LG Electronics Inc. (A066570) Earnings Call Transcript

Good afternoon, and welcome to LG Electronics quarterly earnings conference call. This conference call will begin with the 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 would 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 third 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; Seung-Hyun Kim, VP of VS; and Dong-Hoon Shin, VP of ES. From headquarters, Jung Hyun Park, SVP of Corporate Business Management; Young Kyoon Kim, VP of Finance; Timo Yee, VP of Robotics Strategy Division, IncoPat Head of Accounting; and Sanmen Hong, Head of ESG Office. This presentation will proceed as follows. Our CFO will review the Q3 2026 results and Q4 outlook, followed by an update on the progress of our new growth businesses. I will then present the third quarter financial highlights. After that, each business will share its individual results and outlook. Lastly, the head of the ESG office will present the results of our ESG activities. Please note that all statements made today regarding the third 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 Q3 2026 performance review and the Q4 outlook.

Good afternoon. I'm Chang-Tae Kim, CFO of LG Electronics. Here are our third quarter results. Consolidated revenue reached KRW 23.8 trillion, and operating income was KRW 781.9 billion, both improving year-over-year. Despite persistent challenges including the war in the Middle East and rising interest rates in major markets, we continued to grow revenue, supported by our market position and differentiated competitiveness in our core businesses, home appliances and automotive electronics maintained stable profitability, while TV improved significantly year-over-year, contributing to company-wide profitability. In particular, automotive electronics has maintained solid mid-single digit plus profitability for 7 consecutive quarters, establishing itself as a stable B2B-based cash count. As we go activity and autonomous driving advance, we will keep expanding the business and develop innovative products to improve our results. In Q4, uncertainties over interest rates, raw material prices and exchange rates are likely to persist with the regional demand diverging further. In response, we will continue to advance our proven strategies of B2B expansion, global South and to track to secure growth momentum. In addition, to strengthen our fundamental cost competitiveness, we will improve the efficiency of our global production by leveraging the manufacturing ecosystem in low-cost countries and diversify our supply chain to build resilience against structural cost changes. Next, I will highlight our progress in our new growth engines and a new opportunity in the AI Home Solutions business. First, in AI data center cooling, tangible results are emerging. At our last earnings release, we reported that first half orders exceeded KRW 600 billion and forecast that the figure would reach several trillion by year-end. As reported in the media, we signed a contract with air control concepts, a leading provider of AIDC infrastructure platforms to supply cooling solutions for a 5-gigawatt AIDC, including this contract, cumulative orders as of Q3 exceeded KRW 3 trillion, and our planned order growth is well on track. Given the long-term nature of this agreement, which can provide stable revenue over many years, the market views it as an opportunity for us to strengthen our presence in AIDC cooling. To respond promptly to rapidly growing orders, we are expanding investment in production capacity. Next year, we plan to establish a production hub in Virginia U.S. where data centers are concentrated with 32,000 square meters of floor area on a 170,000 square meter site and build new lines in Pantech and Town for a total investment of about KRW 220 billion. We will expand the capacity in phases as orders grow? We are seeing tangible results in expanding our product portfolio. In addition to chillers and air side products, development and prioritization of coolant distribution units or CDUs, the core component of liquid cooling solutions are progressing smoothly. Recently, we obtained a qualification from NVIDIA for our 600-kilowatt 1 megawatt and 2.6 megawatt CDUs. In addition, our 2.6 megawatt CDU is now DSX ready, which signifies compatibility with NVIDIA's AI factory platform. This demonstrates our next-generation AIDC technology and positions us for future business. We will continue to lead the development of large-scale CDUs that can manage high-density AI servers in a single unit and accelerate our business by winning more projects. Now let me turn to our robotics business. Our strategic direction is to establish ourselves as a solution provider across the entire value chain from key components and hardware to data platforms and operating systems. Actuator mass production preparations are on track. We built a pilot line in Tamon in the first half and will automate equipment and enhance quality in