LG Electronics Inc
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LG Electronics Inc
Earnings Call Analysis
Q3-2024 Analysis
LG Electronics Inc
LG Electronics faced a mixed performance in Q3 2024, experiencing year-over-year revenue growth across various sectors despite laying low demand for home appliances and vehicle components. The company's strategy leaned heavily on expanding its B2B segments and diving into subscription models, particularly in the home appliance arena. Notably, Q3 revenue from the subscription business surged over 50% to KRW 1.3 trillion, currently contributing more than 20% to overall revenues.
For the Home Appliance and Air Solutions (H&A) segment, the results were encouraging with sales reaching KRW 8.3 trillion and operating profit at KRW 527.2 billion, translating to a profitability margin of 6.3%. However, the outlook for Q4 suggests challenges ahead as the domestic market remains stagnant. Conversely, international markets are projected to recover, driven by favorable economic indicators like improved global trade and interest rate cuts. Furthermore, LG aims to introduce new products tailored to local markets and fortify its online sales strategy.
Turning to the Home Entertainment (HE) sector, sales increased primarily due to heightened demand for premium OLED TVs and a stable performance in advertisement and content initiatives through the webOS platform. HE reported sales of KRW 3.7 trillion, with a slight operating profit drop to KRW 49.4 billion, largely due to rising LCD panel costs. Looking ahead, LG anticipates modest demand recovery in Q4, with an aim to boost sales of premium products while solidifying partnerships to enhance the webOS ecosystem. In contrast, the Vehicle Component Solutions area reported growth in sales year-over-year, yet a dip quarter-over-quarter impacted by stagnant demand in the EV sector. The operating profit fell due to increased R&D investments for future EV technologies. Despite these hurdles, optimism remains with expectations of an eventual improvement as geopolitical conditions stabilize.
Despite facing challenges, LG's overall financial standing appears solid. In Q3, the company reported a net income of KRW 90.2 billion, although net cash flow was negative at KRW 727.5 billion due to high investment activities. By the end of the quarter, the cash balance stood at KRW 7.69 trillion. The company's total assets reached KRW 64.3 trillion, with liabilities at KRW 39.9 trillion, indicating healthy leverage ratios of liability to equity and total debt manageable amidst market fluctuations.
For Q4, LG set a clear guidance aiming for year-over-year revenue growth despite prevailing uncertainties including geopolitical risks and a timid recovery in market demand. However, they are focused on high-margin products and optimizing operations to maintain profitability. Notably, LG has targeted a 7% annual growth rate, a 7% operating profit, and a projected sevenfold increase in EV EBITDA multiples by 2030. The company anticipates minimum dividends of KRW 1,000 per common share with a semiannual payout plan, reflecting an increased commitment to shareholder returns as part of their corporate value-up strategy.
LG continues to bolster its position as a leader in eco-friendly products and smart life solutions. Recognition for their developments in high-efficiency appliances solidifies their brand strength. Additionally, LG is strategically pursuing growth in renewable sectors like EV charging and robotics while enhancing its sustainability measures, ensuring long-term competitiveness and compliance with global environmental standards.
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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'll now turn the call over to the first speaker.
Good afternoon. My is Wonjae Park from Investor Relations. Thank you for joining our earnings call for the third quarter of 2024. With me are CFO and EVP of LG Electronics, Chang-Tae Kim; SVP of Global Business Management; Sang Ho Park; VP of Home Appliance and Air Solution, I-Kueon Kim; VP of Home Entertainment, Jeong-hee Lee; VP of Vehicle Component Solutions; Ju Yong Kim; VP of Business Solutions, Dong Cheol Lee; VP of Corporate Business Management, Choong Hyun Park; VP of Accounting Division, Hong Su Lee; Head of Finance, Young Kyoon Kim; and Head of ESG Strategy, Sung Min Hong.
Here's today's presentation agenda. First, our CFO will outline our corporate value-up programs, which were announced on October 22 as well as the result of the third quarter and the outlook for the fourth quarter, then I'll present financial highlights. Subsequently, each division will take turn to deliver its business results and outlook. And finally, we will conclude with an overview of our ESG activities and achievements.
