2Q 16 Earnings release
DISCLAIMER This presentation contains historical information of the company which should not be regarded as an indication of the future performance or results. This presentation also contains forward-looking statements that are, by the nature, subject to significant risks and uncertainties. These forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance or results. Actual results may differ materially from information contained in the forward-looking statements as a results of a number of factors beyond our control. -1-
CONTENTS 1. 2Q 16 Earnings Release Non-consolidated revenue / profits 2. Business Review 3. 2Q 16 Earnings Release Domestic health appliance business Overseas business Home-care and Cosmetics business Consolidated revenue / profits 4. Ice Water Purifier Recall Status Ice water purifier issue recall status 5. 16.1H Review and 2H Plan 16.1H Review and 2H Plan 6. Appendix Non-consolidated financial reports Consolidated financial reports Subsidiary results -2-
1. Revenue and Profits 2Q 16 Revenue KRW 523.0 bn (-0.9% YoY), Operating Profit KRW 21.4 bn (-80.9% YoY), Net Profit KRW 12.3 bn (-85.6% YoY), due to one off revenue reduction and provision driven by recall of 3 types of Ice Water Purifier models Revenue Operating Profit Net Profit Financial statement [Unit: KRW bn] [Unit: KRW bn/ : Margin] [Unit: KRW bn/ : Margin] Excluding recall effect of ice water purifier 590.9 527.5 523.0 2Q 15 2Q 16 577.6 111.7 21.2% 143.5 24.3% 21.4 4.1% 126.9 85.0 22.0% 16.1% 107.1 18.1% 1Q 16 2Q 15 2Q 16 1Q 16 2Q 15 2Q 16 1Q 16 12.3 2.3% 92.2 16.0% 1,168.5 1,127.7 1,033.6 1,100.6 1H 15 1H 16 2H 15 [Accounting standard: K-IFRS Non-consolidated financial reports] * Refer to page 12 on details of one off revenue reduction and cost 210.6 148.3 20.4% 13.5% 270.4 252.3 23.1% 22.4% 1H 15 1H 16 2H 15-3- 160.1 15.5% 199.3 17.1% 104.5 9.5% 189.3 16.8% 1H 15 1H 16 2H 15
2-1. Health appliance business Total accounts 5.85 mn, rental gross adds 385k Financial statement Excluding recall effect of ice water purifier 463.5 2Q 15 513.8 445.9 499.3 2Q 16 1Q 16 [Unit: KRW bn] Health appliance 1) - Health appliance revenue KRW 445.9 bn (-3.8% YoY, -10.7% QoQ) : Steady growth from rental, financial lease and lump sum. However, after revenue reduction from the issue, revenue growth turned negative. - Rental and Financial lease revenue KRW 344.8 bn 2) -7.1% YoY, -14.1% QoQ - Lump-sum and other health appliance revenue KRW 58.6 bn (+24.8% YoY, +6.9% QoQ) due to sales increase of water softener, massage chair, etc. 5,714k 2Q 15 5,846k 5,794k 2Q 16 1Q 16 [Unit: Accounts] Accounts 3)4) - Total accounts 5.85 mn +2.3% YoY, +0.9% QoQ - Rental accounts 4.92 mn (+3.7% YoY, +1.2% QoQ), Membership accounts 0.92 mn (-4.4% YoY, -0.9% QoQ) - Rental net adds 60k in 2Q 16 (1Q 16: 29k) 371k 385k 351k [Unit] Rental gross adds 5) - Rental gross adds 385k (+3.7% YoY, +9.7% QoQ) - High rental gross adds driven by strong sales of main product categories : water purifier, air purifier, mattress and etc. 2Q 15 2Q 16 1Q 16 1) Including other health appliance revenue (A/S, Installation and etc.): Applies to all health appliance revenue in this material 2) 2Q 16 Adj. Revenue : KRW 412.7 bn (+11.2% YoY, +2.8% QoQ), excluding revenue reduction of KRW 67.9 bn from recall of Ice Water Purifier 3) Excluding non-performing, 5 year maturity pending and free membership accounts: Applies to all accounts in this material 4) Including financial lease accounts & sales: Applied to all accounts and gross adds in this material -4-
