Samsung Electronics 2Q Earnings Call

Transcription

1 Samsung Electronics 2Q Earnings Call Robert M. Yi Good morning. This is Robert Yi from Investor Relations. Thank you for joining our second quarter 2017 earnings call. With me, representing each of the business units are Mr. Chun Se Won, Senior Vice President of the Memory Marketing Team, Mr. Hur Guk, Vice President of the S.LSI Marketing Team, Mr. Lee Sang Hyun, Vice President of Foundry Marketing Team, Mr. Lee Chang Hoon, Vice President of Samsung Display Mr. Lee Kyeong Tae, Vice President of the IT and Mobile Business, Mr. Lee Yoon, Senior Vice President of the Visual Display Business, and Mr. Kim Sang Hyo, Vice President of the IR Group. I would like to remind you that some of the statements we will 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. 1

2 Before we go over the earnings results, I would like to update you on the progress of our shareholder return program. As a part of the 9.3 trillion won share repurchase program, we have now completed the second phase. We invested approximately 5 trillion won in the first two phases, where we repurchased and cancelled 1.92 million and 480,000 common and preferred shares respectively. Today, the board of directors approved the third phase of the shares repurchase program with 670 thousand common shares and 168 thousand preferred shares. The third phase will start on July 28th and take approximately three months to complete. Also, the board of directors has approved the quarterly dividend of 7,000 won per share for both common and preferred stocks. Now, I would like to take you through our second quarter results. In the second quarter, the total revenue increased by 20% Y-over-Y to 61 trillion won. Continued favorable conditions in the memory market and increased global sales of the Galaxy S8 drove strong revenue increase. The gross profit amounted to 28.6 trillion won, a 7.3 trillion won Y-over-Y increase, and the gross profit margin improved by 5.0%p. 2

3 SG&A expenses increased by 1.4 trillion won Y-over-Y with revenue growth, but as a percent to revenue it decreased by 2.1%p. The operating profit was 14.1 trillion won, an increase of 5.9 trillion Y-on-Y. The quarterly operating profit reached a record high, driven by significantly improved performance in the component business. The operating profit margin increased by 7.1%p to 23.1%. In the second quarter, the weakening of the US dollar against the Korean won had a negative impact of approximately 300 billion won on the operating profit Q-over-Q, predominantly on the component business. Few highlights on business areas. The component business drove significant earnings growth both on a Y-over-Y and Q-over-Q basis. For the Memory business, we focused on increasing sales of high-density server dram and SSD amid tight supply/demand conditions and strong ASPs based on a strong server market demand. For the S. LSI and DP businesses, we increased sales of AP, CIS, and Flexible OLED panels for the Galaxy S8 and high-valued LCDs under stable prices. With regard to the set business, the IM division achieved a significant increase in earnings compared to last 3

4 quarter, as a result of increased global sales of the Galaxy S8. However the operating margin percentage declined slightly Y-over-Y due to strong component prices. Our TV business saw decreased earnings due to increased panel prices and sluggish demand from Europe and China. Earnings in the home appliance business declined Y-over-Y, due to continued B2B investment. Now regarding Harman, this is the first quarter that we are consolidating the full quarter s results in our financials. Harman generated solid results from operations with $1.9 billion in sales and around $200 million of operating profit. However, with costs associated with acquisition, the net operating profit came in around $5 million. We expect that the acquisition related costs will continue to impact Harman s results by an average of 100 million dollars each quarter for the next few quarters. The second quarter ROE improved significantly to 22.5%, an increase of 9.5%p Y-over Y. The earnings improvement combined with the effect of continuation of share buyback and cancellation programs brought the strong ROE growth. At the end of the second quarter, our net cash came in at 53.8 trillion won, a decrease of 19.1 trillion won compared to the end of last year. Despite the strong earnings, our net cash level declined due to significant increase in capex, the acquisition of Harman, dividend payments, and shares repurchased during the first half. 4

5 Next, I would like to address the business outlook. In the second half of this year, we expect earnings to grow primarily from the component business, as conditions in the memory markets are likely to remain favorable and we expect to increase sales of Flexible OLED panels. However, we may experience ASP pressures on LCD panels from increase in supply within the industry and on rigid OLED panels. In the third quarter, we expect that earnings growth from the semiconductor business will continue, but overall company earnings are expected to decline slightly Q-over-Q as the DP and IM businesses weaken. The display business expects to experience an increase in initial start-up costs, i.e. depreciations, for the new OLED production line, and intensifying pricing competition in the mid to low-end rigid OLED products from the LTPS LCD market. We expect the IM business earnings to decline due to increasing marketing costs related to the launch of the new Note product, with reduced profit contributions from the Galaxy S8. Going forward, our focus remains on First, enhancing the competitiveness of our main businesses. This includes reinforcing our technological leadership in the semiconductor/oled industries, together with the world best and largest production capacities. In addition, we will focus on strengthening design and manufacturing capabilities to develop the System LSI and Foundry businesses as future growth engines. 5

