Earnings Call: Q1 2016

Apr 28, 2016

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2016 First Quarter Earnings Results by Samsung Electronics. This conference will start with a presentation followed by a division of Now we shall commence the presentation on the fiscal year 2016 Q1 earnings results by Samsung Electronics. Good morning. This is Robert Yi from Investor Relations. Thank you for joining our Q1 2016 earnings call. With me from the business units are Mr. Cheonjae Won, Senior VP of Memory Marketing Mr. Ho Gook is the VP of System LSI Mr. Lee Chang Hoon, VP of Samsung Display Lee Kyung Tae, VP of IT and Mobile Business Mr. Lee Yoon is the Senior VP of Visual Display and Mr. Kim Sang Yeo is the VP of IR 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 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. Before getting into business results, I would like to update you on the share buybacks. Of the KRW 11.3 trillion buyback program that we announced last October, we completed the first two phases this month. We invested approximately KRW 7.4 trillion during these two phases, and we were able to repurchase and cancel 4,330,000 common shares and 1,770,000 preferred shares. In both phases, we are able to reduce the total amount spent in the buyback by increasing the proportion of preferred shares relative to the outstanding share ratio. Today, the Board of Directors approved the 3rd phase of the buyback program. The total amount is approximately KRW2 1,000,000,000,000 with 1,300,000 common shares and 320,000 preferred shares to be repurchased. It will take about 3 months to complete starting tomorrow. At this pace, we'll be able to complete the total KRW 11.3 trillion buybacks in early 4th quarter. Now I will go over our Q1 results. In the Q1, the overall revenue was KRW 14,800,000,000,000, increased by 5.7% year on year. The increase was mainly driven by the early launch and successful sales of Galaxy S7, expanded 14 nano supply of system LSI products and increased sales of OLED panels. The gross profit increased by KRW 1,200,000,000,000 year on year. Most of the improvements came from the set business as high end product mix of smartphones and TV improved. As for SG and A expenditures, the percent of revenue decreased slightly year on year despite the increase of marketing and promotional expenses associated with the early launch of Galaxy S7. The company's continued efforts to bring more efficiencies in managing expenses, including streaming lining into low end smartphone lineups, have contributed to this result. The operating profit increased by KRW0.7 trillion year on year to KRW6.7 trillion and the percent of revenue increased by 0.7 percentage point. We estimate that weak Korean won against major currencies such as U. S. Dollar and euro in the first quarter positively component business. Other non operating profit of KRW360 1,000,000,000 mostly came from a gain on sale of investment in Samsung Card. I would like to make few comments on operating profit by major businesses. For the Semiconductor business, despite weak memory demand due to seasonality and supply demand imbalance, the memory business achieved solid earnings by expanding sales of high value added products while continuously reducing costs through technology migrations for both DRAM and vertical NAND. For the System LSI Business, while Q on Q earnings decreased slightly due to the impact of component inventory adjustment by customers, year on year earnings increased led by increase of 14 nano products. For the Display Panel business, although OLED earnings improved mainly driven by Galaxy S7, overall earnings of the Display Panel business decreased due to a sharp decline in LCD earnings. LCD business experienced temporary yield issues while adopting new process technology as well as TV panel price decline in the Q1. The I'm business achieved a substantial earnings improvement both year on year and Q on Q. The improvement was mainly driven by the early launch of Galaxy S7 and its strong sales as well as improved cost efficiency through the streamlining of mid- to low end smartphone lineups. In the Q1, we had onetime expense reduction from a royalty settlement, but the impact on operating profit was less than 1% of I'm revenue. Now I would like to turn to the outlook. In the Q2, we expect our solid performance to continue. As a result, we are cautiously optimistic that operating profits to increase quarter on quarter, led by earnings improvements of Display Panel and Consumer Electronics Business and continued solid earnings in Mobile and Semiconductor Business. For the SET business, Mobile business will focus on securing solid earnings in the 2nd quarter by expanding sales of Galaxy S7 and continue to secure strong profitability of mid to low end products. Consumer Electronic business is expected to improve earnings led by strong seasonal demand of air conditioner and release of new TV models, including upgraded SUHD TV. For the component business, Semiconductor will strive to maintain solid earnings by improving high valued memory product mix such as vertical NAND SSD sales for the server market and also by expanding supply of system LSI components for premium smartphones. In the display panel business, we expect the earnings to improve sizably compared to the previous quarter. LCD profitability is expected to improve with the stabilized yield of TV panels well as improved supply demand conditions. OLED business will maintain solid earnings driven by increased shipments for Galaxy S7 and expanded external customer base. In 2016, we expect the SET business to continue to generate higher earnings than that of the previous year while focused on stabilizing component business earnings in the second half. For Semiconductor business, we'll continue to manage DRAM business with a focus on sustaining solid profitability while enhancing technology competitiveness. The V NAND for V NAND, we believe we have a very strong technology leadership coupled with a solid opportunity to expand VNAND based SSD into server market. System LSI Business will also strive to improve profitability year on year by enhancing overall fab utilization and expanding mid- to low end SoC lineups by applying 14 nano process. For Display Panel Business, we expect OLED earnings to increase driven