Earnings Call: Q4 2016

Jan 23, 2017

Begin the conference of the fiscal year 2016 4th quarter earnings results by Samsung Electronics. This conference will start with a presentation followed by a division of Q and A session. Now we should commence the presentation on the fiscal year 2016 Q1 earnings results by Samsung Electronics. Good morning. This is Robert Yi. Thank you for joining our call this morning. With me representing each of the business units are Mr. Cheon Sei Won, Senior VP of Memory Marketing Mr. Ho Gook, VP of System LSI Lee Chang Hoon, VP of Samsung Display Lee Kyung Tae, Vice President of IT and Mobile Business and Lee Yoon, Senior VP of Visual Display. We also have Mr. Kim Ite and Kim Sang Yeok, both from Investor Relations Group. 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, 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. Before we go over the earnings results, I would like to update you on 2016 shareholder return. 2016 annual free cash flow came in at approximately KRW 24,900,000,000,000. Based on the shareholder return policy that we announced last November, the 50% of KRW 24,900,000,000,000 will be allocated to 2016 shareholder return, which brings the total amount to KRW 12.5 trillion. We will allocate KRW 4,000,000,000,000 to 20 16 annual dividend and the remaining KRW 8,500,000,000,000 to share repurchase program. This will bring 2016 total share repurchase repurchase amount to KRW 9,300,000,000,000 after adding KRW 0.8 trillion carried over from 2015. Taking into consideration of the daily trading volume and other factors, the share repurchases will be carried out over 3 to 4 phases, and all shares repurchased will be canceled. The Board of Directors approved today to pay on a year end dividend of KRW 27,501 per share for common and 27,551 for preferred. Including interim dividend, the annual twenty 16 dividend per share represents about 36% increase over 2015 dividend. In addition, the Board of Directors approved the 1st phase of share repurchase program with 1,020,000 common shares and 255,000 preferred shares. It will start January 25 and take approximately 3 months to complete. For 2016, we achieved solid results despite no 7 issue in the second half as a result of our continuous efforts during past 2 to 3 years to strengthen competitiveness of our component businesses. By focusing on high value added products via widening the technology gap in the DRAM business as well as strategic investments in vertical NAND and OLED panels. We also made several key acquisitions and divestures strategy, which will enable the future growth. In the Q4, the total revenue was KRW 53,300,000,000,000. The year over year increases in revenues from memory and OLED businesses were offset by reductions in I'm division from lower smartphone sales. On Q on Q basis, the total revenue increased by 12%. The gross profit was KRW 22.4 trillion, up KRW 3.1 trillion year over year, and the gross profit margin improved by 5.8 percentage point. SG and A remained flat year over year. The operating profit increased by KRW 3.1 trillion year on year to KRW 9.2 trillion and the margin operating profit margin was 17.3 percent, improvements of 5.8 percentage point year on year. The component business recorded a significant improvement in earnings driven by robust sales of high valued products in the memory business amid tight supply demand balance, strong LCD panel prices and improved utilization of OLED panel capacity. With regard to the SET business, I'm division achieved improved earnings led by solid sales of the Galaxy S7 and improved profitability of mid to low end models from efficiency of lineups. For the CE business, despite sales increase of premium TV, gross profit declined due to a strong I'm sorry, the operating profit declined due to strong panel prices as well as the impact of new investment in the Home Appliance B2B business. In the 4th quarter, the weakening of Korean won against the U. S. Dollar had a positive impact on the operating profit by approximately KRW 300,000,000,000 quarter on quarter, mostly on the component business. Now I'd like to address the business outlook for 2017. In 'seventeen, operating earnings are projected to grow year on year mainly from the component businesses. With respect to the memory business, we expect favorable supplydemand balance to continue throughout the year. We will focus on expanding sales of high value added products and continuing technology transitions to 64 layer vertical NAND as well as the 1x Nano DRAM. The System LSI business will focus on maintaining a high utilization rate by diversifying its customer base and expanding the supply of high value added LSI products as well as securing stable supply of 10 nano products. For the OLED business, we plan to expand the supply of high value added flexible panels to external customers. And the LCD business will focus on improving profitability via product mix toward 55 inches plus panels. In the mobile business, amid concerns over a slowdown in smartphone market growth, we will strive to regain customers' confidence by ensuring product safety. At the same time, we will focus on expanding sales of high end products with a differentiated design and features as well as enhancing user experiences utilizing artificial intelligence. Regarding our CE business, we'll focus on selling new premium products such as QLED TVs and the Family Hub Refrigerators Version 2.0 while increasing B2B investment in home appliances and reinforcing the smart home business. For the Q1 in 2017, for the component business, despite the seasonality, memory prices are expected to be solid due to limited supply on the industry wide low level of inventory at the year end. For the System LSI business, we expect to increase production of 10 nano products, while the Display business is expected to see higher demand for OLED from new products being prepared by its customers. However, we expect overall company earnings to decline quarter on quarter as earnings in the set business are projected to decline resulting from increased marketing expenses in the mobile business and sales decreases of TVs due to weak seasonal demand. In 2016, we invested KRW 25.5 1,000,000,000,000 in capital expenditure, KRW 9,800,000,000,000 for display and KRW 13,200,000,000,000 for semiconductors. The split between memory and system LSI was about KRW 8 to KRW 2. The annual the actual CapEx for 2016 was slightly lower than previous guideline of KRW 27,000,000,000,000, mainly due to the fact that some of the year end investments in display business were carried over to 2017. The capital expenditure plan for 2017 has not been finalized. Looking out to the mid- to long term based on paradigm shifts in the IT industry from the growth of IoT, AI, Automotive businesses, we expect the growth of new demands in the component businesses. In addition, new designs and usability are expected to emerge in the set