LG Electronics Inc
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LG Electronics Inc
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[Interpreted] Good morning and good afternoon. Thank you for joining LG Electronics' Earnings Release Conference Call for the Third Quarter of 2022. [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 2022. With me are representatives of each business management division: Mr. I-Kueon Kim from Home Appliance & 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 Global Business Management Group; Mr. Hyungyu Lee from Finance Division; and Mr. Hong Su Lee from Accounting Division.
Please note that all statements we'll be making today regarding the 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 2022 and the outlook for the fourth 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 third quarter of 2022 and the outlook for the fourth quarter. Consolidated sales of the third quarter was KRW 21.2 trillion, and operating profit was KRW 746.6 billion. Despite declining consumer sentiment due to intensified inflationary pressures and impact from weak demand for durable goods, sales grew year-on-year on the back of increased product sales centered around B2B and new appliances and significant top line growth in vehicle components. Though profit decreased for appliance and TV due to rising marketing costs in response to intensified competition brought on by slowing demand, operating profit grew year-on-year, thanks to the vehicle component business maintaining profitability.
I will now review the third quarter performance of each business. H&A recorded KRW 7.5 trillion in sales, KRW 228.3 billion in operating profit and 3.1% in profitability. HE recorded KRW 3.7 trillion in sales and KRW 55.4 billion in operating loss. VS recorded KRW 2.3 trillion in sales, KRW 96.1 billion in operating profit and 4.1% in profitability. BS recorded KRW 1.4 trillion in sales and KRW 14.4 billion 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 336.5 billion in net income.
Next, on cash flow. Q3 cash flow from operating activities was KRW 998.9 billion, and cash flow from investment activities was negative KRW 835.6 billion, resulting in net cash flow of KRW 437.7 billion. When reflecting cash flow from financial activities of KRW 647.1 billion, cash balance at the end of Q3 came to stand at KRW 7.6 trillion, a KRW 1.1 trillion increase from the previous quarter.
Next is the key financial position and indicators for the third quarter of 2022. As of the end of the third quarter, assets stood at KRW 61.3 trillion, liability at KRW 36.4 trillion and equity at KRW 24.9 trillion. In terms of leverage ratios regarding liability to equity, debt to equity and net debt to equity, we continue to maintain a healthy financial condition.
Now the outlook for the fourth quarter. In terms of the business environment, there are rising concerns of a possible global economic recession stemming from declining consumer sentiment due to inflation and interest rate hike, the persisting Russia-Ukraine conflict, energy crisis in Europe and economic slowdown. Amid this environment, we will secure growth momentum by adopting new business models, including software platforms, and prepare for potential risk in business operations by adjusting channel inventory and boosting operation efficiency.
Our fourth quarter revenue is projected to maintain growth momentum year-on-year on the back of top line growth in appliances and vehicle components. We will strengthen efforts to secure profitability through preemptive risk management.
Now let's move on to the third quarter results and fourth quarter outlook by business. We will start with H&A.
[Interpreted] Let me share the third quarter results of H&A. We recorded sales of KRW 7.5 trillion, up 6% year-on-year, led by a turnaround to growth in Korea and continued growth in the overseas markets. Though enhanced revenue acted as an upside factor for profitability, operating profit decreased year-on-year due to rising logistics cost burdens and costs entailed by intense market competition.
Next is the outlook for the fourth quarter. Appliance demand is expected to weaken further, and subsequently, competition to secure the upper hand in the market is expected to intensify. Amid this environment, along with efforts for top line growth by expanding presence in the volume zone, we will seek to secure profitability by increasing selling prices, especially for premium products, improving cost structures and taking cost reduction measures.
[Interpreted] I will share the third quarter results of HE. Sales declined year-on-year impacted by the decrease in global TV demand and weakened consumer sentiment in Europe due to the prolonged Russia-Ukraine conflict. Despite improved material costs, thanks to panel price drops, operating profit decreased year-on-year due to declining revenue and increased marketing spending to address intensifying competition.
