SK Hynix, Inc. (OTC:HXSCF) Q2 2022 Earnings Conference Call July 27, 2022 8:00 PM ET
Company Participants
Park Seong Hwan – Head of Investor Relations
Kevin Noh – Chief Marketing Officer
Conference Call Participants
JJ Park – JPMorgan
SK Kim – Daiwa Capital Market
Nicolas Gaudois – UBS
Hwang Min Seong – Samsung Securities
Sunwoo Kim – Meritz
Ricky Seo – HSBC
Simon Woo – Bank of America
Park Seong Hwan
Good morning and good afternoon and evening to those calling in from abroad. This is Park Seong Hwan, the Head of IR and SK Hynix. Welcome to the SK Hynix 2022 Second Quarter Earnings Release Conference Call. Before starting the conference call, allow me to introduce the executives present here with me today. Kevin Noh, Chief Marketing Officer; Kim Wook Yoon, Chief Financial Officer, Park Myoung-Soo, Head of DRAM Marketing; and Park Chan-Dong, Head of NAND Marketing.
Let me issue a disclaimer that all outlooks presented by the company are subject to change depending on the macroeconomic and market circumstances. With that, we’ll now begin SK Hynix earnings release conference call.
Kevin will first present the earnings for the second quarter of 2022 followed by the company’s plan and market outlook. There will then be a Q&A session with the executives.
Kevin Noh
Good morning. Allow me to first report to you the company’s performance in the second quarter of 2022. The second quarter saw rising global inflation and the persisting Russia, Ukraine. Shutdowns in some regions of China and continuing supply chain issues prolong the difficult business environment.
The rising inflationary pressures and deepening recession concerns towards the end of the quarter affected not only consumer confidence, but investment sentiment as well, further dampening the IT demand. All of this led to DRAM bit shipment growth of around 10% in the second quarter, compared to the previous guidance of mid-teen.
Demand for PC and mobile softened significant, but sales grew for a computing product for which demand was relatively solid. ASP fell low-single-digit percent from the previous quarter. NAND bit shipment including Solidigm’s grew by high-single-digit percent, compared to the guidance of over 20%. The company tried to make up for the soft demand in consumer products with increased sales of SSD products.
Excluding Solidigm, NAND bit shipment growth was low teen percent. ASP rose by low single-digit percent both including and excluding Solidigm. Despite shipment growth falling somewhat lower than the guidance, the company’s revenue in the second quarter was KRW13.81 trillion, up 14% from the previous quarter, and 34% year-on-year, the highest ever in a quarter. This is thanks to positive shipment growth and the strong dollar offsetting the decline in DRAM ASP.
The recently acquired Solidigm made a contribution to achieving record high revenue, but even excluding Solidigm, the second quarter’s revenue in Korean won terms is the highest ever. This was made possible by the unsparing hard work by all SK Hynix members, despite the mounting adverse like lockdowns in China.
Operating profit in the second quarter was KRW4.19 trillion, up by 47% from the previous quarter and 56% year-on-year. Operating margin was 30%, improving from 24% in the previous quarter. Despite the rise in raw material prices, unit cost declined for both DRAM and NAND as a result of yield improvement, as well as the increase of our 1a nanometer DRAM and 176-layer NAND in the mix.
Therefore, profitability of both DRAM and NAND improved sequentially. Depreciation and amortization in the second quarter was KRW3.48 trillion increasing by approximately KRW0.83 trillion quarter-on-quarter. EBITDA in the second quarter was KRW7.68 trillion one, and EBITDA margin 56%. There was net interest expense of KRW89.8 billion, as well as foreign currency translation loss of KRW311.8 billion from foreign currency denominated debt due to the strong U.S. dollar and on Kioxia investment due to the Japanese yen.
There was also a gain of KRW124.1 billion from the sale of the companies Bundang office building and including all these non-operating gains and losses second quarter’s net non-operating loss was KRW225.9 million. Income before tax was KRW3.97 trillion with corporate tax expense of KRW1.09 trillion. Net profit was KRW2.88 trillion with net profit margin of 21%.
Consolidated cash balance at the end of Q2 was KRW7.5 trillion, down by KRW0.5 trillion from the previous quarter. Interest bearing debt was KRW19.38 trillion, up 1.27 trillion quarter-on-quarter. Debt-to-equity ratio and net debt-to-equity ratio and the end of Q2 was 29% and 18% each flat or up slightly from the previous quarter respectively.
