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

Good afternoon, and welcome to LG Electronics' Quarterly Earnings Conference Call. This conference call will begin with a presentation on the earnings results, followed by a Q&A session. [Operator Instructions] Simultaneous English interpretation will be provided for the presentation, followed by consecutive interpretation for the Q&A. Now I'd like to turn the call over to the first speaker.

Good afternoon. My name is Wonjae Park from Investor Relations. Thank you for joining our earnings call for the second quarter of 2026. With me are Chang-Tae Kim, CFO and EVP of LG Electronics; from each company's business management division, Jong-In Yoo from HS; Sang-Ho Park, SVP of MS; Ju Yong Kim, VP of VS; and Dong-Hoon Shin, VP of ES. From headquarters, Choong Hyun Park, SVP of Corporate Business Management; Young Kyoon Kim, VP of Finance; [ In-Geun Park ], Head of Accounting; and [indiscernible], Head of Robotics, Sales and Marketing Division. Today's presentation will proceed as follows. Our CFO will review the Q2 2026 results and Q3 outlook and provide updates on our new growth initiatives and share buyback program. I will then present the second quarter financial highlights. After that, each business will share its individual results and outlook. Please note that all statements made today regarding the second quarter financial results are subject to change in accordance with external review. Actual results may differ from today's outlooks and forward-looking statements due to market uncertainties and strategic adjustments. Now let us begin with the Q2 2026 performance review and the Q3 outlook.

Good afternoon. I am Chang-Tae Kim, CFO of LG Electronics. In Q2, consolidated sales reached KRW 23.8 trillion with operating income of KRW 1.57 trillion. Despite subdued consumer sentiment amid ongoing maker economic uncertainties and heightened competition. Total sales grew year-over-year driven by strong home appliance sales a higher sales mix of premium TVs and continued growth in automotive electronics. . Operating income improved year-over-year despite higher logistics costs related to the conflict in the Middle East and rising memory costs. Key drivers include overall sales growth a higher mix of high value-added products, continued cost structure improvements, enhanced operational efficiency and tariff refunds. In Q3, escalating geopolitical risks are expected to drive up oil and raw material prices. softening consumer sentiment driven by inflation in key markets, along with intensified competition is expected to weigh on business operations. However, resilient demand in imaging markets and rapidly growing AI data center demand are expected to provide growth opportunities. Against this backdrop, we will expand the share of high-value-added products through differentiated offerings and strengthen our cost competitiveness through cost structure improvements and enhanced operational efficiency. In addition, we will leverage our global South strategy to strengthen our presence in high-growth markets and maintain momentum in our core businesses, while driving continued growth in automotive electronics and expanding our B2B portfolio, including chillers and AI data center cooling solutions. Furthermore, we will strengthen our profitability by expanding our subscription business and online direct sales along with the webOS platform ecosystem. Now let me briefly provide an update on our new growth drivers, including robotics and AI data center cooling solutions. First, we newly established a robotics business center to accelerate our robotics business with greater speed and agility. This enables us to drive the commercialization of our robotics business end to end. By integrating core capabilities across the organization, we expect to strengthen execution and improve operational efficiency. In addition, we are building Korea's largest robotics data factory, targeting its launch in the second half of this year. At the facility, we are gradually deploying Cloyd our humanoid robots currently being mass produced for POC validation. This will enable us to secure high-quality training data across diverse domains and accelerate collaboration with domestic and global partners, including the advancement of RSMs, further strengthening our robotics competitiveness. We also made meaningful progress in commercialization of actuators, a key component of robotics. The pilot production line has been successfully completed and production of the initial actuators or humanoid robot is now underway. In the second half, we will pursue business opportunities with potential customers while accelerating mass production in line with order visibility. Now let me turn to the progress of our AI data center cooling solutions business. We are starting to see tangible results from our efforts to secure overseas orders. Orders exceeded KRW 600 billion in the first half and production is currently underway. We are targeting AI data center project orders worth several trillion by year-end. This order momentum has been driven by supply chain bottlenecks and as existing suppliers struggle to keep pace with rapidly growing demand. As a result, major industry players are actively seeking new suppliers with strong product competitiveness and reliable supply capabilities. Looking ahead, we remain positive our order outlook, supported by our strong track record and favorable customer feedback on product quality and on-time delivery. We will continue to expand our domestic and overseas production capacity to support rapidly growing order volumes, ensuring timely execution of our existing order backlog while further enhancing our competitiveness and securing orders from global customers. We are also seeing tangible progress in securing component qualification certifications from leading global technology companies, including NVIDIA. As announced on NVIDIA's website, certain models of our CDU a key component of our liquid cooling solutions have received certification. Additional product certification efforts are also progressing smoothly. And we expect to have positive developments to share in the near future. Lastly, we have completed the KRW 100 billion share buyback program as part of our ongoing efforts to enhance shareholder value. The share buyback program began earlier this year and was completed ahead of schedule. The repurchased shares will be canceled before year-end. We remain committed to enhancing shareholder value, and we'll continue to pursue initiatives that deliver tangible benefits to our shareholders. Thank you.

