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【Samsung Electronics 4Q Earnings Call】

Robert M. Yi

Good morning.

This is Robert Yi from Investor Relations.

Before we announce our fourth quarter results, I would like to invite Mr. Roh

Hee-chan to share his thoughts as the new CFO and provide updates on the

progress of our shareholder value-enhancement programs.

Now, I'd like to turn it over to our CFO.

Hee-chan Roh

Thank you, Bob. This is Hee-chan Roh.

I am very honored and privileged to introduce myself as a new CFO of Samsung

Electronics to our shareholders and investor communities.

Samsung Electronics has remained focused on driving forward innovation and

establishing effective investment strategies amid the rapidly changing IT

industry. As a result, we secured global leaderships on many product categories

which enabled the company to generate solid results on a continuous basis and

build a sound and strong capital structure.

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We have also worked hard to enhancing shareholder value through our strong

shareholder return program and improved corporate governance.

As a CFO, I am committed to continuing our growth momentum, enhancing our

sound financial structure, and delivering higher value to our shareholders.

I will now update the progress on our shareholder return program.

We have completed the share repurchase program for 2017 that we

announced in our fourth quarter 2016 earnings call. During the program’s four

phases, we invested approximately 9.2 trillion won to repurchase and cancel

3.3 million common shares and 826,000 preferred shares.

As for 2017 dividend, as you know, we announced in last October 4.8 trillion

won annual dividend, which represented 20% increase over 2016. However,

under the dividend focused return strategy that we adopted for 2018~2020

shareholder return program, the Board decided to allocate all of the 50% of

Free Cash Flow to the 2017 annual dividend. This brought 2017 annual

dividends to 5.8 trillion won, 46% year-on-year increase.

Today, the Board approved a year-end dividend of 21,500 won per common

share and 21,550 won per preferred share.

With the approval of the above mentioned year-end dividend at the upcoming

meeting of shareholders, we will complete the three-year shareholder return

program covering through 2017.

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Last October, the Company announced a three-year shareholder return policy

covering 2018~2020, with aim to bring higher clarity and predictability of our

shareholder returns.

To recap, we will allocate at least 50% of free cash flow to shareholder returns

for the three-year period, and will pay out 9.6 trillion won in dividends each

year.

We will faithfully carry out these promises. We will also continuously invest in

key businesses and develop new growth drivers in order to continuously bring

strong results and enhance shareholder value.

As another step in enhancing shareholder value, the Board of Directors

approved 50 : 1 stock split today.

There have been numerous requests for a stock split based on an argument

that a high price of Samsung Electronics shares was a hindrance to certain

potential investors. The request increased in frequency as the price of our

shares rose significantly during 2017 based on our earnings growth and

enhanced shareholder return program.

The Board believes a stock split will make Samsung Electronics more accessible

to a wide range of investors and that they can share the significantly increased

dividends from 2018.

We also expect the split to add liquidity and marketability to our stock, which

could contribute to enhancing our corporate value in the long term.

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The Company’s management and Board of Directors will work tirelessly to

make the company more competitive and profitable. Last but not least, we

remain committed to increasing shareholder value through enhancing

shareholder returns.

Thank you.

Robert M. Yi

Well, thank you, Mr. Roh.

Now we will go over the fourth quarter results as scheduled.

We will now begin our earnings call for fourth quarter 2017.

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 the Foundry Marketing Team,

Mr. Choi Kwon Young, Vice President of Samsung Display,

Mr. Lee Kyeong Tae, Vice President of the IT and Mobile Business,

Mr. Cho Seong, Vice President of the Visual Display Business,

and Mr. Kim Sang Hyo, Kang Tae Gyu, Vice Presidents 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,

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and all such statements are subject to certain risks and uncertainties that may

cause our actual results to be materially different from those expressed in

today’s discussion.

With that, I would now like to take you through our fourth quarter results.

In 2017, we achieved record-high earnings mainly on contributions from the

component business. Demand for high-value-added server memory stayed

strong, and our preemptive and strategic investments to prepare for new

technology and market growth started to contribute to the results.

In the fourth quarter, total revenue grew 24% Y-over-Y and slightly Q-over-Q to

66 trillion won, driven by robust memory market conditions and an increase in

shipments of Flexible OLED panels.

Gross profit increased approximately 7.8 trillion won Y-over-Y to 30.2 trillion

won, and gross margin improved 3.8%pts.

SG&A expenses grew 1.9 trillion won Y-over-Y due to the consolidation of

Harman’s results from March 2017 and an increase in R&D costs and

advertising and promotion expenses. However, as a percentage of revenue,

SG&A expenses declined 1.9%pts Y-over-Y.

Operating profit came in at 15.1 trillion won, an increase of 5.9 trillion won Y-

over-Y, driven by a significant increase in profitability at the semiconductor

business. Operating margin improved 5.7%pts Y-over-Y to 23%.

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The strengthening of the Korean won against major currencies limited our

earnings growth by reducing our operating profit by approximately 660 billion

won Q-over-Q, with the impact mostly on the component business. In addition,

special incentives distributed to employees of Semiconductor division during

the quarter lowered the 4Q profit.

I would like to briefly review operating profits by business units.

In the semiconductor business, earnings improved Y-over-Y as memory ASP

continued to rise and supply and demand conditions remained tight on the

back of strong demand that centered on server memory products.

Regarding the Display business, earnings increased in the OLED business due to

rising sales of flexible products for premium smartphones, but earnings

decreased in the LCD business as demand remained slow.

