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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 2019 First Quarter Earnings Release Conference Call.
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Before starting the conference call, allow me to introduce the Executive's presenter here with me today. 1st, Senior Vice President, Haijun Sock, in charge of finance and purchasing Vice President Kim Jong in charge of the DRAM Marketing Group and vice President Kim Jong Tae in charge of the NAND Marketing Group. Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances.
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With that, we will now begin SKIN Hynix 2019 first Quarter Earnings Release Conference Call. Let me now turn over to Senior Vice President, Hazin Huang, to present the earnings for the 1st Quarter the company's plan for the year as well as the market outlook. Good morning. This is Tajin Sik in charge of Finance And Purchase Organization. I will first report on the company's financial performance in the first quarter 2019.
Consolidated sales in the first quarter was KRW 6.773 trillion, down 32% from the previous quarter. This is owed to the drop in DRAM and NAND bit shipment and faster than expected decline in the ASP due to continued sluggish memory demand.
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Due to DRAM seasonal slowdown, combined with ongoing conservative purchasing by server clients, the rate of price decline widened across all applications. The company responded to the changing market requirement with flexibility, thus DRAM bit shipment decreased 8% quarter on quarter, slightly better than original expectation. ASP fell 27% quarter on quarter, with accelerating decline led by computing applications. NAND bit shipment was reduced 6% quarter on quarter performing better than expected. There was a slowdown in overall demand, but the company actively responded to the market for high density mobile applications.
ASP was down 32% quarter on quarter, showing a steeper decline as competition became more intense among suppliers looking to adjust their inventory and as the portion of sales increased for higher density products, which have lower price per unit.
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MCP sales decreased 32 percent quarter on quarter as its
bit shipment declined
due to weak set demand even as Chinese smartphone makers continue to adopt higher memory density. Meanwhile, its sales portion out of total revenue was retained at last quarter's 23%.
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Operating profit in the first quarter was KRW 1,366,000,000,000, down 69% from the previous quarter. Even as revenue was reduced, there was increase in expense for the initial operation of the M15 fab as well as recognition of inventory write off due to sharp price erosion. Operating profit margin was 20%. Depreciation and amortization in the first quarter was KRW 2.03 trillion, slightly up from the previous quarter. EBITDA was KRW 3.397 trillion with EBITDA margin of 50%.
There was a net non operating profit of 100 13,000,000,000 in recognition from foreign currency related gains as the Korean 1 depreciated at the quarter end well as other factors Corporate tax in the first quarter was KRW377 1,000,000,000 lower than in the previous quarter. Net profit after tax was KRW 1,102,100,000,000, with a net profit margin of 16%. Consolidated cash balance at the end of the 1st quarter was KRW7.192 trillion, down by KRW 1,178,000,000,000 from the previous quarter. Interest bearing debt was 6.147 trillion, up by KRW 865,000,000,001. Debt to equity ratio was 13% and net debt to equity ratio was minus 2%.
Let me now turn to the company's market outlook and plan for this year.
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related to DRAM demand in the 1st quarter, server and PC DRAM prices fell sharply as weaker demand persisted amidst undersupply of CPU and inventory adjustment from data center customers who have led server demand thus far. Meanwhile, Although the seasonally weak demand for mobile DRAM was partially offset with new smartphone launches and more DRAM content adoption, it was not enough to reverse the overall DRAM demand slowdown
on the mobile development
But demand for mobile and server DRAM is expected to start in proving in the second quarter. Demand is picking up for mobile DRAM as handset makers increasingly move toward higher content adoption per box, as evidenced by the launch of smartphones with 6 gigabytes up to 12 gigabytes
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server DRAM demand is expected to recover gradually as client's inventory level lowers down. In particular, along with growing investment by data center customers, demand for key components and system buildup server is turning around to positive growth. This recovery trend of server DRAM demand is expected to materialize in the later part of
Supply demand imbalance
is anticipated start easing in the second half with In the NAND market, there was also faster than expected price decline across all applications in the first quarter, following severe price competition among suppliers, led by higher level of inventory burden across the industry. But now, well over into 1 year of price decline, there is elastic increase in demand due to the lowered price. With increasing SSD adoption rate in PCs, the NAND contents began to increase at the same time. The move
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Demand recovery is expected to gain momentum in the 2nd quarter, with a portion increase of 128 gigabyte NAND adoption among MCPs. Also, 256 gigabytes NAND products which was regarded as higher end specifications will start to be adopted even in MCPs. Moreover, PC SSDs adopting 5 12 gigabytes and above will be gradually increased to reach around 30% at year end. Along with such demand trend, the pace of wafer input and ramp up of next gen products is expected to be adjusted following NAND players' announcements. Consequently, suppliers' inventory burden as well as the rate of price decline is predicted to gradually ease.
