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Good morning and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference 2019 Second 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 2019 second quarter earnings results by SK Hynix.
Good morning and good afternoon to those calling in from abroad. This is Park Song Han, the Head of IR at SK Hynix. Welcome to the SK Hynix 2019 Second Quarter Earnings Release Conference Call.
Although Tom Zokan,
Before starting the conference call, allow me to introduce the executive present here with me today. 1st, Executive Vice President's CFO, Tajun Ho, Vice President, Kim Sock, in charge of the DRIA Marketing Group, and Vice President Kim Jong Kei in charge of the NAND Marketing Group. Let me assure a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. SKI next ichan Chipunya, With that, we will now begin SK Hynix 2019 Second Quarter Earnings Release Conference Call. Let me now turn over to Executive Vice President, Haijun Ho, to present the earnings for the 2nd quarter and the company's market outlook and plan.
Good morning. This is CFO, Tianjin Tsok, our first report on the company's financial performance in second quarter 2019. Amist rising external uncertainties, consolidated sales in the 2nd quarter was KRW 6.4520000000000 and down by 5% from faster than expected ASP decline.
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For DRAM, rising concerns over demand amidst intensifying global trade conflicts resulted in conservative purchasing behavior by some customers. The company responded with mobile and PC DRAM that have relatively higher demand growth. DRAM bit shipment increased 13% quarter on quarter, close to the original expectation. ASP fell 24% from the previous quarter with computing applications showing continued price weakness.
NAND Flash
demand for NAND Flash continuedelastic recovery as price went down. The company actively responded to high density mobile solution demand, and temporarily increased sales of discrete products as a way to relieve inventory burden. NAND flash bit shipment grew 40% quarter on quarter, performing significantly better than expected. ASP was down 25% quarter on quarter, as price competition continued among suppliers and sales of the relatively low priced discrete applications increased.
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In MCP, Increased in demand volatility of Chinese smartphone customers led to sluggish shipment growth and steeper ASP erosion. Revenue decreased 11% quarter on quarter, while revenue mix was maintained at 23%. Although cost per unit was reduced across all applications, it was not enough to completely offset sharp price decline. Incremental costs recognized from the low efficiency in initial operation of the new fabs and higher unit sales led to rise in COGS. Operating profit in the 2nd quarter was KRW 638,100,000,000, down 53% from the previous quarter, and operating profit margin was 10%.
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Depreciation and amortization in the 2nd quarter was 2,108,000,000,000, slightly up from the previous quarter. EBITDA was KRW 2,740,000,000,000, with EBITDA margin of 40 There was a net non operating profit of KRW 38,000,000,000 in recognition from foreign currency related gains as a Korean won depreciated at the quarter end as well as others. Corporate tax in the 2nd quarter was KRW 139,000,000,000 lower than in the previous quarter. Net profit after tax was KRW 537,000,000,000, with a net profit margin of 8%.
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Consolidated cash balance at the end of the 2nd quarter was KRW3.11 trillion down by KRW 4.082 trillion from the previous quarter. There was a large scale cash expense occurring in the second quarter for the payment of corporate tax and dividends for 2018. Interest bearing debt was 8,747,000,000,000, up by KRW 2,600,000,000,000. Debt to equity ratio was 18% and net that equity ratio was 12%. Let me now turn DRAM market in the 2nd quarter showed signs of recovering from the demand slowdown in the previous quarter, but the pace was not up to expectation due to unanticipated external uncertainties.
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Unlike the projection for recovery from late second quarter, demand from data center customers remains sluggish. Despite the decline in their DRAM inventory level, Data Center customers are expected to maintain conservative purchasing policies for now. But purchasing by enterprise server makers, is expected to partially normalize Overall, the growth rate of server DRAM demand will slow down considerably from the previous year.
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In the global smartphone market, high end smartphone sales were below expectations in the first half. While demand volatility grew due to escalating trade tension, but as some also forecast, robust demand growth for low to mid range models and easing of demand volatility, we are keeping a close eye on market trends. Aside from the uncertainties from external conditions, supply of smartphones supporting 5G service will begin in earnest next year. Driving up the adoption rate of high density products from 8 gigabytes up to 12 gigabytes. It also means that demand for mobile DRAM will keep growing.