Now let me share the outlook for the fourth quarter. In the market, amid persistent risk of a global recession due to inflation and energy supply disruption, competition in the market is projected to further intensify because of weak demand. Accordingly, we will secure a competitive position in the market by expanding sales of premium products, such as OLED TVs, and make efforts to secure profitability through sound management of channel inventory and efficient marketing spending.
[Interpreted] Let me share the third quarter results of VS. Sales grew year-on-year to stand at KRW 2.3 trillion, thanks to OEM production increases following easing of the chip shortage and effective supply chain management. We continue to be profitable on the back of revenue growth and ongoing improvements in cost structure.
Next, the outlook for the fourth quarter. Amid continued easing of the semiconductor shortage and normalization of OEM productions, macroeconomic risks also continue to exist in the market such as weak consumer sentiment attributable to inflation. Through collaboration with automotive OEMs and component suppliers, we will actively respond to rising demand. Moreover, we will reinforce global supply chain management and continuously improve cost structure to maintain top line growth and profitability.
[Interpreted] I will share the third quarter results of BS. Q3 sales increased year-on-year, led by recovering demand in the B2B market, including Information Display, but decreased against the previous quarter, impacted by slowing demand in IT. Operating profit decreased year-on-year because of rising marketing costs attributable to weak demand and intensified competition and increased cost burden brought on by the strong dollar.
Now let me share the outlook for the fourth quarter. IT demand is expected to decline centered around advanced markets such as North America and Europe as the risk of a global economic slowdown remains. That said, the B2B market, namely Information Display, is projected to continue on a growth trajectory. We will continue to actively secure new B2B projects centered on hotel TVs and digital signage that also drive efficiency in operations with regard to inventory and resource management in preparation for worsening market conditions.
[Interpreted] That brings us to the end of the third quarter earnings release and 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 Matt Shin from Bank of America.
[Interpreted] This is Woo Dong-je from Bank of America. I have 2 questions. My first question is about corporate-wide operation. As everybody is aware of, the global economy is witnessing a macro -- various macro issues, and we are under a big confusion at the moment. Even though we have enjoyed good performance in the market situation during the past 3 years, I believe that big changes will come right ahead.
I would like to ask how big you think the risks are at the moment. For example, do you believe the current situation is as serious as the situation that we witnessed during the Lehmann brothers crisis or the foreign exchange crisis back in the history? And when do you think we can overcome such situation? And when will we able -- be able to see some recovery in revenue and sales in home appliances and TVs? I know that this is very difficult to make projection. However, I would like to ask for your thoughts of this [ week ].
And my second question is about home appliances. I believe that the current situation is very difficult, but still, you are seeing profit at the moment. But taking a look at the short term, I believe many retailers in the U.S. and Korea are having like quite large amount of channel inventory. And I would like to ask for the inventory level for both LG Electronics and your distributors compared to the average years and how you are planning to manage the risk and what kind of opportunities you see through this.
[Interpreted] Thank you for your question. First, you have asked about the economic recession that we are witnessing, and there are various factors, I know. And I know it is very difficult to determine the depth and elaborate on further more. However, what I can say for sure is that, as I have covered in my presentation, we project the uncertainty in the business environment to continue for now due to the prolonged conflict between Russia and Ukraine and worsened consumer sentiment stemming from deepened global inflation.
And to further answer your question about the current status of home appliance and TVs, I would like to tell you more, starting from home appliances. We have strong position in the premium market and premium appliances. And based on our superior market strength, we would like to further strengthen our position in the market. And also, we are seeing recovery in the vehicle component business, and we would like to further continue such momentum.
To elaborate more on profitability, our plan is to ease cost burden by raising our selling price of the premium lineup. Also, as mentioned, we will continue devoting efforts to secure profitability through enhancing cost structure and taking proactive risk management measures.
Lastly, as you have been -- witnessed throughout the media, our plan is to focus on securing additional profit-making models with great growth potentials such as expanding advertisement and content business based on software platform. Thank you.
[Interpreted] To the second part of your question on H&A, we're currently maintaining an appropriate inventory level as we check by section for our own inventory and channel inventory. And by identifying demand slowdown or uncertainty in advance, we factor all the potential risks into our sales plan that we set. Additionally, we also proactively manage our PSI, which supports our revenues.
