LG Electronics Inc. (OTC:LGEAF) Q2 2022 Earnings Conference Call July 29, 2022 3:00 AM ET
Company Participants
Sangbo Sim – Investor Relations
Lyu Jae-Cheol – Home Appliance and Air Solution
Jeong Hee Lee – Home Entertainment
Jin-Yong Kim – Vehicle Components Solutions
Kim Yong Park – Business Solutions
Sang-Ho Park – Global Business Management Group
Hyungyu Lee – Accounting Division
Tony Park – Finance Division
Conference Call Participants
Dongwon Kim – KB Securities
Ji-San Kim – Kiwoom Securities
S. K. Kim – Daiwa Capital Market
Simon Woo – Bank of America
Sang Ryul Kwon – DB Financial and Investment
JJ Park – J.P. Morgan
Operator
Good morning and good afternoon. Thank you for joining LG Electronics Earnings Release Conference Call for the Second Quarter of 2022. This conference call will start with a presentation on the earnings results, followed by a Q&A session. [Operator Instructions]
I would now like to hand the conference over to the first speaker.
Sangbo Sim
Good afternoon. My name is Sangbo Sim from Investor Relations. Thank you for joining LG Electronics earnings release conference call for the second quarter of 2022. With me are representatives of each business management division, Mr. Lyu Jae-Cheol [ph] from Home Appliance and Air Solution; Mr. Jeong Hee Lee from Home Entertainment; Mr. Jin-Yong Kim from Vehicle Components Solutions; Mr. Kim Yong Park [ph] from Business Solutions. We are also joined by Mr. Sang-Ho Park from Global Business Management Group; Mr. Hyungyu Lee from Accounting Division; and Mr. Tony Park [ph] from Finance Division.
Please note that all statements we will be making today regarding the financial results of the second quarter are subject to change in accordance with the results of the external review. 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 second quarter of 2022 and the outlook for the third quarter. After that each division will take turns to deliver its business results and outlook.
Now let me start with the consolidated financial results of the second quarter of 2022 and the outlook for the third quarter. Consolidated sales of the second quarter was KRW19.5 trillion and operating profit was KRW792.2 billion. Despite the decline in global TV demand, sales grew 15% year-on-year on the back of increased sales in Premium Appliances and revenue growth in Vehicle Component business with easing of OEM production disruptions.
Though there was upward pressure on expense with rising raw material and logistics costs, we maintained solid profitability attributable to the turnaround in BS and topline growth in the Appliance business.
I will now briefly review the second quarter performance of each business. H&A recorded KRW8.1 trillion in sales, KRW432.2 billion in operating profit and 5.4% in profitability. LG recorded KRW3.5 trillion in sales and KRW18.9 billion in operating loss. BS recorded KRW2 trillion in sales, KRW50 billion in operating profit and 2.5% in profitability. BS recorded KRW1.5 trillion in sales, KRW14.3 billion in operating profit and 0.9% in profitability. 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 second quarter. In terms of profit and loss, reflecting financial income and expense equity method gain and loss other non-operating income and expense, corporate income tax and income and loss from discontinued operations, we posted KRW338 billion in net income.
Next on cash flow, Q2 cash flow from operating activities was KRW1.8 trillion and cash flow from investment activities was negative KRW922.7 billion, resulting in net cash flow of KRW984.8 billion. When reflecting cash flow from financial activities of negative KRW121.3 billion, cash balance at the end of Q2 came to stand at KRW6.5 trillion or KRW863.5 billion increase from the previous quarter.
Next is the key financial position and indicators for the second quarter of 2022. As of the end of the second quarter assets stood at KRW55.4 trillion, liability at KRW32.1 trillion and equity at KRW23.3 trillion. In terms of leverage ratios, net debt-to-equity, liability-to-equity and debt-to-equity all decreased quarter-on-quarter and year-on-year, and we continue to maintain a healthy financial condition.
Next is the outlook for the third quarter. In terms of the business environment, uncertainties are expected to persist due to geopolitical risks stemming from the prolonged Russia-Ukraine conflict, worsening inflation and declining consumer sentiment.
Amidst this environment, we will actively address the polarized demand through improved product mix with focus on premium products and expansion of cost competitive mass tier products.
We will drive profitable growth by enhancing sales in BS and boosting content and advertisement revenue. We predict third quarter revenue to grow year-on-year on the back of solid sales of Appliances and topline growth in Vehicle Components. We seek to secure profitability through efficient resource management and product mix improvement.
