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 Call for the Second Quarter of 2020. This conference call will start with a presentation on our 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 Second Quarter of 2020. With me are representatives of financial planning division of each business: Mr. I-Kueon Kim from Home Appliance and Air Solution; Mr. Jin Ho Ha from Home Entertainment; Mr. Dong Myung Seo from Mobile Communications; Mr. Geun Tae Kim from Vehicle Component Solutions; Mr. Kyu Sun Hwang from Business Solutions. We are also joined by Mr. Minkyo Kim from Accounting Division; Mr. Jeong Hee Lee from Business Planning Division; and Mr. Hyungyu Lee from Finance Division.
Please be noted that all statements we'll be making today regarding our financial results of the second 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 today.
Today's call is joined by participants both from home and abroad. The call will be conducted in Korean and translated into English.
First, I will outline the overall performance result of the second quarter and outlook of the third quarter. And each division will take turn to deliver its business results and outlook.
Let me start with the consolidated financial results of the second quarter and the outlook of the third quarter of the year 2020. Consolidated sales of the second quarter was KRW 12.8 trillion and operating income was KRW 495.4 billion. Consolidated sales recorded negative growth quarter-on-quarter and year-on-year as distributors shut down off-line stores and auto OEMs suspended production in the wake of coronavirus pandemic. Despite a decrease in sales, we achieved solid profitability, thanks to enhanced efficiency and cost structure and increased sales in health care products, such as those with steam functions.
I'll now briefly review the second quarter performance of each business. H&A recorded KRW 5.2 trillion in sales, KRW 628 billion in operating income and 12.2% in profitability. HE recorded KRW 2.3 trillion in sales, KRW 112.8 billion in operating income and 5% in profitability. MC recorded KRW 1.3 trillion in sales and KRW 206.5 billion in operating loss. VS recorded KRW 912.2 billion in sales and KRW 202.5 billion in operating loss. BS recorded KRW 1.3 trillion in sales, KRW 98.3 billion in operating income and 7.5% in profitability. Further details by business will be covered in later slides.
Let's move on to the profit and loss and cash flow of the second quarter. In terms of profit and loss, our net income reflecting financial income and expense, equity method gain and loss, other nonoperating income and corporate income tax posted KRW 65.6 billion. Cash flow from operating activities of the second quarter was about KRW 1.4 trillion, and cash flow from investment activities was negative KRW 507.6 billion. As a result, net cash flow amounted to KRW 892.2 billion. And when reflecting negative KRW 290.2 billion of cash flow from financial activities, cash balance at the end of the second quarter was about KRW 5.5 trillion, an increase by KRW 602 billion quarter-on-quarter.
Next is key financial position and indicators for the second quarter of 2020. As of the end of the second quarter, our assets stood at KRW 44.8 trillion, liability at KRW 27.4 trillion and equity at KRW 17.4 trillion. All leverage ratios, liability to equity, debt to equity and net debt to equity decreased quarter-on-quarter, maintaining healthy financial condition.
Next is third quarter outlook. In terms of business environment, uncertainties still remain in the market with the possibility of a resurgence of COVID-19 and trade dispute between the U.S. and China. However, central banks and governments are expected to continue with monetary and fiscal policies to boost the economy, which is likely to turn around after reaching the trough in the second quarter. Accordingly, while continuing to secure our foothold in non-face-to-face and health care business, which has become a new normal in the post-COVID-19 world, we will continue to identify opportunities amidst this crisis and build growth momentum. Despite lingering uncertainties in the third quarter, our sales and profitability is expected to be similar as the same period of the last year.
Now let's move on to the second quarter results and third quarter outlook by business. First is H&A. Let me share the second quarter result of H&A. Due to sales disruption in Korea and overseas caused by the impact of COVID-19, sales recorded KRW 5.2 trillion, a decrease by 16% year-on-year. In terms of profit, despite favorable factors of improved cost structure and reduction of expenditure, operating income decreased year-on-year because of the sales drop triggered by COVID-19. In the third quarter, uncertainties in the business environment is expected to continue with estimates of a prolonged COVID-19 crisis and worsening conflict between the U.S. and China. However, sales is expected to turn around in the third quarter with the gradual improvement of the business environment, and we plan to focus on achieving profitability similar or higher than that of the previous year by improving our cost structure and optimizing resources.
