LG Electronics Inc (OTC:LGEAF) Q4 2022 Results Conference Call January 27, 2023 2:00 AM ET
Company Participants
Dong Cheol Lee – IR
Sang Bo Sim – Senior Manager
I-Kueon Kim – Officer of Home Appliance and Air Solution
Jeong-hee Lee – Officer of Home Entertainment
Jin-Yong Kim – Executive VP & President of Vehicle Component Solutions Company
Choong-hyun Park – Executive Officer of Business Solutions & Finance Division
Conference Call Participants
Jong Jin Park – JPMorgan
Ji-San Kim – Kiwoom Securities
Peter Lee – Citigroup
Roko Kim – Hana Securities
Kangho Park – Daishin Securities
Simon Woo – Bank of America
Yumi Cha – Mirae Asset Securities
Operator
Good morning, and good afternoon. Thank you for joining LG Electronics Earnings Release Conference Call for the Fourth Quarter of 2022. [Operator Instructions]
I would now like to hand the conference over to the first speaker.
Sang Bo Sim
Good afternoon. My name is Sang Bo Sim from Investor Relations. Thank you for joining LG Electronics Earnings Release Conference Call for the fourth quarter of 2022. With me are representatives of each business management division, Mr. I-Kueon Kim from Home Appliance and Air Solution; Mr. Jeong-hee Lee from Home Entertainment; Mr. Ju Yong Kim from Vehicle Component Solutions; Mr. Dong Cheol Lee from Business Solutions. We are also joined by Mr. Sang Ho Park from Global Business Management Group, Mr. Choong Hyun Park from Corporate Business Management Division; Mr. Hyungyu Lee from Finance Division; and Mr. Hong Su Lee from Accounting Division.
Please note that all statements we’ll be making today regarding the financial results of the fourth quarter are subject to change in accordance with the result of the external audit. I would also like to remind you that uncertainties in the market and changes in strategies may cause our results to be different from the outlooks and forward-looking statements made today.
Today, I will outline the overall performance results of the fourth quarter of 2022 and the outlook for the year 2023 and the first quarter. Then each division will take turns to deliver its business results and outlook. After that, I will share our ESG activities and achievements.
Now let me start with the consolidated financial results of the fourth quarter of 2022 and the outlook for 2023 and the first quarter. Consolidated sales of the fourth quarter was KRW 21.9 trillion, and operating profit was KRW 69.3 billion. Despite sluggish sales in home appliance and TV due to slow demand caused by inflationary pressures in major countries, revenue grew year-on-year on the back of strong sales in vehicle components. H&A and BS remained profitable, but operating profit decreased by a large margin year-on-year due to rising marketing costs entailed by intensified competition in the appliance business as demand for durable goods became sluggish and increased promotion cost to secure sound inventory levels in TV and IT.
I will now briefly review the fourth quarter performance of each business. H&A recorded KRW 6.4 trillion in sales, KRW 23.6 billion in operating profit and 0.4% in profitability. HE recorded KRW 4.5 trillion in sales and KRW 107.5 billion in operating loss. VS recorded KRW 2.4 trillion in sales, KRW 30.2 billion in operating profit and 1.3% in profitability. BS recorded KRW 1.2 trillion in sales and KRW 77.8 billion in operating loss. Each business will later share its respective business results and outlook in detail.
Let’s move on to the profit and loss and cash flow of the fourth quarter. In terms of profit and loss, reflecting financial income and expense, equity method gain and loss, other nonoperating income and expense, corporate income tax and income and loss from discontinued operations, we posted KRW 212.4 billion in net loss.
Next, on cash flow. Q4 cash flow from operating activities was KRW 472.2 billion and cash flow from investment activities was negative KRW 1 trillion, resulting in net cash flow of negative KRW 1.1 trillion. When reflecting cash flow from financial activities of negative KRW 123.5 billion, cash balance at the end of Q4 came to stand at KRW 6.3 trillion, a KRW 1.2 trillion decrease from the previous quarter.
Next is the key financial position and indicators for the fourth quarter of 2022. As of the end of the fourth quarter, assets stood at KRW 55.2 trillion, liability at KRW 32.7 trillion, and equity at KRW 22.5 trillion. In terms of leverage ratios regarding liability to equity, debt to equity, and net debt to equity, we continue to maintain a healthy financial condition.
