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 2019. 3rd quarter earnings results by SK Hynix. This conference will start with the presentation followed by a divisional Q and A session.
Now we shall commence the presentation on the year 2019 third quarter earnings results by SK Hynix.
Good morning and good afternoon and evening to those calling in from abroad. This is Tak Songhuan, the Head of IR at SK Hynix. Welcome to the SK Hynix 2019 Third Quarter Earnings Release Conference Call.
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Before starting the conference call, allow me to introduce the executives' present here with me today. 1st, SKIN Hainek's CFO, Tajun Sock. Jim Sock the head of the DRAM Marketing Group and the head of NAND Marketing Group, Kim Yong Pay. 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 2019 third quarter earnings release conference call.
We will first present the earnings for third quarter, the company's plan and the market outlook. Good morning. This is the CFO, I will first report on the company's financial performance Consolidated sales in the 3rd quarter was 0.8390000000000, up 6% from the previous quarter. Sales grew for both DRAM and NAND driven by signs of demand
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DRAM bit shipment grew by 23 percent quarter on quarter, far outperforming the plan. As company actively responded to the mobile market that showed seasonal upturn with new smartphone launches and increased sourcing by some Internet data our customers. ASP fell by 16% from the previous quarter, but the price decline softened in all product categories except mobile. The company actively responded to solution markets such as the high density mobile and SFD market that continued price elastic recovery in the end. But as sale of discrete products, which increased temporarily in the previous quarter, came back down to normal range, NAND flash bit shipments fell by 1% from the previous quarter.
ASP rose by 4% quarter quarter with moderated price condition in all applications and the considerable volume mix reduction of discrete products which carries relatively lower price than others. MCP bit shipment grew with rising smartphone demand in China, but price decline continued, which to 2% sales decrease quarter on quarter. Its sales portion out of total revenue also fell slightly to 22%. Operating profit in the 3rd quarter was 473,000,000,000, down 26% from the previous quarter. Although DRAM unit cost was used, it was not enough to offset the price decline.
Operating profit margin was 7%.
EBITDA
margin Depreciation and amortization in the 3rd quarter was KRW2.159 trillion. Slightly up from the previous quarter. EBITDA was KRW 2.631 trillion with EBITDA margin of 38%. There was, there was net nonoperating profit of KRW 48,000,000,000, in recognition form from foreign currency related gains as the Korean 1 depreciated at the quarter end. Net profit after tax was KRW495,000,000,000, with net profit margin of 7% Consolidated cash balance at the end of the 3rd quarter was 3 point 256,000,000,000, up by KRW146,000,000,000 from the previous quarter.
Interest bearing debt was KRW9.703 trillion, up by KRW956,000,000,000, mainly due to issuance $500,000,000 Let me now turn DRAM Market in the 3rd quarter with demand expansion coming from the PC and newly launched smartphones, and increased sourcing from some
internet data center.
After a period of stagnant demand, DRAM inventory level gradually normalized for Internet data center customers, counting begin increasing their purchase. Server demand is also on the rise for the customers in the Greater China region, and this trend of server demand recovery is expected to continue in the fourth quarter.
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In the global mobile market entering into the second half, the sales remain brisk for new flagship models with high density, 8 to 12 gigabyte mobile DRAM adoption, including those that support 5G services. Next year, 5G smartphones are expected to enter a growth cycle in earnest, triggering the smartphone replacement demand that had been dormant for some time and help drive stable memory demand increase. Graphic Meanwhile, with Windows 7 support about to terminate, demand is improving for enterprise PCs, price competition for market share gain among SoC makers is easing the cost burden on PC OEMs and is expected to have a positive impact on demand for components such as PC DRAM and graphics DRAM.
Issue
In the sick demand recovery is speeding up with lower NAND price. In particular, NAND demand for PC SSD in the third quarter grew nearly 50% year on year. As we saw mid-twenty percent growth year on year in SSD shipment for PCs, an increase in the average NAND content in the SSD with a high 20% adoption of 500 gigabytes or higher content. MCP NAND content in smartphones continue to increase, and the average content per box is expected to reach 100 gigabytes in the fourth quarter. This trend continues in the mid to low end smartphones as well, with the average content of DRAM and NAND in the MCT already reaching beyond 4 gigabytes and 60 gigabytes, respectively.
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And with the fire's inventory level quickly coming down, NAND supply and demand dynamics is regaining balance, adding the gradually rising ESS depurchase demand from server customers, a favorable price environment is expected to continue for some time. While it is evident that the customer demand improvement is a positive trend, there still exists chances for sudden change in demand due to external uncertainties, including trade disputes. And since the customers that are more exposed to the trade issues may be willing to accumulate component inventory preemptively, we will keep executing our production and CapEx plans with a cautious stance.