In the IM business, earnings in the mobile business rose slightly Y-over-Y as we

increased our flagship portion of smartphone sales. Total smartphone shipments,

however, edged down, the decrease mostly coming from the lineup optimization

of low-end models. In the Network business, customers’ LTE investments

concentrated in the first half, resulting in the Y-over-Y earnings declines seen in

the second half. As a result, total IM earnings decreased slightly.

In the CE business,

Despite rising sales of premium products such as ultra-large sized and QLED TVs,

earnings in the TV business edged down Y-over-Y due to a dip in market

demand. In the home appliance business, however, earnings grew on the back

of strong sales of premium products, including our Flex Wash line.

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Next, I would like to address our business outlook.

In the first quarter,

We expect to experience weak seasonal demand and an additional negative

impact on profitability related to exchange rate fluctuations.

Regarding the component business,

we expect demand for server DRAM to remain strong, mainly driven by data

center needs, but overall DRAM shipments to slow down due to the conversion

of line 11.

For the Display business,

under weak seasonality of the smartphone market, intensified competition

with LTPS LCD and a potential decline in panel demand could weigh on OLED

profitability.

In the set business,

we expect the mobile business to improve its earnings, led by an increase in

sales of flagship products with the launch of Galaxy S9.

The CE business will focus on securing profitability under weak seasonality.

In 2018, We expect our earnings growth momentum to continue, driven by the

component business, as the memory business is expected to deliver strong

results.

In the set business, we will strive to maintain solid earnings by focusing more

on securing profitability as opposed to volume growth through further

differentiating our premium products.

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In the mid to long term, we expect our component business to see demand

expand from new applications. For the set business, we also expect increasing

opportunities, mainly related to Software and Connectivity. We will address

this industry trend though implementing our strategy to connect devices and

services based on AI/IoT platforms.

In semiconductors, demand for high density memory for Cloud and Server as

well as for chipsets required for Automotive Electronics/AI are expected to rise.

We will reinforce our technology competitiveness based on cutting-edge

processes and TSV and other next-generation packaging based solutions.

The OLED business will strengthen its competitive edge in the premium

category with the release of foldable panels, and focus on expanding new

applications in areas such as IT/Automotive Electronics, capitalizing on our

technology and cost competitiveness.

Regarding the Mobile business, we will continue our efforts to differentiate

smartphones by adopting cutting-edge technologies, such as foldable OLED

panels.

At the same time, we will drive forward new businesses related to AI/IoT by

strengthening the ecosystem based on Bixby and building on our 5G technology.

The CE business will bolster our leadership in the TV market by applying new

technologies, such as 8K/Micro LED. Also, we will improve the connectivity and

usability of home appliances by expanding the application of Bixby.

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We will do our best to create new business opportunities through our

preemptive and strategic decisions based on the paradigm shift in the IT

industry as well as remaining focused on increasing competitiveness of our

existing businesses.

Now, I would like to comment on our capital expenditures.

Total capex for 2017 was 43.4 trillion won, 27.3 trillion won for Semi, and 13.5

trillion won for Display. The total was up significantly Y-over-Y as we invested in

the Pyeongtaek fab to expand capacity to address rising demand for V-NAND,

facilitate migration of DRAM processes, and build new wafer capacity to

mitigate the capacity loss resulting from the migration. We also increased our

10nm capacity to address demand for cutting-edge process technology for our

foundry business, and invested in expanding capacity for flexible OLED panels

to respond to growing demand.

Although our capital expenditure plan for 2018 has yet to be finalized, we

expect the total amount to decrease on a Y-over-Y basis.

Before the presentations of each business unit, I would like to share several

data points for each of the key business areas.

In the fourth quarter, our DRAM bit growth came in low single-digit and we saw

our ASP increase about 10%. In the first quarter, we expect the market DRAM

bit growth to decline low single-digit and our bit growth will come in similar to

that of the market. And for 2018, at this point, we expect the DRAM market bit

growth to be about 20% and our bit growth will also come in similar level.

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For NAND, in the Q4, our bit growth came in at about 10% growth and we saw

ASP increase of low single-digit. In Q1, we expect to see flat market bit growth

for NAND and also our bit growth will be similar level. And for 2018 for the year,

we expect the NAND market growth to be about 40%, again our bit growth will

be similar in line with the market.

For our Display, the revenue mix of the total Display, about high 70% was from

the OLED business. And for our Mobile business, in Q4 we shipped 86 million

handsets and 7 million tablets and the blended ASP for Q4 was high $210 range.

And the mix of the smartphone within the total handset was mid-80%.

And in Q1, we expect the total handsets to increase slightly quarter-on-quarter,

while tablet to decline. And for blended ASP in Q1, we expect to see an

increase. And the mix of the smartphone within our total handset in Q1 will

rise to high 80%.

And for our TV business, in Q4, our sale of the TV was mid 30% range, but in Q1

we expect to see 20% range decline in volume.

And now, I'll turn the conference call over to the gentlemen from our business

unit.

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Good morning.

This is Se-won Chun from the Memory Marketing Team.

In the fourth quarter, As the overall industry supply remained restricted Due to

increasing seasonal IT demand, A Friendly market environment continued.

For NAND, As peak Mobile seasonality and the trends for higher density Mobile

products continued And growth for server SSD also remained solid, Overall

NAND demand was very strong.

For the supply side, In spite of the industry’s mass production of 64 Layer

product ramping up, for certain customers and applications, Overall

qualification status varies according to each customer and application.