6 Second, in order to respond to the paradigm shift in the IT industry, we need to develop new growth engines by strategic investments and securing advanced technologies through M&As. However, the continuation of uncertainties in domestic and global political and business environment could give rise to many challenges. I would now like to go over our capital expenditure plan. During the second quarter, we invested 12.7 trillion won in capex, which included 7.5 trillion won for the semiconductor division and 4.5 trillion won for the display division. The total capital expenditure for the first half was 22.5 trillion won. I cannot provide a specific 2017 annual Capex plan at this time. However, as you can infer from the first half expenditures, the annual capex is expected to increase significantly Y-over-Y. In the memory business, we plan to expand the Pyeongtaek fab to respond to increasing demand for V- NAND. We also expect to spend capex on converting a part of existing planar capacity to V-NAND. In addition, we need to add new dram capacity to remedy the capacity loss that resulted from technology migration. Despite the increase in 2017 capex for the memory business, our memory supply guidance for this year remains unchanged. With regard to the foundry business, we are increasing 10nm capacity to address the demand for cutting-edge 6

7 process technology. In addition, we expect sizable capex for converting part of line 11 from dram to image sensors in the second half of this year. Further, we are continuously investing in our OLED capacity to expand the Flexible OLED market and to respond to increasing demand from our customers. Before the presentations of each business unit, I would like to share with you several data points for each of the key business areas. For DRAM, second quarter, our bit growth came in at mid-single digit with lowteens of ASP increase. In the third quarter, we expect market DRAM bit growth to be high-single digit, and we expect our DRAM bit growth to be low-teens. And for the year, we expect the DRAM market bit growth to be high-teens, and we expect our bit growth to be aligned with the market growth. For NAND flash, in the second quarter, our bit growth came in again at midsingle digit with same mid-single digit ASP increase. In Q3, we expect NAND market bit growth to be mid teens and our bit growth to be about 20%. For the year, we expect the NAND market bit growth to be about 30%, and we will slightly outgrow the market growth. And in Display Panel Business, based on sales, our OLED mix was about 60%. For Mobile, in Q2, our sales of total handsets came in at 93 million units, with about 6 million units of tablet. Our blended ASP came in about $235 range and the mix of the smartphone within the total handset was about mid-80%. 7

8 And in third quarter, we expect our total handset sales to be slightly increased from Q2, and similar level of tablets as Q2. We do expect our blended ASP in third quarter to decline, but while we will be maintaining the mix of smartphone within the total handset at about mid-80%. For our TV business, our sales of TV in Q2 was roughly 9 million units. And we expect to see a low-single digit increase in Q3. Now, I'll turn the call over to the gentlemen from the business units. 8

9 Good morning. This is Se Won Chun from the Memory Marketing team. In the second quarter, even though demand growth for some applications such as mobile was slow on the weak seasonality, demand for high-density server DRAM and SSD continue to be strong. Due to restriction of industry supply, supply and demand remained solid and price continued to rise. For NAND, although demand growth for mobile slowed down due to partial inventory readjustment by some mobile companies, overall NAND demand remained solid; thanks to continued strong demand for high value-added server SSD and PC. Supply continued to be insufficient due to decreasing panel capacity during the process of 3D NAND migration, combined with restricted industry 3D NAND supply. We continue to drive solid earnings growth by actively responding to demand for products that has been aiming at valued-added high-density markets, such as mobile product over 64-gigabyte, data center NVMe SSD and Enterprise SSD. For DRAM, although there was a partial inventory readjustment by some mobile companies, along with weak seasonality, demand for server remain solid due to the continued expansion of cloud services. Thanks to continued customers by the demand due to concerns of insufficient supply in the second half, overall, DRAM demand remained strong. We increased the sales of differentiated products, such as high-density server products and HBM, and at the same time successfully managed the 9

10 appropriate focused product mix, while taking market circumstance into consideration. And as a result, we achieved outstanding earning growth following the last quarter. Next, I will comment on the memory market outlook. In the second half, including the third quarter, despite the fact that industry supply of 3D NAND and sub-20-nanometer DRAM production, product will increase, overall supply and demand is expected to remain tight due to continuous solid demand mainly from mobile and server. For NAND, with new flagship smartphone launches, strong demand is expected from mobile market, mainly led by increasing shipment and average content growth. Also, demand for high-density server SSD is expected to be strong, driven by increasing adoption of all-flash arrays along with the expansion of new data centers. As for supply, in spite of suppliers' mass production of 64-layer V-NAND, overall supply and demand is expected to remain tight due to limited supply growth compared to demand growth led by reduction of our industry planar capacity. We were focused on 64-layer V-NAND ramp-up and only stabilization, mainly at Pyeongtaek campus. We were showing some market leadership and improved profitability by focusing on expanding high value-added solution markets via differentiated product competitiveness such as V-NAND based server SSD. For DRAM, strong demand from data center server is expected. And, at the same time, demand for high-density DRAM such as 64-gigabyte is expected to 10