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As was reported last quarter, we are converting part of the M10 DRAM capacity into CMOS image sensors for volume production and reducing 2 d NAND wafer capacity. This will reduce wafer capacity for both DRAM and NAND next year and total CapEx, including equipment spending that has a direct bearing on wafer production is expected to
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In addition, the company will keep trying to create stable profitability, while each application. We will focus on driving sales for high value ad products that offer high density low power assumption and high speed enabled by our next generation process technology so that we can accelerate growth as the market improves.
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For DRAM, we started sales of computing products using 1y nanometer technology, and will increase the portion of 1y nanometer to low 10% by this year end as the portion of 20 nanometer shrinks. Only developed next generation 1Z nanometer technology. In addition, we plan to actively address the demand in LP DDR5 and HBM2E market that is expected to grow as customer adoption increases next year.
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For NAND, we started sales of 96 layer products and their respective bid proportion will be pulled up to more than mid-ten stand level by the end of the year. We will focus on the high density NAND markets such as high end smartphones and PCIE as SSDs, which is likely to raise our SSD revenue mix to 30% in the 4th quarter. We are also making preparation on schedule for volume production and sales of 128 In light of the current environment where demand continues to grow, Our DRAM bit shipment in the 4th to increase by around 10% For the company's full year DRAM bit shipment is expected to grow by a high 10% level, thanks to the higher than planned performance in the third quarter. NAND bit shipment growth is expected to reach around 50% level. This will significantly reduce our DRAM and NAND inventory level at the end of this year from the very high level in the first half of this year.
Volatility in the memory market has increased considerably this year due to a number of external factors and slow demand overall. Although memory technology has become far more complex over the years and demand has become more diversified, the magnitude of the change has been bigger than expected, but the company has adjusted its production, sales, and CapEx strategies in a timely manner, ensuring effective response to changes in the market environment as they arise. 5G service that was commercially launched from this year is expected to start spreading more quickly next year. Creating a momentum for new memory demand for a long time to come. SKIN Hynix will utilize this downturn as a chance to minimize business volatility and ensures sustainable growth in the midst of structural changes in the demand environment.
We ask, as always, for your continued support and encouragement. And with that, we are now ready to take your questions.
Now Q And A session will begin. Questions. For cancellation, please press star 2 that is star and 2 on your phone. In order to allow us many as possible. The first question will be provided by Jongmu from Korea investment and securities.
I have two questions. First is about the DRAM demand in the third quarter, which was much stronger than company's guidance. So of course, you did explain a little bit about this in the presentation, but can you elaborate a bit more on the reasons why the to demand for the DRAM in the 3rd quarter outpaced the company's guidance so much? And then in relation to this, now there are some concerns that perhaps the demand in the third quarter was driven by the move to preemptively stock up the inventory, ahead of the China trade dispute. So the concern is that perhaps the demand will not continue into the fourth quarter.
So what is the company's expectations, we believe that the stronger than expected demand in the third quarter will continue into the 4th quarter. And then the second question is about the outlook demand for the 5G smartphones next year, we see that many companies are, upwardly adjusting their demand out look for 5G smartphones and what is the company's outlook? Now first of all, about the DRAM demand in the third quarter, there has been recovery in demand from the server server clients in the Greater China region as well as the IDC clients in the And then from the mobile side, yes, there have been some, let's say, a buy ahead or inventory buildup moves coming from the Greater China region, as you have mentioned, and also some such moves in the PC side as well.
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And then as regards to whether such move will continue into the fourth quarter, now perhaps not so much as the bit growth of 23% that we have seen in Q3, but then we are still expecting about a mid single digit growth in Q4 as well.
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But bearing in mind, the persisting macroeconomic uncertainties, we are also, the possibility of the server customers taking a turn for a more purchase, more conservative purchasing stand. And then regarding the second question about the outlook for 5G smartphones next year, and yes, we see that there is going to be a big jump in the demand for 5G smartphones more so than this year. So whereas this year, the numbers were about millions of units for smartphones. But for next year, combining all the demand coming from the customers and we project this to be around 200,000,000 units. And the reasons or the causes or the drivers of such a jump in the demand for the 5G smartphones, we believe are the increase by the subsidies from the Chinese government and also the dissemination of, MODAT or the integrate mode app, so the integrated chip, which is also driving the development of mid to low end 5G smartphones.
