Earnings Call: Q2 2018

Jul 31, 2018

Now we shall commence the presentation on the fiscal year 2018 Second Quarter Earnings Results by Samsung Electronics. Good morning. This is Robert Yi from Investor Relations. Thank you for joining our earnings call for the Q2 of 2018. With me representing each of the business units are Mr. Chun Zae Won, Senior VP of Memory Marketing Mr. Ho Gook, VP of System LSI Lee Sang Hyun is the VP of Foundry Marketing Sei Kwon Young, VP of Samsung Display Lee Kyung Tae, also VP of IT and Mobile and Mr. Park Kyung Cheol is the VP of the Visual Display Business. I would like to remind you that some of the statements we'll be making today are forward looking based on the environment as we currently see it. And all such statements are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today's discussion. Before we go over the results, I would like to address the Q2 dividend announcement. The Board of Directors today approved a 2nd quarter dividend of KRW354 per share to be paid in August for both common and preferred shares. On a pre split basis, the dividend is KRW 17,701 per share, same as that of the Q1. As was the case, the total dividend payout for the 2nd quarter will be KRW 2,400,000,000,000. With that, I would like to walk you through our Q2 results. In the Q2, despite a strong performance by Memory business, the total revenue decreased slightly year over year to KRW58.5 trillion, mainly due to a decline in sales of smartphones and display panels. Gross profit decreased approximately KRW 1.4 trillion year over year to KRW 27.2 trillion and gross margin edged down. Compared to the last year, SG and A expenses fell in both absolute terms as well as a percent of sales due to a decline in advertising expenses. Operating profit increased KRW0.8 trillion year over year to KRW14.9 trillion despite struggles in the I'm and DP division, thanks to a strong performance in the memory business as well as a reduction in SG and A expenses. Operating margin rose 2.4 percentage points year over year to 25.4%. Operating profit and operating margin decreased slightly on a quarter over quarter basis. In the Q2, positives from a weak Korean won against the U. S. Dollar were eclipsed by effects of a strong won against other currencies such as the euro and Brazilian real, negatively impacting operating profit Q on Q by approximately KRW400 1,000,000,000 with effects felt mostly by the said businesses. I'll now briefly review the operating profits by business units. In the memory business, we continue to generate solid earnings as demand remains strong from data centers for DRAM and strong demand for high capacitive storage amid a strong softening of the prices for NAND flash. We solidified product competitiveness by focusing on sales of high density, high value added products such as 64 gigabyte and higher server DRAM based on 1x nano technology and 128 gigabyte and higher for NAND mobile storage. For the display business, earnings decreased year over year in Q on Q due to weak demand for flexible OLED panels and a deep dip in both sales volume and ASP for LCD TV panels. For the I'm division, earnings in the mobile business slid considerably year over year as well as Q on Q due to weak sales of Galaxy S9 amid a stagnant high end market. In the network business, earnings improved, thanks to increased LTE investments by overseas customers. For the CE division, earnings in the TV business improved year over year and quarter over quarter with a major global sporting event boosting sales of premium products such as QLED TV. In the home appliance business, earnings decreased year over year due to weak demand for air conditioners despite strong seasonality. Now I'd like to share our business outlook. For the second half, we expect earnings to grow half over half, led mainly by the component business on the back of favorable memory market conditions and an increase in shipment of flexible OLED panels. In the set business, we will focus on high end segments via early launches of 8 ks TVs and the Galaxy Note 9 amid rising competition and a new model launches by other players. For the component business, we expect memory market conditions to remain favorable, thanks to strong demand for server PC memory and launches of new mobile products. We will proactively address growing demand for differentiated products such as high density server memory and high bandwidth memory. We will also strengthen our technology leadership by increasing our portion of 10 nano class products through 1Y production ramp up and by expanding mass production of 5th generation vertical NAND. The System LSI and Foundry businesses are expected to achieve a solid earnings as strong seasonality in the smartphone market boost demand for application processors and image sensors. For OLED panels, we expect the flexible panel business to improve its earnings as shipment rises, but the rigid panel business may face intensifying competition with LTTS products. In the LCD panel business, despite rising demand, we expect increased supply from competitors to keep weighing on earnings. Moving on to ZEIT business. New model launches and intense price competition in the mobile business are likely to keep conditions challenging. To address rising competition, we plan to launch Galaxy Note 9 early and add new features to our mid and low end lineups while continue to work fine ways to enhance cost competitiveness. We expect earnings in the TV business to keep improving as we expense sales of new models including QLED and 8 ks TV. For the home appliance business, we plan to secure profitability by focusing on sales of our expanded lineups of premium products. In the mid to long term, as new areas like IoT, artificial intelligence and 5 gs transformed the IT landscape, we expect to see new demand in component business and widening opportunity for the set business