As a result, the increase in market supply has been limited.

We have strengthened profitability and garnered solid earnings growth by

timely responding to newly launched mobile models and higher density trends

while concentrating on value-added, high density SSD markets via stable 64

Layer 3D NAND ramp-up at Pyeongtaek Campus.

For DRAM, Due to peak-seasonality, Demand for all applications increased

compared with the previous quarter.

Demand from server remained solid, Due to cloud service expansion, build

demand for new datacenters and higher density trend for new CPU platform

launches.

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Demand from mobile also remained strong thanks to increasing set numbers

and content growth, mainly from new flagship model launches.

In addition, under continuous peak-seasonality, demand from PC and

consumer market also remained solid.

In spite of the seasonal decrease of demand from game console, Graphics

demand continued to be strong thanks to an increase of GDDR5 demand for

high-specification gaming PC and high-performance products for

cryptocurrency mining.

We continuously improved our earnings by satisfying demand for differentiated

products such as high-density server DRAM over 64GB and low-power

LPDDR4X, HBM through expanding supply of D1X nm products, and elastically

managing product mix.

Next, I will comment on the memory market outlook.

In the first quarter, Even though there might be low season effects, overall

supply and demand is expected to remain solid due to impact of continuously

strong demand mainly from server and industry supply constraints.

For NAND, In spite of off-seasonality, Server SSD demand of major Cloud

providers, especially large companies, continues to be strong, And high-density

trend mainly for flagship and high-end smartphone continues.

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Therefore, overall demand is expected to be maintained at the level of the

previous quarter.

As for supply, In spite of expansion of suppliers’ production of 64 layer, supply

growth is expected to be limited due to reduction of existing planar capacity.

While we will accelerate 64 Layer transition, We will also strengthen product

differentiation via competitiveness of our solution product based on 3D NAND.

For DRAM, Strong server demand including replacement demand from

datacenter, and PC demand for securing inventory will offset slow seasonality.

For mobile, Although set build will decrease under traditional low season effect,

demand decrease will be lower than that of previous year, thanks to not only

higher density trend mainly from High-end but also content growth from Low-

end.

For the consumer side, Strong demand mainly from STB for 4K UHD is

anticipated.

For graphics demand, Despite decreasing demand for Console due to low

seasonality, VGA card for gaming and cryptocurrency mining demand is

anticipated to be strong.

We will continue to deploy a flexible product mix strategy, according to

individual application market conditions.

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Moreover, we will concentrate on strengthening cost competitiveness by

continuously expanding 1xnm process transition.

But, In the first quarter, Slight shipments slowdown will be inevitable, due to

reduction in capacity caused by transition to CIS in Line 11 and reduction in the

number of days of operation.

Next, let me comment on 2018 market outlook and our strategy.

For NAND, As demand is expected to remain strong, Stable market conditions

will continue in 2018.

Thanks to increasing adoption of high-density and high-performance SSD for

datacenter and All Flash Array for Enterprise, SSD will replace HDD in more

wide areas.

In addition, High-performance and high-density trends for mobile NAND are

expected to continue, as needs for higher resolution become greater, and the

number of high capacity content, such as video clip, generated and shared in

mobile devices increase.

As for the supply side, due to expansion of suppliers’ production of 64 layer

supply shortage in the previous year will partially be moderated.

But we think it is more likely that supply expansion may be limited in short

term period due to customer’s qualification is needed mainly from Server.

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We are focusing on mass production of 3D-NAND mainly at Pyeongtaek

Campus. At the same time, We will focus on strengthening our technology

competitiveness and maximizing profitability via introducing and ramping up

the next generation product after 64 Layer product in right timing.

For DRAM, Due to expansion of cloud infrastructure and increase in demand

for real time data analysis using AI, Machine learning Demand for high-density

and high-performance product is increasing, As a result, overall demand is

expected to be solid, especially for server DRAM.

Mobile demand is also expected to grow as content per box increases due to

increasing S/W requirements from high performance mobile games and On-

device AI and to upgrades in H/W specification such as Dual Camera, 3D

sensors and Full Screen Display.

On the other hand, In spite of industries’ efforts to expand the supply,

Extending bit growth will be limited, due to increase in technological difficulty

and limited clean room for expansion.

Therefore, Solid supply and demand conditions are expected to continue.

We will maintain a “profit first rather than market share” policy while

strengthening cost competitiveness through expediting finer process

technology migration under 10nm at a proper time.

We will also strengthen our market leadership by focusing on sales of our high

density server DRAM and differentiated products such as HBM2, LPDDR4X, and

on development of uMCP solutions.

Thank you.

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Now moving onto the System LSI business.

In the fourth quarter of last year, even with the increase in the supply of OLED

DDIs for the premium phones, the earnings have stagnated as the sales of

mobile processors and image sensors decreased due to weak seasonality.

In the first quarter, we will improve the earnings by ramping up mass-

production of mobile processors for the premium phones and by expanding the

sales of highly valued 3-stack Fast Readout Sensors.

In 2018, as many smartphone vendors are expected to increase the adoption of

dual camera as well as 3-stack FRS sensors, the demand for image sensors are

expected to grow accordingly. In addition, we will continue to post strong

earnings through sustained growth of mobile processor sales.

Furthermore, by utilizing our technological leadership in mobile devices, we

will expand our solution offerings to various applications including IoT, VR, and

automotive and collaborate closely with our customers and eco-system

partners.

Now moving on to the Foundry business.

