Hello? This is Sung-Hwan Park in charge of IR at SK Hynix. Thank you to everyone who participated in the business performance conference call for the fourth quarter of 2020. I will introduce the executives of the company who attended today. From this year, Jong-won Noh, who is in charge of management support, Hyuk-jun Jang, who is in charge of finance, and Chan-dong Park, who is in charge of NAND marketing, are newly attending.
Please note that the forecast information included in the conference call announcement may vary depending on changes in macroeconomic and market conditions. Then, from now on, SK Hynix will begin to announce its business results for the fourth quarter of 2020. First, Jong-won Noh, in charge of management support, will explain the 4Q and 2020 results, future plans and market outlook.
[2020년 실적]
This is Jongwon Noh in charge of management support. Before talking about the 4Q results, I will give a general explanation of the company’s operation performance last year and direction this year.
In 2020, the global economy will contract significantly due to intensifying global pandemic and trade conflict, and the memory market, which started out with anticipation of recovery, also showed a slowing trend. Even in such a business environment, the company recorded sales of 32 trillion won and operating profit of 5 trillion won, which is a year-on-year improvement based on rapid development of leading technology, stable mass production of flagship products, and the best quality competitiveness in the industry.
First, for DRAM, along with 1z nano (nm), which began mass production in the third quarter, the portion of the 1y nano front end process reached 40% at the end of last year, and plans to expand to over 75% of the production portion at the end of this year. In addition, we will continue to strengthen our technology leadership by introducing 1a-nano products that improve productivity by about 40% compared to 1z-nano.
Last year, our company has greatly expanded its market share in the server DRAM market based on the industry’s best quality competitiveness. In addition, the DDR5 product, which has nearly twice the speed of DDR4 and reduces power consumption by 20%, was launched by SK Hynix for the first time in the industry in October. This year, we will further solidify our position in the server market through the competitive edge of 16-gigabyte (Gb) products based on advanced processing.
Meanwhile, HBM2E, which we have been selling in earnest since the second quarter, occupies the No. 1 market share in the industry. In the future, we will further strengthen our position in the graphics market by actively responding to the hyper-performance computing and artificial intelligence (AI) accelerator markets with such strategic products.
NAND, the industry’s first 128-layer product, accounted for about 30% of production at the end of the fourth quarter. The 128-layer product will increase its weight to more than half of the production volume in the first half of this year through rapid yield improvement and stable mass production, and will lead the market’s 128-layer conversion.
Based on the high quality, we are supplying 128-layer solutions that meet the level of customer requirements in a timely manner. Following the full-scale sales of mobile and client SSDs last year, it plans to expand the supply of SSDs for servers this year.
On the other hand, based on the successful development and mass production know-how of 128 layers, we developed a 176-layer product last year that increases productivity by more than 35% compared to 128 stages, and is preparing for mass production this year. In the future, it plans to expand its applications starting with high-end mobile products that require high performance and low power. Through this, we will endeavor to continue our competitiveness at 128 levels.
Last year, our SSD sales increased significantly, and the NAND product portfolio focused on mobile has improved significantly. In particular, SSDs for data centers surpassed the original plan, and sales increased 6 times compared to the previous year. By securing a meaningful share in the eSSD market, it is possible to accelerate future sales growth.
In line with this, the agreement to acquire Intel’s NAND business, which was signed last year, will be an important opportunity to further strengthen the company’s NAND business competitiveness. In addition to improving the portfolio and securing economies of scale, it is of great significance in that it secured a pool of people with high understanding of the overall system in a short period of time and established a cooperative relationship between the two companies. In the future, we will establish a firm position as fast as DRAM in the NAND business and write a new growth story of our company.
[4분기 재무실적]
From now on, I will talk about the financial results for the fourth quarter of 2020. Sales in the fourth quarter fell 2% in the previous quarter to 7.97 trillion won, but rose 15% compared to the previous year. In the first half of the year, DRAM NAND shipments in the fourth quarter recorded 11% and 8%, exceeding the guidance. In the case of ASP, DRAM and NAND fell 7% and 8% QoQ, respectively. DRAM prices are easing, and NAND is also slowing.