on introduction of new form factors and technologies and increasing connectivity of digital devices. In the component business, we will use our cutting edge semiconductor technology to capitalize on new demand for chipsets used in automotive and artificial intelligence applications. And leverage our strength in OLED panels to take advantage of expanding applications in the IT and automotive industry. In the I'm business, we will seek to sustain growth and solidify our leadership by introducing innovative form factors such as foldable displays and leading the move to 5 gs technology. The total capital expenditure in the second quarter was KRW8 1,000,000,000,000,000, including KRW6.1 trillion for the semiconductor and KRW1.1 trillion for the display. The total capital expenditure for the first half was KRW16.6 trillion with KRW13.3 trillion allocated to semiconductor and KRW1.9 trillion to display. Before we move on to presentation from each business unit, I would like to share several data points in key business areas. For the Q2, our DRAM bit growth was mid single digit and we saw our ASP increase by low single digit. And for the Q3, we expect DRAM market growth to be mid teens, and we will slightly outgrow that of the market growth. And for the year, we expect the market DRAM bit growth to be roughly 20%, and we expect to grow in line with the market. And for the NAND flash, in the second quarter, our bit growth came in mid teens, while the ASP declined low teens. For the Q3, we expect market NAND growth to be mid teens. And again, here, we will slightly outgrow that of the market. And for 2018, we expect NAND market growth to below 40% and we will grow in line with the market. And for panel business, the OLED sales of panel was roughly high 60% of the total display sales. And for the mobile business, in 2nd quarter, we shipped 78,000,000 handsets and 5,000,000 tablets. The blended ASP of the handsets was about $2.20 range and smartphone mix of the total handset sales was low 90%. And in the Q3, we expect both smartphone I'm sorry, the both handsets and tablet shipment to be similar to that of the second quarter, while we expect blended ASP in the Q3 to increase from that of the Q2. And the mix of the smartphone within our total handset will remain at low 90%. And for TV business, for LCD TV in our 2nd quarter, shipment declined mid single digit. And for the 2018 in total, we expect total shipment to decrease by low single digit year on year. Now I'll turn the call over to the gentlemen from each business unit to present their performance and outlook. Good morning. This is Seowon Jun from the memory marketing team. In the second quarter, on the weak seasonality, in spite of weakness in the smartphone market, thanks to increasing server demand for data center, overall demand growth was solid. For NAND, with price being softened, demand is pan mainly for high density products from continuation of high density trend for smartphone as well as continued increase in server SSD demand. Due to expanding server cloud infrastructure and growing portion of our Fresh Array. We have garnered solid earnings growth by actively responding to Chinese mobile demand for high density e storage as well as concentrating on expansion of 8 and 16 terabyte high density for all flash array via stable supply of 64 layer of VNAND at Teltec campus. For DRAM, thanks to the high density trends and expansion of data center infrastructure, server demand remains strong. PC demand also remains solid mainly from large OEMs. Meanwhile, graphic demand was solid as well, thanks to strong gaming demand. With growing demand for TV set field and 5 gs network infrastructure as well as increasing high density memory demand led by rising UHD set top box portion. Solid demand from the consumer segment has also continued since last quarter. For the mobile market, despite concerns about the slowdown in smartphone set growth, content growth has continued due to the need for high density memory component for their product differentiation. We continue to drive solid earnings growth following the previous quarter through strengthening cost competitiveness by proceeding smooth 1x nanometer product transition and managing product elastically according to each application market conditions. Next, I will comment on the memory market outlook. In the second half of twenty eighteen, overall demand is also expected to be solid because while server demand remains strong, demand for mobile will also be increasing from new model launching season and content growth. On end, as bombarding was relieved as to softened prices, Zen maker may focus more on improving set performance. We anticipate that SSD adoption will take place in more areas and all segments will use more high density e storage. For server, strong cloud service SSD demand mainly for data center continues. Along with this, in the enterprise market, adoption of high density server SSD over 8 terabyte will continue as well, especially for larger OEM companies. For mobile, demand for high density storage such as 128 gigabyte is expected to continue mainly from newly launched smartphone and high end As for the supply side, even though supply and demand condition may vary depending on qualification status, overall supply of 64 layer products for solution demand, including server is expected to expand. While closely monitoring the changes in demand for each application, we will secure production competitiveness through expanding 64 layer VLAN portion. At the same time, we will concentrate on strengthening our competitiveness in the premium market by actively satisfying all fresh array refreshment demand where 10 ks HDD now prevails. Meeting Chinese and flagship mobile demand, adapting high density UFS and preempting high density demand through UMCP. The 5th generation PNAND announced last July is expected to be