by increase of flexible and high resolution panels, and we expect LCD profitability to improve in the second half, mainly driven by improved product mix amid better supply demand conditions. For the I'm business, we expect the sales of flagship products to increase year on year, especially with the strong Galaxy S7 demand and new model launches in the second half. Also, we will continue to manage cost efficiencies through streamlining of smartphone lineups. For Consumer Electronics business, we plan to focus on profitability by increasing premium products, utilizing SUHD and curved lineups. With the Olympics and other major strong sporting events driving global demands for the large sized TVs, we expect strong improvements in operating results year on year. Digital Appliance Business was strived to improve earnings by expanding sales of premium products, including smart appliances as well as enhancing B2B business. Now I would like to comment on our capital expenditure plan. During the Q1, we executed KRW4.6 trillion in capital expenditure, including KRW2.1 trillion for semiconductor and KRW1.8 trillion for display. We have not finalized the annual plan for 2016, but we may see the expenditure to increase slightly compared to last year's with various business opportunities we have. Based on our current view, CapEx for the display panel business may increase as we see strong market demands for OLED panels. For DRAM capital expenditure, our strategy is to be flexible based on supply and demand conditions. And at this point, it is likely to decrease year on year. Before the presentation of each business unit, I'd like to share several data points for key business areas for your convenience. For DRAM business in Q1 this year, our bit growth was low single digit with low teens of ASP decline. For the second quarter, we expect the market DRAM bit growth to be low teens and our we expect our bit growth to be in line with that of the market growth. And for the year, we expect the DRAM bit growth to be somewhere around near 20 mid-twenty percent. And again, we will grow in line with the market. For NAND flash, in Q1, our bit growth was high single digit, and we saw mid single digit ASP decline. And for the Q2, we expect NAND market bit growth to be high single digit, and we will grow with the market. For the year, we expect the NAND bit growth for the market to be around 40%, and we will outgrow that of the market growth. For the mobile business, our total handset shipments in Q1 was 92,000,000 units, and we had 6,000,000 tablet shipments. The total blended ASP of these units were $2.10 slightly above $2.10 and the mix of the smartphone within the total handset was about mid 80%. In Q2, we expect the total handset shipment to be slightly lower than that of the Q1 as well as a tablet shipment. We do expect the improvement in blended ASP and the mix of the smartphone within total handset would reach high 80%. For TV set business, we shipped in Q1 roughly 10,000,000 units of LCD TV. And in Q2, we expect to see mid single digit increase, and we see the mid to low single digit increase on TV sales for 2016. And now I'll turn the call over to the gentlemen from the business units, starting with the semiconductor. Good morning. This is Seowon Jeon from the Memory Marketing team. I am going to present our business result for the Q1 and the market outlook for the next quarter. For NAND, although overall set demand was low due to weak seasonality, SSD demand continued to grow driven by increased adoption of high density products. Mobile demand remained solid due to content growth as Chinese smartphone brands read adoption of high density products over 32 gigabyte. We'll enforce product competitiveness and profitability by spending the mass production of a 3rd generation free NAND and process migration of a 10 nanometer class planner. Especially, we strengthened our SSD product competitiveness by spending sales of a client SSD over 256 gigabyte and high density enterprise SSD. For DRAM, even though overall demand was weak, affected by the slow PC market, smartphone density continued to grow and server DRAM demand remained solid, driven by high density demand from data center. We strengthened cost competitiveness by expanding our 20 nanometer product portfolio and focused on maximizing profitability through profit focused product mix and supply management according to the market situation of each product. Next, I will comment on the memory market outlook and our strategy for the Q2. On end, we expect a strong growth trend for high density SSD due to the expansion of cloud services. Service diversification by mobile and Internet companies and accelerate transition of HDD to SSD by enterprise companies. For mobile, we expect adoption of high density products over 64 gigabyte to expand, led by growing trend of high resolution and specification smartphones. Supply and demand for each application can vary depending on each supply strategy for increasing demand for solution products. We will continue to lead the demand growth of high density and value added solution products by actively responding to high endurance enterprise SSD and also by increasing supply of differentiated mobile storage products based on free NAND product competitiveness. Also, we will make our best effort to improve earnings in our NAND business through the process migration of a 3rd generation free NAND and planner. For DRAM, PC demand is expected to improve and high density server demand is expected to be solid, driven by expansion of new server platforms. We also expect mobile demand to improve, driven by new smartphone launches and continuous content growth, mainly in China. We will focus on strengthening market leadership and securing profitability by increasing sales of competitive 20 nanometer high density and value added products such as 8QV DDR4 and LPDDR4 and by actively responding to mobile, server and graphics demand. Although there are uncertainties in macroeconomic conditions and the IT industry in 2016, we expect the server and mobile to drive overall demand with the trend of cloud services expansion and mobile content growth. Supply and demand will depend on 20 nanometer ramp up and VNAND mass production status in the industry. For NAND, we will strengthen product competitiveness