Let me share the second quarter results of HE. Our sales decreased quarter-on-quarter and year-on-year due to country lockdowns and shutdown of off-line stores following the global spread of COVID-19. In terms of profit, we maintained profitability similar to that of the previous year by continuously reducing material cost and cutting controllable expenses, including marketing cost.
Now let me share the outlook for the third quarter. Despite economic stagnation brought by the coronavirus pandemic, TV demand is likely to recover gradually, starting from the third quarter, especially in the advanced market. We plan to increase sales and recover profitability on a quarter-on-quarter and year-on-year basis by boosting sales of premium TVs, such as OLED, NanoCell and large-sized TVs, expanding online sales and enhancing efficiency of resource management.
Next, the second quarter results of MC. Sales decreased by 19% year-on-year due to the decline in demand from COVID-19, but grew by 31% quarter-on-quarter as supply disruption of ODM was stabilized and lockdown measures were lifted in key markets such as the U.S. and Europe. In terms of profit, operating loss decreased quarter-on-quarter and year-on-year as we reduced marketing expenses and use of unnecessary resources in line with the decline in sales and improved the cost structure of new models.
In the third quarter, global demand is expected to partially recover after hitting a low point in the second quarter. Competition will intensify as manufacturers start to launch new models and expand mid-end lineups in consideration of customers' price sensitivity. We expect sales to turn around in the third quarter, thanks to the improved sellout trends in major markets, launch of VELVET in overseas markets and sales increase of new master models. Although marketing expense is likely to go up slightly with the introduction of new models, we will strive to improve profit on a quarter-on-quarter and year-on-year basis.
Let me share the second quarter results of VS. Sales of the second quarter posted a negative growth due to the factory shutdown of major OEMs and subsequent decrease in demand for vehicle components caused by the global spread of COVID-19. In terms of profit, operating loss increased due to the sales disruption brought by the coronavirus pandemic. For our third quarter outlook, although the COVID-19 pandemic continues, we expect demand for vehicle components to recover quarter-on-quarter with the key OEMs in North America and Europe resuming their factory operations. Accordingly, we expect gradual recovery in our performance as OEMs resume their production and new projects start to mass produce.
Let me share the second quarter results of BS. Our sales, all in all, decreased by 13% year-on-year and 23% quarter-on-quarter due to the sales disruption caused by the COVID-19 crisis. Operating income fell quarter-on-quarter and year-on-year as sales decreased. For the third quarter outlook, the impact of the pandemic will continue to destabilize the business environment presenting threats, but also opportunities in some areas, such as rising new demand in the new normal where the world is advised to reduce direct contact with others. We expect sales to increase quarter-on-quarter and grow year-on-year as we tap into sales opportunities of products related to non-face-to-face services, expand sales of strategic signage products and enhance product competitiveness with high-power solar modules.
That brings us to the end of the second quarter earnings release and third quarter outlook. We'll now take questions. Operator, please commence with the Q&A session.
[Operator Instructions]
[Foreign Language] The first question will be taken -- will be presented by Sang Ryul Kwon from DB Financial Investment.
[Interpreted] I have 2 questions. My first question is regarding VS. It seems that due to the COVID-19 impact in the first half, the auto industry went through a tough time. And related to this, the VS also had some impact in its performance. So what -- there are various concerns about the business outlook for VS in the market. So could you share your business outlook for this year? And also, if you still maintain your premise that you will turn around the business next year. If this is still a valid statement, then could you share specific plans and strategies to achieve this goal?
My second question is related to MC. Recently in the market, there are many rumors related to the MC business. With the continuous decrease in the profitability, there are some talk of restructuring. So should we -- can we get the company's comments on this? And also, could you share the future direction and strategy for your MC business?
[Interpreted] I will answer from VS. Like you said, it seems that the auto industry has been one of the most heavily impacted industries due to the COVID-19. And in particular, in the second quarter, our supply chain is actually centered around the Europe and North American markets. So there was some severe blows due to the shutdown of operations in these regions on our business, and this is delaying the improvement on our operating loss situation. However, in the third quarter, we believe that the demand will recover regarding the vehicle components, and we will see gradual improvement in our profitability.
