LG Electronics Inc
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LG Electronics Inc
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Good morning and good afternoon. Thank you for joining LG Electronics' earnings release conference call for the first 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.
[Interpreted] Good afternoon. My name is Sang Bo Sim from Investor Relations. Thank you for joining LG Electronics earnings release conference call for the first 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. Jin-Yong Kim from Vehicle Component Solutions; [ Mr. Chin Yong Pak ] from Business Solutions. We are also joined by Mr. Sang-Ho Park from Global Business Management Group; Mr. Jeong Hee 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 first quarter are subject to change in accordance with the result 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 first quarter of 2022 and the outlook for the second 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 first quarter of 2022 and the outlook for the second quarter.
Consolidated sales of the first quarter was KRW 21.1 trillion, and operating profit was KRW 1.9 trillion. Sales grew 18.5% year-on-year, attributable to robust sales in premium appliances, revenue growth in VS and recovering B2B demand on the back of easing of COVID-related restrictions across nations and subsequent step-up in government and corporate investments. Though affected by nonrecurring costs associated with workforce restructuring, operating profit grew year-on-year with a one-off increase in royalty income in others.
Regarding nonrecurring income and expense, first, on the cost related to workforce restructuring, to secure a future-oriented organization structure and enhanced dynamism in the organization, we implemented workforce restructuring activities, including early retirement program this quarter.
Though I cannot share specifics on the scale, package amount or impact by business, early retirement package levels were set based on reasonable standards. And like we explained in the preliminary earnings announcement, the gap between the first quarter operating profit of each business and market expectations mostly stemmed from the impact of this cost. Though such activities entail cost burdens in the short term, we expect it to contribute significantly in strengthening business competitiveness in the mid- to long term.
Next to comment on the royalty income that showed a one-off increase this quarter, though it's not the first time we've recorded royalty income. This quarter, we reflected a significant amount of licensing revenue in others as efforts to leverage and monetize our patents since last year bore fruit. I ask for your understanding that we cannot provide details on the counterparty, contract structure, patent type or income amount due to the confidentiality clause in the agreement. We plan to continued efforts to monetize our patents going forward.
I will now briefly review the first quarter performance of each business. H&A recorded KRW 8 trillion in sales, KRW 447.6 billion in operating profit and 5.6% in profitability. HE recorded KRW 4.1 trillion in sales, KRW 188.4 billion in operating profit and 4.6% in profitability. VS recorded KRW 1.9 trillion in sales and KRW 6.3 billion in operating loss. BS recorded KRW 2 trillion in sales, KRW 37 billion in operating profit and 1.8% 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 first quarter. In term 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 1.4 trillion in net income.
Next, on cash flow. Cash flow from operating activities of the first quarter was negative KRW 137.7 billion, and cash flow from investment activities was negative KRW 446.1 billion. As a result, net cash flow stood at negative KRW 536.4 billion. And when reflecting cash flow from financial activities of KRW 45.9 billion, net change in cash decreased by KRW 490.5 billion. After reflecting changes in cash held for sale of KRW 58.4 billion, cash balance at the end of the first quarter came to stand at KRW 5.6 trillion.
Next is the key financial position and indicators for the first quarter of 2022. As of the end of the first quarter, assets stood at KRW 55.1 trillion, liability at KRW 33.2 trillion and equity at KRW 21.9 trillion. In terms of leverage ratios, though there was a slight increase in 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 second quarter. In terms of the business environment, uncertainties are expected to persist with the raw material price hikes due to the prolonged Russia-Ukraine conflict, global inflationary pressures and delay in easing of global supply chain issues. Amidst this environment, we will maintain growth momentum and leading position in the global market by strengthening regional and product portfolio. We will drive business performance through continuous improvement in cost structure and preemptive risk management. We project second quarter revenue to grow year-on-year on the back of new product launches and robust sales of premium products.
In terms of profitability, we expect the upward cost pressure to continue, but we seek to maintain sound profitability through product mix improvement and enhanced efficiency in operations.
