LG Electronics Inc
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LG Electronics Inc
Earnings Call Analysis
Q2-2024 Analysis
LG Electronics Inc
In the second quarter of 2024, LG Electronics showcased impressive growth despite facing headwinds such as sluggish demand in the EV market. The company reported a year-over-year increase in both revenue and operating profit. Key business segments including home appliances, TV, and IT, exhibited robust performance. Notably, the Home Appliance and Air Solution (H&A) division recorded KRW 8.8 trillion in sales with KRW 694.4 billion in operating profit, achieving 7.9% profitability. These results were propelled by effective sales strategies, market expansion, and cost-saving measures, even as competition intensified and costs rose.
Looking ahead, LG Electronics anticipates continued growth in its home appliance and TV segments. Despite potential increases in logistics costs and interest rate delays potentially impacting demand, the company remains optimistic about year-over-year growth. The auto parts business is expected to recover, contributing to overall revenue growth. The company aims to maintain solid profitability through optimized global operations and expansion into emerging markets. By leveraging its strong market presence and innovative business models, LG Electronics seeks to navigate the uncertainties ahead and sustain its growth momentum.
LG Electronics is focused on broadening its B2B offerings, particularly in HVAC and automotive electronics. A significant move in this direction is the acquisition of Athom, a smart home platform provider. Additionally, the company is exploring overseas markets with its subscription and direct online sales models. These initiatives reflect LG's commitment to transforming its business model and expanding its domains to build a more future-oriented portfolio.
Committed to enhancing shareholder value, LG Electronics has implemented a dividend policy that targets distributing no less than 25% of net profit from 2024 to 2026. For 2024, the company confirmed a semiannual dividend of KRW 500 per share, to be paid in the first and second half of the year. This policy aims to provide predictable returns to investors while balancing future strategic investments and maintaining a healthy financial structure.
In the second quarter, the Home Entertainment (HE) segment achieved KRW 3.6 trillion in sales with KRW 97 billion in operating profit, yielding a 2.7% profitability. The Vehicle Component Solutions (VS) segment reported KRW 2.6 trillion in sales and KRW 81.7 billion in operating profit, demonstrating resilience despite market uncertainties. The Business Solutions (BS) segment generated KRW 1.4 trillion in sales but faced a KRW 5.9 billion operating loss due to increased costs and strategic investments in new areas like EV chargers.
Amid rising competition and overhead costs, LG Electronics continues to push for efficiency and cost-saving measures. Efforts such as material cost reduction and manufacturing prowess aim to counterbalance challenges like increased ocean freight rates. The company’s Q2 cash flow from operating activities was KRW 2.6 trillion, and net cash flow stood at KRW 1.2 trillion, with an ending cash balance of KRW 8.5 trillion.
LG Electronics projects weak demand in the U.S. and Europe but anticipates growth in emerging markets, particularly India, Asia, and Latin America. The company emphasizes its strategy to drive B2C sales with new products, enhanced promotions, and expanded B2B contributions. For the home entertainment market, LG expects a slight improvement in TV demand and higher growth for OLED TVs, aiming to secure profitability through a better product mix.
LG Electronics remains devoted to ESG principles, achieving several sustainability certifications and engaging in various environmental initiatives. The company is developing recyclable packaging and technologies to enhance product accessibility for people with disabilities. Collaborative efforts with cities and environmental agencies underscore LG's commitment to a sustainable future and its role as a responsible corporate citizen.
The HE division's webOS platform is on track to surpass KRW 1 trillion in sales this year, supported by strategic partnerships and internal enhancements in data analytics. The subscription business for home appliances is also flourishing, particularly in Korea, where it accounts for over 20% of sales with double-digit profitability. LG plans to expand this model to global markets, including Taiwan and Thailand, with potential entry into developed markets like the U.S. and Europe.
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Good afternoon. Welcome to LG Electronics' quarterly earnings conference call. This conference call will start with a presentation on the earnings results, followed by a Q&A session. [Operator Instructions] I will now turn the call over to the first speaker.
