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 second quarter of 2021. [Operator Instructions]. I would now like to hand the conference over to the first speaker.
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 2021. With me are representatives of business management division of each business: Mr. I-Kueon Kim from Home Appliance and Air Solution; Mr. Jeong Hee Lee from Home Entertainment; Mr. Ju Yong Kim from Vehicle Component Solutions; Mr. Choong Hyun Park from Business Solutions. We are also joined by Mr. Sang-Ho Park from Corporate Business Management Division; Mr. Hyungyu Lee from Finance Division; and Mr. Hong Su Lee from Accounting Division.
Please be noted that all statements we will be making today regarding our 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 2021 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 2021 and the outlook for the third quarter. Consolidated sales of the second quarter was KRW 17.11 trillion and operating profit was KRW 1.11 trillion. Sales grew 48% year-on-year, driven by strong sales of premium appliances in H&A, expanded sales of OLED TVs in HD and revenue growth in BS, attributable to the demand recovery in the automotive market.
Operating profit showed significant improvement year-on-year, thanks to increased sales from premium products in the appliance and TV businesses and efficient resource management.
I will now briefly review the second quarter performance of each business. H&A recorded KRW 6.81 trillion in sales, KRW 653.6 billion in operating profit and 9.6% in profitability. HE recorded KRW 4.1 trillion in sales, KRW 333.5 billion in operating profit and 8.2% in profitability. VS recorded KRW 1.91 trillion in sales and KRW 103.2 billion in operating loss.
BS recorded KRW 1.7 trillion in sales, KRW 61.7 billion in operating profit and 3.7% in profitability. All MC-related profitability was reflected in income and loss from discontinued operations. 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 expense and corporate income tax posted negative KRW 113.6 billion.
Next, on cash flow. Cash flow from operating activities of the second quarter was KRW 366.6 billion and cash flow from investment activities was negative KRW 483.5 billion. As a result, net cash flow amounted to negative KRW 94.4 billion and when reflecting cash flow from financial activities of negative KRW 22.8 billion, cash balance at the end of the second quarter decreased by KRW 117.2 billion quarter-on-quarter to stand at KRW 6.2 trillion.
Next is the key financial position and indicators for the second quarter of 2021. As of the end of the second quarter, our assets stood at KRW 50.6 trillion, liability at KRW 31.7 trillion and equity at KRW 18.9 trillion. All leverage ratios, liability-to-equity, debt-to-equity and net debt-to-equity were maintained at stable levels.
Next is the outlook for the third quarter. In terms of the macro environment, along with expectations for recovery in the global economy in the second half on the back of progress in COVID-19 vaccinations, there are uncertainties stemming from the spread of the virus variant and a possible shift in the monetary policy. Amidst this environment, we will mitigate potential risks by increasing sales through expanded market coverage in main businesses and accelerated growth in new growth businesses as well as by continuously improving cost structures and responding preemptively in operations.
We expect sales to maintain a sound upward trend in the third quarter year-on-year affected by continued demand from -- for premium appliances and TVs and incremental growth in the vehicle component business. Profitability is projected to be maintained at stable levels through efficient resource and supply chain management, though there are concerns regarding the rise in logistics costs and raw material prices.
Now let's move on to the second quarter results and outlook by business. First is H&A. Let me share the second quarter results of H&A. Sales stood at KRW 6.8 trillion with a 32% increase year-on-year driven by growth in overseas markets. Operating profit improved year-on-year, thanks to sales growth in overseas markets and efficient resource management.
Next is the outlook for the third quarter. Intensified competition and cost pressures from raw material price hikes and increased logistics costs are expected to remain in the market. Amidst this environment, we expect to maintain our sales growth momentum year-on-year by strengthening product competitiveness and proactively enhancing sales by region and product. We will focus our capabilities to achieve similar profitability levels as the same period of the previous year by saving costs and optimizing operations.
I will share the second quarter results of HE. Sales increased by a large margin year-on-year thanks to the recovering demand in the global TV market and expanded product sales of OLED TVs.
