Earnings Call: Q1 2017

Apr 27, 2017

Now we shall commence the presentation on the fiscal year 2017 Q1 earnings results by Samsung Electronics. Good morning. This is Robert Yi. Thank you for joining our Q1 2017 earnings call. With me representing each business units are Mr. Cheung Sei won, Senior VP of Memory Marketing Mr. Ho Gook, VP of System LSI Mr. Lee Chang Hoon, Vice President of Samsung Display Lee Kyung Tae, Vice President of IT and Mobile Business and Mr. Lee Yoon, Senior VP of Visual Display as well as Mr. Kim Sang Yeon, VP of IR. 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 could cause our actual results to be materially different from those expressed in today's discussion. I would like to take you through our Q1 results. The Q1, the total revenue was KRW50.5 trillion. Revenues from the Memory and Display businesses increased, driven by strong ASP and increased sales of premium products. However, the company's overall revenue only increased slightly year on year as revenue from I'm business decreased due to delayed launch of Galaxy S8. The gross profit was KRW 22,400,000,000,000, trillion year on year increase, and the gross profit margin improved by 5.3 percentage point. SG and A expenses decreased year on year on both absolute terms and as a percent of revenue, mainly from the I'm business. The operating profit was KRW 9,900,000,000,000, an increase of KRW 3,200,000,000,000 year on year, driven by improved profitability of the component business. The operating profit margin also increased by 6.2 percentage point to 19.6%. In the Q1, the impact of exchange rate movements on the operating profit was minimal. The Korean won strengthened against both the U. S. Dollar and the euro compared to the last quarter but weakened against other emerging market currencies such as the Brazilian real and Russian ruble. The company's 1st quarter ROE improved significantly year on year from 11.8% to 16.1%, which we attribute to the improved earnings and the effects of continuation of share buyback and cancellation programs. We completed the acquisition of Harman in March and consolidated its results into our financials as of March 31. However, the impact on the income statement was minimal as only transactions after March 11 were reflected. We will provide Harman's revenue and operating profit as a separate line items starting from the Q2. A few comments on the Q2 business outlook. For the component business, we expect semiconductor earnings to continue to grow driven by solid high density DRAM SSD demand in the server market, increased 10 nano application processor shipments and a continuation of strong CMOS image sensor and driver IC demand. The OLED business will focus on fulfilling strong demand for flexible panels from our major customers and look to maintain profitability in the LCD business by reducing the cost. For the SET business, we expect AST and operating profit to improve in our mobile business following the global launch of the Galaxy S8. We also expect earnings to improve in this consumer electronics business, thanks to the launch of QLED TVs and strong seasonal demand for air conditioners. In 2017, we expect overall earnings to grow year on year mainly from the component businesses, driven by favorable supplydemand balances for the memory business and increasing the supply of OLED panels. The SET business will focus on maintaining profitability by strengthening product leadership through expanding sales of flagship products. However, during the second half of this year, we need to monitor the possibility of 3 d NAND supply growth within the memory industry and intensify competition in smartphone market on launch of new smartphone products. Looking to the mid- to long term, demand is expected to rise for high performance, low power consumption chipsets such as memory, SoCs and sensors as well as for flexible OLED products driven by form factor innovations amid rapid changes in IT industry with the emergency of IoT, artificial intelligence and automotive business. Regarding the SET business, we expect to see new solution based business opportunities with the developments in utilizing device softwares and connectivity to address emerging areas such as cloud services, artificial intelligence and smart homes. In response to these paradigm shifts in the IT industry, we need to strengthen our capabilities via strategic investments and M and A to secure cutting edge technologies and new growth drivers. However, the lingering uncertainties in political and business environments, both at home and abroad, may bring many challenges. I would like to comment on our capital expenditure plan. During the Q1, we invested KRW9.8 trillion in capital expenditure, which included KRW5 1,000,000,000,000 for the semiconductor and KRW4.2 trillion for display division. The capital expenditure plan for 2017 has not yet been finalized, but we expect annual capital expenditure to increase significantly year on year as we look to focus on vertical NAND, system LSI and OLED capacity expansions. Before the presentation of each business unit, I would like to share with you several data points from our key business areas. For DRAM in Q1, our bit growth declined low teens, while ASP increased low 20%. For 2nd quarter, we expect DRAM market bit growth to be mid single digit increase and we expect our DRAM bit growth in Q2 to be high single digit. And for the year, we expect DRAM market bit growth to be high teens, and we expect to grow along with align with the market. For NAND, Q1, our bit growth was low teens of decline, while ASP increased low teens. In 2nd quarter, we expect market bit growth for NAND flash to be mid single digit and we will grow in line with the market. And for 2017, we expect NAND market bit growth to be about 30% and we expect our bit growth to be low 30% range. For Display Panel Business, the mix of OLED in terms of the revenue was low 60% of total DP revenue. For mobile business, our Q1 sales of total handsets was 93,000,000 units and tablet sales was 6,000,000. Our blended ASP for our mobile products was about mid-one hundred and seventy dollars and the mix of smartphone within our handset sales was about mid-eighty percent. In Q2, we expect both handset sales as well as the tablet to be similar to Q1, And we expect our blended ASP to increase in Q2 and the mix of smartphone within the handset sales in Q2 will be high 80%. The sales of our LCD TV in Q1 was roughly 10,000,000 units. And in