

year-on-year due to the spread of conservative consumer sentiment caused by

a sluggish US housing market and Brexit effects in Europe.

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We improved our sales and profitability through adoption of new models with

strengthened product competitiveness.

In particular, growth in the domestic market is trending up solidly, centering on

new-lifestyle home appliances such as a clothes refreshers, dryers, and air

purifiers.

Now I will share market prospects for 2019 Q2 and the second half.

For the TV market in Q2, market demand is projected to weaken slightly both

quarter-on-quarter and year-on-year due to an ongoing decrease of

consumption caused by unfavorable exchange rates in emerging markets.

While sales are projected to decrease year-on-year because of a lack of global

sporting events this year, Samsung will seek to improve results through

expanding its high-value-added portion of products, including QLED and ultra-

large screen TVs and increasing sales of new models such as QLED 8K TVs.

In particular, we plan to shorten the schedule for new model releases this year

by more than one month compared to last year’s schedule.

Through this, we will focus on further strengthening our leadership in the

premium market as well as securing profitability.

For Digital Appliances in Q2, we will seek improvements by strengthening sales

of air conditioners, which are entering peak seasonality, and continuously

increasing sales of new premium products.

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In the second half of 2019, the TV market for 2H is projected to grow slightly

year-on-year, despite negatives such as economic slowdowns and unfavorable

exchange rates in some emerging markets.

Under these market conditions, Samsung will keep increasing sales of its high-

value-added product line-up, which includes QLED and ultra-large screen TVs,

further enhancing our leadership in premium products and generating

continuous growth and profits.

In addition, through modular Micro LED products—which have no bezels or

limits in size, resolution, or shape—as well as lifestyle products that add value

to our consumer's lives like the Frame/Serif TV, Samsung will continue to show

leadership and spearhead product innovation.

For the Digital Appliances market in the second half of 2019, demand for

appliances is projected to recover half-on-half amid easing of the trade conflict

between the US and China and despite concerns over Brexit.

While improving profitability through an increase in the sales of new-lifestyle

appliances and premium products, Samsung will further strengthen its B2B

business, which includes built-in appliances and system air conditioners, as well

as its online channels to secure future growth engines.

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Robert M. Yi

Thank you. This completes the management's presentation. Now we'll turn the

call over to the Q&A.

Q&A

Operator

Now Q&A session will begin.

The first question will be presented by Mr. Yoo Jong Woo from Korea

Investment & Securities. Please go ahead, sir.

<Q – Yoo Jong Woo>:

I have 2 questions about the semiconductor.

The first question is about the 1x-nano defect that was talked about in the

market quite a lot. Can you share us -- share with us some details about the

cause as well as the current status of that defect? And if there was, what was

the impact -- how much was the impact to your first quarter results due to this

1x-nano defect? Also, would there be any implications or changes to your

DRAM ramp-up schedule as a result of this defect?

Second question is about the bit growth. Actually, you were above guidance for

both DRAM and NAND in first quarter. Can you give us some background to

why you were able to be above guidance? On the other hand, we noticed that

you've actually you sort of decreased the full year guidance for bit growth. Can

you also share some background on that?

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<A>:

To answer your first question about the 1x-nano issue, the cause and current

update, we would like to also then explain the impact that would have on the

company as well as how we plan to respond. The issue itself is actually quality

issue that we found in some of the 1x-nano DRAM products that were

delivered to some of our server customers. It was a temporary quality issue

that occurred in the process of ramping up our 1x-nano product. We've already

found the technical solution. It's been adopted to our mass production. And

currently, our 1x-nano is in normal operation.

The provisioning for this quality was -- quality issue was taken in the first

quarter results. We cannot share with you the specific size, but it was not large.

And therefore, the -- any impact to our profit and loss for the second quarter as

a part of handling this quality issue would be minimized. Also, regardless of this

quality issue, our 1y ramp-up is going ahead as scheduled.

As we move up with the process migration, the technical difficulties are

becoming more sophisticated. Actually, we've learned valuable lessons from

this experience. We are focused even more on quality control, and we will be

able to therefore deliver even more a perfect quality as we ramp up to 1y-nano

and the other processes. And we will maintain a very strong position as the

technology leader in the industry.