Despite the rapid changes of market conditions, SK Hynix intends to speedily recover from this memory downturn, by maintaining a profit oriented product mix and remaining on track for First, for DRAM, the company will respond to demand growth for this year with technology migration without any incremental wafer capacity. As a part of this plan, we will utilize the recently opened Wuxi extension fab C2F to make up for the capacity loss resulting from tech migration.
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mobile The portion of 1x nanometer at mid-thirty percent in the first quarter will be gradually pulled up throughout the year. 1y nano mass production will be started, mainly focused on computing DRAM support in the second half. In addition, we will actively respond to the mobile DRAM market that shows a relatively better demand and slower price decline and following the launch of new server chipset that supports 16 gigabit DDR4 adoption, The company will seek to stimulate demand by supplying 64 gigabytes of high density module products.
Our N15 SYNJFAB ramp up
For NAND, we are trying to minimize the deterioration on profitability from the sharp price decline. 2 d capacity is converted into 3 d and the early product of 36.48 layers, 3 d NAND is phased out since their cost is relatively high, while demand is reduced. Additionally, we will slow down the ramp up timing of the new M15 fab in light of the demand trend. As a result, NAND wafer input for this year is expected to decrease over 10% year on year. That.
For the product mix, the company will focus on high density mobile products for the for the time being that generate a relatively better demand. And with our next generation 96 layers, 3 d NAND, We will improve cost competitiveness and strengthen our proposition in the SSD market and also in next gen flagship smartphone market throughout the second Meanwhile DRAM and NAND bit shipment growth in the 2nd quarter is planned at around mid-ten percent and mid-twenty percent respectively. With the base effect in the previous quarter, gradual recovery in customer's component purchases and demand elasticity from lower price. For the full year DRAM bit shipment growth is planned at mid to high 10% and NAND bit shipment growth at more than high 30% the same as
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There are mixed views in the memory market today, with some concerns with lingering on in demand visibility and others expectant of demand recovery, but there have been increasing signs of market improvement more recently. Furthermore, establishments, including adoption of the 5G network, which will trigger significant changes in the IT industry, launch of products with a new form factor and new IT services such as cloud gaming have solidified our conviction in the growth of memory demand over the long For the near term, SK Hynix will remain focused on cost reduction and product quality improvement whose importance becomes even more pronounced at downturns to prepare for demand recovery. For the longer term, the company will keep developing next generation technology and production capability that will help us take a big step forward when the next upturn comes. I thank once again all the shareholders, investors and analysts for your unending support and generous encouragement and ask for more And we are now ready to
Now Q And A session will begin. You. In order to allow as many Q and A chances as possible within the restricted time session. The first question will be provided by SK Kim from Daiwa Capital Market.
I have two questions. Now first, in the first quarter, we see that for both DRAM and NAND, a bit shipment growth, was better than the guidance, initial guidance. So I wonder what the main reason for this is. Is it because of from mobile was better than expected? And also based on this, will there be any further upside the process to come in the second quarter compared to the guidance?
And then the second question is regarding the WOCE DRAM extension fab, for which you have recently announced the operation. So given the market situation today, I wonder why the company is So maybe assume that this is because the company is convinced of the market recovery coming from coming in the second half of this year? Yes. First about the DRAM. So we are not privy to the competition situation, but then we do not believe that there was any significant impact on our sales.
But then from the customers' demand, especially from the mobile customers, there was additional demand, which did have an impact on our sales. And also, demand coming from server side, there was an increase in March compared to January February. And now looking ahead to the second quarter of course, situation will be different by application. But then as was explained earlier, for server, we are expecting gradual improvement while for mobile more a clearer recovery. Now for NAND, yes, the bit shipment growth in the first quarter was better than the guidance.
And that is on one hand, thanks to the increase in demand coming from the mobile customers in China and also with increased demand for high content. For mobile for 128 gigabytes or higher? Now in the second quarter, similar to DRAM, we believe that there would be pickup across all applications. And other than what has been expected so far, we do not foresee any other changes to come at this time. Now the second question regarding the Wuxi capacity increase.
