LG Electronics, Inc. (OTC:LGEAF) Q3 2020 Earnings Conference Call October 30, 2020 3:00 AM ET

Company Participants

Sang Bo Sim – Investor Relations

Conference Call Participants

Dongwon Kim – KB Securities

S. K. Kim – Daiwa Capital Market

Jong Lee – Samsung Securities

Wonjae Park – Mirae Asset Daewoo

Nicolas Gaudois – UBS

J.J. Park – JPMorgan

Dong-je Woo – Bank of America

Operator

Good morning and good afternoon. Thank you for joining LG Electronics Earnings Release Conference Call for the Third Quarter of 2020. This conference call will start with a presentation on our earnings results followed by a Q&A session. [Operator Instructions] I would now like to hand the conference over to the first speaker.

Sang Bo Sim

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 2020. With me are representatives of the financial planning division of each business: Mr. I-Kueon Kim from Home Appliance and Air Solution; Mr. Jin Ho Ha from Home Entertainment; Mr. Dong Myung Seo from Mobile Communication; Mr. Guntai Kim from Vehicle Component Solutions; Mr. Kyuson Hwang from Business Solutions.

We are also joined by Mr. Minkyo Kim from Accounting Division; Mr. Jeong Hee Lee from Business Planning Division; and Mr. Hyungyu Lee from Finance Division. Please be noted that all statements we will be making today regarding our financial records – 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 in forward-looking statements made today.

First, I will outline the overall performance results of the third quarter and outlook of the fourth quarter. After that, each division will take turn to deliver its business results and outlook. Let me start with the consolidated financial results of the third outlook and the outlook of the fourth quarter of the year 2020. Consolidated sales of the third quarter was KRW 16.9 trillion, and operating income was KRW 959 billion. Consolidated sales recorded high growth quarter-on-quarter and year-on-year, driven by pent-up demand increase of home appliance and TV as well as increase in premium product sales despite the COVID-19 pandemic.

As for profitability, we achieved third quarter record high, thanks to recovery of vehicle component demand and increase in major product sales such as home appliance and TV. I will now briefly review the third quarter performance of each business. H&A recorded KRW 6.2 trillion in sales, KRW 671.5 billion in operating income and 10.9% in profitability. HE recorded KRW 3.7 trillion in sales, KRW 326.6 billion in operating income and 8.9% in profitability. MC recorded KRW 1.5 trillion in sales and KRW 148.4 billion in operating loss. VS recorded KRW 1.7 trillion in sales and KRW 66.2 billion in operating loss.

And lastly, BS recorded KRW 1.5 trillion in sales, KRW 77 billion in operating income and 5.2% in profitability. Further details by business will be covered in later slides. Let’s move on to the profit and loss and cash flow of the third quarter. In terms of profit and loss, our net income, reflecting financial income and expense, equity method gain and loss, other nonoperating income and expense and corporate income tax, posted KRW 649.2 billion.

Cash flow from operating activities of the third quarter was about KRW 1.6 trillion, and cash flow from investment activities was negative KRW 511.2 billion. As a result, net cash flow amounted to KRW 1.1 trillion, and when reflecting KRW 57.2 billion of cash flow from financial activities, cash balance at the end of the third quarter was about KRW 6.6 trillion, an increase by KRW 1.1 trillion quarter-on-quarter.

Next is the key financial position and indicators for the third quarter of 2020. As of the end of the third quarter, our assets stood at KRW 49.4 trillion, liability at KRW 31.6 trillion and equity at KRW 17.8 trillion. As for leverage ratios, liability-to-equity increased quarter-on-quarter as account payable increased to respond to supply amount resulting from demand recovery, but debt-to-equity and net debt-to-equity decreased quarter-on-quarter. Next is fourth quarter outlook. In terms of business environment, there still exists industrial activity uncertainty risk due to slow recovery of the real economy and COVID-19 global risk spread, along with the restrengthening of movement restriction.