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 results 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 us start with our value-up plans and move on to consolidated financial results for the third quarter of 2024 and the outlook for the fourth quarter.
Good afternoon. My name is Chang-Tae Kim, CFO of LG Electronics. As part of our effort to fully reflect our intrinsic value, we announced our corporate value-up plans on October 22. In the announcement, we outlined the detailed strategies and plans for achieving our mid- to long-term goals and directions, which have been communicated through events such as the Future Vision 2030 press conference and this year's Investor Forum.
We have set mid- to long-term goals of achieving the Triple7 target by 2030: A 7% average annual growth rate, a 7% operating profit and a sevenfold increase in EV EBITDA multiple aiming to post no less than 10% in ROE by 2027. To this end, we are focusing on expanding our platform into services and B2B businesses as well as identifying new high-growth potential areas that align with our capabilities.
By innovating our business portfolio, we aim to increase the contribution of these businesses to 52% of total revenue and 76% of operating profit by 2030. We have decided to increase the distributable profit to no less than 25% of the net profit attributable to the owners of the parent, excluding one-off nonrecurring profit, Additionally, we have introduced a minimum dividend of KRW 1,000 per common share per year, along with a semiannual dividend scheme.
We are taking a multifaceted approach to improving our shareholder return policy, including treasury stock strategies. We will keep the market informed of any changes we adopt through disclosures and other means.
Let's move on to our business results of the third quarter and the outlook for the fourth quarter. Despite a delayed recovery in EV demand, Q3 revenue grew year-over-year, driven by increased appliance sales in emerging markets, a rise in OLED TV sales and accelerated growth in incubating businesses such as subscription and webOS platform services. However, operating profit saw a decline due to continued pressure from rising logistics costs, LCD panel prices and fixed costs associated with delayed EV component sales.
Looking ahead to Q4, the business environment remains challenging. Delays in demand recovery and market entities are expected to persist with risks posed by gradual interest rate cuts and potential oil price fluctuations triggered by geopolitical tensions in the Middle East. Global shipping rates, on the other hand, are stabilizing, alleviating concerns over further increases in logistics costs.
We aim to achieve year-on-year revenue growth by expanding our home appliance business and actively responding to the increasing demand for TVs and vehicle components, including the infotainment sector. To maintain stable profitability, we will focus on high-margin products, efficiently allocating -- efficiently allocate marketing resources and optimize global operations.
Despite ongoing global macroeconomic uncertainties, a prolonged demand slump and intensified competition, we will leverage our unique competitive strengths to proactively address the rapidly changing external environment and achieve our desired outcome.
I'll now briefly review the third quarter performance of each business. H&A recorded KRW 8.3 trillion in sales, KRW 527.2 billion in operating profit and 6.3% in profitability. HE recorded KRW 3.7 trillion in sales, KRW 49.4 billion in operating profit and 1.3% in profitability. VS recorded KRW 2.6 trillion in sales and KRW 1.1 billion in operating profit. Last, but not least, VS recorded KRW 1.3 trillion in sales and KRW 76.9 billion in operating loss.
Let's move on to the profit and loss and cash flow of the third quarter. Reflecting financial income and expense, equity method gain and loss, other nonoperating income and expense, corporate income tax and income and loss from discontinued operation, we posted KRW 90.2 billion in net income.
Next, on cash flow. Q3 cash flow from operating activities was KRW 207.2 billion, and cash flow from investment activities was negative KRW 754.1 billion, resulting in net cash flow of negative KRW 727.5 billion. When reflecting cash flow from financial activities of negative KRW 134.6 billion, cash balance at the end of Q3 came to spend at KRW 7.69 trillion or KRW 862.2 billion decrease from the previous quarter.
Next is the key financial position and indicators for the third quarter of 2024. As of the end of the third quarter, assets stands at KRW 64.3 trillion, liability at KRW 39.9 trillion and equity at KRW 24.4 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 third quarter results and fourth quarter outlook. We'll begin with H&A.
Let me share the third quarter outlook, third quarter results of H&A. We achieved year-over-year revenue growth despite the delayed demand recovery in the global appliance market driven by the expanded sales of B2B product and steep growth in our subscription business. Operating profit reached a level, at least equal to that of the same period last year despite increasing pressure from logistics costs, thanks to revenue growth and initiatives to improve material expenses and productivity.