Now the outlook for the year 2023 and the first quarter. In terms of the business environment, impacted by the interest rate hike in many countries, political risk in Europe, concerns of an economic downturn are on the rise and weak demand stemming from declining consumer sentiment is expected to persist for the time being. As part of our business strategy to overcome the situation, we will respond to changes in market demand in an agile manner by launching innovative and differentiated new products and strategic models to target the volume zone. We plan to secure additional top line growth in promising business areas such as contents and service platform and B2B businesses.
In terms of operations, we will focus on profitability-centered risk management in the first half and actively respond to possible improvement in demand in the second half to maintain top line growth momentum on an annual basis for 2023, and also continue to enhance profitability. Our first quarter revenue is projected to decrease year-on-year, impacted by weak demand in appliances and TVs. That said, we expect stable profitability on the back of efforts to improve cost structure and reduce costs.
Now let’s move on to the fourth quarter results and outlook for 2023 and the first quarter by business. We will start with H&A.
I-Kueon Kim
Let me share the fourth quarter results of H&A. We recorded sales of KRW 6.4 trillion, a slight decrease year-on-year as revenue declined in Korea and overseas markets due to weakening demand for appliances caused by deteriorating macroeconomic conditions. Operating profit decreased year-on-year due to rising fixed cost burdens and marketing costs entailed by intense competition.
Next is the outlook for 2023 and Q1. Concerns of an economic downturn are expected to continue to shrink demand for appliances, and subsequently, competition in the market is expected to intensify more than ever. Amid this environment, we will gain top line growth momentum by proactively responding to shifts in market and consumption trends such as demand polarization. We will aim to secure profitability by improving manufacturing cost structure and reducing expenses, including logistics costs. In Q1, we will secure revenue levels similar to that of the previous year by strengthening our presence in the premium segment and driving business in the volume zone. We plan to maintain solid profitability by optimizing spending, including logistics costs and expenses to address competition.
Jeong-hee Lee
I will share the fourth quarter results of HE. Sales declined year-on-year, impacted by the geopolitical risk stemming from the protracted Russia-Ukraine conflict and weakened consumer sentiment due to concerns of a global economic downturn. Operating profit decreased year-on-year due to increased marketing spending to sell out inventory during the peak season.
Now let me share the outlook for the year 2023 and the first quarter. In the market, amid uncertainty over global TV demand improvement, competition in the premium products segment is projected to get fiercer. Accordingly, we will lead the expansion of the OLED TV market based on differentiated product competitiveness, strengthen competitiveness in LCD TVs by further applying quantum nano cell technology, and capture additional growth opportunities by driving platform-based businesses. In the first quarter, revenue is expected to decrease year-on-year due to slowing global TV demand, but we plan to improve profitability through efficient management of resources.
Jin-Yong Kim
Let me share the fourth quarter results of VS. Sales grew significantly year-on-year, thanks to increased OEM orders on the back of high order backlogs. Despite increased costs from running new production subsidiaries, operating profit continued to be in the black, thanks to revenue growth.
Next, the outlook for 2023 and the first quarter. Amid easing of the auto semiconductor shortage, uncertainties regarding global demand for vehicle components continue to exist in the market due to macro risks such as the geopolitical situation in Europe. We will maintain high top line growth and sound profitability by securing more business for high value-added, high-performance products based on differentiated product competitiveness and strengthening our presence in the vehicle component market with stable supply chain capabilities and timely action toward additional top line opportunities. In the first quarter, we will seek to grow the top line through stable supply chain management and continue to be profitable by improving the cost structure.
Dong Cheol Lee
I will share the fourth quarter results of BS. So we continue to post growth in information display. Q4 sales decreased year-on-year, impacted by dampened demand in the global IT market. Operating loss was expanded against the previous quarter impacted by the drop in revenue and jump in promotion costs to reduce channel inventory.
Now let me share the outlook for the year 2023 and the first quarter. IT demand is expected to continue on a downward path due to concerns of a global downturn. Information display is projected to maintain a growing trend, though the pace of growth may be somewhat slower. We will continue to seek revenue growth by strengthening our product lineup with new products and securing more B2B projects by offering tailored solutions for different verticals. We will also focus efforts on preemptive risk management by proactively managing inventory and optimizing spending with the market situation in mind. In Q1, we will improve profitability and seek to achieve a turnaround by focusing on stabilizing operations through timely action to address the IT peak season and strict management of inventory and spending amid demand contraction in the market.