Next is the company’s market outlook and plans. In the past two years, IT demand growth exceeded expectations, due to the increase in online activities and the pandemic followed by pent-up demand, but global supply chain disruptions held back product bill supply, not being able to meet the end the consumption demand, which also negatively affected demand for memory products to some extent.
The recent inflationary pressures and concerns of recession are quickly dampening consumer confidence with businesses also noticeably starting to tighten costs. Although supply chain issues lasting into the first half have begun to dissipate. We are now facing a slowdown in demand compelling us to considerably adjust the memory demand outlook for the second half.
Demand for consumer products like PC and smartphones, which remain soft in the first half will be adjusted significantly for the year as they are directly affected by the weakening purchasing power due to inflation. Demand for enterprise PCs initially expected to be strong in the second half is falling short of expectations with annual PC shipment now likely to fall year-on*year.
On the back of mix increase towards high density PCs such as gaming PCs, memory contents are expected to grow by more than double-digits offsetting the PC shipment decline. Smartphone shipment is also projected to fall year-on-year with a sharp slowdown in demand for low-to-mid end products, which is a segment highly sensitive to economic conditions.
However, in the second half – solid demand for flagship models is expected with new product launches, which can enable mobile demand to a certain degree. Although the set build was impacted by the shortage of some parts, server demand remained solid in the first half, but in the second half it is expected that customers may adjust inventory on hand first as businesses begin to cut cost and reducing investment out of recession concerns.
However, as individual enterprises reduce on premise investments, it is highly likely for them increasingly turn to using cloud services. In other words, they are expected to increase OpEx instead of CapEx in times of high uncertainties and thus will sustain the cloud industries growth over the longer-term, as well as memory demand for data centers.
Given the market uncertainties, market growth for the year is expected to be a lot lower than our expectations earlier in the year. Thus the company’s plan for a third quarter bit shipment will also be revised down, compared to the previous plan. Meanwhile, the company’s cumulative investment in the first half in terms of equipment installation base was KRW8.8 trillion.
[Turning to] [ph] guidance last quarter. CapEx for the year will increase year-on-year. At the same time, the company is carefully renewing various scenarios of the production volume and the necessary CapEx to meet next year’s demand considering the level of inventory that we may end up having at the end of this year. We are also having close discussions with our major customers to better estimate next year’s demand situation and will reflect the outcome of our discussion in setting next year’s CapEx plan.
We are in a period where it is difficult to achieve supply flexibility due to lingering supply chain issues while macroeconomic and market demand uncertainties are ever increasing. The company believes that at time like this, we need to focus on our core business competitiveness to prepare for the time of demand recovery and lead growth in the memory industry over the long-term.
Next, let me report to you the company’s technology and product roadmap. Our 1a nanometer DRAM and 176-layer NAND are showing smooth yield improvement and are increasing in the production mix. The company will minimize the impact of equipment delivery delays on the text migration timeline, meet the targets for a leading technology process by year-end and continue to focus customer demand.
The company’s industry leading 1a nanometer process will be extended to all applications in the second half. We will also focus on increasing density such as 12 gigabit and 16 gigabit LPDDR5 and 16 gigabit and 24 gigabit DDR5 product. DDR5 products are provided mostly for PC customers this year, while for new servers, it will be more from the next year due to the delayed launch of supporting CPUs.
However, the portion of mobile LPDDR5 will increase sharply in the second half as it is adopted in new flagship models. It will take up over half of all mobile solution products excluding [indiscernible] 13:25.
In particular high-density mobile solution based on LPDDR 5x to be adopted in the second half is a high bandwidth product that provides higher performance than the previous tech generation offering 33% higher speed and 25% lower power consumption. I would like to highlight that this solution can enable our mobile customers to differentiate in hardware specifications.
Furthermore, the company is world’s first HBM3 went in mass production in June and began to [indiscernible] to NVIDIA, our major graphic memory customer. The high bandwidth product will be combined with NVIDIA’s H100 to be used in the latest AI based technology like accelerated computing.