With the economic downturn due to the COVID-19 in 2021, we expect that demand for the vehicle component business to be lower than expected. And to make up for the sales decline, we are making various efforts to improve our structural -- profit structure through various means. However, first, despite the fact that the market demand is decreasing next year, we have some newly booked businesses that are going to start production next year. And we believe, despite the decrease in the market, that our sales will actually have high growth of 30%. And internally, like I said, we are making various efforts for structural improvements on our profit structure, such as adjusting our business portfolio and optimizing our R&D resources through efficient management of the software capabilities and also efforts to reduce cost.
Moreover, we are diversifying sourcing of various costs such as material cost to improve our variable cost structure. And like I previously said, we believe that there will be no issue in achieving the turnaround that I said we would achieve in the following year.
[Interpreted] I will answer from MC business. To enhance our business competitiveness and improve our profitability, we are making efforts to realign our production sites and also expand the ODM business, and we are making these efforts to improve our business fundamentals on an ongoing basis and improve our profit structure.
And we are continuously pursuing a strategy of trying to enhance our profitability through expansion of sales. So we are making various structural efforts for our turnaround, and I would appreciate it if you take a long-term perspective in viewing our business. Thank you.
[Foreign Language] The next question will be presented by S. K. Kim from Daiwa Capital Market.
[Interpreted] I have 2 questions. First, with regard Vehicle Component and Solution. There is a very high hope regarding the growth potential of the vehicle solution company, and I would like to know about the backlog situation of the business by product. Also, due to the impact of COVID-19, the automobile industry was struggling -- is struggling with a lot of challenges. So did you have any changes in your backlog for this year? And could you name some of the OEMs that you are working with?
My second question regards Business Solution business. Due to the impact of COVID-19, now people are spending more time at home. Accordingly, I believe that your sales and profit regarding IT products such as monitors and PCs would have increased. So how is this influencing your business? And what is your business outlook for future?
[Interpreted] Let me answer your questions regarding VS business. First of all, our backlog at the end of last year stood at KRW 53 trillion. And we are currently working with major OEMs in North America, Europe, China and Asia, including Korea. Please understand that I cannot give you the names of specific OEMs that we are working with or the specific numbers of our backlog due to the confidentiality agreement that we have signed with our partners.
Regarding your questions of any possible changes on our backlog due to the impact of COVID-19, well, it is true that market is hit hard by this pandemic, but our number of booked business is actually increasing. It is true that we have seen some delays in new project with major OEMS. Some of the projects was reduced in size, and we also saw changes in supply schedule. However, our booked business numbers are quite solid, and it is on the rise. So by the end of this year, in the second half, we believe that we'll be able to reach about KRW 63 trillion level of backlog.
If I may just explain a little bit more about our backlog proportion, about 50% of the backlog is on the vehicle component and the rest of the 50% is -- consist of electric car components and ZKW-related lens components.
[Interpreted] Let me answer your questions regarding BS business. Regard -- with the global spread of COVID-19, we did have production and supply disruptions in the first quarter. But in the second quarter, the global supply started to resume and people opted for work from home and remote learning. As a result, our sales in the second quarter grew and also operating income was improved.
So regarding the market demand of the second half, according to market research institutes, monitor business and PC business are expected to grow by 8% and 10%, respectively, based on the number of units sold compared to the first half.
With our differentiated products in monitor and PC lineup, we believe that in the second half, we will be able to grow year-on-year and also continue to improve our operating income for 2 consecutive quarters.
The next question will be present by Jong Lee from Samsung Securities.
[Interpreted] I have 2 questions. One related to the corporate-wide operations and one related to H&A. First for the corporate-wide question, I think you enjoyed good results in the second quarter. But in the second half, the uncertainties from the external environment continues. And also due to seasonality, the second half is relatively a lower season for you, so you may face some difficulties. So do you have any strategies or direction on how to overcome the low season in the second half?
My second question related to H&A. I believe that the sales declined year-on-year and quarter-on-quarter, but you saw enjoyable profit increase. So could you share with us the various strategies or products or reasons that you were able to enjoy this profitability?