by expanding 3rd generation of V NAND mass production. Also, we will reinforce our market leadership and lead high value added astrology market growth by spending sales of high density and value added enterprise and PC SSD as well as mobile storage such as UFS and eMCP. For DRAM, we will continue profit focused product mix and flexible supply management according to supply and demand conditions in the market. Also, we will concentrate on reinforcing stable mid to long term traffic base by proceeding with 10 nanometer class migration. Now moving on to the System LSI Business. In the Q1, while earnings decreased Q o Q due to customers' inventory adjustment, we could achieve solid year over year growth led by increased demand for 14 nanometer process. In the second quarter, we expect the earning to improve driven by new premium smartphone launches and inventory restocking of customers. In 2016, despite expected challenges from muted premium mobile market demand growth, we will strive to improve our profitability through diversifying 14 nanometer foundry customer base and by enhancing product lineup of mobile SoC. We will continue to focus on strengthening foundation for long term growth through starting 10 nanometer production by the end of year 2016 and diversifying application base into wearable, VR, IoT and Networks. Thank you. Good morning. This is Chang Hoon Lee from the Planning Department of Samsung Display. In the Q1, although we brought solid result from OLED panels, our total earnings declined from the previous quarter, mainly due to the decreased shipments of LCD panels. For LCD panel, in the Q1, our earnings sharply declined Q o Q due to the decrease in demand and the weak seasonality and continued ASP decline as well as the adoption of the new technologies. We have applied new technologies in order to strengthen the competitiveness of our LCD panels, but experienced a production delay in the process of migration. However, most of the issues have been cleared, and we expect production yield to be stabilized during the Q2. In the Q2, we expect TV demand to be fueled by sports event, Chinese Labor Day and display trend moving towards larger size. In response to these market conditions, in the Q2, we will reinforce profitability by stabilizing yield of the new TV production, increasing shipment of strategic products, enhancing PMICs with cost reduction. For OLED panel, in the Q1, our results reflect enhanced Q o Q due to increased demand for mid- to low end smartphones and launches of new high end smartphone panels. In the Q2, we will make the best effort to improve our earnings by actively responding to the demand for new products as well as enhancing utilization led by expanded external customer base. Now I'd like to present the display market forecast and our core strategies in 20 16. While the display industry expects some encouraging signs such as continuous UHD TV market growth and size migration to larger size. There will also be continued challenges by the industry capacity expansion. We will appropriately respond to these market conditions in 2016 by focusing on cost reduction, inventory management and expanding the portion of a high valid product while continuously monitoring the market conditions. For the OLED industry, we expect the global smartphone market to slow down and the growth mainly coming from the low end products, but the demand for OLED panels is expected to increase continuously. Under these circumstances, we will address the new products to major customers and expand customer base. We will also secure capacity according to the market demand and reinforce the competitiveness competitive edge. And we will reinforce our market leadership by continuously developing new applications. Thank you for listening. Good morning, everyone. I'm Kyung Teo Lee from the Mobile Communication Business. I'd like to present our 2016 Q1 business results and the future outlook for the IT and Mobile Communication business. During the Q1, market demand for both smartphone and tablets decreased from the previous quarter due to weak seasonality. As for our mobile communication business, smartphone shipment slightly dropped Q on Q as a result of the market seasonality and reduced sales of our long standing mid to low end model. However, our profit increased compared to the last quarter, thanks to the strong sales of Galaxy S7 and S7 AG released in the Q1, which improved product mix. In addition to enhanced profitability of mid to low end smartphone. Also, our earnings improved from the previous year. We launched our latest flagship model, the Galaxy S7 and S7HE on March 11, a month earlier than their previous predecessors. For the Galaxy S7 and S7 HE, we enriched design attractiveness of the product while enhancing feature such as high resolution of camera, memory slot, water and dust resistance, bigger battery capacity and advanced HU X. To provide our customers with a value and meaningful experience in everyday lives. In addition, we address the needs of our customers in diverse lens of focus of marketing, include the product and reflected those deals in our newest flagship model. With these efforts, the Galaxy S7 and S7 Edge are receiving much interest and affection from our customers. And this year, the U. S. Consumer Reporters and the European Consumer Association of the UK, France, Spain, Belgium and the Netherlands appraised the newest flagship models as the best smartphone in the market. Currently, our flagship models are showing robust sales performance in all regions, including North America and Europe. Also, the Galaxy S7 and S7 HER are outselling the predecessors in terms of sellout and accordingly, inventory level is very healthy. Looking at our tablet business, our shipments declined in the Q1 as a result of a market slowdown and the typical effort effect over seasonality. As for the network business, our earnings decreased from the previous quarter mainly because of reduced LTE network investment by some partners. Next, I would like to talk about the outlook for the Q2. Market demand for smartphone and tablets is expected to remain at a similar level to the Q1. For our mobile communication business, we will maintain our current positive sales momentum through full fledged global sales of the Galaxy S7 and S7HE. We expect