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. If you wish to ask a question, you will need to press star and one on your telephone. English translation will be provided for this call, simultaneously for the presentation and consecutively for the Q&A session. I'll now turn the call over to the first speaker.
Good afternoon. My name is Won-jae Park from Investor Relations. Thank you for joining our earnings call for the second quarter of 2024.
With me are CFO and EVP of LG Electronics, Kim Chang-tae, SVP of Global Business Management Group, Sang-ho Park, VP of Home Appliance and Air Solution, Kim Yi-kwon, VP of Home Entertainment, Lee Jeong-seok, VP of Vehicle Component Solutions, Kim Ju-yong, VP of Business Solutions, Lee Dong-cheol, VP of Corporate Business Management Division, Park Cheong-hyun, VP of Accounting Division, Lee Hong-soo, Head of Finance Division, Kim Yong-eun, and Head of ESG Strategy, Hong Sung-min. Today's presentation agenda will cover four areas. First, our CFO will outline the overall performance results of the second quarter, outlook for the third quarter, mid to long term direction and dividend policy. Then I'll present financial highlights. Subsequently, each division will take turns to deliver its business results and outlook. Finally, we will conclude with an overview of ESG activities and achievements.
Please note that all statements we'll be making today regarding the financial results of the second quarter are subject to change in accordance with the result 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 me start with the consolidated financial results of the second quarter of 2024 and the outlook for the third quarter.
Good afternoon. My name is Kim Chang-tae, CFO of LG Electronics. Q2 revenue grew year-over-year on the back of qualitative growth in core business, including home appliance, TV, and IT, and incubating business, including webOS, despite sluggish demand in the EV market.
Operating profit made a significant increase year-over-year, despite price increase in components, including LCD panels, thanks to the sales leverage effects and expanded contribution of highly profitable B2B business. In terms of the business environment, difficulties are expected to continue in the second half of the year as delays in interest rate cuts slows down the demand for key products and uncertainties in freight rate persist. However, we plan to post the year-over-year growth on the back of continued growth in home appliance and TV and a sales recovery of auto part business. For operating profit, despite a possible increase in logistics cost, we plan to maintain a solid profitability level through optimization of global operation.
In mid- to long run, we intend to maintain a balanced, qualitative growth in both core and incubating business, transform business models, expand domains, and innovate business methods to build a more future-oriented portfolio. We will further strengthen the market position of home appliance, TV, and other main business, while broadening B2B portion, including HVAC and automotive electronics. Our efforts in expanding business model will be continued as evidenced in our recent acquisition of Athom, a smart home platform provider. At the same time, we will further innovate the way we do business as we speed up the pace to enter overseas markets with subscription business and increase direct sales online. Next, regarding dividend policy and payouts. Based on the principle of enhancing shareholder value, our shareholder return is determined within the dividend income, considering future strategic investment, financial structure, and business environment.
Over the 3-year period, from the fiscal year of 2024 to 2026, distributable profit will be no less than 25% of net profit based on the profit attributable to owners of the parent in the consolidated financial statements, excluding one-off non-recurring profit. We plan to provide a minimum of KRW 1,000 a year per common share, which will be paid out twice per annum in the first and second half of the year. The semi-annual dividend for 2024 was confirmed at KRW 500 per share for both common and preferred shares, a board resolution on July 24th. To enhance predictability for investors, the dividend record date and expected payout per share were announced on June 18th, prior to the first half's semiannual dividend record date.
The semiannual dividend will be paid to shareholders on August 13th, in accordance with Article 165-12 of the Financial Services and Capital Markets Act. Now, I will turn the call over to investor relations.
I will now briefly review the second quarter performance of each business. H&A reported KRW 8.8 trillion in sales, KRW 694.4 billion in operating profit, and 7.9% in profitability. HE recorded KRW 3.6 trillion in sales, KRW 97 billion in operating profit, and 2.7% in profitability. VS recorded KRW 2.6 trillion in sales, KRW 81.7 billion in operating profit, and 3% in profitability. Last but not least, BS recorded KRW 1.4 trillion in sales and KRW 5.9 billion in operating loss.
Let's move on to the profit and loss and cash flow of the second quarter. Reflecting financial income and expense, equity method gain and loss, other non-operating income and expense, corporate income tax, and income and loss from discontinued operation, we posted KRW 629.5 billion in net income. Next, on cash flow. Q2 cash flow from operating activities was KRW 2.6 trillion, and cash flow from investment activities was KRW -866 billion, resulting in net cash flow of KRW 1.2 trillion. When reflecting cash flow from financial activities of KRW 308 billion, cash balance at the end of Q2 came to stand at KRW 8.5 trillion, a KRW 1.5 trillion increase from the previous quarter. Next is the key financial position and indicators for the third quarter of 2024.