In the fourth quarter, the earnings decreased due to weak seasonality which

resulted in a slowdown of major customers’ sales.

However, the sales in China have increased significantly as we’ve secured

diverse Chinese customers to establish the milestone for a long-term growth.

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In the first quarter, the earnings are expected to increase with a ramp up of

2nd generation 10-nano process products for this year’s flagship smartphones,

and growing demands for cryptocurrency mining chips.

In 2018, we will continue to provide derivative processes, including 8 and 11-

nano, to satisfy customers’ needs and lead the technological process leadership

with a risk production of 7-nano.

In addition, we will actively address the market demand by increasing the mass

production capability through ramping up the new S3 and S4-line for various

products including mobile processors and image sensors.

Lastly, we will lay the foundations for mid to long-term growth by securing

orders of diverse applications including automotive, network, HPC and VR

Thank you.

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Good Morning.

This is Kwon-young Choi from the planning department of Samsung Display.

During the 4th Quarter, total earnings for the Display business grew Q-over-Q,

driven by an increase in supply of OLED panels and despite a decrease in

revenue of LCD panels due to lower ASPs.

For the OLED business, our 4th Quarter earnings improved Q-over-Q on

increased shipments of OLED panels for flagship smartphone.

On the other hand, earnings for the LCD business, declined Q-over-Q in the 4th

Quarter, due to a decrease in shipments alongside continued ASPs declines of

LCD panels under weak seasonality.

Looking ahead to the 1st Quarter of 2018, we are concerned about a decline in

profitability under weak seasonality of smartphone industry, as well as

intensified competition with LTPS LCD and slowdown demand for OLED panels.

Under these circumstances, we plan to focus on securing profitability by

increasing our flagship product portion of sales, expanding our customer base,

as well as enhancing productivity of flexible OLED panels.

For the LCD business in the 1st Quarter, while we are concerned about a

decline in demand under weak seasonality, we expect utilization to be stable

due to increased demand for large-sized and high-resolution TVs led by a major

sporting event in the 1st half.

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In response to these market conditions, we will try to improve profitability by

focusing on reducing costs, increasing yield, and expanding our value-added

portion of products such as UHD, large-sized, and Quantum Dot products.

Now I would like to present our outlook for the display market and core

strategies for 2018.

For the OLED business, we expect OLED to become a mainstream panel in the

smartphone industry, and in particular, to strengthen its market position in the

high-end product category.

Under these circumstances, we will focus on increasing market share through

actively addressing customers' demand with continued efforts to strengthen

technological differentiation from LTPS LCD.

At the same time, we will strive to secure new growth engines by reinforcing

our competencies in new applications.

For the LCD business, we are concerned about increasing uncertainties caused

by both intensified competition in the industry and capacity expansions by

Chinese manufacturers.

In preparation for such market conditions, we will make every effort to meet

the needs of large-size and high-resolution TV markets as well as to reinforce

our market leadership by offering differentiated products based on advanced

technology.

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At the same time, we will strive to improve the fundamentals of the display

division, not just through quantitative growth, but also based on qualitative

improvements, by reinforcing strategic partnerships with major customers and

expanding our value-added portion of products.

Thank you.

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Good morning everyone.

I am Kyeong-tae Lee from the Mobile Communications Business.

I would like to present our fourth quarter results and share our outlook for the

IM Division.

In the fourth quarter, demand for smartphones and tablets increased QoQ

under year-end seasonality.

Our smartphone shipments decreased QoQ, mainly due to the base effect of

strong sales of the Galaxy J series in the previous quarter.

Conversely, the portion of premium smartphones increased due to solid sales

of flagship models such as the Galaxy S8 and Note 8.

Operating profit, however, declined QoQ, as marketing costs increased under

strong seasonality.

As for the Networks Business, our revenue and profit in second half of 2017

decreased, as LTE investments from our major overseas partners conducted in

the first half.

Next, I will share our outlook for the first quarter of 2018.

In the first quarter, we expect demand for smartphone and tablets to decrease

QoQ due to typical seasonality.

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We will minimize the impact of off-peak season and strengthen our premium

leadership with the sales of the newly launched Galaxy A8 and A8+ and the

introduction of the Galaxy S9.

The newly launched Galaxy A8 and A8 + were well received by our millennial

customers for providing a rich multimedia experience including front dual

cameras.

We will ensure that we translate the positive response into a solid business

performance.

The new galaxy S9 will be released at MWC next month, and we will strive to

maximize initial launch effects.

Through these efforts, we expect our smartphone shipments to increase slightly

QoQ, and both sales and operating profit to increase due to the rise in ASP.

As for the Networks Business, we will strengthen our business fundamentals by

supplying LTE base stations mainly to the US.

Now, let me move on to our outlook for 2018.

We expect demand for smartphones to continue to grow, backed by solid

replacement demand for premium models.

Meanwhile, our business is likely to face growing challenges due to rising

uncertainty in the global business environment, severe competition, and

material cost burden.

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We will increase the revenue contribution of premium smartphones by

launching enhanced flagship models and increasing long-tail sales of existing

flagship models.

To expand the sales of premium smartphones, we will strengthen our product

competitiveness by differentiating our core features and services, such as the

camera and Bixby, and reinforce the sell-out programs and experiential stores.

And we will continue to optimize the low-end to mid-range smartphone lineup

and improve productivity also.

By doing so, we will achieve qualitative growth of our smartphone business.

For the Network business, we will expand the supply of 5G-ready network

solutions into the major market including South Korea, the US, and Japan.

