SK hynix Inc. (A000660) Earnings Call Transcript & Summary

[Foreign Language] 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 2021 first quarter earnings results by SK hynix. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2021 first quarter earnings results by SK hynix.

[Interpreted] Good morning, and good afternoon and evening to those calling in from abroad. This is Park Seong Hwan, the Head of Investor Relations at SK hynix. Welcome to the SK hynix 2021 First quarter Earnings Release Conference Call. Before starting the conference call, allow me to introduce the executives present here with me today. First, Kevin Noh, CFO and Head of Corporate Center; Jang Hyeok Jun, Head of Finance; Park Myoung-Soo, in charge of DRAM Marketing; and Park Chan-dong, in charge of NAND Marketing. Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we will now begin SK hynix' 2021 first quarter earnings release conference call. Kevin Noh, CFO and Head of Corporate Center, will first present our earnings for the first quarter, followed by the company's plan and market outlook.

[Interpreted] Good morning, everyone. This is Kevin Noh, CFO and Head of Corporate Center. First, I will talk about first quarter earnings. Memory market in the first quarter improved quickly on the back of strong PC demand to support work from home and remote online education, and consistent mobile demand from the customers in the greater China region to compete for market share. Thus, despite the seasonality, bit shipment growth for DRAM and NAND were 4% and 21%, respectively, from the previous quarter, both outperforming the guidance. DRAM ASP increased 4% from the previous quarter rising across all applications, while NAND ASP declined 7% quarter-on-quarter as price continued to fall in most products. For MCP, demand for high-density products such as 6 gigabytes or above DRAM and 128 gigabytes or above NAND remained strong as customers in the greater China region continue to adopt higher specifications for their products. Sales of the portion out of sales was 23%, rising slightly quarter-on-quarter. Consolidated sales in the first quarter was KRW 8.49 trillion, up 7% from the previous quarter and up 18% year-on-year. Although labor expenses increased, sales, general and administrative expenses declined from the previous quarter as a result of our continuous effort to reduce overhead costs. From the unit cost perspective, the yield rate for our flagship products 1Z nanometer class DRAM and 128-layer NAND improved faster than planned. Particularly for NAND, larger style -- larger sales mix for 128-layer products made a great contribution to first quarter cost reduction. Consequently, operating profit in first quarter was KRW 1.32 trillion, up 37% from the previous quarter. Operating margin was 16%, improved by 4 percentage points. Depreciation and amortization in the first quarter was KRW 2.53 trillion, slightly down from the previous quarter. EBITDA was KRW 3.86 trillion, with EBITDA margin of 45%. There was foreign currency-related income of KRW 56.8 billion, including gain on foreign currency transaction from the strong dollar in account receivables collection, while there was loss on translation on the valuation of equity investment in Kioxia from the weak Japanese yen. There was net interest expense of KRW 56.6 billion. Combined altogether, there was a net nonoperating income of KRW 26.2 billion. Net profit before tax was KRW 1.35 trillion, and corporate tax expense was KRW 0.36 trillion. Net profit was KRW 0.99 trillion, with a net profit margin of 12%. Consolidated cash balance at the end of first quarter was KRW 5.99 trillion, up by approximately KRW 1 trillion from the end of 2020. Interest-bearing debt was KRW 13.59 trillion, increased by KRW 2.34 trillion from the end of last year. The company's debt-to-equity and net debt-to-equity ratio at the end of first quarter stood at 26% and 15%, respectively, slightly up from the previous quarter. Next is the company's market outlook and plan. For the DRAM market, tight supply situation is expected throughout this year, with the combination of strong demand driven by digitalization speeding up in the post-pandemic era and demand for inventory accumulation by customers concerned over component shortage. For the NAND market, the price is expected to start rising from the second quarter on the back of faster-than-expected market recovery. The PC market is expected to achieve rapid growth at over 10% for the second year in a row, thanks to the post-pandemic trend toward 1 PC per person. Demand remains strong as customers are aggressive for a set build as well as having low inventory on hand. PC demand is likely to remain solid as noncontact culture becomes more widespread and stimulates education and gaming PC demand. Although the smartphone market is showing some signs of recovery after the sales slow down last year, demand has not come up to pre-pandemic levels yet. However, there will be an increase in memory demand from the current pent-up demand, accelerated shift to 5G and competition for market share among mobile customers. Demand for mobile DRAM and NAND this year is expected at mid-20% and mid-30%, respectively, compared to last year. After showing relatively lukewarm demand growth in the first quarter, the server demand is on a fast pace of recovery from the