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 third quarter earnings release conference call. Before starting the conference call, allow me to introduce executives present here with me today. 1st, Executive Vice President in Charge of Corporate Support And CFO, Yimmyo.
Vice President, Kim Jong, in charge of the DRAM Marketing Group and Vice President, Kim Jong Ke, in charge of demand 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 SK Hynix 2018 third earnings release conference call. Let me now turn over to Executive Vice President, Email Young, to present the 3rd quarter earnings and the company's plan and market outlook. Good morning. This is Kim Young in charge of SK Hynix corporate support. Let me begin with 3rd quarter consolidated sales totaled KRW 11,000,000,000,000 and operating profit 1,000,000,000,000, once again, the highest ever performance in the quarter for the company after the previous quarter.
Despite slower DRAM price increase, and continued NAND price fall, with shipment growth continued, leading to consolidated sales growth of 10% quarter on quarter to 11 point 417,000,000,000. DRAM bit shipment rose by 5% quarter on quarter. Demand kept up solid growth in the server market and there was seasonal pickup in the Greater China region for mobile products for which the company responded actively. ASP rose by 1% quarter on quarter rising across most DRAM products, but at a slower pace. There was increase in sales portion of the relatively lower priced mobile products.
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For NAND flash, Its shipment rose by 19% quarter on quarter. We met demand for high density products from our mobile customers in China and demand for SSD products with 72 layer products. The portion of SSD out of total NAND sales in the quarter rose to mid 20%, while enterprise SSDs portion also reached mid-twenty percent portion of total SSD more than tripling quarter on quarter. ASP fell 10% from the previous quarter, weakening in all product categories as supply grew.
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for MCP, sales grew 19% from the previous quarter, with its portion out of sales reaching 22%. There was rapid growth in MCP products combining 6 gigabytes DRAM with 64 gigabyte or 128 gigabyte NAND as smartphone makers continue to increase their content per box, which pushed up the ASP. Our operating profit in quarter on quarter, following higher sales and cost reduction from smooth migration to finer node. Operating profit margin was 57%.
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Depreciation and amortization expense for the quarter was 1,647,000,000,000, up slightly from the previous quarter. EBITDA was KRW8.12 trillion representing an EBITDA margin of There was a net non operating expense of KRW37 1,000,000,000. There was foreign currency loss of around KRW83 1,000,000,000, mainly foreign currency translation loss from appreciation of the Korean I at quarter end. Corporate tax for the third quarter was KRW 1,743,000,000,000 due to the increase in net profit before corporate tax. Our net profit after corporate tax for the quarter was KRW4.692 trillion with a net profit margin of 41%.
Consolidated cash balance at the end of the 3rd quarter was 5,675,000,000,000, an increase by approximately KRW 1,270,000,000,000 from the end of the second quarter. Our interest bearing debt stood at KRW4.977 trillion, a decrease by KRW438 1,000,000,000. Next, I would like to discuss the company's market outlook and plan.
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DRAM market in the third quarter was led by IDC server demand and demand from China mobile customers. However, major customers' inventory levels normalized compared to early this year, while the severe supply shortage has begun to ease following DRAM Mark Maker's efforts to meet demand growth through supply. At the same time, the global trade friction continues unabated while volatility grows in emerging economies after the benchmark rate hike, adding to growing demand uncertainties.
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Given this backdrop, server DRAM customers that showed sharp demand growth are now expected to shift their purchasing strategy to fulfilling short term essential demand. But server DRAM's robust mid to long term growth is likely to remain unchanged. This is because major IDCs are expected to keep investing with the growing need for AI servers, which have more than 50% higher memory density and the advent of edge computing servers to keep up with
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In the mobile DRAM market, While high end smartphone sales have eased, mobile customers deferred demand from their conservative component inventory policy is expected to materialize in the fourth quarter. Also, with the continuing trend for high mobile DRAM content adoption, Seasonal demand volatility is expected to slow. In particular, cameras and 3 d sensors to mid to low end models is very positive for mobile memory contents increase. Aside from this, CPU supply shortage and slowing cryptocurrency demand is expected to have some negative effect on PC DRAM and graphics DRAM demand, thus we are closely monitoring these market trends.