Nonetheless, low interest rate trend and additional physical policies to boost economy will be maintained for the time being. And new business opportunities coexist as non-face-to-face trend expands and consumer spending pattern changes. Accordingly, it is predicted that COVID-19 pandemic will serve as a momentum to raise brand awareness. Efforts to expand online sales, new growth products and OLED TV sales will be continued to maintain growth momentum. And through efficient resource management, fourth quarter sales and profitability is expected to stand higher than the same period of last year.

Now let’s move on to the third quarter results and fourth quarter outlook by business. First is H&A. The third quarter results of H&A. Sales shifted back to growth trend in both Korea and overseas. Sales recorded KRW 6.2 trillion, an increase of 15% year-on-year. In terms of profit, it improved significantly year-on-year and recorded a double-digit base, driven by those growth in all regions and cost structure improvement.

In the fourth quarter, competition in the market is expected to intensify due to delayed recovery of emerging market demand caused by the prolonged COVID-19 situation and the beginning of the fourth quarter promotion season. However, sales is expected to maintain a double-digit growth rate following the previous quarter with the gradual improvement of the business environment. And we plan to focus on achieving profitability, similar or higher than that of the previous year, by conducting cost-optimization activities. Let me share the third quarter results of HE.

Sales increased year-on-year, driven by demand increase in advanced markets such as North America and Europe and also increase in online sales and premium product sales such as OLED and NanoCell TVs supported the jump. In terms of profit, it improved year-on-year, thanks to sales growth and premium product sales increase, even though there were cost-aggravating factors caused by LCD panel price increase. Now let me share the outlook for the fourth quarter. Market is expected to grow during the high demand season, but risk factors such as intense price competition and increase in LCD panel price is also predicted.

We plan to achieve profitability similar or higher than that of the previous year by expanding the sales proportion of premium TVs such as OLED, NanoCell and large-sized TVs, strengthening online sales and enhancing efficiency of resource management such as marketing expense and inventory. That is all. Let me share the third quarter results of MC. Sales increased by 17% quarter-on-quarter, driven by gradual recovery in global demand and increased sales in major markets such as North America and South Central America, but remained at the similar level year-on-year due to supply issues caused by 4G chipset shortage.

In short – in terms of profit, although marketing expense slightly went up due to new model launch, it improved quarter-on-quarter and year-on-year, thanks to increased efficiency of production sites and cost-saving effect of ODM expansion, along with solid sales in mass-tier models. Now the fourth quarter outlook. With the launch of 5G smartphones from competitors, 5G market is expected to show a significant growth, and market demand is expected to increase quarter-on-quarter. And demand is predicted to recover to the level of the fourth quarter last year.

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With the launch of the new form factor, LG WING, we will focus on expanding sales by strengthening mass-tier lineup, focusing on target markets such as North America and South Central America, and also improve our profit structure through continued operation efficiency. Let me share the third quarter results of VS. Sales increased by 24% year-on-year as automobile manufacturers in North America and Europe, our main OEMs, have resumed production in COVID-19 pandemic situation, and as a result, demand for vehicle components is recovering. As for profit, operating income improved slightly year-on-year, driven by sales growth, resulting from vehicle components demand recovery and cost-management efforts such as material and fixed-cost reduction. For our fourth quarter outlook, recovering the automobile market to pre-COVID-19 level is predicted to be delayed. However, connected and electric vehicle business sectors are expected to show high growth.

Accordingly, we will maximize sales through intense supply chain management to respond to market recovery trend and improved profit structure through ongoing cost management. Let me share the third quarter results of BS. Sales increased by 13% quarter-on-quarter despite difficulties in B2B business, thanks to the noncontact trend created from the prolonged COVID-19 pandemic, but decreased by 2% year-on-year. In terms of profit, operating income decreased quarter-on-quarter and year-on-year due to sales decline and increased price competition in the fourth quarter.

