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 third quarter of 2021. This conference call will start with a presentation on the 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 third 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. Jin-Yong Kim, from Vehicle Component Solutions; [ Mr. Kim Yong Park ] from Business Solutions. We are also joined by Mr. Sang-Ho Park from Corporate Business Management Division; [ Mr. Jeong Hee Lee ] from Finance Division; and Mr. Hyungyu Lee from Accounting Division.
Please note that all statements we will be making today regarding our financial results of the third 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 made today.
Today, I will outline the overall performance results of the third quarter of 2021 and the outlook for the fourth quarter. After that, each division will take turn to deliver its business results and outlook.
Now let me start with the consolidated financial results of the third quarter of 2021 and the outlook for the fourth quarter.
Consolidated sales of the third quarter was KRW 18.8 trillion and operating profit was KRW 540.7 billion. Sales grew 22% year-on-year, driven by increased sales of premium and new appliances in H&A and strong sales of OLED TVs in HE. Though operating profit was affected by the provision for GM Bolt recalls, we achieved sound performance in profitability by offsetting the impact from rising costs through steady growth in overseas markets and higher sales proportion of premium products.
I will now briefly review the third quarter performance of each business.
H&A recorded KRW 7.1 trillion in sales, KRW 505.4 billion in operating profit and 7.2% in profitability. HE recorded KRW 4.2 trillion in sales, KRW 208.3 billion in operating profit and 5% in profitability. VS recorded KRW 1.7 trillion in sales and KRW 537.6 billion in operating loss. BS recorded KRW 1.7 trillion in sales and KRW 12.3 billion in operating loss.
Each business will later share its respective business results and outlook in detail.
Let's move on to the profit and loss and cash flow of the third quarter.
In terms of profit and loss, reflecting financial income and expense, equity method gain and loss, other nonoperating income and expense, corporate income tax, and income and loss from discontinued operations, we posted KRW 516.5 billion in net income.
Next, on cash flow. Cash flow from operating activities of the third quarter was KRW 568.1 billion and cash flow from investment activities was negative KRW 907.3 billion. As a result, net cash flow amounted to negative KRW 185.5 billion. And when reflecting cash flow from financial activities of KRW 630.3 billion, net change in cash increased by KRW 444.8 billion from the previous quarter. After reflecting changes in cash classified as held for sale of negative KRW 11.3 billion, cash balance at the end of the third quarter came to stand at KRW 6.6 trillion.
Next is the key financial position and indicators for the third quarter of 2021.
As of the end of the third quarter, our assets stood at KRW 54.6 trillion, liability at KRW 34.3 trillion and equity at KRW 20.3 trillion. All leverage ratios, liability to equity, debt to equity and net debt to equity decreased quarter-on-quarter and year-on-year, continuing to maintain a healthy financial condition.
Next is the outlook for the fourth quarter.
In terms of the macro environment, recovery in the real economy is expected on the back of COVID-19 vaccinations and the plan to coexist with the coronavirus. But there are also uncertainties stemming from raw material and component price hikes, monetary policy normalization and the threat of global inflation. Amidst this environment, we will focus on expanding sales of premium products through differentiated marketing activities and respond preemptively to market volatility and by continuously improving cost structures and proactively managing risk.
We expect our fourth quarter revenue to grow quarter-on-quarter and year-on-year with increased sales of premium appliances and TVs and recovery in the B2B business. In terms of profitability, there are risks regarding raw material and logistics costs, but we will secure stable profitability through better product mix and efficient spending.
Now let's move on to the third quarter results and outlook by business.
First is H&A. Let me share the third quarter results of H&A. Sales stood at KRW 7.1 trillion, with a 15% increase year-on-year, driven by growth in overseas markets such as North America, Europe and Latin America. Despite the upside of revenue growth and marketing cost savings, operating profit decreased year-on-year due to increased raw material prices and logistics and labor cost hikes.