11 remain solid due to the expansion of new CPU platforms for server application. In addition, mobile demand is expected to remain solid thanks to new highperformance product launches and continuous content growth. However, supply and demand may vary according to each application depending on supplier's transition speed and product mix strategies. While closely monitoring market conditions, we were actually responding to increasing demand through expanding 1X nanometer migration. We will also continuously strengthen product competitiveness and improve profitability by expanding shares of our differentiated, high-density, high value-added products such as mobile DRAM over 64-gigabyte, server DRAM over 64-gigabyte and HBM. In the mid to long term, we will continue to make investment and deploy line management strategy according to individual application market conditions and supply and demand status. Moreover, we will concentrate on strengthening cost of competitiveness through continuous process migration. In order to actively respond to strong demand, especially for high-density server storage, which is expected to grow faster to a further extent, we were concentrating on 3D NAND investment mainly at the Pyeongtaek campus and strengthening technology leadership by focusing on next-generation product development after 64-layer V-NAND. For DRAM, we've strengthened our product competitiveness by continuously doing our best in optimizing our production process and achieving cost 11

12 reduction. And at the same time, we were also focused on satisfying our customers with high-performance, low-power, high-density products that are based on 1X nanometer technology. Thank you. Now, moving on to the System LSI and Foundry business unit. Last quarter, we've divided the System LSI Business into two separate business units, System LSI and Foundry business. So System LSI Business will now specialize in chip design, and the Foundry in chip manufacturing. We've dedicated responsible management and strengthened expertise as a new growth engine. The two businesses will excel and grow in its own business segment. We will first begin with the System LSI business. In the second quarter, we've achieved favorable results due to an increased sales of mobile processor for flagship smartphone and have maintained our technological leadership in design capability and process competitiveness for low-power, highperformance. In addition, the steady sales of the 14-nanometer mobile processors for the mid, low tier smartphones and the image sensors have also helped to reach a positive result. In the second half of this year, we expect the earning to continue to improve with stable supply of the 10-nanometer mobile processors and increase in the supply of the OLED DDIs for flagship smartphones. Additionally, image sensor demand and supply is also expected to rise due to a growth adoption of the dual camera solution in the market. 12

13 In the mid to long-term, we will strengthen design capability to stay competitive as a fabless company to further diversify the customer base and product portfolio. To do so, we will work closely with the customers and ecosystem partners and offer competitive product from the premium to low end for various applications including IoT, automotive and VR. Now, moving on to the Foundry business. In the second quarter, we've achieved favorable results due to a stable mass production of 10-nanometer mobile processors for flagship smartphones, and increasing sales of 14- nanometer mobile processors, as well as the products for graphics, TV and IoT. In the second half of this year, to respond to increasing demand for the 10- nanometer mobile processors, we will flexibly operate the fabrication lines by expanding the capacity in S1, S3 lines and improving the production efficiency in S2 line. In addition, following the successful development of the 10-nanometer process, we will continue to maintain the technology leadership and completing the development of the 8-nano process. In the mid to long term, to continue to uphold the leadership in the process technology, we are preparing advanced infrastructures, including EUV, in addition by reinforcing our manufacturing competitiveness and actually addressing the emerging demand from the computing, AI and automotive. We will foster the Foundry business as the company's new growth engine. Thank you very much. 13

14 Good morning. This is Chang Hoon Lee from the Planning Department of Samsung Display. During the second quarter, total earnings for the Display business improved. This was driven by rising revenue of OLED panels, as well as an increased sales of high value LCD products. For the OLED business, our second quarter earnings improved through increased shipment of flexible displays, led by a rise in sales of major customers' new flagship models. For the LCD business, in the second quarter, our earnings increased under stabilized ASPs, led by favorable supply-demand situation. Also, we have strengthened profitability with expanded value-added products, especially from the large-size UHDs. In the second half of 2017, for the OLED business, although we expect our revenue to improve from the first half of this year through increased shipment of flexible displays, we expect to experience an intensified competition with the LTPS LCD in the mid to low end reach OLED products. Also, in the third quarter, risk effect exists, such as an increase in initial startup costs for the new OLED production lines. Under these circumstance, we plan to focus on improving profitability through actively addressing demand for the new products of our major customers and by stabilizing ramp-up of new OLED lines at an early stage. For the LCD business, we are concerned about imbalance between supply and demand, led by increased set makers' panel inventory, as well as capacity 14

15 expansion in the LCD industry. However, at the same time, we expect that the market for premium TV panels, such as UHD and the ultra-large size TV panels, will continue to grow. In preparation for these market conditions, we will make every effort to improve profitability by focusing on cost reduction and we'll yield the improvement, as well as the expansion of value-added products such ultralarge size, high-resolution, frameless and curved panels. Thank you. 15