The next question will be provided by Marcus Chen from Mizuho Securities. Please go ahead with
I have some questions
about your fab operations. So now the ones in C2F in USI, which has newly opened, and then the M15 in Chengdu, the ramp up So can you just give us the update on this path? And also for the M16 ramp up plan for the by the end of next year. So in the second half of next year, so the fab in Yichon. So when do you believe that you'll also be able to start the of M16.
And also you did mention that the CapEx for next year will be reduced. And can you just give us a tell us about how much it is going to be?
In your it's an M16
Now first of all, about the fabs, yes, So the WUCC2F and the Changzhou M15, they have both opened and are operating on schedule But then in terms of the ramp up, now the pace of the ramp up, we are trying to be flexible as we keep an eye out on the market changes. And then for the Itan M16, again, as you have rightly pointed out, yes, this is scheduled to open in the second half of next year. But then again, from then on, in terms of the further ramp up, we will be watching off for changes coming from the market. And will remain flexible in the pace of And about the CapEx plan for next year, please understand that the company's business plan is business plan for next year is still under work. So we cannot tell you the exact number at this point.
But then looking at the activities of the company recently, I believe that the CapEx will be reduced considerably in line with the company's plan so far. And likewise, there is going to be a significant reduction in the investment into equipment as well.
Next question will be provided by Doyon Chen from Xianan Investments. Please go ahead with your question.
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Now I also have two questions. First is about the inventory level in the third quarter. So I see that the inventory level in the third quarter has gone down. So it seems like the first quarter this year that SK Hynix's inventory did go down. So when do you believe that the inventory level will go back to normal for both DRAM and NAND?
And then the second question is about demand profitability. So we see that demand price is recovering. So, and it's likely that the recovery in the pricing will continue into the fourth quarter. So the market is wondering whether there is going to be a reversal in the inventory write off in NAND. And if so, then believe that there is going to be
Now first about the DRAM
Invert which was explained in the presentation that it is going to go down considerably by the end of the year compared to the early part of the year. If I were to give you some specific numbers, then at the end of the second quarter, it was at 7 week level. And at the end of the third quarter, it went down to 5 week level. And this number is likely to roughly continue in the fourth quarter. And then going into next year, in the first quarter, if the trend could change a little bit because of the seasonality, But then afterwards, we believe that this will then start again to slightly go down.
So this means that the inventory level is more or less backed normal. And then for the NAND inventory, by at the end of the 3rd quarter, it was at high 6 week level. And then now this will also continue into the 4th quarter and all the way to the end of the year. So believe that by the end of the year, the non inventory level will also go back to normal. Now as for the NAND price and the profitability, yes, there have been some slight increase in the NAND price in the third quarter because of the additional demand coming from some channels as well as from some applications.
But then since then, in the third quarter, there has been a slight fall in the price after the negotiations.
And
then in the fourth quarter, there is going to be some price increase for the for some applications. So we believe that thanks to the improvement in price and we reduction in cost, there will be some improvement in NAND profitability in the 4th quarter.
The next question will be provided by Rick Isao from HSBC. Please go ahead with your question.
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I also have two questions. First is about the company's capacity operation strategy. So in the third quarter, can you just give us a rough idea about the share in the capacity between mobile and server. And also in terms of the inventory, in the server, we see that the server inventory remains bit high. Then but then now for next year, if the for the smartphones, if the demand for the strong demand for 5G smartphones is going to be a share fire thing, then can we take it that the company be converting some of the capacity more to the mobile side?
And then the second question is about the demand coming from the Taiwanese companies. So it seems as if there is growth in demand for server components, led by the Taiwanese companies, So what is SK Hynix's understanding of the data center company's inventory level today and how strong do you see the demand is coming from them? And when do you believe that there is going to be a full pickup in demand? Now first about the share of capacity between mobile and server. In the first half, mobile was much higher.
And then in the second half, the server's share has increased and this will continue into the 4th quarter. But still, when you look at the shares numbers, then the mobile share is still higher.
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And then looking ahead to next year then, because of the expected demand for the 5G smartphones, yes, the mobile share is likely to be higher next year than this year. Which would mean that the server's share is likely to be lower than it was this year. But now, having said that, please bear in mind that this is dependent on the market circumstances. So we will run our capacity in a strategic and flexible manner as keep an eye out for the market?
Supply change of channel.
And then the second question about the demand coming from these server companies of Taiwan, so the supply chain channel. So yes, of course, we are monitoring them as well. And yes, we also see that there has been increase in component demand and ODM build. So as the set build increases, from the server companies and the data center clients, we see that they are very quickly using up their inventory. So by the end of the year, their inventory level is likely to be about half the level that it was in the beginning part of the year.