Next is the outlook for the fourth quarter. The growth in global demand is projected to slow down, but the situation is expected to unfold differently for each region and segment. The burden from raw material price hikes and increased logistics costs are expected to persist. Amidst this environment, we will actively enhance sales efforts, armed with our strong product competitiveness to maintain a double-digit growth in revenue and also increase selling price and optimize costs to maintain stable profitability.
I will share the third quarter results of HE. Sales grew year-on-year, thanks to robust product sales of OLED TVs on the back of rising demand for premium products. We maintained solid profitability by offsetting the high LCD TV panel price burden with effects from increased OLED TV sales and efficient resource management.
Now let me share the outlook for the fourth quarter. In the market, global TV demand is projected to decrease slightly year-on-year as people spend less time at home with the progress in COVID-19 vaccination. We expect marketing spending to increase to respond to the intensifying competition in the TV market. But we will maintain revenue growth and secure solid profitability by improving product mix, with a focus on premium products.
Let me share the third quarter results of VS. Despite the decrease of vehicle production in the market due to the supply shortage of automotive semiconductors, sales grew year-on-year, thanks to increased volumes from new projects and revenue growth of electric vehicle components. Profitability showed a temporary decrease as the provision for GM Bolt recalls was reflected.
For the fourth quarter outlook, with the spread of the COVID-19 Delta variant, the supply shortage of auto semiconductors is expected to persist, leading to a consequent shutdowns of major OEM plants. This internally lead to a decrease in demand for vehicle components. We expect the continued supply issue of automotive semiconductors and subsequent risk of disruption in auto production to have an impact on profitability, lowering the probability of achieving a turnaround in the fourth quarter.
I will share the third quarter results of BS. Sales grew 14% year-on-year on the back of expanded sales of information display products with the recovery in the B2B market and sound revenue growth in IT business. Operating profit declined year-on-year due to rising prices of major components, such as LCD panels and wafers, and the impact from increased global logistics costs.
Now the outlook for the fourth quarter. There are both opportunities and risks in the market. Demand for IT products, including gaming monitors, is expected to remain strong, in line with non face-to-face trends. And the B2B market is projected to show a gradual recovery in demand, but there may be impacts from the semiconductor shortage and increased prices of major components like LCD panels. Amidst this environment, we expect sales to grow quarter-on-quarter and year-on-year, with the seasonality effect in IT business and the recovering demand in the B2B market. The improvements in profitability are projected to be limited due to the continuing cost increase and intensifying competition. We seek to secure momentum in enhancing profitability by improving product mix and strengthening cost competitiveness.
That brings us to the end of the third quarter earnings release and the outlook for the fourth quarter.
We will now take questions. Operator, please commence with the Q&A session.
[Interpreted] [Operator Instructions] The first question will be presented by Dongwon Kim from KB Securities.
[Interpreted] I'd like to post 2 questions on H&A. First, with a spike in logistics costs, I'm wondering about the impact on the profitability level of H&A and company. And also, I'm wondering what will be your corporate strategy in response to the logistics disruption that is appearing recently?
My second question is related to H&A as well. I'd like to understand the proportion of new appliance sales and its trend. And can you forecast the new appliances business down the road by region?
[Interpreted] Let me take your question on H&A. It was about our corporate response and strategy with respect to logistics disruption. As you know, the air and sea transportation costs are hitting a record high every day, and that is hampering the profitability of H&A company.
According to many research firm, it is forecast that the phenomenon will persist until the first half and even up until the second half of next year. And some predict that it will take another 1 to 2 years more.
If we look at its impact on our top line revenue, it is decreasing our top line revenue by 2% on a year-on-year basis. And in line with this, we are trying to deploy more extra ships in collaboration with global shipping companies so that we can minimize its impact on our supply side. Also, we are trying to curve the spike of logistic costs by optimizing our global supply chain.
In 2022 as well, based on a solid supply chain and logistic network, we are going to make timely decisions and take them into action with speed so that we can minimize the risk on our supply side.
