LG Electronics Inc
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LG Electronics Inc
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Welcome to the LG Electronics Second Quarter 2018 Conference Call. This is [indiscernible], team lead of IR. Thank you for joining us today.
Before we begin, please note that all information regarding our performance and financial results were prepared in advance and is subject to change in the process of final review.
Our forward-looking statements may be different from those expressed or implied by the changes in the future market environment or business strategy.
Now we will start our second quarter earnings.
Consolidated sales for the second quarter 2018 was KRW 15.02 trillion, and the operating income was KRW 771 billion. Sales went up 3.2% Y-o-Y from solid growth of all divisions in spite of the sluggish sales in the mobile business.
Although operating income declined from last quarter due to the increased marketing expenses to support new products and FX rate fluctuations in the growth market, profitability improved from the same period last year.
As far as detailed statement of financial position and cash flow statement, please refer to our presentation material, which is posted on our global website.
Next, I would like address our second quarter results and third quarter outlook by each division.
First, H&A, Home Appliance & Air Solution division, achieved sales of KRW 5.3 trillion, which is up 4% Y-o-Y from the strong seasonal sales of air conditioners and new growth products such as dryers, LG Styler garment care system and air purifiers in the domestic market. We maintained strong profitability from the sales growth of premium products and continuous cost improvement. In the third quarter, we're also seeing stable profitability by expanding sales of premium products and improving costs.
Moving to HE, Home Entertainment division sales went up 4% compared to the same period last year from strong sales of Korean TV, such as LG OLED TV and newly launch products. We maintained stable profitability repeating double-digit margins. Going forward, in the next quarter, we will keep our solid profit structure by expanding sales of premium products and further enhancing cost competitiveness.
With regards to MC, Mobile Communications division, sales declined Q-on-Q and Y-o-Y due to maturing smartphone market and decline in mid- to low-end smartphones in the Americas. The operating loss was largely due to decreasing smartphone sales and increased marketing spend to support new flagship products. This competition in the premium smartphone market is expected to intensify in the next quarter, we will take to expand sales with competitive models and improve profitability by strengthening platform and modular activities.
Next, VC. Vehicle Components sales went up 4% Q-on-Q and Y-o-Y from the mass production of new products. The operating loss reflects increases in raw material prices, such as memory and MLCC, and additional costs incurred for the new projects. In the third quarter, we will focus on launching new projects while paying close attention to the external environment in order to minimize the business risk.
And for B2B, Business-to-Business division, sales went up 11% Y-o-Y from sales growth of large-screen signage displays and high-performance solar modules. Operating income improved from the same period last year, thanks to the sales growth of high-end signage displays, solar modules and enhanced cost structure, but decreased Q-on-Q due to the sales decline in safeguard tariffs on solar modules. Next quarter, demand for premium digital signage is expected to increase while solar module business will likely face increased competition due to subsidy reduction and trade policy changes in some countries.
In summary, despite the sluggish sales of MC division, sales of all business divisions have been up from the same period last year. As a result, consolidated sales of first half 2018 improved at a all-time record high.
Profitability also improved from the same period last year, with strong profitability from TV and B2B businesses offset operating losses from mobile business.
Going forward into the next quarter, we're expecting similar level of sales from the same period last year and last quarter. However, on a margin-wise, we'll improve profitability compared to same period last year by increasing premium product sales across all divisions.
Thanks for listening. Operator, we are now ready to open the Q&A session.
[Operator Instructions] The first question will be provided by Nicolas Gaudois from UBS.
So first one is on OLED TVs. We've seen effectively the first panel price increase for OLED TV panels in Q2. And we were wondering how this is affecting your OLED TV profitability and overall Home Entertainment's profitability going forward starting in Q3.
Yes, thanks for your question. [indiscernible]
Like you mentioned that OLED sales has risen this quarter, but we see the impact, OLED panel price is still stable since that product rolled out. And normally, the panel price basically based on the market condition, so we are -- so even if the OLED panel prices have increased, but we'd have an increase of the [indiscernible] of OLED TV and having the strong fundamental. The HE division will surely generate very stable profitability for annual basis, which is like in the high single-digit [ auto ] market.
Okay. On Vehicle Components, you had some discussion on growth longer term yesterday in the Korea call. It seems so far this year, growth has been below expectations. Going forward, though, you also seem to suggest that, basically, the growth for EV now seems to relate more to infotainment rather than powertrain and EV versus what happened with the initial GM Bolt contract. Does this mean that, that contract with General Motors was largely a one-off situation, where LGD provided a turnkey solution for powertrain, and now OEMs are actually getting more control over powertrain back for EV going forward? And if that is the case, how do we look at it for profitability of the Vehicle Components business going forward? In other words, how would you -- should we look at the longer-term margins for the multimedia business if, indeed, we see the main engine of growth for VC in the next 5 years?
Yes, kind of long and a lot of questions. [indiscernible]
Regarding your question, as for now, based on the last year number, 80% consists of infotainment business, and 20% is for the electric vehicle components. And revenue trend will probably be in the similar way in the longer-term basis. So the fact that you mentioned about the GM is not decreasing on the demand point of view. It is on track right now. And in a longer-term basis, we expect that the revenue for making KRW 1 trillion is expected to be postponed to next year first quarter, and the profitability of turning around will be postponed a little bit for a while. And -- however, we are confident that there are no changes in growth and fundamentals in the big picture. Every year, we are earning new orders, and actually, the backlog is increasing, although we consider the turnover conversion. For your reference, the order backlog held at the time of the establishment of the VC division was around KRW 10 trillion back in the day when it was 2013. Order backlog at the end of June in 2018 was KRW 34 trillion, which is more than 3x amount than at the time of the establishment. So it's quite meaningful that we can be assured over a longer-term basis of the revenue will be increasing.
Okay. But just to come back, for multimedia business, how would operating margins evolve over time? I mean, one driver I can think about is, as of H2 '19, your sister company, LG Display, will start to deliver product solutions to the auto market, perhaps what helps you increasing your infotainment cluster and dashboard-related margins. But apart from this, what could actually lift up multimedia margins and profitability versus what we currently have?
[indiscernible]
Yes, for the question that you asked, for infotainment business, we are trying to focus on the premium products, which makes more hard margins compared with the ordinary type of low-end to mid-end products. If we -- If I just add more information, right now, our portfolio of infotainment is based on audio-video navigation and telematics modules mostly. But in the longer term, we are trying to focus more on the new concept product which we are trying to tackle into instrument cluster and center information display, which makes the higher volume margin. Right now, it's in the initial stage. But in the more longer term, we see -- still see a growth on the infotainment business as a whole. So for -- as a conclusion, we expect that we don't see that much problem on profitability side on a longer-term basis.
Operator, if there are no more questions, I'd like to end this conference call. Again, I'd like to thank you for joining our conference call today. If you have any further question, please contact our IR team. Thank you.
[Foreign Language] It's the end of the conference [ recording ].