supplied this year starting from SSD, and we will keep leading the high density trend in server and mobile application. For DRAM, due to peak seasonality, strong demand for all application is expected to continue. For server, as data center demand expand from the U. S. Market to the Chinese market and as high performance cloud service launch increases, demand growth is anticipated to continue. For mobile, with new flex smartphone model launches, memory content will increase even in mid range models because smartphone makers bought high specification mobile games, on device AI and dual camera as depreciation point. Therefore, we expect a positive effect on memory demand. In addition, thanks to back to school effect for PC and game console buildup, PC and graphic demand is expected to rise continuously. Demand for high performance HEBM products will also rise due to the increasing necessity of data analysis, fully utilizing AI and machine learning. On the other hand, in terms of the supply side, in spite of supply IC42 to expand the supply, supply growth is more likely to be limited compared to demand growth due to increases in difficulties of 10 nanometer mass production. Therefore, overall supply and demand is expected to remain tight. We will stick to our policy of flexible investment and production in accordance with market conditions. We will stably increase mass production of 1 Y nanometer product and push ahead expansion of design in for all applications, and we will also focus on strengthening our product competitiveness via expansion of 1x nanometer portion continuously. We will also intensify our competitiveness in high value added markets by expanding sales of our differentiated products such as high density server DRAM, HVM2 and LPDDR4X and effectively respond to market that require ultra high speed and low power and super slim feature by using LPDDR5, which was developed for the first time in the industry. In the midyear long term view, the server trend of high performance and high density mainly for data center is expected to continue due to expanding AI services based on machine learning adoption of in memory database. Expansion of mobile demand is anticipated to continue, thanks to the spread of high density content as well as increasing need for high performing devices. For the supply side, next generation technology is becoming more difficult. And on top of this, capital intensity has greatly increased. Therefore, we expect that there may be some difficulties of supply expansion. We will actively respond to customers' demand as well as concentrate on managing capacity effectively by monitoring and forecasting each applications market along with supply and demand conditions more closely. In addition, we will try hard to strengthen the sustainable business foundation in the mid- to long term by actively responding not only to the existing business area, but also to the needs of newly emerging market such as automotive, which will drive the next semiconductor generation via industry cutting edge technology. Thank you. Good morning. This is Ben He from the System LSI Business. In the Q2 of this year, overall earnings in the System LSI Business slightly decreased quarter over quarter, which is negligible as weak seasonality slowed demand for mobile APs and DDIs. Nevertheless, image sensor demand continued to rise, thanks to increasing adoption of dual cameras by Chinese smartphone makers. In the second half of this year, our earnings are likely to return to growth quarter over quarter as smartphone makers enter strong seasonality. To be specific, the growth will be backed by strong demand for OLED TDIs and high pixel image sensors, the former for use in flagship smartphones and the latter amid increasing adoption of dual camera and triple cameras. In addition, we plan to diversify our customer base by securing orders for mobile APs from China and to expand our solution offerings by developing chips for use in automotive and IoT applications. With your view to the mid to long term, we will focus on developing cutting edge chipset for use in 5 gs, multiple cameras and display panels. By doing so, we will try to lead the market and establish a stable business structure by achieving high growth compared to the market. Thank you. Good morning. This is Sangyeon Ryan Lee from the foundry business. In the Q2, total earnings continued to grow quarter over quarter, thanks to a strong demand for high performance computing chipsets, mobile APs and image sensors. In addition, our efforts to diversify our customer base are paying off. By securing orders for 8 inches specialty products, we have established a foundation for achieving stable earnings. In the second half of this year, despite uncertainty over demand for high performance computing chipsets, we expect our earnings to be favorable, thanks to rising demand for mobile APs and image sensors. Also, we will continue to strengthen our process technology leadership by starting 8 nanomass production and the EUV 7 nanorisk production. On a full year basis, following sales of $9,800,000,000 in 2017, we expect 2018 sales to exceed $10,000,000,000 and secure a strong second place in the foundry market. For the mid long term, by strengthening our process portfolio, including advanced nodes, FDSY and 8 inches we will strive to expand the custom base by more than twice by 2021. And the foundry business will become the new growth engine of Samsung Electronics. Thank you. Good morning. This is Gonyoung Choi from the Planning Department of Samsung Display. In the Q2, total earnings in the display business decreased quarter over quarter due to weakened profitability in both the OLED and HD business. For the OLED business, earnings decreased quarter over quarter, despite increased utilization for rigid products as demand from major customers for flexible display continued to