Meanwhile, MCP shipments increased sharply for two consecutive quarters on the back of strong mobile demand in Greater China, and product prices rose QoQ. As a result, the proportion of sales expanded to 22%, and sales growth is expected to continue in line with such strong demand for the time being.
Operating profit in the fourth quarter decreased by 26% from the previous quarter due to a decrease in sales and a weak dollar due to a decrease in the average selling price (ASP), but increased 298% from the previous year to 0.97 trillion won. The company’s operating margin was 12%. Depreciation and amortization of intangible assets in the fourth quarter increased slightly from the previous quarter to KRW 2.59 trillion, with EBITDA of KRW 3.56 trillion and EBITDA margin of 45%.
In terms of non-operating items, foreign exchange-related expenses such as exchange loss related to the collection of accounts receivable due to the fall of the exchange rate were incurred 0.33 trillion won. On the other hand, as a result of the year-end fair value valuation of Kioxia investment assets, an valuation gain of 1.72 trillion won was generated, resulting in a net non-operating income of 1.27 trillion won.
Accordingly, net profit before income tax was 2.23 trillion won, an increase of 66% from the previous quarter, net profit was 1.77 trillion won, and net profit margin was 22%.
At the end of the year, the company’s total cash equivalents stood at 4.95 trillion won, an increase of 0.95 trillion won from the end of the previous year. Borrowings amounted to 11.25 trillion won, an increase of 0.73 trillion won from the end of the previous year. As a result, our debt ratio and net debt ratio were 22% and 12%, respectively.
In 2020, FCF, excluding the acquisition of tangible assets from operating cash flows, reached KRW 2.2 trillion due to improved profits and reduced Capex. According to the dividend policy announced earlier last year, the total dividend was set at 800 billion won. This is 36% of FCF, and the dividend per share is KRW 1,170.
[20201년 전망]
-DRAM
In this year’s DRAM market, industry supply is limited. On the other hand, the demand growth rate is expected to exceed the supply growth rate as demand is expected to be solid, mainly for servers and mobile phones. Specifically, the construction of new data centers for major Hyperscale customers, expansion of DRAM support channels from 6 to 8 channels, and the arrival of new central processing units (CPUs) and server replacement demands, 30% per year. Server DRAM demand is expected to grow higher than that.
Smartphones, which had a sharp decline in sales last year due to Corona 19, are expected to continue to expand the launch of new 5G products and adopt high-capacity memory this year. The number of 5G smartphone shipments this year is expected to be around 500 million units, a double increase from last year. Recently, the DRAM loading of major models has reached the level of 6GB to 8GB, so the growth rate of mobile DRAM demand is expected to exceed 20% this year.
In the PC market, customers’ inventory declined due to strong sales in 4Q, and notebooks and gaming PCs are expected to continue strong this year. As for graphics, the HBM2E market is expected to expand as new game consoles and new graphics processing units (GPU) are released, and demand for AI/DC accelerators increases. The consumer market is also expected to see solid demand as smart home devices expand and 5G network infrastructure expands.
-NAND
In the NAND market, the market conditions are expected to gradually recover from 2H as high inventory levels across the industry are resolved in 1H.
Mobile demand is expected to be driven by aggressive build demand from customers for the launch of new 5G products, competition for market share, and expansion of high-capacity NAND adoption. As for the client SSD, strong demand for laptops continues and the effect of launching new game consoles employing SSDs is highlighted, and demand growth is expected to exceed 30%. Demand for eSSD is expected to increase in earnest from 2H11 thanks to the release of new server CPUs and an increase in recruitment per unit.
-Bit gross outlook
It is expected that this year’s DRAM demand growth will be around 20% from the late 10%. We are planning a market-level bit growth.
The growth rate of NAND demand is expected to be around 30%. Despite the decrease in wafer capa following the transition to 3D NAND, we are planning a bit growth that exceeds the market growth rate by switching to 128 and 176 layers, and through this, we will accelerate our cost reduction efforts.