We will move on to the first quarter results and second quarter outlook by business. But before that, I would like to state that, because of the business transfer to LG Chem, the GM battery pack business and CEM business originally under VS and BS, respectively, were incorporated in 2 others. We have reflected these changes in performance results from the first quarter of 2022, and past results have also been restated in line with these changes.
Now the business results and outlook, starting with H&A. Let me share the first quarter results of H&A. Sales stood at KRW 8 trillion with a 19% increase year-on-year driven by growth across overseas markets, including North America. Despite the upside of revenue growth and marketing cost savings, operating profit decreased year-on-year due to rising raw material and logistics costs.
Next is the outlook for the second quarter. Raw material and logistics cost burdens are expected to persist and the Russia-Ukraine conflict, lockdown in major cities of China, and global oil price hikes are projected to pose further risk to business operations. Amidst this environment, armed with our product competitiveness, we will continue efforts to expand sales of premium, large-capacity and high-efficiency products. We will focus capabilities to secure sound profitability through new product launches, aggressive selling price increases and spending optimization.
I will share the first quarter results of HE. Sales recorded a slight growth year-on-year thanks to strong revenue from premium products despite the overall demand decrease in major regions such as North America and Europe. Though revenue grew and the panel price situation improved, operating profits decreased year-on-year due to increased spending, including marketing expenses.
Now let me share the outlook for the second quarter. In the market, demand is projected to decrease year-on-year in Russia and advanced markets such as North America and Europe. But we expect demand for premium products to be maintained. Accordingly, we will improve product mix to focus on premium TVs like OLED, QNED and large-size TVs to maintain revenue levels similar to that of the previous year and previous quarter. We will exert efforts to secure profitability with efficient spending, including marketing cost.
Let me share the first quarter results of VS. Sales grew year-on-year and quarter-on-quarter thanks to close cooperation with OEMs on timely production and supply amidst the prolonged supply shortage of automotive semiconductors. Operating loss was reduced quarter-on-quarter on the back of revenue growth.
Next, the outlook for the second quarter. Uncertainties in the external markets are expected to persist with disruption in auto semiconductor supply, the Russia-Ukraine conflict and lockdown in major cities of China. We will strengthen business risk management through flexible response to customers and continuous improvement in cost structure.
I will share the first quarter results of BS. So uncertainties remain due to deteriorating macroeconomic factors. Sales recorded an increase quarter-on-quarter and year-on-year on the back of the same growth in gaming monitors and gram PCs in Information Technology business and recovering market demand and expanded sales of digital signage and hotel TV products and information display. Operating income turned around to record profit with significant improvement quarter-on-quarter thanks to growth in revenue but decreased year-on-year due to rising component and logistics cost.
Now let me share the outlook for the second quarter. In general, uncertainties still remain in the market, and the B2C market with regard to IT products is expected to be stagnant or decline. The B2B market demand is expected to expand, and demand for signage and hotel TV in information display is projected to show continuous growth.
In IT, we will actively meet demand for high-end products in the B2B market. And in information display, we will identify new projects in diverse verticals and secure more project wins to maintain growth momentum in sales and secure stable profitability.
That brings us to the end of the first quarter earnings release and outlook for the second quarter. We will now take questions. Operator, please commence with the Q&A session.
[Interpreted] [Operator Instructions] The first question will be provided by Dongwon Kim from KB Securities.
[Interpreted] I have 2 questions. My first question regards to Home Appliance and Air Solution business. Due to the spread of inflation, there are growing concerns on disposable income decrease and overall demand slowdown. What are your projections on this year's overall home appliances demand? I also would like to ask about your demand forecast and the current trend that you see in major regions such as Korea, North America, Europe and Latin America.
My second question regards to Vehicle Solutions. There are growing expectations in the market that the vehicle component business may make a turnaround earlier than expected. If your profits do improve, which customer or a product would have mainly contributed to such improvement? Do you think there are chances of meaningful turnaround in the second half of this year?
[Interpreted] Thanks to the pent-up effects of COVID-19, we have seen positive sales demand in the advanced market last year. However, in this year, we are expecting the growth rate of home appliances demand to go down compared to the previous year as many countries' governmental spending that were used to tackle the COVID-19 outbreak has been reduced.