I will now briefly review the Q2 2026 performance of enterprise-wide operations in each business. Our consolidated financial results for Q2 were KRW 23.82 trillion in sales and KRW 1.57 trillion in operating income. AS recorded sales of 0.75 trillion and operating income of KRW 685.9 billion, MS recorded sales of KRW 5.11 trillion, and operating income of KRW 29.4 billion. VS recorded sales of KRW 3.25 trillion and operating income of KRW 191.2 billion. Lastly, ES recorded sales of KRW 2.72 trillion and operating income of KRW 235.8 billion. Next, let me turn to our B2B and subscription businesses. which serve as key drivers of qualitative growth in our portfolio transformation. In Q2, B2B sales grew year-over-year, driven by strong growth in automotive electronics, supported by a solid order backlog along with continued growth in the ID and IT businesses. In addition, the share of B2B sales and total revenue remained stable, providing a solid foundation for qualitative growth. In Korea, the subscription business maintained its growth momentum, both year-over-year and quarter-over-quarter, further reinforcing its competitive edge through differentiated care services. The overseas subscription business continues to grow, and we are expanding into new markets, including the Middle East, beyond Malaysia and Thailand. Though still in the early stages of overseas expansion, we will accelerate growth by swiftly establishing necessary business infrastructure in each market. We will continue to improve our performance by further strengthening our portfolio, including our B2B and subscription businesses. Moving on to the income statement and cash flow for Q2, reflecting financial income and expense, equity method gains and losses and nonoperating items corporate tax and discontinued operations. The Q2 net income was KRW 781.3 billion. Now let's look at cash flow. Cash flow from operating activities was KRW 2.45 trillion while cash flow from investing activities was negative KRW 760.8 billion resulting in a net cash flow of KRW 1.86 trillion. When reflecting a negative KRW 430.8 billion in cash flow from financing activities, the cash balance at the end of Q2 stood at KRW 10.69 trillion, up KRW 1.43 trillion from the previous quarter. Key financial position and indicators for Q2 are as follows. At the end of Q2, assets stood at KRW 73.7 trillion, liabilities at KRW 41.8 trillion and equity at KRW 31.9 trillion. Leverage ratios, including liability to equity, debt to equity and net debt to equity have improved and remain at healthy levels. Now we will hear from each business regarding its Q2 2026 results and Q3 outlook, beginning with HS.

