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 twenty twenty fourth 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 twenty twenty fourth quarter earnings results by SK Hynix.
Good
morning, good afternoon and evening to those calling in from abroad. This is Park Song hwan, the Head of Investor Relations at SK Hynix.
Welcome
to the SK Hynix twenty twenty Fourth Quarter Earnings Release Conference Call. Before starting the conference call, allow me to introduce the executives present here with me today. First, Jongwon No, CFO and Head of Corporate Center Sang Hyuk Joon, Head of Finance Park Chan Dong, Head of NAND Marketing and Park Myung Soo, Head of DRAM 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 earnings release conference call.
Jongwon No or you can also call him Kevin No, who is the CFO and Head of Corporate Center will first present the earnings for the fourth quarter and 2020 followed by the company's plan and market outlook. Good morning to everyone for the first time. This is Jongwon No, Head of Corporate Center. Before briefing you on the company's financial performance in the fourth quarter, I will give you an overview of last year's operational performance and this year's direction. The global economy remains subdued throughout 2020 with a global pandemic and escalation in trade conflicts, which also slowed down the memory market since mid last year, which actually had started the year with hopes of recovery.
Despite the adverse condition, the company achieved KRW32 trillion in sales and KRW5 trillion in operating profit both significant improvements year on year, thanks to rapid development of leading technologies, stable mass production of key products and industry leading competitiveness. For DRAM with the beginning of mass production of 1Z nanometer from the third quarter last year, the portion of leading edge 1Z nanometer and 1Y nanometer technology neared 40% exiting last year and is planned to go beyond 75% by the end of this year. We will also introduce 1A nanometer products within the year, which has productivity improvement of 40% over 1Z nanometer to keep strengthening our technological leadership. The company throughout last year was able to drastically increase server DRAM market share on the back of industry leading quality products. Last October, we launched the world's first DDR5 product with nearly double the speed and 20% less power consumption compared to DDR4.
The company will keep fortifying its position in the server market with the competitiveness of 16 gigabit products based on our leading edge technology. Meanwhile, the company has the largest market share with HBM2E which started sales beginning the second quarter of last year. We will strengthen our dominance in the graphics industry by actively responding to high performance computing and AI acceleration market with these kinds of strategic products. For NAND, our industry's first 128 layer product took up 30% of the production at the end of the fourth quarter. Our 128 layer products will take more than half of the total production during the first half on the back of fast yield improvement and consistent production ramp up leading the market transition into 128 layer technology.
In addition, the company is fulfilling requirements from customers in a timely manner with our 128 layer technology. Following last year's expansion of mobile and client SSD sales, this year we are planning to expand the supply of server SSDs. Meanwhile, we are preparing for mass production of 176 layer products developed last year and having 35% higher productivity over 128 layer technology. We plan to broaden its applications down the road starting from high end mobile products, which require high performance and low power characteristics, continuing our competitive edge from 128 layer technology and onward. Last year, our SSD sales increased significantly and the NAND portfolio which has been focused on mobile has improved vastly.
In particular, the data center SSD showed a six fold increase in sales exceeding the original plan. Also by securing meaningful market share in ESSD, we have laid ground to accelerate revenue growth. And the signing of the agreement to acquire the NAND business from Intel last year will be crucial in driving up the company's NAND competitiveness. Besides improving portfolio and achieving scale economy, it is meaningful that the company secured the human resources pool with higher understanding of the business and established a cooperative relationship between the two parties. The company will thus establish its position in the NAND market as surely as in the DRAM market and will begin to write a growth story unique to us.
Now I will report on the company's financial performance in the fourth quarter twenty twenty. Consolidated sales in the fourth quarter was KRW7.97 trillion, down 2% from the previous quarter, but up 15% year on year. Bit shipment growth for DRAM and NAND in the fourth quarter were 118% respectively, both outperforming the guidance as the company actively responded to the continued strong demand for mobile. DRAM average selling price fell 7% quarter on quarter and NAND ASP fell 8% quarter on quarter. DRAM price decline is slowing down mostly in server and graphic products, while the magnitude of price decline for NAND slowed down in all applications excluding discrete products.