If I may tell you about the Korean market, it seems to enter the period of stagnation. Unlike when COVID-19 pandemic just broke out, recently, we witnessed signs of demand going down. Thus, we're keeping a close eye on the home appliance demand circumstances.
In the North American market, we have seen the pent-up demand and also the slowing down of growth momentum. However, under these circumstances, LG Electronics have paved the way to create continuous revenue by expanding floorings with cooperation with our distributors. And also, we are pouring out such efforts, so even though the supply becomes back to normal, we believe that we will keep the market share as it was.
In case of Europe, as you may already know, we are seeing geopolitical risks stemming from the conflict between Russia and Ukraine, and also inflation level and exchange rate depreciation has gone up more than expected. As additional sanctions are posed on Russia, the possibility of Eurozone nations to enter stagflation has increased. As a result, we expect a short-term demand slowdown until the end of the first half, and slight recovery is expected after the second half of the year.
In Latin America, there are concerns on stable exchange rate due to political uncertainty witnessed in the region. LG Electronics will consider all the circumstances and plan and establish market strategies.
[Interpreted] I'll answer your question on VS. We expect the vehicle components business this year to see revenue growth and improved profitability versus last year. And as you saw from today's earnings report, our Q1 performance indicates that we're close to breaking even.
That said, uncertainties over sales and cost fluctuations abound due to an ongoing shortage of semiconductor chips in the vehicle component industry and rising raw material prices, along with the Russia-Ukraine conflict and COVID lockdowns in China.
Therefore, please understand that we're unable to comment on the specific timing of a turnaround.
[Interpreted] The following question will be presented by Kangho Park from Daishin Securities.
[Interpreted] I have 2 questions. My first question regards to H&A business. I believe that increase in raw material cost, logistic cost and higher inflation are adding uncertainties to the demand, and this will continue in the second quarter as well. At a time when we're expecting continuous growth in logistic costs and raw material costs in the next quarter, I would like to ask your projections on the second quarter and the second half of this year. Additionally, I would like to ask about your strategies to improve profitability, including pricing strategies, to secure margin.
My second question regards to Vehicle Solutions. The market is taking a look at -- taking a good look at JV Magna project. Has it generated any synergies? And I would like what is your outlook for the revenue and P&L for 2022?
[Interpreted] We expect the material cost increase and logistic disruption would continue for a while. Market price of steel is on the rise, and there are also upload pressures on the same cost due to soaring oil prices and increase of raw material prices.
As a result of establishing partnerships and keeping cooperative relations with strategic partners, our purchasing price remains lower than the market price. In addition, LG Electronics is also working hard to offset raw material cost increase by changing our existing materials to those that can lead to cost reduction.
In regards to logistic cost, thanks to long-term contract with shipping companies and less shipping volume from China, the containerized freight index went down. Also, we're seeing less additional freight payments that are paid on top of our shipping contract prices. However, the possibility of short-term recovery seems to remain low, considering the current situation regarding port strike on U.S. West Coast and China's lockdown in major cities.
We are seeing a burden in costs. However, we are conducting improvement activities on all fronts to secure profitability through additionally increasing sales price and implementing optimized spending activities.
Let me answer your question on VS. LG Magna JV is on track. To create synergies, we're continuously working on enhancing our capabilities by benchmarking Magna's Vehicle Component business-related know-how. And we've also been having a discussion about exploring various business opportunities.
Also, we have secured a new channel, and the establishment of LG Magna's new plant in Mexico is a testament to our collaboration.
Despite issues such as a shortage of semiconductors and rising raw material prices, our revenue in 2022 is expected to remain solid, driven by the fast-growing EV market, and profitability is also expected to grow as a result of revenue growth.
[Interpreted] The following question will be presented by Chi Han Kim from Kim Securities.
[Interpreted] I have 2 questions. My first question is on your strategy about new business. At the General Meeting of Shareholders, you have added blockchain and medical devices as new areas of business. In light of this, can you share your new business strategy going forward?