Q2, we expect to see a small decline. For the year, we expect our TV shipment to be increasing by about low single digit. Now I'll turn the conference call over to Chairman from the business units. Good morning. This is Seewon Jeon from the Memory Marketing team. In the Q1, although overall demand slowed down compared to the previous quarter due to weak seasonality. Supply and demand continued to be solid and price rose strongly due to restrictions of industry supply. We improved earnings through a product mix focused on high profitability and differentiated products. On end, even though there was partial inventory readjustment by some set companies, demand for high value added PC and server SSD and high density mobile products continue to be solid. And supply remained insufficient due to delayed transition from planar to 3 d NAND. We continue to drive solid earnings by actively responding to demand for high density server SSD over 4 terabyte and mobile products over 64 gigabyte and by expanding 48 layer green end supply. For DRAM, although there was a set and component inventory adjustment by some mobile companies along with weak seasonality, Overall supply and demand continue to be solid and price remain strong due to solid demand for server DRAM for data center and customers buy ahead due to supply uncertainty in the second half. We achieved outstanding earnings growth following the last quarter. We expanded the supply of high density and high speed products by spending LPDDR4 and LPDDR4X for flagship smartphones and high density server products for data center. Also, we concentrated on improving profitability by continuously securing cost competitiveness through 1x nanometer processes pension. Next, I will comment on the memory market outlook and our strategy for the Q2 and year 2017 overall. In the Q2 for NAND, demand for high density server SSD is expected to increase driven by solid demand for high value added solution products such as high density data center strategy and by extension of a high density enterprise SSD as well as replacement of a 15 ks RPM HDD. Also, overall demand is expected to be solid, driven by competition of completion of inventory adjustment by some mobile companies along with new product launches and content growth. However, supply is expected to remain tight due to continuous constraints on industry three d NAND supply. We will continue to improve our profitability by securing product competitiveness by focusing on expanding the server SSD centric high density and value added solution market and by expanding supply of 48 layer VNAND as well as mass producing 64 layer VNAND. For DRAM, demand for high density server DRAM over 64 gigabyte is expected to increase with the expansion of new server platforms and demand for PC is expected to be solid. As large OEMs prepare for second half sellout. Also, mobile demand is expected to be remain solid, thanks to new product launches and continuous contents growth. We will maintain a solid market base by spending supply of differentiated and high value added products such as high density server products and LPDDR4x and by meeting customers' increasing demand as much as possible through flexible product mix between applications. In the second half, the memory market is expected to have a favorable market conditions due to peak seasonality as well as new mobile product launches. But tighter supply and demand conditions may become alleviated due to possible expansion of the industry 3 d NAND and sub-twenty nanometer 30 NAND product supply. For NAND, overall supply and demand is expected to be solid. Smartphone trend toward the higher density are expected to continue, led by expansion of high density content services and by increasing adoption of higher specifications. Demand for high density server SSD is expected to be strong, driven by increasing adoption of high density products and all flash arrays due to the expansion of cloud services. However, supply and demand may vary according to each application depending on the industry's three d NAND ramp up and capacity status. We will continue to seek high profitability by actively responding to demand for high value added solution products and by focusing on free end transition, while closely monitoring the industry supply status. For DRAM, stable supply and demand conditions are expected to continue while demand for all applications continues to be solid due to increased set demand on the peak seasonality as well as increased DRAM content in each application. We will maintain strong technology leadership and a profit focused product mix by strengthening cost competitiveness through expansion of 1x nanometer process migration and increasing sales of high density low power products. In order to respond to continuous strong demand for high density storage products, we were concentrating on VNAND investment mainly at the Pyeongtaek campus for DRAM while taking market conditions into account for investment and capacity management. We are continuously focusing on improving profitability. We will concentrate on securing stable profitability, while leading the high density and value added memory market with a base is of scaling down our process along with providing differentiated solution such as high density HBM2, over 64 gigabyte register DIMM and over 8 terabyte SaaS SSD. Now moving on to the System LSI business. In the Q1, we have achieved a favorable result due to an increased sales of APs, DDIs, image sensors for flash smartphone and steady sales of the 14 nanometer mobile APs for mid low tier. Similar to that of 14 nanometer process, we have continued to maintain our technology leadership with the mass production of industry first 10 nanometer process. In the second quarter, we will continue to improve the earnings by addressing increasing demand for 10 nanometer mobile APs and expanding the sales of high profitable LSI products, including image sensors and DDIs. In 2017, we will strive to ensure continuous growth through sustainable supply of 10 nanometer based products and securing stable demand from diversified customers. In addition, to strengthen the base for mid- to long term growth, we will diversify 14 nanometer based product lineup to automotive, wearable and IoT and deliver differentiated LSI products such as image sensors and OLED DDIs with innovative technologies. Thank you. Good morning. This is Chen Lee from the Planning Department of Samsung Display. During the Q1, we