CPU In addition, the CPU under apply that affected the PC and graphic DRAM market has begun to be eased and demand started to pick up from the late second quarter. As the trend continues into the 2nd half, it is expected to offset part of the decline in server DRAM demand. S.
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In the NAND market, price decline is leading to elastic recovery of demand across most applications, as PC CPU undersupply situation starts to be eased, adoption of high density SSD of over gigabytes is rapidly increasing. And the mix for the MCP products that adopt 64 gigabytes or over is approaching nearly 50%, continuing the content increasing trend. Internet data center clients who have been passive in NAND as well as in DRAM are expected to begin gradually increasing their purchase of server SSD in the 2nd But from the supply side, NAND suppliers are reducing wafer capacity and wafers input. And due to the production disruptions of some NAND suppliers, the pace of inventory reduction across the industry is likely to accelerate. This is heightening the possibility of easing demand supply demand imbalance in the second half of this year And thus, price decline is expected to slow down considerably.
To effectively respond to such changes production and investment. First, to reflect the changes in DRAM demand environment and to strengthen competitiveness of the CMOS image sensor business, From the second half, we plan to start converting the DRAM capacity in M10 to mass produce CMOS image sensors. Consequently, DRAM wafer capacity that stayed relatively flat compared to last year will begin to decrease from the fourth quarter of this year. Adding the wafer capacity loss resulting from tech migration Next year's DRAM capacity will be reduced compared
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Likewise for NAND, we will accelerate bringing down NAN wafer input by over 15% this year YOI compared to the originally planned reduction of 10%.
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Going further, with less visibility in demand growth down the road, The company intends to revisit the schedule for opening an additional clean room in M15 fab and equipment installation in MC 16 fab for efficient and stable management of the company's capacity and cash flow. Overall, next year's CapEx will be reduced considerably compared to this Not only such flexible CapEx execution and reduction in capacity, The company will also focus on developing next generation process technology and deploying stable volume production. We will also run profitability. For DRAM, we will reduce the portion of 20 nanometer class products, while increasing the 10 nanometer class products in total from the mid-forty percent at the end of second quarter to 80% by the end of the year. We also plan to market computing products with 1y nanometer technology from the second half of this year.
Product mix will focus on high density mobile products that offer relatively strong demand and profitability.
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And we will prepare for NAND, sorry, for NAND, the 72 layer 3 d NAND will be the mainstay for now. But we plan to gradually increase the portion of 96 layer starting in the second half. We will focus on sales for high end smartphones and PCIE SSD market. And we will prepare for volume production and sales of the 128 layer 1 terabit TLC product, which the company became the 1st in the world to successfully develop in June. Meanwhile, DRAM bit shipment growth in the 3rd quarter is planned at mid to high single digit percent in light of the base effect in the previous quarter and the heightening demand uncertainty.
NAND bit shipment growth is likely to remain flat quarter on quarter, at most varying by low single digit percent
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For the year, in light of the slower than expected server DRAM demand, DRAM bit shipment growth targets has been adjusted downward to low to mid 10%. For NAND, given the higher than planned shipment in the first half, Mid shipment growth target has been adjusted upwards to high 40%. The emergence of a number of external factors in the last quarter has dramatically lowered visibility into both supply and demand in the memory market. The weaker than expected demand recovery has kept suppliers' inventory levels still high while further driving down the price of DRAM and NAND. As has been explained so far, The company will effectively respond to the current downturn with the strategy of flexibly adjusting capacity and CapEx in both DRAM and NAND according to the changing demand environment.
At the same time, we remain The company will maintain a long term viewpoint as it tries to turn this downturn into an opportunity for strengthening our core competitiveness products and technology. We ask for your continued encouragement and support.
Session. Session. The first question will be provided by Peter Li from CT Group Global Market Securities. Please go ahead with your question.
First of all, I would like to thank you for the explanation on the very good strategic direction of the company. Now I have two questions. First, about the export control by Japan on the Semiconductor Materials, and I'm sure that the Japan's move has also affected SKIN Hynix, then what is the current status of supply and demand and how do you forecast the so what is your outlook down the road? And then the second question is about the NAND price, which appears to be picking up recently as you have also mentioned in your presentation. So can you also share with us your outlook on the NAND supply demand in the future?