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For the NAND market, The mass production of customer qualified 72 layer and 64 layer products and sales of inventory that rose in the 1st half has led to price decline. At the same time, adoption of high density demand continues in all applications. Doctor.
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SSD, not only the adoption rate but also the content per box are growing for both PC and server products. Assist the adoption in notebook is likely to near 60% this year. And demand for PC SSD is also expected to keep increasing as SATA is rapidly being replaced by value level PCIe solutions. With higher performance than SATA interface, and price competitiveness, value level PCIe solutions content per box is also increasing.
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The enterprise SSD market has grown centered on the PCIE interface demand mainly from IDC customers, And in the future, market expansion of new applications as well as the increase in number of suppliers and price decline is expected to drive continued faster mid to long term demand growth for enterprise SSD compared to other applications. With price decline from industry supply growth occurring over a short period of time recently, van prices have been pushed down to the levels of early 2016 before NAND prices increased. As suppliers still need to work down inventory level that rose in the first half, more price adjustments seem unavoidable, but this is expected to gradually trigger elastic growth in demand.
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Based on these market conditions, our company's growth plan for the fourth quarter is up mid single digit percent for DRAM and up low 30% level for NAND. This will help us achieve the targets of low 20% bid shipment growth for DRAM and mid-forty percent for NAND for the year. For DRAM, we will 1st improve the technological efficiency of the 1x nano process for which there has been yield improvement in the 3rd quarter. We will also focus on developing high density, high performance products for which demand is strong and the value add is higher. You will also complete the 1Y nano process development and the clean room construction in the Wuxi fab by this year end so that we can start match production in the first half of next year.
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For NAND flash, we will keep increasing the portion of 72 layer products and solidify our position in the high density mobile and enterprise SSD market. 72 layer products will be increased to over 50% of all NAND production while the portion of the development of 96 layer within the year to be ready for next year's market. Teen fab, which opened in early October, so that it can contribute to production from the first half of next year. Meanwhile, the company plans to execute our investment plan on a quarterly basis with flexibility in light of rapidly rising external uncertainties and the consequent increase in demand volatility as well as the ease in tight supply. So far, investments were made in DRAM improve the tight supply situation, both through tech migration as well as capacity increase.
However, we will now focus on improving investment efficiency. For NAND, 3 d migration will continue as a way to reduce cost, while capacity will decrease much faster for 2 d whose demand keeps falling. As a result, overall wafer capacity will decrease for NAND. It is true that the recent macroeconomic uncertainties and other factors have reduced visibility in the memory market effectively dealing with such environment would require minimizing business volatility by ensuring the best technology the best value to our customers, And with that, we are now ready to take your questions.
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Questions.
Within the restricted time, we would appreciate only two questions for each participant. The first question will be provided by Peter Lee from Citigroup Global Markets Securities.
Congratulations on the good performance. I have two questions. One is pertaining to investment. So how do you see so do you see any differences between this year and next in your mobile investment. And second, about next year's outlook.
So for the year 2019, how do you see the global DRAM demand? So, what do you expect the increase to be in terms of the global DRAM demand? And second, what is SK Hynix's bit growth outlook?
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I will first answer the question on bid growth followed by the one on CapEx.
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Now, of course, it is too early to tell about the market next year, but then given the from our point of view as of today, our outlook is about 20% bit growth for DRAM and 40% for NAND.
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And now given that we have not completed our business plan for 2019 yet, At this time, it is difficult to for us to specify our CapEx planning for next year. But having said that, Now given the bit growth outlook that I have just mentioned, as well as the global economic uncertainties and also under the assumption that we will keep working down the inventories, then we can assume that for next year, the investment is going to be adjusted at a lower level than this year. Now for this year, there has been active investment an eye towards easing the tight supply. But then going into next year, given that there are a lot of demand uncertainties, what we are planning to do is instead of coming up with an investment plan for the year, it is going to be on a quarterly basis. So we'll make sure that we execute our investment plan on a quarterly basis with flexibility.