Good afternoon. My name is Wonjae Park from Investor Relations. Thank you for joining our earnings call for the second quarter of 2024. With me are CFO and EVP of LG Electronics, Chang-Tae Kim; SVP of Global Business Management Group, Sang-Ho Park; VP of Home Appliance and Air Solution, I-Kueon Kim; VP of Home Entertainment Jeong-hee Lee; VP of V-Go Component Solution, Ju Yong Kim; VP of Business Solutions, Dong Cheol Lee; VP of Corporate Business Management Division, Choong-hyun Park; VP of Accounting Division, Hong Su Lee; Head of Finance Division, Young Kyoon Kim; and Head of ESG Strategy Planning, Sung-min Hong.
Today's presentation agenda will cover four areas. First, our CFO, will outline the overall performance results of the second quarter outlook for the third quarter mid- to long-term direction and dividend policy. Then I will present financial highlights. Subsequently, each division will take turns to deliver its business results and outlook.
And finally, we will conclude with an overview of an ESG activities and achievements. Please note that all statements we'll be making today regarding the financial results of the second quarter are subject to change in accordance with the result of the external review. Uncertainties in the market and changes in strategies may cause our results to be different from the outlooks and forward-looking statements made today.
Now let me start with the consolidated financial results of the second quarter of and the outlook for the third quarter.
Good afternoon. My name is Chang-Tae Kim, CFO of LG Electronics. Q2 revenue grew year-over-year on the back of qualitative growth in core business, including home appliance, TV and IT and incubating business, including webOS despite sluggish demand in the EV market. Operating profit made a significant increase year-over-year despite price increase in component including LCD panels, thanks to the sales leverage effect and expanded contribution of highly profitable B2B business.
In terms of the business environment, difficulties are expected to continue in the second half of the year as delays in interest rate cuts slows down the demand for key products and uncertainties in freight rate persist. However, we plan to post the year-over-year growth on the back of continued growth in home appliance and TV and the sales recovery of auto parts business. For operating profit, despite a possible increase in logistics costs, we plan to maintain a solid profitability level through optimization of global operations. In mid- to long run, we intend to maintain a balanced qualitative growth in both core and incubating business, transform business models, expand domains and innovate business method to build a more future-oriented portfolio.
We will further strengthen the market position of home appliances, TV and other main business while broadening B2B portion, including HVAC and automotive electronics. Our efforts in expanding business model will be continued as evidenced in our recent acquisition of Athom, a smart home platform provider. At the same time, we will further innovate the way we do business as we speed up the pace to enter overseas market with subscription business and increased direct sales online.
Next, regards dividend policy and payout. Based on the principle of enhancing shareholder value, our shareholder return is determined within the dividend income, considering future strategic investments, financial structure, and business environment. Over the 3-year period from the fiscal year of 2024 to 2026, distributable profit will be no less than 25% of net profit based on the profit attributable to owners of the parent in the consolidated financial statements, excluding one-off nonrecurring profit, we plan to provide a minimum of KRW 1,000 per common share, which will be paid out twice per annum in the first and second half of the year.
The semiannual dividend for 2024 was confirmed at KRW 500 per share for both common and preferred stock through a board resolution on July 24. To enhance predictability for investors, the dividend record date and expected payout per share were announced on June 18 prior to the first half's semiannual dividend record date. The semiannual dividend will be paid to shareholders on August 13 in accordance with Article 165-12 of the Financial Services and Capital Markets Act.
Now I will turn the call over to Investor Relations.
I will now briefly review the second quarter performance of each business. H&A recorded KRW 8.8 trillion in sales, KRW 694.4 billion in operating profit and 7.9% in profitability. HE recorded KRW 3.6 trillion in sales, KRW 97 billion in operating profit and 2.7% in profitability. VS recorded KRW 2.6 trillion in sales, KRW 81.7 billion in operating profit and 3% in profitability. Last but not least, BS recorded KRW 1.4 trillion in sales and KRW 5.9 billion in operating loss.
Let's move on to the profit and loss and cash flow of the second quarter. Reflecting financial income and expense, equity net debt gain and loss, other nonoperating income and expense, corporate income tax and income and loss from discontinued operation, we posted KRW 629.5 billion in net income. Next, on cash flow. Q2 cash flow from operating activities was KRW 2.6 trillion, and cash flow from investment activities was negative KRW 866 billion resulting in net cash flow of KRW 1.2 trillion. When reflecting cash flow from financial activities of KRW 308 billion, cash balance at the end of Q2 came to stand at KRW 8.5 trillion or KRW 1.5 trillion increase from the previous quarter.