Now let me first respond to your question about the export control from Japan. Now regarding the export control, the company is trying to make be no disruption to the production. So on one hand, we are trying to secure as much inventory as possible. And we are also trying to diversify the vendors while trying to minimize But if the export regulation is prolonged, then we cannot rule out the possibility of the move causing some product production disruption And given this fact, we are going to keep a very close eye on the situation. And please understand that for us, at this point, it is difficult to share more details because of the current situation and because of the fact that it is highly uncertain and unpredictable.
Now regarding your second question about the outlook on NAND supply and demand. Now on one hand, it is true that the volatility in demand and supply continues because of the external uncertainties. But looking at the non market itself, then the inventory level of the suppliers, which had been the main cause of the supply demand imbalance so far, it's going to fast decline starting in third quarter. And we believe that that is going to help stabilize the supply demand dynamics as well as the price And such stabilization in the supply demand dynamics and the price are expected to continue into the 4th quarter.
The next question will be provided by Yaniro from NH Investment Securities. Please go ahead with your question. Hi.
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Now first is about the production disruption by the by Toshiba and the Western Digital fab. So what is the current situation as understood by the company? And the second question is about the outlook for demand smartphones, especially the Chinese smartphones because the U. S. Appears to be easing some of the regulations against Huawei recently.
Now regarding your first question of out the disruption to the production. Well, regarding this, our understanding is what we have read up on the media reports. But one more thing is that because of this change, what I have mentioned earlier, the inventory level of of the suppliers, which had been the major cause of the supply demand imbalance so far, is now going to decline faster than anticipated. Now to your second question, rather than specifically mentioning a particular customer, we would like to I would like to just give you a general description about the mobile market in general. Now demand from the mobile market has continued from the first quarter up until the second and third quarter And as you have understood, the demand coming from the Chinese smartphone makers is also on the But then the situation is different by customers.
So for some customers, they are increasing demand in order to prepare for possible additional upside, whereas for some others, they have turned around from their conservative purchasing to a more normal in behavior.
The next question will be provided by Riquiza from HSBC. Please go ahead with
from the specific organization that comes at the
Now my first question is about the inventory levels, which you did mention earlier, but then could you be more specific about the current inventory level So what is your current inventory level for both DRAM and NAND at Hynix and what is your outlook for the inventory level? And then also in relation to this, the can you also share with us the inventory level of the customers or by application as under sued by Hynix. And the second question is about the pricing of DRAM. Price and the fixed price in the DRAM. But then on the other hand, we have been observing a sharp rise in the spot price of DRAM recently.
So do you believe that this rise in the spot price is also going to affect the fixed price down the road? Now to separate between the DRAM and NAND, I would like to first answer the question regarding the spot price. Now to your question about whether the recent spike in the DRAM spot price is going to have an impact on the contract price with the OEMs is too early to tell at this point.
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So the OEM customers currently are maintaining a wait and see approach. And yes, some customers do seem to have some upside demand, then, we see that currently the signals are still mixed. Now then going back to the first question about the inventory level first about DRAM inventory. Now given the demand situation level in DRAM has risen. As a result of this, the inventory reduction to occur in the second half is likely to be Now on the other hand, from the customers, it especially from the server customers, their inventory level, as we understand it, has gone down from the average 8 weeks to 9 weeks And we believe that the reduction in the inventory level will continue into the end of this year.
Although it is going to vary by And meanwhile, for the mobile customers, we believe that they have maintained normal inventory level, although in this case, as well. It also varies by customer. Now then let me respond to the question about NAND. Now for NAND in the second quarter, because of the continuing mobile demand, And also, thanks to our efforts to diversify the channels, we were able to increase sales more so than planned So as a result of this, And then for the products and applications for which demand is falling or which competitiveness is falling, we have also made some adjustments to the production and the sales plan in order to improve the inventory status. And the inventory level of the customers by application, we believe that course, there would also be some variances by customer, but still we believe that they are mostly maintaining a normal level of inventory,
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then now the outlook for the 2nd half Given the current demand and the sales outlook for the company, we believe that the company inventory level will continue to reduce to normal level by theendofthisyear.