2-1. Health appliance business Rental gross adds 385k, continued growth of rental net adds Rental gross adds Rental net adds [Unit: EA] [Unit: EA] 341k 371k 338k 359k 351k 735k 385k 1,470k 1,409k 1,330k 66k 81k 32k 53k 29k 89k 60k 232k 232k 166k 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 2016(P) 2015 2014 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 2016(P) 2015 2014 In-line with '16 rental gross adds guidance in 2Q - Rental gross adds 385k (+3.7% YoY, +9.7% QoQ) in 2Q 16 - Increase of air purifier sales due to continuous fine dust issue - Strong growth of mattress sales due to increase of salesforces productivity - Increase of rental gross adds driven by expanding door-todoor sales channel localization strategy and diversifying retail sales channel -5- Continued growth of rental net adds and enlargement of QoQ growth - Rental net adds 60k in 2Q 16 - Strong rental net adds due to increase of rental gross adds, stable cancellation and retention of matured subscribers
2-1. Health appliance business Maintain steady cancellation rate, decrease of rental asset disposal expense ratio, if excluding one off revenue reduction from recall of Ice Water Purifier Cancellation rate 1) Rental asset disposal expense Monthly cancellation rate Rental asset disposal expense % of rental revenue [Unit: KRW bn] 59.8 1.06% 1.05% 0.95% 0.98% 1.00% 1.00% 2011 2012 2013 2014 2015 1Q 16 1.01% 2Q 16 44.0 4.7% 38.8 40.4 40.6 3.6% 2.9% 2.9% 2.7% 9.7 12.4 2) 3.9% 2.6% 2.4% 2011 2012 2013 2014 2015 1Q 16 2Q 16 Maintain cancellation rate, around 1% in 2Q 16 - Maintain stable cancellation rate due to improvement of service quality (2Q 15: 1.01%) Rental asset disposal expense ratio slightly increase in 2Q 16 - Rental asset disposal expense ratio 3.9% : ratio increased due to revenue reduction from recall of Ice Water Purifier - Provision from the loss of rental asset disposal (KRW 30.1 bn) is not included in above rental asset disposal expense 3) 1) Cancellation rate (2012 and 2012 before): Excluding non-performing accounts 2) 2Q 16 Adj. Rental asset disposal expense : KRW 9.3 bn, excluding revenue reduction of KRW 67.9 bn from recall of Ice Water purifier and one off cost of KRW 3.1 bn 3) Refer to page 12 on details of one off revenue reduction and cost -6-
2-1. Health appliance business Continued growth of health appliance business in 1H 16 Health appliance revenue Financial statement Excluding recall effect of ice water purifier 2,030.0 [Unit: KRW bn] 1,903.9 1,013.1 1,732.0 444.6 463.5 486.5 509.3 499.3 513.8 945.2 445.9 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 1H 16 2016(P) 2015 2014 Steady revenue growth of health appliance business, excluding revenue reduction from recall of Ice Water Purifier - Health appliance revenue in 2Q 16 KRW 445.9 bn (-3.8% YoY) : steady growth from rental, financial lease and lump sum. However, after revenue reduction from the issue, revenue growth turned negative. - Rental and financial lease revenue KRW 344.8 1) bn (-7.1% YoY) - Lump-sum and other revenue KRW 58.6 bn (+24.8% YoY) : strong sales of water softener, massage chair and etc. 1) 2Q 16 Adj. Revenue : KRW 412.7 bn (+11.2% YoY, +2.8% QoQ), excluding revenue reduction of KRW 67.9 bn from recall of Ice Water Purifier -7-