Despite the off-peak season in 1Q, the market environment continued to be favorable, mainly for mobile and PC. We plan to increase DRAM shipments at the same level as in the previous quarter, and NAND shipments to increase by mid-single percent.
We intend to maintain a cautious investment policy this year in preparation for still existing external uncertainties. Last year’s investment decreased significantly compared to 2019, as I said at the beginning, and executed a little less than 10 trillion won. This year, despite the opening of the M16, which was completed at the end of last year, the investment trend focused on technology conversion is maintained, so the amount of investment will increase compared to the previous year, but the increase will not be large.
-ESG
Finally, I will explain our ESG plan. We will promote sustainable growth centering on a balanced DRAM and NAND business. By strengthening ESG, we will contribute to humanity and society, and this will create a virtuous cycle leading to the growth of the company.
Last year, it joined RE100, the first domestic and semiconductor company to procur all power consumption through renewable energy by 2050. Earlier this year, it was the first global memory semiconductor company to issue a green bond worth $1 billion.
The funds raised will be invested in eco-friendly projects such as the construction of a state-of-the-art wastewater treatment plant and water recycling system. In addition, it plans to promote various projects for energy efficiency, such as the low-power SSD development project to reduce carbon emissions.
In order to internalize ESG management more systematically, we created a dedicated ESG organization directly under the CEO this year. In addition, the ESG Management Committee will be established to discuss strategies to manage ESG risks, which are expected to have a large financial impact, and to create opportunities for new opportunities.
We will not only respond passively to the needs of stakeholders, but also combine ESG elements in the entire business, such as technology and product development, to become a source of competitiveness that can provide differentiated value to customers and shareholders.
In the future, SK hynix will not stop innovating so that it can achieve an evolution that transcends the existing achievements both in business and beyond. Through this, we will make 2021 the first year to be reborn as a global memory company with a strong and balanced pair of wings such as DRAM and NAND.
[질의응답]
Q. It seems to have expressed that this year’s demand will be more positive than last quarter. Please explain in detail what changes are made for each applied product.
A. I will tell you about the demand forecast by application this year. In the case of PCs, after the pandemic of the previous year, the company’s earnings are expected to outperform the actual PC shipment estimates compared to the 1H forecast. In connection with that, when looking at the market this year, due to the underlying effect, PCs are expected for low-per middle shipments, but the outlook for the market and customers at the beginning of the year is gradually rising. This part is being watched carefully because there are various issues on the global SCM side. If additional demand arises, overall demand for memory, such as PC DRAM, client SSD, and memory for Chromebooks, is expected.
In the case of servers, the use of multi-cloud and hybrid cloud by companies showed a significant expansion after Corona 19 last year. Accordingly, business competition between cloud providers and enterprise companies is also intensifying. I think these things are driving demand expansion.
As mentioned earlier in the overall market outlook, the construction of new data centers, the resumption of investments that have been reserved for the past two years, and the launch of new server CPUs are expected to serve as positive momentum this year. Server set builds are also expected to decrease from the previous year and increase to more than the early 10% this year.
In the case of mobile, centered on smartphones, competition for market share among companies seems to be intensifying. This part is leading to competition for the specifications of flagship products. The demand for high-capacity MCPs is increasing along with the recovery of shipments in the previous year and the expansion of the 5G market. This year’s mobile demand is expected to grow beyond the average big growth from the previous year. In accordance with the booming PC and the effect of the game console newly released in the previous year, demand seems to be solid this year in graphics.
Q. Please explain our stock status and the level of stock for each customer.
A. I will answer about the industry stock level. It is difficult to tell the stock level of customers, but overall, there seems to be a degree of difference by application. Server and mobile stock levels are higher than the industry average, and PC and other products stock levels are relatively low. The server and mobile builds are in progress, so it seems that there is no level of concern.
In particular, in the case of mobile, some have mentioned the possibility of overshooting demand, and we are also cautiously looking at it. As the actual build is solid and the current short-term customer demand-to-supply fulfillment rate is below, we believe that risk management is being conducted to some extent.