Amid the prolonged COVID-19 pandemic and contact-free environment, we will see increase in market demand in certain product groups related to contact-free and new normal trends, but business opportunities and trends such as reduced corporate investment and fierce price competition will both exist. We expect sales to grow year-on-year as we actively tap into sales opportunities of products related to non-face-to-face services, expand strategic product sales, improve product competitiveness and strengthen online marketing activities. That brings us to the end of the third quarter earnings release and fourth quarter outlook. We will now take questions.

Question-and-Answer Session

Operator

[Foreign Language] The first question will be provided by Dongwon Kim from KB Securities. Please go ahead. With your question.

Dongwon Kim

My question is on a corporate-wide basis and on VS. Traditionally, LG Electronics tend to have lower performance in the fourth quarter due to the burden from inventory and the increase of marketing expense. So could you explain the overall direction you expect for the results in the fourth quarter this year? And my question related to VS is do you expect a turnaround next year. And if so, through what activities do you believe you can achieve this? If you could explain based on your strategy and outlook for next year.

Unidentified Company Representative

Let me answer your question on the corporate-wide side. Regarding your question on our performance for the fourth quarter, like I explained in my outlook presentation, due to the non-face-to-face trends brought on by COVID-19, we believe that the online sales will increase, and we will have activities with stronger performance in the new category appliances and OLED TV, together with efficient resource management, and this will lead to meaningful results. However, the fact that the COVID-19 is spreading once again in major countries, including countries in Europe and the partial countries showing a resumption to the lockdown measures, will be a risk to our business. However, we have made efforts to maintain stable and sound channel inventory and execute our marketing expenses based on sellout and manage these risks and also make continuous efforts to escape from this trend of having lower performance in the fourth quarter. So I do believe that we will be able to show improved results year-on-year this year.

Unidentified Company Representative

Let me answer your question regarding the turnaround for VS. In 2020, due to the impact from COVID-19, based on our backlog, there was disruption to sales, which delayed the improvement to our operating loss. In the third quarter, we are seeing the market recovering, and we are maintaining growth in our sales.

And as we make preparations for the new projects compared to the growth in the market, we are maintaining high growth of 20%. And we have made structural efforts to strengthen our software capabilities and improve in terms of our fixed costs. So we believe that we will be able to achieve a turnaround from the third quarter 2021.

Let me explain about the strategy we have for VS business. The overall trend and the direction we are taking with our strategy has not changed. Based on the electric vehicle portfolio, since last year, we have strengthened our efforts to collaborate with advanced companies in this field based on our excellent motor capabilities. And in our smart business, so the IVI business, we are preparing for a new business based on our software capability. And for the ZKW lens business, we have the strategy of expanding our business areas from the existing European regions to include OEMs in Asia and North America as well. Next question, please.

Operator

[Foreign Language] The next question will be presented by S. K. Kim from Daiwa Capital Market. Please go ahead. With your question.

S. K. Kim

I have first question regarding H&A. Due to the impact of COVID-19, more people are working from home. So as a result, the demand for household appliances are replacing, not just demand for new growth appliances, but also the demand for traditionally considered light goods. So do you think the solid performance of demand is a temporary improvement? Or do you think this is a fundamental trend that can be sustained until the end of next year?

And my second question is to the HE side. In the third quarter, your TV sales has increased and also premium product sale has increased as well. So overall, the TV business has recorded a higher sales performance. However, if you look at the profitability, with online sales spending and also the proportion of premium product sales increasing, your OI rate is only the level of last year. So if you look at the competitors, they have recorded a high margin with the TV products. So why do you think you have this low profitability? And can you also forecast the full quarter of TV business?

Unidentified Company Representative

I’ll answer for the H&A business. In the first quarter, due to impact of COVID-19, our demand has been somewhat toned down. In the second half, however, we are going to see an increase of pent-up demand. In the following year, we expect that the demand level will go up compared to this year, but it won’t be easy to pick up to the level of pre-COVID-19, and we believe that it will take a longer time to reach that level.