Furthermore, based on a solid partnership with our -- partnership in companies, we are working on the negotiation to create a win-win operation for both of us. And also by leveraging the H&A capability and logistics competitiveness that we have built thus far, we are going to put the first priority in meeting our delivery commitment with our customers. We will strive to continue to become the leader in the market.
[Interpreted] So let me take your question on the proportion of new appliance sales. I will say that the sales of new appliance has been recording a 2-digit level growth every year. So we are seeing the rise of the proportion from 14% in 2018 to around 17% to 18% in 2021. So I will say that the proportion of new appliances still is increasing within H&A company.
Amid the COVID pandemic, combined with the trend stay-at-home activities, nowadays, consumers have easier access to product information. And the hygiene and health care functions of our home appliances have become a critical component or part of their decision making.
If we look at the pattern of the sales by region, we see that this pattern is more pronounced in the markets, North America and Europe. And as the steam is deeply associated with hygiene and health care, we believe that we were able to record a high growth with our steam function, home appliances such as styler dryer and dishwasher.
In the emerging markets, on the other hand, we see the demand for those products to continue to go up. And we are trying to make those products featuring hygiene and health care functions as an essential product for consumers by offering those product at a more affordable price range to increase up our sales furthermore. So also, for the consumers awareness, we are trying to leverage the successful cases in the Korean market. For this trend, we are continuing our investment in the brand, and we will try to enhance the brand positioning in the market through these efforts.
[Interpreted] The next question will be presented by Jong Wook Lee from Samsung Securities.
[Interpreted] I have 2 questions. My first question is about a power crisis in China. Did power shortage in China caused any damage in divisions of LGE? And if any, how much is the damage? My second question is for HE. Samsung Electronics officially adopted QD-OLED TVs as the next year's TV lineup. What's your position about this move? And what impact do you think it will have on LGE's WOLED TV business? And what will be the competition landscape going forward?
[Interpreted] Answering your question on power shortage in China and its impact on production subsidiaries in China, we received a request to reduce daytime power usage in some locations, including HE division's production subsidiary in Guangdong province, from mid-September.
We are responding by converting daytime production to the night time without significant disruptions. Moreover, in preparation of any worse situation, we added self-generation facilities and are controlling use of power for non-production purpose based on our emergency response plan.
In addition, in close consultation with local governments and energy authorities, we have secured an information sharing system to know power control plans in advance. And we are constantly monitoring any change in power supply status based on the preemptive response system.
So regarding the question about HE, the question was about the launch of a QD-OLED TV in next year by Samsung Electronics and the competition, the outlook. And there are, of course, the concerns about the new product launch with the adoption of a QD-OLED by the competitor, especially about the intense competition. However, we think there is a positive aspect because it can expand the OLED ecosystem.
So as a response strategy, we want to solidify our image as a leader in OLED TV that we have built over the past 10 years. And also, so we will lead the OLED technology so that the customers can experience as intrinsic value such as picture quality and form factors.
And we will continue to maximize our capability as the top the OLED TV manufacturer by strengthening these premium lineup and the meeting the customer needs so that we think we will be able to continue to lead the market.
[Interpreted] The next question will be presented by Ji-San Kim from Kiwoom Securities.
[Interpreted] I would like to pose 2 questions. My first question is on VS. I'm wondering about the impact of the short supply of automotive semiconductor and especially its impact on your performance. If you think the impact was not big, I'd like to understand the reason why.
My second question is on BS. Recently, we see there is a fierce competition in the solar module industry due to the emergence of the Chinese makers, so I'd like to understand your corporate strategy to enhance your profitability.
[Interpreted] We believe that the risk of the shortage of automotive semiconductor is not a temporary phenomenon, but it's likely to persist for quite some time.
In particular, due to the supply chain issues in Southeast Asia brought on by the resurgence of COVID-19, the shortage further deteriorated in the third quarter. And as it is forecast to drag on further into the fourth quarter, we are keeping a close eye on the market situation.
