Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2021 First Quarter Earnings Results by SK Hynix. This conference will start with a presentation followed by a divisional Q and A session. Now we shall commence the presentation on the fiscal year 2021 Q1 earnings results by SK Hynix.
Good morning and good afternoon and evening to those calling in from abroad. This is Park Sung hwan, the Head of Investor Relations at SK Hynix. Welcome to the SK Hynix 2021 First Quarter Earnings Release Conference Call. Before starting the conference call, allow me to introduce the executives present here with me today. First, Kevin No, CFO and Head of Corporate Center Sang Hyok joon, Head of Finance Bang Yong soo in charge of DRAM Marketing and Park Chan Dong in charge of NAND Marketing.
Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we will now begin SK Hynix 2021 First Quarter Earnings Release Conference Call. Kevin No, CFO and Head of Corporate Center, will first present your earnings for the Q1 followed by the company's plan and market outlook. Good morning, everyone. This is Kevin No, CFO and Head of Corporate Center.
First, I will talk about Q1 earnings. Memory market in the Q1 improved quickly on the back of strong PC demand to support work from home and remote online education and consistent mobile demand from the customers in the Greater China region to compete for market share. Thus, despite the seasonality, bit shipment growth for DRAM and NAND were 4% 21%, respectively, from the previous quarter, both outperforming the guidance. DRAM ASP increased 4% from the previous quarter, rising across all applications, while NAND ASP declined 7% quarter on quarter as price continued to fall in most products. For MCP, demand for high density products such CHESS 6 gigabytes or above DRAM and 128 gigabytes or above NAND remain strong As customers in the Greater China region continue to adopt higher specifications for their products, sales the portion out of sales was 23% rising slightly quarter on quarter.
Consolidated sales in the first quarter was KRW8.49 trillion, up 7% from the previous quarter and up 18% year on year. Although labor expenses increased, sales, general and administrative expenses declined from the previous quarter As a result of our continuous effort to reduce overhead costs, from the unit cost perspective, the yield rate for our flagship products 1Z nanometer class DRAM and 128 layer NAND improved faster than planned. Particularly for NAND, larger style, larger sales mix for 128 layer products made a great contribution to 1st quarter cost reduction. Consequently, operating profit in first quarter was KRW 1.32 trillion, up 37% from the previous quarter. Operating margin was 16%, improved by 4 percentage points.
Depreciation and amortization in the Q1 was KRW 2,533,000,000,000, slightly down from the previous quarter. EBITDA was KRW3.86 trillion with EBITDA margin of 45%. There was foreign currency related income of KRW 56 0.8000000000, including gain on foreign currency transaction from the strong dollar in account receivables collection, While there was loss on translation on the valuation of equity investment in Kioxia from the weak Japanese yen, There was net interest expense of KRW56.6 billion. Combined altogether, there was a net non operating income of KRW26.2 billion. Net profit before tax was KRW 1,350,000,000,000 And corporate tax expense was KRW0.36 trillion.
Net profit was KRW0.99 trillion with a net profit margin of 12%. Consolidated cash balance at the end of first quarter was KRW5.99 trillion, up by approximately KRW1 1,000,000,000,000 from the end of 2020. Interest bearing debt was KRW13.59 trillion, increased by KRW2.34 trillion from the end of last year. The company's debt to equity and net debt to equity ratio at the end of 1st quarter stood at 26% 15% respectively, slightly up from the previous quarter. Next is the company's market outlook and plan.
For the DRAM market, tight supply situation is expected throughout this year With the combination of strong demand driven by digitalization speeding up in the post pandemic era and demand for inventory accumulation by customers concerned over component shortage. For the NAND market, The price is expected to start rising from the 2nd quarter on the back of faster than expected market recovery. The PC market is expected to achieve rapid growth at over 10% for the 2nd year in a row, thanks to the post pandemic trend toward 1 PC per person. Demand remains strong as customers are aggressive for set build As well as having low inventory on hand, PC demand is likely to remain solid as non content culture becomes more widespread and stimulates education and gaming PC demand. Although the smartphone market is showing some signs of recovery after the sales slowdown last year, Demand has not come up to pre pandemic levels yet.