the Galaxy S7 and S7HE to show clear distinction in sales compared to its predecessors. Based on continued current sales trends and its differentiated product capabilities. As for the Galaxy A and J3, we will increase our shipment volume mainly with the newly released bottles in 2016, while maintaining the profitability of B2 low end models to continue our strong profit in the Q2 as we did in the Q1. For the network business, we will seek further growth leveraging the LTE expansion of our main overseas partner. Lastly, let me address the outlook of the year 2015. Market growth for smartphone is expected to slow down Y on Y, while the tablet market demand may decline from the previous year. We will improve our profitability to increase our earnings Y on Y by expanding smartphone sales and maintain optimized product portfolio strategy. Especially in the premium segment, we will strengthen our leadership with the Galaxy S7 and S7 Edge and our new flagship model introducing in the second half of twenty sixteen. Also, in the mid- to low end market, we will increase our shipment volume mainly driven by the Galaxy A and J Series and continue to aim for improving profitability. Moreover, we will constantly drive the global expansion of Samsung Pay and seek out for new business opportunities such as VR and wearables. For our network business, we will strengthen the foundation for further growth, utilizing our LTE business experience and technological excellence, while entering new LTE markets including Southeast Asia. Thank you for listening. 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 Q1. TV market demand under the typical weak seasonality declined both year on year and quarter on quarter, which was impacted by slow economic recovery in the euro zone and continued weakness of emerging market currencies. Despite such market conditions, our earnings improved compared to the same period last year by expanding sales of premium products such as SHD and COVID TV. In the digital appliance business in the Q1, while the North American market continued its growth momentum, emerging market demand decreased year on year due to slower market growth in China and the impact from unstable currencies from emerging market. Under these circumstances, we expanded sales of innovative products such as shelf collection refrigerator and active washing machine and increased revenue in the North American market. Accordingly, our earnings improved from the same period of previous year. Next, let me briefly share with you the market outlook. As for the Q2 TV market, due to the impact of sporting events such as the Euro Cup and Brazil Olympics, we anticipate a slight increase in TV demand year on year. In response, with the focus on our 2016 SH TV, we will strengthen premium lineups such as UHD and curved TV in order to further improve profitability as well as earnings. This year, based on the world's only eco friendly quantum dot display technology, 2016 HD TV features, the most true to life picture quality and innovative design. Furthermore, we will put more focus on positioning 2016 SDHD as the representative next generation premium TV. Also, by addressing customer pain points, we made significant improvements in smart TV experience. Our new smart TV automatically recognizes the exact devices you have connected, and it allows consumers to control various TV connected devices with one remote. Also, consumers can access the content from multiple sources quickly and easily through one screen. 2016, while we continue to introduce innovative products, which reflect consumers' lifestyle and needs, we will solidify our leadership in premium market based on our strong brand status in order to outperform the market and improve earnings. As for the Digital Appliance business, in the second quarter, while global market uncertainties persist as the possibility of increased global currency risk exists, we expect the U. S. Digital appliance market continue to grow. Under these circumstances, we will continuously improve our business performance by strategically targeting premium digital appliance market through our newly launched products such as Family Hub Refrigerator. This year, we will make continued efforts to lead the premium home appliance market by continuously launching innovative products. And at the same time, we will diversify our revenue sources by enhancing B2B business, including system air conditioner in order to improve earnings continuously. Thank you. Okay. This concludes the presentations by the management. Now I'll we'll move to Q and A sessions to ensure the communication is perfectly clear that we will be employing the consecutive translation for the session. I know it takes longer, but I think this is the best way to make sure that there's no misunderstanding. So let's turn to Q and A, please. Now Q and A session will begin. The first question will be presented by Ricky Sa from HSBC. Please go ahead, sir. Yes. I have several questions related with the 3 d NAND. First, it seems a main source of the demand for 3 d NAND is the enterprise storage as well as servers. It seems that the fab in Shan is now ramped up to full capacity as of the start of 20 16. But in anticipation of greater demand in the second half, do you have any plans of further expanding the capacity? And if so, how will you go about and do that? The other part of that question is, would the migration to the 48 layer 3 d NAND help increase output? And if so, what would the share of your 38 layer 3 d NAND be as of the end of this year? As you mentioned, a major source of the V NAND is coming from enterprise applications, especially with the expansion of the services, V NAND and SSD adoption is the it seems to be the preferred choice by customers because of the high reliability in Endurance as well as in terms of TCO. It is the high Endurance as well as high density VNAND SSDs are being adopted more. And this is a major source that's driving up demand for our VNAND. So it's the data centers as well as servers and enterprise applications. And we believe that with our differentiating VNAM products that offers high density as well as high endurance and low power, we are very well fit to meet this demand. It's difficult for me to go through the details of our capacity increase plans or plans to