Next is the outlook for Q4. The domestic market is expected to remain stagnant, while the overseas market is projected to recover supported by improvement in leading economic indicators in major countries such as a rise in global trade volume and interest rate cuts. However, uncertainties persist due to the ongoing geopolitical risks and the unpredictability surrounding the U.S. Presidential election, among other factors.
In response to the market, we plan to introduce new products tailored to local market needs and expand the volume on segments, produce additional revenue and strengthen our online and subscription businesses to sustain our growth momentum. Furthermore, we'll enhance our productivity to optimize manufacturing costs and marketing expenses to secure profit.
Next the third quarter results of Home Entertainment business. Sales continued to grow year-over-year, fueled by increased TV hardware sales, particularly in Europe and a surge in OLED TV shipments. The expansion of webOS-based advertisement and content business has also contributed to this upward trend. Operating profit, however, posted a small drop year-over-year due to ongoing cost pressure stemming from rising LCD panel prices.
Let's move on to the fourth quarter outlook. In terms of overall market demand for TVs in Q4, we expect to see a slight year-over-year improvement. The demand recovery is likely to be more pronounced in the volume zone than the premium segment. Accordingly, we aim to accelerate sales growth and enhance our contribution to overall profitability by continuing to increase the sales of premium products such as OLED and QNED TVs, strengthen the competitiveness of master product to meet the volumes on demand and expanding partnerships to grow the ecosystem of the webOS platform.
Next is the third quarter result of the Vehicle Component Solutions business. For sales, we are able to maintain year-over-year growth momentum. However, quarter-over-quarter sales saw a slight dip due to stagnant demand in the EV market. Operating profit decreased year-over-year, impacted by reduced sales and increased R&D costs for upfront investment in the mass production of existing projects and future preparations for [ S EV ].
Next is the outlook for the fourth quarter. The market environment such as that the demand for finished vehicles is likely to grow than to the previous quarter. However, due to stagnation demand, the growth rate is projected to be slower than previously forecasted. Against this backdrop, despite these wins, we plan to continue growing sales and strengthening our market position based on orders on hand and secure profitability by improving our product mix and optimizing operational costs.
Let me present the third quarter results of the Business Solution. Q3 revenue grew year-over-year, thanks to increased sales of gaming monitors, LED signage and other strategic products, a large volume of PC orders from B2B partners and revitalized sales in online channels. Our operating profit experienced a deeper deficit due to a competition-triggered drop in average selling prices, rising logistics and material cost and increased the resource allocation towards the growth of new business areas.
Now let me turn to the fourth quarter outlook. Market demand for monitors and infotainment display business is likely to be similar to that of the previous quarter. Demand for PCs, in general, however, is expected to be sluggish, but we believe that demand for premium laptops will grow year-over-year as the market is showing more interest in AI-powered PCs.
Against this backdrop, we will concentrate on improving profitability by first, growing year-over-year sales of the ID business by capitalizing on emerging opportunities in vertical markets; second, increasing sales of strategic products and invigorating omnichannels for IT products; and third, improving the efficiency of our resource management and optimizing cost structure.
Last, but not least, our ESG activities and achievements. LG Electronics has been widely recognized for its competitiveness in high-efficiency eco-friendly products. With the grand price awarded to our turbo heat pump, we have received a total of 10 awards at the 27th Energy Winner awards, including the carbon neutrality award. This marks our eighth consecutive year as the most awarded company in home appliance category. Additionally, 15 products were selected as this year's green product chosen together with consumers by the Korean green purchasing network, marking the fifth consecutive year of being selected as a green masterpiece.
Meanwhile -- models of our TVs and tram wash combo were certified as the first e-Cycle excellent product of the year by e-Cycle [ governance ]. Our products and services are recognized not only for their eco-friendliness, but also for their excellent ease of use and accessibility. The LG Comfort Kit, an accessory design to help all customers use appliances easily, secured the gold medal at the International Design Excellence Awards. Additionally, in the 2024 Courier Service Quality Index, organized by the Korean Standard Association, LGE ranked first in the home appliance AS category for our -- customer AS experience accessibility and in the call center quality index for the introduction of AI assistant solution.