Nevertheless, H&A business is expecting a higher demand going forward that is driven by our consumer needs for the product with hygiene and health care functions and also the demand for customizable design products. And we are going to expand the hygiene and health care sectors going forward. And we will continue to launch new products that can meet the ever-changing market needs and consumer needs as well.

Unidentified Company Representative

I’ll give you answer for the TV business. You talked about the competitor side with – competitor side having a higher profitability compared to our profitability. And also – I also review the materials related to this data, and that was because of the difference of sales volume. And the competitor actually recorded a higher volume in the third quarter compared to the fourth quarter. Considering this competitive landscape, I think, it is not desirable to determine only looking at first – the single quarter profitability and sales performance.

As we see that the impact of COVID-19 will continue from the second quarter of this year to the third quarter and the first quarter and second quarter of next year. And we are managing our business performance in the long term. And in comparison with the competitor, we are seeing this is a positive sign that we are continuing to strengthen our market presence and also the share of premium product sales.

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Operator

[Foreign Language] The next question will be presented by Jeongu Ko from NH Investment & Securities. Please go ahead. With your question.

Jeongu Ko

Thank you. I have questions regarding HE and BS. For HE, I think the online sales is getting emphasized a lot. So could you explain the proportion of online sales in the third quarter? And compared to the existing previous online trend, how do you see the online sales going to be going forward? And for BS, could you explain the sales trend for IT business, including PC and monitor for the third quarter? And I believe there would have been some impact from COVID-19. So could you explain about that and also the business outlook?

Unidentified Company Representative

Related to the sales proportion coming from online channels, I believe we all know that in the current situation, it can only be that online sales proportion will increase. So according to the information that we have, we believe that similar to the market and competitors and for LGE as well, we are seeing a continuous increase in the online trend year-on-year, growing to 30% to up to 50% as well. And we believe that in this environment, this trend will continue. So considering this situation, we will strengthen overall activities related to online, for example, with online specialized dedicated products for online channels and strengthening digital marketing capabilities.

Unidentified Company Representative

So let me answer your question related to BS. Like you mentioned, it is true that we were able to achieve meaningful growth in terms of the sales in the third quarter year-on-year and quarter-on-quarter related to our IT business, including the monitor and PC products. And this comes from the strengthening of our product competitiveness in our strategic products such as gaming monitor and grand PC. And also, with the non-face-to-face trends with the prolonged COVID-19 impact, there are more stay at home activities related to work and schooling, linking into the demand for monitor and PC products. So this contributed to our performance.

And we expect to continue this growth centered around the demand created by the COVID-19 situation and the demand for high-specification products, not only into the fourth quarter, but also the first half of next year. We plan to maintain this growth in sales by maximizing the customer value we provide by strengthening the competitiveness with differentiation in our strategic products, enhancing the user convenience and quality.

Operator

[Foreign language] The next question will be presented by Jong Lee from Samsung Securities.

Jong Lee

I have questions related to MC business. Due to restrictions on Huawei, we think the competitiveness of Huawei is getting weaker. So do you expect any gains from this? And also, can you share the shipment volume and strategy for your smartphone business? Due to restrictions on Huawei, the cellphone sales of Huawei in the market is expected to decrease dramatically.

And in order to capture this vacant space of Huawei, we are expecting there will be a fierce competition amongst the phone makers. Due to restrictions of Huawei in U.S., Korea and Japan, we are now expecting almost no impact in our company. However, in LatAm region, including Mexico, we are trying to replace this empty slot of Huawei with our more competitive mass-tier product and customer trust. And also, we are going to drive up our sales with our cellphones.

And in the Europe region, by leveraging 5G and new form factor, we are targeting to gain this vacant slot and create additional sales for our business. Let me talk about our corporate strategy for the next year. Based on the competitiveness in cost that we earned through OEM production, we are getting a very positive feedback for our mass-tier product, which has more advanced competitiveness in terms of design, multi-camera and large screen. And next year, we are going to continue to expand our 5G lineup ranging from the low end to mid-end. And through this, we are going to increase our sales of mass-tier models, and at the same time, we are going to improve profitability. Please understand that I’m not allowed to give you any specific numbers.