We will move on to the second quarter results and third quarter outlook by business, but before that I would like to state that upon closing the Solar Panel business at the end of June following our announcement on discontinuing operations last February, all related profit and loss has been reflected in income and loss from discontinued operations from the Q2 earnings release in line with accounting guidelines on discontinued operations and past performance results have also been restated.
Now the business results and outlook starting with H&A. Let me share the second quarter results of H&A, we recorded sales of KRW8 trillion, up 18% year-on-year, led by growth in overseas market it’s notably in North America. So with the revenue growth in overseas markets acted as an upside factor for profitability, operating profit decreased year-on-year due to rising raw material and logistics costs.
Next is the outlook for the third quarter. With worsening inflation and waning consumption of consumer goods in the market, demand for Home Appliances is expected to slow causing the competition among market players to further intensify.
Amidst this environment, we seek to expand premium model sales and strengthen the competitiveness of our volumes zone models to continuously scale the business. We will raise selling prices and reduce cost to secure profitability.
I will share the second quarter results of LG. Sales declined year-on-year due to sluggish sales in major advanced markets impacted by the decrease in global TV demand. Despite improved material cost with panel price drops, operating profit decreased year-on-year due to declining revenue and increased marketing spending to address intensifying competition.
Now, let me share the outlook for the third quarter. In the market as concerns of a global recession continue to shrink market consumption competition is projected to further intensify. Accordingly, we will enhance revenue by expanding sales of premium products such as OLED TVs and proactively capturing opportunities provided by the upcoming World Cup. We plan to secure profitability through efficient marketing spending.
Let me share the second quarter results of BS. Sales grew year-on-year to stand at KRW2 trillion thanks to proactive efforts to address additional demand from OEMs by effectively managing the supply chain. We moved into profit on a quarterly basis on the back of revenue growth and ongoing efforts to improve cost structure.
Next, the outlook for the third quarter, while the automotive chip shortage is expected to gradually ease, uncertainties in the external market stemming from inflationary pressures and geopolitical risks are expected to persist.
So by strengthening cooperation with automotive OEMs and better managing the supply chain, we will actively respond to rising demand and we will continuously improve cost structure, minimum price risk from uncertainties in the market to maintain top line growth and profitability.
I will share the second quarter results of BS. Q2 sales increased year-on-year led by recovery in B2B demand and consequent topline growth in information display, but sales decreased somewhat against the previous quarter, due to slowing sales following the peak season for PCs in Q1.
Despite the strong performance in IT, operating profit decreased year-on-year impacted by the intensifying competition due to reduced IT demand and a hike in major components and logistics costs.
Now, let me share the outlook for the third quarter. IT demand is expected to decline with concerns of a global recession and COVID entering the endemic phase. B2B demand is expected to rise supported by the base effect from last year, so growth may slow compared to past projections. We will build on the sales growth momentum and continue to secure profitability by continuously identifying potential B2B projects in diverse verticals and gaining more project wins.
That brings us to the end of the second quarter earnings release and outlook for the third 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 provided by Dongwon Kim from KB Securities. Please go ahead with your question.
Dongwon Kim
Thank you for taking my questions. I have two questions to BS. First I would like to ask for your mid to long-term projections on the vehicle component business. Could you elaborate in detail and infotainment LG Magna and B2W? My second question is also to the BS business. I understand that recently LG Magna e-powertrain together DKW decided to established plans in Mexico and they are making active investments at the moment. Could you tell us about the background of such an investments, is it because you have secured new clients in North America or because you expect the order intake growth to remain high?
Unidentified Company Representative
I would like to answer your first question. Yes. Company has confident that we are equipped with a sound foundation of growth based on over KRW60 trillion worth order backlog as of last year and based on the mid- to long-term strategy of each business we will work to strengthen our position as a global vehicle component provider.
We start with infotainment, we have developed integrated cockpit based on software capabilities and enhanced our cybersecurity-related business. And as a result, we are expecting growth of mid- to high-teen level based on strategy to expand products with high added value.
That’s the EV component business will accelerate growth by approximately 50% level through securing business capability and diversifying customer and product portfolio based on cooperation with Magna.
Last but not least, the vehicle business, we are working to achieve continuous growth based on down profitability with large volume consumer or product mix structure and better operating capabilities. Expected growth rate is in the mid- to high-teens. Thank you.
I would like to answer your second question regarding investment in the Mexico plant. The United States is asking OEMs and Tier 1 suppliers to satisfy their United States, Mexico, Canada agreements or USMCA conditions in order to invigorate their EV industry and create jobs.