16 Good morning, everyone. I am Kyeong Tae Lee from the Mobile Communication business. I would like to share the second quarter business result and our future outlook for the IM division. For the second quarter of the Mobile Communication business, the market demand for smartphone and tablet was more or less similar to the previous quarter as we currently go through the year's weak seasonality. Our revenue and profit increased significantly Q-on-Q, mainly driven by strong sales of the Galaxy S8 and Galaxy S8+. The Galaxy S8 and S8+ have outsold the predecessor in almost all regions; thanks to the brand new design of Infinity Display and enhanced features, including water and dust proof and iris recognition. In particular, the overall product mix was improved as the Galaxy S8+ accounted for more than half of the total accounted sales for Galaxy S8 sales. Despite the strong sales performance of premium smartphones, however, our smartphone shipment volumes were similar Q-on-Q due to decreased sales of mass smartphones. The network business maintained its solid revenue and profit following the previous quarter mainly due to healthy extension over our major overseas partners. Next, let me move on to the outlook for the second half of Market demand for smartphone and tablet is expected to grow as we enter the period of strong seasonality. Meanwhile, we forecast the market competition to intensify with new smartphone models launched by our competitors. In this 16

17 time, we will launch a new Galaxy Note with ahead of the curve performance and enhanced features that will be well worth the wait for everyone who has been anticipating the next Galaxy Note. By launching the new Note model, we will maintain a strong sales momentum for premium smartphones, together with the Galaxy S8 and Galaxy S8+. For mass smartphones, we have unveiled the Galaxy J series 2017 edition, equipped with elegant metal design, high-definition selfie cameras and specialized services such as Samsung Pay, all of which contributed to stronger product competitiveness. Due to better and upgraded mass smartphone, we expect it to actively respond to demand from the emerging market and maintain our profitability by continuing efforts to optimize our product portfolio. In spite of this, our revenue and profit in the third quarter will decrease Q-on-Q because marketing expenses are expected to increase with the release of new Galaxy Note and because we are likely to see slow launching effect of the Galaxy S8 and Galaxy S8+ and higher sales proportion of mass smartphones at the same time. We are confident that we are onset to regain trust from our customers and market by moving quickly to overcome the Galaxy Note 7 issue. Going forward, under the principle of our customer safety first, we will continue to reinforce our product competiveness based on our technology leadership and we will also strengthen and expand our differentiated services. Particularly, we will create an open ecosystem that promote full connectivity between our core services, such as Samsung Pay, Samsung Cloud, Bixby and 17

18 other third-party services, and enhance the connectivity services among our various products, fostering them as our future growth engine. And for the network business, we will actively expand the supply of LTE-A into major advanced markets and accelerate next-generation network businesses, such as IoT. Thank you. 18

19 Good morning. I'm Yoon Lee, Senior Vice President of Visual Display Sales and Marketing team. I would like to present the current market conditions and our results for the second quarter As for the TV market in Q2 this year, due to a base effect of special demand from sports event such as Olympic Games and Euro Cup in 2016 and slowdown of Chinese market, the TV demand in Q2 seems to have weakened year-on-year. Under these market circumstances, we have maintained our leading position in the premium market by increasing sales portion of UHD and ultra-large screen TVs. However, affected by the decrease of sales due to our price adjustment as a response to the panel price increase, our performance was weaker compared to the same period of last year. As for the digital appliance business, with growing trend of North American market, high growth of the air conditioner in domestic market and economic recovery of emerging countries, such as in Southwest Asia and CIS, the second quarter demand showed a moderate increase. In this year's summer peak season of air conditioner, Wind-Free air conditioner achieved good results. By boosting sales of premium products, including twin cooling refrigerator and AddWash Washing Machine, we continued achieving revenue growth. However, due to an increase in raw material cost and investment in B2B market, we achieved a weaker performance compared to the last year. 19

20 Next, let me brief on the market prospects for the second half of As demand is expected to increase, centering on European and Latin American markets, the TV market in the second half of this year is projected to show a slight growth year-on-year. Also, as the panel price is forecasted to decrease in the second half of the year, we will expand sales portion of premium products, including premium UHD and ultra-large screen TVs to secure profitability and drive qualitative growth. On the DS market prospects, along with QLED TV introduced in the first half of the year, we will reinforce our high-value product lineups, led by frame design to reflect consumers lifestyle, premium UHD TV with higher color reproduction, and our unique 82-inch ultra-large screen TV. By doing so, we will further solidify our premium leadership in the market. As a next-generation display, that takes the conventional viewing experience to the next level in terms of picture quality with 100% color volume, space utilization with No Gap Wall-Mount and Invisible Connection and usability with one remote, the QLED TV is gaining its awareness in the market and its sales are also growing rapidly. In the second half of the year, in order to maximize QLED TV sales, we will further strengthen marketing investment in sharp display, online marketing, and end consumer communication and implement sales promotions tailored to the different local markets, thereby ensuring the QLED TV as the new standard in premium TV. 20

