Panasonic Holdings Corp
TSE:6752
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Panasonic Holdings Corp
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I'll start my presentation on the consolidated financial results for the first quarter of fiscal 2021, FY '21, ended June 30, 2020, and the full year forecast.
First, the summary. For the first quarter of FY '21, overall sales decreased due to deconsolidation in the business portfolio reform and the COVID-19 impact. Overall, operating profit decreased with large sales decrease despite steady progress in enhancing the management structure.
As for the COVID-19 impact, both sales and profit have improved since June 2020.
As for the full year consolidated forecast, overall sales and profit are expected to decrease for the full year despite an outlook of gradual lessening of the COVID-19 impact from the second quarter.
Regarding the profitability improvement, in line with the mid-term strategy, the company will steadily promote enhancing the management structure and strengthen efforts to capture business opportunities from changes in society brought about by COVID-19. Details of the consolidated financial results for the first quarter.
Overall sales were JPY 1,391.9 billion mainly reflecting the deconsolidation impact and the COVID-19 impact. Adjusted operating profit decreased largely due to decreased sales. Operating profit decreased despite achieving profitability by the recording of onetime gains. Net profit also decreased.
This slide shows our sales analysis. Overall sales decreased by JPY 499.2 billion, minus 26%. Excluding the effect of the exchange rates and the deconsolidation impact, sales decreased by JPY 370.5 billion, down 21%. Of which, the COVID-19 impact of JPY 350 billion was seen mainly in Automotive, Appliances and Connected Solutions, which includes the Avionics business. However, the COVID-19 impact has lessened from June.
Monthly sales compared with the previous year for April and May were minus 26% and minus 28%, respectively, whereas in June, it was 9%, showing a noticeable recovery mainly in Japan and China.
Next, our operating profit analysis. Adjusted operating profit decreased by JPY 68.3 billion. However, excluding the COVID-19 impact, profit increased by JPY 11.7 billion.
Mid-term strategy initiatives of profitability improvement are showing steady progress. For example, fixed cost reduction was a factor of an increase of JPY 9 billion, and taking measures to businesses with loss-making structure was another factor of an increase of JPY 8 billion. Automotive business contributed to an improvement of JPY 8 billion.
On the other hand, the COVID-19 impact led to a decrease of JPY 80 billion. Automotive, Connected Solutions and Appliances accounted for a large portion of that impact.
Operating profit achieved profitability owing to onetime gains, although it decreased by JPY 52.6 billion overall year-on-year.
This slide shows the results by segment. I will explain the details starting from the next slide.
Here, you can see the major increase-decrease factors by segment. Sales decreased in all segments. Adjusted operating profit increased in Industrial Solutions while other 4 segments saw a decrease.
In Appliances, sales and profit decreased despite recovery trends in some products in regions such as China and Japan.
In Life Solutions, sales and profit decreased.
In Connected Solutions, sales decreased mainly in Avionics as a result of reduced flight operations. Profit largely decreased despite thorough efforts to reduce fixed costs.
In Automotive, sales largely decreased. This is due to the impact of reduced production of vehicles by customers despite steady progress made with product portfolio replacement at Automotive Solutions. Profit decreased overall due to decreased sales despite achieving significant fixed cost reductions at Automotive Solutions.
In Industrial Solutions, sales were down overall, impacted by lower sales for automotive-use products despite increase in power, storage systems and capacitors for information and communication infrastructure. Profit increased with efforts to reduce fixed costs and effects of contract alteration of semiconductor business, offsetting lower sales.
As a result, company-wide sales in real terms, excluding the effect of exchange rate and deconsolidation impact, decreased by 21%, and adjusted operating profit was down JPY 68.3 billion. Operating profit decreased by JPY 52.6 billion despite improvement in other income and loss.
This slide shows the situation for free cash flow and cash. Free cash flow was an outflow of JPY 54.2 billion. Operating cash flow became negative due mainly to decreased profit and short-term factors such as temporary increase of inventory resulting from the COVID-19 impact. On the other hand, investing cash flow was positive. This is due mainly to onetime proceeds. Free cash flow was negative overall for the first quarter. However, it recovered to be positive in June on a monthly basis.
The graph on the right describes our cash position. The company maintains sufficient liquidity. Gross cash was secured over JPY 1 trillion. In addition, there is no borrowing under the commitment line agreements.
Net cash balance has then improved year-on-year. This is due to the exclusion of lease liability related to housing business, namely Panasonic Homes and others, as a result of the deconsolidation as an example of promoting business portfolio reform.
Next, the full year financial forecast.