As a result, we have decided to build the plant in Mexico in order to have a competitive edge and winning orders in the future and to secure more business opportunities. We are currently expecting our investment in building the Mexico plant to bring greater chances of supplying not only to North American OEMs, but also to Korean and Japanese OEMs that are targeting the U.S. market. Thank you.
Unidentified Company Representative
Next question please.
Operator
The following question will be presented by Ji-San Kim from Kiwoom Securities. Please go ahead with your question.
Ji-San Kim
Thank you for taking my questions. I have two questions, the HE and H&A. My first question regards to Home Entertainment, the global TV demand is remaining low leading to high level of channel inventory. What are your projections on sales and profitability of TV market overall and of LG Company on the second half of this year, especially with expectations regarding the major sports events? My second question regards to H&A. It seems that your revenue is higher than competitors. However, you are profitability will more sharply versus your competitors. In this context, how do you manage to maintain the revenue gap with competitors? On the other hand, why is it that your profitability fall more sharply compared to your competitors?
Jeong Hee Lee
I would like to answer your question regarding Home Entertainment. Ever since we have enjoyed profitability during the pandemic, now we are seeing greater inventory level as TV demand went down because of inflation and rise in interest rates.
As we are seeing higher channel inventory especially in advance markets including North America and Europe, we have taken fine actions following the global economic situation in TV market trend, adjusting our production volume in the second quarter. In other words we have normalized the channel inventory level so far.
Because of greater global inflation, the consumption sentiment is expected to maintain weak and other uncertainties are expected to remain in the TV market in the second half of this year. However, we do expect sales levels to recover in the second half. Thanks to upcoming events such as the Qatar World Cup planned in November and Black Friday season.
Based on in-depth understandings and taking a look at the opportunities that lie in front of us in the second half, we would like to fully leverage our leadership in the premium market. And as a result, we will focus on achieving higher sales in premium TVs efficiently making investments and managing the inventory level compared to the second quarter in order to gradually enhance profitability. Thank you.
Lyu Jae-Cheol
Let me answer your second question on H&A. Last year for the first time we were ahead of Whirlpool, our major competitor in terms of sales revenue and the revenue gap in Q1 is widening further. We expect this gap to remain in our Q2 results as well. We are going to continue to focus on enhancing our premium models and we are going to also focus on the volume zone.
Also, we will continue to enhance business capabilities for not only essential home appliances, such as refrigerators and washers. Well also for products with hygienic features such as dryers and dishwashers. And we will constantly work on differentiating ourselves by offering new products and services including the upgradable home appliances that we have launched early this year.
Despite revenue growth, the impact of soaring raw material and logistics costs was not sufficiently offset leading to a decline in profitability year-over-year. That said, our profit margin still remains above the average profit margin of key competitors.
Unidentified Company Representative
Next question please.
Operator
The following question will be presented by Luc Kim [ph] from Hana Financial and Investment. Please go ahead with your question.
Unidentified Analyst
Thank you for taking my questions. I have two questions. My first question is on corporate wide operations. The cost pressure and the sluggish demand for key products are expected to persist into the second half. So in this context, what is your outlook and can you share your response measures? And my second question is on H&A, as retailers inventory days increase there are growing concerns over the company’s profitability in the second half. In relation to this, can you give us an update on your inventory levels and how much of an impact will have on your profitability?
Unidentified Company Representative
On the raw material side, uncertainty persist, partly driven by an extended conflict in Ukraine, but we are continuously hedging risk through futures trading and enhanced partnerships with key channels. At the same time we are working on improving the fundamental cost structure for example by adopting more cost saving materials.
On the demand side, there are concerns over slowing demand for home appliances and TVs as rising inflation weighs on consumers’ purchasing power. In response to this based on detailed strategy for each region and segment, we will continue to expand sales of premium Home Appliance products in advanced markets such as North America where robust growth is expected, at the same time we are going to continue the growth momentum by enhancing the competitiveness of mass tier products in emerging market. Also, we will be fully prepared to respond to the peak season, including the World Cup through the expansion of OLED TV lineup and aggressive promotions.
As for the vehicle component business, we expect to see additional demand as the shortage of automotive semiconductors is showing signs of easing. Also driven by increased investments in infrastructure, the B2B business environment including digital signage is expected to improve and we are going to leverage this to drive corporate wide revenue growth and profitability.