Lastly, I would like to share our mid-to long-term outlook.

To strengthen our leadership in the premium market, we will continue to

pursue meaningful innovation by utilizing next generation parts and new

technologies based on our competencies and experience in the mobile

business.

Furthermore, we will secure competencies in new businesses to ensure

sustainable growth.

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We have well used periods of technological transitions, which include network

evolutions and the products changes from feature phones to smartphones, as

opportunities to grow.

In response to 5G era, which will drive future changes, we will lead world's first

commercialization of 5G and take a global leadership position.

Moreover, we will continue to foster our services and new businesses, such as

Bixby and IoT, based on our mid-to long-term roadmap.

And we will provide Multi-Device Experiences under 'One Samsung' strategy so

that consumers can use our various devices more easily and conveniently.

Thank you.

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Good Morning,

I am Seong-hyuk Cho, Vice President of Visual Display Sales and Marketing

Team at Samsung Electronics.

Let me start with the current market conditions and our results for 2017 Q4.

The TV market in Q4 has grown by double-digits from last quarter with the

year-end holiday season.

However, the market is projected to decrease YoY because of declining demand

in North America, China and the Middle East.

Samsung’s result was slightly down YoY due to sales decrease from defocusing

on entry lineup and declining selling price from heavy competition.

However, our performance has improved from last quarter by driving sales of

premium products during the year-end holiday season.

Samsung has further solidified leadership in the premium market by expanding

the QLED and ultra-large screen TV sales, and achieved market share growth in

the premium market segment.

The Digital Appliances market in 2017 Q4 has shown a moderate growth from

last year due to the continued growth of the North American market and the

recovery of European/CIS economies.

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We continued to show sales growth YoY and have achieved high sales in

advanced markets like North America and Europe.

We especially had strong sales in premium products like the Flex Wash and the

Dual Cook oven.

However, our results show limited improvement because of an increase in raw

material costs and investments in the North American B2B market.

Next, I will share the market prospects for the first quarter and then the whole

year of 2018.

For Q1, the TV market demand is projected to decrease both YoY and QoQ

because of a slow season following the year-end holiday season and a declining

market demand.

Samsung will further establish premium leadership in the TV market by

reforming our sales structure, with an emphasis on high-value products like the

ultra-large screen and QLED TV.

We will also launch our new models earlier in the first quarter to concentrate

on improving our results.

For the Digital Appliances business, Samsung will increase growth by

continuing to expand the premium lineup, which includes the Family Hub 3.0

refrigerator and the QuickDrive washing machine, and reinforcing our global

marketing activities for 2018 Q1.

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As for the 2018 TV market, the ultra-large screen and premium markets are

expected to continue growing with momentum created from sports events

such as The World Cup and Winter Olympic Games.

As the premium market continues to rise, Samsung will strengthen its new

lineup, which includes ultra-large screen, QLED as well as 8K TV, and expand

marketing activities to achieve great results.

Samsung TV will provide new experiences and values by introducing Bixby and

SmartThings, which will further enhance connectivity between Samsung

products and offer seamless user experiences.

With these efforts, we will continue to be at the forefront of product

innovation as the market leader and lay a foundation for sustained growth.

As for the Digital Appliances business, Samsung will further strengthen the B2B

business which includes built-in home appliances and system air conditioners.

We will expand distribution channels, including online channels, and continue

to provide the future growth engine.

Thank you

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Q&A

Operator

Now Q&A session will begin.

The first question will be presented by Mr. Jong-Woo Yoo from Korea

Investment & Securities. Please go ahead sir.

<Q - Jong-Woo Yoo>: I have two questions. The first question is a

Semiconductor question about NAND demand.

Today during the presentation, it sounded like you have a very positive outlook

on the NAND demand. But I think overall, the market has some concerns not

only about the supply and demand situation, but also the impact that may

have on further price erosions.

Also, can you give us a bit more detail of the grounds for your positive view for

NAND demand this year, especially what is your outlook on supply and demand,

and what do you think would be the pricing-related impact of that?

Second question is about the stock split that you've announced today, the 50:1

stock split. Can you give us details of when that will happen and, for example,

when will the stock first trade after being split 50:1?

<A>: First to answer your question about the NAND demand, or supply

situation. First of all, the first half of 2018 is a seasonally weak or low period.

And therefore, the sound demand and supply situation may temporarily ease

during the first half. But we also think that there is a lot of demand for NAND,

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especially from the mid to low-end mobile side and also other applications that

are more price sensitive or price elastic and that will drive up demand for

NAND as prices may ease. And therefore, for the full year, we're expecting the

demand and supply situation to remain sound.

Also there are some concerns that there will be more supply as other

companies ramp up their 64-layer 3D NAND. But number one, it will take some

time for them to qualify, for example, to servers and other applications and

also the increase in supply may not happen immediately.

About the price trends, because price is determined by the market supply and

demand situation, it's difficult for us to give you an outlook on where prices

would be in the future. But given the fact that there is content increase in

smartphones and also in data centers as the amount of data that has to be

processed increases significantly, there will be more SSD adoption. And

therefore, given all of this, we expect the demand side fundamentals to remain

strong.

<A>: To take your second question about the scheduling and the timeline for

the stock split. Well, the first procedure would be the General Meeting of

Shareholders, which currently is scheduled for March 23. So, the Articles of

Incorporation, a change of the Articles of Incorporation would have to be

approved at our General Meeting of Shareholders.

So that's one step. And then following, there will be a swap or an exchange of

old stock with the new split stock. And so, according to that timeline, we're

expecting that perhaps the split stocks would start trading around mid-May.