So as the inventory goes down and as there is a possibility of a market upturn in 2020, it seems true that the server customers have done some buy ahead. And then looking ahead to the 1st quarter, then Well, the first quarter is traditionally, there is a traditional seasonality in servers in the first quarter, But then now if we are to look ahead into 2020, then there so around the time of the new SOC launch, there is volatility expected at that time. So considering all the factors and the circumstances, we believe that the pickup the recovery in the server demand, is going to materialize perhaps in the, by the end of the first quarter or early second quarter.
The next question will be provided by Natalie from Hanwa Investment And Securities. Please go ahead with
First question is about the your shareholder return policy. So I see that the free cash flow for this year is going to be much worse than last year. And it's very likely to affect your shareholder policy, such as dividend obviously. So will there be changes to your shareholder policy this year? And the second question is, I see that the NAND price as it has been increasing.
So did mention this earlier, but then what do you see as the actual drivers of the stronger price in men? Is it perhaps the Toshiba side. So are there still problems lingering even after the Toshiba came out of the power shutdown situation? And when do you until when do you believe that this is going to continue? And when do you believe that your NAND business will turn to profitability.
Free cash flow to Doctor. Roachudan,
The company began to provide cash dividends in 2014 and then we have maintained the dividend per share flow. But now as you have pointed out, the cash flow for this year has considerably worsened So it is going to be quite challenging for the company to apply the policy as it has been so far. So the company believes that there should be some adjustment to dividend policy and that is currently under review. But then at a time when the company profitability or cash flow are extremely volatile and changing, we believe that we need to try to find the right balance and also consider the acceptance by assessments level by the shareholders as well. So we would be taking a look into the overall factors.
So we will be looking into the company's financial 4 months and the free cash flow and the market circumstances as we try to come up with the kind of policy that would work for the company and would also be acceptable to the shareholders. And Now regarding your second question, the demand has continued to increase in the second half. So in the first half, there had been, so from the supply side, you see that there has been reduction in investment in the first half, whereas sales continued to increase. And as a result, these suppliers' inventory level began to stabilize. And then coming from the demand side, then we also see that the there has been bigger adoption content per box for SSD And also, there has been a bigger increase in content per box for mobile SSD as well.
So we believe that it is this change in the supply demand situation that has driven up price. And since there has been general improvement in supply and demand situation, we believe that the price increase will continue for some time, Having said that, because of the macroeconomic circumstances, there is always a risk of the market volatility increase sir. So thanks to the stronger price and also our continued efforts to reduce the cost We have been able to improve profitability, but it's not likely that we will turn around to profit in the short
The next question will be provided by SK Kim from Daiwa Capital Market. Please go ahead with
Uhakkak habangi, maybe there's an anti vaccination in there.
Now, I have some questions about your technology roadmap. Now, you did explain a bit about the roadmap for the second half, then can you also explain more about the roadmap for both DRAM and NAND for next year? Then also in relation to that, the EUV for the company. So the company has announced completion of the development for 1z nano and you also have announced the intent to start supplying this next year without having used the EUV, But then we see that starting this year, some foundries have started using EUV for their volume production. And it's likely to be applied to DRAM in the very near future.
So what is the SK Hynix's update on the EUV preparation and what is plan for this. And then about NAND for next year, it seems as if some of your peers, some of the other suppliers There would be some supply difficulties from the other players next year. And what is the company's ramp up status for the 96 layer and the 128 layer? And what is your plan down the road? And do you believe that you'll be able to further widen the technology gap with the other players?
Now first about the DRAM development roadmap. Now as has been reported through the media, yes, we did complete the development for 1Z nano to be more specific to 16 gigabit DDR4.
And then using
this technology, nanometer, there would be additional follow-up products to be developed by early and mid next year. For example, LPDDR 5.
And
then the follow-up to that would be 1A nanometer level. And the plan is to develop this by early 2021. And our plan for EUV is to start applying the EUV for volume production of 1A nanometer. And then the next technology will be 1bnanometer planned for 2022. And by this time, the application of the EUV will widen as we move ahead with the development
closing
Then for NAND, in the second half of this year and the first half of twenty twenty, we will 1st focus on increasing sales the 96 layer. And then for the 128 layer products, we will be focusing more on the customer quality case and mass production for in the first half of twenty twenty for a client SSD and some major clients on the mobile side And then the full sales is likely to begin in third quarterofnextyear. Now given that the 96 layer and 128 layer share a lot in terms of the structure, We believe that there is going to be a very smooth conversion between the two products in terms of the production. So for the investment, we will try to optimize investment and also maintain the optimum capacity as we continue to strengthen our competitiveness in both the product and cost And based on that, we will continue to drive business in these products. We'll take 2 more questions.