achieved solid earnings as we did last quarter. This was driven by a rise in sales of OLED panels as well as an increased portion of value added LCD products. For the OLED business, our 1st quarter earnings improved Q o Q through increased shipments of flexible displays, led by rising sales of new products as well as a strong demand for rigid OLED panels. For the LCD business, in the Q1, although our capacity decreased due to strategic decisions to close on LCD production line, we still managed to bring solid earnings on the stabilized ASPs led by favorable supply demand conditions. Also, we have strengthened profitability with an expanded portion of value added products, especially from larger sized UHDs. Looking ahead to the Q2, we expect demand for OLED from major set makers to rise continuously from last year. Under these circumstances, we plan to focus on producing solid earnings through actively addressing customers' demand for flexible displays as well as by increasing demand for from external customers. In the second quarter, although we expect a capacity expansion of LCD industry, market demand for UHD TVs and size migration towards the larger screen is expected to continue with favorable supply demand conditions. In preparation for these market conditions, we will make every effort to secure profits by focusing on cost reduction and yield improvement as well as the expansion of value added products such as ultra large size, high resolution and curved panels. Now I'd like to present the outlook for the display market and our core strategies for this year overall. For the OLED business, while we expect our sales improve Y o Y through increased supply of flexible displays, Intensified competitiveness for LTPS LCD panels in the mid to low end market will present continuous challenges. Although we expect competition to intensify in the LCD industry on the capacity expansion, we also expect that the market for premium TV panels such as UHD and the ultra large size TV panels will continue to grow. Under these circumstances, we will make every effort to strengthen profitability by improving competitiveness of value added products, focusing on UHDs and the largest size TVs as well as expanding the portion of differentiated products such as frameless and curved TVs. Thanks for listening. Good morning, everyone. I am Kyung Keoh Lee from the Mobile Communication Business. I would like to present the Q1 business results and our future outlook for I'm division. For the Q1 of the mobile communication business, market demand for smartphone and tablet decreased Q on Q as a result of weak seasonality. Our smartphone shipment slightly increased Q on Q, thanks to the newly released Galaxy A 2017 series and solid sales of mass smartphones in emerging market. However, our revenue and profit decreased Q on Q due to price adjustment of Galaxy S7H and S7. The network business maintained its solid revenue and profit led by LTE expansion of our major overseas partners and supply of equipment for newly added frequency bands in the domestic market. Next, let me move on to the outlook for the Q2 of 2017. In the second quarter, market demand for smartphone and tablets is forecasted to remain at a similar level as the Q1. Nevertheless, our revenue and profit yield increased Q on Q following the global release of the Galaxy S8 and S8 plus. However, our smartphone shipment is expected to remain at a similar level Q on Q due to decreased sales of massive smartphones including Galaxy A and JHD. While we recently launched our flagship smartphones, the Galaxy S8 and S8 plus on April 21, the Galaxy S8 and S8 plus will redefine smartphones going beyond the current boundaries of mobile devices. With immersive screen of infinite display and covered glass in both front and the back, we redesigned the smartphones from inside out. The newly released flagship will provide an entirely new experience to our customers, including specialized services such as DXD, Samsung Dex and Samsung Connect. Ever since we opened the Galaxy S8 and S8 plus to the public, They are well and in societically received in the market and highly praised for their superiority. They are also showing robust initial sales. Accordingly, we will keep our full effort for the new flagship sales record, sapphire, Galaxy S8 and S8 plus. Now let me address the outlook for 2017. In 2017, market demand for smartphones is expected to slightly increase Y on Y with solid growth from mid- to high end smartphones replacement demand. However, competition within the market will also intensify with the newly launched smartphones in the market at the second half of twenty seventeen. In this plan, we aim to increase our shipment and revenue Y on Y and improve our profit Y on Y by maximizing sales of the Galaxy S8 and S8 plus by successfully launching a new flagship smartphone in the second half of twenty seventeen and by maintaining the profitability of mass smartphone. As to the network business, we will increase our revenue Y on Y with a new business opportunity in growing LTE market with the full scale next generation network business, including IoT and LTE A Pro and with the preparation for the 5 gs based wireless broadband services. Thank you. Good morning. I'm Yoon Lee from Visual Display Sales and Marketing team. I would like to present the market conditions and our results for the Q1 2017. As for the TV market in Q1 this year, as we entered into slow season, market demand decreased quarter on quarter. And due to decreased demand in European and Latin American markets, the TV market is projected to have weakened compared to the same period of last year. Under these market circumstances, we have achieved sales growth and maintained our leading position in the premium market by improving our product mix with expanded premium products lineups, including Quantum Dot TV and curved TV. However, affected by increased panel prices and currency fluctuations, our performance was weaker compared to the same period of last year. As for the digital appliances, with continued growth in North American market and economic recovery of emerging countries such as Southwest Asia and CIS, its market demand slightly increased. By boosting sales of innovative premium products, including shelf collection, refrigerator, kitchen appliances, Ad WASH washing machine and strengthening promotions for each local market, we have achieved sales growth higher than the same period of last year. Despite such