As of the end of the second quarter, assets stands at KRW 63.1 trillion, liability at KRW 37.9 trillion, and equity at KRW 25.2 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 second quarter results and third quarter outlook. We will begin with H&A.
Let me share second quarter results of H&A. Sales has been polarized, with developed markets experiencing a gradual recovery amid global economic uncertainties, while emerging markets are seeing strong growth. We achieved revenue growth year-over-year by strengthening promotion, expanding price coverage, and producing positive results in new domains, such as subscription and online.
Operating profit improved year-over-year by successfully managing increased overhead, including market competition costs and fixed costs, through revenue growth and cost saving measures like material cost reduction. Next is the outlook for Q3. Weak demand in the U.S. and dwindling recovery in Europe is likely to persist. On the other hand, continuous growth is expected in emerging markets, especially in India, Asia, and Latin America. However, given the uncertainties of demand recovery in advanced markets and the spread of geopolitical risks, competition in major markets is anticipated to intensify. In response, we will drive B2C sales growth by responding to the market changes ahead of time with new products, stronger promotions, and expanded volume zone strategies. We'll also move away from the typical seasonality by broadening the contribution of B2B, focusing on HVAC, and enhancing online and subscription business.
Moreover, we'll secure operating profit similar to or higher than that of the last year by cutting costs based on our manufacturing prowess and enhancing operation to address the risk of rising ocean freight rates. Next is our view on the annual demand prospect for the global home appliance market. In the previous earnings call, we started sharing our perspective on the demand of the global appliance market, and we will continue to update the outlook twice a year.
Please note that this section of the presentation regards market demand, focusing on refrigerators and washing machines, and is not related to the projections of our appliance business. Diverse factors may cause the market to be different from the outlooks made in this section. We stand with the previous outlook of limited level of growth for annual market demand, but there are some changes made in terms of timing and region.
We expected to see a gradual demand recovery in the second half. Demand contraction in the first half in the previous call. Demand for the first half has fared better than our projection, while the recovery in the second half is likely to be slower than expected. To elaborate, exchange rates remained stable in the first half in emerging countries, especially in Latin America, Middle East, and India, and consumption improved in oil producing countries due to rising oil prices. However, in the second half, macroeconomic drivers of demand are likely to lose momentum as we see delays in interest rates cut and a drop in new home construction. By region, emerging markets, including Latin America, Middle East, Africa, and India, are expected to continue to grow, while recovery in the advanced markets, including North America and Europe, fails to meet the market expectation.
As consumers are continuing to trade down, seeking less expensive alternatives, we expect the overall average selling price to decrease. Difficulties of the market are likely to persist for the remainder of the year. By preemptively responding to demand changes with the adoption of two-track strategy and by driving sales in emerging markets, we aim to continue to produce solid results as we had in the challenging years of post-pandemic era.
Next is second quarter result of Home Entertainment business. By tapping into the momentum of growing demand for TVs in Europe, in line with the upcoming mega sports events, we were able to increase hardware sales, including all the TVs. At the same time, webOS-based advertisement and content business continued to grow, driving up sales significantly year-over-year.
For operating profits, although an increase in sales worked in our favor, operating profits decreased slightly year-over-year due to the rising cost pushed up by LCD panels. Let's move on to the third quarter outlook. The overall market demand for TV is expected to improve slightly year-over-year, while OLED TV is expected to post higher growth compared to the market. Accordingly, we aim to continue to grow top line and secure profitability by improving the product mix of premium products, such as OLED and QNED TVs, and by broadening the ecosystem of webOS platform by offering free upgrade on mass tier products.
Next is second quarter result of the Vehicle Component Solutions. Despite demand stagnation of the EV market, we were able to grow sales slightly year-over-year on the back of an increased demand for high value-added components of infotainment and ADAS.
While there was some cost pressure from upfront investment in R&D for SDV and awarded projects, we were able to continue to secure profitability through improved project mix, leverage effect of revenue growth, and activities to stabilize the cost structure. Now let me turn to the outlook of the third quarter. Market uncertainties, including slowdown in EV demands, are likely to persist. However, demand for high value-added auto parts is predicted to exhibit an upward trend. In this environment, we expect to see a continuous growth in sales and improvement in project mix as awarded projects start to launch product. We aim to secure stable profitability by optimizing our operation and improving the cost structure.