[Interpreted] Let me answer from the corporate side. I think your question was regarding the strategy and direction for the low season we see in terms of our performance in the second half. Due to our business characteristics or the seasonality of the product itself, we do have a tendency to be slightly weaker in the second half compared to the first half. And to overcome the seasonality in our business, we are taking various measures such as expanding the B2B business or reducing the seasonality in the product itself by diversifying the features in the product, optimizing the cost spending by quarter and expanding our rental business, which is less vulnerable to seasonality. Also, we seek to expand sales opportunities in service or platform-based business as well. So through these various measures, we are trying to have strategic changes to our business.
And within our -- regarding our business direction, in the short term, we do believe that there will be some demand that was suppressed in the first half deferred over and coming into play in the second half. So for our Appliance business, we plan to maintain our global top position for our TV business. We seek to expand the OLED TV sales based on the mass production being started at the Guangzhou factory of LG Display and also maximize sales in the peak season of our large-sized TVs.
For mobile, we would like to expand sales of our mass-tier products, especially in the U.S. market and also increased sales that are more cost effective for the customers in 5G. And in terms of a corporate-wide effect, we will also continue our efficient cost management. In this, well, we'll try to minimize the impact on our profit and continue to cope with the low season we usually see in the second half.
I'll answer from H&A. So like I mentioned before, due to the COVID-19 impact, we saw sales decrease in both first and second quarter. In the first half, we made efforts to improve our cost structure and also did -- conducted cost-saving activities for a sounder profit structure, which led to the increase of our profitability. Also within our business, we are expanding the sales proportion from our new category appliances, and this is driving the profitability where we are maintaining double digits.
Moreover, in the second half, we believe that some of the restrictions brought on due to the COVID-19 situation will be lifted in the market, and our sales will turn around to increase. And we'll see expand sales in our premium and new category products and also the health care-related appliances with the hygienic features as well. So we'll be able to enjoy stable profitability in the second half.
[Foreign Language] The next question will be presented by Joonhwan Kim from Hanwha Financial Investment.
[Interpreted] I have 2 questions. First, regard H&A company. Recently, the economy is shifting toward subscription-based economy, and the market is keenly interested in H&A's rental business. So could you tell us the situation with your rental business regarding the number of accounts you have and the business outlook of this business? And what is the rental business's contribution to the overall sales and profitability of H&A company?
My second question regards MC business. Recently, Chinese players are aggressively entering into the 5G device market, and Apple is expected to come up with 5G new model in the second half. LG was enjoying the benefit of being one of the first player in the 5G market. But with the aggressive entry of the competitors in this landscape, competitive landscape, it looks like all of those benefits may just go away. So what are your strategies to maintain your competitiveness in the 5G market?
[interpreted] Let me answer your questions regarding rental business in H&A. As of late last year, the number of rental accounts stood at about 2 million accounts, posting more than 40% growth year-on-year. In the first half of this year, the number of account was about 2.4 million, increasing by 350,000 accounts year-on-year.
By introducing differentiated products and services, we are continuously expanding the rental business. By the end of this year, we believe that the number of rental accounts will be more than 2.7 million, posting a very high growth rate of 30%.
Currently, our sales of the rental business actually surpassed the target level, and the sales is constantly on the rise. And also our profitability is maintaining double-digit figures. In the Korea market, our rental business ticks up about 8% of the overall sales, and we believe that the percentage will continue to grow.
[Interpreted] Let me answer your questions regarding Mobile business. In the second quarter, we expect Apple to introduce 5G devices, and this will actually increase the actual size of the overall 5G market, which may play in -- which may work in our favor as we have been preparing for 5G devices for a while.
For our 5G lineup, for products and models over $1,000, we would like to introduce a product with differentiated form factor to enhance brand image and raise customer awareness. We would like to also introduce premium products that are rating design and affordable in price and also equipped with specifications that customers prefer to increase sales.
Also by cooperating with chipset makers and ODMs, we would like to come up with 5G devices targeting mass market and would like to become one of the first manufacturers to do so. And in this process, we would like to also meet the carriers' need to deploy 5G in the market. By doing so, we will contribute in making 5G a popular choice for general consumers.