business. In semiconductor, we expect to see a huge growth in demand for high density, high performance memory for processing big data in the server market and chipsets for automotive and AI. In the OLED business, the demand for high value added flexible panel is projected to grow substantially from the innovations in smartphone form factors. In the SET business, the importance of solutions such as cloud, AI on mobile devices will expand rapidly as well as connectivity such as smart homes. Through these new developments, we expect that there could be a significant new business opportunities. However, we also have to be mindful of uncertainties in domestic and global political and business environments, which could bring challenges in executing our mid- to long term business strategies through M and A and investment decisions as well as disruptions in developing new growth engines. Before the presentations of each business unit, I would like to share with you several data points on key business areas. On DRAM, in Q4, our bit growth came in low single digit, and our ASP increased high single digit in Q4. For Q1 twenty seventeen, we expect the DRAM market bit growth to decline high single digit, and our bit growth will decline low teens. For 2017 whole year, we expect DRAM bit growth to be high teens and our bit growth will be similar level. For NAND Flash for Q4, our bit growth was low teens, and we saw mid single digit ASP increase. For Q1, the market and the growth, we expect to decline mid single digit and our NAND bit growth will decline high single digit. For the year, we expect NAND market bit growth to be approximately 30%, and we expect our bit growth to be low 30%. For handsets, in Q4, total handset sales came in at 90,000,000 units with about 8,000,000 units in tablet. Our blended ASP for the handset was $180 range. The mix of smartphones within total handset was about mid-eighty percent. For Q1, we expect our total handset sales to increase over Q4, while tablet, we expect small decline. We expect the blended ASP to increase in Q1 over Q4, and the mix of smartphone within total handset shipment will increase to high 80%. For our TV business, we expect we saw in Q4, 116 I'm sorry, 16,000,000 units shipment. And Q1, we expect sizable decline of about 40% because of seasonality. And for the year, we expect our TV sales to increase low single digit. Now I'll turn the conference call over to gentlemen from the respective business units. Thank you. Good morning. This is Seowon Jeon from the Memory Marketing team. In the Q4, supply and demand conditions remained tight and prices increased in all applications due to solid demand driven by content growth as well as increased SaaS sales due to peak seasonality. The Memory division achieved outstanding earnings growth by focusing on the high profitability and differentiated product mix management. For NAND, demand for high performance, high density SSD solutions as well as mobile solutions was solid. But the industry failed to fulfill mid demand due to 3 d NAND ramp up delays in the market. This result in continuous tight supply and demand conditions. We achieved outstanding improvement in earnings compared to the previous quarter by spending 48 layer of RINAND and by actively responding to demand for high density enterprise SSD over 4 terabyte and mobile DRAM over 64 gigabyte. For DRAM, supply and demand conditions remained solid. As demand continued to grow, while supply was limited. More specifically, mobile demand was strong, driven by smartphones with higher specifications and new smartphone launches. Demand for PC and server remains solid as well, driven by an increased portion of high end PCs, including gaming PCs as well as content growth in data center. As we did with NAND, we achieved outstanding improvement in TDM awnings by responding to increased demand for mobile, server and PC and by concentrating on a profit focused product mix. Next, I will comment on the memory market outlook and our strategy for the Q1 and 2017 overall. In 2017, for NAND, SSD demand is expected to be strong driven by an increased portion of high density NVMe over 2.56 6 gigabytes in client, increased adaption of high density SSD in data center and all fresh arrays in the enterprise server market. Demand for mobile storage is also expected to grow continuously as density of high end products increased to 128 gigabyte or over and for mid- to low end to 64 gigabyte. Supply and demand conditions are expected to remain tight throughout the year and the industry's 3 d NAND supply condition will be a key variable. In order to respond to demand for high value added products, we are preparing for mass production in the Pyeongtaek campus as planned. We will secure differentiated profitability and strengthen technology leadership by focusing on 64 layer process migration. For DRAM, overall demand is expected to increase, driven by server demand mainly from data center and also driven by mobile. Well, that's the growth will take place in all segments based on strong growth in China and other emerging markets. Uncertainty regarding demand fluctuation in the first half has been mostly resolved, and supply and demand conditions are expected to remain solid throughout the year. We will continue to improve earnings and maximize flexibility by focusing on sales of high density and low power high value added products and by spending 1x nanometer process migration. In the Q1, although overall demand may slow down compared to the previous quarter due to weak seasonality, supply and demand is expected to remain solid given the industry's limited supply. For NAND, demand for high value added solution products such as high density storage is expected to remain solid. We will continue to secure product competitiveness by strengthening profitability based on 48 layer of VNAND and by mass producing 64 layer of V NAND. For DRAM, although sales treatment may decrease due to seasonality, the trend toward adapting higher density is expected to continue in all applications. We will focus on strengthening products and cost competitiveness by spending supply of the industry's first mass produced 10 nanometer class products, including high density, low power LPTDR4X. Now moving on to the System LSI Business. In the Q4, we achieved a solid result due to consistent strong demand for mid to low range mobile APs and the growth of the mobile market in China. Also, by beginning mass production of the industry's first 10 nanometer, we have once again demonstrated our technology leadership as we did with our 14 nanometer process. In 2017, we will continue to grow our earnings by maintaining a high utilization ratio. We will expand the supply of 10 nanometer products in a stable manner and address the increasing demand for high end LSI products such as image sensors and DDIs. Also, we strengthened the base for mid to long term growth by diversifying the product