Also, we received some impact due to the shutdown measures of Tier 1 suppliers and increase of automotive component prices. However, we collaborated with suppliers OEM. And we also pulled in some of the automotive semiconductors in advance and also we applied dual-sourcing in order to minimize its impact on our supply side.
[Interpreted] Let me take your question on solar business. This year, the price of polysilicon on top of the value chain for solar module business has increased by fourfold on a year-on-year basis. With a spike on raw material prices, the cost level deteriorated, which hampered the profitability of most of the module makers.
As you know, we've been running our business centering around high output, high-efficient products. We will be leveraging our LG brand and global sales capability. Also through our development capability for high efficiency, high output products, we will continue to expand sales opportunities in the residential markets in advanced countries, showing a clear preference for high output products. At the same time, we will strive to raise profitability by improving cost level and output of our products.
[Interpreted] The next question will be presented by S K. Kim from Daiwa Capital Market.
[Interpreted] I have 2 questions and both goes to the VS division. And the first one is about the VS as automotive electronics business. The market expectations have been so high about the automotive electronics business of the VS. However, the raw material costs are increasing and there has been the shortage of semiconductors, so worsening the outlooks of all the performance of the VS division. And the semiconductor issue will continue and will continue until the fourth quarter, and so raising the concern about the turnaround, the target of the VS. So what's your outlook for the performance? And what's your opinion about the current situation?
My second question is about the provision for the vehicle, the cost. According to the disclosure, the provision has been set aside for the recall the cost. However, the provision amount seems greater than the actual needs. So is there a possibility that you will reverse the provision the later?
[Interpreted] Answering the -- your question about the business outlook, then the production of the OEMs complete car is expected to decline by 10%.
We have been responding to the situation. However, it was an avoidable situation because it was the impacts on the production disruption at the top Tier 1, the vendors and OEM side.
In regards to the profit turnaround of the VS business next year, the risk of automotive component demand reduction is expected to continue until the first quarter of the next year or even the second quarter of next year.
The uncertainties still remain in the global automotive market, but we will minimize sales disruptions through close cooperation with OEMs and the diversified supply chain. Moreover, in terms of profitability, we will make concerted efforts to achieve meaningful outcome in 2022 by focusing on improving the profit and loss structure through continued cost saving activities.
Answering your -- the question on the possibility of the recall the provision, the reversal, the GM is a plan to recall about 140,000 Bolt EVs manufactured and sold from 2016 to the first half of 2021.
The total amount of provision was calculated using the most reasonable estimation based on the recall methods agreed between the 3 companies and what has been identified so far.
In addition, LGE and LG Chem evenly split the recall cost to book the provision expenses. And the final cost sharing ratio will be later decided depending on the liabilities of LGE and LG Chem.
Therefore, please understand that it's difficult to tell you about the possibility of the reversal of the preset provision just based on the assumptions.
[Interpreted] The next question will be presented by Sang Ryul Kwon from DB Financial Investment.
[Interpreted] I have 2 questions. Both questions are on HE. First, this year, you've recorded such a solid performance with your TV product. I think that with this performance, you'll be able to achieve 4 million units of sales this year. So I'm wondering how you forecast this year 2021 and next year in terms of the sales of OLED TVs. If you meet the target of sales, I'm wondering what will be the proportion of OLED TV sales out of the total TV revenue.
My second question is also on HE. We see the price level of LCD TVs is going down very rapidly. I think compared to OLED TV, with this price decrease, the LCD TV will be able to recover its price competitiveness in the market. So I'm wondering about the impact of this trend on the sales and profitability of your OLED business. So can you share your corporate opinion on this?
[Interpreted] So let me take your first question on HE, in particular, regarding the forecast of OLED TV sales. So looking at the performance of OLED TV sales, in the third quarter of this year, we are meeting the plan for OLED TV sales 100%. However, looking into the fourth quarter, there is a concern or the risk of the slowdown of TV demand globally because of the uncertainty in the global economy and expansion of living with COVID-19 scheme.