Our competitiveness in sustainable products and services stem from our commitment to responsible technological innovation. Our V2X module, which enables communication between vehicles and surrounding [ offsets ] has achieved common criteria certification for its security, making a world first. Additionally, we are collaborating with [ Altair ], a leading American simulation company to develop solutions that extend the lifespan of automotive electronic components, thereby enhancing the reliability of our product in this sector. We'll continue to strengthen our competitiveness in sustainable products and services as a smart life solution company.
That brings us to the end of the third quarter earnings release and outlook for the fourth quarter. We'll now take questions. Operator, please commence with the Q&A session.
[Operator Instructions] The first question will be presented by Kangho Park from Daishin Securities.
I have 2 questions. And my first one is about an additional question on the corporate value-up program. Taking a look at your announcement, I was able to hear some news about incineration and dividend scheme policies. Thus, I am seeing higher expectation from the market. Can you share some schedule or plans that we can seek in the market?
The second question will go to the HE business. I think it's very important for us to realize that we have to expand the webOS platform within LG. And recently, LGE decided to exit from its LCD panels. It is -- and we also have seen an increase in Chinese brands gaining more market share. What kind of measures is LG taking?
Thank you for your question. Your question will be answered by Investor Relations. As you just covered, we have announced our corporate value-up program last 22nd of October. And we have newly set our target ROE, reaching no less than 10% by 2027 in connection with the mid- to long-term goals of like achieving KRW 100 trillion in sales and the Triple7 target by 2030.
For this, we would like to bring -- transition of our business portfolio by focusing on platform business, B2B business and new business discovering. And we aim these 3 business groups to achieve 52% revenue and 76% operating profit by 2030. In addition, along with the dividend -- of 2024 that we have announced earlier this year, it includes a minimum dividend and semiannual dividend scheme. And on top of this, we would like to further review introducing quarterly dividends as well.
To tap on buyback and incineration of treasury stocks. These are also under review as they can be one of the efficient options that can enhance shareholder value. However, we would like to comprehensively consider the market condition as it may change, and we also have to take a look at the financial condition that we are facing in order to determine the exact time line or scale. Of course, we will keep the market informed at all times about any changes to our shareholder return policy through disclosures and other means.
To answer your second question on HE, as you are well aware, Chinese TV brands are capturing market share by offering entry-level products and ultra-large lineups to customers at a low cost. The strategy is far from the direction our company is taking to deliver a memorable customer experience through our unique and differentiated products. Excessive price cuts may trigger channel inventory issues and cause profitability to deteriorate throughout the entire ecosystem.
LG's product is already highly recognized within the market, and LG continues to gain the upper hand in the premium TV segment with OLED and QNED TVs. To compete with Chinese TV brands, we are making procurements and production more efficient and the entry-level TVs to secure cost competitiveness, delivering customer value through our exceptional and unparalleled product competitiveness, while also ensuring robust profitability.
For instance, we have launched more entry-level TVs that come with our highly acclaimed webOS and strengthen product competitiveness in the volume zone while maintaining a relatively favorable price and increasing sales of entry-level TVs.
The following question will be presented by Simon Woo from Bank of America.
Thank you for taking my questions. And I would like to first say thank you for the explanations on the value-up program. I believe that your comment was more important than any other times in history. And my first question is about logistic costs and marketing expenses. I would like to ask the impact of these 2 expenses on the profit and loss of the further compared to other times. Do you think this will continuously be a burden?
And my second question is about your investment plan on new business because I know that the management level has been continuously emphasizing on this. When do you think to expect -- when do you expect to achieve profitability?
I would like to answer your first question from the home appliance perspective. To begin with the impact stemming from logistic costs, we have witnessed some impact on the third quarter profit and loss year-on-year as we have gone through renegotiation of freight rates by region with major shipping companies due to geopolitical issues. Fortunately, SCFI has been declining from July and we are talking about adjusting freight rates with high rate shipping companies.
As the fare will be adjusted based on the existing contracts of the previous second half, we expect that, that decline will not be significant, but we do anticipate the impact from sea freight charges will lessen in the fourth quarter compared to the previous one.
