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【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.

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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.

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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

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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.

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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.

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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

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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 low-

teens 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 mid-

single 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%.

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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.

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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

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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

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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 high-

performance 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

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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, high-

performance. 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.

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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.

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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

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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 ultra-

large size, high-resolution, frameless and curved panels.

Thank you.

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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 2017. 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

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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

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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.

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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 2017.

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.

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Next, let me brief on the market prospects for the second half of 2017. 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.

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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.

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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

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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

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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.

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<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 EUV-

based semiconductors in the market.

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<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.

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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-

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large size premium display products has the greatest profit contribution to your

business? How do you plan on differentiating your QLED products in that ultra-

large 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

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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 2017. And so, regarding what you plan from

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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 2016. 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

2020. 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

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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

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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,

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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

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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?

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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.

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<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

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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 2018.

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 high-

performance computing. Also, we have been recently adding on more positions

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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 ramp-

up 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

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reason why we're investing in ground works now is to be prepared to respond

quickly and timely to the market when necessary. So it's an infrastructure

investment. Our basic position is to respond flexibly depending on market

demand as well as customer needs in a stable way so that we are able to meet

customer needs in a timely manner.

Operator

The last questions will be presented by Teoh Kek Yee from CIMB Principal.

Please go ahead, sir.

<Q>: Hi. Thank you for the call.

And it was reported in the press that you have the ambition to grow your

Foundry Business to 25% market share. I was wondering how will you achieve

that? Will it be more on the leading-edge Note market share or you are also

growing the 8-inch and the legacy Note?

Thank you.

<A>: Actually, we plan to increase our market volume in all areas, that's

leading-edge processes, 8-inch, as well as the derivative process including RF.

Of course, we would be more than happy to go into details later on.

<Q>: Okay. Thank you.

Robert M. Yi

Well, thank you very much, and we look forward to seeing you again next

quarter.