The next question will be provided. From Korea Investment Securities. Please go ahead with your question.
So I have two questions. First is about the PC DRAM demand. So by the end of the second quarter, it was explained that the demand for the PC DRAM has been recovering. And coupled with the demand for the PC, with the Windows 10 cycle, then perhaps the DRAM demand for PC is going to intensify in the second half. So Can you give us an outlook for the PC DRAM demand in the second half?
And then the second question is now in the first half, because the hyperscalers CapEx reduction, there has been some impact as well. But then now the hyperscalers data center, the upper the utilization rate is going to recover soon. So when so what is the extent of the so what do see as the current utilization rate of the hyperscalers data center? And when do you believe and so once the hyperscalers data center goes back up to the normal utilization rate. And this is also going to increase the CapEx.
So when do you believe the timing of this
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Now first about the PC demand, looking at the company's performance as well, then we see that yes, there has been a increase quarter on quarter between the 1st quarter 2nd quarter. And then for the second half, we keep receiving orders for the coming from DP to clients. So we have also made our mix heavier towards the PC side. And part of the reason is, yes, on one hand, the impact from the Windows 10 cycle, but all so the fact that the undersupply of CPU has eased. And second question about the hyperscaler and their CapEx.
Yes, it is true that their CapEx this year has decreased year on year, but then the problem is that their CapEx is mostly going into infrastructure. So it's only a part of that that would be spent on a server set or parts.
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So against this backdrop, the utilization rate of the data centers, it hasn't really gone up sharply. So we see that for the TTC, it's about 30% to 40% of the normal level. And for the ID sees, it's around 60%.
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Now in terms of the recovery of demand coming from the server customers, we believe the key is their inventory level. And as was explained earlier, the inventory level continues to go down expected to reach the normal level by the end of this year. So we are expecting the demand coming from the server customers to recover starting by theendofthisyear.
The next question will be presented by Doyancy from Xinan Investment.
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have two questions regarding the DRAM and NAND cost. Now first for NAND in the second quarter, there has been it for the third quarter? Then do you believe that you will be able to reduce the inventory valuation loss in the 3rd quarter? And if yes, then what do you see as the extent of the reduction in the inventory valuation loss? And the second question is, I see that in the second quarter, there has been a bigger reduction in the profit margin compared to the reduction in sales So do you see this situation to continue?
And when do you believe that this will come to a stop? And also in relation to this, for the so given the DRAM and net NAND bit guidance for the third quarter, what do you expect to be the cost cutting to be achieved by the company. Yes, it is true that in the first quarter, there has been significant inventory valuation loss. So for the company in general, then it was about KRW 400,000,000,000 in inventory valuation loss in the first quarter. But then in this quarter, because of the meaningful cost cutting that was achieved, the inventory valuation loss was made was reduced quite a lot
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Now in the first quarter, the major one of the major causes of the inventory valuation loss was the cost coming from the initial operation of the M15. So the initial operation cost of the M15 had been concentrated only on a small number of first products to be produced. But then since then as the M15 operation was stabilized and normalized, the up the manufacturing costs has also been distributed across a bigger volume, meaning that the cost has been reduced. And as a result of this, there has been almost no inventory valuation loss in this quarter, and we believe that this trend will continue into the 2nd half. And then you also asked about the cost cutting as well as the profit and loss estimation for the second half of of this year.
Now in the second quarter, as I have explained earlier, there has been meaningful cost cutting On one hand, the sales of DRAM have gone up and also the portion of the 1X class sales has also gone up, and this has reduced the cost per unit. And for NAND, again, there have been increase in sales and also the portion of the 72 layer product has gone up. And as a result, this has achieved about the double digit reduction in cost.
Now
for DRAM and NAND, in both cases, compared to the past, we see that the fixed cost is gradually increasing. This means that the extent of the cost cutting per unit that we can achieve is slowing down. Having said that, the company will continue to work on reducing cost by adjusting the mix for DRAM and NAND and also continuing with an enterprise wise cost cutting efforts. Such efforts will continue into the second half. So by the end of this year, our target target is to achieve a cost cutting that is
The next question will be provided by SK Kim from Daiwa Capital Markets.