The next question will be provided by Marcus Chin from Mizuho Securities. Please go ahead with
I also have two questions. One is about the demand for mobile. So, in the fourth quarter, we believe that there has been some substantial decrease in the demand for your mobile, not only from the PC clients and the smartphone clients, but also from the data center clients So for your data center clients, what has been the extent of their demand adjustment and how long do you expect this demand adjustment to continue? And related to this is now is the demand adjustment coming from the datacenter clients Is it because of their real needs? In other words, is it because of their need to work down the inventory?
Or do you believe that it is part of their preemptive strategy to kind of give a pressure on the memory makers to lower the price. And the second question is, you mentioned the And also in your presentation you talked about Edge Computing and also how the demand for Edge Computing is rising. So if you could also elaborate on this please? And then the second question is related to NAND. So now in the second half, it seems as if the NAND price has fallen more so than expected.
So then for next year, there are also some views in the market that for SK Hynix, your NAND business is going to turn to operating loss. And if that is the case, so if the NAND price continues to fall, then are there any plans for the company to adjust the pace of the ramp up first of all, about the data center question. So now we believe that it is going to be a short lived temporary adjustment. First of all, there would have been some burden coming from the very intense active investment that occurred in 2018. And also, the memory price has risen quite sharply So, from their BOM perspective, they probably also had felt some burden.
Now having said that, There's no doubt that the demand will keep rising for the mid to long term because now, when we look at the macro environment for the ID see. So for example, the global conversion to cloud as well as the, the spread of AI as well as increasing workload, Then we can see that they are all pointing toward growth for the long term. And now for the server DRAM bit growth, in 2018, it was 40%. And in 2019, even at a conservative estimate, it is going to be over 30%. Now then, for overall, the DRAM bit growth is likely to be around 20% to be led by the bit growth in server DRAM.
So now in conclusion then for the server customers, the current temporary adjustment in demand is probably going to turn around in the second half of next year, 2019. And so we believe that by that time the demand is going to recover to the previous level. And this is not only the company's view, but also the views expressed by many of those who are who have worked or are currently working in the IDC Industry in the Americas. And then for the edge computing, so in the presentation, it was more of a long term outlook and for this year out of the total sets, it was a out 1%, but then we believe that for the next 3 to 4 years, it will go up to around 10%. And Edge computing is not going to be a substitute of the existing in data centers, but then naturally it is going to be complementary to the data centers.
So in terms of, creating incremental memory demand, we believe that this is a very positive development. Now allow me to answer your question about the M15 operation planning, depending on the NAND market changes.
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Now, the NAND price adjustment is likely to continue in the first quarter of next year, but then we do not believe that there is going to be a long drawn out slump in the market, but Now, having said that, if it does come true, in other words, if the market situation worsens for NAND, then now for the M5 seen now since we are operating this as 1 fab in conjunction with M11, it's obviously there is going to be adjustment in the speed and the volume. Because we are using M15 to shift some of the 2 d NAND from the M11. And if the situation, as you have mentioned, if the market worsening continues, then yes, we will make some adjustments. And also regarding demand pricing and also how it could affect our operating income, Now yes, it is true that it would have some impact on our profitability, but then the company will remain focused on maintaining profitability. By continuing to increase the portion of 72 layer products and also by improving our cost by enhancing productivity and we will also improve our product mix with more share of profitable products.
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And we will continue to expand the competitive ESSD lineup by doing so, we intend to broaden our customer base as well as the market share while improving our business portfolio and strengthening profitability.
The next question will be provided by from NH Investment Securities.
Now I also have two questions and first, as you have mentioned earlier, there has been some tight supply of Intel CPU. And in the market, there are some talks of having some yield problems. So, as a result of this, the supply is not meeting the demand. So what is the company's take? Do you also believe that it is the problem of the yields or are there any other issues as you understand them?
And then the second question is related to the U. S.-China trade friction. So is the company seeing any impact from this? So for example, it has there been less sales of IT, has there been less sales of products for IT products in China? Now first regarding Intel CPU, of course, we are not in the position to comment on it.
