Hello, Oscar. SK Hynix
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 the SK Hynix 2018 fourth quarter earnings release conference call. Before starting the conference call, allow me to introduce the exact President here with me today. 1st, Vice President, Kim Jong, in charge of the DRAM Marketing Group, Vice President, Kim Jong Pei, in charge of demand marketing group and Executive Vice President, Tajun Zolp, newly in charge of finance and purchasing from this year.
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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 SK Hynix 2018 fourth quarter earnings release conference call. Let me now turn over to Executive Vice President, Haijun Zao, to present the earnings for the 4th quarter and the year and the company's outlook. Good morning. This is Tajin Huang in charge of finance and purchase purchasing at SK Hynix. I will first report on the company's financial performance in the fourth quarter of 2018.
Consolidated sales in the fourth quarter was 9,938,000,000,000, down by 13% from the previous quarter. This is O2D lower than planned DRAM and NAND bit shipment and decline in the ASP due to overall sluggish memory demand amidst global economic uncertainties.
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Eram bit shipments fell 2% quarter on quarter as server clients became conservative in their purchase, and smartphone sales slowed down. ASP fell 11% quarter on quarter, similarly across most applications.
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NAND flash bit shipment rose 10% quarter on quarter due to sluggish demand for high end smartphones with higher NAND density. ASP was down 21% quarter on quarter, showing a steeper decline than in the previous quarter as price competition became more intense among suppliers looking to adjust their inventory.
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naturally MCP sales fell 9% quarter on quarter, but its portion out of sales rose slightly to 24% as demand for lower end smartphones remained better than Operating profit in the 4th quarter was KRW4.43 trillion, down 32% 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 one off labor costs. Operating profit margin was 45%.
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depreciation and amortization in the 4th quarter was KRW1.751 trillion slightly up from the previous quarter. EBITDA was KRW 6,181,100,000,000,000 with EBITDA margin of 62%.
There was a net non operating profit of KRW281. In recognition from foreign currency related gains as the Korean 1 depreciated at the quarter end and others. Corporate tax in the 4th quarter was one point 314,000,000,000,000 lower than in the previous quarter. Net profit after tax was KRW 3.3980000000000 with a net profit Next, let me go over the company's financial performance for the year of 2018. Memory semiconductor market, especially DRAM market, enjoyed an unprecedented boom last year on the back of soaring demand for higher performance and specifications from mobile devices and data centers.
But the market is changing rapidly since the second half as the severe supply shortage began to ease following demand slowdown. SK Hynix has actively responded to the changes in the market with high value add products. Achieving the highest ever performance in 2018 with sales of KRW 40,400,000,000,000, operating profit of 20 800,000,000,000 and net profit of KRW 15,500,000,000,000. Operating profit margin and net profit margin were 52% and 38%, respectively, up by 6 percentage points and 3 percentage points year on year. Consolidated cash balance at the end of the year was 9,000,000,000,000, down by KRW 185,000,000,000 from the end of 2017.
Interest bearing debt was 15.282,000,000,000, up by 1.116, I'm sorry, so interest bearing debt was 5,282,000,000,000,001,000,000,000, up by 1,111,000,000,000. Although annual profit rose significantly last year, free cash flow generation was limited. The cash outflow throughout the year was also considerable due to much higher CapEx than 2017, at KRW17 trillion for M15 fab construction and the Wuxi fab expansion. It was also increased working capital of KRW 2,000,000,000,000 from growing sales and inventory on top of tax expense reaching 6 trillion level. Given all these circumstances, the company has decided on cash dividend payment of 1501 share for the year Let me now turn to the company's market outlook and plan for 2019.
Demand slowdown across the IT market, which began in fourth quarter last year, is continuing into 2019. As such, this year began with lower demand visibility and higher inventory level across the industry as macroeconomic uncertainties persist. Server client's data center investment that drove memory demand is decreasing and demand for high end smartphones is falling short of expectations. While memory makers supply is increasing. Thus, changes in supply demand dynamics are faster and bigger than expected.