Thanks to strong mobile demand from China, MCP sales rose precipitously for two consecutive quarters and prices also rose quarter on quarter. Revenue portion of MCP increased to 22% and we expect the upward trend of sales to continue following the strong demand. Operating profit in the fourth quarter fell 26% quarter on quarter as revenue decreased due to the drop in ASP and weakness of U. S. Dollars.
However, profit increased 298% on a year on year basis to KRW0.97 trillion and operating profit margin was 12%. Depreciation and amortization in the fourth quarter was KRW2.59 trillion slightly up from the previous quarter. EBITDA was KRW3.56 trillion with EBITDA margin of 45%. For non operating items, there was foreign currency related costs of KRW0.33 trillion including loss on foreign currency transactions from the weak dollar in the course recovering account receivables. On the other hand, there was gain of KRW1.72 trillion on year end fair valuation of our investment in Kioxia, adding up to a total of KRW1.27 trillion of net non operating income.
Profit before tax was KRW2.23 trillion, up 66% quarter on quarter and net profit was KRW1.77 trillion with a net profit margin of 22%. Consolidated cash balance at the end of fourth quarter was KRW4.95 trillion, up by KRW0.95 trillion from the previous year. Interest bearing debt was KRW11.25 trillion, increased by KRW0.73 trillion year on year. As such, the company's debt to equity ratio and net debt to equity ratio stood at twenty two percent and twelve percent respectively at quarter end. With improved profitability and reduced CapEx in year 2020, free cash flow which is cash flow from operations less acquisition of plants, property and equipment was KRW2.2 trillion.
Per the company's dividend policy announced last year, the total dividend payout will be KRW800 billion, which is roughly 36% of total FCF and dividend per share is KRW1171. Next is the company's market outlook and future plans. This year DRAM industry bit demand growth will be above supply growth as we expect supply growth to be constrained, while strong demand from server and mobile applications persists. More specifically, we expect the server DRAM demand growth to be above 30% this year as key hyperscale customers resume new data center investments, new server CPUs with eight DRAM support channels instead of six will be launched leading to new server replacement cycle. For smartphones whose sales plummeted last year due to COVID-nineteen, new five gs products are slated for launch while the trend to adopt high density is expected to continue.
We expect five gs smartphone unit sales to double this year to approximately 500,000,000 sets and recent major models adopt six gigabytes to eight gigabyte expect that mobile DRAM demand growth will be above 20%. In the PC market, notebooks and gaming PC demand is likely to remain strong as customers' inventory level has been reduced following sales pickup in the fourth quarter of last And for graphics, HBM2E market is expected to grow as the impact of new game console and GPU launches remain and demand for AI DC accelerator grows. We also anticipate robust demand from the consumer market with increase in smart home devices and expansion of five gs network infrastructure. On the other hand, as the generally high inventory level across the industry eases off in the first half of this year, the NAND market environment is expected to gradually recover as we enter the second half. For mobile, new five gs product launches and aggressive build demand from customers buying for market share and adoption of high content NAND will drive demand.
Strong demand growth of over 30% is expected in client SSD as demand remains strong for laptops and with the impact from new game consoles that adopted SSD. And launch of the new server CPU and content per box increase will drive enterprise SSD demand in earnest from the second half. Based on the demand environment explained so far, DRAM demand growth this year is expected at between high teens and 20% and the company is planning for a bit growth in line with the market. NAND demand growth will be in the low 30% level. The company is planning to outgrow the market despite the decrease in wafer capacity following the transition to three d NAND.
By converting to 128 layer and 176 layer products, we will achieve rapid growth and continue to cut costs. Despite the seasonality in the first quarter, the market remains relatively healthy mainly in mobile and PC sectors. Thus the company's DRAM bit shipment growth will be similar quarter on quarter, while NAND bit shipment growth is aimed at mid single digit percentage. The company intends to maintain prudent investment policy this year against the external uncertainties that still persist. As was the guidance, CapEx last year was considerably less than in 2019 slightly below KRW10 trillion.
