LG Electronics Inc. (A066570) Earnings Call Transcript & Summary

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2020 First Quarter Earnings Results by LG Electronics. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2020 first quarter earnings results by LG Electronics.

Hello. This is [ Dustin Lee ], the Team Leader of LG Electronics IR Communication team. Thank you for attending LG Electronics' 2020 First Quarter Earnings Release Conference Call. Before we begin, please be notified that 2020 first quarter performance and the contents of LG Electronics' earnings release may change during the final review process by external auditors. And further performance outlook may vary depending on market environment changes and strategic modifications. The order of the conference call is: first, consolidated earnings and outlook; and second, performance and outlook by division in sequence. Now we will begin from LG Electronics' consolidated 2020 first quarter performance and second quarter outlook. The company's consolidated sales in the first quarter of 2020 were KRW 14,277.8 billion (sic) [ KRW 14,727.8 billion ], and operating income was KRW 1,090.4 billion. Sales in first quarter decreased Q-o-Q and Y-o-Y due to sales decrease in MC division and the impact of COVID-19. Operating income, despite the impact of COVID-19, increased Q-o-Q and Y-o-Y, driven by sales increase in premium home appliance, product mix improvement of TV product and solid profitability in business solution division. The following is a brief summary of first quarter 2020 performance by business division. Home appliance and air solution division recorded a revenue of KRW 5,418 billion, operating income of KRW 753.5 billion and 13.9% in profitability. Home entertainment division recorded revenue of KRW 2,970.7 billion, operating income of KRW 325.8 billion and 11% in profitability. Mobile communications division recorded revenue of KRW 998.6 billion, operating loss of KRW 237.8 billion and minus 23.8% in profitability. Vehicle component solution division recorded revenue of KRW 1,319.3 billion, operating loss of KRW 96.8 billion and minus 7.3% in profitability. Business solution division recorded revenue of KRW 1,709.1 billion, operating income of KRW 212.2 billion and 12.4% in profitability. The detail of each division will be explained later in the performance and outlook by division section. The next is profit and loss and cash flow of the first quarter of 2020. In terms of profit and loss, net income reflecting financial income/expense, equity method gain/loss, other nonoperating income/expense and income tax expense recorded KRW 1,086.7 billion. For cash flow, cash flow from operating activities in the first quarter was KRW 104 billion. Cash flow from investment activities was minus KRW 120.7 billion. As a result, net cash flow amounted to KRW 31.6 billion and reflecting cash flow of KRW 53.8 billion from financial (sic) [ financing ] activities. Cash flow -- sorry. Cash and cash equivalent balance at the end of the first quarter increased by KRW 85.4 billion and recorded KRW 4,862.8 billion. Next is the major financial position and indicators for the first quarter of 2020. As of the end of the first quarter, assets amount is KRW 45.6 trillion, liability amount is KRW 28.2 trillion and equity amount is KRW 17.4 trillion. All leverage ratios, of which liability to equity, debt to equity and net debt to equity, decreased quarter-on-quarter. The figures imply the company is in a healthy financial condition. Next is the outlook of second quarter of 2020. In terms of business environment, market demand reduced due to COVID-19 and low crude oil price trend continued. As well, economic indicators deteriorated and uncertainty in upcoming outlook increased. In this situation, we plan to manage resource efficiently and capture competitive advantage in products to strengthen business fundamentals in the mid- to long-term perspective and establish the basis of growth after COVID-19 by developing new business opportunities. We all things considered, revenue and profit are expected to decrease quarter-on-quarter, year-on-year due to the impact of COVID-19. The next is the performance of first quarter and second quarter outlook by each division. Before moving on: IT business in HE division and CEM business in others are transferred to BS division. As a result of the reorganization to expand B2B business, the figures, including the previous years, are restated based on reorganization standard herein after. We will start with the home appliance and air solution division. In the first quarter of 2020, sales growth trend continued until February. But sales in March decreased due to the impact of COVID-19 and recorded KRW 5.4 trillion. For profit, despite unfavorable factors such as increased marketing expenses, operating income increased year-on-year driven by the strong sales in system air-conditioning and steam home appliances as well as cost-saving activities. In the second quarter of 2020, uncertainty in business environment is expected to be higher than ever due to the global market demand decrease caused by COVID-19, and competition is expected to be intensified among consumer electronics companies. In this situation, sales decline is expected. But we will make an effort to acquire additional sales opportunity through real-time monitoring of market and secure profitability by optimizing resource balancing and cost-saving activities. The next is HE division. In the first quarter of 2020, due to COVID-19, global supply constraints and mobility restrictions have reduced market demand and caused sales decrease quarter-on-quarter and year-on-year. In terms of profit, despite the macroeconomic deterioration such as reduced demand and vulnerable exchange rate, improved profitability driven by expanded sales volume of premium products such as OLED, NanoCell, large-size TV; and operation efficiency. In second quarter of 2020, market demand is expected to sharply drop as many countries continue mobility restrictions due to COVID-19. Under the premise of the rapid drop in market demand, efforts will be made to promote profit-oriented business operations by increasing the weight of premium product, online sales and optimal resource management. Moving on to MC division. In the first quarter of 2020, sales decreased quarter-on-quarter, year-on-year due to supply issue of ODM suppliers and decreased demand caused by store shutdown in EU, Lat Am from COVID-19 outbreak. In term of profit, expenses have been saved through efficient marketing resources management and labor cost reduction from relocation of production site, but profit decreased year-on-year due to sales decline. In second quarter of 2020, market demand is expected to decline significantly year-on-year due to COVID-19, and competition among global manufacturers to secure market share will be intensified. Under the circumstances, we will launch 5G mass-premium product with outstanding design and features, strengthen mid-range product lineup, expand online sales and enhance operation efficiency to proactively manage the current difficult conditions. The next, vehicle component solution division. In the first quarter of 2020, despite infotainment business growth driven by the sales increase in new projects, sales decreased year-on-year, quarter-on-quarter due to the sales decline of xEV components and ZKW automotive lightings. For profit, operating loss still continued due to the sales decrease related to factory shutdown of U.S., EU automakers caused by COVID-19 pandemic. In second quarter of 2020. Under the impact of COVID-19, global demand of vehicle components in second quarter is expected to decline due to sales decrease of U.S., EU automakers. Considering demand fluctuation of global automakers, we plan to minimize the risk by continuous business structure improvement activities. The last is business solutions division. First of all, please be notified that financial results of IT and CEM business have been restated to BS division starting 2020 first quarter earnings release. In the first quarter of 2020, despite the decrease in demand and supply due to the impact of COVID-19, sales increased year-on-year, quarter-on-quarter from IT, solar module growth. For profit, BS division achieved double-digit profitability driven by the growth of solar modules and stable profit in information display business. In the second quarter of 2020, despite a decline of market demand, difficulty in production from mobility restriction in many countries and reinforcement of regulation to prevent expansion of COVID-19, new business opportunity related to untact trend and remote learning are expected to be enlarged. In this situation, we plan to minimize the risk of sales decline by expanding online sales of IT products and promoting information display products related to work from home and remote learning environment. Up to now was the first quarter earnings and second quarter outlook of the company. From now on, we will move on to Q&A session.

[Operator Instructions]

Okay. Yes. [ We will now and ] LG Electronics 2020 First Quarter Earnings Release Conference Call. If you have any further questions, please contact LG Electronics IR team, and we will explain in detail. Thank you.