Related to DRAM demand, server clients were driving demand until last year with aggressive investment. But they changed their operation strategy and are now trying to maximize investment efficiency by optimizing existing data centers. They will now probably respond to demand using their internal DRAM inventory, which will slow down demand for server DRAM for some time. But demand from the service side is expected to recover in the second half of this year, as customers' inventory level normalizes and demand grows for high density modules with over 64 gigabytes with the launch of new
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Meanwhile, even as flagship smartphones, equipped with next generation display and network services are launched this year, smartphone shipments will inevitably decline compared to last year, with sluggish demand for high end products and the replacement cycle becoming longer. But market share competition among smart for makers will introduce more multiple cameras with higher density from 60 six gigabytes to up to 12 gigabytes For the driving, mobile DRAM contents per box increase. Given the overall trends in demand, DRAM demand bid growth this year is expected as mid to a high 10% level lower than last year. In the NAND market, despite the price decline throughout last year, demand remains sluggish for SSD and high density mobile man. On the other hand, as suppliers accelerated 3 d NAND production, the supply demand imbalance has worsened.
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But this year, as NAND price goes down, elastic content to box increase will materialize, leading to overall demand growth. In particular, adoption rate for high density PC SSDs over 5 12 gigabytes is likely to keep expanding or enterprise SSD, demand is expected to increase for storage servers with relatively high price elasticity and internet data centers are also expected to increase adoption of high density PCIE based SSDs. For mobile land, content per box is expected to increase, along with the trend of enhancing hardware specifications, like multiple cameras in smartphones. But given the maturity of the smartphone market, unit shipment is projected to fall from the previous year, keeping demand demand bit growth this year at mid-thirty percent level slower than the previous year. Based on this outlook, SK Hynix plans to lay the ground for differentiation in the future.
We will minimize business risks by enhancing sensitivity to demand changes, focus on customers and high value add products and be ready to take the larger chunks the upside once the market rebounds
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1st, For DRAM, we will actively broaden the customer base for 16 gigabit DBR4 products to lead accelerated adoption of high density modules in the server, while strengthening our responsiveness to HBM2 and GDDR6, that have high growth potential over the longer term. In addition, unlike last year when we had capacity expansion, this year, Our production will be more focused on technology migration. To that end, we will increase the Nano and prepare for stable ramp up of YY nano. For NAND, we will focus on sales of high density solution products with matured 72 layer technology to solidify our position in the enterprise SSD market and USS based next generation flagship mobile market. We will also remain focused on profitability by optimizing capacity mix, including ramp up of 96 player products on target.
Signings is planning at mid to high 10% of DRAM bit shipment growth for this year and for NAND high 30% level. Meanwhile, Digital plan in the first quarter is expected to decline by around 10% for DRAM and by mid 10% level for NAND quarter on quarter due to the combination of the generally weaker demand and seasonality.
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The year 2019 began with persistent external uncertainties and growing concerns over slowing IT demand. Although recent changes in the memory market were more rapid and larger than expected, We remain convinced of the importance and long term growth potential of memory semiconductor. SK Hynix will have a clear eyed analysis of the current environment and detailed planning for the future so that we can strengthen our fundamental competitiveness to become the indisputable best in class company. I thank once again all the shareholders, investors and analysts for your unending support and generous encouragement and ask for more of the same this
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now ready to take your questions.
Questions. That you start into a new phone. In order to allow as many trips as possible within the restricted time, We would appreciate The first question will be provided by Marcus Chin from Mizuho Securities. Please go ahead with your question.
Uh-uh. Station. I need about the inventory level. And now, per your okay. Your guidance, and also now heard about you on the server side.