Despite the continued rise of LCD TV panel prices, operating profit grew significantly year-on-year driven by operating leverage effects and improved product mix focusing on premium products.
Now let me share the outlook for the third quarter. In the market, with the progress in COVID-19 vaccination, demand for products related to the entertainment at home is expected to be stagnant, but premium product demand is projected to continue its upward trajectory. We will maintain sound profitability by improving product mix with a focus on premium TVs and expanding sales, though we expect some cost pressure due to the continuous panel price hike.
Let me share the second quarter results of VS. Sales grew year-on-year driven by increased volumes from major projects on the back of the demand recovery in the global automotive market and increased sales of electric vehicle components. Profitability improved significantly year-on-year, with revenue growth from the increased demand for vehicle components but decreased quarter-on-quarter with a temporary spike in cost due to the semiconductor supply shortage.
For the third quarter outlook, the automotive semiconductor supply shortage is expected to persist for a considerable period of time. But as major semiconductor manufacturers take action regarding the shortage, the supply situation is projected to stabilize in the second half. We will focus our capabilities on securing major components by strengthening global supply chain management and continuously improve profitability by maximizing sales and continuing cost saving activities.
I will share the second quarter results of BS. Sales grew year-on-year on the back of expanded sales of high-end large screen and gaming monitors and Gram PCs and the gradual recovery in the demand for information display products. Operating profit decreased quarter-on-quarter and year-on-year due to rising prices of major components such as LCD panels and solar wafers.
Now the outlook for the third quarter. A gradual recovery of demand is expected in the B2B business with expanded infrastructure investments by major economies on the back of the resumption of economic activities, but risks related to rising prices of major components such as LCD panels and supply shortage for some semiconductors are expected to continue. We expect sales to grow quarter-on-quarter and year-on-year with the demand recovery in the B2B market, but improvements in profitability may be limited due to the impact from continuing price increase of major components. We will focus on securing profitability through proactive cost reduction activities. That brings us to the end of the second quarter earnings release and the outlook for the third quarter.
We will now take questions. Operator, please commence with the Q&A session.
[Foreign Language] The first question will be presented by Kamu Park from Daishin Securities.
[Interpreted] I'd like to pose two questions. My first question is on a corporate-wide basis and second question is related to MC. My first question on a corporate-wide basis, as of end of July, you officially closed the MC business in early July, you established a joint venture between LG and Magna. And also because of this reason, we can look forward to strengthening of the -- your business of automotive electronics. I will appreciate if you can share, if there is any change in your strategy for your long term?
And my second question is related to VS company. Actually, the market is keenly interested in your situation after your announcement in -- for the closing of MC business. And since that most of the reassignment with your MC members have completed. So it will be appreciated if you can share the overall size of internal transfer and external transfer to other affiliates, in particular, in the case of internal transfer, considering the technological relevance, I'm wondering, if you can look forward to the synergy impact from this reassignment of MC members.
[Interpreted] Let me take your first question. After closing of MC business and business restructuring and of automotive electronics, the long-term business strategy for our company in the long term is being considered based on 2 major pillars centering around qualitative growth. If I explain the first pillar, we are going to make more innovative business methods and models based on our existing business, and we are going to enhance both revenue growth and profitability at the same time.
To this end, we are going to make use of growth assets, loyal customer base and customer behavior data. And based on this, we are going to take a new approach regarding platform service and solution to expand the business. And with respect to the electric vehicle component, we are going to closely cooperate with Magna to strengthen synergy, and we are going to accelerate the growth of vehicle land and automotive electronics to make the new growth engine.
Secondly, we are going to enter into the new businesses where we expect the market size, growth, profitability to be high, and we will secure both future growth and profitability potential at the same time. To this end, we are going to pursue inorganic growth based on partnership with strategic businesses and equity investment for the future businesses. So we will continue to see the scale up of new businesses for the future.
[Interpreted]
So I'll take the second question regarding the size of the assignment of MC members and their contribution to our business. After the announcement of our business closing, we have opened job positions for transfer. With the top priority on individual preference and job relevance, we implemented transfer both internally and to external affiliates. Out of Korean employees around 1/4 of the members decided to transfer to affiliates.