Yes, it's true, the overall inventory amount is a bit considerable. However, it's normal that we normally have about KRW 5 trillion of channel inventory. As of the end of September, we have also managed a sound level of channel inventory when compared to previous years.
On our future inventory operation strategy, to respond to the pandemic-to-endemic shift, in combination with demand declines driven by the global economic crisis, we're going to establish quarterly goals to efficiently operate our resources by way of ensuring sound inventory levels in conjunction with sophisticated inventory management and minimum inefficient inventory based on our past experience and flexibly operating our own inventory, thereby differentiating for each region and product to support business strategies. Thank you.
[Interpreted] The next question will be presented by Dongwon Kim from KB Securities.
[Interpreted] I have 2 questions. And my first one is about Home Entertainment. Due to the slowdown in TV market demand, it is expected for retailers to adjust inventory level and display companies to lower its production volume. What are your plans to respond to such circumstances?
And my second question is about Business Solutions. What is the business portfolio strategy of the BS company after exiting the solar panel business?
[Interpreted] I would like to answer your question about Home Entertainment. As you have seen from the second quarter of this year, due to the global TV market demand drop, TV manufacturers and retailers have seen an increase in their inventory level. The company has also put in effort to minimize channel inventory risk by adjusting the shipment levels from the first quarter. And as of late September, our inventory level remains relatively sound Y-o-Y.
However, at a time when panel supply is exceeding demand due to a slowdown in demand, it is expected for display companies to adjust their shipment volume in order to prevent additional price dip and protect their profitability.
However, the oversupply in panels will continue for a while unless the overall industry adjusts the LCD production capacity. Therefore, we would like to optimize the inventory level and panel supply through precise demand forecasting, and we are currently making actions. Thank you.
[Interpreted] I would like to answer your question about Business Solutions. BS company's business portfolio consists of information technology, including monitors and PCs; Information Display, like commercial display and hotel TVs; together with commercial robot business.
Our business strategy that is being implemented focuses on nurturing B2B solution business from the IT business sector.
In addition, the company would like to continue expanding our solution business that provides products and services to customers in each vertical by developing robots and EV charging business as part of the new portfolio.
In terms of IT business, LG Electronics would like to continuously provide products that satisfy the high-end market needs with our outstanding gaming monitors and Gram laptops. And also, we would like to expand our capability from our strong B2C to B2B area.
[Interpreted] The next question will be presented by Ji-San Kim from Kiwoom Securities.
[Interpreted] It's a twofold question on H&A and VS respectively.
First, on H&A, there have been improvements to logistics and raw material costs despite slowing global home appliance demand due to weak consumption sentiment led by inflation. Can you give us H&A company's revenues and profitability guidance for Q4 and the 2023 year given all that?
And then secondly, what is your outlook on VS company's revenues and profitability for Q4 and the 2023 year? Your Q3 profitability was better than expected. Do you think you could continue to secure and improve profitability?
[Interpreted] Let me start with the first part on H&A. Although logistics and raw material costs have fallen in the back half of the year relative to the first half, raw material costs are still a burden when compared to the previous year. Additionally, logistics costs seem unlikely to fall by year-end when we are to renew our contracts since we have usually done long-term contracts.
Looking at over Q4 and next year, if the recent sluggish demand leads to limiting revenue expansions during Q4, the peak season, and competition ramps up marketing cost, it's likely to present headwinds to our profitability.
However, when the effects of renewed contracts materializes in 2023 and our cost competitiveness improves, like further drops of raw material costs, and as we increase premium product ASP and target the volume zone to achieve solid revenue growth, we expect to further improve our profitability of the appliance business. Thank you.
[Interpreted] Let me answer your question on VS. We have had positive profits in Q3 following Q2 despite component supply issues for OEMs and some component cost increases. For Q4 as well, we aim to achieve -- we aim to have positive operating profit margins as we continue to improve profitability. So in Q4, we will continuously drive a high growth of revenues and achieve positive operating profit margins.
Going into 2023, by further improving cost factors and achieving high revenues, in addition to rising vehicle component demand and mass production and kicking off for new projects, we expect to be on track to secure profits. Thank you.