increase our production, But we are expanding our mass production of the 3rd generation V NAND. And at the same time, the customer demand is also increasing on this side, and we will be continuing to meet and further increase our positioning in the market. Next question please. The following question will be presented by JJ Park from JPMorgan. Please go ahead, sir. I have two questions. The first question is related with the mobile side. In addition to the strong demand for the new flagship Galaxy S7, it seems also the J Series has been a contributor to the good performance. Even though the mid- to low end is a very competitive segment, is there a reason why particularly the J Series has been able to be more profitable? And do you think this profitability of the J Series will be able to continue in the future? As you know, since late 2014, we have revised our mid- to low end product lineup with a focus on the more competitive Galaxy A and J Series. And with the new models introduced for 2016 Q1, the sales of Galaxy A is increasing especially around Europe and China, and the sales of Galaxy J Series is increasing especially with a focus in the emerging market side. Also, the cost structure of the mid to low end lineup has been improved, thanks to optimized lineup, but also the increased use of common components and better yield of internally produced components. Also, our marketing spend related with the mid- to low end lineup has been more efficient. And we think that with continued innovation of the business fundamentals as well as continued improvement in the cost structure, this profitability of our mid- to low end models will we expect will be maintained in the future. My second question is related with the display side. Could you give us your investment plans related with OLED for this year as well as next year? And also, could you give us an idea of the capacity of the A3 line, which produces the flexible OLED also this year and next year? We do expect OLED demand from the smartphone market to continue to increase in the future. And therefore, we are planning to make investments for expansion, if necessary, at the optimal time to meet this increase in OLED demand. Even though it's difficult for me to give you the details of the size or in terms of the capacity of our facility investments, our basic approach is that we will maintain our competitive edge. And in order to maintain that competitive edge, we will continue to meet the market demand and customer needs through appropriate investments. The following question will be presented by Nicolas Godoy from UBS. Please go ahead, sir. Good morning. I've asked 2 questions. First one is actually a follow-up on display. Could you maybe give us an idea of how much would external customers represent of your mobile OLED revenues in 2017 2018? Bearing in mind, you already gathered, if I'm correct, that for this year, those will be around 30% of revenues. And I have a follow-up question. Thank you. The plans regarding our OILITY business, especially serving the external customers that we mentioned during the last quarter's conference call is being carried out smoothly according to schedule. We are not only maintaining the advantages of OLED, which is the high picture quality and performance, but also have gained a cost competitiveness enough to compete with LCD solutions. We are continuously focusing on increasing adoption by external customers, and we have also been building up our collaboration system so that we will be able to serve our external customers better and more external customers. At this current time, it's difficult for us to go into details of 2017 2018 plans, but we do expect and we do plan to focus on continuously increasing our business towards external customers. Okay. And on the NAND side, if we look at your profitability overall for semiconductors, it's very clear that margins improved for NAND flash in Q1. Is that an indication that 3 d NAND flash costs are now mature and optimized and that therefore you are realizing with 48 layers in particular some of the cost benefits you would expect to see versus 16 and even maybe 40 nanometer planner as well? Thank you. Actually, we believe that the main contributing factor to our earnings in the Q1 is the fact that we were able to capture the demand from the SSDs for the high density enterprise servers, and we were able to, therefore, capture the more profitable opportunities in the market. Regarding the cost of the 3 gs VNAND that we are producing, it has already met in terms of cost competitiveness level similar to a 10 nano class planner. And as we further expand the mass production of our 3 gs NAND, profitability is expected to further increase. Securities. Please go ahead, sir. I have two questions related with the TV business. The first is related with the profitability. Even though Q1 seasonality is weak and also despite the seasonality, global TV demand was weaker than expected, it seems your TV business profitability has been quite strong and sound. Of course, one reason would be the decrease in the panel prices, but were there other reasons other than the decrease in panel prices that explained the relatively strong profitability of the TV set business? This ties in with the second part of the question, which is the fact that in the second quarter, the panel prices have already started to stabilize. Would this indicate that the TV set business profitability would start to decline in the second quarter? Or are there other reasons other than lower panel prices that would explain your profitability and therefore actually indicate that the margins of the TV set business will continue to be maintained despite stable panel prices? 