slow. In the HD business, earnings declined quarter over quarter due to a decline in shipments alongside a continued slide in Penner ASP. In the second half of twenty eighteen, we expect sales in the OLED business to increase half over half on increased shipments led by rebounding demand for flexible displays. Under these circumstances, we plan to increase our market share by actively addressing customer demands, enhancing our cost structure and strengthening our technology competitiveness. At the same time, we will strive to secure new growth engines by embedding more value added features into our panels such as fingerprinting technology and reinforcing our competitive competencies in new applications such as foldable displays. For the LCD business, under peak seasonality in the back half of the year, we expect demand to keep growing for premium TV panels for high resolution and ultra large TVs. However, we expect improvement in profitability to be limited due to both intensified competition and capacity expansion by Chinese manufacturers. In preparation for such conditions, we strive to secure profitability by further differentiating our value added products such as panels for quantum dots and 8 ks resolution TVs and reinforcing strategic partners with our major customers. Thank you. Good morning, everyone. This is Ken Terry from the Mobile Communication Business. I would like to share our second quarter results and the outlook for the I'm division. For the Q2 of the Mobile Communication business, market demand for both smartphone and tablets increased slightly compared to the previous quarter amid weak seasonality. For the smartphones, the overall market ASP declined as demand focused on low end and mid range products. Our shipment and revenue decreased Q o Q due to weaker than expected sales of legacy models, including the Galaxy S9 and the effect of having discontinued production of older low end models. Sales of Galaxy S9 and S9 plus fell short of our targets amid a strong premium smartphone market and rising competition among flagship models. These factors considerably affect the Q o Q decline in revenue in the Q2. Moreover, operating profit also decreased significantly as marketing cost as a percentage of total revenue increased with intensified marketing activities to expand the sellout. The network business achieved solid sales, thanks to increased investment in LTE expansion by our major overseas partners. Next, let's move on to the outlook for the second half of twenty eighteen. Market demand for smartphone and tablets is expected to grow half over half as we enter a period of strong seasonality. However, we expect the environment to remain challenging as our launch of a new product featuring higher specs and intensified pricing price competition in order to increase the demand. We aim to expand the sales of flagship models via an earlier than usual release of a new Galaxy Note, which offers exceptional performance for a reasonable price. Detailed informations about the new Galaxy Note will be reviewed at our unpacked event on August 9 in New York. We will also strengthen price competitiveness and actively adopt advanced technology in our mass models to aggressively response to market condition. Offering more sophisticated steps throughout our lineup will make it difficult to maintain profitability. In response, in order to secure our profitability, we will focus on expanding sales of our competitive new models in all segments from flagship to mass models and execute very organized and effective marketing campaigns tailored to each region's seasonality. As for the network business, we will supply our major partners with the next generation network solution for 5 gs commercialization and continue our investment and preparations to becoming the global leader in next generation network solution. I'm division will thoroughly prepare for the upcoming years based on new technologies such as 5 gs, IoT and AI. From a product perspective, we will regain our leadership in hardware technology by reinforcing core features to the ultimate level, which we have the strength and aggressively adopting cutting edge technology, creating innovative form factors and taking leadership in 5 gs technology. Furthermore, our pixie based ecosystem will expand application of AI service to a diverse range of product that includes not only smartphone, but also consumer electronics such as TVs, refrigerators, air conditioners and IoT devices. At the same time, we will strengthen cooperation with the 3rd party partners. Based on this development of our ecosystem, we will improve user satisfaction via personalized services and amplify synergies with the services such as Bixby and Samsung Pay laying the foundation for the monetization of our service business. Thank you. Good morning. I am Kyung Cho Park, Vice President of our Visual Display Sales and Marketing Team at Samsung Electronics. Let me start with the current market conditions and our result for 2018 Q2. The TV market in Q2 has decreased from last quarter due to continuous continued global economic slowdown, but the market has grown Y o Y due to sports events over this year. Samsung's results significantly improved due to a full scale start of Samsung's new model sales, especially driven by expanded sales and strategic products like QLED and ultra large screen TV. Marking 2nd year of its release, Samsung QLED was evaluated as the best TV of all time by German and the U. S. Prestigious tech media. In addition, the QLED also received positive reviews from customers and consumers. As for the ultra large screen lineup of 75 inches and above, Samsung is expanding and leading the market while recording high market share of far above 50%. Also, Samsung is leading the largest screen TV market's ground by extending 80 to 20 gs lineup. With this trend, sales of both quality and ultra