lineups to include automotive, wearable and IoT. In the Q1, we are focused on improving earnings. To this end, we will ramp up mass production of 10 nanometer products for flagship smartphones, which generates stable yield and address the increasing demand for LSI products such as DDI and 14 nanometer products for mid- to low end smartphones. Thank you. Good morning. This is Chang Lee from the Planning Department Samsung Display. During the Q4, total earnings for the Display business improved Q o Q. This was driven by increased shipments from OLED panels as well as increased earnings in larger sized LCD TV panels. For the OLED business, in the Q1, we brought solid earnings due to increased shipments based on expanded customer base and continued cost reduction. For the LCD business, our Q1 earnings improved Q o Q and stabilized ASPs led by favorable supply demand situation. Also, we have strengthened profitability with improved yield and continued cost reduction as well as expanded value added products, especially from the larger sized UHDs. Now I'd like to present the outlook for the display market and our core strategies for 2017. For the OLED business, we'll strive to achieve an earnings improvement Y o Y through expanding supply of the flexible display based on our technology leadership and supply capacity. Although we expect competition to intensify in the LCD industry under the capacity expansion, we also expect that the market for premium TV panels such as UHD and 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 larger sized TVs as well as expanding a portion of differentiated products such as flameless and curved TVs. Looking ahead, in the Q1 2017, we expect OLED demand to rise as major asset makers pursue product differentiation in form of hardware specification. Under these circumstances, we plan to focus on improving earnings through actively addressing customer demands as well as enhancing product mix. In the Q1, although we expect weak demand for LCD panels under weak seasonality, The market demand for UHD TV and seismic migration towards large screens is expected to continue with a favorable supply demand situation led by dwindling supplies in overall industry. In preparation for these market conditions, we will make the best efforts to secure profits by focusing on cost reduction and yield improvement as well as expansion of value added products such as ultra large size, high resolution and curved panels. Thank you. Good morning, everyone. I am Kenteo Lee from the Mobile Communication Business. I would like to present the Q4 business results and our future outlook for the I'm division. For the Q1 of the mobile communication business, market demand for smartphone and tablets increased Q o Q as a result of year end seasonality. Despite the absence of the Galaxy Note 7, our practice slightly increased Y o Y, thanks to strong sales of the Galaxy S7 and S7 Edge as well as the solid sales of our mid to low end smartphone. As to the network business, our revenue and profit increased Q o Q led by expansion of LTE related overseas business and supply of equipment for newly added frequency bands in the domestic market. Next, let me move on to the outlook for 2017. This year, we expect that smartphone market growth to slow down, but new services, for instance, artificial intelligence will emerge as a new differentiator in the smartphone market. As to our business, we will increase our market leadership in the premium market by introducing differentiated design as well as by applying features of meaningful innovation. Moreover, we will maximize our mid to low end smartphones product competence by adding new features including water and dust proof and fingerprint recognition. Along with these differentiations in hardware, we will continue to strengthen our software and service capabilities to provide new values to our customers. For example, we will increase the number of models or where the service can be used for Samsung Cloud and Samsung Pay. We will also apply new artificial intelligence related service in our flagship smartphone. As to the network business, our goal is to maintain the current sales momentum by expanding LTE business in emerging markets and network business in advanced markets. Now let me address the outlook for the Q1 of 2017. In the Q1, market demand for smartphone and tablet is expected to increase decrease Q o Q, Q2 typical seasonality. In this past, we will continue to introduce new Galaxy HD smartphones and to increase our mid end smartphone shipments including the J Series. With these efforts, we expect our smartphone shipments and revenue to increase Q expect our profit to slightly decrease Q o Q due to increased expenses, including marketing related spending to enhance our brand presence. Lastly, under the principle of putting customer safe and quality first, we will improve on our existing quality related processes, establish innovative preventative measures and build human expertise not to repeat what happened with the Galaxy Note 7. Through all the aforementioned, we will continue our efforts to improve our profit in 2017 despite all the difficulties that we might face. Thank you. Good morning. I'm Yoon Lee, Senior Vice President of Visual Display Sales and Marketing team. I would like to present the market conditions and our results for the Q4 2016. In Q4, the TV market increased by double digits quarter on quarter, driven by an increase in demand during the year end peak season. However, despite the favorable market trend in the advanced markets, the level of global demand remained equal to the same period last year due to the economic downturn that has been observed in the emerging markets, including Latin America. Under these market circumstances, we were able to outperform the market growth rate and strengthen our market share in the premium segment by successfully managing peak season promotion activities, including Black Friday. In spite of such results, our overall earnings slightly decreased compared to the same period last year due to the headwinds from various factors, including increased panel price and currency fluctuations. As for the digital appliance business in the Q4, although North America has been experiencing a continuous upward growth trend, there was a slight decrease in the overall demand due to the weak performance in the emerging markets, including China. As our sales outcome showed favorable tendencies in the North American and Asian markets, we are able to achieve sales growth in comparison to the same quarter last year by expanding our premium products, including Ad WASH and Chef Collection Kitchen Appliance series. However, we saw a decrease in the overall earnings affected by new investment activities in the B2B area. Next, let me share the market prospects for 2017. With regard to the TV market in 2017, as demand in emerging markets, including Latin America, is to recover, while demand