Let me present the second quarter result of the Business solutions. Revenue grew year-over-year on the back of increased sales centering on strategic products like gaming monitors, e-board, and LED signage, and winning large PC volumes from B2B partners. Operating profit recorded a loss despite an increase in sales as the business environment worsened with a rise in exchange rates, logistics costs, and component price, and as we increased investment in new businesses, including EV charger.
I'll now move on to the third quarter outlook. Demand for IT and information display is expected to grow year-over-year, but the overall level will be similar to that of the second quarter. However, when broken down into product level, gaming monitors and LED signage are likely to continue to grow in the third quarter. Against this backdrop, we aim to grow revenue year-over-year by focusing on sales of high value-added strategic products, enhancing online sales, and putting more effort in winning B2B projects. At the same time, we will enhance the efficiency of resource operation to improve profitability and manage growing investment in new business.
Last but not least, our ESG activities and achievements. LG Electronics continues to strengthen competitiveness with sustainable products and technologies. This year, OLED evo TVs received certification on CO2 measurement and reduction from the Carbon Trust, environmentally evaluated mark from SGS for four consecutive years, and recycled content certification from Intertek for two years in a row. Last December, our pulp molding packaging received Minister's Prize from the Ministry of Trade, Industry and Energy. Last December, industry's first molded pulp that can handle more than 20 kg was developed and applied in packaging air purifiers, and the packaging is now being applied to 30 kg-50 kg.
Our plan is to replace plastic packaging with molded pulp by developing pulp packaging that can handle more than 70 kg. We are supporting 15 suppliers in consultation to help them reduce carbon emissions, and we plan to continue to increase the number. In April, LG signed a business agreement with the National Rehabilitation Center to develop technologies that can improve accessibility of home appliance products and provide better customer experience to people with disabilities, older adults, and children. Last June, our world's first traffic safety smartphone solution, Soft V2X, passed ICT Sandbox. With the Seoul Metropolitan Government in Sejong City, we plan to deploy the solution to verify its service effectiveness. We believe that the solution will lower and prevent the risks of traffic accidents by being integrated into vehicles and various connected micro-mobility, such as e-scooters and e-bikes.
We are also actively engaged in ESG campaigns. Between last May and June, we conducted battery return campaign with Korea Environment Corporation and E-Cycle Governance, collecting waste batteries of cordless vacuum cleaners from homes for recycling. Last April, celebrating Earth Day, we unveiled Endangered Species Series on Times Square billboard in New York City. The campaign will highlight four endangered species throughout the year, beginning with snow leopard, to raise an awareness on climate change and importance of biodiversity. We also became the first Korean company to be certified by the National Wildlife Federation, as our pollinator garden, built in North American campus, was recognized as a wildlife habitat. Pollinator garden is designed to be a sanctuary for bees, butterflies, and other pollinators whose population is in decline. LG Electronics will continue with these activities to create a better life for all stakeholders.
That brings us to the end of the second quarter earnings release and outlook for the third quarter. We'll now take questions. Operator, please commence with the Q&A session.
[Foreign language]
Now Q&A session will begin. Please press star and one if you have any questions. Questions will be taken according to the order you have pressed star and one. For cancellation, please press star and two on your phone. The first question will be provided by Simon Woo from Bank of America. Please go ahead with your question.
Uh, yeah, [Foreign language]
Thank you for taking my question. First of all, congratulations on such a good quarter. I have two questions. The first question on the HE division and the second on the H&A division. First of all, would be for the HE division, especially with regards to your webOS platform. Can you please share on where you are in terms of progress and profitability in reaching your KRW 1 trillion goal for 2024?
I would appreciate it if you could break it down by segment and region. In addition, will your growth volume and profitability continue to sustain current strength over the mid to long term? My second question is on home appliance business. I believe that the subscription business is pretty booming in the market, and I would like to ask the number of subscriptions and the breakdown of revenue per product, such as refrigerators, and dishwashers and washing machines. Are you actually seeing profitability throughout this new innovation? The other one is, do you have any marketing strategies to bring this innovative solution to developed markets such as the U.S. or Europe?
[Foreign language]
I will first answer your question on webOS.
Yes, you have probably already seen on news, but then our webOS platform business has sustained its upswings in line with the fast shift from linear TV ads to connected TVs. To best leverage the favorable market and the unique advantage that CTVs bring of delivering value-added ads to targeted customers, number one, we have acquired controlling stakes in Alphonso, the exceptional data analysis company. And number two, we have reinforced our relevant internal teams, such as on data analytics. And number three, we have strategically partnered with leading content players to deliver better content.