This year despite the opening of M16 late last year, we will keep the current focus on spending on technology migration. This will increase our CapEx year on year, but only to a limited extent. Last, I will discuss the company's ESG plans. We have already communicated our goal of creating a virtuous cycle by seeking sustainable growth with a balanced business portfolio of DRAM and NAND, while making a contribution to humanity and society by strengthening ESG and leading to further growth of our business. Last year, we became the first in Korea and the first semiconductor company to join RE100 with a commitment to using 100% renewable energy for our power consumption by year 02/1950.
Earlier this year, we also became the first global semiconductor company to issue a green bond with a total value of $1,000,000,000 Proceeds from the issuance will be invested in environment friendly projects such as building a new state of the art waste water treatment plant and water recycling systems and we will proceed with various projects to improve energy efficiency including the development of low power SSDs in order to reduce carbon emissions throughout the ecosystem. We newly launched the ESG organization under direct control of the CEO to more systematically internalize ESG management and also installed ESG management committee to discuss strategies on how to manage ESG risks that could potentially have a significant financial impact and turn them into opportunities. Rather than passively responding to stakeholders' request, we will integrate ESG components into our business from technology to product development and build a source of competitiveness to provide differentiated value proposition to our customers and shareholders. SK Hynix will not cease to innovate and evolve our business and external environment beyond our previous achievements. In so doing, we will turn 2021 into the first year of SKIN Hynix being reborn as a true global memory company soaring higher with a strong and balanced pair of wings in DRAM and NAND.
Thank you very much for your attention.
Questions. Questions will be taken according to the order you have pressed the number 1. For cancellation, please press 2, that is star and 2 on your phone. Session. The first question will be provided by Ricky Seo from HSBC.
Please go ahead with your question.
Now before starting the Q and A session, let me issue a correction. It was stated earlier that the company's DRAM shipment DRAM bit shipment growth will be similar quarter on quarter, but let me make a correction that it is the company's DRAM bit shipments not growth. So DRAM bit shipment is expected to be similar quarter on quarter. Now the first question. Now thank you very much for taking my questions.
I have two regarding DRAM. First is about the DRAM market and I see that what you have stated today, so your guidance appears to be more positive than what you have stated in the previous quarter. So can you just elaborate a bit more on the kind of market changes that you are seeing per application? And then the second question is regarding the inventory. So for the DRAM companies, so especially for SK Hynix as well as your customers, what is the current level of the DRAM inventory?
Thank you very much for the questions. I would like to first respond to your question about the demand and supply for per application. Now for the PCs, now since the previous year since the pandemic that started last year, we believe that in the first half of this year, so we believe that the compared to the outlook, the PC shipment is going to be much higher than expected. So for the so for our market outlook, so we thought that also because of the base effect, we thought that the PC shipment was going to grow by about mid to single percentage compared to 2020. But then now as the developments unfold in the first half of this year, we see that both the market and the customers appear to be upwardly adjusting their outlook.
But of course, we have to be cautious in this outlook because it also involves other issues of the global SEM. But then if such incremental demand does transpire, then we believe this can also translate into demand for other memory including client SSD. And for servers since COVID-nineteen, we see that companies are increasing their use of multi cloud services or hybrid cloud services. And as a result of this, the cloud service providers and also the enterprise companies are tightening their competition over the business and we see that this is resulting in growing demand as well. And now it was mentioned in the general market outlook earlier, but then yes, there are plans for constructing new data centers and also the investment that has been held back in the past two years, we see that many of the investments are now starting again.
And also with the launch of the new service CPUs, so we see that the server set build is also going to increase. So compared to last year, there is expected to be about low 10% so low teen percent increase in the set build. And for mobile, with focus on the smartphones, we see that the companies are increasing their competition to take away market share. And this is also leading to fiercer competition over the specifications for their flagship models. And also in the market, we see that the shipment is beginning to pick up since the sluggishness of last year.