in TV replacement is soon to arise, we expect global TV demand to start to show a slight upward trend. Also, we project demand in premium TV products such as large inch and UHD models will continue to expand. However, we also anticipate the increase in demand will be somewhat limited due to the presence of risks that can potentially slow down growth affected by currency fluctuation in the major markets. And we project this will eventually intensify competition in the market. With such market prospects, we will focus on securing our profitability and achieving growth by continuing to expand high value product line ups, including ultra large and UHD models led by our newly introduced category QLED TV. Our QLED TV, which we first unveiled at CES this year, is applied with new metal quantum dots to produce more delicate and detailed picture quality. We will strengthen our presence in the TV industry as a leading company while we actively promote QLED TV's premium design that even takes the surrounding space into account as well as enhanced connectivity and improved usability. In the meantime, we will solidify our leadership in the premium TV market by offering differentiated consumer experience and launching TVs that reflect consumer lifestyle. And we will not be satisfied with consecutive 11 year number 1 brand position and will lay the foundations for sustained growth and profitability in the future by seeking to improve on what kind of values and experiences our TV can offer to consumers. For the TV market in Q1 2017, as we are entering into slow season after Q4 and expecting continuous economic downturn in the emerging markets, including Latin America and China, TV demand is projected to decline both year on year and quarter on quarter. Although we expect a slight impact in sales revenue as a result of adjustment in selling price in response to the fluctuation in panel prices, we will focus on profitability by introducing latest lineups earlier while promoting sales increase in the premium product category. As for the digital appliance business, we will strengthen our leadership in the premium market by further introducing differentiated innovative products and smart appliances such as Family Hub 2.0 and FlexWash and FlexDry. In addition, we will seek to boost our brand position and competitiveness in B2B area by expanding investment in developing products, infrastructure, marketing to target the B2B Electronics market, which is currently showing how growth potentials. Thank you. Now we'll turn to our Q and A sessions. The first questions will be presented by Mr. J. J. Park from JPMorgan. Please go ahead, sir. My first question is regarding the Memory business, about the capacity and the investment plans that you have. As you mentioned during the presentation, this year, we are also expecting another tight supply and demand balance in the market. And there is in the market talks of possible increase or investments in DRAM facilities by Samsung Electronics. So could you give us in your DRAM aspect, what are your investments or capacity plans for this year? And also on the 3 d NAND side, supply is not that sufficient. So in that context, can you also introduce your plans of how to operate the Pyeongtaek fab this year given the supply situation? And also how much of V NAND capacity are you able to increase this year? Regarding the DRAM, because there is strong demand for high performance, high density, high capacity DRAMs, we have decided to execute supplementary investment on the remaining space of Line 17. To clarify, this is not to increase capacity but to supplement and make up for the natural capacity decrease that we experience as we migrate towards 1x. Regarding the Pyongtaek fab, it is being pursued as planned, and we are expecting that to start operation possibly in mid-twenty 17. You may have a lot of questions regarding our capacity plan for this year, but we have not finalized or decided any specifics of capacity operation plan. Actually, our approach is that we will take it step by step, monitoring the market situation as well as the competitors. Also for your information, our basic approach to the Pyeongtaek campus is that we will expand Pyeongtaek campus look watching the market situation of the semiconductor products. Currently, we have no plans of increase or adding DRAM capacity to the Comtech campus. My second question is about the display panel. You phased out Line 7-1 last year. Given that, could you give us your expected LCD line capacity at the end of 2017? Also, what are your plans of L7-two? Are you planning to phase that out this year as well? Or will you keep operating that? And is this connected in any way to the discontinuation of supply from Sharp? Regarding the LCD line, as you mentioned, Line 7-1 was completely phased out as of end of last year. Currently, we are not considering further phased out of any of the lines that we currently have. Regarding the OLED capacity, our basic approach is that we will secure necessary OLED capacity on time in response to demand. And so we will be operating our resources strategically to respond to market as well as customer needs. Regarding the further regarding the phase out or the closing of Line seven-1, that was already decided as planned before the Sharpe matter came up, and so that was according to our original plans. The following questions will be presented by Mr. SK Kim from Daiwa Capital Please go ahead, sir. My first question is towards the I'm division. Yesterday, the company announced the results of its investigation regarding the Note 7 incident. And it appears that the company, going forward, will focus even more efforts on securing the stability and the safety of the battery and other components of the handset. This may have increase in cost and which may have a negative implication towards your profitability. Could you offer any plans or opinions regarding this possible increase of cost? As we and as you mentioned, yesterday, we announced that we will be, in our future products as well as services not only focused on further innovation but also place top priority on customer safety. So we announced yesterday our plan to prevent another recurrence of the new seven like incident by preparing comprehensive plan that strengthens not only our development and manufacturing but also our quality related processes. And we have also adopted a new business management system that places quality first. So it's the quality of first management system. We do expect that quality related costs will increase as a result of these new processes and systems, but we believe that this is actually an investment that will help us recover our credibility from the customers by providing safe products. Also, we believe that this is an investment that would lead to increased sales. So that will be a way of also covering the increased quality related costs. Also, internally, we will continue to raise