With respect to potential synergy, there were a great need to hire more to grow their business fundamentals and prepare the future within LGE and in LG Group. To fulfill the needs, we implemented reassignment by matching the individual functional and technological capability with the requirements. So that's the reason why we can look forward to making a great contribution to individual growth at the same time to expanding our business for the future within our LG Group.
I'll take the next question, please.
[Foreign Language] The next question will be presented by Sang Ryul Kwon from DB Financial Investment.
[Interpreted] I have 2 questions. The first question is on BS. With widespread vaccination and increased mobility, the demand for consumer IT products such as laptops is forecast to decline. What is your outlook for the demand for IT products? And what's your response to this?
And my second question is on H&A. Samsung Electronics is engaging in very aggressive marketing for their BESPOKE. What is your response to the increased competition in the premium home appliance market? And what is the sales proportion of Objet Collection out of total revenue of premium products? And I'd like to know if there are any changes in your sales strategy around Objet Collection.
[Interpreted]
I will answer your first question on BS. According to the market research firm, IDC's Q2 report of 2021, it expects 11% year-over-year growth of the monitor market as a whole and 54% year-over-year growth of the gaming monitor market in 2021. In 2022, the monitor market is expected to slightly decline year-on-year, whereas the gaming monitor market is expected to grow by 6% year-on-year.
Regarding the demand for IT products going forward, with significant lifestyle changes brought on by prolonged COVID, we believe that remote working and online learning have become a common trend, not a temporary phenomenon. Therefore, we believe the demand will continue.
Having said that, as contactless trends can shift with signs of economic recovery, we're keeping a close eye on market trends, and we haven't detected a major change yet.
We are going to focus on the sales of high-end products such as large screen monitors, gaming monitors, high-end -- high-performance and ultralight laptops. And at the same time, we will continue to capture business opportunities in the B2B business market.
Now I will answer on H&A. As the role of home changes and the need for personalized and tailored space grow, the competition in the tailorable home appliance market, including Objet Collection and BESPOKE is expected to intensify, as you said.
Unlike our competitors, we have launched Objet collection from the outset as a package ideal for design. With newly coined terms such as space interior appliances, and [ applianceterior ], which is a combination of appliances and interior, for each life stage of customers, we offer a variety of materials and colors to give them options to choose from and help them make the desired choice by facilitating decision-making.
Moving forward, we will continue to expand materials and colors that can be in harmony with the overall interior of customers' home, not limited to a specific state area. To do so, we will continue to expand our partnerships with different companies such as the Pantone Color Institute, a world-renowned color institute.
In addition, rather than responding to the low-end coverage of the competitor in the increasingly competitive market, we're going to expand our presence as a premium brand by clearly differentiating our design and performance. And the sales of appliances under the Objet Collection are steadily on the rise, delivering strong double-digit profitability.
[Foreign Language] The next question will be presented by Jong Lee from Samsung Securities.
[Interpreted] I'd like to pose 2 questions. My first question is on BS. With the expectation for economic recovery, high growth is expected for the BS company focusing on B2B business. In line with this, can you share with us the current status and forecast of your business? And my second question is on HE. Your OLED TVs are getting positive response from the consumers, and there is a great expectation for the growth. And if Samsung enters into the over the market, with WOLED panel source from LGD. And can you share with us what you think about the impact this movement will have on LGE?
[Interpreted] Our BS company is running 3 different product categories, one for IT devices, including Monitor and PC; second, for information displays such as signage and hotel TV; and lastly, solar module business.
Driven up by non-face-to-face environment embodied by working from home and online schooling, the IT business is showing a growing sales trend. For the future market, it is forecast to show a rather slower increase for monitor and PC from 2022. But then for the high-end product segment that we are focusing on with large-size monitor, gaming monitor and high-performance ultra lightweight laptop, the demand dynamics is forecast to go up continuously.