outcomes, however, with additional expenditure on continued investment in North American B2B market since the last quarter, our overall earnings remained flat year on year. Next, let me brief the market prospects for Q2 2017. The TV market in Q2 is projected to show a modest growth from the previous quarter, driven by a full fledged release of new products in TV industry. But the market is expected to show a slight decrease when compared to the same period of last year due to sluggish demand, mostly facing Europe. Under these prospects, we will focus on securing our profitability and achieving growth by expanding high value product line ups, including UHD curved TVs and ultra large inch TVs as well as starting to sell new models led by QLED TV. As a new category of TVs, QLED TV is the only TV in the market that can reproduce 100% color volume, render or HDR 1500 to 2000 nits of brightness, almost matching natural light, deeper blacks and an ultimate level of contrast ratio. Armed with these features, QLED TV put an end to an aged long controversy over better picture quality. Not only that, QLED TV also features no gap wall mount and invisible connection for better space, utilization and harmony with the home decor as well as one remote that addressed pain points felt by consumers. All these features upgrade the value of QLED TV and its superior ROT is gaining recognition from numerous media in the market. Besides QLED TV, we also have a premium UHD TV with more enhanced color reproduction than the traditional UHD TV and innovative products. The frame is one of the innovative products that consider consumers' lifestyle and a winner of the Best Innovation Award at the 2017 Consumer Electronics Show in January. By promoting these products, we will strengthen our leadership in the premium market. As for the digital appliance business, we will strengthen our cooperation with retailers and expand sales of peak seasonal products, including air conditioner as well as focus on improving our performance with successful launch of new products such as Family Hub 2.0 and FlexWash. To share our market prospects for 2017, as recovery of demand in the emerging markets, especially in Asia, Latin America, Middle East and fast shift to TV will drive up demand. The global TV market will be back on a slight growth track. However, there are slowdown risks, including weak currency in major markets. In order to overcome these potential risks, we will continue to expand the sales of premium product lineups such as QLED TV and ULE ultra large inch TVs, thereby solidifying our leadership in the premium market and ensuring constant growth and profitability. In the meantime, as for the digital appliance business, we will strengthen our B2B business by making full scale advancement into builders market in North America, boost online sales through distribution channels and expand sales of innovative premium products so as to achieve stronger performance. Thank you. Thank you, gentlemen. Before beginning the Q and A session, I would like to update you on the progress of the shareholder value enhancement program announced last November. As we announced in our 2016 Q4 earnings call in January, we are in the midst of carrying out KRW 9,300,000,000,000 share repurchase program. The first phase was completed on April 12. We invested approximately KRW 2.45 trillion to repurchase and then cancel little more than 1,000,000 common shares and 255,000 preferred shares. Today, the Board of Directors approved the 2nd phase of the program that calls for the repurchase of 900,000 common shares and 225,000 preferred shares. It will start on April 28 and take approximately 3 months to complete. The Board of Directors also approved the 1st quarter dividend of KRW7000 per share for both common and preferred shares. Quarterly dividends will enable us to provide more evenly distributed dividends to our shareholders throughout the year. The Board established a new governance committee in order to improve corporate governance further. The new committee will consist of all 5 independent directors. In addition to merging the current CSR committee, the governance committee will review basic directions of the company's shareholder return policy and address all issues relating to enhancing shareholder value and interest. Now I'd like to update you on the results of the review on conversion to a holding company structure. Samsung Electronics has established well balanced business structure between its component business with the semiconductors and display and its SET businesses mainly consisting of TVs and smartphones. Based on this structure, we have been able to minimize earnings volatility during economic downturns and maintain stable growth through decisive and strategic investments in new technologies and the related capacity required to dominate. In addition, our structure allowed us to invest in new growth engines with the earnings generated from high profitable businesses. This model serves as a platform for sustainable growth and gives us a unique edge among global IT companies. As a part of efforts to enhance shareholder value, we have been reviewing various business structures that could strengthen our competitive edge, including a holding company structure. However, as we have been unable to find any significant benefits from changing our corporate structure, including adopting a whole co op format, we have held a negative view on the shift to the holding company. Under these circumstances and as requested by investors, the company has reviewed the conversion to a holding company structure with the assistance of independent experts for an unbiased perspective in areas such as operations, finance, legal, taxation and accounting. After completing the review, we have concluded that it would not strengthen our business competitiveness. On the contrary, it may in fact burden our operations as we disperse management and financial assets into 2 entities. In addition, we came across number of issues during the review. In order to comply with the holding company regulations in Korea, it would be necessary for Samsung Electronics and its affiliates to divest shares of affiliates, which may increase volatility of affected shares and create uncertainties as implementation may require separate approvals from the board and the shareholders of those entities. In addition, according to the separation of Banking and Commerce Act and the Insurance Business Act, our