| A visitor tries out a Samsung Electronics’ Galaxy Note 7 at company’s headquarters in Seoul, South Korea, October 5, 2016. Picture taken on October 5, 2016. REUTERS photo |
Samsung Electronics Co Ltd on Thursday said it aims to recover quickly from the disastrous withdrawal of the fire-prone Galaxy Note 7 that dragged third-quarter mobile earnings to their lowest level in nearly eight years.
The South Korean giant said it was expanding its probe into the Note 7 fires beyond batteries, as it tried to reassure investors that it would get to the bottom of one of the worst product failures in tech history.
It also held out the prospect of greater returns by disclosing consideration of a share buyback, talked up its semiconductor business and promised to consider proposals for a corporate makeover from U.S. hedge fund Elliott Management.
“We know we must work hard to earn back your trust and we are committed to doing just that,” said Co-Chief Executive J.K. Shin as he apologized for the debacle at a general meeting in Seoul following the release of the company’s results.
Investors expect sweeping management changes in response to the Note 7 failure, especially after voting on Thursday to make parent conglomerate Samsung Group’s [SAGR.UL] de facto chief, Jay Y. Lee, a Samsung Electronics director.
Lee, 48, the son of patriarch Lee Kun-hee who has been hospitalized following a heart attack, will now have greater accountability at the group’s flagship company and a clearer mandate to play a public role in setting strategy.
But shareholders may have to wait for the Note 7 investigation to conclude before seeing any heads roll at the family-run conglomerate.
Samsung Electronics Chief Executive Kwon Oh-hyun said at the shareholder meeting the company would assign responsibility only after the crisis was resolved.
The world’s top smartphone maker posted a 96 percent plunge in third-quarter mobile earnings to 100 billion won ($88 million).
Overall operating profit was 5.2 trillion won ($4.6 billion), matching Samsung’s revised guidance and marking a two-year low. Before the Note 7 was discontinued, the firm had estimated a 7.8 trillion won profit.
The scrapping of Samsung’s flagship phone erased 0.1 to 0.2 percentage points from South Korea’s third-quarter GDP growth in quarterly terms, a finance ministry official told Reuters on Tuesday.
WHAT WENT WRONG?
The Apple Inc rival said it now aimed to achieve fourth-quarter mobile profit close to that of October-December of 2015, on the back of sales of Galaxy S7 phones and lower-tier models. Galaxy S7s – its other premium smartphones with smaller screens – were on track to set a new launch-year sales record for the company, it said.
Samsung has previously warned of another $3.1 billion hit to profit from the Note 7 withdrawal over two quarters. But it also said on Thursday it expects overall earnings to improve in the fourth quarter from a year earlier on a strong performance by its chip and display businesses.
As for what went wrong, Samsung still does not know what caused the fires in devices sent to customers as replacements for the initial 2.5 million Note 7s it recalled due to fire-prone batteries.
Co-CEO Shin said the battery might not be the only problem, suggesting the root cause may be more difficult to determine than had been hoped.
Investors now want a clear plan for how Samsung will revive earnings growth, repair its tattered brand image and boost shareholder returns, hence the company’s promise to consider a share buyback.
“The key is whether Samsung will be able to remove uncertainty surrounding Note 7 and maintain its leading position in the smartphone market,” LS Asset Management fund manager Kim Sung-soo said.
Samsung also said it was reviewing proposals by Elliott, which include a special 30 trillion won dividend. The company will respond to Elliott and announce its shareholder returns policy by end-November.
Samsung SDI, supplier of the batteries blamed for the first recall, reported a 110 billion won operating loss for the quarter on Note 7-related provisions – more than double its losses for the same period a year earlier.
Seeking to appease shareholders, SDI also announced a share buyback worth 298 billion won.