2-1. Health appliance business Maintain premium brand strategy by releasing IoT and multi-function products Water Purifier Dual ice IoCare water purifier (July) - First in market to introduce dual ice dispensing function (crushed and cube ice type) - Apply IoCare system to monitor 11 types of malfunction, hygiene status, filter infromation - Ice water purifier with first grade energy efficiency Air Purifier Multi-circulation air purifier (June) - Purifies preferred space by customized multi-circulation air purifier - Provide customized purification by choosing different filters (3 Seasonal + 1 Allergen) - Enhance efficiency of room space by tower shape slim design Circulating sterilization bidet (July) Bidet - Enhance convenience and hygiene by one-touch 3 step self-sterilization system - Strengthen bowl cleaning function by applying revolving spray technology - Adopt electrolysis sterilizer for hygienic wash function Hybrid (memory foam + spring) mattress (June) Mattress - Strengthen comfortability by applying 2 Layer memory foam toper - Maintain best sleeping position by adopting ergonomic 7 zone design - Support body by dual independent spring -8-
2-2. Overseas business Export revenue KRW 59.8 bn (+53.3% YoY), Continued growth from export and overseas subsidiaries revenue Export revenue Overseas subsidiary revenue ODM/Dealers Subsidiaries [Unit: KRW bn] [Malaysia Subsidiary] [Unit: KRW bn, Accounts] 116.5 Revenue Total Accounts 39.0 18.8 20.2 59.8 30.5 29.3 56.7 36.2 20.5 72.0 43.6 28.4 66.7 49.8 77.2 38.6 38.6 23.3 34.4 29.4 219k 340k 2Q 15 2Q 16 1Q 16 1H 15 1H 16 [U.S. Subsidiary] Revenue Total Accounts 2Q 15 2Q 16 1Q 16 1H 15 1H 16 2H 15 Export revenue KRW 59.8 bn in 2Q 16 (+53.3% YoY) - ODM/Dealers revenue KRW 30.5 bn (+62.4% YoY, -15.7% QoQ) : Sales increase from air purifier ODM business in China and others : QoQ growth turned negative due to air purifier seasonality - Subsidiaries revenue KRW 29.3 bn (+44.8% YoY, +42.8% QoQ) : Strong growth driven by continuous sales increase in subsidiaries 13.6 14.7 16.5 88k 98k 2Q 15 2Q 16 1Q 16 1H 15 1H 16 Maintain growth of revenue and accounts - 2Q 16 Malaysia revenue +47.3% YoY, Accounts 340k (+55.5% YoY) - 2Q 16 U.S. revenue +8.3% YoY, Accounts 98k (+11.6% YoY) -9-
2-3. Home-care & Cosmetics business Continued growth of Home-care business, Strengthen door-to-door channel to increase Cosmetics business revenue Home-care Cosmetics Financial lease revenue1) [Unit: KRW bn] [Unit: KRW bn] Revenue Total accounts Revenue 20.4 46.9 40.0 243k 297k 265k 21.1 17.3 20.1 44.2 37.4 38.9 28.6 21.5 2Q 15 2Q 16 1Q 16 1H 15 1H 16 2H 15 2Q 15 2Q 16 1Q 16 1H 15 1H 16 2H 15 Continued growth of Home-care business sales - Mattress gross adds : 37k (+32.1% YoY, +30.8% QoQ) - Total accounts : 297k (+22.3% YoY, +11.8% vs.2h 15) - Increase of rental gross adds due to improvement of salesforces productivity 1) Financial lease: Record 5yr/ 6yr revenue at the time of the sales as present value -10- Cosmetics revenue KRW 17.3 bn - Door-to-door channel KRW 12.5 bn (-1.8% YoY, +24.2% QoQ) : QoQ turned positive due to increase of salesforces numbers and productivity - Retail channel KRW 4.8 bn (-42.6% YoY, -52.3% QoQ) : Weak revenue due to reduced number of broadcasting in TV home-shopping channels : Plan to turnaround in 2H by release of new products and adding new TV home-shopping channels
3. Consolidated revenue / profits 2Q 16 Revenue KRW 555.0 bn (-0.1% YoY), Operating profit KRW 11.8 bn (-89.3% YoY), Net profit KRW 2.8 bn (-96.6% YoY) due to one off revenue reduction and provision driven by recall of 3 types of Ice Water Purifier models Revenue Operating Profit Net Profit Financial statement [Unit: KRW bn] [Unit: KRW bn/ : Margin] [Unit: KRW bn/ : Margin] Excluding recall effect of ice water purifier 623.0 555.3 555.0 2Q 15 2Q 16 623.7 134.0 110.5 97.5 123.6 21.5% 82.7 15.7% 95.2 11.8 15.3% 19.9% 19.8% 2.8 14.9% 2.1% 0.5% 1Q 16 2Q 15 2Q 16 1Q 16 2Q 15 2Q 16 1Q 16 1,246.6 1,211.7 1,103.5 1,178.7 1H 15 1H 16 2H 15 [Accounting standard: K-IFRS Consolidated financial reports] * Refer to page 12 on details of one off revenue reduction and cost 257.5 210.8 20.7% 252.5 135.4 20.8% 19.1% 11.5% 1H 15 1H 16 2H 15-11- 160.3 192.8 15.5% 182.8 14.5% 98.0 8.3% 15.1% 1H 15 1H 16 2H 15