financial affiliates may need to liquidate either a portion or their entire state in the newly created holding company, which may cause volatility in the holding company valuation. We also face growing legal uncertainties as several amendments to laws and regulations that may negatively impact the establishment of a holding company structure are being pushed forward simultaneously. As such, the Board has the management has decided not to convert to a holding company structure as such change would not only fail to improve our current corporate structure, but also create risk that would not be beneficial to either shareholder value or company's growth. Finally, I would like to comment on company's treasury stock. We previously held treasury shares to utilize them for M and As or securing talented professionals from overseas. However, as the financial structure has stabilized over past few years through earnings growth, the need to hold treasury shares has gradually decreased. Accordingly, the Board of Directors decided to cancel treasury shares as a way of enhancing shareholder value. Considering the market value of the treasury shares, which exceeds KRW 40,000,000,000,000 as of today, we plan to carry out the cancellation over 2 phases in order to minimize the impact. Today, the Board of Directors have resolved to cancel 50% of common and preferred shares held in treasury and the remaining shares to be canceled by resolution of the Board of Directors in 2018. This completes the management's presentation, and we'll now turn to Q and A. Just want to remind you that we would be conducting Q and A in consecutive interpretation for clarification and to make sure that all Q and As are communicated properly. I know it's going to take a little bit of time, but we ask for your patience. Thank you. Now Q and A session will begin. JJ Park from JPMorgan. Please go ahead, sir. My first question is regarding the talk of the red tint of the S8 that we're hearing in the market. How many cases have been reported to the company? And are all of these cases that you've heard mainly a setting issue as you've been explaining? Or have you also seen any cases that are more technical, for example, having issues in the OLED quality or in the assembly process? The red tint or the reddish that's been reported in the media is not a product defect. And therefore, we don't have data officially because we're not treating this as a product defect. As you know, all of our Galaxy S8 as well as S8 Pluses undergo very thorough inspection to guarantee the highest level of quality. The S8 and S8 Plus uses the Super AMOLED, which actually has a natural variance in color expression. Consumers have wanted to adjust the color expression to meet their personal preferences and we have been supporting this in the form of a software update, which also was provided as a part of the Galaxy S8 and S8 plus. But it seems that since the launch of the S8 and the S8 Plus, there were some consumers who felt that this the optimizing or personal adjustments were inconvenient. And so we're planning to have an additional feature added so that there's more detail adjustment of the color is possible with the upcoming software update. And we will continue to exert our best to provide the best customer satisfaction as well as customer convenience. The second question is related with your decision today to not convert to a holding company structure. I'm wondering whether this is a tentative decision not to go. That means that the company may come back to revisit this if there are any changes in the related regulations? Or is this a final conclusive decision not to convert to a holding company structure? And if it's the second, if the company is not deciding to go, then how are you going to address other related issues, for example, of the circular shareholding between the related companies. I think what I can say today is that something Electronics has no plans of converting to a holding company structure in the future. Regarding the circular shareholder issue, that is something that has to be resolved together not only by Samsung Electronics but with other Samsung affiliated companies. It may take some time, but we will find the way and the timing to undo that, that would have minimum impact on the market. The next questions will be presented by Mr. Peter Li from NH Investment Securities. Please go ahead, sir. My question is about your investment plans for the DRAM business and your future capacity operation plans for DRAM. As you know, recently, the DRAM industry has been seeing a very tight supply and demand situation. And not only Samsung Electronics, but overall, the DRAM industry is seeing an uplift in its performance. Many people looking into the market are very interested in Samsung Electronics DRAM investment plans because it has a large impact on forecasting the industry outlook for the second half of this year as well as first half of next year. There's also talk of Samsung Electronics, for example, shifting its Line 11 to another product. So in that context, can you give us a bit more detail of how you plan to operate your DRAM capacity? As you know, we, as a company, try to manage our capacity at an optimal level for the entire semiconductor business so that we are able to flexibly respond to different applications. As you mentioned, we are planning to convert Line 11 to CIS given the fact of strong image sensor demand. In the DRAM, we will continue to invest supplementary and also invest in capacity to make up for the loss that happens as we migrate to the 1x. But other than this, we have no plans of additional capacity. As a semiconductor company, in order to leverage this as much as possible, we've always had a very flexible capacity operation that optimizes the capacity for each product depending on the market situation that unfolds. That is why we optimize our equipment allocation or line allocation and also remove bottlenecks as we adjust the capacity. We have worked out various ways of optimizing our line and also we'll be investing flexibly to maximize the efficiency of our overall portfolio. And to get more detail about the CMOS image sensors, the CIS that we'll be using part of Line 11 to produce. As you know, with the increased adoption of a dual camera, the application has itself been growing. And also in addition to these mobile cameras, we're also trying to expand the applications to VR, automotive as well as 3 60 degree cameras. So to respond