The company will further boost our industry leading performance and quality that we have been maintaining since HBM2E to firmly establish our position as the Number 1 provider in the fast growing HBM market and lead the high performance premium memory market. Despite increasing macroeconomic uncertainties and rapid changes in demand, the company remains convinced of the long-term growth potential of the industry.
Although it is hard to predict and prepare for any many variables that affect demand, the company will strive to sustain growth based on our business management capabilities that have grown stronger over the years. Last, let me brief you on the company’s ESG activities and performance in the last quarter.
As a member of the responsible mineral initiative or the RMI, the company is trying to end human rights violations and environmental degradation that occur in the process of mining minerals in conflict affected or high risk areas. To ensure responsible sourcing of minerals, the company has completed due diligence on suppliers of raw materials that contain four conflict minerals called 3TG, tantalum, tin, tungsten, and gold according to the OECD guidance.
We have undertaken improvement actions wherever necessary and achieved 100% responsible minerals insurance process certification in our supply chain. Also the list of 227 smelters has been posted on the company’s website. The company will go beyond conflict minerals to ensure responsible mineral sourcing and will transparently disclose related information.
The company recognizes the risks stemming from the supply chain can seriously affect not only the company, but also the industry as a whole and intendeds to thoroughly address them. We will keep communicating and sharing our ESG values with our suppliers in order to build together with our partners a sustainable semiconductor ecosystem for shared growth. Thank you.
With that, we are now ready to take your questions.
Question-and-Answer Session
Operator
[Foreign Language]
[Operator Instructions]
[Foreign Language]
The first question will be provided by JJ Park from JPMorgan. Please go ahead with your question.
JJ Park
[Foreign Language] So, my first question is regarding bit growth. So, you’d mentioned that – the company had mentioned that in the third quarter, the company will revise down the bit growth guidance? And so, the question is then what is going to be the bit growth guidance for the third quarter? And also for the year, the industry’s bit growth is going to be around low-teen percent as has been forecasted by the company. Then the company also believe that the company’s bid growth for the year will be roughly similar to the industry average.
And then the second question is, about bit shipments in – so in the – actually the second question is about the inventory policy. In the second quarter, the bit shipment has fallen under the guidance for both DRAM and NAND and as a result, it is expected that the inventory level would be higher than it used to be.
And what is the company’s inventory management policy into the second half of the year, does the company foresee the inventory being carried into next year or is there some kind of threshold that the company has where upon, if it is reached, then the company plans to sell down inventory.
Kevin Noh
[Foreign Language] Thank you for the questions. Now, as everyone knows, when we look at the macroeconomic conditions, then they still remain [quite murky] [ph] into the second half of the year. And likewise, for the memory, economy that is highly correlated with the macro economy, so, we all know that the situation does not bode well for the memory industry at this time.
So, because of this compared to the second quarter, in the third quarter, we expect the both for DRAM and NAND to be a flat QoQ, but please understand that it is very difficult for us to specify any numbers at this time because of the very high uncertainties, because of the uncertainties, we are seeing numbers change almost on a day-to-day basis, but internally, internally, we are planning to be at least flat QoQ in the third quarter.
And then so for the third quarter, in terms of the bit shipment as well, the target has been also adjusted downward as well. So, it is also planned to be flat. And of course, despite the uncertainties for the market on the whole, we believe that the market will grow by low-teen percent for DRAM and the company’s target is also aligned with the market growth. And for NAND, the NAND numbers will also be much lower than initially expected.
Now, for the market, the bit shipment is expected at 20% and for the company, as always, we will – we are aiming to achieve bit growth numbers that is higher than the market bit growth. And then also for the third quarter, including the Solidigm volume, then the QoQ growth will be about 10%, so higher than 10% and also for the year, again, including Solidigm volume, then the growth will be about 70%.
[Foreign Language] Now, on your second question about the inventory at the end of the second quarter. Now for both DRAM and NAND, the inventory level has gone up by around one-week. And as has been explained earlier, the bit shipment plan has been reduced from the initial plan, but as you would also know, in the memory industry, what has already been invested in, for example, for the CapEx or the capacity. So, what’s already been invested in, then what comes out of them?
For example, the production volume cannot be reduced or changed. And this actually has been the cause of the memory industry’s difficulties over the past few decades, and this has been the biggest cause of the memory industry’s cyclicality over the past few decades. So, again, on one-hand, we have the volume that is pretty much fixed, but the bit shipment plan has been reduced.