And my second question is on VS. The shortage of automotive semiconductors seems to be continuing with no end in sight. When do you expect the supply constraints to ease?
[Interpreted] Let me explain the amendments made to the corporate charter related to added objectives. Since blockchain technology is the core technology in the electronics industry, we believe that various business opportunities can be created utilizing this.
We have amended our corporate charter in order to install NFT platforms that will enable NFT art gallery services and the trading and brokerage of crypto assets on our high-quality smart TVs, and we have high expectations for potential business opportunities in this area.
As for the medical device business, we have amended the corporate charter in order to sell Pra.L products which have been certified as medical devices through our online platform.
So far, the purchase of Pra.L MediHair was available through a retailer like Hi Plaza, which is allowed to sell medical devices. And now with the amendments made to the corporate charter, we have filed a notification of sale of medical devices so that consumers can purchase them through our online channel as well.
Health care is a business area where we're constantly looking for opportunities and open to possibilities. Also, we're going to actively make an effort to increase licensing revenue utilizing our IP assets.
Let me answer your second question on VS. While supply constraints for some semiconductor suppliers are gradually easing, the overall supply-demand imbalance of semiconductors remains largely unresolved. Although the situation is expected to gradually ease after the second half of the year, it will take quite some time for it to be fully resolved.
In response to this, the VS division will closely cooperate with OEMs, semiconductor suppliers and wafer suppliers while exercising flexibility in PSI management by looking for alternative components and multisourcing.
[Interpreted] The following question will be presented by Sang Ryul Kwon from DB Financial Investment.
[Interpreted] I have 2 questions. My first question regards to H&A. Currently, I'm not seeing any new big things from LG Electronics. Has the new product launch cycle has come to an end? It will be appreciated if you can share your plans of what will come next after you release the steaming product lineup.
My second question regards to Business Solution. I'm wondering about the estimated cost associated with the closure of the solar panel business and the timing of its recognition.
[Interpreted] I would like to answer your question in regards to H&A. In early this year, LG Electronics announced that we will move on to upgradable home appliances. We are providing new value through upgrading services, not only on new products but also on those already in the market. We're also planning to continuously bring new products equipped with upgradable features to the market.
Please understand that I cannot describe all new products that we'll launch in the near future. However, we're planning to launch products that our customers can customize the usage according to their personal taste and those that we can provide additional upgradable appliances-related contents and additional features through then too.
In addition, we're planning to apply sanitation and health-related features such as steaming and UV nanosterilization technology to more products and expand into the global market. Also, as more customers are asking for contact-free services after the pandemic outbreak, we have made enhancements on products so that our customers can disassemble air conditioners and replace filters of water purifiers and sterilize by themselves.
We also have plans to expand the application of steaming features that are optimized for sanitation and health appliances to new products and existing products. Thank you.
[Interpreted] Let me answer your question on BS. Since the closure of the solar panel business was approved by the Board of Directors and announced in February, we have been working on closing the cell production lines. Also, discussions with channels and suppliers of our compensation are underway. We're going to finalize the process involved within the scheduled closure of the business.
And in accordance with accounting standards related to discontinued operations, the costs associated with the closure of the business will be accounted for as discontinued operations in June when production and sales will cease.
Please understand that, at this point, we're unable to provide details of such cost.
[Interpreted] The next question will be presented by Hong Sung Kyu Kim from Daiwa Capital Markets.
[Interpreted] I have 2 questions. My first question is on corporate-wide operations. After the change of leadership at the end of last year, with CSO being appointed CEO, it looks like the company is undergoing large-scale business restructuring. Can you share the new management's key business strategies along with mid- to long-term revenue and profitability guidance?
And my second question is on VS. Can you give us an update on the revenue from each business, including IVI, LG Magna JV and ZKW? Can you also talk about the production disruptions experienced by each business caused by supply constraints?
[Interpreted] Let me answer from business strategy, business portfolio and new growth engine perspective. From a business strategy point of view, we aim to build momentum for change and growth across all of our business areas by enhancing operational efficiency with a select and focused approach and utilizing the resources gained from it.