to market demand as well as customer requests, we will be converting part of Line 11 for CIS production. Our target is to start mass production first half of twenty eighteen, but that is subject to market demand as well as customer request. The next questions will be presented by SK Kim from Taiwan Capital Markets. Please go ahead, sir. First, I have a question about the NAND capacity plans. In Pyeongtaek, my understanding is that you're preparing Pyeongtaek with a target of starting operation mid this year. Are there any changes to this plan? Or have you changed, for example, your ramp up schedule? Also regarding Huasong, there's still quite a lot of planner capacity left in Huasong. Do you have any plans of converting any of that to VNAND? And in terms of VNAND, do you have plans of adding additional lines in Xian? Regarding Pyeongtaek, it's difficult to give you the details, but we are on schedule. We're planning to start operation mid this year and to gradually scale that up as we approach the end of this year. Regarding our planner capacity, we are planning to gradually convert that to VNAND as there's more demand, for example, on the high density SSD for servers. Regarding Xiaowei Zhu, we are planning to add, but we have not decided the details yet. My second question is regarding the decision to not go to a holding company. As you mentioned, there are currently laws or amendments to laws that are being pursued that would make it difficult for a holding company to be established. Is it not possible to consider converting to a holding company before these amendments are passed? As you know, converting to a holding company is not done in a short period of time. Even if the BOD does resolve on it, it would usually take 5 months to up to a year for the actual conversion to happen, while as an amendment, a legal amendment can be passed any time. Especially there's also the possibility that if Samsung decides to convert to a holding company, these amendments could be passed faster so that we would be subjected to these legal amendments anyway. The next questions will be presented by Ms. Claire Kyung Min Kim from Teshin Securities. Please go ahead, ma'am. I have a question for the system LSI. You've completed the 2nd generation 10 nano. Do you have plans of adding capacity there? And also can you give us details of how you plan to manage your 14 nano processes in terms of capacity? Regarding the 2nd generation 10 nano process that we've completed, yes, we are expecting that to be there to be more demand, especially from customers that need these leading edge processes. And that is why we are planning to add a 10 nano equipment additionally in S3 of Huasong Q4 of 2017, so that we have a more stable mass production base for our cutting edge processes. Regarding 14 nano, we also expect there to be still very strong demand for 14 nano, especially from the mid to low price APs as well as other logic devices. And so without additional expansions, we will use the capacity in S1 and S2 flexibly between 10 nano and 14 nano. My second question is regarding your decision not to go to a holding company structure. Was the detention of Vice Chairman Lee a part of this decision? Was that a factor in deciding not to convert to a holding company? And was he personally involved in this decision? Regarding the holding company structure and this whole study on whether we should go to a holding company or not, you will recall that this study started from the request of the investor that was made last year, which is not the usual case. Also, unlike the usual case, we actually executed quite an in-depth study as to not only the pros and cons of this structure, but also what would happen when we actually do go to a holding company in terms of operation, finance, legal and tax issues. So this is a decision that was reached after quite an in-depth study that also involves outside experts who also participated to provide their insight. As you know, Vice Chairman Lee is a member of our registered director. And as a part of as a member of the Board, he was informed. However, my information is that he did not have a particular opinion regarding this. The next questions will be presented by Mr. Nicolas Coteau from UBS. Please go ahead, sir. Yes. Good morning. Thanks for taking my questions. The first one is on NAND flash. Could you update us on how your 96 layers technology development is progressing? And could you confirm within that whether you're using a full 96 layer continuous stack or actually if you have a dual structure? And more importantly, when do we expect to see mass production there? And I have a follow-up after this. Thank you. You were asking about our 5th generation V NAND product, which is currently under development. And because it's still under development, we cannot give you the details of it. But our approach is that as we have always done, the 5th generation VNAND, we will also develop as scheduled without disruptions so that we can maintain our technology leadership. Okay. And another road map question, if I may, for LSI. I think there was an announcement recently that you may have an 8 nanometer technology node after the 10 nanometer plus you will do next year, so effectively in 2019. What does this imply, if this is the case, for the 7 nanometer rollout time line, which I think you mentioned you're expecting to be 2019 as well before. And also, we've invert the use of EUV lithography in mass production for this 7 nanometer node, I'm assuming that the 8 may not use EUV. Thank you. As you know, as we migrate from 14 nano, 10 nano to 7 nano, the amount of development difficulty as well as the amount of investments that are necessary each step increases quite significantly. And that is why except for the very large customers, most customers feel difficulties in terms of taking on that additional investment and development difficulty. We've taken the approach of, 1st of all, developing the leading processes ahead of time and then supplying following that up a year later with derivative processes so that customers can take advantage of the capacity investments twice. And we will continue to do that so that we are able to first do the leading investments and then follow-up with derivative processes so customers can take advantage of these derivative nodes as well. Regarding 7 nano, in the last conference call, we mentioned that we will start the risk production of 7 nano in 2018 and mass production in 