the efficiency of our product lineup as well as further improve our processes to enhance the cost efficiency. The second question is about the memory business. Both DRAM and NAND are showing very strong prices under a very tight supply and demand situation. This does help improve the profitability of the supplier. But if such tight supply and demand situation and strong prices continue, the BOM cost, the BOM cost of the headset makers such as smartphone makers will increase, which is giving rise to concerns that this may bring about this may actually hurt overall market growth. So within that context, can you give us some of your opinions regarding the possibility of the strong prices and tight supply possibly hurting the overall market? Actually, if you look at some of the long term price trends, even though due to the shortage of supply, the prices have been strong since second half of last year. If you look at the past 2 to 3 years from 2015, there was a large drop in prices. And we think that we're still in the process of those prices normalizing, adjusting to the normal levels. Of course, as you mentioned, if this goes on for a long time, if this shortage of overall components continue pushing up prices and that lasts for a long time, this may have a negative impact that you suggest. And that's why in terms of our operation, we closely monitor changes in market demand, and we will be operating and executing our investment as well as capacity plans so that we are able to effectively respond to customer demand. But overall, regarding prices, we believe that prices will be recover an optimized level based on market dynamics. And regarding this, we will continue our approach in the product mix, which has been to focus on the high end, the high value products, which helps improve our profitability as market The next questions will be presented by Mr. Peter Li from NH Investment Securities. Please go ahead, sir. I have two questions. The first question is at the enterprise level, this may be a sensitive topic, but there has been issues related with the special prosecution process. Do you can you comment on the impact that this may have on the business side? There is concern that the investigation may limit in any way the top management's efforts to identify and foster future growth business, especially this is concerning given the overall business outlook, that the outlook remains uncertain due to changing global political landscape as well as rapid paradigm shifts in the technology industry. However, the management will make its best efforts to ensure that the company and its business does not miss out on any growth opportunities due to this. The second question is to the memory business. If you look at recent media as well as events such as CES, we're all noticing that there is a shift in the IT industry towards, for example, new technologies such as AI, VR, AR as well as automotive applications next generation as they are unveiled, are showing different areas and different features. From the memory business perspective, how does this tie into your future business? We are also very closely watching the new trends that you've mentioned such as the increase in content of new application, changes in the hardware devices that bring that actually implement these new applications as well as how the ecosystems around these new applications are taking shape because we believe that this has implications especially in the mid- to long term demand changes for the memory business. These new applications may have limited impact in the short term of memory, but we think that in the mid- to long term, it would have a positive impact on the memory business. We also note that actually rather than these being individual application and device opportunities, actually it would be more of a network and mobility based solution where the server is at the center and all sorts of devices and services take place around it. But also looking at these new applications, we believe that it may take a considerable amount of time for the systems and also the content to settle down. And also, if you look at applications such as AI, it requires a very high technology a cutting edge technology, very technology intensive, high performance and high reliability memory. And so we are prepared to for some time to take for these new applications to mature as business opportunity. And so given the high level of technology that's required, we're not only preparing the technology, but also we're focusing on fostering and building strategic relationships with our customers so that we maintain our technology as well as market leadership as these new application areas open. The next questions will be presented by Mr. Nicolas Godoy from UBS. Please go ahead, sir. Yes. Good morning. Thanks for taking my question. The first one is on NAND flash. You just guided for bit growth this year to be in the low 30s in spite of your ramp up of PureTech. So I'm wondering how much capacity losses you may have at a wafer level in Line 16 due to conversion there continuing from 2 d NAND flash to 3 d NAND flash? And I have to ask a follow-up. Thank you. Please understand that we cannot offer any specific numbers or data for your question. We do believe that in the mid- to long term, our planner capacity share will continue to decrease And that is part of the reason why we're planning the increase of capacity at Pyeongtaek. But at this point, we cannot go into further detail. Okay. And on a more general manner, we've seen, obviously, the U. S. Dollar appreciating quite a bit since mid November against some of the key emerging market currencies for markets served by both the consumer electronics and mobile business. At this stage, have you seen, like in 2015, any negative impact on end demand by the key business verticals? And if how are you managing this going into Q1? Thank you. Actually, we have not yet seen any impact on the demand in these markets. Unlike what we saw in 2015. If you recall in 2015, there were some major exchange rate fluctuations. This time, what we saw at the end of last year is not to that degree. And so we are not noticing any effect on the demand side. Based on our experience, we believe that gradual change, gradual strengthening of the dollar or gradual weakening of emerging market currencies do not have much impact on demand unless the change in exchange rate is rapid that brings about change in prices, that is when the demand is affected. The next questions will be presented by Mr. Ricky Ta from HSBC. Please go ahead, sir. My first question is to the TV business. Recently, Sharp announced that it can no longer supply panels. As a result of that announcement, what are your plans and strategies regarding sourcing of the 65 and 72 inches panels? I would appreciate if you could give us some details of your plans. Actually, Sharp had notified us without any prior or advanced consultation. So there