Now for the Wuxi fab because of the space shortage, we were not able to undertake a tech migration last year. And as we intend to move as I intend to migrate from 2ytoz technology to 1x nano, there would be capacity loss coming So what we plan to do is to utilize the extension fab to make up for the capacity loss from the tech migration. And that is because the C2S currently is the only available space where we will be able to increase the make up for the capacity loss. And that is why there has been concentrated activities to move in the equipment recently. But then having said that, because there is not going to be physical capacity increase, the overall capacity coming from Wuxifab will remain the same as last year.
The next question will be provided by Chung Wu from Korea Investment And Securities.
So,
I also have two questions. First is about your inventory level. So as of the end of the first quarter, the inventory value has gone up by 15%, which, the increase itself was expected because of the negative growth coming from the bit shipment growth. Now then for the second quarter, can you give us your guidance? So based on the bit growth guidance for the second quarter and also your production plan, Then can you just give us some guidance about your inventory value for the second quarter?
So both in terms of the value and the number of days of the inventory, can you give us this guidance compared to the first quarter? And then the second question is about your approach to secure profitability for NAND. So as you have announced, there would be a suspension of production of some three d products And also you will pull up the date of the tech migration. So does that mean that the plan for the 96 layer volume production would also be pulled up So will it be done earlier than had been announced previously? First, about the DRAM inventory.
Now for our production plan for the year, the plan is to increase it regularly on a quarter to quarter basis. But then when it comes to sales, then the sales usually show the pattern of low in the first half and high in the second half, meaning that in the first half, we tend to have higher inventory and then an adjusted downward in the second So given this trend then, in the second quarter, we believe that the inventory in both the volume and the number of days will slightly go up compared to the first quarter, but then they will start to go down in the third quarter 4th quarter. So by the end of the year, our inventory level for DRAM will be similar to the level at the end of last year. Now for NAND, looking at the inventory at the end of the first quarter, then yes, we see that the volume has appeared to gone up on a quarter on quarter basis. Then when we look at the number of days in the inventory then, given the sales projection for the second quarter, then we see that it has actually And then now by the end of the second quarter, there is a pass ability of the NAND inventory increasing slightly, but then the increase is not is the increase itself is going to be limited.
And then going into the third quarter 4th, the non inventory would also start to go down. And by the end of the the year, it will stabilize at a normal level. Now, for NAND profitability and tech migration. And the question was how we intend to improve the profitability for NAND. Now, of course, we would have to drive further sales of mobile and try to increase the market share because mobile products is where there is a better profitability and where we have a product competitiveness.
And we also have to drive further sales for enterprise SSD. And also increased the portion out of sales. And when it comes to capacity, our aim is to secure cost competitiveness by optimizing capacity, including for 96,000,000 Now, for the timing of the 96 layer production, it is moving along as scheduled. And in the second quarter, as we improve the productivity, we will go into customer qualification and also undertake some initial sales. And then our sales will start in earnest in the third quarter and we will continue to improve cost competitiveness and product competitiveness
The next question will be provided by Marcus Shin from Mizuho Securities. Please go ahead with
So,
I also have two questions. First is about the DRAM demand. So it appears that the for the DRAM demand, it started to recover late in the month of March. So then for Hynix, for the demand recovery. So what do you what is the company's forecast for DRAM demand recovery in the second quarter 3rd quarter?
And also compared to 3 months ago, have there been any adjustment in the DRAM demand outlook And then the second question is about the memory business change in the structures. In other words, the data center customers, so the share of the data center customers has increased significantly compared to a few years back and it continues to go up. But then following this trend, the forecast or the projection for demand, the volatility of the demand actually has gone up. So which that makes the demand forecast more difficult. So given the fact that there is a higher demand volatility, making the demand forecast more difficult, then how does the management intend to cope with this situation?
Now regarding the first question about the demand for the server DRAM, now in the Second And Third quarters, in the second quarter, we expect slight recovery, as was mentioned earlier. And then in the 3rd quarter, the demand recovery that we expect is going to be in a a stair step type of pattern. And compared to 3 months ago, whether there have been any changes to our demand forecast, I would say no, it's just that there is now a stronger evidence, which led to a stronger conviction on the company's hard.