Next is the key financial position and indicators for the third quarter of 2024. As of the end of the second quarter, asset stands at KRW 63.1 trillion, liability at KRW 37.9 trillion and equity at KRW 25.2 trillion. In terms of leverage ratios regarding liability to equity, debt to equity and net debt to equity, we are maintaining a healthy financial condition.
Now let's turn the call over to each business for its second quarter results and third quarter outlook. We will begin with H&A. Let me share second quarter results of H&A. Sales has been polarized with developed markets experiencing a gradual recovery amid global economic uncertainties, while emerging markets are seeing strong growth. We achieved revenue growth year-over-year by strengthening promotion, expanding price coverage and producing positive results in new domains such as subscription and online. Operating profit improved year-over-year by successfully managing increased overhead, including market competition costs and fixed costs through revenue growth and cost-saving measures like material cost reduction.
Next is the outlook for Q3. Weak demand in the U.S. and dwindling recovery in Europe is likely to persist. On the other hand, continuous growth is expected in emerging markets, especially in India, Asia and Latin America. However, given the uncertainties of demand recovery in advanced markets, and the spread of geopolitical risks, competition in major markets is anticipated to intensify. In response, we will drive B2C sales growth by responding to the market changes ahead of time with new products, stronger promotions and expanded volume zone strategies.
We'll also move away from the typical seasonality by broadening the contribution of B2B focusing on HVAC and enhancing online and subscription business. Moreover, we will secure operating profit similar to or higher than that of the last year by cutting costs based on our manufacturing prowess and enhancing operation to address the risk of rising ocean freight rates.
Next is our view on the annual demand prospects for the global home appliance market. In the previous earnings call, we started sharing our perspective on the demand of the global appliance market and we will continue to update the outlook twice a year. Please note that this section of the presentation regards market demand focusing on refrigerators and washing machines and is not related to the projections of our appliance business.
Diverse factors may cause the market to be different from the outlooks made in this section. We stand with the previous outlook of limited level of growth for annual market demand. But there are some changes made in terms of timing and region. We expected to see a gradual demand recovery in the second half after demand contraction in the first half in the previous call. Demand for the first half has fared better than our projection while the recovery in the second half is likely to be slower than expected.
To elaborate, exchange rates remained stable in the first half in emerging countries, especially in Latin America, Middle East and India and consumption improved in oil-producing countries due to rising oil prices. However, in the second half, macroeconomic drivers of demand are likely to lose momentum as we see delays in interest rate cut and a drop in new home construction. By region, emerging markets, including Latin America, Middle East, Africa and India are expected to continue to grow, while recovery in advanced markets, including North America and Europe, fails to meet the market expectation. As consumers are continuing to trade down, seeking less expensive alternatives, we expect the overall average selling price to decrease. Difficulties of the market are likely to persist for the remainder of the year by preemptively responding to demand changes with the adoption of two track strategy and by driving sales in emerging markets, we aim to continue to produce solid results as we head in the challenging years of post-pandemic era.
Next is second quarter result of home entertainment business by tapping into the momentum of growing demand for TVs in Europe, in line with the coming mega sports events, we were able to increase hardware sales, including OLED TVs. At the same time, webOS-based advertisement and content business continued to grow, driving up sales significantly year-over-year. For operating profit, although an increase in sales work in our favor, operating profit decreased slightly year-over-year due to the rising costs pushed up by LCD panels.
Let's move on to the third quarter outlook. The overall market demand for TV is expected to improve slightly year-over-year while OLED TV is expected to post higher growth compared to the market. Accordingly, we aim to continue to grow top line and secure profitability by improving the product mix of premium products such as OLED and QNED TVs and by broadening the ecosystem of webOS platform by offering free upgrades on mass-tier products.
Next is second quarter result of the vehicle component solution. Despite demand stagnation of the EV market, we were able to grow sales slightly year-over-year on the back of an increased demand for high value-added components of infotainment and ADAS. While there was some cost pressure from upfront investment in R&D for SDV and awarded projects, we were able to continue to secure profitability through improved project mix leverage effect of revenue growth and activities to stabilize the cost structure.