So, this translates into higher level of inventory as has been and that has resulted in one-week higher inventory for both DRAM and NAND.
Now, having said that, we do not intend to push too strong to sell down our inventory. Given the difficulties in the market, and also given the higher level of inventory held by the customers as well. So, we do not want to have too much of an aggressive selling so that we will cause any difficulties in the market. So that is not the, kind of positioning that we are going to take. So, for the higher level of inventory that is expected, we will also take into various factors into consideration for next year’s CapEx planning.
Operator
[Foreign Language]
The following question will be presented by SK Kim from Daiwa Capital Market. Please go ahead with your question.
SK Kim
[Foreign Language] First of all, congratulations on the good performance. I also have two questions, one on DRAM, another on NAND. Now, as has been explained in the presentation, the demand for data center appears to remain solid, but then there has been some delay in the launch of the server CPU that is going to support the demand for the DDR5. So, this is potentially going to affect the demand for DDR5 or in the second half or the production of the DDR5. So, then regarding the DDR5, as well as other premium DRAM products, what is the company’s policy down the road?
And the second question on NAND. Actually, last night, Micron has announced the production of NAND 232-layer. So, it appears as if the competitor’s ramp up is occurring at a faster speed than expected. What is the company’s plan or strategy down the road?
Kevin Noh
[Foreign Language] Now on the first question about the DDR5 outlook, as well as strategy for premium DRAM products.
[Foreign Language] Now, on one hand, it is true that there has been some impact on the demand for DDR5 because of the delay in the launch of a certain CPU. So – but then we do believe that the ramp up is going to be expected in next year. And also, another CPU is engaging with market on track. So, we believe that the plan has been shifted by one to two quarters at most and in the bigger picture, we believe that it remains the same meaning that there is going to be a shift to the DDR5 in next year.
[Foreign Language] Now, over the medium to longer term, when we look at the market trend, then there is increasing workload for the high specification computing, for example, for AI or machine learning, and we also believe that there is a growth potential for the medium to longer term for this type of higher workload and high density computing. So, we do believe that there is going to be a general migration to DDR5 starting next year. So, to respond to this trend, the company is going to prepare the DDR5 based on our competitiveness in the 1a nanometer and try to broaden our position in the market.
[Foreign Language] And also part of the question was about our strategy for premium DRAM products. And largely, I would say that there are two-fold strategy. One is to increase the mix of high density products and second is to increase the mix of differentiated products. So, for the first part, we intend to increase the sales of 1a nanometer products.
So, for example, the 12-gig or 16-gig LPDDR5, as well as the 16-gig and 24-gig DDR5. So, we will increase the mix of high density technologies. And then in terms of the finished products, we do believe that we have dominance in the high density areas, for example, for the servers.
So, we intend to continue to maintain our dominance in this segment. And also, we discussed a little bit about the HBM. And we see that in this – this market particularly is growing very fast almost incomparable to the other DRAM segments. So, this segment is growing very fast and our leadership in this segment is very strong. So, over the medium to longer term, we have a roadmap to continue this leadership. And also for the graphics, right now the main technology is GDDR6, but within the next one-to-two years, we plan to migrate to GDDR7, so as to solidify our leadership.
[Foreign Language] Now, this is the response to the question on NAND. And before responding to it, let me make an analogy. So, let’s say we are hiking than when we do, then we see that there are differences in pace by individuals. Then also even for one particular individual, there are differences in the pace where the tempo depending on the time. So, even for one individual, they can travel at different speed.
So, we see that each company or each person moves at their different tempo and their different strategy. So, for the particular competitor that you have mentioned, it appears as if that they have a shorter cadence and has announced a new migration. And yes, of course, we are taking note of the development.
[Foreign Language] So, the question was about the company’s response to the current development and as had been reiterated several times before, for SK Hynix and now all the more so with Solidigm, the plan, the strategy has always been to outperform the market. And for this year, now by the end of the year, we will have the mix of 176 layer.
In terms of wafer to be around 70% of the fab. So that will also provide us with the industry best cost in terms of the fab operation. So, what I’m trying to say is that the company will also march at its own tempo and we will try to achieve the, kind of economy of scale that we had not seen before.