However, we think that there will be no difficulty in achieving our target of meeting 4 million units of sales that we set up early this year, which is the double the target of the previous year. If this is the case, we forecast the proportion of OLED TV sales to be around 32%, showing 24% of growth on a year-on-year basis.
Regarding the target for the next year with our OLED TV, we hadn't finalized our target yet. And we are working on the planning and simulation to set up the target for the next year.
However, if we do a close analysis on the TV market trends, both for TV sets and panels and consumer needs, we forecast that the demand for premium products will continue to go up. So in line with this, we are going to continue to increase the proportion of our OLED TV sales down the road.
[Interpreted] I'll take your second question. It was on the impact of decrease of LCD TV prices on the profitability and top line revenue of OLED TV. Based on our understanding on the market dynamics, we understand that the competitor has given a price discount, mainly to the mini OLED TV sales.
However, looking at various external factors, such as the LCD supply, LCD panel supply led by the Chinese panel makers, a short supply of semiconductor components and increase in logistics costs, we believe that it won't be easy to give that much price discount to the LCD TV.
Given that there will be some impact on the demand of OLED TV because of this limited price discount of LCD TV, however, we can make use of this trend of increasing demand for premium products, especially our OLED TV. And the strength of OLED TV -- strength that OLED TV can bring about, I believe that we will be able to maintain this solid top line revenue and profitability for the next year.
[Interpreted] The next question will be presented by Nicolas Gaudois from UBS.
Going back to semi supply constraints, you talked about automotive. But what has been the overall impact across all of your businesses? How are you managing this? Has it gotten better or worse as well for the course of 2021? And what has been the impact on revenues and margins? So that's both revenues and margin, they are not just revenues.
And secondly, on appliances, you also talked about the impact of logistic costs going up. But what has been the impact on -- of material price increases on appliances margins in the last quarter, in Q3 '21? And what could we expect to see going forward?
[Interpreted] Regarding the semiconductor shortage issue, my answer can be divided into the TV business and the automotive component business.
I think these questions raise a concern mainly about the automotive semiconductor shortage. The insourcing of the semiconductors required for our products, we don't have significant issues except for some impact on the price increase. However, as other Tier 1 vendors for semiconductor shortage and problems in supplying components, it has resulted in intermittent production disruptions in major OEMs.
As for the impact on our performance, we have been affected to some degree by the supply disruption of OEM because these -- our demand on our side has decreased. And also, there have been some price hikes of a component. However, our diversified supply chain management system enables us to fulfill customer orders on time. So therefore, so once this issue is resolved, because we are ready to fulfill customers' orders in a prompt manner, we anticipate that we can achieve more meaningful growth down the road.
As for the TV business, as a market leader in the industry, so we have by procuring power and a deep trust and partnership with the suppliers, so with that, so we have been managing an appropriate level of inventory. And by doing so, we have minimized the impact on our business by securing the DDIC and SoC and other components.
As for the raw material cost and there's an impact on the H&A's business, in 2021, we will say that the impact on our annual sales for this year will be 2.5% to 3%. And this estimations include the outlook for the fourth quarter.
Our major raw materials, such as steel, the resin and the copper have seen a price increase on every quarter, and that this trend will continue even in the fourth quarter. So for H&A's business, it is serving as a factor worsening our profitability outlook.
Again, in 2021, raw material supply and demand imbalance will continue. And also, we expect that especially the steel price will increase steeply.
Under these circumstances along with globally integrated negotiation, we are minimizing need for raising product prices by the fostering the key makers in each region, adopting diversified sourcing and the optimized SCN and the other -- many others activities.
In addition, as macroeconomic factors and external factor, especially China, have suddenly increased, we are focusing our organizational capabilities on proactively responding to current price hikes and offsetting risk from unstable supply through timely interregional sourcing and the price forecasting.