Overall sales and profit are expected to decrease for the full year despite the outlook of gradual lessening of the COVID-19 impact from the second quarter onward. Sales are expected to be down JPY 990.6 billion at JPY 6.5 trillion. Excluding the effect of foreign exchange and special factors, such as the deconsolidation, sales is expected to decrease by JPY 496.3 billion.
Adjusted operating profit is expected at JPY 220 billion; operating profit, JPY 150 billion; and net profit, JPY 100 billion.
Although the COVID-19 impact is expected to remain throughout the fiscal year, we will steadily promote the enhancement of management structure.
Now let me explain our assumptions regarding the COVID-19 impact used in formulating the fiscal '21 full year forecast. In terms of sales, we assume a gradual recovery. However, the impact is expected to remain in the second half for aviation, housing-related and automotive industries. The details are shown in this slide.
Next, I will explain the -- our assumptions regarding the COVID-19 impact on profit. We assume the negative impact on profit will lessen in Q2 and towards the second half of fiscal '21. As shown here, the impact of the Q2 is expected to be half of that of the Q1. With the second half, we expect some impact to remain in certain businesses. However, this impact is expected to be largely alleviated compared to the first half. And it is expected at the same level as the second half of fiscal '20.
Based on these assumptions, I would explain the sales analysis of fiscal '21 forecast. Overall sales is expected to decrease by JPY 990.6 billion. Excluding the effect of the exchange rates and deconsolidation impact, sales is expected to decrease by JPY 496.3 billion.
Among the overall sales decrease, we factor in the decrease of JPY 650 billion of COVID-19 impact in fiscal '21. In fiscal '20, the decrease was JPY 140 billion. Therefore, the net amount of JPY 510 billion is the year-on-year difference.
Next is the analysis of operating profit forecast. Operating profit is expected to decrease by JPY 143.8 billion. Of which, adjusted operating profit is expected to decrease by JPY 66.7 billion.
However, excluding the COVID-19 impact, we aim to achieve an increase of about JPY 50 billion in adjusted operating profit from the about JPY 320 billion in fiscal 2020. For example, we reduced fixed costs and take measures to businesses with loss-making structures. In addition, for our Automotive business, we will improve the efficiency of R&D at Automotive Solutions as well as improve productivity at Automotive Batteries.
On the other hand, in terms of COVID-19 impact, decrease of JPY 150 billion is factored in fiscal '21 compared to JPY 30 billion in fiscal '20. The net amount of JPY 120 billion is the year-on-year decrease.
Other income and loss is expected to decrease by JPY 77.1 billion year-on-year mainly impacted by JPY 122.6 billion of gains from the establishment of joint venture and others in fiscal '20. Restructuring expenses of JPY 50 billion is expected in fiscal '21.
This shows the full year financial forecast by segment. Details will be explained on the following slide.
This shows our fiscal '21 full year forecast by segment. Sales is expected to decrease in all segments due mainly to COVID-19 impact. Adjusted operating profit is expected to decrease overall due to a large decrease in Connected Solutions despite expected increases in Appliances and Industrial Solutions as well as maintaining the same level as the previous year in Automotive.
In Appliances, sales is expected to decrease. On the other hand, profit is expected to increase through initiatives to enhance our management structure mainly with air conditioning and white goods business.
In Life Solutions, sales and profit are expected to decrease due mainly to decreased sales of housing-related business despite certain businesses being strong.
In Connected Solutions, sales and profit are expected to decrease, impacted by much lower sales at Avionics.
In Automotive, sales is expected to decrease with the loss at the same level as the previous year. At Automotive Solutions, profit is expected to decrease despite efforts to reduce fixed cost. But at Automotive Batteries, profit is expected to increase due mainly to improved productivity effect at the North American factory.
In Industrial Solutions, sales expected to decrease due to lower sales of automotive-use products. Despite favorable demand of products for information and communication infrastructure, profit is expected to increase due mainly to the effect from restructuring in semiconductor business.
As a result, company-wide sales is expected to decrease by JPY 496.3 billion. In real terms, excluding the effect of exchange rates and the consolidation impact, adjusted OP is expected to decrease by JPY 66.7 billion. Operating profit is expected to decline JPY 143.8 billion due to onetime gains from the previous year.
This shows the fiscal '21 guidance of free cash flow. From Q2 onward, we will secure profit. At the same time, we will also continue efforts to promote optimizing inventory level and narrow down capital investments.
With regard to strategic investment, we will execute them within the proceeds generated mainly by business portfolio reform. For the full year, we aim to -- we aim for the level of free cash flow above the net profit.
This shows our business portfolio reform progress. Let me explain the changes after the fiscal '20 full year announcements in May 2020.