Now let me turn to the outlook of the third quarter. Market uncertainties, including slowdown in EV demand are likely to persist. However, demand for high-value-added auto parts is projected to exhibit an upward trend. In this environment, we expect to see a continuous growth in sales and improvement in pricing mix as awarded projects start to launch products. We aim to secure stable profitability by optimizing our operations and improving the cost structure.
Let me present the second quarter results of the business solution.
Revenue grew year-over-year on the back of increased sales centering on strategic products like gaming monitors, e-board and LED signage and winning large PC volumes from B2B partners. Operating profit recorded a loss despite an increase in sales as the business environment worsened with a rise in exchange rates, logistics cost and component price and as we increased investment in new businesses, including EV charger.
I will now move on to the third quarter outlook. Demand for IT and information display is expected to grow year-over-year, but the overall level will be similar to that of the second quarter. However, when broken down into product level, gaming monitors and LED signage are likely to continue to grow in the third quarter. Against this backdrop, we aim to grow revenue year-over-year by focusing on sales of high value-added strategic products, enhancing online sales and putting more efforts in winning B2B project. At the same time, we will enhance the efficiency of resource operations to improve profitability and manage growing investments in new business.
Last but not least, our ESG activities and achievements. LG Electronics continues to strengthen competitiveness with sustainable products and technologies. This year, OLED evo TVs received certification on CO2 measurement and reduction from the Carbon Trust, Environmentally Evaluated Mark from SGS for 4 consecutive years, and Recycled Content Certification from Intertek for 2 years in a row.
Last December, our pulp molding packaging received Minister's prize from the Ministry of Trade, Industry and Energy. Last December, industry's first molded pulp that can handle more than 20 kilogram was developed and applied in packaging air purifiers, and the packaging is now being applied to 30 to 50 kilograms. Our plan is to replace plastic packaging with molded pulp by developing pulp packaging that can handle more than 70 kilograms. We are supporting 15 suppliers in consultation to help them reduce carbon emissions, and we plan to continue to increase the number.
In April, LGE signed a business agreement with the National Rehabilitation Center to develop technologies that can improve accessibility of home appliance products and provide better customer experience to people with disabilities, older adults and children. Last June, our world's first traffic safety smartphone solution, Soft V2X passed ICT Sandbox. With the Seoul Metropolitan Government and Sejong City, we plan to deploy the solution to verify its service effectiveness. We believe that the solution will lower and prevent risks of traffic accidents by being integrated into vehicles and various connected micromobility such as e-scooters and e-bikes.
We are also actively engaged in ESG campaigns. Between last May and June, we conducted BattleReturn Campaign with Korea Environment Corporation and E-Cycle Governance, collecting waste batteries of cordless vacuum cleaners from homes for recycling. Last April, celebrating Earth Day, we unveiled Endangered Species Series on Times Square billboard in New York City. The campaign will highlight 4 endangered species throughout the year, beginning with snow leopard to raise an awareness on climate change and importance of biodiversity.
We also became the first Korean company to be certified by the National Wildlife Federation as our Pollinator Garden built in North American campus was recognized as a wildlife habitat. Pollinator garden is designed to be a sanctuary for bees, butterflies and other pollinators whose population is in decline. LG Electronics will continue with these activities to create a better life for all stakeholders.
That brings us to the end of the second quarter earnings release and outlook for the third quarter. We will now take questions. Operator, please commence with the Q&A session.
[Operator Instructions] The first question will be provided by Simon Woo from Bank of America.
First of all, congratulations on such a good quarter. I have two questions. The first question on the HE division and the second on the H&A division. First of all, would be for the HE division, especially with regards to your webOS platform. Can you please share on where you are in terms of progress and profitability in reaching your KRW 1 trillion goal for 2024?
I would appreciate it if you could break it down by segment and region. In addition, will your growth volume and profitability continue to sustain current strengths over the mid to long term? And my second question is on home appliance business. I believe that the subscription business is pretty booming in the market. And I would like to ask the number of subscriptions and the breakdown of revenue per product, such as refrigerators and dishwashers and washing machines. And are you actually seeing profitability throughout this new innovation? And the other one is, do you have any marketing strategies to bring this innovative solution to developed markets such as the U.S. or Europe?