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Operator

The next questions will be presented by Mr. Peter Lee from Citigroup. Please go

ahead, sir.

<Q - Peter Lee>: I have a question on Semiconductors, but this time it's on

DRAM. On DRAM, there's also concern in the market of especially demand

slowdown from smartphones. Can you give us the demand outlook and overall

demand and supply outlook for 2018?

<A>: Regarding the DRAM, the DRAM demand will be – the strong driver of

DRAM demand will remain servers, especially as data center infrastructures

continue to expand, also the rollout of the new CPUs, that's also driving more

demand for DRAM because of other applications such as machine learning,

that is all driving demand for DRAM, especially from the server side.

On the mobile side, there was some burden of the BOM side, the material cost

side, especially in the mass segment of mobiles. But as more and more mobile

phones adopt dual cameras and full screens, this would require more content.

Also, especially the high-performance mobile games that are becoming more

popular will also require more content, as well as on-device AI. These will all

increase the content on mobile phones which will keep demand from mobiles,

applications strong as well. And even though the industry has been working

very hard to increase supply, there are difficulties because of the 10-nano class

technology being very difficult. Also there are limits in terms of the cleanrooms

that are available.

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And therefore, given all of these factors on the demand and supply side, we

expect that for DRAM full year, the demand and supply situation will remain

sound.

Operator

The next questions will be presented by Mr. JJ Park from JP Morgan. Please go

ahead, sir.

<Q - JJ Park>: I have two questions. The first question is on the Mobile side.

The component prices have remained strong since last year and that has

increased the BoM cost burden on smartphones. And so, my number one

question is, what is your plans of maintaining the profitability of the overall IM

division? Also, is there a room for example, increasing the prices of your

handsets? And recently in China, it seems Chinese company has been

increasing quite a lot of market share. Can you share with us your plans of how

to respond to this?

<A>: This year, while continuing to expand sales of our premium products, we

are also preparing various initiatives on the mass segment side.

First of all, we will improve the overall product mix by actively driving upsell

from feature phones to smartphones and from entry level to mid-end

segments. Through this, we anticipate the effect of qualitative growth resulting

in ASP increase. Also, we will roll out useful functions that are already proven

on flagship models to mass segments to enhance the competitiveness of our

mass products.

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Also, we will continue the efforts for profitability such as streamlining the

product lineup, increasing common parts and also enhancing productivity.

Regarding India, we have quite a wide lineup. And of this lineup, we will pick

the lineup that is optimized towards the Indian market. Also, while maintaining

the premium brand leadership through collaboration with operators as well as

distribution, we will also have very targeted customer segment marketing and

also focus on providing more experienced type retail species to Indian

consumers so that we're able to gain market share as well as profitability.

<Q - JJ Park>: The second question to the DP side, is actually connected. Given

the high BOM cost burden on handset makers, some are saying that this has

resulted in lower-than-expected penetration of OLED panels on handsets. In

order to increase the OLED panel adoption on smartphones, do you have plans

for example adjusting the prices for weather rigid or flexible OLEDs?

<A>: Regarding the OLED panels, there has been competition always from the

LTPS LCD side. But compared to the LTPS LCD, OLED has the advantages in

terms of resolution, color, real black as well as in terms of power consumption.

And therefore, given the inherent advantages of the OLED panel, we believe

that we will be able to continue penetration and market share. In order to

provide more cost competitiveness, we'll continue to enhance our operational

efficiency as well as our cost saving efforts, also we will continue to drive our

efforts to add new customers not only in China, but also in other parts of the

world so that overall our customer portfolio becomes more diverse.

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Operator

The next question will be presented by Mr. Kim Dong-Won from KB Securities.

Please go ahead, sir.

<Q - Dong-Won Kim>: I have two questions. The first question is to the DP side.

Due to the lower-than-expected demand for the recent flagship launch by the

North American strategic customer, market is expecting your flexible OLED

shipment in the first half to decrease. What is your strategy in responding to

this decrease in shipment?

Second question is to the CE side, the TV business, it seems especially in the

high-end TV segment, OLED TVs are increasing market share faster than

expected. So, we would like to ask what is your plans of responding and

differentiating to OLED TVs using your QLED.

<A>: Regarding your first question, I'm sure you will understand it's difficult for

us to mention specifically to a customer. But as we mentioned before in the

previous Q&A session, we have been increasing and adding new customers not

only in China but in other parts of the world, in order to secure a stable and

diversified customer portfolio. And we believe that with that portfolio, our

overall business structure will not be impacted by temporary changes in

demand.

So, in addition, when it comes to the OLED business rather than temporary

increase or decrease of demand, what's important is the fact that OLED has

become the mainstream display especially it is the display that defines high-

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end smartphones, and therefore it will continue to be used on the high-end

segment.

We were the first to develop the flexible OLED, and we are following this

output continuous technology development. We will not only continue to

launch differentiating products, but also uses to pioneer new applications for

OLEDs.

Also internally, we're continuing our focus on improving our yield as well as

productivity. And based on this operational efficiency, we will respond to

competitors as well as the uncertainties in the market situation.

And so, by efficiently operating our lines, we will gain not only better

productivity but also profitability.

Regarding your second question, the QLED TV was launched in first quarter of

2017. And since its launch, it has been gaining not only wide recognition

globally, but also its sales volume has been increasing quite rapidly. Based on

this, we have been able to not only maintain but strengthen our leadership in

the premium TV segment. The industry also has various initiatives to further

rollout and increase the adoption of QLED TVs.