About your second question on the bit growth, first about the reason why we

were able to overachieve the guidance in terms of the first quarter shipments.

Even though the overall market demand remained weak, we were fortunate to

have a high share, especially of the high-density mobile products, the new --

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for the new smartphones. And that has helped us overachieve on the guidance

as well as the market growth.

In terms of the reason why we are downward adjusting our full year guidance is

explained by several factors such as the fact that actually, the market demand

for first quarter was weaker than what we had expected. Also actually, the

timing when major customers are expected to complete their inventory

adjustments and come back to buying, that timing is actually being pushed

back closer to the end of the second quarter. Also, we're noticing that as prices

decline, the customers are actually operating on a leaner inventory than what

they used to. So considering all of these factors, we have decided to downward

adjust the full year bit guidance to mid-teens.

Now about how we expect our bit growth to be slightly above market for the

full year, to give you some background, our basic strategical direction of

focusing more on a profit-based growth, mid- to long-term sustainable growth

has not changed. We will focus on sustainable profitable growth rather than

focusing on, for example, short-term growth in scale.

However, the reason why we're expecting to be slightly above market is,

number one, because we have grown above market in terms of first quarter

shipments. So that has been counted in. Also, we believe that of the

application markets, the mobile, where we have a large share, is going to be

relatively the more stronger application market. And that's why we are

expecting our full year bit growth to be slightly above market.

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Operator

The next questions will be presented by Mr. Ricky Seo from HSBC. Please go

ahead, sir.

<Q - Ricky Seo>:

I have 2 questions about the DRAM inventory. It seems the DRAM suppliers,

their inventory is rapidly increasing. Can you give us some color in terms of

your inventory, how high it is right now? And is it high enough to call for

flexible adjustment of your production? For example, have you been

considering ways of adjusting your production by, for example, reducing the

wafer, feed or input?

A second question is that we're also noticing that the data center customers,

data centers are not just buying anymore. Do you notice from your customer

and -- whether the inventory is just -- inventory has been run through?

Do you see signs of your customers' demands improving? And if you see that,

can you compare that to the amount of demand improvement you saw this

time last year?

<A>:

To answer your question, even though we can't share you with the details of

our inventory levels, we can say that our inventory has definitely increased

quarter-on-quarter mainly due to the fact that we're in the weak season of the

year and also the fact that we went through the expansion of the capacity

second half of last year.

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But as we mentioned always during our calls, we have continued to maintain

flexible capacity considering the market demand.

And because we've downward adjusted our overall market demand for this

year, we are currently in the process of undergoing line optimization to

respond to the decrease in demand and also to stabilize our future inventory.

About the line optimization, as you know, because there was such a rapid

increase in market demand over the several past years, we've been increasing

our production through not only facility expansions but also by converting

some of our production capacity. And in this process, there were actually many

areas that needed to have some optimization work done.

And this time, we have decided to optimize and raise the efficiency of our

overall semiconductor line through, for example, relocating some of the

equipment. Of course, line optimization is something that goes on routinely in

a fab. But this time, we will be able to take on a more aggressive scope, and

this may have some impact on the production volume. However, the actual and

detailed scale of the production that will be affected by our line optimization

has not been determined, and we plan to review and adjust this level

depending on market demand in the future.

About your second question of the customer demand and their inventory, even

though it's difficult for us to share the details of customers' inventory levels, we

do presume that their inventory levels would have decreased at least

compared to the end of last year given the fact that they've been going through

inventory adjustments since fourth quarter of last year. Even -- however, it

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seems that the timing when the server customers will start back purchases

have been pushed back to closer to the end of the second quarter. But we think

that from the second half of this year, as inventory levels stabilize and also the

seasonality kicks in, there would be an increase in demand.

Operator

The next questions will be presented by Mr. Nicolas Gaudois from UBS. Please

go ahead, sir.

<Q – Nicolas Gaudois>:

The first one relates to memory. So several of your peers have implemented

production cut, so idling for NAND Flash and to a lesser extent DRAM. Beyond

what you described today in terms of probably more -- another impact of line

optimization, do you consider potentially implementing similar measures or

not going forward? And why? And what would be the cost duration in doing so

including profitability, pricing and also risk for DRAM of potential price

collusion?

