Session 1. Mr. Sang-Hoon Lee, President and CFO of Samsung Electronics

Transcription

1 Session 1. Mr. Sang-Hoon Lee, President and CFO of Samsung Electronics Good morning and welcome to Samsung Analyst Day I am Sang-Hoon Lee, President and CFO of Samsung Electronics. First, on behalf of the Samsung Electronics employees around the globe, I'd like to thank all of you for being here with us today. Since our first Analyst day in 2005, we have witnessed a paradigm shift in the global IT industry. And our company has gone through major transitions over the past eight years. In light of this, we have organized today's meeting to help you understand how we have expanded our leadership in the global IT market and responded to significant changes in the business environment. Through our time today, we hope to also give you insight into our vision and future strategies for core businesses. It is also our hope that this event will allow you to be further aware of our core competencies and enhance your confidence in Samsung's long-term growth potential. To start off, I'd like to briefly outline the points I will cover in today's presentation. This shows the elements that create the house of the CFO. Our House of the CFO is built on a strong foundation of management infrastructure, which delivers operational efficiency through sound financial health, risk management, and management systems. On top of this foundation, we have focused on enhancing our competitive edge through investment in the key elements of core competences, namely Capex, R&D, patents, marketing, human resources, and M&A. These efforts are making valuable contributions to our company's continuous growth and profitability. I will discuss in detail each of the elements followed by an overview of our shareholder return policy. Before moving on to further explanation about the House of the CFO, I will spend a few minutes discussing the highlights of our financial performance over the past three years. The current market expectation for Samsung Electronics revenue of this year is 211 billion US dollars. During the past three years, our revenue has increased by annual average of 16%. As seen in these figures, we have solidified our leadership in the global IT industry.

2 Revenue has increased in all businesses, while IM sales have grown rapidly driven by the expansion of the global smartphone market. Looking at revenue by regions, during the first half of this year, we recorded 28% of our total sales from the US, 23% from Europe, and 18% from China showing a globally balanced revenue structure. According to the market consensus, 2013 operating profit is estimated at 35 billion US dollars, with 32% annual growth rate over the past three years. In addition, Operating Profit margins are expected to increase from 11% to 17% this year. Not only do we expect growth in absolute terms but also in profitability. This increase was mainly caused by differentiation through enhanced offerings of premium products. Improved profitability is also due to efficient SG&A expense management amid rising sales. ROE has increased from 20% in 2010 to 25% in the third quarter of Our debt-to-equity and cash borrowing ratios have declined for the past three years as a result of our continuous effort to pursue a disciplined financial structure. At the end of the third quarter of 2013, our debt-to-equity and cash borrowing ratios were around 46% and 8%, respectively, which I believe are top tier among key players in the IT industry. This ratio indicates how we have improved cash flows from operations by managing increases in working capital while revenue growth continued. It also shows how we have efficiently managed asset such as inventory and account receivable. Now, let's move on to the primary portion of today's presentation. I'd like to talk about our core competencies, I, as Samsung Electronics' CFO, spend a great deal of time focusing. The first is six areas of investments : Capex, R&D, patents, marketing, human resources, and M&A. Let's have a look at our Capex. During the past four years, we have continued large-scale investments of 20 billion US dollars every year, which has fueled both our growth and competitive edge. We have two guiding principles for our Capex strategy. The first principle is to reinforce our competitive edge through differentiated technology and profitability.