2nd question relates with the Quantum Dot TV, which since last year has been showing good sales. And especially with the LED technology, the light source technology getting better, the color reproduction of Quantum Dot TV technology seems to have been improved as well. Do you think that in terms of picture quality, Hwansun Dop is a competitive solution even to OLED? To answer your first question regarding our earnings in the Q1 and also outlook to the Q2, yes, panel prices were lower in the Q1, but that's a factor that was enjoyed not only by us but other competitors in the market. We contribute our Q1 results more to the fact that we were able to analyze the market correctly and focus more on the sales of the premium segments such as SUHD and curved TVs, especially in the developed markets. And by doing that, we were able to enhance our profitability. In the Q2, actually, we have more factors to look forward to, such as the launch of the new models. Also, there will be the Euro Cup and the Brazil Olympics in coming in August, which will also demand which would also drive demand for TV. And so our plan is to respond to this by having a stronger lineup on the high premium segments such as SUHD TVs, curved and large screen TVs. And with this, we believe that we will be able to minimize whatever increase in panel prices that we may experience and continue to grow and maintain our profitability. And to answer your second question regarding Quantum Dump TV and comparison with OLED solutions. As you know, our SUHD TV is the world's only such solution that uses Quantum Dot TV, which is the eco friendly solution. It is based on our proprietary technology and is an innovative product in terms of color as well as brightness. Also, recently, the Hollywood content producers have defined the HDR specification as 1,000 lit and our quantum dot TV solution or UHD TV is capable technically the ones that were launched this year, to actually reproduce the 1,000 lit or to express 1,000 lit spec pictures. And so it is a solution and a product that enables viewers to enjoy the content as intended by the original producers of the content. You've mentioned OE led, but unlike OE led or organic solutions that would lose color as well as brightness over time, Our content. Tv technology is a non organic solution that can maintain the high quality of color as well as brightness over a long period of time of usage and was designed to do this and will be able to satisfy the customer needs in that aspect. The following question will be presented by Min Sung Huang from Samsung Securities. Please go ahead, sir. I have two questions related with the semiconductor side. Could you give us your change in DRAM and NAND inventory on a quarter on quarter basis? And I would appreciate if you could detail that into work in process versus finished product inventory for DRAM and RAN Q on Q. And given the fact that DRAM prices have continued to decline, if DRAM prices, even in the future, continue to decline, does the company have any plans or thoughts of trying to defend the prices by either converting DRAM to NAND or by increasing its DRAM inventory? Please understand that it's difficult for us to give you the details in terms of the work in process as well as finished inventory for DRAM and NAND. But as we mentioned in the Q4 conference call, our basic position is that our production is flexibly operated depending on the demand and supply situation for each specific market as well as the profitability of each specific product segment. Currently, as you mentioned, the NAND market outlook is very strong. Actually, our outlook towards the DRAM market is not that bad either. And our production plan going forward as well as our inventory will be managed flexibly depending on our market outlook. And our current inventory as well as work in process is at stable levels. My second semiconductor question regards the AP side. It seems when we look at the handset OEMs, there's an increasing trend of handset OEMs using their own AP. This ties in with your comments during the presentation of system LSI planning to expand its SoC lineup. So given all of that, how much do you think the ratio of Samsung's own AP or what how much of the ratio of your own AP can how much of that or how far can that increase to is the first question? And my second question regards with lagging edge. How are what are your plans in terms of enhancing or further expanding the profitability of lagging edge? To answer your question about the ratio of our own APs that will be used in Samsung handsets, there is no set ratio because our basic policy in terms of component sourcing is that we will adopt what is most competitive that is available out in the market and that policy will be maintained in the future. To answer that question from the system LSI side, the ratio of owned or in house or captive AP that's used by the mobile business is a decision or the results of our customers. So that's something that the system LSI would not be able to comment on. Regarding the lagging edge, our basic policy towards our process is that at the front end side, we will provide to our customers the best performance and the most value. And then the cost savings at the following side of or the following processes will also be approached as a way of providing the most affordable as well as profitable solution. The following question will be provided by Mark Christian from Goldman Sachs. Please go ahead, sir. Yes. I have one question regarding the mobile side. You've mentioned that the S7 since launch has been showing very strong sales. Could you give us a better picture of the current sellout of S7 and S7 Edge? And would it be possible to compare that to the previous S6? Well, as mentioned during the speech, our Galaxy S7 and S7 Edge are both showing very a stronger sellout compared to the previous flagship model, especially the market response to the Galaxy S7 Edge has been stronger than expected, and we're seeing very fast turnover speed for the Galaxy 7 Edge in major areas such as North America, China and Middle East. They are almost being sold immediately upon being supplied and inventory levels are therefore at very healthy levels. With current trends expected to be maintained, I think even at a full year basis, the S7 and S7 Edge is expected to show clearly distinctive to show a clear distinction in sales compared to its predecessors. The following question will be presented by Peter Sacha Li from NH Investment Securities. Please go ahead, sir. I have two questions related with the semiconductor side. It seems you have been continuously reducing your investments on the DRAM side. Could you provide your company's outlook on the DRAM growth for this year? And what is the company's strategy regarding the DRAM business this year? Also, could you once again clarify the data point for the Q2 DRAM that you gave during the presentation? To