Next is marketing expenses, which increased year-on-year and quarter-on-quarter. In the fourth quarter, we would like to add more resources with strategic marketing activities so that we can further contribute to greater sales at year-end and in the future.
Your second question in regards to new business investment will be covered by Business Solutions as we are making investment in EVs and robots. We're not only expanding and enhancing the existing production lines, but also making continuous investments this year in order to establish a growth foundation and secure competitiveness in new businesses with like promising future growth such as EV charging business and robots.
To begin with, we acquired a business in October 2022 and established production sites in Texas, U.S. in late 2023 aiming to enter the North American market. This year, we are expanding the business structure through establishing product lineup and making more investments, and our robotics business has made investments centered on delivery robots.
We believe that EV charging and robot business is the future growth of Business Solutions and will drive revenue significantly in the mid- to long-term reaching trillions. Therefore, we would like to continuously make investments in these areas so that we can secure business competitiveness.
Please understand that I cannot specify the exact timing for achieving operating profit as our new business is focused more on strengthening capabilities for business expansion rather than generating immediate revenue. However, we are striving to achieve profitability as soon as possible based on securing stable sales at a certain scale.
The following question will be presented by Sang Uk Kim from UBS Securities.
I have brought 2 questions. First one on H&A, the second one on Vehicle Solutions. To begin with, I understand that you have been emphasizing the growth of HVAC several times. Can you share the sales portion of HVAC within the H&A business along with the B2C and B2B sales contribution to HVAC? Additionally, how much do you expect the HVAC sector to show revenue growth in 2025?
The second question will go to the VS business. The first question is, could you please give us the current status of order backlog and provide a breakdown of each business? Additionally, could you give us an estimate of the order backlog for 2025 in comparison to 2024? Also, could there be order cancellations due to the flagging demand for EVs and concerns in the market? Please give your measures.
Your question in regards to HVAC will be covered by home appliance business. The contribution of HVAC to our H&A business is slightly over approximately 25%. Taking a close look into the HVAC sector, B2C business consisting of RAC and air care represents 45% of revenue share, while B2B business, that includes system air conditioners and chillers, accounts for 55% of revenue.
In the coming year, we anticipate encountering challenging market condition due to a slowdown in the electrification transition in advanced markets, geopolitical risk in the Middle East and increased competition. Against this backdrop, however, we believe that we will be able to maintain our revenue growth through preparing for and responding more specifically to electrification opportunities in North America and Europe and expanding our chiller business based on enhanced data center cooling solutions.
To answer your question for the VS business, as of late September, although we cannot provide you with the exact figures, we can say that we have been successful in actively pursuing new orders based on our unique and distinct products and strong market press and have secured an order backlog worth KRW 100 trillion.
As EV market growth slows down, we expect to see delays and decrease in sales in some projects, which may marginally impact our order backlog. Regardless, we remain strong with order backlog increasing year-over-year and expect to see this upward trend continue into 2025.
Going into the sales composition of each business, in-vehicle infotainment accounts for 60% of the entire order backlog. EV components take up 25%; and automotive lighting and headlamps hold 15%.
The following question will be presented by Hyung Wou Park from SK Securities.
I would like to bring 2 questions. My first question is about subscription business. I understand that so far, you have been focusing on domestic subscription business, and now you're trying to bring this to the overseas market. Can you tell us about the current -- status and to which extent you expect the business to grow? And also, it will be appreciated if you can share the scale, proportion and profitability and your outlook for the next year? .
The same question will go to the VS business. I have 3 questions for the VS business. The first is, could you please walk us through the current demand status for EVs and the outlook?
The second question, does the slowdown of OEMs EV sales ripple through and impact LG?
And lastly, when will VS hit the trough? And how long will it take for the business to rebound?
Let me answer your question about subscription business. We anticipate revenue from subscription business from home and abroad to continuously grow in the future. Based on our competitiveness and experience in the Korean market, we are gradually expanding our business in the overseas market.
As our subscription business centered on large appliances continues to grow in the Korean market, we have achieved an accumulated revenue of KRW 1.3 trillion in the third quarter, making a growth of over 50% compared to the same period last year. Consequently, subscription business contribution has increased by approximately 15% last year to over 20% currently, while maintaining a double-digit operating profit.