Operator

[Foreign language] The next question will be presented by Wonjae Park from Mirae Asset Daewoo. Please go ahead with your question.

Wonjae Park

I have two questions. First, we are seeing a recent resurgence of COVID-19 in the European region, so I believe many people have questions about that. So could you explain the business environment as you see it going into next year? And second, my question is related to CapEx. How do you expect the CapEx levels to be next year?

Unidentified Company Representative

Let me answer your question. Due to the high uncertainty in the market, it’s difficult to provide an outlook related to 2021. However, if you look at the economic environment, based on the economic growth estimates announced by IMF in October, next year, the economic growth is expected at 5.2% globally. And in particular, for emerging markets such as China, India, Russia and Brazil, the estimated economic growth stands at 6.0%; for Korea, 2.9%; and for advanced countries, 3.9%. So we do believe that the market environment will show considerable improvement.

However, we believe that it years before the real economy can recover to the pre-COVID-19 levels. And we are seeing permanent job loss increase in advanced countries, and this is undermining the purchasing power of customers. So we believe that there will be some difficulties in seeing an improvement in the demand. And if you look at the competitive environment, we believe that the competition will intensify as companies try to secure the limited demand. And unlike this year, the marketing expense, including promotion costs, will go up. So we believe that we will need much efforts and strategies to maintain our profitability.

In the case of LGE, based on the enhanced brand awareness that we built up this year, we will continue to launch products in a timely manner to the market, in line with the changing trends and customer needs to enhance our profitability. And in this way, we will increase our sales and profitability.

Unidentified Company Representative

Let me answer your question related to CapEx. As a general rule, we do try to maintain our CapEx levels within the EBITDA levels. So for next year, we believe the CapEx levels will be similar to this year at the mid-KRW two trillion levels.

Operator

[Foreign language] The next question will be presented by Nicolas Gaudois from UBS. Please go ahead with your question.

Nicolas Gaudois

The – hopefully to TV business. So first one is TV business has actually performed well considering COVID-19. And if anything, it looks like LG Electronics has gained share. How sustainable do you think this is into 2021, considering pressure on disposable income and considering that, perhaps, some of the demand may have been pulled in? And secondly, regarding TV operating margins. Could you quantify, going forward, the negative impact from LCD panel price increases, which seems to be continuing into the fourth quarter and could be continuing next year? And is this offset by OLED panel price declines or other cost savings in order to maintain the profitability?

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Unidentified Company Representative

As you can see from our performance of TV products, in the third quarter, recovery of the advanced market demand has contributed to an increase of sales and profitability. And in particular, when we pursued the improvement of sales and profitability, we focused on expanding sales of premium segment, which is different from the current market trend. And we are trying to think carefully regarding until when this solid demand trend will continue, as you have said. So we are going to make a decision based on a lot of market research and internal analysis in greater detail.

I will take your second part of question. You asked about the forecast of the pent-up prices increase and also its impact on our profitability. Regarding the panel price, depending on which firm or which agency comes up with the forecast, actually, the result is different based on various perspectives.

However, what’s common amongst the research report, they are saying that the growth will go up until this year and stay unchanged or go down until next year. However, in the past, our TV business has experienced a lot of panel price fluctuations. Therefore, we are going to execute an appropriate policy according to the market and customer situation, and we are going to pursue a profitability improvement, at the same time, the increased sale of premium segment. And thereby, we will continue to make improvement, both in profitability and sales performance.

Operator

[Foreign language] The next question will be presented by J.J. Park from JPMorgan. Please go ahead with your question.

J.J. Park

I will ask my questions. Related to TV, in the third quarter, it seems that shipment has increased for Samsung and Sony as well, and they have grown 70% to 80% Q-o-Q. I’m not certain about the LGE numbers, but it seems that – like you have grown as well. So does this mean that the market share has gone up for all major three companies? And does that mean then that the market in the third quarter has increased its pie that much to that level.