Last but not least, let me share our ESG activities and achievements. As a major ESG management company in Korea, LG Electronics has been playing a leading role in corporate social responsibility. In recognition of our efforts, we continue to receive A grade in 2022 in ESG ratings provided by renowned external institutes such as MSCI and KCGS. In particular, we were included in the Dow Jones Sustainability Index World list for 11 years in a row. DJSI considers not only economic achievements, but also nonfinancial performance such as environment, social, governance related practices in this evaluation.
Building on these capabilities and achievements, we presented our ESG vision of a better life for all and 6 strategic initiatives to achieve this vision at CES in January. To accelerate our actions to mitigate climate change, we established a challenging goal to become carbon-neutral by 2030, and to ramp up the use of renewable energy to 100% in our sites around the world by 2050.
In terms of products, we also plan to drive and lead ESG efforts by reducing carbon emission of 7 major products in the product use stage by 20% compared to 2020 levels, and expanding use of recycled plastics to 600,000 cumulative tonnes by 2030. Moreover, we will take action to realize our vision of a better life for all by strengthening ESG risk management across the supply chain, promoting diversity in our organization and culture, and developing products with enhanced accessibility to enable anyone to use them without obstacles. Going forward, LG Electronics will pursue competitive and reliable ESG activities by managing relevant risks and improvement plans across our decision-making process and deriving optimal solutions to create value for all stakeholders through systematic and expert ESG efforts, including the ESG Committee.
Sang Bo Sim
That brings us to the end of the fourth quarter earnings release and outlook for the year 2023 and the first quarter. We will now take questions. Operator, please commence with the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] The first question will be presented by Jong Jin Park from JPMorgan.
Jong Jin Park
I have 2 questions. First, on corporate-wide operations. It’s only in a new year. Last year, there were some price issues such as logistics issues. So was there any effect in improvement of margins? And to talk about B2B and B2C. Now it seems that B2B guidance is pretty okay, but in terms of B2C, it seems a little bit weak. So can you please talk about this year’s corporate-wide revenues and profitability? And whether there is any effect in terms of margin. Usually, we have a seasonality that is high in the first half and low in the second half. Do you expect our seasonally higher earnings in the first half and lower earnings in the back half to continue into this year? We usually have this seasonality because we have high proportions of consumer products. .
My second question is on BS. What is your outlook on BS division’s revenues and profitability? Up until 2021, there were some improvements in terms of margin. However, from 2022, now the margin has been falling a little bit. Can you please talk about it?
Sang Bo Sim
Let me answer your question on corporate-wide operations. We expect rising inflation, geopolitical risks and deep concerns over slowing economy to continue into 2023.
In terms of our business environment, while there are positive factors like that of the eased raw material and logistics costs and a bigger contribution of our EV component business to our profitability, we also have risks such as prolonged demand declines, subsequent intensification of market competition and market cost increases.
Despite the hurdles, we expect to focus on managing risk, especially to our profitability amidst slowing consumer demand trends in the first half of this year and to prepare for demand improvement by ratcheting up our fundamental business capabilities in the back half of the year to continue top line growth and secure strong profitability for the year.
On the logistics and raw material price changes you mentioned, from 2020, there have been changes in terms of logistics costs. So we reflected the changes from 2020. Pardon me there, from the end of 2022, we reflected the changes by reviewing our contracts with ocean shipping companies. As a result, from 2023, we expect a significant tailwind in terms of our cost savings.
On the effect of raw material cost declines, we have already reflected based on the lead time from product manufacturing to sales. So now we think that the effects will be reflected from the third quarter as we conclude our contracts with ocean shipping companies.
On seasonality, you mentioned our profits in 2022 showed a familiar seasonal trend, high in the first half and lower in the second half. And this year, we intend to stabilize our quarterly profits by having a sound inventory build and facilitating the B2B business.
Dong Cheol Lee
Let me answer your question on BS division’s revenues and profitability. As noted in the remarks on the 2023 outlook today, if the slowing demand trends in the market continued into this year, there will be inevitable impact on our business. With that said, we have set up and are implementing detailed plans for 2023 to improve both revenue and profitability against last year.