3 The second is to minimize investment risks by flexible planning. Based on these two principles, we follow the operational guidelines when executing Capex strategy. All Capex resources should be allocated from operating cash flows and meet IRR & payback period requirements. In addition, we try to minimize risks while increasing the scale of investments and length of recovery periods by conducting quarterly investment audits. Thanks to our efforts, we expect ROIC to increase from 15% in 2010 to 21% by the end of In terms of our focus of Capex, since 2011 we have been gradually shifting our investment focus from market share gains to new market creation. We plan to continue this strategy in the near future. Let's shift our discussion to R&D. We have continued our investments in R&D in order to secure sustainable success. We expect that R&D investment will increase from 8 billion US dollars in 2010 to about 14 billion US dollars by the end of We also have increased the number of global R&D staff from 50,000 in 2010 to 80,000 in September Through these efforts, we have moved up in rank from the sixth to second place according to Booz&Company study of global R&D investments. Meanwhile, we have also made major changes to our global R&D investment strategies. First, because industry-wide technology development is shifting from hardware to software, we have hired more software experts and established a new software center. Second, we have adopted an open-innovation platform along with an in-house R&D system. In addition, we have been focusing more on R&D for set businesses than before to keep up with market trends. Finally, we have established overseas R&D centers to further advance the development and utilization of customized technologies to address region-specific needs. Going forward, our goal is to leverage over 25,000 overseas R&D employees to create a brighter future for Samsung Electronics. Moreover, we will strive to reinforce our soft competitiveness in software platforms, design, and IP. At the same time, we plan to focus our investments on securing innovative technologies as engines for our future growth. Now, I'd like to turn your attention to Patents.

4 In recent years, we have witnessed a dynamic shift in the global patent environment. Some IT companies are leveraging their Patents as a source of profits. Furthermore, as IT products become more complex, the number of patent disputes is on the rise resulting in greater exposure to patent risk. In addition, IP-related rules and regulations are changing, while patent disputes continue to increase in countries around the world. We have increased our efforts to continuously improve our competitive edge and reduce global dispute risks in patents. In 2010, we established the IP Center in order to centralize our patent capability efforts, and established country-level IP centers around the world to mitigate IP risk. In addition, we have increased our in-house team of patent experts and managers, including lawyers and agents. Also, our various patent experts have gotten involved in new product development cycles at the planning stage. The next core competency is Marketing. For the past three years, we have increased our brand value through various marketing activities and investments. As a result, we have ranked as the number 8 by Interbrand's 2013 global brand ranking, with a brand value of about $40 billion US dollars. Also, we have maintained our position at the top of smartphone and TV markets in various consumer brand surveys. We have achieved global brand power through consistent and active marketing investments. Our strategy going forward is to harvest the benefits of our current brand assets. Our goal is to continuously achieve revenue and profit growth without increasing marketing expenditures. Thus, we are applying our brand philosophy of "Accelerating discoveries and possibilities" in every aspect of our business activities. In addition, we will reinforce consumer engagement marketing by experience-based marketing and interactive marketing through social media, and regionspecific marketing based on local consumer needs. We are going to focus on high ROI areas such as On-line and Retail and improve investment efficiency to become one of the global top five brands by Since its founding, Samsung has always recognized 'People' as one of our company's core values and made investments in human resources.

5 The number of Samsung employees has increased from 190,000 in 2010 to 326,000 in 2013 due to business growth and our efforts to secure the highest quality talent available. In particular, the number of overseas-based employees has increased steadily and now accounts for more than 60% of our total workforce. We believe diverse backgrounds and expertise presented by our global workforce are an important source of new innovation and success for our future growth. As the number of employees has increased steadily, our total human resource expenses will reach 18 billion US dollars in We are working hard to balance our need to secure top talent while at the same time improving cost-effectiveness. In recent years, a paradigm shift in the IT industry from hardware to software has changed market conditions greatly. In this new environment, talent and creativity are becoming increasingly important for companies. In response, we are putting emphasis on nurturing the capabilities of our S/W workforce, and securing about 700~800 core talents every year. In addition, we are building our Open Innovation system to access creative input from outside of the company and promoting the operation of Creative Lab, an internal innovation team. While our expansion has been mainly the result of organic growth, we now pursue both organic and M&A growth in response to rapidly changing market conditions. Through M&A, our goals are to enhance core businesses and foster new businesses. During the past three years, we have acquired 14 companies by investing over 1 billion US dollars. For our new businesses, our efforts have been driven by medical device companies such as Medison and NeuroLogica. For our current core businesses, while our set business focused on S/W, service, and content areas, our component business focused on companies with technological advantages. Going forward, we will expand our M&A strategy beyond a few target areas and pursue opportunities across a wide range of fields in order to enhance the competitive edge of our current businesses and capture new chances for our future growth. In addition, we also want to use M&A to secure the highest quality of talent available. [Risk Mgmt & Systems]