may be some issues in securing the 60 and 70 inches panels. However, we are also talking with our customers in order to, for example, switch up the panel sizes to meet such disruptions if they do occur. Also, we were already planning to substitute the lineup for the 65 and the 75 inch for this year. So we are already preparing models to substitute the inches that are affected. And overall, by continuing to cooperate and to talk with these panel suppliers and to maintain by maintaining a strategic relationship, we believe that we will have no issues in securing the panel of volume that we need for this year. So second question to the System LSI division is, can you give us some details or ideas of your 7 nano mass production plants? According to information, it seems that your 7 nano mass production plans are a bit behind or later than that of competition. Do you think that this may cause any customers of yours leaving due to the 7 nano mass production plant being later? Also, are you planning to adopt EUV technology? And if so, in terms of number of steps versus conventional technology, how much of an increase would that bring about? 14 nano technology. We will maintain that in the 7 nano technology as well. We plan to start initial production of 7 nano from 2018, and we will be using EUV technology, and we will maximize the advantages of EUV in terms of performance, power and scalability. The next questions will be presented by Ms. Kim Kyung min from Taishin Securities. Please go ahead, ma'am. My first question is towards the System LSI division. Recently, the foundries have been implementing strategies to diversify the customer base as well as the product mix. In that context, overall, what is System LSI's plans of its capacity operation this year? Since the 14 nanotechnology, we have been able to stabilize overall yield as well as produce or operate at a very stable mass production system. And with this advantage, we have been able to develop our customer base in various applications, including mobile, automotive, graphic as well. We believe that we will see a strong demand for our 14 nano technology this year as well, especially with the mid to low end mobile applications as well as new applications. We plan in terms of capacity operation to continuously monitor changes in market as well as demand and to flexibly operate our capacity to maximize the efficiency of existing lines and also to maximize our productivity. My second question is towards the I'm division. Last year, you've acquired Vibs Labs and have been focusing on an AI services. Could you give us a bit more color detail of the strategic direction of the AI service that you have? And also as another question, there are concerns of potential conflict with the AI as well as voice recognition platform of Google. What is your position on that? And how do you plan to respond? Well, to answer your first question regarding our service strategy for the AI, we are going to implement the AI service based on technology that we have developed by on our own. It will take the form of, for example, conversation based interface, and we plan to adopt this service on our next flagship model. But in addition to that, we will further leverage the capabilities that came with VIBSLab to operate and create an open ecosystem of AI so that not only our smartphones but other devices that we manufacture such as tablets, TVs and other home appliances will be connected onto this platform. Also, our services such as Samsung Pay and Health and also services offered by third parties will be invited onto this platform. That is one of the strategies that we have for the AI service. Regarding the second part of your question, as you know, Samsung and Google have been cooperating and collaborating very closely, and we are very long term partners. We believe that in order for AI, which is a new application, to effectively take root and successfully take root, actually, a collaboration between different companies in the same space would actually help and be potential overlap between our AI and voice recognition service and what Google offers, we believe that actually such competition between the services offered by Google and services offered by Samsung will actually, in the end, help enhance and develop the AI as a service further. And so we believe that we will be cooperating continuously in the future with Google in this space. The next questions will be presented by Mr. Yoo Jong Woo from Korea Investment and Securities. Please go ahead, sir. I have a question regarding the Galaxy S8. There's a lot of talk in the market about when that will be launched. Even if it may be difficult to give us a specific launch date at this point, could you give us at least a rough idea of when that launch would happen? Also, as the previous question mentioned, there are increases in prices of major components, including semiconductors. Also display prices are expected to go up as more and more high specification high end displays are adopted on the smartphone. This may cause, for example, decrease in smartphone demand. Immediately, though, that would increase the BOM cost for the smartphone maker. And so specifically related with S8, S8, given these potential BOM cost increase possibilities, how do you plan to secure profitability of the S8. Regarding the first question about the launch of S8, S8, when that would happen, please understand that I am not at liberty to release information of un launched products. But I can say that we are fully preparing to have a very successful launch of a product that is not only safe but also delivers the best user experience to our customers. Regarding the second part of your question, yes, due to the adoption of new features as well as increasing component prices, this may have upward pressure on the BOM cost. Also, this is part of what we do continuously. We continuously evaluate and user experiences user experiences, we bring meaningful innovation to the customers. And in the process, this may bring about increase of material cost in the end handset. We fundamentally respond to this by providing an innovative product that will drive up market demand and by increasing sales in the market. And also internally, we continuously try to optimize our resource operation and also to eliminate any inefficiencies. The next questions will be presented by Mr. Marco Shin from Goldman Sachs. Please go ahead, sir. And it's about the smartphone's business strategy for 2017. If you look at the Chinese handset makers, the shipment plans that they announced as well as the price plans that they announced, they seem to be prepared to very aggressively attack the mid to low end handset market. And given that competition from the Chinese makers, how do you plan to differentiate yourselves in the mid- to low end space? To differentiate our products in the mid- to low end space. For example, there are innovative features that