[Foreign language]
Based on the activities outlined previously, we expect our sales to run higher than KRW 1 trillion this year. We are faring well, having surpassed our target for the first half of the year, while profitability too hovers above our expectations amidst proactive investment underway.
We will continue to expand our footprints, not only in the North American region, our core market, but to cover Europe, Latin America, and Asia as well. Competition is, however, on the rise as the market gains volume and appeal. We are responding with a greater focus on not only the basics, which includes the strength of webOS itself and the delivery of high quality content, but also on expanding the ecosystem, which we intend on realizing through a greater number of alliances, driven by the sale of our webOS to other TV brands. Thank you.
[Foreign language]
Let me answer your question in regards to subscription business in home appliance business unit. In regards to the actual number of subscription or performance, please excuse us, we're not able to bring accurate figures to the table, but we do expect subscription business revenue from home and abroad to show a continuous growth.
In Korea, thanks to expanded business focusing on large appliances subscription, our business accounts for over 20% with double-digit profitability. Based on our competitiveness and experience in the Korean market, we would like to expand into the global market with our subscription business model.
[Foreign language]
Touching upon our business in the overseas market, we are gradually enlarging the market scope from Malaysia to other Asian markets, such as Taiwan and Thailand. Adding more colors on the case of Taiwan, we have first launched the business on the first of this month and are planning to expand the business this October after going through system and infrastructure check and customer analysis. Our plan is to expand the business to Thailand and India within this year. Please understand that I cannot clearly disclose the timeline, but we are also reviewing feasibility of launching this business in the developed markets, such as the U.S. and Europe. Thank you.
[Foreign language]
Next question, please.
[Foreign language]
The following question will be provided by Dong-won Kim from KB Securities. Please go ahead with your question.
[Foreign language]
Thank you for taking my questions. I have two questions, and my first one is on VS. What is your target on the order backlog at the end of this year? Can you share the breakdown? My second question would be for corporate-wide operations. You seem to be driving growth of your B2B business. What is the contribution to the entire sales as well as the outlook?
[Foreign language]
Let me answer your question regarding VS. Though EV demand growth showed a slowdown in the short term, we expect the growing trend to continue in the mid- to long-term. Additionally, as we are responding to the market with our new program for each OEM's different strategy and implementing activities to win new orders, we expect our order backlog to remain over KRW 100 trillion as of the end of this year. In detail, infotainment accounts for mid-50% of the overall backlog, while EV components account for low-30% level and lamps mid-10% level. Thank you.
[Foreign language]
I am VP Park from IR. Thank you for your question, and I will be addressing your question because the B2B, because it addresses corporate-wide operations. Our B2B business currently leads the sales growth of our entire company, generating meaningful contributions to profitability as well. During last year's announcement of our future vision, we have laid out our goal to reach KRW 100 trillion in sales volume by 2030, of which B2B will make up to 40%. As of the first half of 2024, B2B already constitutes 34%-35% of entire sales, and our performance went higher than our goal. Going forward, we will continue to expand on this share by proactively identifying opportunities down the road.
[Foreign language]
We are confident in this area, therefore, we will drill it down by business areas. Number one, for vehicle components, against the stalling EV market, we continue to drive growth of backlogs and sales by drawing on greater orders of value-added solutions and an extended customer pipeline to include Europe and Asia.
[Foreign language]
For HVACs, with tightened regulations around energy and environment in advanced countries, we expect a fast rise of new demand for air-to-air heat pumps that are energy efficient, and therefore we plan to tap into this opportunity with greater product coverage and penetration to seek additional growth. Market for data center cooling is expected to gain fast momentum driven by the AI big wave, and we are working towards securing orders in advanced markets with our energy efficient chillers.
[Foreign language]
Last but not least, we will also deliver on greater product strength as well as wider regional and product coverage for EV chargers and information display solutions to scale up our B2B business. Thank you.
[Foreign language]
Next question, please.
[Foreign language]
The following question will be presented by Kang-ho Park from Daishin Securities. Please go ahead with your question.
[Foreign language]
Thank you for taking my questions. I have two questions, and my first question is on H&A business. In the second quarter, your revenue jumped dramatically by 10.6%, and this was over market expectation while your operating profit has become lower than our expectations. Do you have any plans to make further enhancements on this? Talking about the second half of this year, I believe that there are some logistic cost issues, and you may expect higher marketing costs. I would like to ask about your profitability that may, like, be different from the previous year. My second question is for corporate-wide operations. We continue to hear rumors that you are exploring the possibility of an IPO for your Indian subsidiary. If an IPO is in plan, can you add color on the timeline and the effects it will have on your company? Thank you.