And there's also the increasing share of five gs smartphones as well, which means that there is an increase in the adoption of the high density MCP. So overall, we believe that the demand for mobile this year is going to outpace the average bit shipment growth. And we also expect the graphic demand to be healthy this year following the pickup in the PC sales and also launches of game consoles. Now of course, regarding customers' inventory level, understand I'm not in the position to discuss that. But then overall, we see that there are some differences per application.
For example, for server and mobile, we see that it is a bit slightly higher than the industry average, while for PC and others we see that the inventory level is slightly lower than the average. But having said that for server and mobile, although the inventory level is slightly higher than the industry average, average because there is also the ongoing demand for build, we do not believe that it is cause for concern. Of course, on the other hand, there are some concerns of demand overshoot and we are also mindful of that possibility and we are cautious about that too. But then we do see that there is healthy demand for build in on the ground. And also on the near term basis, we see that the fulfillment, so the supply fulfillment for the demand coming from the customers is falling short.
So again for the time being, I believe that it's not a cause for concern. Now for the company, the DRAM inventory level is kept at within two weeks, so below the two week level and we will be responding to the real demand coming per application, so they will be able to maintain a balanced inventory.
The next question will be provided by SK Kim from Taiwan Capital Market. Please go ahead with your question.
The NAND market this year with focus on demand and supply dynamics and also the CFO touched upon this earlier about the NAND migration plan. So can you also give us your outlook on the company's NAND business with focus on the timing of profitability improvement? Market demand outlook for 2021, we believe that it is going to remain healthy throughout the year, thanks to increase in smartphone sales driven by five gs. And for servers where the demand remains relatively slower, while we see that the customers generate of the CPU, so increasing content per box in the CPUs. So we believe that this is also going to drive stronger demand.
Now on the other hand, we see that the supply increase is going to be limited because of the margin pressure on the part of the suppliers. So this would not this will make it difficult for them to increase the investment by much. So overall, the market in 2021 is likely to see demand grow quite healthy because of the circumstances. Of the turnaround. Now let me use the analogy of learning to play golf.
It's very difficult to get both the distance and the direction right, meaning that you need to first get the distance then work on the direction. Now for SK Hynix, it is true that we got started late in NAND and also we were a bit belated in converting to the three d NAND which places us in a rather disadvantageous position compared to the peers. But then we also believe that in the 128 layer products, we are moving ahead of others in terms of moving on to the technology and also with the pace of our mass production. So we intend to maintain our technological competitiveness. So it is so for in order to ensure such technological competitiveness and mass production capacity, we have been focusing the company's resources on this front.
But now I believe that it is time for us to work on the direction in the Golf or the Driver. So now that direction for us means cost competitiveness. So that is going to be So for our NAND business, we are trying to turn it around within the year and of course for the acquisition of the Intel NAND business, of course we also need to receive the regulatory approval first, but then afterwards in the initial days there is going to be some increase in cost. But we will continue to focus on improving the NAND profitability, so that we will be able to improve make the improvement in a faster date.
The next question will be provided by Kyung Min Kim from Hana Financial Investment.
First of all, when it comes to cash holdings, then normally it is used for acquisitions like M and A or facilities investments or dividend payout. So what is the company's plan with your cash holdings on each of these three fronts for the mid to long term? And the second question is now for the memory products as well, we see that there is the new trend of using the EUV lithography equipment. So what is the company's plan on using EUV for your memory products? Now then regarding your question about the allocation of our cash resources.
Now the first category for the CapEx, we will make our decisions based on two criteria, the market circumstances and the need to maintain industry competitiveness. And for dividend, as has been announced earlier policy for now and we will maintain this dividend policy until this year. And for the remaining cash resources, we will be investing them into the areas or the categories where we believe will be instrumental in ensuring the company's future growth and development. And now regarding your EUV equipment and we would be applying them to our long term on securing the further EUV if necessary, we are also in close consultation with the vendor. Now as was mentioned in the presentation, EUV is going to be applied for the first time this year for the 1A nano, which involves the mass curl and CS.
And then it is going to be on the YB nanometer products that we will be applying the EUV in earnest.