In order to provide 5G services, it is essential to have a successful quality test result and also stabilize all the necessary features. So we will continue to strengthen our technological and strategic partnerships with chipset makers and carriers and also focus on -- focus to increase sales in the market where 5G deployment is advanced and where it is difficult for other players to enter.
[Foreign Language] The next question will be presented by Nicolas Gaudois from UBS.
The first one relates to OLED TVs. What is your worst expectation for OLED TV unit sales in 2020? And how would you characterize profitability vis-à-vis LCD TV segment?
And secondly, we've reduced smartphone sales on the back of COVID-19. Are you actually getting closer to the point of reducing further number of countries, of geographies where you will remain present for the smartphone business, even if, as you just discussed before, you intend to keep a reasonably full lineup of products?
[Interpreted] Let me answer on the TV side. It is true that there is a slight decline in our business compared to the plans we set at the end of last year. But we do believe that there will be improvement, especially in the fourth quarter, and we are expecting increase in the shipment volume by 30% with especially sharp increase in our sales in the fourth quarter.
And you asked the question regarding the profitability comparison between LCD and OLED TVs. So we are maintaining a high-end premium policy for our OLED business. And in terms of the cost, we have more advantages with our OLED business. But in terms of the sales as well, we are making marketing investments to strengthen our brand in the OLED space. So overall, I can say that the profitability between LCD and OLED TVs are quite similar.
[Interpreted] I'll answer from the MC side. For key markets, even now for key markets such as North America and Korea through selection and concentration, we are expanding our business and importing resources. And for market, selective markets where we see the growth opportunities as well, we are aggressively pursuing sales.
And recently, we have the mass-tier new model that is getting positive response in the North American market and also the improved premium products. So with these enhanced sales capabilities, we will expand not only in North America and Korea, but also with the mass-tier products in the LATAM region as well to help enhance customer value. And in Europe as well for some selective countries where we see potential, we will expand sales.
[Foreign Language] The next question will be presented by Dongwon Kim from KB Securities
[Interpreted] I have 2 questions, one for HE and the other for H&A. Starting from July, LG display started OLED panel production in production. And I believe the OLED panel supply will get much better. So what is your outlook on the changes of the OLED panel price? And do you have any changes in your strategy regarding this?
Next question is to H&A business. When you look at the past 3 years' earnings number of the H&A business, it looks like you have been maintaining very high level of sales and profitability. Do you think you'll be able to get this high profitability and sales figures through the future? And do you think this is valid and feasible? And in mid- to long-term perspective, what is the appropriate level of profitability for H&A.
[Interpreted] Let me answer your questions regarding HE business. LG Display is starting the production of OLED panel in June, July, and it is increasing the number of supply of the panels. However, this -- it is all based on the preestablished plans. So the panel price is, yes, moving, but within our preplanned scope. So I won't say that there is like a big price drop in the panel. And I would just say that the panel price is on track, and it is moving as planned and as predicted.
Regarding the strategy for OLED TV business, as we have mentioned before, we are maintaining our premium strategy with this existing premium segment, and there is no big changes in the OLED TV strategy.
[Interpreted] Let me answer your questions regarding H&A business. When you look at the past 3-year numbers of the H&A business, it is true that we have been growing and also our profitability level is quite solid. We are posting around 7% to 8% level of profitability, and we've been maintaining that level. Recently, we've been hit by COVID-19 and H&A business is experiencing that blow. However, we have taken this as an opportunity to actually improve our cost structure, and the cost structure has become more stable. If we can improve our sales as we have planned in the second half, I believe we'll be able to have a very good profitability in the second half. So unless there is like this massive global-wide blow, we believe that we'll be able to maintain a very stable profitability level of about 8% to 9%.
[Foreign Language] The next question will be provided by Dong-je Woo from Bank of America.
[Interpreted] I have 2 questions. First, recently, there have been the trade disputes, and -- but I believe that the Chinese players will not be a threat in the European market, India or the U.S. And if you maintain a high-end strategy for your appliances and TV with very good products, you'll be able to provide products that satisfy the customer and also enhance your profit and market share as well. So do you still believe that, that is the case and this is an opportunity for you?