21 As for the digital appliance business, with close collaboration with the distribution partners and stronger promotion for peak season in each local market, we will reinforce sales of premium products, such as Family Hub in refrigerator and FlexWash in washing machine, to expedite our growth. Finally, we will keep expanding our B2B business with a full lineup of built-in home appliances and system air conditioner for the builders market, especially in North America, as well as online business with key online partners. Thank you. 21

22 Robert M. Yi Okay. This completes the management's part of the presentation, and I'll turn the call to Q&A. Thank you. Q&A Operator Now Q&A session will begin. The first questions will be provided by Mr. Yoo Jong Woo from Korea Investment & Securities. Please go ahead, sir. <Q Jong Woo Yoo>: I have two questions. The first question is about the capacity on the semiconductor side. There are already some talks in the market of possible working out demand and supply situation as companies have been adding DRAM capacity. And so, in that context, can you give us some detailed explanation of how Samsung plans to manage and operate its DRAM capacity. You've mentioned that, as the technologies migrate, there is a natural decrease in capacity. And so, in that context, what are your plans, for example, in investing to make up for this natural decrease of capacity? Also, during the presentation, you mentioned plans of expanding your NAND capacity. Can you give us a bit more detailed explanation of that. Regarding the 22

23 mobile business, my second question is about the expected worsening of profitability in the handset business due to the expected strong component prices that are still expected. Memory prices probably won't go down in the second half. So, in that context, how are you planning to defend your profitability? Are you planning, for example, on increasing your product prices? Don't you think that would decrease demand? Also, how are your plans specifically on maintaining your profitability on the mass segment? <A>: Regarding the DRAM capacity management plan, we have always emphasized that our basic approach is to meet customer demand by process migration, the bit growth that we gain by migrating our processes and technologies. And, of course, in that process, because there's a natural decrease in capacity, we need to invest to make up for that loss. We have, for example, this year have made that investment using the space on Line 17. Next year, we are considering possibly converting some of the NAND capacity to DRAM, but the actual timing or size of that will depend on the market situation that unfolds next year. As we have always emphasized in the conference calls, we will refrain from, for example, increasing market share, fighting on volume. We manage our business with a profitability focus. And so, we will flexibly manage our capacity by very closely monitoring the market situation, as well as the supply and demand balance. On the NAND side, we are planning to expand the V-NAND capacity in Pyeongtaek, especially to meet the strong demand for the high-density and 23

24 high-value server SSDs. But the specific size and timing of that would also depend on the market situation. <A>: To answer your second question about the handset business, about possibilities of increasing product prices, well, first of all, it's difficult for us to give you details about our pricing policy regarding a product that has not been yet launched. So let me focus more on the second part of your question which was about how we plan to defend and maintain our profitability on the mass segment. As you know, we plan to increase the overall sales of our mass segment, especially focused on the J series 2017 edition, which is a new model. In this model, we've actually introduced many of the features that were familiar on the flagship side. For example, metal design, high pixel count selfie camera, as well as Samsung Pay support. So the overall specification of the product competitiveness of the J series has been greatly enhanced, and we will use this to overall increase the sales of our mass segment, also continue the streamlining of our mass segment lineup, and also internally increase our efficiency so that we will be able to maintain the profitability in the mass segment. Operator The next questions will be presented by Mr. Nicolas Gaudois from UBS. Please go ahead, sir. 24

25 <Q - Nicolas Gaudois>: Yes. Good morning. Thanks for taking my questions. The first one is on semis. It appears that you have placed a fairly large order for EUV lithography tools in Q2. Can you share, therefore, development progress on 7- nanometer logic process using EUV and the timeline to mass production? And secondly, regarding smartphones, the setting of Galaxy S8 was good, but somewhat little bit lower than initial expectations. Do you see this as a result of higher channel pricing versus Galaxy S7? And if so, are you actually reconsidering longer term how much increase in hardware specs you can realistically do for the coming higher end smartphone releases as potentially in a way limit to how much price increases we can see and buy in? Thank you. <A>: To give you an update on our 7-nano EUV development progress, we have brought in the EUV equipment and have demonstrated recently the 250-watt, which is the source power level that we have targeted. And so, our EUV development is being carried out as planned with the target date of risk production of 2018 early. And our yield on the SRAM side is also as we had planned. Regarding our equipment order plans, even though it's difficult for us to go into the detail, our basic approach that we will bring in the equipment for the EUV consecutively depending on our process development schedule as well as customer demand. But we are expecting that Samsung Electronics overall, including the Foundry Business, will probably be the largest supplier of EUVbased semiconductors in the market. 25