6 These topics have not been discussed with our investors. I'd like to spend the next few minutes explaining the context of our risk management system and operational infrastructure with the expectation that you will be able to learn about other aspects of our competitive edge. To address financial risk, we established real-time risk monitoring system to analyze information such as currency and various regional market conditions and set up contingency plans at each business level. Next, we enhanced the financial conditions through operations based on rules and processes. For our efforts to prevent frauds and improve transparency, we have created process manuals, an integrated check-list system, and instituted an early warning protocol. As countries around the world have tightened regulations, we have reinforced our compliance management procedures. In 2010, we newly established a global compliance management team who has compiled cutting-edge compliance manuals and systems. In addition, we have improved the monitoring of global compliance issues and increased compliance awareness among employees through training and education. Let me begin the next section by asking you a question. Do you think it's possible for all 326,000 global Samsung employees to access the same data in real-time under the single system? The answer is yes. With continuous growth of our business since 1998, especially in the global market, we had become less efficient due to the operation of 115 different systems in 129 business sites around the world. Because of this, we launched a project to create global IT systems in 2006, and integrate all systems across purchasing, manufacturing, sales, and finance. Today, our system is the largest single ERP system in the world. All Samsung employees in 54 countries are able to work under the single system. Through our ERP system, we are managing our complex global operations and improving efficiency by providing real-time data. Our ability to make fast decisions and quickly respond to market situations give us an unmatched competitive advantage. Samsung Electronics, as an IT company with significant manufacturing capability has established the world's best SCM network through innovative supply chain processes based on cutting-edge IT infrastructure.

7 With our SCM network, we can monitor the status of every aspect of operations at every subsidiary around the world in real-time and sense any market changes. Also, we have established a Global Sales and Operations Plan based on a weekly basis, for our core products. This allows our management speed advantage to compete with our competitors. In addition, we have created CPFR to enable our mobile and TV business to have more flexible operation by improving information sharing in a partnership program with our major customers. I am sure everyone in this room has very strong interest in this subject. In the past we have managed our capital resource allocations by placing priority in making strategic investments to generate future growth. The results of our efforts are evident in Samsung's stock performance of 90% increase from 2010 through Going forward we will put more emphasis on direct shareholder return while maintaining our strategy for growth. First, we will manage total shareholder return based on Free cash flow. Second, we will modify our dividend policy based on target dividend yield. In addition we plan to manage our shareholder return policy on a three-year term to reflect changes in our business conditions. Based on these, we are contemplating 2013 dividend around 1% of average share price of The actual amount will be determined by the board of directors at the board meeting that will take place at the end of January 2014, and it will be confirmed at the following Annual Shareholders Meeting. Even though we have maintained sustained earnings growth and increased ROE trends, our valuation was 1.6 for PBR and 7 for PER as of September of this year, indicating historical low levels. In particular, the price earning ratio declined sharply despite climbing profits over the same period. Our management's view is that our current valuation multiple does not truly reflect our earnings growth and leadership position in the IT industry. Following my presentation, our Vice-Chairman and Presidents of all major business will present their visions and strategies.

8 I hope today's presentations will provide you with a better understanding of our mid- to long-term growth potential and invest in Samsung Electronics' future. Thank you. Q&A Session Question 1. Samsung's cash reserve is expected to be around 40 ~ 50% of total market cap by the end of 2014, what is Samsung's Cash management plan going forward? Answer 1. As I have mentioned during my presentation, we plan to allocate significant portion of the annual operating cash flow to our investments in Capex and R&D to secure future growth and to shareholder return. For our current net cash balance, our strategy is to keep them in reserve to prepare for potential significant investments in capacity for disruptive technologies in component business and for M&A. I know we have been somewhat conservative in M&A but it may be different in the future. Based on these, I don't believe the current level of net cash balance is excessive. Question 2. Can you tell us about your view on possibility of listing in the US market, such as ADR, to increase valuation? Answer 2. In general, investors identify enhancements in share valuation, transparency and brand value as the positive affects on issuing ADR. Therefore, we should consider issuing ADR based on global economic recovery and changes to Korean equity market positioning in relation to global market.