With respect to information display, with the recovery of demand in 2021, the sales of IT products are showing signs of recovery. With the expectation for economic recovery, the private and public sectors are expected to spend their investment. Against this backdrop, we also expect the sales increase from major verticals like corporate vertical, schools and hospitality for digital signage, e-board, hotel TV and others. But again, the business is more volatile against COVID-19. It's the reason why the current resurgence of COVID-19 is more concerning for this sector?
Lastly, solar module business. With the clean energy policies of the U.S. and other major countries, the demand is forecast to continue to go up. But then with the rising prices of raw materials such as polysilicon, the profitability level has declined and with more aggressive investment by Chinese players, the competition is heating up. At the end of the day, we will focus on enhancing the product competitiveness like high output product and improved cost level.
LGE is the world's first to launch OLED TV. So far, there has been widespread awareness among consumers that equals LGE with OLED TV.
In terms of amount, the OLED TV market share is whopping 70%, showing absolute market presence, and we expect this trend to continue to be in the market.
Around 19 companies have already entered into OLED band. And with this entrance of our competitors, if I explain the positive impact of LGE, in terms of market, with the size of market increasing, we're able to expand the ecosystem of OLED TV.
With the expanded market, if we continue to strengthen our market presence based on the competitiveness of our products, we'll be able to create more sales in the market.
Furthermore, with the expansion of OLED volume, instead of having worried about the possibility of panel price increase, we rather forecast that -- thanks to the increased yield, there will be more pressure to decrease the overall cost level. And with the improvement of cost, there will be more positive impact on LGE's business.
[Foreign Language] The next question will be presented by Sung Kyu Kim from Daiwa Capital Market.
[Interpreted] I have 2 questions. My first question is on H&A. Have there been any changes in the trends in advanced markets with respect to sales of premium products due to the impact of COVID-19? And what does the demand for premium products look like in those regions?
And my second question is on VS. With the launch of LG Magna e-Powertrain in July, the market expectations for your EV business is quite high. However, investors don't have full understanding of the competition dynamics in the e-Powertrain industry or your competitiveness. So can you tell us about your competitiveness regarding core components such as motor and inverter and perhaps your channel status and the current competition dynamics?
[Interpreted]
Throughout the pandemic, consumer buying behavior is shifting from stress buying to planned buying.
In advanced markets, with increased disposable income and more time spent at home, the demand for high-end home appliances has grown. And it seems that the growth in the demand for those premium products is continuing.
Therefore, the sales and demand for premium products in advanced markets are continuously growing throughout COVID. And in line with the needs arising for more time spent at home, the demand for large capacity model is on the rise.
I will answer your second question on VS. We have core technologies, including hairpin motor manufacturing to lead the high-power motor market. And we also have the capability to develop and produce inverters and power modules, the core parts of the e-powertrain module, in-house. Meaning we have the competitiveness in individual EV components. Based on this, we are winning projects from global, major OEMs.
Please understand that we cannot disclose the details about the current status regarding OEMs as we have signed an NDA.
[Foreign Language] The next question will be presented by Ji-San Kim from Kiwoom Securities.
[Interpreted] I'd like to pose 2 questions, one for VS and the second for MC. My first question is on VS. In the second quarter, VS company has recorded quite a big deficit level, and there are still risk factors in the market such as automotive semiconductor shortage. I'm wondering, if you are maintaining your plan to see the profit in the second half of this year? And also, can you forecast the sales and profitability for the following year.
My second question is on MC. You officially closed your MC business. And I'm wondering, if you have any plan to sell off your patents or assets.
[Interpreted] Let me take your question on VS. In the second quarter, there were multiple risk factors such as automotive semiconductor shortage and shutdowns of some OEMs. But to respond to the demand from the OEMs, we closely cooperate with them to minimize the impact on our sales side. Our sales performance exceeded the previously said plan, but there were overall price and cost increase to respond to demand. So our profitability was temporarily impacted.
Looking into the latter half with automotive semiconductor shortage expected to get mitigated, we look forward to additional sales. On top of that, the cost saving activities, we will aim to turn around in the second half.
Considering the backlog, we already secured and the cost structure improvement that we are working on now, we look forward to improvement of sales and profitability in the mid- to long term.