the second half. We expect this to improve our cost and quality competitiveness in robots, and secure the vantages such as a first-mover position in component standardization. In parallel, we will step up our order-winning activities with potential global customers to deliver tangible business results. In humanoid robot development, we plan to launch LG Data Factory, Korea's largest hub for robot learning and data acquisition in Soles omentum in Q4. It will be the starting point for advancing our robot foundation model performance built on our domain expertise in manufacturing, home and commercial settings and the collaboration center for partners in Korea and overseas, including NVIDIA. Next is a new business opportunity in AI Home Solutions. In partnership with global big tech companies, we are pursuing an AI home solutions business built on cutting-edge IoT technologies. By integrating our manufacturing, AI and customer-centric IoT hardware capabilities into the AI home ecosystem, we will deliver intuitive solutions with tangible results. Finally, to enhance shareholder value, we plan to cancel all 730,000 treasury shares repurchased this year within Q4. Next year, we will also pursue multifaceted efforts to enhance shareholder value including additional shareholder returns of around KRW 100 billion. I will now briefly review Q3 2026 performance across the enterprise and each business. Our consolidated financial results for Q3 were KRW 23.82 trillion in sales and KRW 781.9 billion in operating income. ATS recorded sales of KRW 7.04 trillion and operating income of KRW 259.2 billion. MS recorded sales of KRW 5.02 trillion and operating income of KRW 146.7 million, CS recorded sales of KRW 2.82 trillion and operating income of KRW 190.3 billion. Lastly, ES recorded sales of KRW 2.17 trillion and operating income of KRW 87.2 billion. Next, I will outline the results of our B2B and subscription businesses, the 2 pillars of our portfolio transformation, which is driving qualitative growth. In Q3, B2B revenue grew year-over-year, driven by automotive electronics, where a solid order backlog supported strong sales and by commercial displays. B2B also maintained a stable share of total company revenue, reinforcing its role as a key driver of qualitative growth. In subscriptions, our Korean business further strengthened its competitive edge through differentiated care services while sustaining solid quarter-over-quarter and year-over-year sales growth. For overseas subscription business, our business is also expanding actively into new markets, including the Middle East, in addition to core Asian markets such as Malaysia and Thailand. Although we are still in the early stages of global expansion, we will rapidly build the country-specific business infrastructure and capabilities to accelerate the growth momentum of our overseas subscription business. We will continue to strengthen our mid- to long-term competitiveness and results by advancing our business portfolio, including B2B and subscription. Next, we look at the income statement and cash flow for Q3. After accounting for financial income and expenses, equity method gains and losses, other nonoperating items, corporate tax and discontinued operations, Q3 net income was KRW 78.4 billion. Now let's look at cash flow. Cash flow from operating activities was KRW 620.5 billion, while cash flow from investing activities was net of KRW 986.9 billion. After reflecting the foreign exchange impact of negative KRW 972.2 billion on foreign currency denominated cash, net cash flow was negative KRW 1.33 trillion. When reflecting a negative KRW 471.6 billion in cash flow from financial activities, the cash balance at the end of Q3 stood at KRW 8.25 trillion, down KRW 1.81 trillion from the previous quarter. Key financial positions and indicators for Q3 are as follows: at the end of Q3, assets stood at KRW 78.8 trillion, liabilities at KRW 41.2 trillion and equity at KRW 29.6 trillion. Leverage ratios, including liability to equity, debt to equity and net debt to equity remain at healthy levels. Now we will hear from each business company regarding its Q3 results and Q4 outlook. We will now begin with the HS business. Here are the Q3 results for the HS business. Despite persistent uncertainties, such as interest rates and FX volatility and a delayed recovery in appliance demand, sales grew year-over-year, driven by growth strategies for our major products, including the 2 track and global sales strategies and by our successful expansion into new sales channels, led by subscription, B2B and online branch of businesses. We largely contained the cost pressures through structural improvements in operational efficiency, leveraging the low-cost country ecosystem. However, operating income declined slightly year-over-year, mainly due to a short-term rise in logistics costs and higher marketing costs to strengthen our brand position. Looking ahead to Q4, we expect demand to diverge, reflecting