4. Ice Water Purifier recall status Revenue reduction and provision from recall KRW 122.1 bn, non-operating expense KRW 2.9 bn (reflected in 2Q in advance) One off financial impact [Unit: KRW bn] Operating impact 122.1 Revenue 67.9 Refund for recalled Ice Water Purifiers (106,152 EA) COGS 4.6 Provision on asset disposal expense KRW 3.2 bn, installation fee KRW 1.5 bn SG&A 49.6 Provision on rental asset disposal expense KRW 30.1 bn, sales commission, other commission, outsourcing fee and etc. KRW 19.5 bn Non-operating expense 2.9 Disposal expense of mold due to discontinue of the 3 Ice Water Purifier models - From the above items, accelerated future costs as of 2Q 2016 is KRW 39.0 bn (KRW 30.1 bn rental assets disposal expense, KRW 1.5 bn installation commissions, KRW 7.4 bn sales commissions). Excluding the accelerated future costs, net added impact is KRW 83.1 bn (excluding non-operating expense) Current status update * Completed 99.4% of call to subscribers (out of 106,152 recalled Ice Water Purifiers) Completed 89.1% of refund to contacted subscribers * Current status update : as of August 1. -12-
5. 16.1H Review & 2H Plan Health appliance revenue +11.6% YoY, excluding revenue reduction from recall of Ice Water Purifier KRW 67.9 bn [Unit: KRW bn] 1,013.1 908.1 1H 15 1H 16 Operating profit +28.4% YoY (OPM : 23.1%), excluding one off cost from recall of Ice Water Purifier KRW 122.1 bn [Unit: KRW bn] 270.4 210.6 23.1% 20.4% 1H 15 1H 16 Maintain strong growth of overseas business ODM/Dealers Subsidiaries Strengthen responsibility of No.1 health appliance company by restoring customers trust 72.0 43.6 28.4 1H 15 16.1H Review 116.5 66.7 49.8 1H 16 [Accounting standard: K-IFRS Non-consolidated financial reports] [Unit: KRW bn] 16.2H Plan Health appliance Restore customers trust Prepare plan to improve product quality and safety - Recheck all process (product planning, design, manufacturing, service, etc.) : Improve product quality and safety verifying process - Establish a monitoring team reporting to CEO directly and enhance the standard of safety and harmfulness Establish service competitiveness improvement plan - Provide differentiating customized product and maintenance service : Differentiated service by water quality, using pattern and usage period - Monitor water and air quality regularly - Notify inspection and monitoring result to customers, implement necessary action immediately Restore brand trust and enhance customer communication - Diagnose current brand value and seek for restoring customers trust - Establish customer communication plan to gather customer feedbacks more actively and rapidly Overseas Maintain strong growth Maintain ODM growth and develop brand business - Continue growth of ODM business with China and other partners - Promote growth by establishing strategy with water purifier partner in China Maintain high growth of overseas subsidiaries - Continue growth by releasing new product and expanding organization in Malaysia - Seek growth by establishing successful door-to-door business model for U.S. subsidiary -13-
APPENDIX Non-consolidated financial reports Consolidated financial reports Subsidiary results -14-