were first adopted on our flagship lines that are considered more practical and widely used, those are the features that we will roll out towards the mid to low end models as well. For example, as you've noticed in the 2017 A Series, we've adopted the 3 d glass. Also, the A Series for this year has water resistant as well as dust resistant features and also have adopted a high pixel count camera on the front side. Also for this year's J Series, we plan to enhance the design as well as cameras to provide a better user convenience. And also, we'll be rolling out some of the services that we have been offering on the high end side that have had very positive responses such as Samsung Pay. We plan to roll that out today this year. The second question is towards the video or the TV division. Last year, we've noticed the very strong growth trends in the OLED TVs. Is that I think that's not only because of picture quality, but also new form factors are driving up exciting demand. Also, we've noticed that major players in the high end space, including Sony, have also started OLED, which may be a threat to the QLED that you offer. And so given this context of strong growth as well as new competition, how do you plan to respond? As we unveiled the QLED TV at the CES, we plan to increase the demand in the premium segment with our new QLED TV and also to expand our marketing efforts so that we maintain our position in the premium TV segment. We believe that what we launched this year, the new QLED TV, is a TV at a totally different dimension from the conventional TVs. Technology wise, it's based on quantum dot technology that uses metal that has various advantages. For example, it has 100% color volume so that the same color is maintained despite the brightness or the darkness of the environment. Also, it offers a very bright display of 1500 to 2000 HDR and also offers the highest contrast in the industry. It also offers a very wide visibility angle so that the pictures do not deteriorate regardless of where the viewer is seated. And so in terms of picture quality, it has no it has we believe that it is a completely different offering from what you have seen in the previous displays. But also in the design area, we have also made quite a lot of progress. We are focused on any inconveniences that the consumers may experience in the process of watching TV. And so for example, we have changed the cables to individual connections using optical cables. And also the design has been changed so that it offers a new gap wall mount so that the display, the TV itself blends into the overall environment as a part of the integral design. Also, in terms of the control, we have designed in one remote control system so that the same remote control is used to control other devices as well as using smartphones to control the displays and also connecting the smartphone to the TV display and also adopted voice recognition technology. So we believe that all of this will provide a differentiated experience to the consumers, and that is why we believe that this will maintain our leadership in the premium TV segment. The next questions will be presented by Mr. Peter Yu from BNP Paribas. Please go ahead, sir. My first question is regarding the semiconductor business, the memory business. I recall that during last quarter's conference call, you did foresee some uncertainty in Q1 as well as thereafter. However, it seems that the tone has changed today. Today's conference call seems to assume that much of this uncertainty has already been resolved and that you forecast a solid market for the full year. Can you explain a bit more detail of what uncertainties have been resolved, how to bring about this tone change? To answer your question, the uncertainty To answer your question, the uncertainty that we had mentioned in the last quarter was the risk of both changes happening rapidly on the demand as well as the supply side. On the demand side, the risk was that, for example, demand from smartphone companies may rapidly decrease in the first half or on the supply side that the industry supply may rapidly increase in the first half. We have not seen neither as of yet. We have not seen smartphone companies rapidly decrease their demand or the industry pump up its supply rapidly. And we believe that since we don't see it as of yet, that these uncertainties we can consider to have been resolved. The second question is more of a long term question. It's to the semiconductor business in relation to AI. With so much interest being attracted by AI, some are now developing and offering chips that are specialized for AI applications and SDKs. In that context, you've also heard that Qualcomm last year is announcing an AI specialized platform. So in that context, do you plan or are you planning on any specific semiconductor that's specialized for AI, such as APs or AI blocks? So in addition to what's happening on the SET side, I'm wondering if the semiconductor business is also preparing products specialized for the AI application opportunities. This does connect to the previous Q and A that we have. As I mentioned during the previous answer, we believe that AI as an application is an area that still needs for the ecosystem to mature in terms of both system as well as content. Of course, to implement AI as an application, a very technology intensive memory is necessary to deliver the high performance, the low power as well as reliabilities that are necessary for an AI application. We are, therefore, preparing various technologies related with machine learning based on HVR or TSV based HBM and for high capacities as well. And as I mentioned during the previous answer, we are doing this especially in the mid to long term together collaborating strategically with our customers so that we are able to deliver the memory solutions that better fit the needs of the customers. And to answer that question from the system LSI division's perspective, we do expect AI to be a major computing resources and the computing power because to enhance the computing resources and the computing power because we believe that in order to implement AI, especially on a platform such as a smartphone, a very high performance computing power will be necessary. And therefore, we are developing the AI to enhance the computing resources on it as well as developing and researching new algorithms and architectures that would implement deep learning effectively, and that is how we will be preparing our products for these new applications as they adopt AI. The next questions will be presented by Mr. Mark Newman from Bernstein. Please go ahead, sir. Hi. Thanks for squeezing me in. Congratulations on great results for the quarter. My question actually is on semiconductors, on memory. Looking at the bit growth for 2016 and guidance for 2017, considering supply demand is so strong and profitability getting for DRAM back to, I think, all time high