Adding more colors on the overseas business that you've just touched upon. After launching our business in Malaysia, we are expanding the scope to other Asian countries such as Taiwan and Thailand. We are continuously seeking for subscription business growth centered on large appliances in Malaysia, and we've planted our subscription business in October in Taiwan and Thailand, after establishing system and infrastructure for the business.
Please understand that I cannot disclose exact time line, but plans and feasibility of entering India and other Asian countries are under review from various angles.
Let me answer your question headed towards the VS business. Despite seeing slower-than-expected market growth due to a tapering of demand in the short term, we believe that the mid- to long-term direction towards electrification remains strong with the increase of EV charging stations, adoption of new environmental regulations and OEM's expansion of EV lineup. We believe that overall, this is going to have a positive impact as major OEMs are also strengthening their ex-HEV portfolio -- EV growth slowdown.
As demand for EVs cools, we may see sluggish growth in the short term. Nevertheless, we are capable of swiftly responding to OEMs' request to develop hybrid vehicles as we see growth in the in-vehicle infotainment system centered on ICEs and our technological capabilities in developing motors and inverters for ex-HEV. Performance levels may undergo temporary adjustments yet we expect to see growth rate and profitability continue to improve.
The following question will be presented by Jay Kwon from JPMorgan.
I have 2 questions. And my first question is about the value-up program because when you first announced the value-up program, you suggested the ROE proportion and in order to achieve such target of 10%, do you have any like anticipated equity or financial structure plans? I am asking this because I believe that this portion may differ based on the net debt ratio.
The second question is going to go to the HE business in regards to the webOS business. We see that the webOS is centered around the North American market. I would like to ask whether your mid- to long-term plans hold any different strategies regarding North America and the composition -- sales composition of North America and other regions? I would like to also talk -- I would also like to get an answer from -- regarding the growth and the growth possibility within the markets.
Thank you for your question. Your question in regards to ROE will be covered by Investor Relations. When announcing the Vision 2030, we have all reflected the financial structure, including ROE, revenue, operating sales and so on. And also the recent business performance, the future environment was all comprehensively considered.
As you have mentioned, market uncertainties and challenges for business operations still persist. However, we would like to accelerate transition towards a high value-added business. And also, we would like to explore various plans to enhance efficiency on equity management, including shareholder returns.
To answer your question headed towards HE, the business. Yes, we realize that our market share is focused on the U.S. as it holds about 80% of the market share as of 2024 and other regions hold about 20% in 2024. Our goal for mid- to long term by 2030 is to seek other advancements, especially in a few of the advanced EU markets. We also hope to expand to the central -- South American region, but still we are seeing quite some uncertainties regarding the advertisement business. So we think that the ratio of the share -- sale share will be 40% to 60% -- 40% to 60%.
The following question will be presented by Eoyeon Hwang from Nomura Securities.
My question is going to head towards the VS business. I have 2 questions in total. First, we are seeing a growth slowdown in the EV sector. However, one of our key customers, GM, has reported QS profit as -- has reported a rise in Q3 profits recently. They have diversified their EV lineup and they have penetrated the low-end EV car sector as well. They have seen a 60% growth year-over-year. When do you think this performance will be reflected in LG and Magna's performance? And what do you expect this to have a reflection on LG's 3Q profits?
To answer your questions regarding GM's 3Q profits. Yes, we have seen the rise in EV sales for GM in the GM's IR recently. But that's not -- it seems high because their sales in the previous quarter and the year before was quite low. Their supply request has also been reflected into the LG and Magna's performance. And with -- as we see increase in the lineups for new cars, we believe that this will overall have a positive effect on our business as well. We also believe that these efforts will revitalize the EV market. Do you have any more questions?
Currently there are no participants with questions.
Thanks to shareholders and investors, LG Electronics was selected as the grand prize, the highest price at the 2024 Korea IR Awards. We would like to take this time to show our deepest appreciation.
That brings us to the end of LG Electronics earnings release conference call for the third quarter of 2024. For further questions, please contact the IR team. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]