[Interpreted] The next question will be presented by Kangho Park from Daishin Securities.
[Interpreted] I have 2 questions on H&A and VS, respectively. First, on H&A. Now there are concerns over the home appliance business. Are you going to continue to increase prices of premium appliances in 2023 as well? And can you please elaborate on the background of your increasing ASP going to 2023?
And then secondly, how do you see the revenue proportion trends per region and customer? You have seen great revenue -- high revenues in Q3 as well. If possible, can you please elaborate on it?
[Interpreted] Let me take the first part of H&A's pricing strategy. As the demand for high-end premium products is solid despite declining demand trends, we're to continue our strategy in expanding premium products with lower demand volatility well into 2023.
While scaling up the premium appliance segment where we have competitive edge, we expect to continuously roll out new products with new technology mounted to lead the market and further ramp up our own premium strategy going forward.
As for pricing strategy, we always calculate spend worthiness figures considering diverse factors, including market demand and inventory. And we plan to continuously increase ASP of products, especially premium ones, within proper ranges given what's happening in the market.
In regards to what products in what regions we'll increase the ASP, we will consider spend worthiness when setting prices of newly launched products with new or upgraded features or designs as we always do.
[Interpreted] Let me answer your question on VS. VS company does business with various global OEMs. North America and Europe pick up over 60% of the total infotainment revenues, and we have also worked to expand the size of the business with Korean and Japanese companies.
While NA customers still take up a large share of the total in the EV components business, with the inception of the LG Magna e-PT, we expect orders and revenues from European OEMs to expand. Thank you.
[Interpreted] The next question will be presented by Sung-ryul Kwon from DB Financial Investment.
[Interpreted] I have 2 questions. My first question is about Home Entertainment. At a time when we are witnessing an increase in market demand, I believe that your company may have great impact. So I would like to ask the OLED TV sales quantity of the second half of this year and the entire year 2022 and, if possible, the figures for 2023 together.
My second question is to corporate-wide operations. I believe that liquidity is found in the market and cash managing is very important. So under such circumstances, do you have any changes in the overall CapEx compared to the plan established earlier this year? And it will be also very appreciated if you can share the mid- to long-term investment plan of each business.
[Interpreted] I would like to ask your -- answer your question about Home Entertainment. As mentioned earlier, we have seen a decrease in TV market demand, not only in OLED TVs but the TV market as a whole. And especially, we have seen a decrease -- drop in the European market.
Well, the demand drop was what we have witnessed by the third quarter of this year. And if I may elaborate furthermore on the demand of the peak season in the fourth quarter, there are some risk factors that may bring down purchasing power due to various global economic issues. However, there are also opportunities such as the World Cup at the same time. Therefore, we believe that we will be able to see some recovery in major distribution channels through marketing and promotions.
Especially, just as the sales success that we had witnessed in major channels in the fourth quarter of last year, we are expecting sales growth, especially in OLED TVs, led by the World Cup and Black Friday promotions.
In terms of the European TV market especially, we have seen negative growth in demand until August, with a 7% drop in sales volume due to macroeconomic issues, including geopolitical risk in Russia and Ukraine, weak euro and inflation. However, we are expecting sales quantity to grow by approximately 5% in the fourth quarter with our aggressive sales plans for channels, coupled with peak sales season. And we are being well prepared for this.
Well, this is the case in this year and next year altogether. We are preparing to bring new model to the market. Especially, we are planning to bring lifestyle screens such as Easel, Posé, Flex to the market this year so that we can see a slight increase in the market sales in the second half of this year together with next year. Thank you.
[Interpreted] I would like to answer your question in regards to CapEx investment. The company's investment in capital expenditure this year will be made without witnessing big changes compared to the plan established earlier this year, following principle to invest within the EBITDA amount.
And if I may elaborate on each business's mid- to long-term investment plan, the company is investing in expanding existing businesses, advancing and intellectualizing the manufacturing sector and realizing digital transformation. As a result, we will continue to make best practice such as Lighthouse Factory in Changwon.