And number two, related to mobile. Last week, you issued a press release

indicating you are delaying the launch of the Galaxy Fold. Could you summarize

for us the key issues, how you intend to address them and whether and how

this is changing your outlook for foldable devices into mid- to long term?

<A>:

To answer your first question, as we've always done when it comes to our

decisions about investment, supply or price strategy, we've always done our

decisions based on our own market analysis and our own market outlook

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regardless of what peers or other suppliers have been doing. And in terms of

the line optimization, it's being done for 2 main purposes. One is, of course, the

fact that this will help us optimize the lines in mid- to long-term perspective

but also because we adjusted down the full year demand growth. And based

on this adjustment, the inventory would have gone above the appropriate level

that we believe, and therefore, the line optimization will also achieve that

purpose.

<A>:

To answer your second question about the Galaxy Fold, we have received the

review sample. And according to what we've analyzed, there were some

display damages in the review sample due to force applied to the part of the

display that's exposed on the top and bottom part of the hinge. And also, there

were some foreign substances that were discovered in the display.

The reason why we announced to delay the launch was because we wanted to

thoroughly analyze these issues to find the fundamental solution and to supply

and deliver a product that meets our very high standard of completeness. The

updated launch schedule will be announced within the next few weeks.

Also, we have realized that we need to provide and prepare even better

communications with the customers in terms of how to use the Galaxy Fold.

Regarding the Galaxy Fold itself, as you know, we have invested quite a long

time and effort in order to develop the Galaxy Fold. We believe that it is going

to be the product that provides a differentiated premium experience to

customers who want to have the latest technology and innovative experiences

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and that the Galaxy Fold will create a new category in smartphones. And our

conviction and commitment behind that has not changed. We will continue to

exert our efforts to innovate new form factors and also actively respond and

reflect the voices of our customers and the market.

Operator

The next questions will be presented by Mr. SK Kim from Daiwa Capital Markets.

Please go ahead, sir.

<Q - SK Kim>:

I have 2 questions about memory.

First of all, it seems that listening to the message, you're expecting the recovery

of DRAM demand to be delayed than what we originally thought. And under

that assumption, do you still think that you'll be able to meet the bit growth

guidance that you provided for second quarter? Also, it seems that the price

pressure is going to continue into the second half. Given that, can you give us

an outlook for the overall market as well as how you plan to respond to it in

terms of strategy?

The second question is about the NAND industry. Inventory seems to be

running quite high. But if the SSD demand doesn't recover as people are

expecting, probably this oversupply may even continue until the end of this

year. If this happens, if oversupply continues in the second half, how will you

respond? Are you, for example, considering ways of responding by using this as

an opportunity to gain market share by actually increasing your investments?

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<A>:

To answer your first question, first of all, in terms of the bit shipment for

second quarter DRAM, we expect to actually meet the guidance for second

quarter by increasing shipments for not only the mobile but also for server

DRAM in the second quarter.

Regarding recovery of the data center demand, even though there will be

differences in inventory levels from server customer to customer, we think that

overall, as inventory stabilizes for servers, there will be recovery gradually of

demand starting from second quarter.

Regarding price outlook, fundamentally price, of course, is determined by the

demand-and-supply situation of the market. But more recently, I think visibility

has even become lower, so it's very difficult to predict where the price will go.

But just looking at the market situation, even though there are external

variables in terms of environment, we think that in the second half, with the

seasonality kicking in and also the server customer inventory stabilizing, there

will be solid demand in the second half. And that's why we would leverage our

technology leadership, especially strengthening our cost competitiveness

around our cutting -- our advanced nodes and also actively respond to the

high-density and differentiated demand in order to gain a stable profitability.

Regarding your second question of NAND, NAND prices, there are many

complex dynamics in play. For example, in some customers, actually, they were

hesitant in increasing the memory content because they saw that if they

started to buy again, this may actually rebound the prices. On the other hand,

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from the suppliers' perspective because of the impact of the inventory that

they're carrying, even though demand was growing, supply also grew. And this

also resulted in continued weak prices. That was the past.