Now, it is for the aggressively spending CapEx on data centers for the past 2 years. But then now in 2019, because growing macroeconomic uncertainties, but they are now trying to optimize existing infrastructure and also having a more Now in terms of the software and hardware optimization, for server companies, that that is Hold on, but it's what it is. But then now, more recently, you need for some documentation as you come sharper. And that is why I received that of the larger customers have gone on in the path of optimization, which has, But then having said that, there is also limitations in utilizing the existing inventory And also, we are launching new services and also because of new CPUs there's also the need for high density modules. So I believe that, 2 to 3 quarters after their optimization could a lot of the work And per your second question about inventory level, the inventory level in the early part of 2018 was at 1 week level.
And then by the end of 2018, it was We need to touch the weak level. And now, as you have mentioned, because of the seasonality in this first quarter, it is almost inevitable that the inventory level will further go down. So the company will try to manage the inventory and also the products with an eye toward the second half So we will be, utilizing our inventory so that we will be ready for exploring demand in the second half. And as for NAND, now the, in the fourth quarter, the sales for NAND had been more sluggish than expected. And that is mostly because of the slowdown in demand coming from the memory side.
So, in at the end of the 3rd quarter, the NAND inventory level was 4 weeks, whereas at the end of the 4th quarter, it is at 9 Now in the first half, again, because of the seasonality, it is expected to inventory level will further go up. But by, optimizing the company's capacity, we will try to keep the inventory level growth under control? Hi, Steven. So, because of these efforts, we believe that for the year, the growth in production will fall short And also, in terms of the inventory, composition in the first half, So just like Japan for the DRAM, for demand as well, we will manage our inventory with focus on the products for which the demand will increase in the 2nd
The following question will be provided by Peter Lee from Citigroup Global Markets. Securities.
And regarding the previous question, let me just confirm once again that the expectation by the company is that the DRAM inventory level will rise further in the first quarter of this year. And then now the second question was now in for the memory market, because of the changes in the memory market in 2019, it seems as if the company's investment plan would also change. So do you expect that the investment level will go down considerably in 2019 compared to 2018? And also, can you give us a more detailed investment plan for DRAM and NAND? And the second question is about your performance in fourth quarter.
So in the fourth quarter of 2019, the demand from memory had been quite weak. But compared to other companies, it seems as if SK Hynix has fared, comparatively well in terms of resale. So what do you believe was the reasons for this
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Now first about the CapEx. In 2018, the CapEx spend was KRW17 trillion. In 2019, we expect the CapEx to be much lower than that. And now, in light of the changes in the market and also the weakness in the demand in the market, the investment in equipment would go down by around 40% year on year. But now for the R and D and M16 new fab, In other words, the investment for future growth, the company plans to keep maintaining the investment into the future.
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And regarding your second question for the GM sales, Well, of course, if you're not privy to the competition situation, but then perhaps it is owed to the differences in the composition of our products. In other words, the product mix as well as the customers. For SK Hynix, because of the lower demand for server and mobile, but our bit shipment growth was lower than expected. But in the second half of twenty eighteen, overall, we were able maintain a, an adequate level of production and also adequate level of sales per customer without much volatility.
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The following question will be provided by Cheadouyan from Xinhan Investment.
I also have two questions. Now our first is about the demand outlook. In your third quarter release, you had expected that demand will pick up starting in the second half of this year. So is this guidance still valid? And have there been any changes in your outlook since the third quarter of last year?
And if so, what are such changes and what are the reasons or causes for such changes? And the second question is about investment. So you now because of the macroeconomic factors and also so because of the macroeconomic factors, it seems as if the pace of the demand pickup in the second half would also depend on various factors. So then you did already mention that you are planning to reduce investment year on year this year, But if the demand pickup is slower than expected, do you believe that it will be possible to become even more conservative, meaning that Will it be possible to further downward adjust your investment level?