On the revenue front, we will continue to drive revenue growth by improving our portfolio with new model launches and expanding new B2B project orders. On profitability, despite competition-driven risks such as marketing or raw material cost increases, we aim to enhance our profitability by reducing costs and improving cost structures proactively.
Operator
The next question will be presented by Ji-San Kim from Kiwoom Securities.
Ji-San Kim
I have 2 questions. My first question is on HE. It seems that setting a price for OLED TVs can be tricky. While LCD panel prices have plummeted, it is unlikely that OLED panel prices will fall. In light of this, what is your price positioning strategy to drive OLED TV demand? Do you have any plans to decrease the ASP this year? And my second question is on VS. This year, macro trends for VS are likely to be unfavorable, such as declining demand for vehicles and the weakening dollar, unlike your great 2022 performance beyond a turnaround. In such a tough environment, do you have any other profitability improvement plans than the volume ramp-up?
Jeong-hee Lee
Let me answer your first question on HE. As you know, LCD panel prices have plummeted. And since LCD panel makers have been adjusting their capacity utilization, I believe that further price drops will be limited. And so the gap between OLED panels and LCD panels will be maintained.
And as an OLED TV market leader for over 10 years, we are going to focus on our competitiveness to provide value to customers.
And as for the ASP plan, we’re going to move in the direction optimized for each region and market by appropriately pricing the product in a way that it will reflect the fundamental value unique to LG’s OLED TVs.
In particular, we are going to provide a differentiated competitiveness of our OLED TVs and especially with our wireless AV connected OLED TV, which is our first in the world, we are going to provide differentiated value to the market, and we are going to maintain a value premium over LCD TVs.
Jin-Yong Kim
Let me answer your question on VS. As you said, the uncertainties surrounding the business environment such as vehicle demand declines are expected to continue into this year.
Nevertheless, we aim to pursue high growth in the markets by continuously securing more product orders and expect to see robust revenue growth in 2023 based on cotton backlogs.
On profitability, we also expect improvement driven by the growth of our volume and revenue in addition to tailwinds from product and product mix improvements, which we’ve made by strengthening our internal capabilities in regards to winning new orders and to ensuring a sound level of orders for many years. Moreover, in 2023, we will further enhance our profitability by improving cost structures more proactively across our operations, like improving SCM and production efficiency along with volume ramp-ups.
Operator
The next question will be presented by Peter Lee from Citigroup.
Peter Lee
This is Sei Cheol from Citigroup. I have 2 questions on corporate-wide operations and VS. First, on corporate-wide operations. Now FX rates are falling again after reaching a peak in the back half of last year. Has this caused any impact on your profitability? And then secondly on VS, as we’re likely to see slower macroeconomic trends into 2023, there are concerns over weak demand for vehicles. What is your outlook on the demand for vehicle component this year? .
Sang Bo Sim
Let me answer your question on corporate-wide operations. When the dollar falls, that could result in some impact on each division’s results depending on the scale of their revenues and purchases based on dollar value. However, on corporate-wide operations, the FX headwinds on our revenues have been only limited based on the stable operations of our business portfolios in each region.
And on profitability, the impacts would also be limited as we are able to provide a natural hedge like currency matching with our global operations in addition to managing FX volatility through various tools.
Jin-Yong Kim
Let me answer your question on VS. The automotive market has recently been recovering from COVID-driven demand slowdown and its rate of recovery is slower than expected due to the prolonged Russia-Ukraine conflict.
To quantify it, e-market research firm expects vehicle production to grow by 3.5% year-over-year in 2023, and we expect our vehicle component business to grow beyond that growth as both installations of connected car components and the demand for EV component increase led by high growth within the ex-EV markets.
Operator
The next question will be presented by Roko Kim from Hana Securities.
Roko Kim
I have 2 questions. My first question is on H&A. Concerns are being raised about negative revenue growth in 2023. In this context, what is your strategy to protect profitability, and what is your target profitability? And my second question is on HE. Driven by shrinking TV demand in 2022, the distribution inventory issue has persisted in the market. So what is the current status of your inventory levels? And it is my understanding that there has been an increase in your expenses for the normalization of distribution inventory. Could you give us an update on your inventory levels? And considering demand outlook for 2023, what is your inventory management strategy, both for customers and channels?