Next question will be provided by Yonggang Kim from Media Asset Dale. Please go ahead with your question.
I have two questions about demand. First, the stronger demand on the mobile DRAM side So do you believe that it is coming from the increase in sets or increase in content? And if it is coming from the increase in the set, then depending on the level of sell through in China, I believe that the mood can change all of a sudden, but if it is due to the increase in sell through, then perhaps there are some changes in the structural demand. So, which do you believe is the main driver of the strong for DRAM? And then the second question is about the CPU shortage that seems to persist to this day.
So with this CPU shortage not going away, do you believe that this is also going to weigh down on the demand recovery? Well, the first question about the mobile for the smartphones and your question was whether the mobile DRAM demand is driven by a set increase or the content increase? And Obviously, it is very difficult to pinpoint, where it is exactly coming from between the 2, but then for the smartphone said, there has been negative growth from 2018, which also continued into this year. But then next year, we believe that because of the 5G replacement demand, there is going to be set increase by around 1 percentage points.
Content to And then for the
content side, this year, the average content was 4 gigabytes. Next year, it's expected to be 5 gigabytes. And of course, it's because of the increase in tier and also the high premium smartphones, for example, for the 5G. So the increase on average is going to be about 20% for the content. So then we see the increase in sets by about 1% and content by about 20% level.
So all of this combined is likely to drive up the mobile demand and mobile DRAM demand year by 20% level?
And
then the second question about the PC CPU shortage. Now this appears to have been caused by the more concentrated demand on one side than expected out of the overall expected mix between the CPU tiers?
Is that please go ahead.
And it is likely to have an impact on the build or a shipment of PC sets in the 4th quarter. Meaning that the sudden jump in demand for one particular side, that probably is going to have an impact on the build
Foundly of
But then looking ahead, for the longer term into next year. And we see that from the EPC CPU side, in terms of the number So looking at the numbers from the PCCP companies, then also looking at the capacity that the foundries have secured so far, And we see that the CPU is going to increase considerably next year. So this means that in general and also for the longer term, the is not going to affect
The last question will be provided by JJ Park from JP Morgan. Please go ahead with
you can. There's a inventory evaluation Okay. Inventory.
My first question is about your performance in the 3rd quarter and the margin. So I see that in the 3rd quarter sales grew quarter on quarter, but then margin actually fell. Of course, in the first quarter, there had been some impact from the inventory valuation loss and so but then in the 3rd quarter, why do you believe that the margin actually fell compared to the previous quarter? And also in the 3rd quarter, I see almost no tax credits or tax breaks. So have there been any tax credits in the third quarter?
And then the second question is now next year, it seems as if the there is going to be some unit growth. And so the because of the increase in the content also 5G demand and the inventory normalizing. So overall, it seems as if there is expectation of demand growing next year, but then the company is planning to reduce CapEx. So is this because you believe that you'll be able to support the incremental demand just with technological migration or is there any other reason? Now regarding the performance financial performance in the third quarter, so throughout the first Second And Third quarters this year, aside from the changes on the profitability coming from the changes in the shipment in ASP, There are no other non ordinary factors that we can mention.
And then about the tax credit, yes, you mentioned that in the third quarter, there seems to have been no tax credit, while the overall corporate tax has gone down and one part of it is because of our lower pretax profit. So as a result, the corporate income tax has also gone down. Aside from that, there were some tax credits that were not reflected in our books. So this was captured the last time in the 3rd quarter, and that is why this has decreased our corporate income tax. And then to your question about CapEx, basically, of course, we would have our fab operations based on the business outlook and the market circumstances, and CapEx would of course follow such fab operation strategy.
And then for as we had explained earlier, Now the company will, of course, maintain the investment into the infrastructure for future growth. But other than that, let's say if the short term investment into equipment, we would be flexible about such investment as we keep an eye out for the market circumstances and this stance will continue into next year And then for both DRAM and NAND, it is true that there are some signs of change in demand to come, but then when it comes to CapEx, we still have to be mindful of the external uncertainties that are still persisting. So basically, we are being we are taking more conservative stance for CapEx next year. So that concludes DSK Hynix 2019 third quarter earnings release conference call. Thank you very much for your participation.