However, we think that there is actually a recovery in demand in all the

applications including e-storage and SSD driven by the lower prices. And as an

example, for example, in mobile, the adoption of e-storage, of high density, of

256-gigabyte and more is expanding. And actually, the demand from HDD to

SSD, that conversion demand is also accelerating. That's why from the second

half, we expect both the market situation and also prices to stabilize.

Regarding our investment plans, as we've always mentioned, we do not pursue

just a short-term growth in size and scale, but we've always emphasized the

stable profitability as the priority of our strategy. And that remains valid. So in

the short term, we will very closely sense changes in the market to flexibly

manage both our investments and supply but at the same time focus on the

mid- to long-term perspective so that we're able to analyze and better

understand the overall mid- to long-term trends of the IT industry so that we

are well prepared to maintain our position as the industry leader.

Operator

The next questions will be presented by Mr. JJ Park from JPMorgan. Please go

ahead, sir.

<Q - JJ Park>:

I have 2 questions.

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The first is about the semiconductor. Can you give us the current status of the

second floor of Pyeongtaek Phase 1 and plans of using the remaining space?

And also, can you give us when you expect to operate the second phase of

Pyeongtaek?

Second question is about the IM. It seems that the S10 has actually done even

better than expected. But compared to that, the improvement in your

profitability for first quarter seems to be limited. Assuming that S10 would sell

even more in the second quarter, accounting for that, can you give us your

overall outlook for mobile results in the second quarter?

<A>:

To answer your first question, as we mentioned in the last call, this year we'll

be focusing more on migration rather than new expansions.

That's why the remaining capacity on the second level of Pyeongtaek Phase 1,

that will be operated flexibly according to market demand, and we have not

reached any specific decisions regarding operation of a new fab.

<A>:

Regarding your second question about the S10 and the IM performance

outlook, as we mentioned during the speech, in the first quarter, the

improvement in profitability was limited.

For example, there was the new model unpacked for both the S10 and Fold

brand marketing. And also, there were some costs associated with the revamp

of our mass lines.

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But the S10 margin itself is maintaining healthy second -- or 2-digit level similar

to its predecessor. And looking forward, even though the BOM cost burden

continues as products become more high spec and market competition is

expected to become more fierce, and so overall, it's not an easy competitive

situation, we will try to improve our profitability incrementally by gaining

stronger economies of scale, by increasing our sales and also by cost efficiency

and more effective marketing efforts.

Operator

The next questions will be presented by Mr. Mehddi Hosseini from SIG. Please

go ahead, sir.

<Q - Mehddi Hosseini>:

On the smartphone guide for the second half, you said that you should be able

to show year-over-year growth.

Can you share with me some of the factors that give you the confidence that

the unit shipment in the second half of '19 would actually grow on a year-over-

year basis? And I have a follow-up.

<A>:

The reason why we're projecting that we'll be able to grow in terms of

shipments year-on-year, number one, is the A Series which actually was

announced at very competitive prices compared to the product itself. The

shipment -- the sales volume we're expecting will increase throughout the year.

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The A Series that was launched last quarter has had very positive responses

from the market. Also on top of that, there is the S10, which has shown very

strong performance in the first quarter. That will continue in the second

quarter and thereafter.

And also, towards the second half, there's always the launch of the Note, which

will also help increase our overall shipments.

<Q - Mehddi Hosseini>:

And as you -- on the foundry side as your 7- and 6-nanometer ramps, how

should we think about the margin profile for that specific subsegment relative

to the operating profit for the entire semiconductor business unit?

<A>:

Regarding the profitability, the margins of our advanced nodes, having done

advanced nodes before, we do know that 6-nano and 7-nano, these advanced

nodes, do require initial investment. But once we have the volume ramp-up,

the margins actually quite improved to cover, for example, the depreciation.

And on top of the 7-nano and 6-nano, we have the road map for 5 and 4

following. And so we are confident that in the long term, margins will be

secured.

Operator

The next questions will be presented by Ms. Kim Kyung Min from Hana

Financial Investment. Please go ahead, ma'am.

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<Q - Kim Kyung Min>:

I have 2 questions.

The first question is about the Foundry business. You've announced plans of

investing KRW 133 trillion in system semiconductors by year 2030. Also, you're

planning expansions for both 8-inch and 12-inch. Can you share with us the

insight that you have in terms of your downstream demand to justify the sort

of expansions and investments?