2019, which, of course, is always subject to changes due to customer demand or market situation. And 7 nano will be maximizing the advantages of EUV so that the processes have the best benefit. The next questions will be presented by Mr. Simon Wu from Bank of America Merrill Lynch. Please go ahead, sir. My question is about the OLED panels. You've been making large investments in OLED last year as well as this year. It seems that your A3 fab is probably awful. The clean room seems to be all used. Also there are talks of changing the 7th generation fab part of that for OLED. So in that context, given the huge amounts of investments and the importance of the OLED business, can you give us a bit more detail of the current status of your capacity operation? And also looking forward, current investments that are going in are more 6th generation, but even the LCD sides have already moved over to the 10 gs glasses. So in terms of long term investments, what are your plans in terms of moving over to the later generation glass sizes such as 7, 8 or 10? Regarding the LCD seven-one line, we've already closed that down and it's currently being refitted to OLED capacity. The A3, that is being carried out according to plan, so that is on schedule. And regarding our basic approach to OLED investments, we will continue to make timely investments depending on the market and customer needs so that we continue to maintain market competitiveness. Second question is about the QLED TV business and how you plan to respond to competition that we're seeing in the market. We're hearing of a crystal OLED and some of the Japanese makers have heard are introducing OLEDs that include sound. So compared to these OLED TVs, how do you differentiate and respond with your QLED TVs? Well, the QLED TV is next generation display solution or TV solution that overcomes the short comings, the weaknesses of the existing LED as well as OLED TVs. It not only provides the best picture quality, but also in terms of design and usability is a totally new dimension from the users. Well, as you know, the in terms of picture quality, the metal based quantum plus material has various advantages. For example, it has 100% color creation so that the color actually does not change depending on the brightness. Also in terms of the picture brightness as well as visible angle, it has advantages over other displays. Also, it provides a very high yet consistent viewing experience regardless of content or the viewing environment to the users. Also because it's based on an inorganic material, it does not have, for example, burn in that would occur in other display technologies and therefore has a longer user life and a stronger durability. We've backed such strong picture quality with unique design features such as the invisible connection, the no gap wall mount and the 1 remote, which provides a very exceptional user experience to our consumers. Even though it's still initial in its introduction, we've received very strong reviews from global and European Industry Media. We've received the highest point ever from major European media in the industry and have received very strong reviews that we have been receiving very strong reviews from overall media. The next questions will be presented by Mr. Son Woo Kim from Merit Securities. Please go ahead, sir. I have a question regarding the memory business as well as the company's strategies responding to this big picture where we see a lot of demand being driven up for the data center servers. That's what you mentioned from the semiconductor side. But if you look at this from a bigger picture perspective, the reason why there will be more demand from data center servers is probably because there will be a lot of devices out there, whether it's AI, AR, VR or even self driving vehicles that would all have to be connected at the back end through these servers that are in the data center. And many people are expecting a lot of value to be created as this big picture unfolds. In that context, what is the relevance of the memory business to this new frontier? And then second, from the company's perspective, how is it planning to strategically respond to this new change? As you mentioned, in addition to the mid- to long term growth in servers, mobile devices and SSDs, we're also seeing that AI or automotive, AR and VR, these trends would have direct and indirect impact on our memory business in the mid- to long term, especially because they will be driving up the server demand. More devices will be connected to the server. These devices will be continuously generating and using data, which will again need more servers to back them up. And so we are thinking that with this, the overall IT industry and the server demand will continue to increase. As these new applications will also start to grow more vigorously as ecosystems start to form around them. And as a response, we are preparing with a greater focus on the high density, high performance, low power memories. Also, we're seeing a rise in HPC with the increase of deep learning or AI applications. And actually, you will remember that we launched high density HBM2 in 2016. And last year, we actually saw a greater quite a significant growth of sales versus the year before. And we are expecting this to happen. We're expecting this to continue in the memory business. The next questions will be presented by Mr. Ricky Seo from HSBC. Please go ahead, sir. My question is for the memory business, which is entering peak season. And so as we enter the peak season, it's difficult to expect the strong prices to weaken. But if prices remain strong, that would increase the cost burden of the set makers, which will level off the growth in content, which may, in the end, result in a decrease or contraction of demand. How do you think that such a scenario may play out? How do you think is the possibility that this scenario may play out? And the second question, do you see any supply side risk that we need to watch out for? Given the fact that smartphones have become very high spec and also the expansion of data centers as well as the increase of memory content in all of the applications, I think the possibility of rapid slowdown in demand is relatively low. Also, as we move on to the second half of this year, the supply demand situation may ease in some components and that may alleviate some of the BOM or BOM burden of the customers. And but we think that as there will be differences of the supply