Good morning. And good afternoon and evening to those calling in from abroad. This is Paksong Han, the Head of IR at SK Hynix. Welcome to DESke Hynix 20 21st Quarter Earnings Release Conference Call.
CFO, Tazinjang Damda Marketing,
Before starting the conference call, allow me to introduce the executives present here with me today. 1st, CFO, Sazinzal, Anmyoongsoo in charge of the DRAM Marketing Group and Kim Jong Tae in charge of the NAND Marketing Group.
Components Corp.
Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on macroeconomic and market circumstances. With that, we will now present Good morning. This is the CFO, Chazinzok. I will first report on the company's financial performance in first quarter 2020. Consolidated sales in the first quarter was KRW 7,199,000,000,000, up 4% from the previous quarter.
Sales grew despite derivative changes in the market environment from COVID-nineteen, with shipment increase in server memory focused products and continuously favorable price environment.
ASP.
DRAM shipment declined by only 4% from the previous quarter, reaching the top of our guidance range. Mobile DRAM shipment was hit by but this was offset by server DRAM shipment growth where demand stayed strong. ASP rose 3% Q on Q with server DRAM leading the price increase NAND Flash also showed a similar demand trend to that of DRAM. For NAND shipment, the company significantly increased server SSD volume support backed by favorable demand conditions, and SSD sales portion out of NAND reached 40%. This led NAND shipment growth of 12% Q on Q, which was better than typical seasonality.
ASP rose 7% from the previous quarter as solid price trends continued for major applications. For MCP, sales grew 2% QoQ and sales portion was maintained at 19%. Decrease in shipment was offset by rise in price.
1y nanometer
From a profit perspective, thanks to yield progress of 1y nano DRAM, 96 layers NAND and also efforts to cut manufacturing costs, profitability improved in all applications, In particular, NAND profitability was meaningfully enhanced. The rapid increase in SSD sales portion improved in cost efficiency, which brought down the cost reduction per unit and inventory valuation loss was reversed following price increase. Accordingly, operating profit in Q1 was KRW 800,000,000,000 or KRW 800,000,000,000 up 2 39% from the previous quarter, and operating profit margin was 11%.
EBITDA
margin Depreciation and amortization in the first quarter was KRW2.307 trillion, slightly up from the previous quarter. And EBITDA was KRW 3,107,000,000,000, with EBITDA margin of 43%. There was a net nonoperating profit of JPY 128,000,000,000 in recognition of foreign currency related gain as the Korean 1 depreciated at quarter end. Corporate tax in the 1st quarter was SEK279,000,000,000. And net profit after tax was KRW 649,000,000,000, with a net profit margin of 9%.
Consolidated cash balance at the end of the first quarter was KRW 4.742,000,000,000, up approximately KRW0.747 trillion from the previous quarter. While interest bearing debt was KRW 12.416 trillion, up by KRW 1,892,000,000,000. Debt to equity ratio was 26% and net debt to equity ratio was 16%. Next, I would like to update you on the company's measures in response to COVID 19. The company put together a task force in mid January when the spread of COVID-nineteen became known to make our best efforts to the health of our global team members, partner companies and local communities, while maintaining business continuity.
First, the company implemented an action plan for its members in accordance with the risk level in epidemic prevention measures, which include Broad and preemptive self quarantine, containment efforts, mask wearing, discouragement of business travel, and in person meetings and granting special leave to pregnant employees or employees with underlying diseases. The company is strictly complying with recommendations from authorities in each country and region of operation, and thus some team members in overseas branches are working from home accordingly.
Sandra Kajikunima, chungukwe,
Thanks to active participation from global team members and efforts of the company, all fabs in Korea and China are maintaining normal operation. However, given the different degrees of proliferation of COVID 19 in each country, There could be possible disruptions in production, sales or development schedule of our partners and customers depending on the duration of travel restrictions. In order to minimize any potential impact, the company is in close discussion with both partners and customers. To overcome these hard times together, the company is currently running support programs for partner companies and local communities. The company has donated protective masks to partner companies and community groups who need aid, emergency kits to 10,000 healthcare and volunteer workers in critical areas and have stepped forward with For partner companies, out of the existing KRW370 1,000,000,000 collaboration fund designed to help SNE's competitiveness, the remaining usable JPY 130,301,000,000,000 will be fully provided to partners affected by COVID-nineteen.