However, there will be an increase in memory demand from the current pent up demand, accelerated shift to 5 gs and competition for market share among mobile customers. Demand for mobile DRAM and NAND this year is expected at mid-twenty percent and mid-thirty percent respectively compared to last year. After showing relatively lukewarm demand growth in the Q1, The server demand is on a fast pace of recovery from the Q2 on the back of increased spending for new data centers by hyperscalers. However, the demand increase is expected to take off from the second half of the year As the impact from the launch of new server CPU materializes, the new CPU will stimulate server replacement demand And memory content is also expected to increase with improved computing power. For graphics, as new game consoles launched last year and strong PC demand persist, Growth rate of above 60% for DRAM demand for consoles, around 30% for a graphic card and over 40% for client SSD demand are expected.
Based on this trend, DRAM demand growth for this year is projected at the higher end of the previously expected range at around 20%. The company will address the incremental demand with enhanced productivity and inventory digestion. This year's DRAM bit growth Meanwhile, As the yield rate for 1Z nanometer class, the company's major product this year is improving faster than planned, The mass production will take place in earnest in the Q2. The company will also begin the mass production of 1a nanometer class using EUV within this year to stay ahead of technology competition. NAND demand growth is expected at mid-thirty percent, slightly higher than the initial expectation.
The company is planning for a bit growth more than the market this year by further transitioning to 128 layer technology, which is garnering customers' recognition for competitiveness. Following the full scale marketing of 128 layer based mobile and client SSD, The company plans to increase the sales of enterprise SSD. The company will increase the 128 layer product mix close to 80%, begin mass production of 176 layer products with the accumulated know how from the 128 layer technology and further strengthen technological competitiveness in NAND as well. The market environment in the second quarter is expected to be favorable across all applications And the company will proactively react to customer demand with market leading product quality, particularly using the 1Z nanometer DRAM and 128 layer NAND technology showing outstanding product competitiveness, the company will start expanding high density products based on 12 gigabytes or more DRAM and 128 gigabytes or more NAND and further increase the market share in the high density MCP market this year. For the 2nd quarter, DRAM bit shipment is expected to grow in low single percent.
For NAND, given the base effect of the high bit growth achieved in the Q1, bit shipment in the second quarter is expected to be flat quarter on quarter. With the stronger than expected demand growth this year, the company is responding to the additional demand with enhanced activity and inventory utilization. However, as the expectation for the customer set build continues to exceed the projections From early into the year, there is a likelihood that the supply and demand condition becomes tighter going into the second half of the year. In the midst of increased equipment spending due to the supply shortage situation across the overall semiconductor industry and given the elongated equipment lead time and setup period, The company has decided to pull in a part of the capital expenditure plan for next year to the second half of this year. While this will slightly increase our CapEx over the initial plan, the increase in production will be materialized next year.
Lastly, let me provide an update on the company's ESG management during the quarter. SK Hynix has strengthen Board of Directors centered management, so that the Board can more easily supervise and check the management as the highest governing body for decision making processes. Formerly the Lead Independent Director has been named the new Chairman of the Board. The council for recommending candidates for outside directors now consists 100% of independent directors promoting a more transparent and independent decision making structure. In addition, former committees have been expanded to reinforce the Board of Directors' engagement in corporate management such as the company's mid to long term plans and over decisions for the evaluation process and compensation for senior management such as the CEO.
The newly structured Future Strategy Committee and Human Resources and Compensation Committee will allow closer participation of the Board of Directors and Company Management. In March this year, the Semiconductor and Display Carbon Neutrality Committee was newly launched with the participation of the Ministry of Trade Industry and Energy and the 4 major domestic semiconductor and display companies including SK Hynix. And a joint declaration towards the goal of Although the semiconductor and display industry have been each making independent efforts to reduce greenhouse gas emission through investment in leading edge reduction facilities and development of alternative process gases, The Carbon Neutrality Committee is now acting as the trigger to strengthen mutual cooperation such as developing eco friendly technologies initiatives such as RE100. SK Hynix will be an active participant in this endeavor to help establish the Korean semiconductor industry as the best leading practice in global ESG. And with that, we are now ready to take your questions.
The first question will be provided by Ricky Se from HSBC. Please go ahead with your question.
First of all, congratulations on the good performance and thank you very much for taking my question. I have two questions. First is about the EUV. You mentioned that you will start Applying the EUV for 1a nano production in the second half of this year, I wonder what is going to be the number of layers that the company will be applying the EUV-two in order to make sure that it is going to be cost effective, then I believe that you would have to apply this to as a high layer as possible. So when do you believe that you will be able to have a meaningful application of the EUV?
And also what is the currently available unit of equipment that the company has now? And what is your plan for the acquisition of the equipment down the road the next 2 to 3 years? And the second question is, the company also explained earlier about the DRAM market situation per application. But then if you could let us know what were the stronger performing application than you had expected? And also what were the weaker performing applications and the company expected and why do you believe that was the case?