[Interpreted] Let me take your question regarding our patents. Regarding your question on our plan to sell or assets or patents, that is deeply related to our business model. So we are considering various ways to make a profit stream using the patents. So once we decide on our direction, let us communicate with the market proactively.
For your information, if I add my explanation regarding our plans to utilize the patent assets, we hold around 24,000 telecommunication standard patent for 4G and 5G. And with the core IP assets to be secured from mobile communication business, we'd like to leverage them to develop new products based on IoT and other smart appliances.
Those telecommunication assets are the core component or core technology for vehicle connectivity. So we are going to use them to develop infotainment products such as display radio as well as telematics.
[Foreign Language] The next question will be presented by Dongwon Kim from KB Securities.
[Interpreted] I have 2 questions. My first question is on VS. After the acquisition of ZKW, I'm wondering what kind of synergies you are generating -- and could you specifically tell us about the activities that you have been doing and when and how we can see visible results?
And my second question is on MC. In relation to the net loss from discontinued operations, approximately how much is directly associated with the withdrawal of the business? And can you share the details related to obsolete inventory or compensation for distribution channels and suppliers and et cetera?
[Interpreted] Recently, in the headlamp business, the connection between vehicle lamps and vehicle components and relevant technologies are growing in importance. Based on these market trends, we expect ZKW's lamp light technology and our vehicle component-related competitiveness to create synergy. And as for the visible outcome ZKW has recently won the next-generation headlamp business for a European customer.
ZKW'S revenue and profitability were temporarily affected by COVID-19 and semiconductor supply constraints. But once the uncertainties in the external environments are resolved, we expect to see visible results.
As reported in this earnings call, the net loss from discontinued operation for the first half of this year amounts to approximately KRW 1.3 trillion.
I would like to say that we have sufficient provisions set aside for maintenance, such as OS upgrades and app service operations for customer services that we have promised to deliver.
With respect to the costs associated with the withdrawal of the MC business, if we exclude the loss from operating activities that occurred in first half, which is estimated at around KRW 530 billion, the net amount is around KRW 770 billion.
I understand you asked for the details of the net loss from discontinued operations but please understand that we are unable to disclose that information.
[Foreign Language] The next question will be presented by Nicolas Gaudois from UBS.
First one is on H&A revenue growth. So we will likely exit 2021 with H&A recording quite a remarkable more than 15% year-over-year revenue growth. This is probably not however, sustainable. So how -- how do we look at 2022 growth? What are your initial thoughts about the growth you can achieve there? And the key factors to sustain it? And secondly, on TV profitability, where do you see LCD and OLED TV operating margins going into the second half of 2021 and 2022.
[Foreign Language]
[Interpreted] Thanks to the remarkable growth of overseas market, as you said, we forecast to achieve a solid 2-digit growth rate.
Looking into the following year, we expect the pent-up demand to slow down quite a bit. And also we forecast a competitor to offer more stable supply of their products. And looking into the advanced market, the U.S. and European region, we forecast the competition to get intensified down the road. And in line with this, we -- if we forecast our sales growth for the following year, that will be slower than that of this year.
But then internally, we are setting up scenario plan to maintain or expand the market share that we notch up this year by adding more growth higher than the average growth rate of the market.
[Interpreted] Let me answer for the profitability of TV product. We expect a solid profitability to be maintained as we are going to spend sales of premium TVs, including OLED TV and NanoCell TV.
Looking into the year 2022, with the pent-up demand returning to normal, we forecast the overall TV demand to go down slowly.
For the price and the product segment with a price tag of over $1,000, we forecast the demand to continue to go up.
Given therefore OLED TV, we will improve the market presence and increase the volume for LCD TVs by expanding the sales of QNED TV and large-sized screens, we will achieve a solid profitability level.
[Foreign Language] The next question will be presented by J.J. Park from JPMorgan.
[Interpreted] I have one question on VS. As I understand the JV with Magna launched yesterday, correct? But I'm a bit confused. It's a joint venture. So each of you must have your own customers. So I'm wondering your customers should only source from LG and Magna e-Powertrain? Or -- so can you please clarify the structure of your joint venture in terms of your agreements with customers?