But then what we understand is that there are a number of various factors at play and one of them could be the unexpected upside. And then now in terms of the impact on the market, now for the server CPUs, there are no problems because they are getting the preferred allocations, so they are getting the allocation first. But then for the PCs, we understand that there is some impact that is being felt for the low end PC products. And of course, we cannot be certain of this, but then it's likely that impact will last into the first half of twenty nineteen and the scale of the impact be into the low single digit of DPC shipment, but then we believe that the impact will be eliminated by the second half of next year. And in conclusion for SK Hynix, Now for next year, our plan is for DPC DRAM, it's only about 10% of the business.
So we believe that the impact to be felt on our business is almost none. And now on to your second question about the U. S. China trade friction and whether there has been an impact. And yes, I guess we cannot deny that there has been some impact on the demand from IT coming from China.
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So for example, the demand on the recent national founding day was not as high as what it used to be in the past and also we see that from the smartphone makers They are also making some adjustments to their plan for the fourth quarter 1st quarter of next year.
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Now having said that, as we have explained during the opening presentation, now looking at the changes in the portfolio as well as the spread of the high performance camera and the 3 d sensors to even the low to mid end models, we believe that the demand for the memory is going to continue.
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So if we are to quantify all these factors into numbers, then Now the mobile DRAM, which takes up 40% of total DRAM demand, is likely to maintain about 20% man bit growth next year.
The next question will be provided by Claire Kungmin Kim from Hana Financial Investment.
Now, I have questions on the new fab operation and also the DRAM price outlook. First, the M15, now the clean room has recently opened and then also you plan to open the extension of the woosif app by the end of this year. So when do you believe that you can start shipping out of each of these fabs. And also related to that is for next year, what do you expect as the capacity for each fab And what we believe is going to be the increment to the DRAM and NAND capacity as a result of the addition of these 2 new fabs. And the second question is now it seems as if the non seasonality has already begun in the fourth quarter as a result the DRAM price going down.
So there are a lot of concerns in the market about the decline in the DRAM pricing. So what is your outlook for the fourth quarter and into the first quarter of next year and how do you plan to overcome this non seasonality?
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first about the new fab operation, Now for the M15, which will be used mostly for a tech migration for the NAND So the M15, this is a non fab that will be used for tech migration to the 72 layer. And as was explained earlier, the equipment is currently being moved into And, it will be so we will go through the testing and the fab qualification until the 1st part of the first quarter of next year. So given the TAT, then we believe that we can probably start shipping by the end of the first quarter or the early second quarter of next year, But now given all the circumstances, it's quite likely that we can start shipping in full out of the M15 fab by the second quarter of next
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And for the C2 fab Now this will open in December this year. And upon that time, equipment will start being moved in. So the setup will continue into January next year. So we believe that it is going to be a bit later than the M15 fab in starting the volume production. So it can probably start volume production in the second quarter of next year.
And for the C2, currently at the Wuxifab, it is mostly the 2Y and 2Z nano that are being produced. We are going to use the C2 fab to convert to the 1x nano. And as for your question on capacity, for next year, because we plan to have flexible operation of the capacity, depending on the market circumstances, it is too early to tell.
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And now about the DRAM pricing. Now, throughout 2018, there has been slowdown in the DRAM price increase quarter to quarter. So as was mentioned in the opening presentation, in the third quarter, the increase in DRAM price was only 1%.
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Now of course, it is very difficult to say what is going to come in the future, but then what we are assuming at this point is that for the fourth quarter as well as the first quarter of next year, this trend is likely to continue. Now, we usually say that the typical pattern is to be low in the first half and high in the second half, And but then the year 2018 was an anomaly in that it was outside of this pattern. But then in 2019, we believe that just going to go back to the
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And for SKIN Hynix, for 2019, so in 2019, we are going to be flexible in our PSI to production sales and inventory, in accordance with the market circumstances.
The next question will be provided by SK Kim from Taiwan Capital Market.
I also have two questions and one is about NAND and the second question is return to shareholders. So now first about NAND. So it seems as if until the third quarter of this year, the decline in NAND pricing has continued. And as a result there has also been growing market interest in stimulating demand as was also mentioned in your opening presentation. And also it seems that there are also signs that inventory level is improving.