Lyu Jae-Cheol
Let me answer your second question on H&A. The distribution inventory of the first half of 2022 remains at appropriate levels and is being managed at stable levels. As the sales forecast of retailers for the second half vary by region, we are adjusting the supply volume in a timely manner in line with changing sales projections.
We are exercising sound inventory management by expanding supply for regions that have the growth momentum, while reducing supply in regions where sales are expected to decline. Therefore, we believe excess inventory will have little impact on our profitability.
Unidentified Company Representative
Next question please.
Operator
The following question will be presented by S. K. Kim from Daiwa Capital Market. Please go ahead with your question.
S. K. Kim
Thank you for taking my question. My first question is on Home Entertainment, I understand that LG Electronics witnessed high performance during the past two years under the COVID 19 pandemic. Thanks to the strong pent-up demand in the consumer electronics, such as Home Appliances and TV. With both reopening trends and global inflation in the market, there are heightened concerns of your performance in the consumer sector declining from this year into 2023. Could you share your projections and counter measures? And my second question is on corporate wide operations. Taking a look at the results on top of the second quarter, we have witnessed one-off effect in the Q1 and the strong performance of LG Innotek and excluding the two the performance for the year 2022 is expected to be weaker compared to last year. And in this context, can we expect any sort of upside in terms of the company’s performance in the second half and beyond? I would like to ask a question on Home Entertainment, is it true that the market demand is projected to go down until 2023 due to the end of the pandemic and global economic slowdown, despite the rising demand trend that we had witnessed during the past two years?
Jeong Hee Lee
Under these circumstances, we have three major pillars to bring qualitative growth to our business; first, strengthening our stance in the premium market with our OLED TV lineup; next, differentiating customer experience; and lastly, strengthening platform business.
To start with, we would like to maintain strong leadership in the OLED TV market that is expected to show rapid growth. Thanks to our competitors entry with its QD OLED into this market.
And as a pioneer of OLED TVs, LG Electronics would like to provide a differentiated LG OLED TV experience to our customers, so that they can actually experience the difference and we believe that this will enable us to strengthen our stance in the premium market.
Next, we will continue to differentiate our product and services so that it satisfies our customer needs. We are working on to bring fundamental changes that can reflect our customer’s opinion and thoughts to our product and services in order to go hand in hand with the customer experience transition from simply viewing to make actual use of TVs. So we will bring LG’s innovative form factors such as Standby Me, and content and services to fit in the super personalized era and lock in our fans.
Lastly, we will take a software centric perspective to boost platform business growth. We have been nurturing our revenue growth and content and services through WebOS based smart TVs and our plan is to integrate all sort of screen experience from various devices, as well as TVs and to further expand our business portfolio with enhanced business model adding advertisement and so on. Thank you.
Unidentified Company Representative
Let me answer your question on corporate wide operations. As you know, uncertainties surrounding the business environment caused by global inflationary pressures, governments around the world raising interest rates and supply bottlenecks are likely to persist. On top of this concerns over an extended conflict in Ukraine slowing global economic recovery are expected to heighten the already existing uncertainty.
In response to this, from a B2B perspective, we are going to maximize leverage by solidifying our competitive presence backed by premium products in core markets including the North American region, where we are maintaining relatively robust growth. At the same time, as mentioned before, we are going to continue to explore additional sources of income including content and ad revenue based on our TV platform competitiveness.
Also from B2B perspective with the shortage of automotive semiconductors showing signs of easing we will be fully prepared to respond to additional orders from the OEMs and does expand sales, and by actively responding to the new orders of digital signage and hotel TVs that are showing signs of full recovery, we aim to capture additional revenue opportunities.
Unidentified Company Representative
Next question please.
Operator
The following question will be presented by Simon Woo from Bank of America. Please go ahead with your question.
Simon Woo
Oh! Yeah. Thank you for taking my questions. I have two questions. My first question is on corporate wide operations. For the past several years you had very strong results, but in spite of that, you have a debt amounts to KRW10 trillion and as the interest rates are soaring it is likely that your finance costs will also increase in line with that? And then I have a follow-up. What is your response to this?
Unidentified Company Representative
Let me answer your first question on finance cost. As most of our debt as long-term fixed interest rates, there has been little increase in the finance cost triggered by rising interest rates. For new borrowing though we expect to see an increase in the interest expense, driven by rising interest rates, but we are going to minimize the increase in our finance cost through low interest funding utilizing various sources of funding.
On the other hand, as our deposits are variable interest rates, we expect rising interest rates to drive up the interest income, offsetting the increase in finance cost associated with new borrowing.