second quarter on the back of increased spending for new data centers by hyperscalers. However, the demand increase is expected to take off from the second half of the year as the impact from the launch of new server CPU materializes. The new CPU will stimulate server replacement demand and memory content is also expected to increase with improved computing power. For graphics, as new game consoles launched last year and strong PC demand persists, growth rate of above 60% for DRAM demand for consoles, around 30% for graphic card and over 40% for client SSD demand are expected. Based on this trend, DRAM demand growth for this year is projected at the higher end of the previously expected range at around 20%. The company will address the incremental demand with enhanced productivity and inventory digestion. This year's DRAM bit growth by the company will be in line with market demand growth. Meanwhile, as the yield rate for 1Z nanometer class, the company's major product this year is improving faster than planned, the mass production will take place in earnest in the second quarter. The company will also begin the mass production of 1A nanometer class using EUV within this year to stay ahead of technology competition. NAND demand growth is expected at mid-30%, slightly higher than the initial expectation. The company is planning for bit growth more than the market this year by further transitioning to 128-layer technology, which is garnering customers' recognition for competitiveness. Following the full-scale marketing of 128-layer-based mobile and client SSD, the company plans to increase the sales of enterprise SSD. The company will increase the 128-layer product mix, close to 80%, begin mass production of 176-layer products with the accumulated know-how from the 128-layer technology and further strengthen technological competitiveness in NAND as well. The market environment in the second quarter is expected to be favorable across all applications, and the company will proactively react to customer demand with market-leading product quality, particularly using the 1Z nanometer DRAM and 128-layer NAND technology, showing outstanding product competitiveness, the company will start expanding high-density products based on 12 gigabytes or more DRAM and 128 gigabytes or more NAND and further increase the market share in the high-density MCP market this year. For the second quarter, DRAM bit shipment is expected to grow in low single percent. For NAND, given the base effect of the high bit growth achieved in the first quarter, bit shipment in the second quarter is expected to be flat quarter-on-quarter. With the stronger-than-expected demand growth this year, the company is responding to the additional demand with enhanced productivity and inventory utilization. However, as the expectation for the customer set build continues to exceed the projections from early into the year, there is a likelihood that the supply and demand condition becomes tighter going into the second half of the year. In the midst of increased equipment spending due to the supply shortage situation across the overall semiconductor industry and given the elongated equipment lead time and set up period, the company has decided to pull in a part of the capital expenditure planned for next year to the second half of this year. While this will slightly increase our CapEx over the initial plan, the increase in production will be materialized next year. Lastly, let me provide an update on the company's ESG management during the quarter. SK hynix has strengthened Board of Directors center management so that the Board can more easily supervise and check the management as the highest governing body for decision-making processes. Ha, Yung Ku, formerly the lead independent Director, has been named the new Chairman of the Board. The council for recommending candidates for outside directors now consists 100% of independent directors, promoting a more transparent and independent decision-making structure. In addition, former committees have been expanded to reinforce the Board of Directors' engagement and corporate management, such as the company's mid- to long-term plans and over decisions for the evaluation process and compensation for senior management, such as the CEO. The newly structured future strategy committee and human resources and compensation committee will allow closer participation of the Board of Directors and company management. In March this year, the Semiconductor and Display Carbon Neutrality Committee was newly launched with the participation of the Ministry of Trade Industry and Energy, and the 4 major domestic semiconductor and display companies, including SK hynix, and a joint declaration toward the goal of 2050 carbon neutrality was announced. Although the semiconductor and display industry have been each making independent efforts to reduce greenhouse gas emission through investment in leading-edge reduction facilities and development of alternative process gases, the Carbon Neutrality Committee is now acting as the trigger to strengthen mutual cooperation, such as developing eco-friendly technologies and discussing initiatives such as RE-100. SK hynix will be an active participant in this endeavor to help establish the Korean semiconductor industry as the best leading practice in global ESG. Thank you very much.