So when do you believe that the demand supply balance will be met in the NAND market? And so what is your outlook on the improvement the demand supply dynamics in the land market? And the second question is on the return to the shareholders. Now continuing from this year into next SK Hynix is expected to continue to have very high performance. So there are also equally fundingly increasing market expectations on return to shareholders.
And also, it seems as if there are also some views in the market that the SK Hynix stock has been there has been a low valuation of the stock. So what is your direction for the return to shareholders and if you can give us some guidance? Now first about the NAND price, it is true that the NAND price has continued to slide for the past three quarters, reaching down to the level that we had seen in the first half of twenty sixteen. And as you would know, in the mobile side, so mobile companies are already increasing their content per box, whereas in the PC and the IDC side, they're also considering increasing the density of the SSD And given that the price elasticity is realized usually 1 quarter or 2 quarters later. So what we are expecting is that for the new models to be launched next year, the content per box is likely So the with the price decline through this year and also with signs of the inventory improving throughout this year and also So over the end of this year, we believe that perhaps in the second half of next year, thanks to the seasonality as well as the materialization of the price elasticity, the demand and supply dynamics is going to become more stable.
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And now regarding your question on the return to the shareholders, first of all, there are no major changes to our basic policy. And that was to gradually increase the dividend payout within the range of 30% to 50% of the free cash flow. So, this policy remains unchanged, but now having said that, we also have to remember that the fridge free cash flow, might not be as big as, as could be expected because on one hand, with the, of course, there has been a sharp rise in our operating profit, but also at the same time, there has been some increase in cash outlays. So for example, increase in investment and also the growing need for working capital. So because of the TAT getting longer, the working capital required is also becoming larger And also, there has been a higher payment of the corporate tax and also the growing corporate tax rate So these are all factors that are going to kind of push down the increase in the free cash flow.
Again, the free cash flow might not be as big as expected, but now having said that, our basic policy of increasing the returns to shareholders remains unchanged.
The next question will be provided by Mark Newman from Bernstein. Please go ahead with your question.
I want to two questions or so. On the pricing negotiations for the next quarter or 2, I'd like to get a sense of management on, the range of expectations we, should potentially see for how bad price declines will be in both DRAM and NAND. So NAND, we've already seen double digit price decline, just now in Q3, for us? Could that be in Q4 and early next year? And for DRAM, are we what's the kind of range of expectations for price declines for the next couple of quarters?
And then the second question is specifically on the data center demand. It seems quite much more difficult to predict the demand from data center customers, particularly because you have this very lumpy big customers called the hyperscale players or cloud players. And I wanted to see if Melanie could comment on How you think about that? How you're predicting that the demand should recover in the second half? Because such a large portion of the demand is coming from just a few very, very big players.
And we don't get a huge amount of information from those big players. So if you give some confidence to our on why you think that the demand will recover in data center in the second half of next year? I think that'd be very helpful.
Now regarding the DRAM price, as was explained earlier, there has been a slowdown in the DRAM price increase throughout the year this year. And we believe that this trend will continue into the fourth quarter 1st quarter of next year. So we do not expect any sharp decline, but then it's likely to remain flat or have a small decline in the price. But it is difficult for us to give you a range of the decline. And then for the second half of next year, again, although it is difficult to predict at this point, the price is likely to remain flat or turned around to increase?
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And the basis, for this assumption is that for the data center big players, Now, their demand bit growth in the first half of next year will be in the single digit percentage, but then in the second half next year, it will be up
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And the reasons for such projection is Now typically, so it's also quite typical that they would be getting ready for the events starting in the second half, so there is going to be more investment into the infrastructure to be ready for the various events Then also, the temporary adjustment in the investment and inventory will be completed by the end of the first half. Now for NAND, in the third quarter, what we have seen is that now the number of prior that have increased in the first half, we see that they have also started, selling off their inventory. And as a result, the supply has spiked and also the price declined considerably in a very short period of time. And we believe that this trend will continue into the fourth quarter. So for the inventory, we believe that the inventory will be reduced around the time of the end of this year.
And as a result, the oversupply is going to be considerably eased in the first half of next year. And as a result, we believe that the extent of the price decline
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And with that, we are going to conclude the SK Hynix 2018 third quarter earnings release conference call. Thank you very much for your participation.