I will first answer your question on webOS. Yes. You have probably already seen on use, but then our webOS platform business has sustained its upswings in line with the fast shift from linear TV ads to connected TVs. To best leverage the favorable market and the unique advantage that CTVs bring of delivering value-added ads to targeted customers.
Number one, we have acquired controlling stakes in Alphonso, the exceptional data analysis company; and number two, we have reinforced our relevant internal teams such as on data analytics. And number three, we have strategically partnered with leading content players to deliver better content.
Based on the activities outlined previously, we expect our sales to run higher than KRW 1 trillion this year. We are faring well having surpassed our target for the first half of the year, while profitability too hovers above our expectations amidst proactive investment underway. We will continue to expand our footprint, not only in the North American region, our core market, but to cover Europe, Lat Am and Asia as well. Competition is, however, on the rise as the market gains volume and appeal. We are responding with a greater focus on not only the basics, which includes the strength of webOS itself and the delivery of high-quality content but also on expanding the ecosystem, which we intend on realizing through a greater number of alliances driven by the sale of our webOS to other TV brands. Thank you.
Let me answer your question in regards to subscription business and home appliance business unit. In regards to the actual number of subscription or performance, please excuse us for not able to bring accurate figures to the table.
But we do expect subscription business revenue from home and abroad to show a continuous growth. In Korea, thanks to expanded business focusing on large appliances subscription, our business accounts for over 20% with double-digit profitability. And based on our competitiveness and experience in the Korean market, we would like to expand into the global market with our subscription business model.
Touching upon our business in the overseas market, we are gradually enlarging the market to go from Malaysia to other Asian markets such as Taiwan and Thailand. Adding more colors on the case of Taiwan, we have first launched the business on the first of this month, and are planning to expand the business this October after going through a system and infrastructure check and customer analysis.
Our plan is to expand the business to Thailand and India within this year. Please understand that I cannot clearly disclose the timeline, but we are also reviewing feasibility of launching this business in the developed markets such as the U.S. and Europe.
The following question will be provided by Dongwon Kim from KB Securities.
I have two questions. And my first one is on VS. What is your target on the order backlog at the end of this year? Can you share the breakdown? My second question would be for corporate-wide operations. You seem to be driving growth of your B2B business. What is the contribution to the entire sales as well as the outlook?
Let me answer your question regarding VS. Though EV demand growth showed a slowdown in the short term, we expect the growing trend to continue in the mid- to long term. Additionally, as we are responding to the market with our new program for each OEM's different strategy and implementing activities to win new orders, we expect our order backlog to remain over KRW 100 trillion as of the end of this year. In detail, infotainment accounts for mid-50% of the overall backlog, while EV components account for low 30% level and lamps mid-10% level.
I am VP Park from IR. Thank you for your question, and I will be addressing your question because -- the B2B because it addresses corporate-wide operations. Our B2B business currently leads the sales growth of our entire company generating meaningful contributions to profitability as well. During last year's announcement of our future vision, we have laid out our goal to reach KRW 100 trillion in sales volume by 2030 of which B2B will make up to 40%.
As of the first half of 2024, B2B already constitutes 35% of entire sales and our performance went higher than our goal. Going forward, we will continue to expand on this share by proactively identifying opportunities down the road.
We are confident in this area. Therefore, we will drill it down by business areas. Number one, for vehicle components against the falling EV market, we continue to drive growth of backlog and sales by drawing on greater orders of value-added solutions and an extensive customer pipeline to include Europe and Asia.
For HVAC, with tightened regulations around energy and environment in advanced countries, we expect the fast rise of new demand for air-to-air heat pumps that are energy efficient, and therefore, we plan to tap into this opportunity with greater product coverage and penetration to seek additional growth. Market for data center cooling is expected to gain fast momentum driven by the AI big wave, and we are working towards securing orders in advanced markets with our energy-efficient chillers.
Last but not least, we will also deliver on greater product strength as well as wider regional and product coverage for EV chargers and information display solutions to scale up our B2B business.
The following question will be presented by Kangho Park from Daishin Securities.