26 <A>: To answer your second question about the handset, the high-end handset. To give you a bit more detail about the S8 sales, actually you will remember that the S8 was launched a bit later in the calendar than the S7, which was launched in March. And so, that may bring in this effect of appearing as if the S8 has not sold as strongly. But if you adjust for that late introduction in the year, actually in almost all of the areas, the S8 has been outselling the S7, its predecessor. We're especially noting that there was very strong performance in the growth markets in addition to the strong performance in the developed market. There is difference from region to region, but there are even areas where the S8 revenue has grown by more than 2 times versus its predecessor. Also, we would like to highlight the fact that the model mix between the S8 and the S8+ has much more improved, so that the S8 revenue is now accounting for more than 50% of the overall S8 series revenue, which has helped improve revenue as well as operating profits. <A>: Regarding whether there is a limit to specifications, the high spec that can be added even in the high-end segment, we believe that we need to approach this by focusing more on the actual value that we provide to the consumers, which we have been doing, rather than trying to compete only on the hardware specifications alone. We have leveraged our strengths in R&D and technology to introduce features and performances that consumers actually need and genuinely appreciate, such as the edge design, Samsung Pay, iris recognition and the Infinity Display. 26

27 And that has actually brought a very strong response from the market. And so, we will continue to take this approach to enhance the value as well as the competitiveness of our product to get the strong response from the market. <A - Robert M. Yi>: Okay. Thank you, Nick. Operator The next questions will be presented by Mr. Kim Dong Won from KB Securities. Please go ahead, sir. <Q Dong Won Kim>: I have two questions. First of all, the question is regarding the Display business about the plans of responding to the shortage in supply in the flexible OLED capacity. So there is a need for additional capacity for the flexible OLEDs. But before investing in a new plant, are you planning, for example, increases by converting the H2 line from the rigid to flexible, which is an area where there is a strong competition from the LTPS LCDs, or what you did last year, for example, convert some of the LCDs to a flexible capacity line? Second question is about your, the VD business mid to long-term strategy questions. In the mid to long term, do you plan on continuing the focus on maintaining the shipment volume, for example, shipping 48 million units per year or are you thinking of, for example, adjusting that in terms of the content and quality, for example, depending on how the panel sources have changed, maybe change the product mix or overall business profile to be more profit oriented rather than volume oriented, especially given the fact that the ultra- 27

28 large size premium display products has the greatest profit contribution to your business? How do you plan on differentiating your QLED products in that ultralarge size premium segment? <A>: Given the fact that more and more smartphone's handset makers are adopting the OLED panel, we do expect the current strong demand to continue in the future. However, depending on the market and the customer, there are different demands, someone flexible, someone rigid. And so, for us, we need to flexibly manage our resources depending on the market and customer demand. And so, our basic approach to how to manage our capacity and resources is to flexibly respond strategically to market demand, as well as customer needs. And specific to your question of whether we have further plans of converting our LCD, we don't have plans currently. <A>: Regarding your second question of the CE business, our approach is to further strengthen our leadership in the premium segment and to focus on the profitability improvements. We have in the first half already prepared and completed that foundation, especially with our QLED Ultra UHD, as well as the ultra-large sized products. And based on that foundation in the second half, since we're expecting panel prices also to start declining, we will further expand the premium segment sales to achieve a quality growth that has a focus on profitability. In this, of course, our QLED plays a very important role. It's been launched three months ago. And so, we will thank the marketing going forward on the QLED. Also, we have high expectations for the 88-inch that we will be launching 28

29 in August, and we'll focus on global rollout of that new size. And by focusing our resources on the QLED, we hope that even though it has already made a very strong start, we'll be able to even further accelerate that growth. We already introduced 82-inch, which is only available from Samsung, also has very strong responses. And so, we will further strengthen our position in the premium segment by enhancing our lineup in the ultra-large size displays. To give you bit more details of the position that we have command in the premium segment, in the $1,500 plus segment we have predominant market share. Even in the higher the $2,500 plus segment, we have close to 40% market share and is number one. Also, in terms of TV size, in the 70-inch plus size segment, we are number one by a very large gap with our competitors. And so, given already a very strong position in the premium segment, we will further strengthen that by as we explained adding to the lineup that we have and also increasing our revenue. That is why the launch of the 80-inch will play a very important role, but we will follow-up with further introductions to build up an even stronger line up in the QLED TV. Operator The next questions will be presented by Ms. Claire Kyung Min Kim from Daishin Securities. Please go ahead, ma'am. <Q - Claire Kyung Min Kim>: I have two questions. The first question is about shareholder return policies. The current plan that you've announced covers 2015 to And so, regarding what you plan from 29