large screen TV tripled Y o Y and the average prices significantly increased in the course of innovative product mix restructuring, contributing to profitability increase. The digital appliances market in Q2 has shown a moderate growth in advanced economies, but the overall market demand has decreased Y o Y due to economic instability in emerging markets. Samsung continued to expand sales of premium products like Family Hub Refrigerator and Cube Air Purifier. However, the result has slightly decreased Y o Y due to weak demand for seasonal products like air conditioner. Now I will share the market prospect for the second half of the year twenty eighteen. The TV market in the second half is projected to grow Y o Y, mainly in the advanced market. Samsung's strength, leadership in the premium TV product marked by actively responding to year end peak season, mainly with QLED and ultra large screen TV. Based on largely raised awareness of QLED, Samsung will complete a trend of QLED's dominance by maximizing its peak season sales through an advanced partnership with main customers. For ultra large screen lineup of 75 inches and above, we will promote ultra large screens benefit and consumer communications that ultra large screen is not that big. This way, Samsung will build its strong brand awareness that is associated with ultra large screen TV, also by releasing industry first AI based Clarity 8 ks that delivers a new sense of realism experience enabled by integration of picture quality, sound quality, ambient mode and smart feature technologies. We will be a market leader that paves a new way for ultra high picture quality TV. We will achieve high profits by continuing our market leadership in the premium TV market. As for digital appliance business, demand is projected to show a stable growth in the advanced markets like North America and Europe. But in emerging markets, demand could decrease due to economic instability. Samsung will strength promotion for regional peak season like Black Friday also expand sales of new premium products like Chef Collection and large capacity dryer and reinforce sales of builder and built in home appliances to focus on securing profitability. Thank you. Thank you. This concludes the management's presentation. Now we'll turn the call over to questions and answers. Now Q and A session will begin. The first question will be presented by Ricky Seo from HSBC. Please go ahead with your question. I have first a question regarding the memory business. There is talk in the market that Samsung Electronics will focus its strategy more on expanding its market share given the fact especially around servers, given the fact that it's making movements to increase supply and also making quite a lot of investments. Can you confirm whether your company's strategy for the memory business has indeed shifted from the profitability focus to a market share focus? And can you share us some direction strategic direction in your Memory business going forward? As we have mentioned during previous conference calls, our focus is on mid- to long term profitability rather than short term growth in volume and size, and that strategy has not changed. In the second half, there's seasonality as well as a strong demand expected, especially around data centers and smartphones for high density and solution based products. And that's why we expect the supply and demand remains tight in the second half. That is why we're focused on meeting and responding to the customer demand, especially around the 64 gigabyte server DRAMs, the 8 terabyte SSDs and HBM2. Go ahead, Ricky, for the next question. And question for the system LSI was regarding the image sensors. A lot of the smartphones are now adopting triple cameras. So I would like to hear your view regarding the image sensor market and an update on how you're preparing to meet the image sensor market demand. Recently, you've converted some of your DRAM capacity to image sensors. Would it be possible for the company to convert even more capacity to image sensors? I'll answer that question first by giving you an update on the market as well as our outlook and then share our plans about capacity management. First of all, regarding the triple camera, the triple camera offers various advantages such as optical zoom or ultra wide angle, also extreme low light imaging. And that's why we're expecting more and more handsets to adopt triple cameras, not only in 2018, but next year as well, that by next year about 10% of handsets are expected to have triple cameras and triple camera adoption will continue to grow even after that point. Given this market outlook, actually, we've already completed quite a wide range of sensor lineup that can support the key features such as optical zoom, ultra wide viewing angle, bouquet and video support so that we're able to supply image sensors upon demand by customers. At the same time, we will continue to develop higher performance image sensors that will be able to implement even more differentiating and sophisticated features based on triple camera. To answer your second part of your question about capacity plan from the foundry business side, given the expected increase of sensor demand going forward, we are planning additional investments to convert Line 11 from Hwasong DRAM to image sensors with target of going into mass production during first half of twenty nineteen. The actual size of that capacity will be flexibly managed depending on the customers' demand. Following question will be presented by Jong Woo Yoo from Korea Investment and Securities. Please go with your question. I have two questions. The first question is about memory. Your 2nd quarter memory performance, some are saying, was a bit below what markets were expecting. A bit growth wise, 2nd quarter bit growth was a bit below what you had originally provided as guidance. Can