Regarding the EUV, as was explained in the presentation, yes, SK Hynix plans to apply the EUV for Dimash production of 1a nanometer for the first time. And given that this is going to be our first application of the EUV, the layer is not going to be much. So for the 1a nanometer production, we will be applying the EUV for only one layer. But then for the 1b and 1c nanometers down the road, we will be applying the EUV to more layers. And as was explained earlier in the previous earnings release conference call, We have already acquired the EUV for mass production in the early part of this year and we have also completed the installation.
And as has been reported through the media, we have also signed the volume purchase agreement for EUV with ASML, laying the groundwork for consistent supply of EUVs for the next few years. And given that this is only the early days of the EUV application, there are still some uncertainties we do understand. So We have set up a task force for the EV application to make sure that we will be able to move ahead with this plan with no glitches. Next is about the DRAM demand per application. Now I would like to give you my responses in 2 parts.
First is about the device applications, which are related to the consumer side and second are for server. Now first, for the PC and the game consoles as so PC game consoles as well as the smartphones. So in these devices market, we believe that The set build is going to be stronger or higher than the company had initially expected. Some of the reasons are that because of the COVID-nineteen impact, the work from home demand continues into this year. So because of this, unlike the previous trend, we are also seeing increasing demand for high spec products.
And as a result, we are seeing that the supply keeps falling short of meeting the demand for the bit growth. And next about the server side. So demand for server products in the 4th in the Q1 And also looking at so it was a bit different depending on the inventory level by customer as well as the demand per customer. And of course, overall, there has been growth in the server demand as well. But then compared to other locations, I would say that for server in the Q1, the growth was about at the recovery level.
But then starting in the Q2, we do believe that the demand was for server products will also start to take off Because investments by hyperscalers as well as cloud companies is increasing and there's also stronger set build confidence. So overall, we believe that the server demand will also take off in the Q2. In addition to that, the effect of the new CPU launches will will begin to be felt starting in the second quarter and into the second half of this year. So we believe that the demand for server is also going remained strong throughout the year.
The following question will be presented by Nicolas Godowa from UBS. Please go ahead with your question.
Good morning. Thanks for taking my questions. The first one relates To demand in inventories, investors are often asking currently how much of a recent upside in memory is and consumption As opposed to inventory build, how do you think end demand bit growth has changed for 2021 versus your prior expectations? And how do you compare this to the industry bit shipment growth? And secondly, you just talked about Upside for CapEx this year and putting in some of the delivery schedule for tools into 2021.
When is the audios you can actually execute that this year? And are equipment lead times currently bottleneck In that context when you will consider to generate that upside in your capacity ramp plans? Thank you.
First, about the inventory for both the suppliers, so for the company and also the customers. Now for the supplier, the inventory level also has been announced several times already. Now it is going to be lean through the year. And also as we move further into the year, it is likely to become leaner. And then inventory from the demand side, of course, it is difficult for us to tell for sure.
But then For the server inventory, where the enterprise demand is strong, For the server inventory, it started out with a little bit of more room than other applications. But then as I have explained about the server demand projection for the rest of the year. So it's likely that the server demand will also start growing further in the second quarter and the second half of this year, meaning that starting in the second quarter, The server product inventory is also likely to start declining. And then that I believe is then also going to be related to the memory demand as well. And regarding your second question about CapEx plan, the company's investment review committee holds meeting on a quarterly basis to make adjustment to the CapEx if necessary.
And now as was mentioned earlier, Because of the longer delivery time for equipment and tools and also in consideration of the tight demand and supply dynamics, The company has decided to pull in a part of the CapEx of next year into this year. And as for the equipment with particularly long delivery time. We have already had taken the review and is now ready to issue the PO for these equipment with long delivery time. So we have had this ready at the end of the Q1, so at the end of March. And then for the equipment and tools with relatively less urgent delivery time, We would keep monitoring the market situation and again make the decision related to them at the end of the second quarter.
So with these developments, we believe that the equipment will be all set up by the end of this year and the production coming out of these new equipment will contribute to a bit growth next year.
The following question will be presented by Min Sung hwan from Samsung Securities. Please go ahead with your question.
I have some questions about your foundry and that there were reports about the company's plan to increase investment. And when we look at your 8 inches then we see that in terms of the cost competitiveness as well as the price competitiveness, The company does have an advantage over the 12 inches So if the company does go ahead with further investment, then what is your plan between the 8 inches and the 12 inches And also are there any plans to convert some of the DRAM capacity into CIS? Now with regards to the foundry investment, as the The questioner has rightly observed the company currently remains 8 inches focused in our business plan. So at this time, there are no plans to enter into the, for example, 12 inches or other leading technology foundries. And also the system IC, which is a 100% owned fully owned subsidiary of SK Hynix.