Also, the company's payment cycle to partners will be made more frequent to help their cash flow. From the current three times a month, to four times a month. Next is the company's market outlook and plan.
Global IT search on bango,
The unexpected proliferation of COVID 19 is causing unprecedented uncertainties in overall global IT demand and supply chain. Because of this slowdown of global smartphone sales seems to be inevitable.
Jangmyeon 5g
Global smartphone shipment, which was originally expected to increase YOI, with the launch of 5G supporting smartphones, leading replacement demand is now projected to show more decline than the previous year. However, given the recent signs of recovery in manufacturing and economic activities in China and the expectation of active support measures to promote 5G demand, there still seems to be possibility of partial improvement of smartphone sales in the second half.
Tishuo game consultant, I shared your way to entertainment to them, Pete, Damian, IT, Ms. Graphics DRAMG,
Whereas PCs and game consoles have been affected by manufacturing disruptions in the Asian region, demand for PC DRAM, graphic DRAM and PC SSDs remain sound with growing IT needs for stay at home activities such as online education, remote work, video conferencing, and online entertainment. The server segment is relatively resistant than other applications towards demand risk. From COVID 19. Customer's component inventory level has decreased compared to the previous year. On top of the real demand improvement, from investment resumption by large scale Internet datacenter customers, incremental demand is occurring from streaming services and remote work support caused by COVID 19.
In fact, the current situation is likely to accelerate the momentum for server led memory growth over the mid to long term. As more people experience remote working systems and governments and companies speed up the deployment of cloud based systems. Having said that, things remain highly uncertain, with no telling of when COVID-nineteen will subside and global economy can reboot. If the economic downturn is prolonged, we cannot dismiss the possibility that even server memory demand might weaken. And from the supply side, disruptions could occur in equipment and raw materials procurement or logistics hindering normal production activities.
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Even amidst the uncertainties, the company will focus on strengthening core competitiveness and preparing for potential demand fluctuation. Therefore, CapEx this year will be considerably lower than last year as we guided early this year. Equipment related CapEx also to be lower than last year, will be mostly for tech migration. Infrastructure Investment will be focused on construction of M16, and we plan to complete the preparation of the clean room by the end of the year. Conversion of M10 DRAM capacity to CMOS image sensor and also the non wafer capacity conversion to 3 d will continue as planned, which will reduce our wafer capacity compared to the beginning of this year.
However, we are aware that some equipment partners are facing difficulties in maintaining normal operations or securing core parts due to the movement control order in some countries. This can increase the possibility of potential delay of equipment installation compared to our original schedule. The company will address this in multiple directions as much as possible to prevent disruptions our existing investment
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For DRAM, the company plans to actively respond to the accelerating demand for high density server modules, with 64 gigabytes and above by focusing on production of 16 gigabit products. We will also continue With the start of 1Z nanometer mass production in the second half, we plan to generate a combined bid portion of 1YN1Z Nanometer over 40% by yearend. In addition, with active support of GDDR6 and HBM2E markets, which are expected to take off this year, shipment bit growth for graphics DRAM is planned to increase by more than 50% compared to the previous year.
The key data center, PCI ESS SSD Panmabijon.
For NAND, we plan to increase the bid portion of 96 layer products to over 50% and begin mass production of 128 layer products within the second quarter and expect a combined bid portion of both 96 and 128 layer products to exceed 70%. In particular, we will further expand our SSD sales mix focusing on pcie based data center SSDs together with enhancement of our product and customer portfolio and continue to improve
smartphone
For the second quarter, SK Hynix is planning to generate flattish bit shipment growth compared to the previous quarter for DRAM and around 10% of bit growth for NAND. Considering the trend of weak smartphone demand and relatively solid server demand will continue. As the company's DRAM and NAND inventories return to normal levels by the end of first quarter, we will actively utilize this factor in case of unexpected demand decline. And considering this unprecedented uncertainty in supplydemand dynamic robbed by COVID-nineteen, we ask for understanding that we cannot provide annual shipment plan at this point in time. In our previous earnings release in January, we mentioned higher complexity and uncertainty level in the market are today's new normal.