you give us a bit more detail of your 2nd quarter memory business and its performance? Second question is about the TV business regarding micro LED TVs or displays. Currently, the ones that exist are commercial applications. Do you think it's possible to develop micro LEDs for consumer applications? And if so, when would such a product be available? And do you have ways of addressing the cost, which is one of the prohibiting factors of microLED in consumer applications? To explain the memory business performance in 2nd quarter, while the NAND actually increased its shipments because there was demand driven by stable prices on the DRAM side, there was a weaker demand on the mobile application side and also the issues on the 1x nano production for servers also had an impact so that we were under the guidance that we provided last quarter. Due to this change in product mix and also because of the initial cost related with the ramp up of PyeongChang upper level, there were limitations in how much cost savings we could realize. To give a bit more detail about the 1x nano production, there was a temporary increase in defects for 1x nano during the second quarter. But given the territory of technical difficulty we are working in, I think this was something that could be normally that could normally occur in the process of ramp up. We have been able to normalize the situation, and we do not expect this to have impact further down the road. To answer your second question about the microLED, microLEDs are displays that do not have a color filter and therefore they're able to emit the colors itself. And in terms of color recreation as well as contrast of viewing angle and the fact that it's a modular design, it's a totally new concept of display. We're actually preparing micro LED based products for both commercial and home entertainment applications. The commercial product, which is the wall, is actually orderable based on a reservation basis. We are planning for mass production of the wall starting from around October. The home entertainment version of MicroLED, we're currently targeting the product launch for first half of next year. It will be a slimmer version than what you can see currently. And the in terms of price ranges, the Samsung MicroLED products will be launched at a price range where customers are able to accept and also what would be viewed as a reasonable price range. The following question will be presented by SK Kim from Daiwa Capital I asked 2 questions. 1st question is about the mobile business, about the DRAM demand and supply situation. There's a lot of talk in the market of whether the DRAM demand has already reached the peak or has not yet. So can you share your view about the DRAM supply and demand situation, not only for the second half, but also for next year 2019? And in the mid- to long term, do you think that in the DRAM industry, there will be a supply reduction in supply volatility so that overall, this stable supply would continue in the mid- to long term? Do you think that's a possibility? Second question is about the mobile business, S9 in particular. I'm sure the company has studied the reasons why S9 sales were below what was expected. So what were the main causes do you think? And regarding with that, if the company continues to compete on specifications, that would probably further increase the BOM cost burden, and there's concerns in the market that this would reduce margins further. Given this scenario, how does the company plan to respond in terms of its high end flagship? To answer your first question, at least for the second half, there's seasonality and also there's strong demand expected from data center as well as mobile applications. And therefore, despite the industry's efforts to increase supply, we expect the industry situation to remain solid because the increase in supply would not be it would not be easy for the increase in supply to catch up with the growth in demand. Regarding the outlook for 2019, even though it's early for us to say specifically, first half usually is a weaker season, so there could be some seasonality effects in the first half. But for the full year 2019, we're expecting the industry to remain stable, especially with strong server demand continuing until next year. But there could be some changes or volatility in the supply demand situation depending on how the industry is able to complete the migration to 10 nano class technology. And so even though there could be some short term fluctuation in supply and demand due to factors such as seasonality, we think that in the mid- to long term, given the fact that there are major drivers for increase in server demand, especially applications such as AI, machine learning and 5 gs. On the other hand, the supply side, given the fact that we are in very difficult process territory and also going forward, there will be greater capital intensity required to add on new supply. Given these two factors, we expect mid- to long term the industry to remain quite stable. To answer your second question regarding the S9 and the reasons for its weak sales, First of all, overall, in the premium smartphone segment, the demand remains weak. We also see that as smartphones become a more high spec and product differentiation is becoming less clear, the globally handset replacement cycles are getting longer. Also the higher price points of premium products appears to be driving market resistance. To overcome these challenges, we implemented financing programs to ease initial consumer burden, including trade in programs. But due to fierce market competition and also differences country by country in terms of situation, it was difficult to reap immediate effects. And to answer the second part of your question, which was about what we plan to do, You may have noticed that for some time, we have been focusing on ensuring high