Simon Woo
My second question is on Home Entertainment, as you mentioned, the sales in second quarter remain — dropped a lot and this is leading to negative results. And I know that you are in the market with premium OLED TVs with high ASP and margins. However, at a time when your competitor jumped in as a market player with their QD OLED and it seems to be a very high end product, and at a time when as mentioned, the TV market is not so promising, could you tell us about your strategies and how to operate and how to countermeasure this situation?
Jeong Hee Lee
I would like to answer your question on HE. We focus on the fact that when our competitor offers unveiled its QD OLED TVs, we finally recognize the value of OLED and scrap the strategy they used to proceed and they scrapped to diminish OLED TVs that they were pursuing in order to secure the LCD TV market. And that then we delivered our message that we do welcome their entry into the OLED TV market during the last IR callings.
If you will take a look at our competitors, they have very limited entry into the market. They only launched their models to North America and Europe, and they only have 65 inches and 55 inches model lineup and we can say that their market stance in the OLED market is very limited.
To tell you about our strategy, I believe that our product is very like superior. We have launched OLED EVO this year and also we have launched various products with resolutions in 8K, 4K and size from 42 inches to 97 inches and we are planning to launch these new sizes in the second half and we have other form factors such as bendable gaming TVs, anterior TVs.
And I believe that our in-line of will be strong enough to deal with the market and we are trying to provide. Is it an array of options to our customers, so that they can experience furthermore, and feel the differentiated product and I do believe that our strategy will work. Thank you.
Unidentified Company Representative
I am telling you about the market recovery sector, of course, the demand dropped dramatically. However, this, we also have impact in the high channel inventory level within the market. However, this is not only limited case to LG Electronics, but all TV market is experienced us to difficulties.
And as mentioned previously, I believe that the channel inventory may be normalized soon and we still can work on with the premium strategy. We are — have been working and we believe that this may lead to greater profitability.
Unidentified Company Representative
Next question please.
Operator
The following question will be presented by Sang Ryul Kwon from DB Financial and Investment. Please go ahead with your question.
Sang Ryul Kwon
Yeah. Thank you for taking my question. I have one question on BS. So the solar panel business is terminated by the end of the first half of this year and starting from the second half the BS division will mainly operate in the IT and ID sector. So my question is, what is your outlook after the closure of the solar panel business, please share the strategy and outlook of the BS division. For example, what would be the appropriate level of margin and profitability after the closure of the solar panel business, so please share your outlook?
Unidentified Company Representative
Let me answer your question, in terms of product going forward the BS division will continue to achieve above industry average profitability. Your high end focus product portfolios, including gaming monitors, Gram PCs and digital signage and hotel TVs.
And in terms of growth potential, as you mentioned we will be focusing on our IT business and ID business, and I hope you understand that, we are reaching a right balance between B2C and B2B.
In terms of our B2C business of the IT business, we are going to focus on high end products and as the demand for high end product is growing, we believe we will grow in line with that. And in terms of our ID business in B2B, we will focus on providing tailored product for each verticals and thereby expanding our pipeline. Thank you.
Unidentified Company Representative
Next question please.
Operator
The following question will be presented by JJ Park from J.P. Morgan. Please go ahead with your question.
JJ Park
I have one question to BS. You talked about sales growth and I believe that you have backlogs until this end of this year. And when talking about backlog, could you confirm whether this is a like already fixed figure or in may change according to customer request?
Unidentified Company Representative
As covered in the media recently, we have one new project that amounted to KRW8 trillion in the first half of the year and our order backlog level remains in the mid KRW60 trillion level. To tell you in detail infotainment products accounts for 60%, while EV Components and Vehicle Lamps accounts for 20% each building up the order backlog.
And I believe that you were asking questions about our soundness of the backlog and when we talk about order backlogs, we provide a platform to our clients and we have contract — made contract in providing infotainment, motor and lamps.
And about the detailed volume, it changes according to how much are like on OEM companies will sell afterwards. So the confirmed factor is that, we will provide the component to our OEM companies and about the detail volume it may change furthermore. Thank you.
Unidentified Company Representative
Thank you. And do we have any further questions.
Operator
Currently, there are no participants with questions. [Operator Instructions]
Unidentified Company Representative
Please ask if you have any questions if any. If there is no further questions that brings us to the end of LG Electronics earnings release conference call for the second quarter of 2022. For further questions please contact the IR team. Thank you.
Be the first to comment