And because of a never experienced pandemic, even basic business activities such as maintaining normal operations and predicting future demand
This crutches
But when COVID-nineteen receipt and anxiety is relieved, we anticipate that natural recovery will follow. At that time, 5G and server led memory growth which remains valid even today could become even stronger and quicker. The company will thoroughly prepare to minimize the risk of uncertainties expected to remain for the time being. To realize momentum when the business environment returns to normal through technological innovation and well supportive infrastructure. Let me conclude the presentation by wishing everyone's good health.
And with that, we are now ready to take your
Q and A session will begin. In order The first question will be provided by Peter Lee from Citigroup. Please go ahead with
M16. I have two questions. Now first is about COVID-nineteen, which was, yes, indeed, unexpected, but Now I do suspect that it has also changed your changed this demand situation as well. So What are the changes that you see in terms of demand for both DRAM and NAND? And the second question is, recently there have been reports of the company's new fab and M16.
So the WUCI new fab and M16 going into early operation, So could you give us an update on the WOCE new fab as well as M16 and what is the company's plan for a memory investment this year? This is Tangmyeongsu from DRAMARKeting and allow me to take your Now given that the global economy is now seeing heightened uncertainties from COVID-nineteen. It is also difficult for both the customers and the company to project the demand. With many countries around the world now projecting negative GDP growth for the year, and also because of the differences, in the spread of COVID-nineteen in each country, we don't even know when the different countries will be bottoming out in terms of their economy. Some are expecting it to happen in the second quarter, some as late as the second half of this year.
So this means that it depends on the country by country economic as well as the demand recovery from the different customers for us to actually see the demand bottoming out. And this also means that the demand trend In terms of set shipment, the smartphones is expected to see negative growth this year. So obviously, this would also affect the demand for NAND and mobile DRAM. So for both the NAND and mobile DRAM demand, we believe that in the first half, it is going to be lower than we had initially
even give
And now for the PCs, now because of the heavy reliance of the supply chain in China, Now in the first quarter because of the lockdown in China, the set build had gone down dramatically but then now we are seeing things going back to normal in the second quarter.
Kyo Yoke. Hey, commerce search Inngaro inan, data usage in JINGA.
And then for server products, of course, this would also be somewhat affected by the economy in general. But at the same time, now with the COVID situation changing the way we live and the way we work, it is also raising the needs and demands for non face to face contact and activities. So for example, online education and working from home, and online conferences, online entertainment. And this is also requiring more data usage than ever before. And also, are now trying to build out their infrastructure.
So on the other hand, this is also a boon for some of the server cloud companies. So based on all this, Now, as was the guidance in the second quarter, for both the DRAM and NAND, the and server memory demand for the short term remains little changed. Now down the road, the demand for the in the second half, so in terms of the demand in the second half, Of course, this would largely be determined by how or whether the market can resume globally. At that time. So depending on the situation, the company is trying to strengthen our response and planning so that we will be able to come up with immediate and flexible response whenever the situation changes.
And to your second question about the Wuxi Fab and M16.
And the
Now for We'll see fab, as you would know, we have done the build out last year. And equipment was being moved in, and we have so the equipment continues to be moved in with the operation starting So it is on track of our schedule. And for M16 as well, work is still underway to complete the clean room by the end of this year. So that is also moving on pace of our schedule. So to sum it up, for both the Wuxi and M16, They are all on schedule, so on pace with our original schedule.
And, we have not planned for any pull up of the operations compared to the original schedule.
The next question will be provided by K Kim from Daiwa Capital Market.