Our DRAM inventory levels are operating for less than two weeks as in last year. We plan to focus on balanced inventory operation through coordination between applications.
Q. As DRAM market conditions become more visible, prices are expected to rebound and earnings are expected to improve. NAND also has expectations for a market recovery. Please explain this year’s NAND market with a focus on supply and demand.
A. In 2021, the NAND market is expected to remain solid throughout 2021, depending on the demand for smartphones, PCs, and gaming due to 5G. In the case of servers showing relatively weak demand, customers are running out of inventory, and strong demand is expected as the number of newly released CPUs increases.
On the other hand, on the supply side, margin pressures from suppliers limit investment, and supply capacity is expected to be somewhat insufficient. Therefore, the market conditions in 2021 are expected to gradually improve due to solid demand factors.
Q. He explained the migration plan for NAND. Please explain the timing of the NAND business’ profitability improvement.
A. In the future, I will tell you about the profitability of NAND and the timing of the turnaround. When learning golf for the first time, catching a driver, it is not easy to catch both distance and direction. Usually, after making enough distance, I set the direction.
SK Hynix’s NAND business is a latecomer compared to competitors. It is true that there were difficulties compared to competitors due to the late transition to 3D NAND. As previously mentioned, we are confident that our product competitiveness and mass production development speed are ahead of competitors at 128 stages. We plan to make efforts to maintain technological competitiveness in the future. To secure such technological competitiveness and mass production capacity, we have been focusing on the resources of the company. From now on, I think it is time to focus on cost competitiveness that corresponds to the direction of golf.
SK Hynix’s NAND business will make efforts to turn around this year. Regulatory approval from each country should be preceded, but there may be a temporary cost increase after the acquisition of Intel’s NAND division, but we will overcome such a burden in the short term and speed up the improvement of NAND profitability.
Q. The use of cash assets will eventually consist of M&A facility investment and dividends, but I am curious about how they will develop each in the mid to long term.
A. You seem to be asking about the medium and long-term cache resource. First, CapEx will make a decision in consideration of the market conditions and maintaining competitiveness in the memory industry. In terms of dividends, we will maintain the dividend policy of paying 5% FCF on a fixed dividend of KRW 1,000 per share until 2021. The remaining resources will be used where it is judged to be primarily necessary for the company’s future growth and development.
Q. The introduction of EUV exposure equipment is also becoming increasingly visible to memory semiconductors. How will the RAM refinement roadmap be unfolded in relation to EUV equipment?
A. We have been planning to introduce EUV from several years ago. We already have EUV equipment. We are also in close discussion with equipment makers on the direction of securing mid- to long-term EUV according to our development and mass production plan. As mentioned in the performance announcement, CS and mass production certification will be applied for the first time this year in 1a nano. In earnest, it is planned to apply from 1b nanometers.
Q. In the last conference call, there was a mention of strengthening the competitiveness of System IC. How is the current system IC-related strategy progressing?
A. As you may know, SK Hynix has an 8-inch foundry capacity of about 100,000 to 120,000 units in the M8 fab in Cheongju. The 8-inch business has recently been booming. Usually, the tech migration is from 6 inches to 8 inches and 8 inches to 12 inches respectively. However, the investment cost of 12 inches is too high. You can go from 6 inches to 8 inches, but it is not easy to go from 8 inches to 12 inches.
Market supply continues to be limited. This 8-inch boom is expected to continue for the time being. In order to fully utilize this opportunity, a plan was made to move the 8-inch facility to China, where cost reduction is expected, and is in progress. Initially, the relocation period was going to be carried out over two years, but in order to cope with the increasing customer demand, a plan was made to relocate to China as soon as possible.
To expand the product portfolio, it plans to produce a diverse product portfolio including CMOS image sensors (CIS), display driving chips (DDI), and power semiconductors (PMIC). As a shortage of 8-inch capacity was expected last year, SK Hynix indirectly invested in 8-inch capacity, equivalent to 100,000 sheets from Cheongju Magnachip, through LP investment last year. We will proceed in a direction that contributes to customer value in accordance with the future 8-inch market conditions, such as the M8 assets being transferred and the assets of Magnachip (currently Key Foundry), which are indirectly held through LP investment.