[Foreign Language] And if I add one more explanation, in terms of the development, the company plans to complete the CS4 238-layer by the end of the year and begin mass production at the 238-layer next year. And when we see the market trend recently, then it’s not more about the technology. In other words, it’s not about who develops a better technology one to two quarters earlier than others.
I think the focus now is more on the business aspect, meaning [Technical Difficulty] who can deliver the latest technology in a customer friendly manner and to get the most bit growth or revenue or profitability out of it?
Operator
[Foreign Language] The following question will be presented by Nicolas Gaudois from UBS. Please go ahead with your question.
Nicolas Gaudois
Yes. Hi, good morning. Thanks for taking my questions. First, on the back of our recent research, it seems that you have actually recently reset your initial 2023 CapEx budget lower in-light of end demand uncertainty and you kind of alluded to looking at options earlier in the call, would you actually confirm with general EBITDA action and maybe give us some initial quantification about how CapEx and specifically with further comments spending could trend year-over-year in 2023?
And secondly, you talked earlier about server memory demand. How is specifically memory procurement from hyperscale customers trending and in particular for server DRAM? Have you seen any adjustment at this stage from U.S. hyperscale customers in particular for the [purchasing] [ph] plans into H2? And how do you see the emerging inventories? Thank you.
Kevin Noh
[Foreign Language] Now, on your first question, please understand that I am feeling quite cautious in responding to this question because as has been mentioned in the presentation and also given the sensitivity of this topic, I am a bit cautious, but now since the question was asked, now because the inventory level is likely to be higher than average for the market on the whole and for the memory industry on the whole and also for the customers, it is almost unavoidable that the CapEx for next year also has to be adjusted significantly.
[Foreign Language] Now, except for the past – the immediate past one to two years, So, looking back to a pre-COVID and further to 6 years to 7 years ago, Then we see that the memory cycle has been relatively stable in that time. So, from 6 years to 7 years ago until the pre-COVID period, the demand was consistent and so was supply. So, we had been seeing quite a stable market cycle until then, but then COVID hits and along with that, the supply chain issues began to occur.
And so much so that even when there is demand in the market because of the equipment lead time, it was difficult for us to adjust the CapEx. And now, of course, during the pandemic period, it is true that there was a big boom in demand because of the rising demand for IT products. And the question at that time was how to meet such demand with appropriate supply. But now I believe we are in a different phase.
Now, demand is uncertain. And if there is no flexibility in supply, then this is going to create a very difficult situation for us, but fortunately, it appears that things are going to improve for both the supply chain management, as well as the equipment lead time and as a result, we believe that we will be in a better position to make our moves in accordance to the changes in the market.
[Foreign Language] And in the second half, including the third quarter demand – market demand remains highly uncertain, but again, it appears that inventory is going to be higher than usual. So, for next year’s CapEx plan, we have a number. We are looking to a number of different scenarios and also looking into the market situation. And one of the scenarios includes considerable adjustments in the CapEx budget. So, we would take into consideration the different scenarios and try to respond agilely as we see – as we monitor the developments of the market in the second half.
[Foreign Language] The second question on the procurement outlook by the server customers. Now, we have been listening to the views of the key customers lately and it appears that there is a common trend toward higher cloud demand. So, we believe that over the medium to longer-term, this is going to be the direction.
[Foreign Language] But now for the shorter-term, there has been some impact from the parts supply issues, as well as the uncertainties in the macroeconomic condition. And because of this, we see that there has been an impact on the demand coming from the consumer related segments in the first half, and this has also affected the server side. And because of this, we see that the server customers has been conservative in their stance for some time, but we believe that this is going to be – this is a tactical move in order to adjust their inventory level.
[Foreign Language] Now, with the top tier customers, we are continuing with our discussion with them for their planning in the second half with the assumption that the plan for the year will be maintained. And starting this quarter, I believe that our discussion would also include the planning for next year as well. So, there is going to be the implementation or execution of the plan in the second half in linkage to the potential plan next year.
Operator
[Foreign Language] The following question will be presented by Hwang Min Seong from Samsung Securities. Please go ahead with your question.