The next question will be provided by Young Seok Song from High Investment Securities. Please go ahead with your question.
Now in the last conference call, I remember the company talking about how you're going to strengthen competitiveness of the System IC. So I would just like to ask about the company's strategy regarding the System IC. And then the second question is, now it was also mentioned earlier that because of the COVID-nineteen COVID-nineteen crisis unexpectedly there has been a much higher demand for PCs and servers probably because of the need to remain in non contact. So there has been a much stronger demand for these products especially starting from the second half of this year and continuing to this day. But now then what about the flip side in other words what if COVID-nineteen goes away and we all go back to normal then perhaps the demand related to such non contact activities would plummet.
So then perhaps this would have a negative impact on the demand overall. So this is one of the concerns in the market now. So what is the company's view on such possibility? And if it does happen, then how do you plan to respond? Now regarding your first question about the system IC or the eight inches foundry.
Now as you would know, SK Hynix has in the Jeongju MH site foundry in the capacity of 100,000 to 120,000 products. So eight inches foundry with a capacity of between 100,000 to 120,000. Now as you would know, the eight inches business is currently booming and the reason is, normally there would be tech migration going in the order of six inches to eight inches then to 12 inches, but then moving on to 12 inches requires enormous investment. And that is why after moving from six inches to eight inches, it is very difficult to migrate to 12 inches. So right now there is a very strong demand for eight inches while supply is being supply is limited.
So for SK Hynix, we expect the boom in eight inches to continue for some time. And in order to seize this opportunity, we decided to relocate our eight inches facilities to China where further cost cutting would be possible. So we have already come up with a plan to relocate and the plan is currently being implemented. Initially our plan was to complete the relocation across two years. But given that the demand coming from the customers is very strong and rising, we now plan to complete the relocation as soon as possible.
We would be broadening from the existing DDI CIS to the high cause of the shortage of eight inches capacity. We have also invested as LP investor for the 100,000 capacity in the Chengdu foundry of Magna chip. So for both the M8 assets that we are currently relocating and also the Magna chip or the key foundry that we are currently indirectly owning as an LP investor. So for these two facilities or assets, we would be considering various options as we watch the market circumstances and also try to respond better to the customers' demand, so they will also be able to provide better value proposition to the customers. And now regarding your second question.
Now, this is a complex and difficult question or possibility So if COVID goes away and things go back to normal and more people enjoy outdoor activities then perhaps the demand for IT for staying or working out of home might go away. So I believe that this concern is valid to a certain degree. But then on the other hand, what we have experienced over the past couple of years, so the non face to face working environment or the online education or home entertainment. So I believe that more businesses and more people now realize the importance and the value of such working or learning or home entertainment environment as well.
And I do not believe that such understanding of these values would go away anytime soon. So perhaps they will become part of the new normal and will stay around for some time. Phone, it is expected that their sales will more than double year on year So not only the five gs, but also edge computing AI and the VR equipment. And we see that now there are attempts being made to discover new values out of these equipment and devices and then concretize them into other types of services or devices. And this is something that we have already witnessed at this year's CES as well.
So yes, I believe that there are other factors to consider as well as such and also for example the company's digital transformation which got kick started last year is also going to accelerate. So there are all these various factors and I believe that they combined will continue to drive demand in the market. And last is you also asked whether if this risk transpires and how we are going to respond. But if it is a risk, I believe that it's a risk factor with very high degree of uncertainty. So rather than thinking about this as a let's say a standalone risk factor, what we can do and have done is increase the percentage of customers on an annual contract.
And by doing so, I believe that we were able to further bring about further stability to our business. And the CFO has added that the movement toward non contact, I do not believe that this is going to disappear all of a sudden just because COVID goes away. So I believe that a part of it is also going to stay.
The next question will be provided by JJ Park from JPMorgan. Please go ahead with your question.
Now I also have two questions. First, the CFO has mentioned this earlier, but then it's about the cost reduction this year in both DRAM and NAND in comparison to last year. And the second question is now the M16 is going into operation starting this year. So what is going to be the product allocation in M16 as well as the expected capacity by the end of this year? And what is the maximum capacity for M16?