Together with making investment that can advance our business portfolio and discover new business sector, we would like to put in our best efforts in minimizing unnecessary investments and making investment more efficient so that the company can respond to global economic recession and slowdown in demand and eventually can well manage the financial soundness.
[Interpreted] The next question will be presented by Sung Kyu Kim from Daiwa Capital Market.
[Interpreted] I have 2 questions on VS, Vehicle component Solutions Company, and BS, respectively.
First, on VS, your Q3 performance was pretty great. Can you give us more color on backlogs across the VS company and for each of the main businesses, namely infotainment, LG Magna, EPT and ZKW? And by year -- by end of year 2022, how do you expect your backlogs and proportions of each main business?
And the other thing is around B2B demand. I believe the company's B2B demand can remain strong compared to that of B2C on this economic slowdown. How do you see the demand trends?
[Interpreted] Let me start with the first part on VS. Our backlogs were initially expected to be around KRW 65 trillion, but we now expect to have over KRW 80 trillion towards the end of the year, supported by new orders and exchange rate effects and so on in Q3 to Q4.
As of now, infotainment takes up around of 60% of the total backlog; EV components, mid-20%; and automotive lamps, the rest. On the back of the high growth of the EV markets and LG Magna's JV joint venture effect, we expect the EV components business to take up a larger share of backlog in the future. Thank you.
[Interpreted] I would like to answer your question about Business Solutions. And as you just covered, the overall B2B demand remains relatively stable compared to B2C.
We have witnessed higher demand in the first half of this year as governments and corporates started to make actual investments that were postponed and downsized during the pandemic.
Starting from the second half, the global economic recession became worse, and hence, demand of government and corporate vertical is not rising as expected. However, hospitality, including hotels and education vertical demand, are showing relatively strong growth.
In a nutshell, the overall demand outlook of B2B has decreased compared to our forecast estimate. However, the overall demand will be on the rise.
And lastly, adding more about the company's outlook, the B2B performance is remaining sound based on the sound demand, and we are expecting high revenues. Therefore, I can say that the profitability is remaining sound at the moment. Thank you.
[Interpreted] The next question will be presented by Jong Jin Park from JPMorgan.
[Interpreted] I have 2 questions. My first question is about corporate-wide operations. Currently, the dollar is remaining strong compared to the Korean won. And how does this impact your sales and COI?
My second question is about Home Entertainment. You mentioned that TV sales will go up by 5% in the fourth quarter. Do you think this is because of the World Cup effect? Or do you have any other reasons behind such growth?
[Interpreted] I would like to answer your question about the exchange rate. The company is running stable regional portfolio operations. And in addition, we are taking natural hedging methods, such as currency matching, in order to mitigate exchange risk despite foreign exchange rate fluctuation. As [ per ], we are well striking the balance between foreign currency assets and liability. Therefore, the foreign exchange rate fluctuation has very limited impact on the corporate-wide performance. Thank you.
[Interpreted] I would like to answer your question about Home Entertainment. As you have mentioned, we are expecting World Cup effects. And the figure that I have mentioned, 5%, is mentioned by the market analysis ahead from the peak. And I believe that we will be able to see additional enhancements in the fourth quarter along with the peak season. And we believe that this sort of increase will be limited compared to past levels.
And if I may move on to the regional sales, taking a look at the developing market, the Brazilian government is planning to implement an economic stimulus package that can bring positive breeze to TV sales during the World Cup. And the company is also expecting higher demand in Middle East/Asia market, driven by greater interest towards the event as the World Cup is taking place in the region for the first time in history. And as mentioned, the 5% figure came from market analysis ahead from the peak. And despite the worsened economic situation in Europe, we believe there will be additional demand as the World Cup is going to take place during the winter season and people may enjoy the event indoors, and we are implementing marketing measures accordingly. Thank you.
[Interpreted] Currently, there are no participants with questions. [Operator Instructions]
[Interpreted] Any further questions?
[Interpreted] Once again, currently, there are no participants with questions. We will wait for a second until there is another question.
[Interpreted] If there is no further question, this brings us to the end of LG Electronics' Earnings Release Conference Call for the Third Quarter of 2022. 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.]