The SK Hynix system IC recently has relocated its domestic 8 inches foundry business to China to strengthen its cost competitiveness. And then also last year for the what's called the key foundry, so for the MagnaChip foundry business acquisition. SK Hynix is currently participating in the bid to acquire the magnitude foundry business as an LP. The company sees the 8 inches foundry business to have a positive future outlook. But then we are also looking at the current tight supply situation, especially looking at the supply shortage for the automotive semiconductors.
The company also feels a sense of responsibility as a large semiconductor supplier. So currently, we are looking into various options regarding the foundry as well as well as other businesses. And although no specific decisions have been made yet, We are mulling over our ATMs business, for example, the potential expansion in from various angles. And as for your second question about the possibility of converting some of the DRAM capacity into CIS, We remain conservative regarding this at this point given especially the tight supply that continues for both DRAM and NAND market. So So at this point, regarding the potential conversion of DRAM capacity to CIS, all I can say is that we remain conservative.
One last comment regarding this particular question. Now regarding the global tightness in the semiconductor supply, We are also monitoring the situation and especially the fact that this is also affecting the supply of some parts because of the semiconductor shortage. Now regarding the current situation, SK Hynix continues to think about how we can make a contribution to this. And as soon as we come up with any viable businesses or ideas, then we will communicate them with you. And we will also try to have discussions and work together with the other players in the semiconductor ecosystem.
Just to give you some clarification regarding the explanation earlier about the investment. So I did mention about The investment review committee being held on a quarterly basis to make decisions. But then for the CapEx pull and decision for this year, Now the amount of the CapEx to be pulled in from next year has already been determined. And then any further decisions will be made within that limit. So I did mention earlier about the decision to purchase the equipment with especially long delivery time.
So we have already prepared the POs to be issued at the end of March. And then for the equipment with less urgent lead time, then we will make the related decisions in the future, for example, at the end of June for the PO to be issued. So once again, let me clarify that for the CapEx pull in or an incremental CapEx, we have already made the decision at the end of the Q1. And it's not likely that there is going to be any increase in the CapEx further in the second or the Q3 of this year.
The following question will be presented by Mehdi Hosseini from SIG. Please go ahead with your question.
Yes. Thanks for taking my question. Given the strengthening demand environment looking into the second half, do you see a scenario where customers would commit to a longer term contract?
Now I would say that, yes, there are such moves because among some customers, there are inquiries about long term agreements at longer than 1 year and also there is some expressing interest in broadening our strategic relationship. So yes, there are such interests or moves. And regarding such inquiries or expectations, the company is responding to them within our existing framework of the strategic customer relations.
Thank you. If I may have a follow-up regarding the mix of DRAM, specifically to Specific to server and enterprise grade, do you also expect more diversification Where high bandwidth memory and GDDR will also account for enterprise grade type of DRAM and therefore it would broaden the high margin server DRAM.
Inference
Now for the short term, yes, as you have mentioned, the high performing computing, the demand for high performing computing is increasing, especially for example for AI acceleration. So we see that demand for high bandwidth memory is increasing rapidly. And as a result, its portion out of our business is also increasing. And for the longer term, we believe that there will be continuous growth, especially for, let's say, AI acceleration and inferential training for such purposes. And as a result, we believe that yes, also for GDTR, believe that it is also going to be taking place as being established as a high value add product in the accelerated in the acceleration market as high bandwidth product.
The following question will be presented by JJ Park from JPMorgan. Please go ahead with your question.
I have two questions. First is that I see that currently the gap between the spot price and the contract price is at a historic low. So do you believe that the contract price can continue to rise to be really on par with the spot price? Or do you believe that the spot price will perhaps will be temporary and then will start to fall in the And next question is about the your Kioxia investment in relation to the Intel NAND acquisition. So because of the company's acquisition of the Intel's NAND business, this would also require quite a lot of funds from the company.
So are there any plans by the company to perhaps capitalize your current investment in Kioxia? Or if not, then how do you plan to finance Regarding your first question about the spot price and contract price outlook, obviously, spot price responds more quickly to the market situation than the contract price. And that is also what we have seen into the Q1 of this year, the spot price reacting very And as a result, the contract price also has risen since the Q2. And we believe that as a result, The gap is going to become lower between the 2. But then looking at the second half of this year then looking at the customer demand per application as well as SK Hynix's supply ratio, We believe that the contract price will continue to rise.