30 next year forward, can you give us what kind of plans you are considering, as well as the communication schedule that we can look forward to regarding your shareholder return plan after this year? Also, you've mentioned that in 2017 probably there will be a significant increase in CapEx versus Also, there was the acquisition of Harman. And so, we're expecting that there will probably be a significant increase in the cash outflow from your free cash flow. So in that context, what is the expected level of cash and cash equivalent as at the end of this year? The second question is about the IM business, the mobile business. You were planning to launch the Note 8, second half of this year. Some people are concerned about possible cannibalization between the Note 8 and the Galaxy S8+, given the similar screen size. So how are you planning to respond to that? <A>: Regarding the first question of our shareholder return policy, we are currently in the process of studying the shareholder return policies for 2018 to We're expecting to be able to communicate the plan or announce it within the second half of this year. Regarding the net cash that we're expecting at the end of 2017, because this is subject to various factors, it's difficult to predict this accurately at this point in time. As you know, the CapEx has increased in the first half. We expect CapEx to go on in the second half. Also, if we assume that the stock buyback programs or quarterly dividends continue in the second half, probably our net cash at the end of this year will be more than what we have at the end of June. But if you 30

31 compare end of 2016 to 2017, we expect our net cash to have significantly decreased compared to the end of last year. <A>: To answer your second question about how we plan to respond to the Note 8 launch together with the existing S8+. As you know, the Note series itself since it was first launched in 2011 has actually pioneered its own segment, the so-called Phablet segment with it, large screen size, also the S-pen feature, and has been able to gather a very strong and devoted followership. And it's a very unique product that only Samsung offers. And so, as we prepare for the new launch in the second half, we have further enhanced various multimedia features that are highly used use by the Note users, also have even built better, more functions and features into the S-pen, so that the users can look forward to new experiences. In the second half, in addition to the launch of the Note 8, we will continue to maintain the S8 series. And, overall, we plan to have more performance and sales in terms of the overall flagship on a year-on-year basis for the full year. Operator The next questions will be presented by Mr. Peter Lee from NH Investment & Securities. Please go ahead, sir. <Q - Peter Lee>: I have two questions. The first question is for the Memory division. Even though during the presentation you gave us your outlook on the demand and supply situation for the Memory Business, can you give us a bit 31

32 more detail for each product on what kind of demand and supply that you expect? Also, currently, there is a very strong demand for server DRAMs. Can you give us a bit more detail of why you think that strong demand is currently happening on, for example, the background of the server DRAM demand? And the second question is about the System LSI Business. There has been a very strong growth in image sensors, especially as more and more handset makers adopt the dual camera. So in that context, what is the market outlook that Samsung has regarding the image sensor market and what is the differentiating points of Samsung's image sensors compared to those offered by competitors? <A>: Regarding the first question about the demand and supply outlook for the DRAM as we approach the seasonal peak and there is more and more content being added by all applications, we do expect a very strong demand to continue in the second half for DRAMs. But, of course, the actual demand and supply situation will differ for each application depending on how the competitors migrate to further advanced processes and also what kind of product mix they manage. Regarding the NAND outlook, as there is more and more being added on the mobile side and there's new mobile high-end handsets being launched into the second half, also there is stronger demand for the server SSD. We believe that, yes, the strong demand will continue in the second half for the NAND as well. We expect the 3D NAND ramp-up process will be gradual. But in this process, 32

33 because there is natural decrease in capacity, we believe that there will be a limit to how much bit growth there could be in the NAND. Regarding the background to why we're seeing such a strong demand for server DRAMs, it's basically because there is very strong demand for servers from the data center side and we expect this to continue in the second half. Many of the IT companies that had originally used enterprise servers have started to consider their OpEx and increase their dependence on public clouds. And, therefore, the data center companies that operate and provide the public cloud services have started to build out their infrastructure further, and this is driving the server demand. We think that this has actually triggered a virtuous cycle in the industry. The other is a huge increase in data, both the traditional typical data as well as the new types of data has increased. This is requiring more and more data processing. And, therefore, more and more high-performance CPUs are being adopted in servers and with that, the memory content of servers has been increasing. And this is also driving up demand for our server DRAMs. Regarding the market outlook for the image sensors, we think that the flagships that will be launched in the second half will have or adopt dual cameras more and more. According to outside sources, considerable number of the new smartphones that will be launched in 2018 will be featuring dual cameras. Dual cameras can provide users with DSLR class or level picture quality. And, therefore, we're expecting dual cameras to be adopted not only in 33

34 the premium, but also the high-end and even the volume segments going forward. So this adoption of dual cameras all translates to stronger demand for image sensors. And, for us, we are planning to respond by, first of all, we plan by converting the DRAM capacity partially to image sensors. Also, the differentiating points of our image sensors versus others is our technology, the ISOCELL technology, that we have in terms of image processing. Also, we use the cutting-edge 14-nano technology, which gives us an advantage in terms of logic, design and structure. Also, we have a very strong collaboration in the ecosystem which differentiates our products. Operator The following questions will be presented by Mr. Mark Newman from Bernstein. Please go ahead, sir. <Q - Mark Newman>: Hi, and thanks for taking my question. My question actually was around this high-bandwidth memory that you talked about earlier in the call. I understand Samsung has a very strong leadership in the HBM2 currently. I'd like to get a little bit more, if you could share, about the plans for the future of high-bandwidth memory. So specifically what is the future and the technology? So I've heard about some of the comments around HBM3 in the market. Can you share like what is it and when is HBM3 going to be coming out? 34