Here are the Q2 results for the HS business. Sales continue to grow as we proactively address market uncertainties and through our 2-track strategy, strengthening both premium and entry-level product lineup, while further advancing our portfolio through B2B, online direct sales and subscription businesses. Operating income improved significantly year-over-year as we enhance operational efficiency through cost structure improvements and supply chain optimization, mitigating certain cost pressures. This was further supported by U.S. tariff refunds. Looking ahead to Q3, uncertainties in the external business environment are expected to persist. Inflationary pressures in major markets are likely to dampen consumer sentiment resulting in subdued demand in the short term. In response, we will continue to build on our proven 2 track strategy and portfolio advancement efforts, while strengthening profitability through proactive efforts. In addition, we will further reinforce our business fundamentals and profitability by expanding our presence in the global South, where demand remains relatively robust. Let's turn to our outlook for the global appliance market demand in 2026. We update this forecast twice a year and by sharing our view. We aim to provide our perspective on global demand trends and corresponding strategies. Please note that this outlook focuses on the year-over-year market demand forecast, not our appliance revenue. Actual market conditions may differ from this outlook due to various factors such as economic policies on tariffs, interest rates and other variables as well as geopolitical issues. In the global home appliance market, the gradual recovery in demand that began in the second half of last year continued into the first half of 2026. However, demand is expected to weaken significantly in the second half across most regions outside of India and China due to the prolonged Russia, Ukraine war and renewed tensions in the Middle East. Consequently, global demand for 2026 is expected to grow modestly. In North America, the housing market recovery is expected to remain gradual amid elevated interest rates resulting in somewhat softer demand for home appliances in the second half. We expect consumer spending to become more polarized with some consumers feeling a greater impact from inflation than others. Therefore, we are broadening our product coverage by offering differentiated products in the premium segment, while reinforcing our lineup of cost competitive products in the volume segment. We also plan to strengthen our market position in the global South, where demand remains relatively resilient by launching new products tailored to local market needs and designed to enhance local competitiveness. Through these initiatives, we are positioning the [indiscernible] as a new growth engine alongside our traditional core markets. Despite continued macroeconomic uncertainties in 2026, we remain committed to building a more resilient business structure that minimizes the impact of external factors on our business. Let's now turn to the Q2 results for the MS business. Global TV market demand grew modestly supported by promotional events, such as the FIFA World Cup and Amazon Prime Day. Against this backdrop, we delivered strong year-over-year sales growth through a higher mix of premium products, including OLED, QNED and Ultra large TVs, continued growth in emerging markets and the expansion of webOS platform revenue. Operating income improved significantly year-over-year, extending the strong momentum from the previous quarter. Key drivers included a higher mix of high value-added products, greater efficiency and competitive spending, enhanced cost competitiveness, reduce fixed cost and ongoing operational efficiency efforts. Looking ahead to Q3, TV market demand is expected to decline slightly year-over-year, reflecting heightened macroeconomic volatility driven by the prolonged conflicts in the Middle East and rising raw material costs, weakened consumer sentiment due to inflation and the pull-forward effect of demand related to major sporting events. We will continue to improve our cost structure and operational efficiency while increasing the proportion of high value-added products in our sales portfolio. Through the continued growth of the webOS platform business, we aim to maintain solid profitability in Q3. We I will now review the Q2 results for the VS. Sales maintained year-over-year growth, supported by the continued stable growth of the infotainment business. Operating income improved year-over-year, supported by sales growth and ongoing efforts to improve cost and operational efficiency. Looking ahead to Q3. Given continued softness in EV demand and ongoing external uncertainties, global automotive demand is expected to recover gradually in the near term. While market uncertainties may continue to pose risks, we expect to maintain stable sales growth. We will also continue to secure stable profitability through improved cost efficiency and enhanced operational efficiency. I will now review the Q2 results for the ES business. Despite weak demand in the Korean market amid heightened competition and a slowdown in the construction sector, sales grew slightly year-over-year, driven by increased air conditioner sales in overseas markets. Despite positive factors such as sales growth, profitability declined year-over-year due to higher logistics costs stemming from the conflict in the Middle East, increased competitive spending and higher personnel expenses related to the new growth initiatives. Looking ahead to Q3, we expect the business environment to remain challenging amid the prolonged conflicts in the Middle East and intensified competition across the market. In response, we will further enhance profitability in Korea through our subscription business and online direct sales while accelerating global growth by expanding revenue from eco-friendly, high efficiency and region-specific products as well as customer tailored solutions in overseas markets. This brings us to the end of LG Electronics Q2 2026 earnings release and Q3 outlook. We will now take questions.

Operator, please begin the Q&A session. .

[Operator Instructions] The first question will be provided by Kangho Park from Daishin Securities.

First of all, I would like to deliver my congratulatory message to you on your good performance under harsh conditions nowadays. I have brought 2 questions today. First on the corporate-wide operations. And second one on HS. There have been recent news articles about the NVIDIA CEO visiting the Twin Towers and meeting with the management of your affiliate. That said, I would like to know more about your ongoing collaboration with NVIDIA, specifically are the specific areas and constitutes of collaboration that has been materialized so far? And what does the future road map look like? Also, is there any possibility of a collaboration similar to the NVIDIA and [indiscernible] case or potential participation in the platform ecosystem. For HS, with the SCFI trending upward, are you seeing across from carriers for higher freight rates. Also to what extent are you able to control your logistic cost? And what is your outlook for logistics costs in the second half of the year?