Second question is about the System LSI business. Mobile still accounts for a

large share, which may have actually dragged down the business in the second

half of 2018. But especially with the rollout of 5G, this may actually become an

opportunity for you. And so in terms of that context, what kind of product

portfolio are you preparing?

<A>:

Regarding the 12-inch, actually, it is the demand from applications such as

mobile network, 5G, HPC and auto that's driving and justifying the investments

and expansions that we're doing, including the EUV exclusive line for 5 and

below -- excuse me, 7-nano and below. Also, for the legacy 65-nano, we have

demand coming, for example, from the high pixel and multiple camera image

sensors, and that is why we're planning to expand the S4 line.

We will -- regarding the 8-inch, that is focused, for example, for the power or

DDI or sensors, fingerprint recognition and the sensors, even the discrete

products. Also, that's the current demand. In the future, we're expecting more

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demand to grow, for example, in the automotive and IoT. And that's why even

for the 8-inch, we are making investments to expand the production.

<A>:

Regarding your second question, yes, even though the smartphone handset

market itself decreased, contracted between '18 and '19 and expected to only

grow about 1%, actually from the Semiconductor business side with the

adoption of 5G, this is actually an opportunity to see increase in both market

revenue as well as market size. Given the fact that we were the first to

commercialize the 5G, we think that this is a great opportunity for us to

strengthen our position as a mobile SoC company.

So we were the first to develop and supply the chipset solution for 5G for the

flagship handset. On top of that, we are currently working on creating a one-

chip solution that combines the AP and the modem. In addition to the mobile

demand, there will be 5G solution demand from the auto as well as IoT, which

we are preparing, and we will continue to expand our business in the 5G area

by signing on new customers.

Robert M. Yi

We'll take one last question before ending the call.

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Operator

The last questions will be presented by Mr. Marcus Shin from Mizuho Securities.

Please go ahead, sir.

<Q - Marcus Shin>:

I have 2 questions.

First question is about the Display business. We're noticing that the first half is

always weak. First half last year was a weak period. And also, you're recording

an operating loss first half of this year. Do you know why, the reason why this is

repeating? Would you think that the same pattern would repeat next year? Or

do you have strategies and plans of countering this repeated seasonality in the

business?

Second question is about the network, the 5G network equipment business,

which many people are expecting to be the next driver for the company overall.

Compared to the expectations that the market has about the 5G equipment

business, I think there's relatively less known about specifically what Samsung

is targeting in terms of 5G equipment. What's the size? What kind of market

are you targeting? And so can you share with us to your target market size and

the description of the 5G equipment market that your -- will be focusing on?

And can you give us some guidance in terms of the 2019 and 2020 revenue

that you're expecting for the equipment 5G?

<A>:

Regarding your first question about the low utilization of capacity in the first

half, that is actually caused by our high dependency on a specific customer and

a specific part of the smartphone industry. So it will be difficult to

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fundamentally remove that effect in the short term, but we are countering this,

for example, by developing new solutions such as FOD fingerprint sensors or

SoD, speaker on display. And also, we're increasing our supply of flexible OLED

to Chinese handset makers.

Even though we can't disclose the exact scale, we do expect there for the

supply volume to increase in the second half, and this will continue to have a

positive effect until the first half of next year. In the mid- to long term, the way

of us countering the seasonality of the business will be to diversify our

applications to -- beyond the mobile to look at, for example, laptop computers

in IT, automotive or foldable.

<A>:

Regarding your second question, actually when it comes to our 5G network

equipment business, there is the equipment business itself consisting of the

radio access network or core. But also, there is -- we are also focusing on the

service business, for example, on equipment deployment and optimization.

We are working with the major carriers in markets such as Korea, U.S., Japan

and India. We were able to complete 5G commercialization first in the world

successfully early April in Korea. We will leverage this to maintain a strong

leadership in 5G in countries such as Korea and the U.S. and also continue to

roll out our base to new areas.

Even though it's difficult to give you details of the results, the business results

we're expecting, we are expecting to have solid results on -- because not only

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the 5G network business but also that we will continue to supply the 4G LTE

equipment.

Robert M. Yi

Thank you very much. That completes this quarter's conference call.