[Interpreted] The 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 H&A and HE. If you look at the operating income on a quarterly basis, you used to show a great fluctuation for many, many years so far in terms of TV and home appliance businesses. However, looking at the fourth quarter, the performance of the fourth quarter is decreasing more slowly than what has been happening in the past. Can you explain the reason why behind this phenomenon? And also, I'm wondering if there will be any risk of showing a high performance, solid performance in the first half and then showing a decrease of the performance in the second half once again like the past? Or you have already established a stable business models with TV and H&A products, showing even performances between first half and the latter half?
And my second question is on VS. Recently, many agencies or governments are announcing their ESG or emission-related policies. As you have already explained about your solar business, I'm wondering and I'd like to understand the overall progress of your renewable energy, business-related strategy and the ongoing project in line with this trend.
[Interpreted] If the trend for the past 4 years, including 2021, especially looking at the 2 years, 2018 and 2019, the profitability ratio was around 73 between first half and the second half. Maybe it's driven up by the pent-up impact caused by the COVID-19 for the past 2 years, recent 2 years, 2020 and '21, the performance was around 6% to 4% first half in second half. So we are seeing a gradual improvement of profitability in the second half.
As you are already aware, most of the promotional seasons, including the United States, are concentrated in the second half or in particular, fourth quarter, which is driving all of the cost of that period. And also, we are impacted by the seasonality related to the AC business. So that's the reason why we have the structure of showing a lower profitability in the second half compared to that of the first half.
Of course, there were some impacts coming from the pent-up demand in improving our performance in the second half for the past 2 years. However, we internally made continuous efforts to improve the profitability in the second half. And also, we strive to execute our expenses in a more efficient manner.
As of yet, we couldn't overcome this pattern of showing a lower performance in the second half fully. However, compared to the past, we're able to make this gradual small but important improvement, showing better performance in the second half. So with this gradual improvement, I believe that this pattern of showing lower profitability in the second will continue to persist for the time being.
[Interpreted] Let me take your question regarding new renewable energy. As ESG growth is important, major countries are expanding their green policies to tackle climate change. In light with this trend, the demand for new renewable energy is forecast to grow continuously.
Regarding your question about the progress of new projects, please understand that it is difficult to share specifics. But I'd like to say we're keeping a close watch on additional business opportunities arising in the energy business ecosystem.
So for example, we are reviewing a solution as to how we can offer an optimized solution for efficient power consumption at home.
[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The next question will be presented by Dong-je Woo from Bank of America.
[Interpreted] I have one question about the VS business. When we look at this, the quarterly sales performance of the VS, that it's hovering around or under KRW 2 trillion. And the VS division explained the many reasons, including the component, the shortage and the disruption on the customer side. And can you again provide a high-level overview about your business situation? And as -- in regards to the order backlog, as of October, is it about KRW 60 trillion? And when can you make the turnaround in profit recordings over KRW 2 trillion and the even KRW 3 trillion in the sales? So I'm wondering when will be the inflection point of a profit? And is it -- can we expect that it's going to be the third quarter 2022? And also, out of this, the backlog is KRW 60 trillion. So what is the portion of EV-related component business?
[Interpreted] So answering your questions on the order backlog. So as we communicated, the order backlog as of 2021 is over KRW 6 trillion, and it is continuously rising.
And if you look at the proportions, out of the order backlogs, the infotainment accounts for 60% and the remaining part is the LG, the Magna-related EV component and the ZKW lens products.
Considering the high growth potential of the EV industry, we believe that these backlogs from the EV component-related business will increase with the LG Magna JV participation.
And as you mentioned, the sales have been stagnant because the semiconductor shortage caused by the disruption in the OEM plants. However, when we see our -- the trend of our order backlog, once this semiconductor issue is resolved, we can say that we can start to achieve a meaningful outcome.
[Interpreted] Currently, there are no participants with questions. [Operator Instructions] Once again currently, there are no participants with questions. We will wait for a second until there is another question.
[Interpreted] brings us to the end of LG Electronics earnings release conference call for the third quarter of 2021. For further questions, please contact the IR team. Thank you for your participation.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]