and demand situation depending on whether you're on the leading end of the process or not as well as depending on which applications they are. And so from our perspective, we will continue to very closely watch the demand and supply situation for each application and flexibly respond. The next questions will be presented by Mr. Mark Newman from Bernstein. Please go ahead, sir. Yes. Hi. Thanks for taking my I wanted to ask about the shareholder returns policy you have. In light of the announcement that Samsung is not going to go ahead with the restructuring proposal and considering the cash balance, I recall in the statement you had made that Samsung will try to maintain a net cash balance of €65,000,000,000,000 to €70,000,000,000,000 going forward. And considering even with Harmon acquisition, you I believe are going to get outside that range by the end of this year. And so does that mean, especially in light of the no restructuring, can we be talking about expecting further additional shareholder returns at some point in the future? Regarding the first well, I'll answer that in two points. First of all, if we, at the end of this year, have a net cash that goes beyond the level that you've mentioned, yes, we will then use that additional cash for shareholder return as we had promised previously. We have announced the shareholder return policy to cover until end of this year. Currently, we're in the process of studying the shareholder return policy to cover 2018 to 2020, which we plan to communicate to shareholders and the market before the end of this year. Great. That's great news. I have one quick follow-up or further question. It's about China memory. So lots of bold ambitions from the Chinese players. Could we get some comments from the Memory division on how you're thinking about the threat from China in the memory industry with all these huge capacity plans that they're talking about? And plus related to that, we're also hearing that they're poaching a lot of employees not just from Micron and competitors, but also from Samsung as well. How is Samsung going to prevent that type of situation? It is true that the Chinese companies recently have been trying to break into the memory market, but the memory market itself has evolved during the past and is now a very is now protected by quite a high entry barrier because memory business today requires not only the very cutting edge processes migrated, but also needs to have various high value add solutions to go with the products. And so not only the DRAM or the NAND, the place pieces, but also controllers and other solutions have to be offered to the customer as a multiple high quality solution, which is the approach that we have been taking. Regarding the second part of questions, it's difficult to give you details, but we can say that we are doing our best to prevent and to keep our talent internally. We will take 2 more questions before ending or questions from 2 more people before ending the conference call. The next questions will be presented by Mr. Yoo Jong Woo from Korea Investment and Securities. Please go ahead, sir. I have two questions about the S8. You said that the initial response is quite good. Can you give us, for example, some guidance so that we have a better sense of how good the initial response is? Also, there are talk that especially for the S8 plus there is a bit of delay in supply, maybe because of the very strong demand. But can you tell us a bit more detail of, for example, whether there are any supply bottlenecks regarding the S8 and S8 Plus? My second part of the question is how you plan to maintain profitability in the new flagship given increase in the material cost, memory prices have gone up, panel prices have been going up too and we're expecting you to spend a bit more marketing on the S8. So regarding the higher cost base, how are you planning to maintain the profitability? The S8 and S8 Plus has received very strong responses from carriers as well as our partners even before it was launched and has been very showing very strong preorders as well as initial sales. Even though it's difficult for us to give you, for example, a total sales target, we will be exerting our best effort to record the best sales because we have a product that has differentiated design as well as stronger performance. You may seem to have hinted on any supply part supply disruptions with the S8 or the S8 plus which is not the case, especially some are concerned that because of the edge display is being used on both the S8 and the S8 plus that this may have some additional burden on getting the supply. But actually, we have been talking with a supplier so that we are able to have a supply stably for the full year volume. So there we have seen any we have not seen any disruption in terms of the display supply. Other components also as well we have prepared very well and also we have prepared dual sources to eliminate any further risk. Regarding the profitability of S8 and S8 Plus, because both S8 and S8 Plus have these large edge screens, have iris recognition and have very high spec components, all of that has ended up in providing a product that is very competitive, which we'll use to drive up the sales and also internally optimize the way we use our resources to support that sales. And by doing this, we are thinking that we will be able to defend the profitability that we had in our previous models. The last question will be presented by Mr. Kim Nam Hyo from ARIT Research. Please go ahead, sir. My question goes to the DP business about the plans that you have or thoughts that you have of the OLED panels for TV. Even though I understand that currently your focus in terms of resources and investments will be on the mobile side. Have you given up, for example, the TV applications because of the technical difficulties? Or do you have plans of eventually moving on to OLED panels for TV? In the OLED space, we have been the market leader and we will continue to maintain our position as the market leader also in terms of technology. In the TV area, we're actually in the process of developing various technologies including Quantum Dot. And for the TV, in addition to OLED, we believe that we need to develop various new technologies to support, for example, the ultra large size and high value add solutions. And with these TV technology supported, we will maintain our leadership in not only profitability or but also in terms of technology position.