Thank you for your question. The CFO will address the first question regarding collaboration with NVIDIA and HS will respond to the second question regarding logistic costs.

I would like to address your question regarding the current status of our collaboration with NVIDIA. First of all, in the robotic sector, we are pursuing a joint project aimed at combining LG's robot hardware technology and manufacturing capabilities with NVIDIA's fiscal AI technology stack. This involves testing robots for manufacturing sites from the proof-of-concept stage all the way to actual application. We are also collaborating on building a robust building a data robot factory, advancing robot foundation models and developing emulation and versification platforms. Furthermore, in the AI factory sector, we are pursuing the integration of NVIDIA's AI data center platform with our infrastructure solutions. We're also collaborating on the development of advanced high-density cooling technologies which are regarded as a key challenge for next-generation AI data centers. Recently, we achieved a meaningful milestone as certain models of our CDU, a core cooling component for AI data centers obtained NVIDIA certification. In the mobility sector, and direct collaboration between the engineering teams of both companies have begun for the development of the IDV platform. Currently, practical work is underway, such as reviewing next-generation, high-performance computing platform technologies and setting up a development environment. Facing a major market inflection point known as fiscal AI, both LG and NVIDIA share the understanding that collaboration is necessary across various areas based on our respective core competencies. From this perspective, we believe that a strategic partnership at the platform ecosystem level can certainly be considered in the future.

Let me answer your question on logistics costs for the second half of the year. The SCFI has been trending upward, driven by geopolitical tensions in the Middle East and increased cargo demand from China. During our freight negotiations for the second half of the year [indiscernible] Solution fight rates compared to the first half of the year. However, with additional vessel capacity expected to enter the market and global shipping demand likely to moderate after the peak season, we will continue to renegotiate terms with carriers by leveraging our large-scale volume and long-standing relationships. In parallel, we are working to improve freight conditions through further negotiations while optimizing in-line transportation trucking and warehouse operations, all of which are aimed at minimizing the impact of higher logistic costs. . In summary, although the CFI has resided since February due to geopolitical disruptions and increased cargo volumes from certain regions. We expect ocean freight rates to peak in the third quarter from the fourth quarter, easing market conditions and the full impact of our renegotiation efforts to drive rates back towards prior year levels. We are proactively managing logistic costs within a controllable range, and we expect just the cost pressures to gradually ease as we approach the latter half of the year.

Next question, please.

The following question will be presented by Jongbae Kim from Hyundai Motor Securities.

I have 2 questions as well. And they both address the robotics market, which has garnered quite a lot of interest in the market these days. For the first question, we understand that you are accelerating the commercialization of robotic actuators. Could you provide an update on the progress of commercialization efforts, including production line setup, as well as your outlook for the future sales and profitability within the scope that can be disclosed. And for the second question, we believe the newly established robotics business center will play a key role in overseeing commercialization efforts. Could you elaborate on how collaboration is structured among relevant companies, including your company, be robotics, Robo star and other LG affiliates like display Also, how do you define your target position within the robotics value chain over the long term?

Yes. Thank you for your question. For the question on the actuators, it will be answered by HS and for the Robotics business center, it will be answered by our Robotics sales market division.

Let me provide an update on the progress of our actuator business. As previously noted by our CFO, we completed the actuator pilot line at our Changan slide during the first half. And are now focused on validating manufacturability and ensuring all of the stability through initial production. We are also investing in automation as well as additional infrastructure to support stable quality. In parallel, we are actively engaged in joint development and broader strategic collaborations with start-ups as well as leading robotic companies in Korea, Europe and North America. However, we ask for your understanding that we are unable to disclose specific partners at this time. We are accelerating the establishment of our business foundation by expanding both our product portfolio and production capabilities, leveraging these early commercialization capabilities we aim to grow the actuator business into a meaningful contributor to the company's overall financial performance.