levels of Q1 this year, I'm a little bit surprised that Samsung is not looking to be a little bit more aggressive towards capacity additions. Can you talk about what flexibility the company has to potentially grow more than the high teens you guided for DRAM and the 30% or so you guided for NAND flash. Is there if demand continues to be so strong and supply demand balance remaining tight, is there some possibility that Samsung can actually boost capacity through the year and potentially beat those numbers just like it did 2016? As you know, DRAM investments are very costly. And looking at the current market situation, we believe that we are able to cover the current market demand through our technology migration. So that is why we will be maintaining our operation flexibly and try to cover the market demand within our technology migration. And so given the size as well as the lead time necessary for increase of DRAM capacity, we believe that temporary increase of DRAM supply is not very easy. And therefore, in a tight supply and demand situation, we will focus our product mix on the higher profitability products and to respond flexibly to The next questions will be presented by Mr. Huang Min Sung from Samsung Securities. Please go ahead, sir. I have a follow-up question regarding the 7 nanotechnology. In these cutting edge technology and processes, securing the customer is a key requirement. You were the first to mass produce in the 14 and 10 nanos, but actually the competitor will probably do that first for the 7 nano because the competitor is going through a half nano shrink whereas you're going through a full nano shrink and also adopting EUV. Is this because of technology difficulties such as in terms of patterning? Or is this in order to meet the customer needs in terms of scaling? Regarding the 7 nano technology, it is progressing as our plan, so it is on schedule. In terms of patterning as well as scaling, in 7 nano space, both are challenging. But we believe that in the technologies, R7 nano is the most stable technology. Also, we are very confident that we will be able to provide a competitive solution. And therefore, we are confident that we will be securing customers for the 7 nano technology and that we will maintain the leadership that we have in the advanced technologies as we did in this 10 and 14 nanos. There's 3 more people on the queue. We will take the 3 questions before ending the call. The next questions will be presented by Mr. Mehdi Hosseini from SIG. Please go ahead, sir. Thank you. Thanks for taking my question. Two follow-up questions on your memory. Can you please share with us your plans for the Xi'an fab in China? And also, what do you see in terms of DRAM and NAND inventory down in the channel? I understand that manufacturers' inventories are very lean, but I would like to learn more of what you see downstream. Thank you. Regarding the Xian fab, actually no changes have been made to our original plan. So that will be operated as planned. Regarding the inventory, as of end of Q4, since we have been responding to market demand in the DRAM, in the case of DRAM as of end of 4th quarter, our inventory is quite tight on a quarter on quarter basis. Our information is that the market inventory is also a bit low even though we cannot disclose the numbers that we have. The next question will be presented by Mr. Seung ho Lee from IBK Securities. Please go ahead, sir. I have two simple questions. First is in terms of depreciation, if you look at your depreciation, 2nd quarter was about JPY 4 point 8 trillion, 3rd quarter KRW4.7 trillion, but in 4th quarter, we're noticing that that went up to KRW6 trillion. And so in terms of modeling for 2017, can you give us some guidance of what to set the depreciation for on a full year 2017 model? Second question is about Hammond acquisition. Is that going smoothly according to plan? When do you think you'll be able to close the deal? And when do you think Haman, therefore, will consolidated onto your financial statements, for example, around Q3? Regarding the first question, we've never actually provided guidance on depreciation. But basically, given that there was 25,000,000,000,000 investment made roughly in 20 16 and given everything else is equal versus 2015, I guess a certain percentage of increase would be warranted for your 2017 model. But I don't think we can give you a guidance of what the depreciation would be for the full year 2017 just based on fluctuation from quarter to quarter. Also to note, I think the 4th quarter, the depreciation number that you gave us is different from what we have. So you may want to check that again. Regarding the Hammond matter, there's nothing that has changed from our perspective. It's going on as planned. There are we've heard through news that there are some actions being taken by shareholders in the U. S, which we will have to watch. But nothing has changed from our perspective. The last questions will be presented by Mr. Simon Wu from Bank of America Merrill Lynch. Please go ahead, sir. My first question is about the VLIP growth projections that you've offered for 2017 full year on the Memory side. As you as we saw in the Q4 results, the profitability of the Memory business is very strong. But for the full year 2017, you've projected a NAND bit growth of low 30%, which I feel is maybe too conservative given the fact that you'll be adding 3 d capacity, that you'll be mass producing 64 layers and also the demand from this Enterprise Solution business appears to be very strong this year. I'm thinking maybe 40% to 50% bit growth would be more reasonable or realistic. Can you offer some explanation towards your NAND bit growth projections for this year? As we mentioned, yes, we will be operating the NAND capacity at Pyeongtaek from second half of this year, but we will be doing that on a step by step basis. And that's why the capacity increase may appear to be more gradual than what you expect because it's now going to be a full one step increase. The second question is to the LSI division related with the DDIs for the OLED. I've noticed that there's a lot of OLED investments that are being made. I'm wondering if the preparations to in terms of capacity to produce your own DDIs are going smoothly. And also in terms of profitability and economics, is it more profitable or competitive to do the driver ICs on 20 nano or 14 nano class technology? Or is it more effective or profitable to do that on, for example, 30 node class technology that's already been depreciated? Regarding the DDIs, our DDIs for not only OLEDs but also LCDs, we're currently preparing for demand based on our current capacity. As you mentioned, whether we will use the cutting edge processes or not will have to be decided depending on performance as well as the ROI considerations that you've mentioned. Currently, we have not specifically decided to use cutting edge technologies for the DDI