And with that, we are now ready to take your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Ricky Seo from HSBC.

[Interpreted] Now first of all, congratulations on the good performance. I have 2 questions. First is about the EUV, you mentioned that you will start applying the EUV for 1A nano production in the second half of this year. I wonder what is going to be the number of layers that the company will be applying the EUV too, in order to make sure that it is going to be cost-effective then I believe that you would have to apply this to as high layers as possible. So when do you believe that you will be able to have a meaningful application of the EUV? And also, what is the currently available unit of equipment that the company has now? And what is your plan for the acquisition of the equipment down the road for the next 2 to 3 years? And the second question is the company also explained earlier about the DRAM market situation per application, but then if you could let us know what were the stronger performing application than you had expected? And also what were the weaker performing applications that the company expected? And why do you believe that was the case?

[Interpreted] Regarding the EUV, as was explained in the presentation, yes, SK hynix plans to apply the EUV for the mass production of 1A nanometer for the first time. And given that this is going to be our first application of the EUV, the layer is not going to be much. So for the 1A nanometer production, we will be applying the EUV for only 1 layer. But then for the 1B and 1C nanometer down the road, we will be applying the EUV to more layers. And as was explained earlier, in the previous earnings release conference call, we have already acquired the EUV for mass production in the early part of this year, and we have also completed the installation and as has been reported through the media, have also signed the volume purchase agreement for EUV with ASML, laying the groundwork for consistent supply of EUVs for the next few years. And given that this is only the early days of the EUV application, there are still some uncertainties, we do understand. So we have set up a task force for the EUV application to make sure that we will be able to move ahead with this plan with no glitches. Next is about the DRAM demand per application. Now I would like to give you my responses in 2 parts. First is about the device applications, which are related to the consumer side and second are for server. Now first, for the PC and the game consoles as -- the PC game consoles as well as the smartphones. So in these devices market, we believe that the step build is going to be stronger or higher than the company had initially expected. Some of the reasons are that because of the COVID-19 impact, the work-from-home demand continues into this year. So because of this, unlike the previous trend, we are also seeing increasing demand for high-spec products. And as a result, we are seeing that the supply keeps falling short of meeting the demand for bit -- for the bit growth. And next about the server side. So demand for server products in the first quarter, and also looking at -- so it was a bit different depending on the inventory level by customer as well as the demand per customer. And of course, overall, there has been growth in the server demand as well. But then compared to other applications, I would say that for server, in the first quarter, the growth was about at the recovery level, but then starting in the second quarter, we do believe that the demand was for server products will also start to take off because investments by hyperscalers as well as cloud companies is increasing, and there's also stronger set build confidence. So overall, we believe that the server demand will also take off in the second quarter. In addition to that, the effect of the new CPU launches will be -- will begin to be felt starting in the second quarter and into the second half of this year. So we believe that the demand for server is also going to remain strong throughout the year.

[Interpreted] The following question will be presented by Nicolas Gaudois from UBS.

The first one relates to the memory inventories. Investors are often asking currently how much of a recent upside the memory is and consumption as opposed to inventory bill. How do you think end demand bit growth has changed for 2021 versus your prior expectations? And how do you compare this to the industry bit shipment growth? And secondly, you just talked about upside for CapEx this year and pulling in some of the delivery schedule for tools into 2021. When is the earliest you can actually execute that this year? And our equipment lead times currently a bottleneck in that complex when you will consider to generate that upside in your capacity ramp plans?