Q. Depending on the Corona 19 situation, demand for untouched PCs and servers exceeding expectations has been continuing since the second half of last year. However, if Corona 19 is alleviated and we return to our daily lives, the demand for untact that has occurred so far could drop temporarily. Rather, it is said that it may have a negative effect in terms of demand. If this happens, how do you plan to respond?
A. If after Corona 19 recovers and people’s activities go out to the outdoors, there seems to be some concerns about whether the demand for IT needed at home or office space will drop. It seems that the values such as non-face-to-face work, educational environment, and home entertainment experienced so far have been sufficiently confirmed by companies and individuals. I don’t think these things are values that will disappear suddenly, but as a kind of New Normal trend.
This year’s 5G smartphone is expected to more than double compared to the previous year. In connection with this, the introduction of new technologies such as 5G, edge computing, AI, and VR is expected to accelerate. This was confirmed at this year’s CES exhibition. It is expected that companies will further accelerate digital transformation as an inflection point. We believe this will continue to serve as a momentum to increase memory demand.
Finally, when it comes to the response when this part is perceived as a risk, it is seen as an uncertain risk factor. Therefore, rather than responding to risks, I think it has built a more stable business by increasing the proportion of contracted customers compared to the previous year.
As a side note, I do not think that the trend changed to untouch will easily return as before even after Corona 19 ends.
Q. In terms of cost reduction, how much has the cost reduction of DRAM and NAND this year compared to last year?
A. The level of cost reduction per party achieved in previous years has also been achieved in 20 years. This year, we will endeavor to achieve last year’s level of cost reduction through process refinement as well as investment efficiency. DRAM and NAND are striving to achieve the level of cost reduction compared to last year. Considering the weak exchange rate, the target is expected to be achieved in won. However, on a dollar basis, we expect it to slow down compared to the target.
Q. The M16 fab will be operational from this year, and I am curious about the overall product allocation, how much the capacity can be improved this year compared to the end of last year, and what the maximum capacity of the M16 is.
A. Usually, it is a multi-layered fab. In the case of M16, it is the world’s largest fab formed in a three-layer structure. The completion ceremony is scheduled for February 1. Starting this year, pilot mass production is expected to begin based on the latest technology we have. By the end of the year, while looking at the DRAM market situation, we plan to variably bring an appropriate mass production plan to meet the market demand.
Mass production begins in earnest after June, when the pilot test ends. From June this year to next year, we will make appropriate investments according to the market conditions.
Q. When you hear about the DRAM plan, it seems that the company is keeping its cautiousness in the face of rising demand. M16-related plans also seem cautious. What changes have made you so approaching, and why are you maintaining a cautious approach in the situation of DRAM upcycle?
A. The cautious view is correct. The biggest part is that there are exogenous risks this year following last year. First, the corona 19 part should go on a marked recovery along with the vaccine, and that part should lead to the real economy and consumption.
At the present stage, each application to recover demand has plans to expand its business this year, and there are some supply chain issues. I believe that this could lead to demand volatility. In addition, there is still a risk of global trade conflict. However, we believe that the overall business performance this year will improve compared to the previous year, as we believe that demand is better than the situation at the supply end.
Q. In terms of DRAM technology, compared to 1z nano, 1a nano has improved productivity by 40%. What does it mean in detail? For example, if the yield is assumed to be the same, the bit per wafer will improve by 40%, and if so, it seems to be a significant improvement. I am curious about how the DRAM design was changed and improved.
A. We maintain the same tech platform with no major technological changes in the 1x, 1y, and 1z deployments in recent years. However, the gap in technology competitiveness and technology development gap between each DRAM maker is narrowing.
The 40% productivity improvement I mentioned is correct that I am referring to the increase in bits per wafer at the same yield. In a situation where the technology gap between competitors narrows, a specific technology and specific specification are important, but a stable mass production ramp-up speed is paramount. In particular, various technology investments are made to achieve 40% big growth, and I think it is more important to secure cost competitiveness in the process.
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