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Now, in the so starting from the second half of twenty eighteen, going into the first half twenty nineteen, We believe that the demand slowdown is going to be bigger than expected for various reasons. Now first, on the macroeconomic side, there is the China's economic slowdown and also the U. S.-China trade situation. And then from the IT industry side, we see that the server customers continue to adjust their inventory and the memory companies continue to reduce their inventory. But now I believe that the server customer's inventory adjustments would probably be completed in the first half of twenty nineteen Then also going into the second half of twenty nineteen, there would be launch of new cloud services by the server customers as well as other seasonal events.
And as was mentioned earlier, from the mobile customer side, their, content to box is going up to as high as 12 gigabytes per box. So we believe that this is also going to drive further demand for DRAM. And in fact, we are seeing that demand coming from the customers is increasing in the second quarter compared to the first quarter. So we believe that there is going to be gradual increase over the 3rd fourth quarters as well. So for the year, we expect the demand ratio to be 45 percent to 55% between the first half and the second half or even 40% to 60% between the first half and the second half.
And so we believe that the in the second half, the demand will gradually pick up.
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And your second question regarding the possible, further downward adjustment of the investment level if the market situation warranted. Now we it was mentioned earlier that the inventory, the investments level will be reduced this year compared on flexibly as the according to the need. So it is also possible for us to try to complement the reduction in the capacity or adjusted pace of the technology migration. So, we would be making our decisions and conducting our operations according to the market environment, with the possibility of further reducing the investment, if necessary.
The following question will be provided by asking Kim from Daiwa Capital Market. Please go ahead with your question.
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I also have two questions. First is about your 4th quarter operating profit, which seems a bit lower than expected. So I wonder whether there have been one off expenses. And of course, the CFO has mentioned this earlier, but then were the one off expenses, the labor costs? And then the second question is also in the 4th quarter, it seems as if your NAND performance is lower than did, so much more sluggish.
So I wonder whether any loss had been recognized on the NAND business And if so, then how do you plan to improve the profitability of your NAND business this year?
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Regarding your first question about the one off expenses in the fourth quarter, yes, it is true that there have been a number of one off expenses. Now first is about the M15. So the clean room, so the new fab opened its clean room in the early part of October, So for the initial operation, there would have been some increased expenses. And also, because of the initial operation of the M15, there have all been some loss in the inventory valuation and also some, one off expenses on the labor costs as well because of the higher overall financial performance of the year. So we believe that overall, without these one off expenses, the operating profit would have been at the level that was on par And as to your second question on whether there had been loss coming from the NAND business in the 4th quarter, Now in the fourth quarter, there were some expenses involved with the beginning of the M15 operation.
And also overall, the market situation was quite sluggish. So it is true that the NAND business operations have been a bit more sluggish than had been expected. But then if we are to, eliminate the one off expenses, then in the 4th quarter, the NAND business still saw operating profit. Now down the road as the M15 operations further stabilize and once the fixed cost are more evenly allocated. So in other words, after the second quarter, we believe that we will be able to see improvement in the profitability of the NAND business as well.
And to further answer your question about how we are going to improve the profitability of the NAND business, Now the company intends to focus more on the increase in sales as well as increase in market share of the products that have market competitiveness and also provide higher margins. And also, we will try to optimize our capacity, for example, by developing the new technology of 96 layer. So as to further our cost competitiveness, And also to make sure that the company's continues to grow its business, we will try to strengthen the product competitiveness of the enterprise SSD while increasing its portion out of total sales. Now in the NAND market, the because of the continuous slump in the prices, It is true that it has also weighed down on the profitability of the suppliers. But then we believe that this is also going to be a health flow in increasing NAND demand over the longer term.
So the company intends to focus not only on the short term profitability of the NAND business, but also will try to secure leading competitiveness over the long term. So we will take 2 more questions.
The following question will be provided by Ricky Song from HSBC.
In the detailed and follow-up question, the CapEx the you took 2 further meaning plan of all of our KMG, finagination
I also have two questions. First is about a more detailed follow-up on your CapEx. So you did mention that, so the company's guidance is that the CapEx will go down this year. But then my question is regarding more detailed operation plan for the M15 and the Wuxi fab. So especially for the Wuxi fab, I understand that the plan is to have a ramp up in the second quarter 3rd quarter.