35 And also low cost, is there going to be a low-cost version of high-bandwidth memory that might be applicable to other devices such as possibly PCs or mobiles. Just want to see if there's any future long-term application for HBM outside of a service? And if there's any comments you can share on clearly, this is a fastly growing market. If there is anything you can share on any projections based on orders you're getting, short-term or long-term, in terms of how big this market could be for Samsung or globally? Thanks very much. <A>: Regarding the high-bandwidth memory, the HBM, it is true, even we see that there is strong demand from the applications that require high-speed data processing such as deep learning or AI. And so, there is a very rapid growth in demand for HBM, especially from the machine learning side. But HBM is also at the same time a very high-end premium segment. And so, in terms of business, currently, we're focusing our HBM also on the high-performance machine learning sort of applications. Also regarding HBM, process migration for the existing HBM, we are currently considering it given the fact that this is an area there is very strong growth in demand. We will consider and migrate our processes of our existing HBMs depending on the market demand. Regarding HBM3, it's really too early to talk about it. But given the very strong demand and expected strong demand in high-bandwidth memory, we will have to wait and see. Operator The next questions will be presented by. Mr. SK Kim from Daiwa Capital Markets. Please go ahead, sir. 35

36 <Q - SK Kim>: I have two questions. First question is about the Foundry Business, second question is about the OLED business. About the Foundry Business, since separating the Foundry, it appears that you've been very active in terms of promoting the Foundry Business especially to the new customers. But there is also a lot of speculation and rumors about your Foundry Business, the technical road map, as well as what kind of customers it plans to serve. And so, in that context, can you give us which is the strategic focus of the Foundry Business? Would you prefer focusing more on leading-edge technology and serving the large size customers or would you rather focus on diversified customer base, as well as diverse processes? Also, we've heard that the Foundry Business will also provide 8-inch foundry services. Can you give us a bit more detail about that strategy? The second question is about the OLED business in the second half. Especially as the new demand and orders come in from the new customers, we expect your performance in the OLED side to greatly improve. But also we're seeing some downside possibilities in terms of yield, as well as increasing cost. And so, can you give us a bit more detail, especially on the downside risk of the business in the second half? Also, you've mentioned that you're planning or considering possible additional investments in infrastructure, a new line or new complex. What is the background to considering a new investment? Is it because you see additional 36

37 upside in demand or is this because there's better visibility now about the foldable and you're preparing for that. If there is visibility on the foldable side, when do you think that would be in terms of timing? <A>: First to answer your question about the Foundry Business, I think your question can be divided into three factors. One is the road map that we have in terms of process migration. Second is about our strategy in terms of customer base and processes. Third, I think, is about the 8-inch service that we provide. To answer your first question, actually our strategic approach is to do both: to migrate on to the cutting-edge processes and also diversify our customer base. Recently, we announced our process road map that stretches all the way down to 4-nano in the foundry forum that we held recently. Based on that road map, we've already, for example, completed the start of mass production and expect to expand the production of the 10-nano this year. We plan to do risk production of the 8-nano by end of 2017 this year. Next year, the road map is to have 7-nano EUV-based by end of End of 2019, we would through Smart Scaling do 5 and 6-nano. And in 2020, we will have gate all around(gaa) on 4-nano. And based on that process road map, we will continue to maintain our leadership. Regarding the second point, we will diversify both the processes as well as the customer base. Even though we have started the business based on mobile applications, we have successfully diversified to Consumer GPU, as well as highperformance computing. Also, we have been recently adding on more positions 37

38 in network, as well as automotive businesses. And so, to continue to serve a more diverse customer base, we will continue to develop derivative processes such as 14-nano and 10-nano, as well as technology resources such as the FD- SOI, RF and MRAM. Regarding the 8-inch service, actually we opened that service in 2016 and since then have received dozens of projects, tasks from the customers very successfully. Especially, we have technology competitiveness in areas such as e- Flash, PMICs and DDIs. Also, in addition to the CIS, we have recently also provided or opened fingerprint sensor services. <A>: Regarding the second part of your question, which is basically about the OLED market second half risk factors and the recent article that was in the media about plans on investing in a new complex or new line. Regarding the second half, even though we expect demand for OLEDs, especially around flexible OLEDs, to remain very strong in the second half, there are some risk factors. For example, the increased compensation with the LTPS LCD, especially in the mid to low segments. Also, there will be some costs associated with the rampup in the third quarter. Regarding the investments on the new complex, actually nothing has been finalized yet. So we cannot give you details such as size of investments or timing of that. What was announced through our e-disclosure was that we will invest in the infrastructure, the ground working of a new complex. And the 38