Now first about the cost reduction. Yes, the unit cost reduction has been ongoing and we have also achieved last year what we have been achieving in the other years as well. So and we are also going to repeat the FEED this year as well with the continued migration to finer technology and more efficient investment, so that we will be able to cost we will be able to reduce cost at a rate that is at least similar to last year's. And this is the CFO now. So what we are going to do is for both DRAM and NAND, we will continue to work toward cost reduction that can go beyond last year's extent.
Having said that, we also have to be mindful of the currency effect. Now because of the so because of the weak dollar, now we believe that we will be able to achieve our goal based on the Korean won. But then when it is translated into the dollar, then perhaps the kind of cost reduction that we have seen in the Korean won might appear to be slower when it is in the dollars. Now and then about the M16, so thank you very much for this question. And yes, this is a three layer facility because usually the fabs are in two storey structure, but then this is the three storey building, so the largest three storey fab of its kind in the world.
And the it is so the construction is completed and we will be holding the completion ceremony on February 1. So we would be starting our pilot volume production utilizing our latest technology starting this year. And we would also try to make adjustments if necessary depending while keeping an eye on the DRAM market. So we would try to fulfill the market demand as we operate the M16 as well as the mass production on a variable basis. So mass production will begin in full starting in June when the pilot test will be completed.
And then from that point on until next year, we will be making the investment flexibly depending on the market circumstances.
The next question will be provided by Nicolas Gadwa from UBS. Please go ahead with your question.
Can
you hear me? Yes, sorry about that. Good morning. Thanks for taking my question. Just as a follow-up on capacity planning for Doctor, I mean, particular but also for NAND flash.
I mean, it looks as if you are so far responding to demand upside a little bit more cautiously than you have had in prior cycles, as you just explained for M16 in particular. Could you maybe elaborate a little bit on what has changed from your perspective and why so far you're approaching the Armor cycle in particular more on the cautious side than you may have had before? And secondly, on technology, you made a comment in your presentation about productivity improvement of 40% for DRAM for one alpha nanometer versus one z nanometer. Could you just clarify, you're talking about 40% more bits per wafer on a comparable yield basis? If that is the case, that seems to be quite a step up.
So could you elaborate on how you're getting then, whether there's a change in design for DRAM involved? Thank you.
Now then let me respond to your first question. Now yes, you are right. We are remaining a bit cautious and that is because just like last year, we continue to see some exogenous factors this year. Now for example for COVID-nineteen, so there are high hopes that this will go away soon, but then yes, it does have to happen first. So COVID-nineteen has to disappear hopefully with the help of the vaccination.
And then this also has to translate into the recovery in the real economy as well as pickup in consumption. So at this point and also at this point we are coming up with different so we have different plans per application in preparation for a stronger demand this year. And also according to this plan, we would also be expanding our business in the different applications. But then we also see that there are some supply chain factors as well, which could also affect the demand. And also the global trade conflicts continue, so there could be some complications coming from that as well.
So yes, we are remaining cautious, but having said that we do believe that demand this year is going to be much more positive than the supply side. So overall, we believe that our business is going to achieve a performance that is better than last year's. Now regarding your second question about the 1Z nano, now for the company over the course of its evolution from 1X to 1A 1Z nano, we have been maintaining pretty much technological platform without any major technological changes. And on the other hand, you would know that more recently, the technological competitiveness gap, in other words, the technical or the technological gap between the different DRAM companies is reducing. And now regarding your question about the 40% productivity improvement, yes, you're right.
So it is based on the same yield and it means that there is improvement in the bit per wafer. Now as the technological gap between the different companies continues to be reduced, I believe that what is perhaps more important than the technology itself or the specifications could be the ability to maintain stable mass production and the speed of ramping up. So yes, in order to achieve the 40% bit growth or the productivity improvement, this also requires various technological investment as well as cost competitiveness. And that concludes the SK Hynix twenty twenty fourth quarter earnings release conference call. Thank you very much for your attendance.