On IDC, internet data center,
Now then to cite some examples of the children's first is the major IDC company's investment. So whereas in the first half, it seems as if the month from the IDC's is pretty much contained. Starting in third quarter, it is going to increase significantly.
Temanix
And also the Taiwanese server ODM companies, so when we look at their server build, Then in the first quarter, it was a bit sluggish. And then in the second quarter, it turned around to growth. And in the third quarter, it is expected to have a significant
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And not only the server set build, but also looking at the server supply chain. In other words, the parts companies, then we see that even for them, in the 1st quarter and the second quarters of the first quarter, it was pretty much subdued. In the second quarter, there's going to be slight improvement and then a significant rebound in the third quarter.
Data center of
And for the data center companies, there are seasonal events are concentrated in the second quarter 3rd quarter of this year, so they appear to be making the preparation for those events.
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conclusion, the demand numbers that we are getting from the server customers for the third quarter show significant increase compared to the 2nd quarter. Now regarding your second question, yes, it is true that for the data center companies in the years of 2017, 2018, because of competition, there has been a lot of investment and leading to purchasing of parts, so as well as overbuying of memory? No. So we have the effects of that. And then in 2019, the data centers are now facing their periodic cycle of investment and so investment for a server replacement.
And because of that, the data centers are currently trading on using up their inventory, which is delaying And now looking ahead into 2020, then on one hand, we have the launch of the 5 gene network, which signifies a significant change in the IT Industry. And this is also going to be combined with the cycle in the data from the data centers. So we expect to have a big boom in the industry in 2020. So it is true that this kind of 3 to 4 year cycle and the resulting volatility is causing difficulties for both the clients and the parts companies. So we are currently trying to come up with ideas together with the clients to smooth out this volatility and smooth out the changes in the
The next question will be provided by Peter Lee from Citigroup Global Market Securities. Please go ahead with your question.
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I also have two questions. First is about the NAND pricing. So now in for because of the global NAND high, the NAND price has now gone down to the level of cash cost, which is worsening the profitability of many companies. And also in the presentation, the company has announced a 10% reduction in the input for NAND. So does this mean that Hynix is having a production cut for NAND?
And then in relation to this, how do you so what is your plan for NAND capacity operation down the road? And then the second question is about the DRAM and NAND pricing projection. So in the first half, we see that the price has come down quite a lot for both DRAM and NAND. So What is your price projection for the second half? Now regarding your first question about capacity operation, As has explained earlier, following the conversion from 2 d to 3 d for the capacity loss to come from such conversion, we would be making only limited investment to make up for the capacity loss and then also the production for the 30 and the forty eight layers for the 3 d will be suspended.
And as for the M15 ramp up, we will adjust it adjust the face according to market circumstances. So as we move ahead with our plan and also with our plan for the capacity optimization operation, including for the 96 layer. So based on this, we believe that for the company in the second half, supply, there will be supply and demand balance. So there would be, so our inventory overall would also be lowered going into the second half of this year. So we believe that we will be able to have more stable business operations in the latter half of this year.
And let me also respond to the question about demand price projection. So in the first quarter, because of severe imbalance in the supply and demand, there has been price decline across all applications. And yes, there has been a particular price decline NAND in the first quarter. And in the second quarter, we believe that the decline trend will continue, but then the pace of decline will slow down considerably And then looking ahead to the 2nd quarter, we believe that the supply demand imbalance will now start to ease. And also given the fact that there is already a low supply price established for across all the applications, it's not likely that there is going to be any a more significant decline in the price to below the cost level.
And now for the DRAM price projection of in the second quarter, we believe that compared to the first quarter, the price decline will ease and then it will continue to so the price decline will continue to ease, quarter on quarter, although into this second half of this year. Of course, it is difficult to predict when the DRAM price will start rebounding. But then as we near the end of the year, the inventory level at both the supply and demand side will go down. So we expect that by the end of the year, we will be near supply demand balance.
The next question will be provided by Ricky Sa.
2 minutes.
Now my first question is about the so first, we all know that there is a higher DRAM inventory But then the company also mentioned in the presentation that there has been better than expected demand coming from the mobile DRAM side. Then perhaps as as an approach of a strategic inventory operation, maybe the company plans to convert some of the capacity from server to mobile side. So the question is whether you have such a plan and also perhaps the company might try to adjust the wafer input volume? And the second question is about the inventory write off. So this was also mentioned in the presentation and we expect that the inventory write off will be bigger in the second quarter.