[Interpreted] Okay. Let me answer your question. So what the e-Powertrain JV is targeting is, we are mostly focused on components related to motors and power. And we are planning to expand our product portfolio from individual parts, such as motors and inverters into IPGM and drive unit.
So Magna is also doing business on e-Powertrain components, and we can either choose to source through Magna, and we can also partner with other OEMs independently.
[Foreign Language] Next question will be presented by Dong-je Woo from Bank of America.
[Interpreted] I'd like to pose 2 questions. My first question is on VS. You've already explained about a digital venture with Magna and your vehicle lamp business. And there are great expectation for future growth in terms of infotainment and any devices related to safety -- safety and convenience. And I'm wondering how you'll be able to achieve such growth with which components. And actually, if you look at the vehicle market, the telematics appeared around a decade ago. So I'm wondering what kind of new component solution will be out there, which will help us grow in the market, especially related to safety and convenience. I'm wondering how we can achieve, especially in the electric vehicle industry? And my second question is related to HE and H&A you have maintained a solid profitability with home appliances and TVs for the -- at 2 to 3 years, and I'm wondering if you can maintain such solid profitability in the long term as well.
If the reasons behind such solid performance were expensive prices of your products and high market share in the United States and Korea, are you going to maintain the same strategy? Or do you think there is need to apply new strategy like increase of subscription with your cloud service or offering solutions instead of hardware. So looking at the big picture, I'm wondering if you think you need to change or apply a change to your strategy to maintain the current solid profitability.
[Interpreted] The VS company in response to the market and technological trends is going to make use of our internal capability improvement and external partnerships to offer customizable integrated product solution to become global top tier #1 vehicle component supplier.
For the infotainment area, we'd like to strengthen our cooperation with the existing core OEMs by strengthening our software development capability.
Regarding infotainment, we are producing at [ uni ] telematics and CID. And what we look forward to in the future as to integrate all of the component to become and make an evolution into kind of cockpit.
We are going to operate and grow our business in line with the future trend like controller based on our software development capability.
[Interpreted] Let me take your question regarding H&A. For the recent 3 years, H&A company has maintained a solid growth every year and maintained around 8% to 10% of profitability and also by expanding the sales of premium products and new appliances and also product featuring hygiene and health care functions, we are trying to offer better product services to maintain this solid performance.
Also by expanding the core business and new businesses, if I share the concept of our future growth for mid- to long term, we are going to expand the new product categories and also enhance the competitiveness of the product based on our technological prowess and also we're going to just pick up this pace for the growth of our differentiated and customized services to enhance the speed of transformation. And based on all of these activities, we'll be able to secure growth in the mid- to long term.
In particular, we are trying to offer differentiated experiences that go beyond the expectation of consumer based on the customer micro segmentation based on the database. And also, we are going to discover and develop various new business models like subscription economy by combining both products and services. By doing so, we'll be able to secure growth momentum down the road.
[Interpreted] Let me take your question regarding HE, we are going to continue to put our first priority on OLED TV continuously.
In terms of hardware, we are going to put our OLED TV at the top of our product lineup to solidify our brand awareness and power. And with QNED MiniLED TV, we are going to target the large-size screen market and also with the expansion of NanoCell TV sales, we are going to pursue qualitative growth.
We are going to find a customer base who will find our value from various user experience and based on that, we are going to create the new demand stream down the road.
For example, we are carrying out a project to create a fandom amongst the gamers through various marketing activities with our OLED TV. And recently, we launched [indiscernible] which is the portable wireless TV and also which is the -- individual personal device. And this product is targeting, for example, NG generation who like to spend their time watching TV in their own spaces. So likewise, we are trying to offer new experiences to our customers.
And also with the strengthening of our software areas, other than hardware, as you could see from the case where we acquired Alphonso, down the road, we are going to strengthen our content business. And also, we are going to enhance the signs of this content business at the same time securing a solid profitability down the road.
[Interpreted]
That brings us to the end of LG Electronics earnings release conference call for the second quarter of 2021. 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.]