I have two questions. My first question is on H&A business. In the second quarter, your revenue jumped dramatically by 10.6%, and this was over market expectation, while your operating profit has become lower than our expectations. Do you have any plans to make further enhancements on this and talking about the second half of this year, I believe that there are some logistic cost issues, and you may expect higher marketing costs. And I would like to ask about your profitability that may be different from the previous year.
My second question is for corporate-wide operations. We continue to hear rumors that you are exploring the possibility of an IPO for your Indian subsidiary. If an IPO is in plan, can you add color on the timeline and the effect that will have on your company?
Let me answer your question in regards to home appliance business. As you just covered, H&A business this quarter, we have seen an increase of approximately KRW 100 billion and sales have grown approximately 11% year-on-year. Compared to the previous year, there were some factors that led to enhancements in our operating profit, such as sales growth and activity to cut costs. However, our actual enhancement level slightly went down due to an increase in competition and overhead costs.
Moving on to projections on the second half, as a result of ocean freight bidding, the average freight cost is expected to go up by 58% year-on-year, along with marketing competition expenses including advertisement cost hikes. In order to continuously secure profitability in the second half, LG Electronics would like to launch new models and further reposition our price level. In addition, we will expand our B2B business and further grow our B2C business by focusing on volume zone, keeping the continuous increasing momentum in sales and our growing trend. Throughout innovation on logistics operation and cost enhancements based on our manufacturing competitiveness, we expect to overcome rising ocean freight and eventually witnessed enhanced operating profit year-on-year.
Once again, VP Park from IR, the growth potential held by India has recently attracted many interest from investors, home and abroad. And with many of Korea's major companies, including Hyundai Motors, filing for IPOs in India, we too are aware of the rising interest the public has placed on the possibility of listing our Indian subsidiary, which have unique strengths in the strong Indian market. A variety of avenues may come under review in light of our corporate value, growth strategy and capital management, not to mention how we plan to steer our Indian subsidiary. At the moment, however, things are still in the wind and nothing is officially underway.
The following question will be presented by Sung Kyu Kim from Daiwa Securities.
My first question is on VS. What is your expected sales growth of this year? I understand that the EV demand remains sluggish. So under such circumstances, do you think the sales will show a negative growth? Or do you still expect a double-digit sales hike?
My second question would be for the BS division. How does your robotics and EV charging business look like? And when will it be that these 2 areas lead growth of your business?
Let me answer your question about the market uncertainty, including slowdown in EV demand is expected to persist throughout this year. Our target is to witness greater growth compared to the market through continuously winning new orders and we project the sales growth to continue, thanks to the launch of our [indiscernible] new programs.
Adding more colors on our revenue despite the slowdown in EV market demand, we expect growth of over high-single-digit year-on-year, thanks to stable sales growth in infotainment and sales jump in high-value-added automobile components.
Let me answer your question for the BS division on Robotics and EV chargers. For Robotics, we are focusing on the delivery and logistics robots. And this year, we are taking our business a step further from SMB to include these verticals, hospitality for indoor delivery and logistics powered by automation.
The robotics industry, however, has yet to bloom and with our business capabilities still at the stages of development rather than boosting sales, we are, at the moment, more geared towards strengthening our capabilities such as on cost and technology that sets us apart from our competitors.
Next for EV chargers, our domestic EV charging business kicked off in 2023 with the launch of two types, each of both slow chargers and fast chargers. We will be targeting the North American market this year, starting with the launch of our slow chargers, followed by fast chargers. And in 2025, we intend on gaining on our shares, especially for our fast chargers.
In North America, construction of our Texas plant is now complete, and our dedicated sales force is identifying new clients and local CPOs to partner with. At the moment, we have joined forces with the #1 CPO in U.S. ChargePoint and details of the business model are being drawn out. Additional opportunities for global partnerships are being explored, and we intend to broaden our horizon starting with Europe to Asia.
Robotics and EV charging are indeed seen as underpinnings of the growth of our division, and we will be committed to build on these areas to lead or division sales over mid- to long term.
Currently, there are no participants with questions. [Operator Instructions] That brings us to the end of LG Electronics 2024 second quarter earnings release. Thank you once again for participating. If you have any further questions, please contact our IR team for further detail. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]