[Foreign Language]

[Interpreted] First, about the inventory for both the suppliers, so for the company and also the customers. Now for the supplier, the inventory level has -- also has been announced several times already. Now it is going to be lean through the year. And also, as we move further into the year, it is likely to become leaner. And then inventory from the demand side, of course, it is difficult for us to tell for sure, but then for the server inventory, where the enterprise demand is strong. For the server inventory, it started out with a little bit of more room than other applications, but then as I have explained about the server demand projection for the rest of the year, so it's likely that the server demand will also start growing further in the second quarter and the second half of this year, meaning that starting in the second quarter, the server product inventory is also likely to start declining. And then that, I believe, is then also going to be related to the memory demand as well. And regarding your second question about CapEx plan, the company's investment review committee holds a meeting on a quarterly basis to make adjustment to the CapEx if necessary. And now as was mentioned earlier, because of the longer delivery time for equipment and tools and also in consideration of the tight demand and supply dynamics, the company has decided to pull in a part of the CapEx of next year into this year. And as for the equipment with particularly long delivery time, we have already had taken the review and is now ready to issue the PO for these equipment for -- with long delivery time. So we have had this ready at the end of the first quarter. So at the end of March. And then for the equipment and tools with relatively less urgent delivered time, we would keep monitoring the market situation and again, make the decision related to them at the end of the second quarter. So with these developments, we believe that the equipment will be all set up by the end of this year. And the production coming out of these new equipment will contribute to bit growth next year.

[Interpreted] The following question will be presented by Min Seong Hwang from Samsung Securities.

[Interpreted] I have some questions about your foundry. And there were reports about the company's plan to increase investment and when we look at your 8-inch, then we see that the -- in terms of the cost competitiveness as well as the price competitiveness, the company does have an advantage over the 12-inch so if the company does go ahead with further investment, and what is your plan between the 8-inch and the 12-inch? And also, are there any plans to convert some of the DRAM capacity into CIS?

[Interpreted] Now with regards to the foundry investment, as the questioner has rightly observed, the company currently remains 8-inch focused in our business plan. So at this time, there are no plans to enter into the, for example, 12-inch or other leading technology foundries. And also the System IC, which is a 100% owned -- the fully owned subsidiary of SK hynix. The SK hynix System IC recently has relocated its domestic 8-inch foundry business to China, to strengthen its cost competitiveness. And then also, last year, for the -- what's called the key foundry. So for the Magnet Chip Foundry business acquisition, SK hynix is currently participating in the bid to acquire the Magnet Chip Foundry business as an LP. And the company sees the 8-inch foundry business to have a positive future outlook. But then we are also looking at the current tight supply situation, especially looking at the supply shortage for the automotive semiconductors, the company also feels a sense of responsibility as a large semiconductor supplier. So currently, we are looking into various options regarding the foundry as well as other businesses. And although no specific decisions have been made yet, we are mulling over our 8-inch business, for example, the potential expansion in -- from various angles. And as for your second question about the possibility of converting some of the DRAM capacity into CIS. We remain conservative regarding this at this point, given especially the tight supply that continues for both DRAM and NAND market, so at this point, regarding the potential conversion of the DRAM capacity to CIS, all I can say is that we remain conservative. One last comment regarding this particular question. Now regarding the global tightness in the semiconductor supply, we are also monitoring the situation. And especially the fact that this is also affecting the supply of some parts because of the semiconductor shortage. Now regarding the current situation, SK hynix continues to think about how we can make a contribution to this. And as soon as we come up with any viable businesses or ideas, then we will communicate them with you. And we will also try to have discussions and work together with the other players in the semiconductor ecosystem. Now just to give you some clarification regarding the explanation earlier about the investment. So I did mention about the investment review committee being held on a quarterly basis to make decisions. But then for the CapEx pull and decision for this year, now the amount of the CapEx to be pulled in from next year has already been determined. And then any further decisions will be made within that limit. So I did mention earlier about the decision to purchase the equipment would -- especially long delivery times. So we have already prepared the POs to be issued at the end of March, and then for the equipment with less urgent lead time, then we will make the related decisions in the future. For example, at the end of June for the PO to be issued. So once again, let me clarify that for the CapEx pull in or any incremental CapEx, so we have already made the decision at the end of the first quarter. And it's not likely that there is going to be any increase in the CapEx further in the second or the third quarter of this year.

[Interpreted] The following question will be presented by Mehdi Hosseini from SIG.