Hwang Min Seong
[Foreign Language] Now, in order to improve profitability, then it appears as if the cost is going up, then in terms of the cost reduction, how much has been the cost reduction YoY? And a related question is, now the company also mentioned that various options are being considered when it comes to the inventory, but then in order to meet the low-teen percent growth target for DRAM, the company also mentioned that in the third quarter, it is likely to be flat, meaning that in order to meet this low-teen percent growth, then the company will need to have a significant growth in the fourth quarter, which appears to be too optimistic at this time.
And also, considering the equipment lead time, then if the company were to make their decisions about the inventory level after monitoring and waiting and seeing things in the second half, perhaps it is going to be too late to make that adjustment next year. So, what does the company think about making a significant adjustment to the inventory at this time?
And another question is, in the presentation, it was mentioned that the company will focus on the core business competitiveness in the year. Then does this mean there has been any change to the company’s strategy from previous year, which had been focused more on profitability aspect?
Kevin Noh
[Foreign Language] Well, there were so many questions in there. I do not know where to begin, but, now first of all, regarding the comment that if the bit growth for the third quarter is going to be flat, then wouldn’t it be difficult to reach the target of low-teen percent for the year for DRAM. Well, it is true that it is going to be a challenge. But then for the fourth quarter, we are expecting the kind of demand that we normally expect at the year-end. So, we do believe that we will be able to achieve a very low-teen percent bit shipment growth for the year. So, for both the company and the market.
And another part of your question was the cost and for DRAM, except for 2019, when the ASP drop was particularly significant, so except for that 1 year, in the past 3 years, our cost reduction has been to the extent that has been more than enough to offset the drop in the ASP. And likewise, for NAND or even more so. So again, except for 2019, looking at the past 3 years, then the ASP would sometimes go up by single digit, drop by like 2 digits, but still, our cost reduction in NAND has been enough to more than offset the ASP drop more so than DRAM. The question is, will this remain so in the future. And I would say that, that depends on the market circumstances, as well as the company’s effort.
[Foreign Language] And the second part of your question was about our business operation strategy and whether there has been a change in our business focus. In other words, whether we are going to shift away from focus on profitability more towards strengthening competitiveness, I believe that you probably meant more investment in R&D and so forth. And so to give you the straight answer first, our focus on profitability remains unchanged.
Now, having said that, I must also note that there are slight differences between DRAM and NAND. For DRAM, again, we remain profitability focused, and that is because DRAM is the company’s cash cow. So, it is where we can also invest into the future technologies and also even support the NAND business. And it is also vitally important that we remain profitable in DRAM to keep investing into the next memory technologies.
Now, for NAND, that does not mean that we are going to forsake profitability for to go all out to increase market share in order to maintain bit growth that is higher than market. So that is not the case. So, even for NAND, we will maintain our focus on profitability, which actually is lower than DRAM, but again, we will maintain profitability as we continue to increase market share.
And also for the medium to longer-term, we believe that increasing – by increasing the economy of scale, we will be able to reduce costs, which will then translate into profitability.
Operator
[Foreign Language] The following question will be presented by Sunwoo Kim from Meritz. Please go ahead with your question.
Sunwoo Kim
[Foreign Language] Now, my question is related to the previous question. Now, regarding NAND development, the company made the analogy of hiking and also emphasized the importance of maintaining our own pace, but then when we look at the memory environment, the memory industry, then what we see is that the ASP tends to converge on the cost of the leading companies.
What this means is that it’s not only important to maintain your own pace, but we also have to be mindful of the cost reduction coming from other makers. And another question related to this is, now for the acquisition of Solidigm and Solidigm in the first half on a non-GAAP basis, the operating profit margin was in the single-digit. And so we see that, of course, Solidigm has differentiated applications, but then I wonder what the company’s plan is to improve profitability of Solidigm?
Kevin Noh
[Foreign Language] Well, before I respond to the question, let me just make a clarification because of the internal miscommunication, this is not going to be the last question. We intend to take a few more questions.
[Foreign Language] Now, to your question, perhaps, again, I was not entirely accurate in my explanation about how the company intends to remain on its own path. It does not mean that we will just be single-mindedly remain on our own path being oblivious to other players’ development. That was not the case. It’s just that the point I was trying to make was about the importance of the economy of scale because when we look at the market, then we see that the competing on the basis of economy of scale is becoming more and more important.
