LG Electronics Inc
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LG Electronics Inc
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Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2018 third quarter earnings results by LG Electronics. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]
Now we shall commence the presentation on the fiscal year 2018 third quarter earnings results by LG Electronics.
Welcome to LG Electronics Third Quarter 2018 Conference Call. This is [ SG Kim ], Team Leader of IR. Thank you for joining us today.
Before we begin, please note that all information regarding our performance and financial results were prepared in advance, and it is subject to change in the process of final review.
All forward-looking statements may be different from those expressed or implied by the changes in the future market environment or business strategy.
Now we start our third quarter earnings.
Consolidated sales for the third quarter of 2018 was KRW 15.43 trillion, and operating income was KRW 749 billion. Sales went up 1.3% Y-o-Y and 2.7% Q-o-Q from solid sales growth of premium products.
For operating income, improvement trend continued on Y-o-Y basis. For your information, ZKW is now consolidated in our financial statement as we completed the acquisition of ZKW in the third quarter, and ZKW's numbers are included in PC division's performance.
ZKW reached EUR 1.26 billion of sales revenue and generated around 8% of operating profit margin in 2017. For last 2 years, this company showed around 20% of sales revenue growth with a solid profitability, and we expect such performance to continue this year and for many years to come.
Please understand that we cannot give you financial information of ZKW in detail.
As for detailed statement of financial position and cash flow statement, please refer to our presentation material, which is posted on our global website.
Next, I'd like to address our third quarter results and fourth quarter outlook by each division.
First, H&A, Home Appliance and Air Solution division, achieved the sales of KRW 4.9 trillion, thanks to steady growth in Korea, Europe and North America regions despite unfavorable FX movements and economic recession in Middle East, Africa, Latin America and other emerging markets.
We maintained a high profitability, mainly driven by expanding the proportion of high value-added products and improving cost competitiveness by reducing material cost.
In the fourth quarter, despite a weak season, demand for new growth product is expected to steadily increase. The market volatility is expected to continue in overseas market due to FX movements and trade disputes.
In our case, although we will invest to strengthen with the long-term trend, we anticipate that our profitability Y-o-Y by efficiently utilizing the resources and expanding premium product sales in North America and India.
Moving to HE, Home Entertainment division. Sales declined Q-o-Q and Y-o-Y, mainly from shift in the demand to the first half due to sporting events and the economic downturn in Latin America, where the company's sales portion is relatively high.
Although the profitability declined slightly Q-o-Q and Y-o-Y due to the weaker sales and unfavorable FX movement in emerging markets, we maintained a high profitability by focusing on sales of premium products.
In the fourth quarter, demand in developed markets, such as North America and Europe, is expected to grow slightly Y-o-Y, driven by the entrance of peak season.
However, demand for the entire TV market is expected to be flat Y-o-Y due to the recession in Latin America and Middle East and Africa regions. Although market is sluggish across the premium TV, such as OLED TV and ULTRA HD TV, it is expected to continue.
As such, we plan to launch a strategic model focused on premium TV, which will actively respond to demand for the peak season over the year-end TV market and maintain stable profit structure.
With regard to MC, Mobile Communications division, sales declined Y-o-Y due to weakening demand and intensifying competition in the global smartphone market. However, MC division achieved a similar level of revenue Q-o-Q by enhancing [ the price scheduled ] lineup, such as Q7 and Q Stylus in key strategy markets.
Loss amount have been reduced, driven by platform and modernization activities, continuous improvement in material and overhead cost. In the fourth quarter, as the smartphone market is entering the peak season, premium smartphone sales competition is expected to intensify, and price competition and promotion cost will increase accordingly.
Going forward, we will expand the sales and improve profitability with a new competitiveness model, such as V40 ThinQ and profitability improvement trend to continue.
Next, VC, Vehicle Components. Sales went up 35% Q-o-Q and 41% Y-o-Y on the back of ZKW and mass production of a new infotainment project. Profitability improved slightly both Q-o-Q and Y-o-Y, driven by the revenue growth although there was increase in raw material price and additional costs incurred for the new project.
Next quarter, we expect the sales growth trend to continue. And ZKW pretty good result in Q -- 4 quarter, with [ releases ] bringing positive impact to both sales and profit of VC division.
As for B2B, Business-to-Business division, information display business, we saw a steady sales growth across most of the regions. However, sales of the solar module business declined Y-o-Y and slightly decreased compared to Q-o-Q, due to regulation changes in certain countries.
In case of our profitability, information display business continuously maintained a favorable profitability, and we saw significant improvement in cost structure. But operating profit fell due to the impact of a solar module tariff and market price drop.
In terms of outlook, information display market is expected to grow mainly in premium products, while intense price competition is anticipated in solar module market due to policy changes in major countries.