level of completeness in the actual user experience and ensuring seamless and convenient user experience, which may have resulted in a conservative approach to adopting new technologies on our models. However, in the future, especially around the premium products, we will be enhancing the core functionality while also actively adopting leading technologies to provide differentiated value to our customers. Also given the fact that we expect 5 gs and new form factors to bring energy to the market, we will be preparing busily to tap this breakthrough technology. This is the approach that we will take to not only increase sales but also to improve profitability. The following question will be provided by Nicolas Godoy from UBS. Please go ahead with your question. Good morning and thanks for taking my questions. I have 2 related to memory. The first one is coming back to server DRAM demand. There's been a lot more debate recently on demand from hyperscale and the inventory level at some customers. Have you seen on your side any changes of behavior recently from either Chinese or U. S. Customers? And how would you expect overall server bit DRAM demand growth to change in 2019 versus 2018? Again, this is for total server bit DRAM demand. 2nd question, you have approximately half of your floor space on the 2nd floor of Piantech fab still available. When do you expect to reach full capacity? And how should the remaining capacity be split between DRAM and NAND Flash? Thank you. Given the very dynamic changes in the cloud service market, it's difficult to give you a specific outlook towards next year 2019. But we do expect a very strong demand, especially around the 64 gigabyte and plus products for the higher density and for server applications to remain strong. Especially from the Chinese data center companies, we expect that demand to continue in the second half to be solid. Also in addition to the Chinese server customers, the U. S. Server customers, which are larger in scale, we expect that demand to remain strong as well. So as we mentioned during the presentation, regarding 2019 server DRAM demand, we expect the DRAM demand for servers to continue solid growth next year. Regarding customer inventory levels, even though there will be differences customer by customer, even the fact that the inventory levels were very low at start of the year, it's higher than where it was earlier in the year, but still lower than what customers would find to be normal inventory levels. Regarding your second question about the upper level of Pyeongtaek, we haven't decided yet what to do with the remaining space. We will be using it flexibly depending on the market situation. I have two questions. First question is about the DRAM side. In the first half, there was a bit of an over price softness will continue in the second half? And do you think this will lead to greater demand? And if so, how? Also, can you share with us the supply and demand outlook for NAND in 2019? 2nd question is about the I'm business. I'm wondering if there was any reversal of provisioning related with the Apple litigation, which came to a close. Was there a reversal of provisioning that was included in your 2nd quarter I'm performance? And if so, can you share with us the size of that provisioning reversal? To answer your first question, as you can see in the NAND performance, actually, because prices stabilized, there was an increase or greater increase in demand, especially around the high density products. We expect this to continue in the second half so that there will be greater adoption of SSD as well as 128 gigabyte mobile storage. Looking forward to 2019, we think that the same factors will be in play, greater adoption of SSD as well as mobile devices trying to differentiate by adopting more storage. Those would we believe will keep demand solid. However, the variables for next year would be how the ramp up to 90 layer levels actually unfolds as well as qualification situations for specific customers and applications. Depending on how these two factors play out next year, we think that the demand and supply situation may be different depending on product and also application. Regarding your second question, yes, there was the impact from the end of the Apple patent litigation that did reflect in our 2nd quarter earnings. But due to confidentiality clauses in the agreement, we are not able to disclose details. I can also share that there will not be further impact on our performance in the following periods. The following question will be presented by Jong Woo from NH Investment and Securities. Please go ahead with your question. I have one question about the display business. There was a recent media article about Samsung going into QD OLED about installing lines and starting pilot production. Can you comment regarding these news reports and share with us, if possible, your business direction regarding QD OLED? In the Display business, our key focus is on gaining competitiveness and maintaining competitiveness in both the mid- to small size as well as large size segments. Given the investments in China in 10.5 gs, we expect, especially in the large size segments, the competition and industry situation would worsen. And therefore, we want to actually move away from the existing capacity competition and focus more on quality rather than scale. Therefore, our focus on quality rather than quantity translates into a short term strategy of trying to achieve quality or qualitative growth by focusing on high end differentiated products such as ultra, large size, quantum dot, 8 ks as well as frameless products. On the mid- to long this means that we are looking into various technologies for the large TV segments. And QD OLED is one of many technologies we are currently considering and researching and developing to meet the more sophisticated customer needs in the