Now, before acquiring Solidigm, our market share was in the low-10%. And then by the end of the year, we – our plan is to reach around low 20%. And over the medium to longer term, of course, our target is to reach a much higher market share. And along the way, then it would also require trillions of R&D cost. And so, compared to this, then what is important for us is to reach economy of scale so that we will be able to lower the unit cost as much as possible because that is going to be a key source of our competitiveness. So, that was the point that I was trying to make that it is important to reach economy of scale, and we intend to remain on that path.
[Foreign Language] And I also mentioned earlier about the importance of customer-friendly product delivery, but of course, speaking purely on the technology front, SK Hynix has already become a market leader in terms of tech migration or ramping up leading technologies, but what I was trying to say is that unlike DRAM, NAND is more of a solution-based product. So, it is very important for us to have a good understanding of the customers, to have a good understanding of what the market actually wants.
Now Solidigm, having been a division of Intel has been in the ES – has been very strong in the eSSD business for the server customers. They have very good technological capability and very good understanding of the customers.
[Foreign Language] So, through Solidigm, we believe that we will be able to further solidify our market leadership in solution development capability. And also in the SSD market, now Solidigm’s – now in the SSD market, because Intel’s NAND capacity has been limited, Solidigm was not able to serve as many as customers as possible or as it could have. And – but it still has the ability to do so because it has the know-how of servicing customers, and they have a very diversified customer base. And so – and they also have the timely delivery capability as well. So, I believe that such capabilities of Solidigm greatly enhance SK Hynix’s capabilities in many different ways.
[Foreign Language] And in terms of profitability on non-GAAP terms, Solidigm is going to be in the black this year and in terms of the U.S. GAAP, which includes one-off cost, then it is going to be slightly in the red, but overall, between SK Hynix and Solidigm, the NAND business is going to be profitable for the year. And in this process, we will be focusing all our capabilities to make sure that the integration process is going to be efficient and effective.
Operator
[Foreign Language] The following question will be presented by Ricky Seo from HSBC. Please go ahead with your question.
Ricky Seo
[Foreign Language] My first question is about the exchange rate and its impact on the operating profit margin. So, in the second quarter, it seems as if the, one, on average depreciated by about 5%. So what has been the impact on the company’s operating profit margin? And also about the structure of the exchange rate affecting the company’s operating profit margin, could you explain a bit more about this? For example, for every 101 change in the exchange rate to the dollar, what would be the impact on the company’s OPM?
And the second question is, the company’s inventory level was mentioned earlier, but then also what is the company’s understanding of the inventory level by the customers, by application or by channel?
Kevin Noh
[Foreign Language] Regarding your question about the exchange rate going up, in other words, the Korean won depreciating, and its impact. Now, in the second quarter, it is true that there has been a 5% rise in the Korean won’s exchange rate to the dollar, meaning that it has depreciated about 5%. And for the company, we receive our payments 100% in U.S. dollars So that has translated to roughly KRW500 billion increase in our sales so far.
[Foreign Language] Now, of course, there is the other side, meaning the cost side, the expenses where we also pay in foreign currency and that is about 40% of the total cost, and if we exclude the yen against which the Korean won appreciated. So that is [about 5%] [ph] out of the 40%. So that means that there was impact on about 35% of our cost coming from the exchange rate rising or the Korean won depreciating. So, if we are to exclude that, then that means that the net impact of the Korean won depreciating against the dollar is about KRW400 billion.
[Foreign Language] And your question about the impact on the company’s [PLL] [ph] for every 101 difference in the exchange rate to the dollar, of course, it is difficult to make a definitive, give a definitive answer to that, but then I think the numbers from this quarter gave a lot of hint. So, we can look at the numbers for this quarter and also the impact of the exchange rate on the company’s revenue, as well as the spend side, as well as the net impact.
So again, for the revenue, it was over KRW500 billion increase, and for the cost side, it was about KRW100 billion. So then, for the net impact, for the operating profit, it is about KRW400 billion. So, I guess we could use these numbers to make a quarterly simulations.
[Foreign Language] And about the inventory per customer or per application, now, the assessment of the customers or other inventory is – cannot be accurate from our side. And also depending on the source of information or depending on the viewpoint, the information that we get tends to vastly differ.