Our recent decision to close the solar panel business and restructure the workforce was also part of this effort. And with our core business areas, such as home appliances and TVs, we are enhancing our capabilities to reach full potential by improving competitiveness for premium products and regional portfolios.
And from a business portfolio point of view, once the Vehicle Component business makes turnaround, all of our business divisions will be able to secure a stable profit structure. And we expect the revenue and profit contribution of the Vehicle Component business, which is a future growth engine, to grow further.
Also, in order to gain momentum for continuous growth, we're going to apply future technologies such as big data, AI and IoT, to our existing business. And by adopting new business models such as software platforms and rental services, we're going to lay the groundwork for leadership in the era of convergence.
Lastly, from a new growth engine perspective, we're going to actively explore new business opportunities across various areas and execute swiftly for timely commercialization, including inorganic growth. As for the new business items that we're already working on commercializing, we will improve the business models through intensive development, thereby accelerating growth.
Based on these business strategies, we aim to achieve solid over mid-single-digit revenue growth in the medium to long term and secure a stable profitability.
[Interpreted] Let me answer your question on VS. In line with recent market situations, we did experience some production disruptions, but sales of each business grew year-over-year. The revenue contribution of Smart, including IVI, LG Magna and ZKW, is in the ratio of 17:10:20, respectively.
LG Magna, in particular, saw year-over-year growth in the mid-40% range. And despite the shortage of semiconductors, Smart and ZKW saw year-over-year revenue growth by closely cooperating with channels and semiconductor suppliers to minimize disruptions to production and also driven by new projects.
[Interpreted] The following question will be presented by J.J. Park from JPMorgan.
[Interpreted] I have 2 questions. My first question is on corporate-wide operations. Will the workforce restructuring be a onetime event? Or will it recur throughout the remainder of the year? And although you may not be able to mention specific figures, but can you at least tell us which business was most impacted by this?
And my second question is on HE. Due to the slowdown in consumer demand, can you share the -- can you share your outlook for LCD and OLED panel supply prices verse the second quarter and over the year?
[Interpreted] Let me answer your first question on workforce restructuring. All the cost associated with the workforce restructuring activities, including compensation for early retirees, have been reflected in this quarter's results. And at the moment, no additional plan related to this is under review.
Although this workforce restructuring has resulted in the cost burden in the short term, we expect it to contribute greatly to the enhancement of our business competitiveness in the medium to long term.
And as to the -- which business unit was most impacted by this, considering the size of revenue and the number of personnel, I assume that H&A was impacted most by this.
[Interpreted] I would like to answer your question regarding home entertainment. It is true that due to various macro events, such as temporary lockdown in Shenzhen, China, the conflict between Russia and Ukraine, global inflation and others, the global TV demand had slowed down. These factors will lead to the LCD panel price drop until the second quarter. And afterwards, we expect the price to show a recovery from the first quarter as the panel demand will hike in the second half of the year and during the strong season of TVs.
However, I expect that the OLED panel price drop would be limited due to higher sales in premium line and LGD's quality-centric growth strategy.
[Interpreted] The next question will be presented by Simon Woo from Bank of America Securities.
[Interpreted] My first question is on corporate-wide operations. I see what's unique about this quarter is that you have royalty income. I understand that it may be difficult to comment on specific figures and specific information. Can you at least tell us what the growth income is related to? For example, is it from mobile-related patents? Or is it related to EV? Please explain the background. It would be very much appreciated. And although you say that it's a onetime royalty income, do you think it's possible to make it a steady source of income?
And my second question is on HE. For a long time, LG has been differentiating itself through OLED TV. And as you know, the competitor has started mass-producing QD-OLED panels, and we are seeing many new competitors entering the market. And LGD has a limit as to additional panels they can produce. So in this context, in terms of differentiating quantitatively and considering the fierce competition, you are facing a lot of challenges. So please comment on this.
[Interpreted] Let me answer your first question. Regarding the one-off increase in royalty income this quarter, we have had nonrecurring royalty income in the past. But since last year, we have been making efforts to monetize the IP assets that we own. And as a result, a fairly large amount of licensing revenue has been reflected as other income this quarter.