answer your second question first about the bit growth for DRAM and NAND, what we saw in the Q1 was that DRAM bit growth our company bit growth remained in the lower single digits and same for the NAND. For Q2, what we're expecting is for DRAM bit growth in market to grow in the low teens and the company bit growth in DRAM to be within line of market growth. For NAND, in the second quarter, we're expecting a high single digit growth in market DRAM growth, and we will be in line with that. Regarding the first question, we're seeing the main drivers for DRAM demand growth being the server and mobile applications. And even though the industry is expected to further its migration towards 20 nano technology, the fact that it's dealing with more difficult technology and the fact that it takes some time for customers to evaluate and accept new supplies, we don't expect there to be major increases in supply of DRAM in the near future. And actually, we're thinking that the demand supply situation for DRAM will actually improve as we approach the second half of this year. Given that market outlook, we will continue to manage our product mix flexibly and with profitability in mind to better fit the demand in the market. And we will in terms of full year 2016 DRAM shipment, we expect to be within in line with the market growth. Semiconductor is on the new application side and your outlook on new applications as well as your strategy in meeting these new application demand, VR as well as self driving cars are gaining a lot of attention as new possible applications. What is your outlook? And what is your strategy? Regarding VR, with more and more high resolution content being used on a wide basis, we think that there will be more demand for high density and high bandwidth memory, not only in PCs but also peripherals. Regarding automotive applications, even though currently the main source of automotive demand for memory is related with infotainment, we think that with more ADAS tech features being adopted, there will be more demand from the auto side for memory to process the information that comes in from the sensors. So in anticipation of such additional demand from consumer as well as automotive applications, our plan or our strategy is to allocate a specific supply capacity or a line to meet these segments or these application demand so that the customers from these segments and application will be able to enjoy stable and sufficient supply. The following question will be presented by Claire Kyung Min Kim from Daejun Securities. Please go ahead, ma'am. My question in regards to System LSI business, which has been changing its business or operating strategy from year to year, even though I guess the main tone of expanding the captive customer would be maintained, especially given the recent earthquake in Asia. Do you see any possibilities of the customer share changing? And also, it seems you would also need to have some new strategies to meet the back end related back end process related demands of your customers, especially related with POP. So do you have what are the details of your strategies regarding the back end side of your processes? Yes. So the recent earthquake was quite a tragic event, and we would like to take this opportunity to express our condolences to everyone who has suffered and also hope that the damage would be repaired and recovered as soon as possible. Regarding the earthquake, we have not sensed any short term demand changes due to it. Also, you've asked about the back end processes of System LSI. We have not changed our approach or policies regarding the back end processes compared to the start of this year. Our basic approach has always been to continue our R and D efforts so that we are able to provide whatever high-tech and high performance packaging needs that are necessary and demanded by our customers. The following question will be presented by Simon Wu from Bank of America Merrill Lynch. Please go ahead, sir. I have two questions. I'll give you the first question and then ask you my second question after your response. It seems actually the Q1's earnings have produced some very good numbers. You've also mentioned that the share buyback and cancellation program is moving ahead as scheduled. I would like to hear your plans regarding your shareholder return plans or policies within the free cash flow that will be generated this year. Do you have any plans quarterly or full year that you can share with us at this point? Assuming that your good strong performance that we saw in the Q1 will continue in the Q2 and thereafter, what kind of shareholder return policies could we look forward to? Regarding our shareholder return policy, the policy that we announced at the end of last year has not changed. We are maintaining that policy. As we mentioned during the presentation, this year, we're expecting investments or CapEx to there is a possibility that it may increase slightly. It's too early in the year to talk about operating profit or net profits on a full year basis. Also, it may be worth considering that there's still part of the 30% of free cash flow that we announced as part of last year's shareholder return that has not yet been used. And so even if there is some fluctuation in the free cash flow expectations for this year, I think what we have left would be able to cover it and us not change our shareholder return policies. So our free cash flow, 30% to 50% of it being used for shareholder return, that policy is not changed and is being maintained. You've mentioned about quarterly dividend. I think the fact that we have not announced a dividend at this point indicates that this year, we would not be adopting a quarterly dividend policy. We have been paying out a midyear dividend, which usually is announced after the BOD meeting resulted at the end of July. My second question regards to SysMLS Eye Business. Recently, some Taiwanese companies have started wafer level packaging. There's also integration, SiP on a single chip basis. You have mentioned your plans of starting mass production of 10 nano at the end of this year, but that is the traditional track of following Moore's Law. Aside from that, I'm thinking looking at how the industry is moving, there will be a greater need towards new back end solutions that is not only