differences in country's economic fundamentals between regions affected by persistent geopolitical risks and those benefiting from the rise of AI. As a result, the recovery in global appliance demand is expected to remain limited. We will strengthen our competitiveness by continuing the 2-track strategy, which is proving effective even in the inflationary environment of major markets and by deepening localization, including by launching regionally tailored products in the global South, which is posting relatively high economic growth. Let's now turn to the third quarter results for our Media Solutions business. Sales declined quarter-over-quarter, mainly due to seasonality, but grew year-over-year, thanks to strong premium TV sales, growth in the Web West platform business and rising demand in the emerging markets. Operating income continued its upward momentum, posting a significant year-over-year improvement, driven by a higher share of premium products, lower material cost, efficient use of marketing resources and other initiatives to enhance cost competitiveness. Our outlook for the fourth quarter is as follows: Cost pressure continues as prices of core components, such as memory and LCD panels rise and supply chain uncertainties persist. With consumer sentiment remaining weak due to high oil prices and interest rates, we expect TV demand to decline year-over-year. In response, we will continue our efforts to strengthen our structural competitiveness, including improving cost competitiveness and operational efficiency. In addition, we will increase investments and strengthen execution to deliver our differentiated customer value and secure future competitiveness. I will now review the Q3 results for the VS business. Despite uncertainties in the external environment, such as concerns over slowing EV demand, sales grew year-over-year, supported by stable conversion of our order backlog into sales and solid growth in the infotainment business. Operating income improved year-over-year driven by sales growth and ongoing improvements in our cost structure and operational efficiency. Now let me move on to the Q4 outlook. A meaningful recovery in global automotive demand is likely to remain limited given stagnant EV demand and continued uncertainties in the environment. Accordingly, while closely monitoring market changes and their impact, we will sustain our stable sales growth momentum based on a secured order backlog and achieve stable profitability by strengthening cost competitiveness and operational efficiency. I will now review the third quarter result of the ES business. Sales held steady year-over-year despite a weak domestic consumer sentiment and a prolonged slump in the construction sector, as we strengthened our response to commercial HVAC demand in overseas markets such as North America and Europe. Operating income decreased year-over-year, mainly due to lower sales in the Korean market and higher investment in labor costs related to new growth businesses. Let me now move on to the Q4 outlook. The market environment is expected to remain challenging as uncertainties such as the war in the Middle East persist and competition intensified. In response in the Korean market, we will expand customer touch points and strengthen our competitive advantage, focusing on subscription and D2C marketing. Overseas, we will pursue accelerated growth by enhancing product and service competitiveness while responding promptly to large-scale AIDC cooling solution projects. Lastly, I would like to talk about our ESG activities and results. We continue to strengthen our competitiveness, eco-friendly, high-efficiency technologies. At this year's Energy Winner awards, we won 12 awards, including 3 Grand prizes the most in our industry for the tenth consecutive year. In addition, our OLED TVs are in carbon trust, carbon footprint certification for the sixth consecutive year and all our 2026 new models received Intertek Resource Efficiency certification. In the circular economy, we are expanding our end-of-life appliance collection and recycling infrastructure. We built a refrigerant recovery and recycling system with the Ministry of Climate Energy & Environment and established logistics and recycling base for appliance collection. Finally, our technological capabilities are recognized in cybersecurity and accessibility. We obtained TUV Rheinland's qualification as a designated EU cybersecurity testing lab, allowing us to run related tests in-house and reduced time cost for product development and certification. We are also named to Forbes Global 200 Accessibility Innovators List for improving product accessibility, including the U.S. launch of the convert kit for laundry appliances. Going forward, we will turn our ESG achievements into business competitiveness, leveraging our technology to capture growth opportunities in the AI era. That concludes LG Electronics' Q3 2026 Earnings Presentation and Q4 Outlook. We will now take your questions.