Second question regarding mobile business and smartphones. I believe that the 5G phones are already common and prevailing in the market. So with the Chinese market seeing a monthly shipment of the smartphones out of their monthly shipments, 60% are 5G phones and the consumer price is already at the $200 to $300 range. So if you were to launch a really mass-tier phone, maybe at the $100 to $200 level ahead of the competitors, then I think you could be a leader, especially in the U.S. market and gain meaningful market share. So if you leverage the ODM business and the media tech chest, I think this would be possible. So what do you think about this possibility?
[Interpreted] So you mentioned the threat coming from Chinese competitors in your question. And for the TV business, though, I think it would be similar for the appliance business as well. I believe that the market segments we focus on are very different. So rather than this being a factor of the trade dispute, they are the Chinese plays that focus on the low-end market with low price and low cost. And first-tier players like LG who have mid- to high-end products with -- focusing on value based on their brand and technology. So there is the gap between the markets that we play in. So it would be rather about where we strike a balance between these 2 fronts.
So we will not be complacent and continue to strengthen our position in terms of our cost, technology, product competitiveness, brand power, marketing investments and enhance the market share. So we will especially solidify our position in the large-sized, high-end premium TVS, and we will continue to pursue this strategy.
[Interpreted] I will answer from the MC side. Like you may know, we are continuing to expand our ODM business and continuously expand the cost competitiveness.
Recently, we launched the mass-tier product, which is getting a very good response from the U.S. market with specifications that meet the customers' needs with a large screen and multi cameras and better design and usability.
And based on the success we've had with our new mass-tier model in the U.S., like you mentioned, we will expand our ODM business for a 5G mass-tier product and launch the 5G mass-tier for the first time for LG and launch in key markets like Korea and the U.S. in the second half, and expand our sales by being an early player in this market for the customer demand in 5G.
[Foreign Language] The next question will be presented by J.J. Park from JPMorgan.
[Interpreted] I have 2 questions. First is for H&A business. Due to the impact of COVID-19, I believe that there is an increasing demand in online sector. LG is a set -- manufacturer set business player. So what is your percentage of online in your business? And if this trend continues, I believe that your marketing expenses will fall compared to all those activities that used to be focused on off-line marketing activities. So will this be beneficial to you as a set business player?
My second question regards Mobile business. You have relocated your production site to Vietnam, and you are constantly increasing the proportion of ODM. And due to the structural changes, is it being -- is it helping you to reach the breakeven point for the sales? So how much of the sales do you need in order to meet the breakeven point in the business?
[Interpreted] Let me answer your questions regarding H&A business. As you have -- as you mentioned, the world is changing due to COVID-19 and people are spending more time at home. Accordingly, sales in online is increasing. In terms of home appliance market, we are seeing more opportunities growing online, especially regarding refrigerators and cooking appliances like oven. Company-wide, not just limited to H&A, but company-wide, the percentage of online sales take up about 15% in overall sales in the first half.
Regarding marketing, the importance of online channel is becoming very important. And the business is looking and expanding the -- and the business wide, the services regarding the so-called noncontact lifestyle is expanding. So we are currently building our infrastructure to respond to these changes. In H&A business perspective, we are expanding our activities online, such as online exhibitions and marketing, increasing online brand shops and also doing a lot of activities with the digital marketing.
[Interpreted] Let me answer your questions regarding MC. So we have been doing a lot of activities to strengthen our cost competitiveness, such as reducing fixed cost, relocating our production sites and increasing proportion of ODM. And thanks to these activities, we are seeing some improvement in our profit structure. And as a result, we are reducing the amount of VP sales.
In the second half, we believe the market will start to pick up. And accordingly, our sales will start to grow. And we believe that we'll be able to see a gradual increase in profitability. Thanks to all those -- these efforts that we have made in improving our cost structure, we are seeing some signs of positive signs. And as we start to increase sales with the innovative products that we are launching, we believe that we'll be able to come up with a meaningful improvement in a short period of time.
[Foreign Language] Currently, there are no participants with questions. [Operator Instructions]
[Interpreted] I believe there are no further questions. So with this, we will end the '20 second quarter -- 2020 Second Quarter LG Electronics Earnings Release Conference Call. Thank you for your participation. If you have additional 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.]