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Now I also have two questions mostly about the technology conversion. So My first question is about the DRAM oversupply. So you announced the plan to shift some of the M10 line for the mass production of CIS. So are there any further changes to your plan for the production or the technology conversion? And then also, can you share with us the plan for volume production of 1x nano and 1y nano?
And the second question is about NAND, for which SK Hynix has also announced a plan to develop and mass produce 128 layer. Now you also have a plan to mass produce 96 layer products Then what is your plan for mass production of the 96 layer as well as 128 layer? And then what do you see as SK Hynix differentiating points for the 96 and 126 layer products compared to the competitors? Now with regards to your first question, Now about the, as was explained earlier, for the DRAM, for the legacy technology, for example, the 20 nano, On one hand, because of the fast dwindling demand from the customers and also for the sake of improving the quality of our inventory, we are planning to further reduce So that means that there is going to be a corresponding increase in the percentage of the 10 nano production. So as was explained earlier, we are going to increase the percentage of 10 nano from around 40% in the second quarter to around 80% by the end of this
year. Advanced technology
And then the most advanced technology so far for the 1y nano, we are going to begin mass production by the end of this year for computing and mobile applications. Now about NAND. Now in terms of the capacity by per technology, the company plans have optimal operation of the capacity in consideration of the investment efficiency as well as cost competitiveness. And then biopsy So for the 96 layer, the qualification is underway by application. So for the 96 layer, we will be expanding our sales in the fourth quarter and into the first half of next year.
And then for the 128 layer, this will be targeting the next generation applications and also high density applications. And for this, we are getting ready for qualifications in the first half as well as stabilization of the volume production and sales will begin in earnest And for SKIN Hynix, the between the 96 layer to 128 layer, we would be sharing most of the major devices as well as the technology processes So there is going to be very smooth migration from the 96 layer to 128 layer. And also the investment efficiency for the tech migration is going to be quite high. So the company will be able to migrate to 128 layer in a good timing so that we will be able to strengthen our fundamental competitiveness in NAND.
The last question will be provided by Nicholas Gadoa from UBS. Please go ahead with your question.
Going back to your comments on a DRAM reduction in production that you're planning for into the back end of the year and year. Could you perhaps help us quantify a little bit how much of a capacity in M10 you are considering to moving to email similar sensors. And what kind of output in terms of wafers we could therefore consider for similar sensors as a whole for you next year. And also clarify whether we see effectively to the nanometer capacity being converted see more sensors or if there's anything else in terms of geometry fan? And the second question is also on your plans for NAND flash wafer starts to decline 15% year over year this year.
If we do the math, that probably means that you will exit the year below 200,000 for wafer starts. The industry give or take when we'll be back in full production at some point next year, will be at 1,500,000 dollars, $1,600,000 per month. So how would you handicap what should be over time you targeted supply share and whether it is okay actually for Helix to go below 10% or if you intend at some point when the cycle gets better to reverse that and go over 10%. Thank you.
From the from then they will update Is there any Now regarding your first question about the capacity conversion from M10,
Taman, Tangeni.
Now regarding your first question about the capacity conversion from M10, yes, the as explained earlier, we are going to convert the capacity as part of the capacity of M10 for the production of CIS starting in the second half of this year. And we believe that the effect will be begun to be felt starting in fourth quarter. And the effect will continue into the end of next year. But in terms of the specific volume of the capacity reduction, it is difficult to give you the number at this point given that we do not have the investment plan finalized yet, particularly for next year yet. And then for the M10 operation, because it was focused on 2Z production, if we are to convert the capacity to CIS, then that means automatically that we will be reducing 2z capacity.
And in terms of the NAND capacity adjustment, we would make adjustment to the legacy technology depending on the product competitiveness and the cost competitiveness And
it is
a natural result of the legacy technology adjustment that the NAND capacity is being reduced. So our investment decision making will continue to be based on the judgment on investment efficiency and product competitiveness. And as for additional changes to the investment plan, currently, there are no further changes that are planned. Thank you very much. And that concludes GSK Hynix 2019 Second Quarter Earnings Release Conference Call.
Thank you very much for your participation.