based on POP, but that finds new ways, for example, integrating chip to chip. And could you tell us the company's plans and strategies regarding that aspect? Regarding the 10 nano production plan, the plan is moving ahead smoothly with a target of year end. Regarding the packaging, in addition to the existing packaging technologies, we are continuously developing internally new packaging solutions that best fit the front end And in line with the new developments at the silicon level, we will continue our R and D to develop high performance as well as high value back end solutions. The following question will be presented by Mehdi Hosseini from SIG. Please go ahead, sir. Yes. Thank you. I actually have a follow-up question to the 10 nanometer capacity system on the side. When you're ready for mass production, how should we think about additional capacity? Or should we think about that you would convert existing capacity to 10 nanometer? So the first question has to do To answer your question, the current 10 nano capacity has been converted from existing lines. And how do you plan on adding additional capacity? Do you need to wait till later this year to better forecast demand? Or do you plan on converting additional capacity? Regarding our investment plans for 10 nano, we are looking at market demand currently. And if necessary and if justified by market outlook, we will be making investments, for example, procuring the equipment, if additional capacity is necessary to be considering the lead time of the equipment procurement so that we will be in time with the demand that we expect on the long term. Sure. And one follow-up question on DRAM. How should we think about cost and benefit of 10 nanometer class DRAM versus 20 nanometer. In terms of gross die size or area, the 10 nano class DRAM would increase by about 30%. And also our plan for the 1x nano mass production is being carried out according to schedule. The following question will be presented by Mark Newman from Bernstein Hong Kong. Please go ahead, sir. Hi, thanks for taking my question. I've got a question on the handset side and then if I may, a follow-up on the semis. On the handset side, so obviously, very, very strong profitability. I think that's very good to see that. I'm interested to see what's going on, what do you predict on the volumes and market share side because although the profitability has improved a lot, the volumes don't seem to be particularly strong. And considering that you are now reasonably profitable on the A line and J line, your low end, mid end phones. And considering also that some of the emerging players, some of the local Chinese players, Huawei, etcetera, are making or have made huge share gains and are getting increasingly stronger. Why I'm just curious why Samsung is not being more aggressive to protect share given that you've already lost a fair bit of share, especially in China and other markets. It seems to me that there's an opportunity to gain some of that share back. Is that not the strategy? I'm just kind of curious how you think about the share question versus profitability. In terms of full year volume outlook, even though there is some decrease effect due to the fact that many of the mid- to low end models, the long running ones will no longer be sold, we think that both in terms of revenue as well as volume shipments, we will be able to grow on a year on year basis. Regarding whether this is an opportunity to go and get back our market share, we don't necessarily think that we need to sacrifice our margins for the sake of market share. Both are important. And we believe that by operating an optimal portfolio that meets each specific market segment and offering competitive offerings for each region, we are actually be able to increase our market share and also maintain profitability. For example, while we leverage our brand power and our flagship models in the premium segment, we will continue to increase our sales in the mid to low segment. And by doing that, we actually aim to gain on both market share and profitability. Thank you. That's extremely helpful. On the semiconductor side, my question is on NAND flash. It seems to me that with 3 d NAND, you have a very, very clear leadership in technology. Others seem to be struggling somewhat. And I'm just wondering, does that mean Samsung could be incrementally more aggressive going forward, similar to what Samsung did in 20 nanometer for DRAM. So when you have a technology leadership, kind of extending that leadership and taking advantage given the competitors struggling. So my question is, could you be more aggressive on capacity and bring in more capacity for 3 d NAND this year? I think our leadership in the 3 d NAND space is market proven. The fact that our 3 d NAND solutions are high density, low power consuming as well as highly reliable and are the best solution for data center as well as enterprise servers have already been proven. And based on this leadership, we have actually continued to increase our production on V NAND. And VNAND will be a major focus this year as a way of leveraging our market leadership. The last question will be presented by Jong Ho Yoo from Korea Investment and Securities. Please go ahead, sir. I have two questions related with the semiconductor business. It seems this year semiconductor CapEx may slightly decrease also for DRAM. I guess that implies that rather than investing at wafer level, it would be more of process migration. In that context, when do you expect to go into mass production of 1x? And what will be the share of 1x at the end of this year? Second question is your 3rd generation 3 d NAND or VNAND seems to be going very smoothly. Could you give us a bit more details about what you expect or when you expect the 4th generation to start? Regarding our 1x DRAM, it's currently in sampling. The specific time of mass production of 1x will be determined based on market situation, customer needs as well as the longevity of our existing products. Our plans and development for the 4th generation V NAND is moving ahead smoothly. But in terms of our business, our current focus is more on ramping up the mass production of our 3rd generation products. But our investment as well as research will continue in order to maintain our technology leadership in this