For example, in the first half of last year, we had the QLED forum in China,

which was attended not only by us but TLC, Hisense, other TV companies as

well as members of the academia and retailers also participated in the QLED

forum in China in order to spread more adoption of QLED TVs. This year our

focus will be on expanding the QLED TV lineup. We will have a stronger lineup.

Also we will focus on more active marketing globally, in order to increase the

sales of QLED TV.

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Operator

The next question will be presented by Mr. Hwang Min-Seong from Samsung

Securities. Please go ahead, sir.

<Q - Min-Seong Hwang>: I have two questions. First question is about the AI

chip. You've mentioned of expanding the AI chip. In that context, what is your

strategy going forward for the Exynos AP for AI as well as machine learning?

Second question is about the DRAM business. In the previous presentation, you

provided your DRAM bit growth for 2018 to be 20% growth that being market

level, which I notice is a bit higher than the previous forecast that you

mentioned which used to be in the high-teens. And so, I'm wondering whether

this counts in some of the capacity that you're seeing visibly this year. So, for

example, at the end of 2018 that's this year, what is the output that you're

expecting from Pyeongtaek that went into this 20% bit growth for 2018?

I also heard that the wafers are starting to go in for the 1Y process. How much

of an output are you expecting from that to that went into the 20% bit growth

projection?

<A>: Regarding the AI, currently what is required by these AI applications

especially on the mobile and deep learning side, it's still very initial, face

recognition, object recognition or some intelligent image processing is the

current requirements that will stay this year. But I think from next year, actually

there will be demand for high-performance AI technology, not only on the

mobile but also in consumer as well as automotive applications.

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So, the System LSI division has been preparing for this market environment. So,

this year, we will be launching an Exynos processor that is capable of face

recognition and intelligent image processing. And further down the road, we'll

prepare this in an NPU, a neural processing unit, form that would support for

example automotive consumer as well as mobile applications.

Also in terms of our strategy, we'll prepare actually a very wide SoC lineup to

respond not only to the premium but also to the mass segment with our

intelligent Exynos processors.

Regarding the second question about the DRAM, as we mentioned during the

presentation as well as the Q&A, our outlook on DRAM demand is that it will

remain sound. So, even though there was some capacity loss in the process of

converting Line 11 to CIS, we are continuing for example to increase the yield

on our 1X-nano processors. And regarding Pyeongtaek capacity, as we have

previously mentioned, we will invest flexibly into the Pyeongtaek capacity in

order to meet the bit demand depending on the market situation.

Regarding 1Y-nano, as we mentioned, we have succeeded in mass production

in November last year, in 2017. And currently, we're ramping up with the target

of doing a bit crossover with 1X-nano in 2019. Regarding capacity, we will

manage the capacity depending on the market situation as well as the overall

situation in the 10-nano class technology.

37

Operator

The next question will be presented by Mr. Nicolas Gaudois from UBS.

Please go ahead, sir.

<Q - Nicolas J. Gaudois>: Yes. Hi. Good morning. Thanks for taking my

questions. The first question relates to DRAM, and once again you remain

positive outlook for server DRAM in 2018. So, maybe if you could help us a little

bit estimating what was eventually a bit demand growth in server DRAM for

the market in 2017. What is your expectation for 2018 and how you see the

segmentation between data center and traditional enterprise in this segment

evolving with, on top of that, what are the typical differences in DRAM

densities you observe currently between these two segments?

And the second question relates to RGB OLED. So, obviously, you alluded to

some uncertainty on demand that you will effectively address for your

customer mix. In the context of your comments earlier on foldable products

coming in, what are your plans regarding the A5 fab and is it more likely than

not that would effectively deploy capacity there in 2019? Thank you.

<A>: Regarding your first question about the server DRAM bit growth, in 2017

we estimate that the server DRAM bit growth was around 30% to 40%. As you

know, in servers, memory is a very essential component in order to provide

high quality service. And therefore, compared to other applications in the

server segment, price elasticity is relatively low. Also, given the fact that high-

density memory is critical to provide service for servers, we expect the demand

for DRAM on the server segment to remain strong.

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Also, some of the dot-com companies that used to operate their own servers

have converted to the public cloud. And this has resulted in demand for

traditional servers decreasing, but actually this isn't a decrease in itself, but

actually a shift of demand from traditional servers to a public cloud supporting

servers. Also, this has left traditional server makers to actually focus more on

the very high end, the high capacity servers such as hyper converged servers,

and this is driving increase in content for both the data center as well as

traditional servers.

Regarding the foldable OLED question, our position has always been to prepare

our technologies to meet the customer demand when ready. And therefore, we

have continued our R&D and development efforts regarding foldable display

solutions. Our focus is on delivering the level of execution and the

completeness that would satisfy the market and also the consumers' level of

expectation. And therefore, currently, we are in close collaboration with our

strategic customers in order to deliver the solution that will meet the

consumers' as well as market demand.

Regarding the new fab, we have actually started to do the preparation work,

the groundwork for the new fab on a preemptive basis to prepare for uncertain

market situation as well as expected new demand. However, we have just

started to do the preparations. And so, the exact timing of when it would

operate or how much capacity will be delivered from the new fab has not yet

been decided.

39

Operator

The next questions will be presented by Mr. SK Kim from Daiwa Capital Markets.

Please go ahead, sir.