So will this expectation be correct? Regarding your first question about the mobile and server DRAM, So in the second quarter, there has already been some adjustment in the capacity mix between mobile and server. And so for the company, depending on the market demand for each application, we are already making some adjustment in terms of the production share of the finished products. And also, within the inventory, we are trying to meet the current demand using the inventory by changing the mix between And then now looking ahead to the second half, so depending on the demand forecast, We also intend to adjust the wafer input mix by application and by product. Now regarding your second question about the inventory write off, it's true that in the first quarter, there has been sizable inventory write off because of the concentrated cost for initial operation of the new fab also the sharp decline in the prices.
But then in the second quarter, because the build up in the inventory is going to slow down, And also the price decline is going to slow down. So we believe that in the second quarter, the inventory write off increase is not going to be significant.
The next question will be provided by Torian Che from Shannon Investment. Please go ahead with your question.
Gaming,
Now my first question is about the recent issues in the market about the server DRAM quality. So perhaps in the data centers, which operates in a higher temperature, the products made for ambient temperature might not be So perhaps there has to be an increase in the quality to better suit the high temperature of the data centers. So perhaps of that the products require higher reliability. Then, will this mean that for the semiconductor production perhaps it could slow down the production process because of that. And do you believe that this will have some kind of impact on the supply and demand dynamics down the road?
And then for the server DRAM demand, the company expects to have a pickup in the data center demand in the second half then, I believe the part of it is coming from the base effect, but at any rate, so with the server demand pickup in the can have, will there be any so what actions does the company intend to take in order to create a momentum to accelerate the pickup in the server demand. And then the second question, so I believe that some are points. So in the market, they are pointing to the Intel's 10 nano launch and also the cloud gaming as well as the 5G network launch as some of the factors to drive further momentum. But so what does the company see as the driver to create further momentum. Yes.
So for the first question about the server about the quality for the server DRAM, So it has been always very important. And now as the content becomes larger, And also as our technology moves more toward the 10 nano side, then there would also be some constraints coming physically and also on the performance side. But then also with the emergence of the edge computing, so I would say that the reliability of the server DRAM is even more required and becomes even more important? So the company is currently preparing the technologies to respond to these changing trend for the short term and also for the long term. And at the same time, regarding the technology migration, so in the past, it used to be at every year that the technology would further shrink, but then now that cycle has become longer to 1.5 years.
So the bit loss to come from the longer cycle will be made up by increasing our wafer capacity. So by doing so, the company intends to achieve balance between supply And your regards to your second question about the server demand recovery in the can have and what the catalyst can be to further accelerate this pickup, we would say that the most important is the server customer activities. So their inventory use up and also the seasonality and also how they resume the in the second half that had been postponed so far?
Cloud gaming
and what you have asked about the new CPU and 5G network and the cloud gaming. So in 2019, they will still go through the preparation phase then we believe that they will start to have an impact on the demand in 2020.
The next question will be provided by Mark Newman from Bernstein.
Hi, thanks for taking my question. My question, I got 2 questions, one on the inventory, you commented about the inventory write down in the presentation and there's a brief question in the Q And A, but I don't think so far I've heard any specifics on how much the write down was or perhaps I've missed it So the first question is, could you clarify how much the inventory write down was in Q1? And how much of that was related to the price related erosion versus you commented fab specifics. And I assume that is all mandated, if you clarify that as well. Also on inventory.
Could you comment on the level of inventory? There's been a lot of questions in the call about inventory trend. I understand that inventory trend should improve in the second half due to some of the better supply dynamic and also some improving demand, but lots of worries in the market about the level of inventory And I think if you comment on finished goods inventory rather than the total inventory you will see on a balance sheet, how the finished goods inventory has increased and where that sits compared to previous quarters. I think that would be very helpful. And then my final question if I may, is on a capacity, you commented about NAND capacity coming down about 10% this year, but DRAM capacity sounds like you're keeping flat, but some of the comments we've heard from the market, specifically calling out Esco Hynix as well as others, that capacity, the wafer starts falling in the 1st part of this year.
So is it like that those wafer starts declining? Is that all NAND or is there a temporary declining wafer starts in DRAM as well. I'd just like to see if there's any comment you can provide on the wafer capacity.
So,
Jagopan