Or we are doing them there. 5G smart punch is down in time to Mungi or
Now my first question is about the inventory level. The CFO in his presentation did mention that by the end of the first quarter, the company has seen its inventory level go back to normal. Then for both the DRAM and NAND, what is inventory level now compared to what you would call the normal level. So basically, what is the inventory level now? And for the mobile server OEMs inventories compared to the normal level, where are they standing at this point?
And also do you see that there can be further improvement in the inventory in the second quarter? And second question is about mobile. So, it appears that the order reductions have already started from the Chinese mobile customers. And now it seems that it will continue into the second quarter. Do you see this affecting the pricing as well as the supply and demand situation.
And also there are concerns that the introduction or the deployment of 5G will be delayed. And also regarding the 5G smartphone market, of course, that there are some differing views, but then still, with the expectations of the 5G phones to be newly launched, there were expectations that these 5G phones would also be adopting 6 gigabytes. Now so, what do you see as the mobile demand for 5G down the road? Now first, regarding your question about the inventory levels. So first, in response to the question on DRAM, Now the company's inventory, so the company inventory level will continue to remain healthy as we move from the end of the 1st quarter to the end of the 2nd quarter.
So by the end of the second quarter, we expect the DRAM inventory level to be even lower than the first quarter end level, so down to the early 2 week level. And regarding the mobile server customer's inventory level, now it would also depend on the situation. So it would also vary by company, but we see that overall there has been slight increase. And the company's NAND inventory level was also backed normal by the end of the first quarter to below 4 week level, and we expect this to drop even further by the end of the second quarter as sales increase. And to your second question about the weakening demand for smartphones and also the outlook for 5G smartphone demand.
First of all, for the second quarter, we see that there would be a little impact because most of the discussions have been completed terms of the Now for the year, Smart phone is expected to show negative growth yoy, but we do expect some pickup in the second half of this year compared to the first half. And we will try to have flexible operations by the different situations per customer.
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Now for 5g Phones, the initial expectation was 200,000,000 units of sales. But then in the first half, you see that sales were sluggish. And of course, this is going to have an impact for the year as well. Now having said that, the extent of the drop is not as precipitous as the 4G smartphones. And with the Chinese economy going back to normal, and we also see some of the smartphone companies trying to make efforts to further boost sales.
So we also expect that the fall in the 5G smartphone sales compared to the expectation might be lower than
The next question will be provided by Riquiza from HSBC. Please go ahead with
1 break the even point to to that range, Jeremy, on the and the container management comes like a similar.
Now my first question is about your margin in the 1st quarter, which which is actually much higher than expected. And you did mention some of the reasons behind it, but could you elaborate? For example, is it because of the rising layer in NAND. And also you talked of the inventory, the reversal of the inventory valuation loss. So what was the value of this reversal?
And also, when was the breakeven point reached for NAND? And the second question is about the PC DRAM portion today because now we see that the demand for PCs is now growing in China and Korea. And it appears that the there is similar expectation for the regions of U. S. And Europe.
So once the lockdowns in these regions are eased and appears that there are expectations that their PC demand will also grow. So what is the company's view for PC demand in the second half? And how much of an impact do you see this will have on the pricing? We're now regarding your question about the profit margin in the first quarter.
1 YY 1 and then the outbreak
Now to this question, actually, you have already answered your own question. But anyway, so now, why do you profitability was much in in the first quarter? Yes, the 1y nanometer and also the 96 layer products, the yield has much improved And also we were able to reduce the cost considerably. And also there was an increase in ASP across all product categories. So, for NAND, in particular, because of the rapid increase in sales, we were able to reduce the unit cost quite a lot.
And also the reversal of the inventory valuation loss, the effect of this was about KRW 180,100,000,000 in the first quarter. On top of that, there was also the exchange rate effect. The exchange rate rose in the first quarter, so we believe that this had the effect of adding about 70,000,000,000 to our operating profit in the first quarter. So to sum it all up, there was improved yield for 1y nano and the 96 layer. Product and also improvement in the production efficiency as well as the reversal of the inventory valuation loss.