[Operator Instructions] [Interpreted] The first question will be provided by Simon Woo from Bank of America.

[Foreign Language] I have 2 questions, 1 on robotics and the second for I know that AIDC is 1 of LG's key business areas. And when you expect the business to begin generating meaningful results, including revenue and what are your mid- to long-term sales targets and outlook for profitability? Also, in your view, what differentiated strategies will help LG achieve these goals? And as for my second question regarding ES, I would like to know in which areas of the AIDC Cooling Solutions business LG Electronics has the greatest potential to generate value, such as chillers and CDUs. Could you also provide some color on the revenue mix within the AIDC Cooling Solutions business? And how do you expect this mix to evolve over time? And lastly, how will changes in the product mix affect the growth rate and profitability of ES in comparison with your existing businesses, such as HVAC and air conditioners. .

Thank you for those 2 questions. The first question on our Robotics business will be answered by the Head of Robotics Strategy Division. And the second question on AI data center cooling will be answered by the Head of ES Business Management Division.

[Interpreted] To answer your first question on robotics, our approach is twofold. First, we aim to establish an early lead in manufacturing and logistics while developing our technologies and product lineup and building a track record and markets expected to develop first, including academia, the public sector and manufacturing as well as in the early stages of mass production for key components such as actuators. Second, from around 2030, when the humanoid market is expected to take off, we plan to expand into home humanoid robots. Even before the home robot market fully opens up, we are developing home robots and form factors that fit naturally into people's homes, drawing on the strength we have built in our home appliance business. For the home robot markets to gain traction, we believe it is important to reach price points at which consumers would realistically consider buying these robots. We believe our approach of robots designed for appliances and appliances designed for robots can help us achieve this. . Lastly, according to global consulting firm BCG, the robotics market is projected to grow from $132 billion in 2031 to $255 billion in 2035, representing a CAGR of 21%. As physical AI becomes capable of handling a wider range of tasks faster 2030 both the B2B and B2C markets are expected to expand. Against this backdrop, we are actively pursuing our goal of becoming a top-tier global player through an agile approach aimed at establishing market leadership. Thank you.

[Interpreted] Let me answer your question regarding AIDC Cooling Solutions. From a product portfolio perspective, LG Electronics AIDC Cooling Solutions business currently generates revenue primarily from chillers. Going forward, we plan to continue expanding the business based on our chiller competitiveness while broadening our product mix to include liquid cooling products such as CDUs and airside products such as FWUs. . Over the medium to long term, we plan to expand our business beyond the supply of individual products to integrated cooling solutions that encompass the design, control and maintenance of the entire cooling system. As a result, we expect our currently -- current chiller-centric revenue mix to become increasingly more diversified over time. In terms of our regional expansion strategy, we are broadening our geographic footprint beyond the U.S., which is our largest market in terms of demand into other regions such as the Middle East and Asia. If we continue to make steady progress in expanding our product portfolio establishing ourselves in an integrated cooling solutions provider and broadening our original coverage, we expect to strengthen our market position through accelerated business growth, realize economies of scale and expand revenue from high value-added products and services. Accordingly, we believe this business will offer significant profitability upside compared with the conventional HVAC business. However, we ask full year understanding that it is difficult to disclose specific medium- to long-term revenue targets and the revenue mix by product at this time. Next question, please.

The following question will be presented by Jong Wook Lee from Samsung Securities.

[Interpreted] I have 2 questions, 1 for FX and 1 for robotics. My first question for the foreign exchange is that the $1 exchange rate has fallen sharply after holding at around 1,500. And given your global operations, to what extent is this currency movement affecting LGE? And could you walk us through the impact on revenue and on profit loss under the current business structure. And secondly, could you update us on the LG data factory and outline its road map. Do you have plans to commercialize it such as through paid pilot projects for external customers? And could you also share an update on your collaboration with NVIDIA and your plans going forward?

The first question on the foreign exchange will be answered by the Head of Corporate Business Management division; and the second question on the data factory will be answered by the Head of Robotics Strategy Division.

[Interpreted] To answer your first question, with transactions in multiple currencies across our global operations, we have a substantial natural hedge against exchange rate movements. A stronger 1 reduces the 1 value of revenue denominated in U.S. dollars, euros and other major currencies. At the same time, it can lower production costs in on terms in countries such as China and Vietnam. As a result, the overall impact on earnings depends on the share of transactions in each currency and how much each currency moves against the one.. However, the one's recent strength against most major currencies is somewhat weakening our company-wide hedging efforts. . To minimize the impact of exchange rate movements, we plan to continue monitoring our exposure to each currency, further strengthen our global production strategy, including swing production and refine our FX scenario planning while optimizing pricing by region and improving product mix and cost competitiveness. To answer your second question on robotics, we are planning a range of business models in robotics. These include research products incorporating stand-alone devices, vertical-specific package hardware, software solutions developed with SI partners for the service sector and data sales and data set developments. We are considering paid pilot projects for external customers as a mid- to long-term opportunity for the data factory. For now, however, our priority is to use it internally to enhance the performance of our own robots. We will share further details on our plans for external commercialization as the business model takes shape. . We continue to work with NVIDIA to advance our technologies using reference robots. Drawing on the domain expertise, we have built in home and manufacturing environments through our existing businesses we are rapidly collecting real-world data in an environment that closely replicate actual operating conditions. We are also collaborating with NVIDIA across a broad range of physical AI technologies including simulation, world models and robot development platforms. By combining real-world and synthetic data, we are building a virtuous data cycle and aim to accumulate approximately 500,000 hours of training data by year-end. Next question, please.