And regarding your second part of the question, please understand that, due to confidentiality clauses, we're unable to provide detailed information such as specific names, agreement structure or patent type.
As to whether it could be a steady source of income, we have been developing core technologies related to future business across various areas. And as a result, we own numerous core IP assets, including mobile-related standard essential patents.
And with recent amendments made to the corporate charter this March at the General Meeting of Shareholders, to which patent licensing business has been added, we will actively and continuously engage in the monetization of IP assets.
[Interpreted] Let me answer your question on home entertainment. As reported in media many times, we believe that our competitor jumping into the OLED TV business will bring positive effect as it may scale up the OLED TV market where, currently, we are taking the lead.
LG OLED TV has been recognized by our customers and the market ever since from its launch, and the outstanding market share proved that we are leading the market for sure.
Our market share may have some impact in case our competitor enters into the OLED TV market. However, we believe that this can rather lead to growth in the overall OLED TV market, eventually allowing us to find more opportunities to expand sales.
We are continuously communicating with the market by sending our key message that OLED TV equals LG Electronics. With such message being the key of our TV marketing, we are planning to implement the next-generation OLED EVO marketing that allows a brighter and clear viewing experience based on our 10-year experience in this year as well.
Our plan is to make continuous enhancement on our products so that our OLED TV can continue to take the leadership in the market. Additionally, we will discover the customer value that can only delivered by LG in order to strengthen the differentiation points compared to our competitors.
And to answer your question about OLED panel supply issue, so far, we are seeing no impact on the mid- to long-term supply matters.
[Interpreted] The following question will be presented by Jong Wook Lee from Samsung Securities.
[Interpreted] I have 2 questions. My first question is on home entertainment. Many are concerned saying that. It will be difficult to secure mid- to single digit in TV profitability in the long term because it may take considerable time until a rising raw material -- until rising raw material prices inflation and supply chain issues get resolved. What are your projections on LGE's mid-long-term TV profitability?
My second question regards to H&A business. I know that Smart appliances and subscription economy is on a trend nowadays. And your competitor also launched a big data appliance as well. What kind of preparations are you making for the home -- smart home appliances lineup, including the subscription services based on ThinQ? And what are the factors that differentiate your products from others? I would like to listen your strategy.
[Interpreted] I would like to answer your question in regards of home entertainment. As you just mentioned, we are witnessing various macro risks, including rise in material cost, logistic cost and supply chain disruption because of the conflict between Russia and Ukraine. And it is true that TV business is facing difficulties in securing profitability in the short term because of this.
However, taking a look at the demand in the TV perspective, those demand over $1,000 is growing continuously. So at a time when we are seeing growth in premium line of demand, we are planning to expand the lineup in premium models such as OLED and QNEDs. And together with this, we are planning to do our best to maintain sound level of profitability in this mid- to single digits through developing and launching differentiated products.
[Interpreted] I would like to answer your question on H&A business. We have differentiated solutions to lead the evolution to smart appliances, especially throughout the features of our newly launched upgradable appliances together with the ThinQ application, we're introducing various services that can improve diverse customer experience based on AI and big data. Throughout this process, we're continuously strengthening our competitive edge in the market.
[indiscernible] ThinQ's My Home report service, and we analyze customers' appliances usage data and provide usage status for each appliance and information on their energy consumption. Our ThinQ care service, via AI technology, checks whether the product is working in the right way and proactively let the users know how to take actions according to what happens so that they can use their appliances without having any concerns.
Other services, such as smart life labs and smart tips proactively provides and recommends appropriate information and content that users would like to know based on the appliances they have and their usage patterns. This allows customers to enjoy a smart appliance experience.
Moreover, based on the usage history and status, our services alerts our customers on what they need, linking in with a rental solution or replacement of a consumable part and let them move on to the next step. In this sense, we're providing customized services throughout the customer experience journey. Thank you.
[Interpreted] That brings us to the end of LG Electronics' earnings release conference call for the first quarter of 2022. For further questions, please contact the IR team. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]