<Q - SK Kim>: I have two questions for the IM business. First of all is, I think

one of the concerns in the market is that especially as the smartphones

become more and more high specification, especially around the flagship, the

high-end but at the same time, prices for components, MLCCs as well as

memory prices, are going up. So, this would inevitably increase prices of

smartphones, which may result in decrease of demand. That's the scenario

that the market is concerned of. So, I'm wondering how you are planning to

respond to this series of events.

The second question is actually linked to the OLED Q&A that we had from the

DP side, as the OLED mentioned, OLED display is becoming a mainstream

display on the high-end handsets. And more and more Samsung's competitors

are starting to use OLED on their handsets, which is diminishing the

differentiating power that you used to have by having OLED displays on your

handsets. So, I'm wondering how you plan to continue to differentiate even

though OLEDs are becoming more mainstream in the high-end segment.

<A>: Regarding your first question about the high-end smartphone segment,

the high-end smartphone segment is expected to continue growth, especially

driven by replacement demand from mid-high segment users. However, it

appears that there is some consumer resistance for smartphones that are

above the $1,000 mark. And therefore, we need to prepare for that. We will

focus on expanding the premium product sales by launching new and

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differentiated flagship models, while at the same time maintaining the long-tail

sales of existing flagship models. We will also support this with stronger sell-up

programs, for example, in collaboration with operators or distribution, and

conduct active marketing activities, especially around experience spaces.

Regarding your second question of how we will respond to competitors

adopting OLEDs, well, in terms of OLED display itself already from several years

ago, we have been leading the market by offering differentiated and well

executed designs using OLEDs starting from the Edge to the Infinity Display

based on our flexible OLED technology and experience. So that's one strength.

On top of that, we offer new and rich experiences through useful services such

as Samsung Pay or Samsung Pass, Bixby, as well as companion devices such as

the Gear S or Gear VR and IconX, that is another point of differentiation.

In the future, we will strengthen our leadership in the market by providing

differentiated services such as AI, IoT, Health while continuing product

innovation based on our next-generation components and new technologies.

Given the limited amount of time, we will take questions from two more

attendance before closing the session.

Operator

The next questions will be presented by CW Chung from Nomura Securities.

Please go ahead, sir.

<Q - CW Chung>: It seems that overall because the industry is now in the

territory of very high and sophisticated technologies, it's becoming more and

more difficult to achieve cost savings. I'm wondering how Samsung Electronics

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plans to respond to the situation? And also, do you think the next-generation

memory could be a solution to this issue? And in that context, could you give

us an update on your development efforts on the next-generation memory?

<A>: We have already achieved differentiating advantages in terms of

productivity and cost by preemptively investing large scale strategic in our

technology. We will continue to do this. So, leveraging our process technology

as well as 3D NAND technology, we will continue to achieve cost as well as

productivity advantages compared to the competition.

Also, we will continue this leadership to go further in the 10-nano class DRAM

as well as higher stack 3D NAND developments so that we are able to maintain

our productivity as well as cost advantages going forward.

Regarding the next-generation memory, we have been working on next-

generation memory for quite a long time. We have been looking into various

different options. We have been talking to customers as well as other industry

partners on next-generation memory solutions. But given the fact that the

existing memory actually has additional room for scaling and additional room

for cost reduction, we think that for the time being, next-generation memory

solutions will only remain in the niche market.

Operator

The last question will be presented by Ms. Claire Kyung Min Kim from Daishin

Securities. Please go ahead, ma'am.

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<Q - Claire Kyung Min Kim>: I have two questions. The first question is for the

Foundry business. It seems that there has been demand from the

cryptocurrency mining side especially, so I would like to ask what was the

impact on especially the cutting-edge process side of your Foundry business.

And going forward, what is your outlook on the demand being generated from

cryptocurrency mining?

Second question is to the DP side. We have been hearing that a Korean

competitor as well as a Chinese company is preparing to go mass production

with their flexible OLED. And so, how will you respond to the entrants of these

new competitors?

<A>: Regarding your first question, there has actually been an explosive growth

in cryptocurrency related demand and that has resulted in our orders also

increasing significantly from such cryptocurrency mining related customers.

Especially, it seems our 14-nano and 10-nano processes not only have the right

to process, but also the design infrastructure needed to support their

cryptocurrency applications. And what is more encouraging is that actually our

process technology has proven to have an advantage in serving the

cryptocurrency demand.

In addition to the 14-nano and 10-nano technologies, we're also receiving a lot

of inquiries regarding new note such as 8-nano from such customers. And we

believe that that our Foundry customers will be increasing their market share

in the cryptocurrency segment. In addition to cryptocurrency, we expect our

supplies to penetrate into further applications.

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And driven by this, we expect that the Foundry business will achieve a sound

growth and a very strong number two position.

Regarding your second question about the display and how we plan to respond

to the new competitors in the OLED market. We believe that the focus lies in

the fact that we have accumulated technology leadership as well as business

leadership in the mid-to-small sized OLED segment. We will leverage that. Also,

we think the key lies in number one gaining the technology differentiation, so

we will continue to innovate our technologies and use that innovative

technology to maintain our market leadership, but also focus on improving our

yield as well as productivity and to widen the gap in terms of productivity

versus the new entrants.

Also, we will focus on developing new applications and also widening our scope

of business in order to make our customer portfolio stronger as well as our

business structure stronger and resilient. Also, we will consider how the market

dynamic changes and continue to communicate with our strategic customer to

meet the demand that unfolds in the market.

Robert M. Yi

Thank you very much. And that ends the conference call for this quarter.