And now as for the demand and supply, now because of the rapid changes these days, it's very difficult for us to make any predictions. But now if the trend were to continue as such, then we believe that by the fourth quarter of this year, we will be able to reach the breakeven point for NAND. And now regarding your second question.
Ebovolone, through our Chrome Bogina, we'll travel Okay.
Now the PC demand. Now in the second quarter, yes, there have been increase in the volume requested by the customers. For education and home PCs in the second quarter 3rd quarter. So, this is because of the rising demand for Chromebooks and Ultra Books, because of the COVID-nineteen situation. And now in the second half, If the back to school demand were to be added on top of that, then yes, it is highly likely that there is going to be a very positive impact for PC's demand overall.
And now, so in order to respond to this, the company is planning to increase the supply of DDR4 for onboard as well as the LP DDR.
Ship
And as for the sales portion for PCs, for the year, we expect this to be around mid to high teen level, and we expect the demand to remain solid throughout the year. And also, regarding your question by geography, rather than the geography, we believe that it's more due to the current situation where there is growing demand for edge occasion and pieces for home as well. And you also asked about the potential impact on pricing now to answer That question, of course, it is too early to tell, but then we do expect the trend to be high to be healthy throughout the third quarter along with the
demand
The next question will be provided by Yanudo from NH Investment. Please go ahead with
Now my question is now first, it seems as if COVID-nineteen is increasing the demand for game consoles and graphic cards. So do you and also it appears that there would also be growing demand for at DRAM as well. So then the GDDR6 for the SSD usage for game consoles, so are you also seeing the increase of such adoption in the game consoles and also the SSD supply and demand? So Are you seeing any changes to that as well? And now for the server market, we see that the the SSD.
So in the server market, it seems as if there is growing demand for SSD, but is it because of the over growth in the overall market demand? Or are the reasons more specific to the company? So for example, are there any push by the company or specific efforts by the company in order to increase the demand for SSD? First, to your question about DRAM for game consoles.
Game high performance competing
Now in the first half, yes, there was growing demand, strong demand for handheld gaming devices and gaming PCs. And also in the second half, we take the launch of new gaming consoles, we believe that the demand for DRAM, including the GDDR6, will continue to grow. And also the new product, the HBM2E. Now because of the rising interest in high performance computing, once again, because of the COVID-nineteen, we believe that the HBM2E sales will also pick up. Yes.
Do you as you have rightly pointed out, the SSD, so SSD is expect be adopted for new game consoles that are to be launched in the second half. So the company is also planning to enter the game consult market with SSD in the second half and continue to drive sales. And to the second question about the increase in the SSD portion, Now the rapid increase in the portion of SSDs for the short term, yes, on one hand, it is attributable to the change in the supply and demand dynamics overall, but also it is also partially owed to the company specific factors. So for example, our efforts to diversify and improve our product lineup and also to improve our overall competitiveness. So we believe that such companies specific factors were all set play.
We continue to try to broaden our business base by trying to improve our market share among the existing customers and also trying to acquire new customers. And also, for example, the leading technology base PCIE. So we are trying to further give a push to such a leading technology and the PCIe and also trying to improve the product coverage. And overall, we are trying to strengthen our cooperation, including in the areas of development, with the customers in all segments as well as all relevant regions. And based on such efforts, we are trying to link or turn the diverse needs of the market into our business areas.
And by doing so, we will keep trying to increase our
The next question will be provided by Yonggang Kim from Mira Esete. Please go ahead with your question.
I have two questions about demand. Now first, you did explain about the short term demand outlook per application, but then let's say in the second half, if the demand or to fall short of your expectations, then are there any particular products that would be more vulnerable to inventory risks? So that's the first question. And the second question, so in terms of the memory scale, so for example, the growth of hyperscaler in the Greater China area and also the member scaler in the North American region. So what is the company's view regarding such trend?
So your first question about the inventory risk per application and possible inventor risk in the second half.