[Foreign language]
Let me answer your question in regards to home appliance business. As you just covered, H&A business this quarter, we have seen an increase of approximately KRW 100 billion, and sales have grown approximately 11% year-on-year. Compared to the previous year, there were some factors that led to enhancements in our operating profits, such as sales growth and activities to cut costs. However, our actual enhancement level slightly went down due to an increase in competition and overhead costs.
[Foreign language]
Moving on to projections on the second half. As a result of ocean freight bidding, the average freight cost is expected to go up by 58% year-on-year, along with marketing competition expenses, including advertisement cost hikes. In order to continuously secure profitability in the second half, LG Electronics would like to launch new models and further reposition our price level. In addition, we will expand our B2B business and further grow our B2C business by focusing on volume zones, keeping the continuous increasing momentum in sales and our growing trend. Throughout innovation on logistics, operation, and cost enhancements based on our manufacturing competitiveness, we expect to overcome rising ocean freights and eventually witness enhanced operating profits year-on-year. Thank you.
[Foreign language]
Once again, VP Park from IR. The growth potential held by India has recently attracted many interest from investors home and abroad, and with many of Korea's major companies, including Hyundai Motors, filing for IPOs in India, we too are aware of the rising interest the public has placed on the possibility of listing our Indian subsidiary, which has unique strengths in the strong Indian market. A variety of avenues may come under review in light of our corporate value, growth strategy, and capital management, not to mention how we plan to steer our Indian subsidiary. At the moment, however, things are still in the wind and nothing is officially underway. Thank you.
[Foreign language]
Next question, please.
[Foreign language]
The following question will be presented by Sung-kyu Kim from Daiwa Securities. Please go ahead with your question.
[Foreign language]
Thank you for taking my questions. My first question is on VS. What is your expected sales growth of this year? I understand that the EV demand remains sluggish. So under such circumstances, do you think the sales will show a negative growth, or do you still expect a double-digit sales hike? My second question would be for the VS division. How does your robotics and EV charging business look like? And when will it be that these two areas lead growth of your business?
[Foreign language]
Yeah. Let me answer your question about VS. Market uncertainty, including slowdown in EV demand, is expected to persist throughout this year. Our target is to witness greater growth compared to the market through continuously winning new orders, and we project the sales growth to continue thanks to the launch of our already won new programs. Adding more colors on our revenue, despite the slowdown in EV market demand, we expect growth of over high single digits year-on-year, thanks to stable sales growth in infotainment and sales jump in high value-added automobile components. Thank you.
Yeah, BS robot electric vehicle charging question, I will answer. First, the robotics business in the division [Foreign language]
Let me answer your question for the BS division on robotics and EV chargers. For robotics, we are focusing on the delivery and logistics robots, and this year we are taking our business a step further from F&B to include these verticals, hospitality for indoor delivery and logistics powered by automation.
[Foreign language]
The robotics industry, however, has yet to bloom, and with our business capabilities still at the stages of development, rather than boosting sales, we are, at the moment, more geared towards strengthening our capabilities, such as on cost and technology, that sets us apart from our competitors.
[Foreign language]
Next, for EV chargers, our domestic EV charging business kicked off in 2023 with the launch of two types, each of both slow chargers and fast chargers. We will be targeting the North American market this year, starting with the launch of our slow chargers, followed by fast chargers. In 2025, we intend on gaining on our shares, especially for our fast chargers.
[Foreign language]
In North America, construction of our Texas plant is now complete, and our dedicated sales force is identifying new clients and local CPOs to partner with. At the moment, we have joined forces with the number one CPO in U.S., ChargePoint, and details of the business model are being drawn out. Additional opportunities for global partnerships are being explored, and we intend to broaden our horizons, starting with Europe to Asia.
[Foreign language]
Robotics and EV charging are indeed seen as underpinnings of the growth of our division, and we will be committed to build on these areas to lead our division sales over mid to long term. Thank you.
[Foreign language]
[Foreign language]
Currently, there are no participants with questions. Please press star one, star and one to give your question.
[Foreign language]
[Foreign language]
[Foreign language]
That brings us to the end of LG Electronics 2024 second quarter earnings release. Thank you once again for participating. If you have any further questions, please contact our IR team for further detail. Thank you!