So for both of these fabs, what is your more detailed operations plan for this year? And also do believe that by the end of the year, they will be able to reach a meaningful capacity level and whether that has already been reflected in your CapEx plan for this year? And then the second question is about NAND demand. So, we have been talking about price elasticity, but then looking at the NAND price that we can see that it has gone down by 50% to 60% compared to the peak, then are you now seeing any signs of demand increasing for NAND? And also with the inventory at a higher level and the NAND prices, likely to go down even further in the first quarter, Now some companies are planning a production cut.
I wonder whether a similar planning is being done by SK Hynix.
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First about the CapEx, yes, the M15 and the Wuxi fab have newly opened. So M15 in the October last year, and we see fab at the end of last year. Now as you have mentioned, regarding the CapEx planning, yes, the both the operation plan for the team and UC fab are already included in our CapEx plan for this year. But now having said that, I did also mention earlier that because of the various circumstances and factors, the company is likely to reduce the company is planning to reduce the investment for this year. And then also depending on the circumstances, ramp up, the pace of the ramp up could also be adjusted.
So, we will remain flexible, with a close eye on Now, because of the continuous fall in demand prices, across the PC industry, we see that the attach ratio of SSD as well as the gigabyte per box are increasing and also the memory, from the, so memory for the mobile devices is also Now for the PC SSD, we are seeing the adoption of 5 12 gigabytes or higher And then also for some of the high resolution smartphones, we are seeing the adoption of 128 gigabytes or 256 gigabytes getting higher and we believe that these trends will continue into the second half of this year. And as for your question on production cut, this has not been reviewed by the company. And our plan at this point is to effectively manage the rising inventory level. And as I had mentioned earlier, as a result of that, the company's guidance in terms of the beat growth for this year is that the sales bit growth would be higher than the production bit growth.
The next question will be provided by Tuohyen Wu from NH Investment And Securities. Please go ahead with your question.
I also have two questions. Now first is about the Intel CPU. In the third quarter of last year, because of some problems in the tech migration, the Intel CPU had supply shortage, So they began to invest into their capacity in the fourth quarter, so it's likely that their capacity will increase in the 1st quarter So what has been the impact on the DRAM demand so far because of DCP shortage? And then also if the supply increases as capacity increases and what do you expect that impact is going to be? Then second question is about the DRAM demand.
So what do you see in terms of the share of DRAM demand between the server and the mobile side? Then also the And related to that is overall, we believe it seems as if this year, there is going to be oversupply compared to the demand. So will the company agree to this assessment? Regarding your first question about the Intel CPU and it seems as if that it did have a real impact a real negative impact on the PC shipment in the fourth quarter of last year. And the expectation is that it will recover from the second quarter of 2019.
And you can also see that the demand coming from our top PC customers is rising from the 2nd quarter. And we believe that from the second half of twenty nineteen, the PC demand will recover because there would be more demand for build and also the seasonal demand and new SoCs to be launched. Now regarding your second question about the server DRAM bit growth, we are planning at mid to high 20% level, which is much lower than the 30% to 40% level of last year and the previous year. And for mobile side, we our guidance remains at high 10% level. Overall, the demand bit growth.
So the DRAM demand bit growth is expected at mid-ten percent level and supply good growth at mid to high 10% level. So, there could be, oversupplied by a few percentage points. And as had been mentioned several times, we we expect the demand to be low in the first half and high in the second half. So although, in the first half, there would be some oversupply we expect this to be eased in the second half of this year. And for the company as well, our production bit growth will be lower than the shipment bit growth.
So we will manage our bit growth, we will manage our bit shipment according to the market circumstances. Thank you very much, though, the participants. And with that, we conclude Daseke Hynix 2018 4th quarter earnings release conference call.