Non-consolidated financial reports [Unit : KRW bn] [Appendix] [Unit : KRW bn] Balance sheet Jun. 16 Dec. 15 <Assets> 1,872.0 1,742.4 Current Asset 746.8 658.1 Cash and cash equivalents 123.8 86.6 Accounts receivables 391.1 353.6 Inventories 49.9 48.2 Non-current Assets 1,125.2 1,084.3 PPE 580.4 624.9 Affiliates and subsidiaries 84.5 70.3 Intangible assets 149.3 146.1 <Liabilities> 705.0 472.9 Current Liabilities 655.3 421.6 Short-term borrowings 241.4 80.0 Debenture (Less than 1 year) - - Debenture (More than 1 year) - - Non- current Liabilities 49.7 51.3 Long-term borrowings - - Bonds - - <Stockholder s Equity> 1,167.1 1,269.4 Liability / Equity 60.4% 37.3% Net debt / Equity 10.1% Net cash Income statement 2Q 16 2Q 15 YoY Revenue 523.0 527.5-0.9% COGS 192.6 166.8 15.4% Gross profit 330.4 360.7-8.4% SGnA 309.0 249.0 24.1% Operating profit 21.4 111.7-80.9% Margin(%) 4.1% 21.2% -17.1%P Other income 2.4 4.0-41.0% Other expenses 4.0 2.9 35.6% Financial income 0.3 0.3 12.3% Financial expense 2.0 1.7 22.5% Investment income from investments in affiliated companies - - - Profit before income tax 18.0 111.4-83.8% Corporate tax expenses 5.8 26.4-78.1% Net profit 12.3 85.0-85.6% Margin(%) 2.3% 16.1% -13.8%P -15-
Consolidated financial reports [Appendix] [Unit : KRW bn] Balance sheet Jun. 16 Dec. 15 <Assets> 1,906.0 1,775.4 Current Assets 733.1 653.3 Cash and cash equivalents 150.5 116.3 Accounts receivable 267.6 256.0 Inventories 74.8 69.8 Non-current Assets 1,172.9 1,122.1 PPE 660.3 699.5 Intangible assets 186.5 168.8 <Liabilities> 776.5 537.2 Current liabilities 709.1 472.9 Short-term borrowings 246.6 80.0 Debenture (Less than 1 year) - - Debenture (More than 1 - - year) Non-Current liabilities 67.5 64.3 Long-term borrowings 9.8 8.0 Bonds - - <Stockholder s Equity> 1,129.5 1,238.2 Liability / Equity 68.8% 43.4% Net debt / Equity 9.4% Net cash [Unit : KRW bn] Income statement 2Q 16 2Q 15 YoY Revenue 555.0 555.3-0.1% COGS 199.2 170.6 16.7% Gross profit 355.9 384.7-7.5% SGnA 344.1 274.2 25.5% Operating profit 11.8 110.5-89.3% Margin(%) 2.1% 19.9% -17.8%P Other income 1.7 5.6-68.7% Other expenses 6.6 5.8 13.8% Financial income 0.3 0.3 0.1% Financial expense 2.1 1.7 25.7% Investment income from investments in affiliated companies - - - Profit before income tax 5.2 108.9-95.2% Corporate tax expenses 2.5 26.2-90.6% Net profit 2.8 82.7-96.6% Margin(%) 0.5% 14.9% -14.4%P -16-
Subsidiary results - 6 entities (4 overseas subsidiaries, Coway Entech, Green Entech) [Unit : KRW bn] Subsidiary 2Q 16 2Q 15 YoY 1Q 16 QoQ Malaysia Revenue 34.4 23.3 47.3% 29.4 16.9% Operating profit 1.5 2.0-1.2 21.9% Margin 4.3% 8.4% 4.1% U.S. Revenue 14.7 13.6 8.3% 16.5-10.9% Operating profit 0.1-0.2-0.1 67.3% Margin 1.0% - 0.5% China Revenue 3.0 3.3-10.8% 5.1-41.9% Operating profit -0.4-0.5-0.5 - Margin - - 9.8% Thailand Revenue 1.2 1.7-27.5% 1.2 3.4% Operating profit -0.3-0.2 - -0.2 - Margin - - - Coway Entech Revenue 1.9 - - 3.8-51.4% Operating profit -0.7 - - 1.2 - Margin - - 30.1% Green Entech Revenue 8.5 9.4-9.9% 12.1-29.8% Operating profit 0.2-0.5-0.9 - Margin 2.4% - 7.5% Malaysia. 2Q 16 Revenue KRW 34.4 bn (+47.3% YoY, +16.9% QoQ). 1H 16 Accounts 340k (1H 15: 219k, 55.5% YoY). Revenue growth driven by increase of brand recognition and salesforces. Local currency basis : +54.4% YoY, +15.5% QoQ U.S.. 2Q 16 Revenue KRW 14.7 bn (+8.3% YoY, -10.9% QoQ). 1H 16 Accounts 98k ( 15.1H: 88k, 11.6% YoY). Revenue growth driven by increase of rental and membership accounts China. 2Q 16 Revenue KRW 3.0 bn (-10.8% YoY, -41.9% QoQ). Decrease of air purifier sales due to discontinue of main model driven by exchange of new models Thailand. 2Q 16 Revenue KRW 1.2 bn (-27.5% YoY, +3.4% QoQ). Plan to turnaround by expanding door-to-door sales organization Coway Entech. 2Q 16 Revenue KRW 1.9 bn (-51.4% QoQ). Decrease of revenue due to lower-than-expected progress in its construction and decrease of new project orders Green Entech. 2Q 16 Revenue KRW 8.5 bn (-9.9% YoY, -29.8% QoQ). Decrease of revenue driven by weak new orders -17-