Now, having said that, we can still look at the overall trend and the trend is pointing upwards for inventory across all the applications, but of course, by a product differences exist. So, what we are planning to do is, to have a strategic operation of our inventory against this backdrop.
Operator
[Foreign Language] The last question will be presented by Simon Woo from Bank of America. Please go ahead with your question.
Simon Woo
[Foreign Language] My first question is on CapEx and second is about the lower bit growth that is going to appear to be the norm compared to the previous cycles? Now my first question. Now looking at the CapEx, it appears as if there is very little room for the company to reduce the CapEx in the second half of the year given that this is already the end of July. And also about half of the CapEx has already been committed to [indiscernible] areas.
So, for example, you need to purchase a site and also you need to build the LNG related to utilities. So, it appears that for this year, reducing CapEx is not going to happen. And then looking into next year, I think it is a similar picture. So of course, you could decide to reduce the investment in infrastructure, but when it comes to equipment, then given the fact that the company has to keep competing against other makers like TSMC, Samsung and also U.S. and Japanese companies, then for the company to reduce or not use the lithography equipment or also decide not to use or decide not to procure [etching equipment] [ph].
I believe that that is going to be highly risky, especially if demand turns out to be higher than expected and also the competitors might decide to get the equipment that the company decides not to use in order to ramp up their production or upgrade their facilities. So, my question is then, does the company believe that it is possible or realistic to revise down CapEx next year either?
Kevin Noh
[Foreign Language] Now regarding the CapEx, it is true that for the past few years, it has been very difficult for the company to be flexible about the CapEx spending. And we have – that is why we have repeatedly emphasized for the past few quarters that our business planning window is going to be pulled up to October from the usual year-end. And now I also mentioned that we will make our decision about next year’s CapEx by looking at the developments in the market in the second half, but that does not mean that we will be making the adjustment in October or November because for the memory side, we can pretty much forecast the next three months because the customers commit for that long.
And we could also stretch that out to about six months, meaning that we can make the forecast for the next six months. So, when we say that we will be looking into the business plan for CapEx next year in October this year, does not mean that we will be making that decision at that time. So, for the CapEx, we will be able to make that decision much earlier sometime in August or September.
[Foreign Language] And also, it is true that the company’s investment in infrastructure has gone up, so we do have a higher mix of infrastructure investment out of our total CapEx because it has – the sheer number has also gone up in recent years, but now one thing that you have mentioned about the power generator, so our own power generator.
Now, looking at the overall power situation, as well as the cost of electricity, we do believe that this infrastructure investment is a worth investment because over the medium to longer-term, it is the type of investment that will enhance the company’s competitiveness and will end up significantly reducing our OpEx.
So, although this requires some investment, this is one investment that we intend to continue. And also as you have pointed out, we also have plans to purchase sites, for example, the Yongin site and also other land and also make investment into infrastructure, but still, I would say that the dominant part of our CapEx is equipment. So, there is still room for us to reduce investment in equipment. And when we look at the other players, so for both our competitors and foundries, I believe currently the consensus is not to be overly aggressive in CapEx investment so much so that they will try to pull up the volume that is going to be needed later to make the investment now. So, I believe that that is currently the consensus.
[Foreign Language] And then this is not a direct response to your question, but let me also say this as a way of closing comments. Now today, when we were doing this earnings release, we did mention that in Korean won terms, the company has achieved a historic high in business performance, but given the less than [rosy picture] [ph] in the second half, as well as the uncertainties for next year, I believe that the [mood] [ph] today was not too celebratory and perhaps it was a bit gloomier than we had hoped for. But now in hindsight, when we look at the past decade or so, then we see that the memory industry has developed in a fairly stable manner.
And of course, it is true that we had not been able to exercise flexibility in supply for some time, so that we are not able to respond agilely to changes in the demand, but also when we look at the ASP, then for the past two to three quarters. So, let’s say two to three quarters ago, we were talking about upturn and now we talk about downturn. So, it does appear as if we are going back and forth between hot and cold too often, but having said that, if we can recover supply flexibility, then I believe that the market would also begin to normalize, meaning that we will also be able to regain relatively stable growth in the memory industry as well.
Park Seong Hwan
[Foreign Language] So with that, we conclude the second quarter earnings release conference call by SK Hynix. Thank you very much for your participation.
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