In order to response to these market conditions, we will differentiate our products in the information display business. And in profitability, by expanding sales focused on premium products. For solar modules, we will increase the portion and expand sales where we are well recognized for high-power and high-efficiency premium products.
In summary, the company total, in Q3, despite uncertain market conditions, we improved our consolidated revenue both Q-o-Q and Y-o-Y by continuously increasing our portion of the premium products.
In the case of operating profit, profitability improved compared to the same quarter of the previous year. Going forward, in the next quarter, we are expecting similar level of sales from the same period of the last year. However, on a margin-wise, profitability is expected to improve Y-o-Y.
Thanks for listening. Operator, we are now ready to open the Q&A session.
[Operator Instructions] The first question will be provided by Nicolas Gaudois at UBS.
Yes, I was just wondering, first of all, considering the exposure you have to emerging markets in TVs and in smartphones, have you seen any impact at all of the recent depreciation of U.S. dollar against emerging market currencies on demand either for units or for mix? And then I've got another follow-up question.
Yes. Regarding FX impact for our -- for the company, especially TV and Home Appliance product, not important. However, most of our products were impacted from the FX impact, especially emerging market. And it is true that we had big difficulties in maintaining our unit shipment in those markets. Because we sought to sell our product with the same price based on our Korean currency, we should have met the really better impact from the FX fluctuation. So in some regions, we raised our price to compensate at those FX movement. So it is true that we lost certain 10% more product. However, recently, our top management always has been focusing on profitability than just getting more unit sales. That's why, especially in TV side, initially, we expect the more unit shipments in Q3. However, there was some revenue decline compared to our initial expectation. However, we couldn't maintain our profitability.
So in summary, it's true that we faced bad impact from the FX fluctuation. However, we more focused on maintain profitability. And we see successfully maintained our profitability in those bad circumstance.
Great. Very interesting color. On -- second question is a little bit related. Now obviously, there is still risk of seeing full tariffs for any China imports into the U.S. at some point. And in that context, what can you actually do to avoid having products coming to U.S. market, which would be coming from China and, therefore, will be subject to tariffs as we assemble them in China? And in that context, could you actually give us a bit more color on where you actually are currently producing appliances, TV and smartphones between Korea, U.S., China and other locations just to get a more comfort and a better sense that if that event was to occur, you could potentially, unlike some of your competitors, sell very much non-China assembled products into U.S. market across the full spectrum?
Yes. We understand that you are concerned on the China and U.S. dispute. First of all, we are kind of aggressively using China as our picking site. However, our revenues product of China is really low, really low. And it was true that a large portion was there in manufacturing. I mean that we were producing a lot of products in China, especially low-end products. However, recently, we are making most of our products from Home Appliance to TV and smartphone, I mean, the premium products, mostly from Korea site. And we basically transport a lot of low-tier product to Vietnam and some European countries. So we don't see very much risk from those disputes between China and U.S. However, if there is certain problem in the States, we also have a certain plan to move the beneficiary for us to the States, focusing its effort where a certain problem, there's some argue occurred in our washing machine, within 1 year, we are well prepared to produce the washing machine for the U.S. market, in Tennessee factory. And so we don't see much risk compared to our competitor.
Right. And on the mobile side, you have started actually to contain -- to control your losses better even as the mix has actually been moving to mid-range devices. And within that mix shift also what is interesting is that your ASP's actually reasonably resilient, right? So you're moving more to review that, but you're still managing to increase a little bit your ASPs. You are effectively stabilizing your losses. From there on, what can you still do to improve profitability for Mobile Comm, whether we see either reducing the number of models further exiting specific geography-specific markets, increasing or sourcing or rationalizing supply?
Yes, way I see it, is kind of weird, difficult cost and so we need to have a little more.
[Audio Gap]
Nick. This is [ Jay ]. Actually, we were able to, let's say, improve our profitability in third quarter by launching more of mid-end product. And this actually shows that our business improvement strategy is proceeding as we planned because we weren't able to contain the magnitude of our loss within the range of our prediction. And we raised our visibility actually. And this is -- actually I think this is a very much meaningful. And in the fourth quarter, we are still launching new premium model, which is V40. And also, we are expecting to expand more mid-end product in the fourth quarter as well. And from launching those 2 range of products, we actually expect to increase sales in the fourth quarter. And going forward, actually, we will strengthen our collaboration with the key players in the industry, such as Google and others, in our major markets, like Korea and U.S. and also Japan to respond to like the emerging trends such as the 5G or AI in order to create new opportunities, especially in that -- discussion are underway with major telcos in North America and Korea, for 5G network commercialization in order to secure like competitive advantage in the initial state of 5G market. So we expect Korea and North America to be the leading countries to commercialize 5G. And we see like great opportunities in those new markets.
And if there are no more questions, I'd like to end this conference call. Again, I'd like to thank you for joining our conference call today. If you have any further questions, please contact our IR team. Thank you.