And regarding the spot price outlook in the second half of this year, rather than whether it is going to go up or down, I would have to say that it is likely to have a much bigger volatility in the price compared to the demand for OEM. Because in the spot market, the demand comes largely from the white box and also small invisible demand. And because of this, they are also more susceptible to the volatility in the parts supply. So I believe that spot price is also going to remain quite volatile. And regarding our share in Kioxia, Now as you would know SK Hynix has equity share in Kioxia, but now 2 thirds of that is in the form of SK Hynix as an LP in the large private fund, the Bain company.
And then onethree is held in a separate vehicle. And the original plan was that after the IPO, Then the share that we hold as an LP to Bain Capital will be sold off through the IPO process as well as further processes down the road. So that was the original plan. And then for the remaining 1 third, which is up to 15% share, our plan was to maintain this share to establish a strategic cooperation relation with Kioxia for the longer term. And of course, I'm sure that you are also being exposed to various news, for example, Western Digital or Micron making some kind of offers to Kioxia and so forth.
But then what we have been informed from Bain Capital and Kioxia is that they are working toward the IPO sometime in the second half of next year as was planned. So the as you would also know, For the share that we hold as an LP in the GP, then in terms of the exit timing, it is not up to us to make that decision. It is up to the GP, which is paying capital to make the decision on behalf of the investors. And given that SK Hynix is also in competition with Kioxia, so although we do have an indirect share in the company in terms of the decision, so for example, like IPO decisions or any type any other decisions, there is no room for SK Hynix to be involved in such decision making. Having said that, in relation to the financing for the Intel acquisition, You would know that the debt market recently is quite favorable.
So the company's plan now is to finance the acquisition of the Intel NAND business by raising debt and also utilizing the company's operating cash flow. Having said that, we also remain flexible to the to any changes in the situation. For example, if there is an IPO in the second half of this year, then we would also take that into consideration.
The following the last question will be presented by SK Kim from Daiwa Capital Markets.
Now my next question are about the inventory level at The different customers and also the associated risks. Now because from the second half of last year, there have been in the U. S. And China and also some disruptions in the product supply. And because of this, there are Some who say that among the, let's say, the mobile customers and also among the Chinese companies, so depending on certain applications and the customers, Their inventory buildup has been quicker than others.
And also they some say that for the data centers as well, their inventory buildup has also quicker than others. So there are some concerns also at the same time that perhaps the inventory adjustment or the price adjustment could come earlier than anticipated at this point. So what is the company's outlook regarding this possibility? Level, I would just like to call them all together as server customers. So then for the server customers, I would say that the inventory strategy is different by the group of customers.
And also looking at the situation from the Q4 of last year into early part of this year, then we can also see that by the different customer groups, their purchasing policy and also inventory strategy have been different. So some had decided to have a high inventory position at the end of last year and then they would reduce their purchasing this year, while some decided to build up inventory in the early part of this year and then consume them throughout the year. While some decided to have a gradual decrease in their inventory, while some others also decided to increase their inventory throughout the year, Given the tightness of the parts supply that they have seen recently, so again, we see that the inventory strategy among the server customers are not homogeneous. And then as I mentioned earlier regarding the server market overall, Moving from the Q1 into the Q2, we see that there is a stronger demand for service set build. So we do believe that in the second half of this year, the overall server inventory is going to be lower than we have team in the early part of this year.
And as a result, we do not believe that there is much cause for concern in terms of the supply and demand situation. And then for the mobile side, the mobile inventory, now the mobile customers, Chinese customers have been maintaining very aggressive marketing and shipping since the Q4 of last year. So their inventory level continues to fall. Just one more follow-up question. I see that your NAND bit growth in the first quarter significantly outperformed the guidance.
What do you believe made this possible? And what is the current NAND inventory level? Now regarding the NAND sales, there has been increase in the bit shipment for bit shipment of PC products and also stronger demand for the client SSD. And there has also been a recovery of mobile demand, especially for the high specification smartphones. So the company has been very actively responding to the growth in demand coming from the client SSD and the mobile side.
And we have also seen that the MCP adoption, the high density MCP adoption has increased as well as the density itself. So this has also contributed to increase in the bit growth of NAND. So as a result of these developments, the NAND inventory level at this time, I would say, has come back to the normal level. With that, we conclude the SK Hynix 2021 Q1 earnings release conference call.