large TV segment. So we are looking at various technologies as candidates, and we will continue to closely collaborate with our customers so that we are able to deliver products that satisfy customer needs on a timely basis. We will take questions for 2 more attendants. The following question will be provided by Claire Kuming Kim from Pearson Securities. Please go ahead with your question. I have two questions. First question is for DRAM. As all of the DRAM manufacturers move on to higher process technology, the migration is becoming more and more difficult. And I think cost saving is becoming quite a challenge. In that context, can you share with us your road map in terms of process migration at the 10 nano class? And my second question for the mobile side is the Note 9 launch, which will be coming. Compared to the previous Note product or the S9, what are your what are the differentiating features of the Note 9? Also, how do you plan to expand the sales of it? And also, how much of a sales volume are you expecting from the Note9? Well, first of all, to answer your question about our migration, regarding 1Y, we've already started sampling and are in the process of receiving the reviews and assessments from our customers. We have started the 1Y mass production in first half and will continue to increase the supply going forward. Regarding 1X, actually, it's counting for more than 50% in terms of wafer count. So combining our 1Y and 1X, we expect that the 10 nano class processes would be accounting for around 70% of our capacity by year end or production by year end. Regarding the next 1Z, it's difficult to give you details about mass production schedules, but we are developing 1Z according to plan. And we are planning on maintaining the technology leadership in the industry. To answer your second question about the Note 9 and how we plan to differentiate that, as you know, Note customers are known to appreciate and use a lot of the SPEN based productivity features such as note taking or drawing. Also, they watch a lot of videos and also use the multimedia functions, for example, by playing games. So given this insight into the Note 9 customer base, in Note 9, we have focused on, 1st of all, providing the best ever level of performance for these core features and functions. Also, we've built in more functions around the distinguishing S10. Also, we are offering new experiences by combining hardware, software and services. Also, we have increased the product value around these key essential user features. Therefore, improve the product competitiveness, but we'll be offering the Note 9 at reasonable prices in order to maximize sales. Of course, the details of Note 9, please look forward to the unpack event, which is scheduled for August 9. You've also asked about how much sales we're expecting from the Note 9. Given the fact that Note 9 is being launched earlier in the year versus previous models, also that we have put in a lot more value, offering it as reasonable price points. We expect in the second half, Note 9 to sell more than its previous models. Also to ensure the successful launch, for each phase, we will be supporting the product by mobilizing all of our sales and marketing resources. The last question will be presented by JJ Park from JPMorgan. Please go ahead with your question. My first question is for the memory. Some are saying in the market that the issues that you've had with the 10 nano processes have actually resulted in delay of investments for 2nd floor of Pyeongtaek. Regarding these rumors, can you share with us your investment plans for the upper floor of Kyung Taek in the second half? Also, can you share with us your targets regarding when you would go into mass production for number 2 line in Xi'an as well as number 2 line in Kyung Taek that's currently being constructed. Regarding your first question about the investment plans for upper level of Hyungeek. Actually, it's the investment plans and expansion plans are originally following original plans. The process migration or other issues have not impacted our investment plans for upper level of Kyung Taek for 2018. For 2019 investments, we are currently in the process of reviewing that, but we will decide the investment plans depending on customer demand as well as market situation. Regarding number 2 line of Xi'an, as we have originally mentioned, our targets still are to start operation around late 2019 with target mass production in 2020. For Pyeongtaek, we are doing the groundwork, but it takes about 2 years from where we are now for actual lines to be in operation. And we have not yet decided specifically regarding mass production schedules or product mixes. My last question is for the I'm the foldable form factor. In a foldable and making a foldable form factor, what do you think is the greatest challenge or the stumbling block? Is it more of a price? Is it a UI? Is it a specific technology that needs to be overcome to produce and supply a foldable phone? Can you share with us some of the challenges that you see? In terms of developing the foldable smartphones, the foldable smartphones need not only innovation in terms of the display, but other parts as well, including battery as well as cases. At the same time, there needs to be UX as well as user scenarios developed to optimize to match the new form factor. And that's why we have been engaged in research and development of the foldable smartphone for several years. The introduction of this new form factor is expected to bring new energy to the rather stagnated mobile market. To give you an update on where we stand, we're in the process of stabilizing the part performance as well as durability by working together with parts companies. Also, we are at the same time focused on developing software and services optimized for this new form factor in order to raise the level of complete