I-Kueon Kim
Let me answer your question on H&A. Amid concerns over an economic recession and declining demand in the home appliances market, our revenue started to turn negative, as you’ve heard in the beginning of the call, as we have entered Q4 last year.
This tough market environment is expected to continue into 2023. And even if there is a possibility that difficult macroeconomic environments such as inflation and interest rate hikes will ease to some extent after the second half of the year, it will take quite some time for consumer sentiment, that has been weakened due to decreased disposable income triggered by inflation, to recover.
Under these circumstances, we will continue to enhance the competitiveness of our premium products. And at the same time, by expanding our volume zone product that we have been preparing continuously, we are going to work on overcoming the impact of declining demand and maintain growth momentum.
Also on the cost side, we are going to maximize the effects of decreased raw material prices and logistics costs. And under a contingency plan, we will be carrying out cost-cutting activities to maintain the business structure where sustainable profitability can be secured.
Jeong-hee Lee
Let me answer your second question on HE. In 2022, decreased sales driven by a slowdown in global TV demand have led to increased inventory levels of manufacturers, including us, and distributors.
And in order to normalize the increased inventory levels, the marketing expenses of TV makers have increased significantly.
And thanks to our detailed and preemptive management of PSI and our efforts to maintain sound inventory levels during peak season, our current inventories are managed at normal levels, which is lower year-over-year.
As concerns over an economic recession and slowing TV demand persist, heightened competition within the market is expected to continue. Therefore, sound inventory management as a strategy to protect profitability will become increasingly important this year.
Our goal is to maintain the current level of inventory by closely cooperating with distributors to improve the accuracy of demand forecasts. And we aim to continuously maintain sound inventory levels by developing product and sales plans that are aligned with actual sales.
Operator
The next question will be presented by Kangho Park from Daishin Securities.
Kangho Park
I have 2 questions. My first question is on HE. Will your TV business strategy be affected by LG Display’s decision to close its LCD panel business? And what is your response to the market’s concerns over the possible shrinkage of the OLED TV ecosystem? Please comment on this, if possible? And then my second question is on H&A. As mentioned before, we have high expectations for the improved profitability in terms of logistics costs. And I’m wondering how have the terms and conditions of the logistics contracts changed compared to the past, such as contract rates or contract period? And how much will it contribute to H&A’s margin improvement this year?
Jeong-hee Lee
Let me answer your first question on HE. As you may well know, we will continue our strategy to pursue the qualitative growth of our TV business by solidifying our presence in the premium market led by OLED TVs and accelerating our efforts to change the fundamentals into more software oriented.
Amid an oversupply of LCD panels stemming from slowing TV demand, panel makers are expected to maintain flexibility in capacity utilization in order to prevent further price drops and protect profitability.
In response to this, we are going to work on sourcing from multiple panel suppliers other than LGD, and we are going to improve the supply chain management, and we will make sure that we meet our supply plans and that our strategy to focus on premium products remain on track.
And we believe that LGD’s shift from LCD to OLED, we believe it could have a positive impact on the expansion of the OLED ecosystem.
Even as overall demand for TVs is falling, the OLED market remains strong with our competitor entering the OLED market.
And once LG Display improves their fundamentals to become more high-end oriented and thus create economies of scale, we will also be able to deliver differentiated customer experience unique to LG OLED TVs to more customers by adding fundamental value to our products based on a more stable supply of OLED panels.
I-Kueon Kim
Let me answer your second question on H&A. Market conditions, including falling ocean freight rates since the second half of 2022, were reflected in the negotiations for the logistics contract for 2023, and substantial efforts were made to meaningfully improve our cost structure. Although freight rates may differ depending on whether the contract is short term or medium term, the rate decreases have been reflected to secure competitiveness in ocean freight rates after sufficiently taking into account the volatility in the market.
The new rates are applied as of January 2023, which will contribute to P&L improvement. Also, not only ocean freight rates, but also trucking rates are declining due to weakening demand. Logistics inefficiencies such as demurrage and costs associated with moving from one warehouse to another that we experienced during the pandemic are expected to be eliminated in 2023.
Although uncertainties remain amid challenging macro environment, including global demand slowdown, we do expect our cost structure to improve to close to pre-2021 levels.