My second question related to ZKW. What are the synergy effects you have enjoyed after acquiring ZKW? You mentioned about combining the headlamp and the tail lamp businesses and having access to global OEMs. So could you provide an update on the progress to these activities?

Unidentified Company Representative

Let me answer your question related to BS. Like you mentioned, it is true that, overall, the market has grown, whether in terms of quantity or in terms of amount, although the specific numbers may differ depending on the institute that provides the perspective. I believe that based on quantity, the market has grown 20% to 50%. I don’t know about the data for September, but if you look at the GfK data for up to August, it shows that Samsung Electronics takes up the biggest increase in market share and LGE and Sony. So our first-tier makers are also taking up a large market share. So I think maybe I can provide a clearer picture, including the fourth quarter and the year-end outlook, in our next conference call.

Let me answer on your question related to ZKW. So there were two purposes in us acquiring ZKW. The first is to secure growth and expand our business portfolio as a latecomer to the vehicle component market. And secondly, we were trying to maximize the synergy effects we could have in terms of the technology operations and the expansion and access to market. We have already completed combining the headlamp business of ZKW with LGE’s existing rear lamp business last year. And we have already secured products by enhancing our competitiveness in the rear lamp business based on the experience and know-how that ZKW brings on.

And to strengthen the product competitiveness, we have entered into a joint development with ZKW to seek new light sources. And in terms of our business operations as well, based on the sales and procurement capabilities that we have, we are seeking further cooperation for local OEMs and partners, and we are seeking new markets and new possible projects.

Operator

[Foreign Language] The next question will be presented by Dong-je Woo from Bank of America. Please go ahead with your question.

Dong-je Woo

As many analysts have asked about your corporate strategy for the next year, I want to understand your corporate strategy in the long term. If you look at the performance of the second quarter, your performance has improved due to your efforts to reduce expenses. And in the third quarter, your profitability went up due to an increase of sales. And looking at your business in the long term, I don’t think it is appropriate to gracefully – aggressively enter into the market with the volume for the TV and home appliance products, and it will have a risk to reduce ASP and margin.

And like a cellphone, if you have your market share taken by other players, then you’ll have smaller amount of scale – economies of scale, and that will make you in a difficult situation. So what is a big picture for home appliance and TV that LGE management is drawing? And do you think the market share gain is more important? Or do you think that it is more important to improve the product mix with low volume and maintain your high price policy?

Unidentified Company Representative

Let me give you an answer for H&A business. As you said, in the short term, we are not seeing a recovery of demand. However, we are seeing that the market environment is making gradual improvement. And in H&A business, we are maintaining a solid double-digit growth. In the short term, if you look at our short-term performance for the previous three years, our profitability was as high as 9%.

So we forecast that until the first of next year, we will be able to maintain the current sales growth level. Let me explain about your question in the short term and in the mid- to long term, respectively. First, in the short term, we are going to focus on our major business such as refrigerator and washing machine, where we see expanded opportunity due to impact of COVID-19. And mid- to long term, we are going to look into our portfolio so that we can maintain our number one position in the global market with our home appliances.

For the incubating and strategic product, other than the major products, we are going to continue to maintain and secure competitive edge with our product, which features hygiene or health care functions. And we are going to accelerate the growth by expanding the area of B2B infrastructure. That was about our efforts related to hardware. But we will also internalize our digital capability and expand database product and services, which is driving the changes of the market currently. And we will do our utmost to maintain a solid and stable growth going forward.

Unidentified Company Representative

The direction of TV business in the mid- to long term is clearly the same, as said out, the home appliances business. Furthermore, what we have been doing in the market is that we try to gain the market share through qualitative growth, and then we again expanded our market presence.

Operator

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions]

Unidentified Company Representative

It seems that there are no further questions. So with this, we will end the Third Quarter 2020 Earnings Release Conference Call for Electronics. If you have additional questions, please contact our IR team. Thank you.



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