Tung san and Sanjay
No. For the demand risk, I would say that the there is, so for the demand risk, the leading example would be the smartphone, but then there have been already a decrease in the set shipment in the first quarter So in terms of the potential risks in the future, the company is already responding to this with a preemptive mix strategy. And also in the first quarter, we already see that the both the so in terms of the fall in the demand for both DRAM and NAND, it has already been offset by the increase in demand for server products. So we see that until the end of the second quarter, the inventory level and the mix are showing a very And for PCs, as was mentioned earlier, there is rising demand coming from customers or PCs for both home and education purposes. And because of this, there is already tight supply.
So we see little inventory risk.
Net order
And then for servers, of course, it would be very difficult to predict the demand by the end of the year. But then between the years 2018 2019, the company has already made adjustments to its sales and inventory plans to be better suited to the customer's demand adjustment and also changes or growth in the market. And as a result of this, we were already able to return our DRAM and NAND inventory to the normal level by the end of the first quarter of this year. Now having gone through all this, the company is now in a better position to respond to the customer's adjustments in both the inventory and mix. And to your second question about the potential growth of hyperscaler by different regions?
Cloud Meet, ecommerce service platform
Now for companies that have the cloud as well as the e commerce service platform, I would say that they have a very strong growth momentum regardless of geography.
5g
And in particular, in China, with the COVID 19 situation, now we see that the 5G infrastructure is being strengthened and also the need or the demand for on premise services by public organizations. Is growing. On top of that, there is also the government's efforts to boost the economy and also the SNS and cloud services continuing to grow in China. So we believe that there is a good chance that this will continue to grow.
Or not an
Namely the companies that are related to stable streaming of home entertainment or video platform and the companies that provide video conferencing services I would say that they have very good,
The last question will be provided by Jong Woo from Korea Investment And Securities.
Tenant
Now in the CFO's briefing, it was mentioned that there is the possibility of some supply disruptions coming from equipment manufacturers. But then we understand that there have already been some supply delays in China. So do you force see something similar to what happened down the road. So now in the second quarter, so there So do you believe that there would be equipment delay in Wuxi? And will this affect your production schedule?
Do you believe that this will do so or has such production delay already occurred? And the second question is now we expect the mobile demand to weaken. And the company is now shifting some of the production with more focus on server and enterprise SSDs. And now if the but then, is it also possible that there could also be some weakening of demand for the server DRAM as well as NAND And you did mention that the pricing and the volume are already determined for the second quarter, but then now there are still concerns for the second half of this year. So do you believe that there could be some weakening of demand for servers in some applications?
To your first question, Now yes, it is true that there are some hurdles in terms of equipment supply and delivery because of the COVID-nineteen because now, some countries have, like, movement control orders and some countries also have travel So yes, in terms of the supply and production of components by the equipment manufacturers, there could be some hindrances. But the situation has remained manageable until now because we were able to find alternatives or other means in order overcome the in production. Now having said that, if the current situation were to be protracted, let's say, if it were to be prolonged into the second half, then, yes, there is the possibility of actual disruptions occurring. Now in order to prevent such a situation, the company is in close cooperation with the partner companies as well as customers in order to come up with a system to avert such a situation. But it all depends on how the COVID-nineteen is going to develop and unfold.
So, it is only by watching the COVID-nineteen situation, then we will be able to assess the actual disruptions or impact. And so it is only then that we can also come up with the solutions. But at this time, I would say that there have been no meaningful or major disruptions in our production so far.
Now to your second question
about the pricing and demand outlook Now let me reiterate that there are a lot of uncertainties in terms of the demand and price outlook for servers, indeed actually for all applications, but also server in the second half.
To one Shilenge
But of course, for the mid to solve in this situation, the company for the mid to long term. Now looking at the both the memory and the server market growth trend, the company sees that this is going to remain solid and the growth story is going to remain valid. And because of that, the company will focus more on, supplying high density server products in the second half, And the second point that I would like to make is that based on our experience of dealing with the major customers over the years, we see that the execution of the agreement has been quite solid. So in the second half of this year, we do not foresee major problems in the contract execution. Thank you very much.
With that, we conclude the Skihanix 2020 first quarter earnings release conference call. Thank you.