Operator
The next question will be presented by Simon Woo from Bank of America.
Simon Woo
I have 2 questions. My first question is related to TV. As you know, TVs have been evolving continuously from 2K to 4K to 8K. And as TVs evolve in terms of resolution, it is only natural that it is consuming more power. And currently in Europe, they are imposing regulations on TV power consumption. So I would like to know what is our response to this. And as you know, 8K TV can be a critical inflection point for us. But I’m wondering how we’re going to respond to these regulations being imposed by the European Union?
My second question is on corporate-wide operations. What is your CapEx plan for 2022 and 2023? Can you please elaborate on it? It’s been already known that Innotek’s investment is around KRW 2 trillion, which is even larger than LG Electronics. Can you please provide that information, excluding LG Innotek? And can you also talk about the CapEx for 2022 and 2023? And can you also tell us, especially where you’re making investments?
Jeong-hee Lee
Let me answer your first question on HE. In the case of our 8K LCDs, we were already aware of the regulations. So we are fully prepared to meet the EU’s energy requirements. And for OLED as well, since our OLED business primarily focuses on OLED with high energy efficiency, we do not believe we will see any issues or problems in terms of EU’s regulations on power consumption.
Sang Bo Sim
Let me answer your question on CapEx. As you know, we have made investments of just over KRW 2 trillion on an annual basis based on our role to set CapEx investment only within our EBITDA.
On investment area for 2023, we plan to continue that funding to maintain and strengthen the existing business capabilities to develop an intelligent approach to manufacturing innovation and to achieve digital transformation going into 2023. We’ll also continue to invest in identifying new promising areas and diversifying our business portfolio. So we expect this year’s CapEx to stand at around mid KRW 2 trillion levels like last year.
However, we do plan to minimize unnecessary investments and further the efficiency of our resources amidst changes to our business environment such as concerns over economic slowdown or slowing global demand, so that we can continue to secure and improve our financial health.
Operator
The next question will be presented by Yumi Cha from Mirae Asset Securities.
Yumi Cha
This is Cha Yumi. I have 2 questions on VS and BS. The first one is on VS. How are the backlogs as of the end of 2022? What is your targeted amount by the end of this year? If possible, can you please provide the information by each business? And do you expect any impact on that given the FX rates that are now falling? If so, what do you expect that amount to be? And then secondly, can you talk a little bit about BS division’s robot business’ progress and plan for 2023?
Jin-Yong Kim
Let me answer your question on VS. We recorded a backlog of KRW 80 trillion on the back of a surge of new orders in 2022. In terms of each business’ shares of the total backlog as of late 2022, infotainment took off a percentage in the mid-60s, EV component around 20%, and automotive lamp about like reached 10%.
In terms of our backlog at the end of 2023, there might be some FX impact. But we’re to continue growth momentum with more order intakes down the road and expect the EV component business to continue to take up a larger share of the total backlog in the future on the back of high growth within the EV market and LG Magna’s DV effects.
Choong-hyun Park
Let me answer your question on your question about BS divisions, robot business progress and plan. A survey on the robotic industry found domestic service parts have shown a high 42% CAGR over the past 3 years. Standouts are logistics robots for manufacturing processes for tending robots and serving bots being rolled out. With the government quickly addressing regulations in the sector, we expect the market to continue its growth trajectory.
In response, we have done serving, delivery, logistics, guide, and disinfection bot businesses for various verticals such as hotels, hospitals, residences and F&B companies. In particular, we have made integrated solutions to provide our customers with differentiated experiences based on our technological capabilities to best meet requirements like aligning with their different operating systems.
In 2022, we expanded our delivery bot sales for strategic partners and kicked off our supply of robotic logistics and delivery solutions, making major achievements.
Going into 2023, when the serving and logistics bot market is to steadily grow, we will continue our readiness of unmanned and automated solutions based on robots for each vertical, so that more of our customers can meet and experience our LG coy.
Operator
Currently, there are no participants with questions. [Operator Instructions]
Once again, currently, there are no participants with questions. We will wait for a second until there is another question.
Sang Bo Sim
Since there is no more question, that concludes today’s earnings call for the fourth quarter of 2022. For further questions, please contact our IR team. Thank you for joining us today.
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