In terms of investment for growth in July 2020, we executed a strategic investment in Blue Yonder, a leading supply chain software company related to Gemba Process business.
Regarding our solar business, the company resolved to end the partnership with GS-Solar in China, which was agreed in May 2019, as described in the press release announced today. For the solar business, we will consider various measures aiming to turn profitable at early stage.
Finally, this is a summary of our key initiatives for fiscal '21. With regard to the mid-term strategy initiatives, we will continue steady progress in the enhancement of management structure, profitability improvement of our automotive business and business portfolio reform.
In terms of addressing the COVID-19 situation, we will respond to business risks and make efforts to capture business opportunities.
In terms of responding to business risks, we will reduce costs mainly fixed cost, and promote countermeasures to structural changes accordingly.
To capture business opportunities arising from changes in society brought about by the COVID-19, we will develop products and services and invest in expanded capacity.
While the COVID-19 impact is expected to remain in fiscal '21, we will execute these initiatives toward overcoming the low profitability structure.
Thank you for your attention.
I have 2 questions. First, thank you for the opportunity. One on Automotive and Avionics. I'd like to get your comments on each of those businesses.
Regarding Automotive, due to the impact of COVID-19 and others, the assumptions on a quarterly basis seem to have changed from the first quarter to second quarter, both in negative. First quarter, it was about 50% to -- in the second quarter. The size of the decline seems to be smaller. What do you think are the backdrop to that? That's my first question.
And second question is on Avionics. CNS is in red, and I think that is largely due to the sales decline in Avionics. At the last earnings conference call, you said that the Avionics management has changed and the structural reform efforts had been made. So despite that, doesn't seem to have improved much. Is that because the reduction was something that could not be overcome by new management? And could you also talk about the top line for the Avionics going forward for Q2?
Thank you for your questions. First, automotive, Slide 11, the impact, the Automotive Solutions -- as for Automotive Solutions, that -- it has to do with our customers. When you look globally, in Europe and in North America, the situation is still very difficult, whereas Japanese automakers, as has been reported already, starting from the second quarter, production has been promoted to be normalized. And many of our customers in Automotive are Japanese and U.S. automakers, so their performance are reflected in our results.
And also within AM -- or the Automotive Batteries business, Tesla, Q1, as was mentioned 3 months ago, in April and May -- or until April and May, the Model 3 plants in California were affected by lockdown. But with the resumption of those plants, we expect recovery going forward. That's for Automotive.
Now Avionics. We have been working on a large reduction in fixed costs. But in terms of sales in the first quarter, less than 50% was the result.
The marginal profit when the sales go down that much, we were not really able to reduce the fixed cost to make up for that. And therefore, Avionics was in the red. And in CNS, that was reflected in the CNS results.
For the second quarter onward, gradually, recovery is expected. But not a major recovery. That's the basis of our full year forecast for CNS. On a full year basis, large profit decrease is expected, and that is due to the reduced top line in Avionics which is directly related to the flight operations of the airline companies as well as the aircraft manufacturing business. That's it. Thank you.
Just one clarification, Avionics, the current orders and deliveries, installation, for the second half of the year, do you think that 20%, 30% reduction will continue?
30% to 40% decline is our current view. So rather difficult half year is our projection.
Citigroup Global markets, Japan Ezawa-san, please.
This is Ezawa. Can you hear me?
Yes.
Two questions, please. First is about the batteries business. It is improving. That is the trend. But now EBITDA or operating profit margin, how would the profit expand in your view, Mr. Umeda, this year and next year? When you look at the next fiscal year, the major trend? What would be the percentage of the increase of the profitability or the size of the profit? How sure are you? Could you talk about those?
Also, Gigafactory, new CapEx, large major CapEx, the Tesla SEC filing talks about the new agreement. So concerning CapEx, when you generate certain level of the profit, that maybe you have made this decision because of that or maybe you expand in the CapEx in order to expand the profit. So that's my first question.
And also second question is about the guidance for this fiscal year, adjusted operating profit of JPY 220 billion. So how did you come to this number? What are the forecast? So if the JPY 220 billion is not achieved, what could be the variables or the reasons in terms of the businesses or internal factors? What could be the factors, which will inhibit the company reaching the JPY 220 billion?
Thank you for your questions. First, about the batteries business. The battery business for Tesla is the first question. This fiscal year, in Q1, for almost 2 months, the operation was suspended, and now we are recovering. That impact, however, is likely to be seen for the full year.
And as I announced in the previous briefing session, toward the 31 -- 35 gigawatt hour, we are working on the technological innovation. So that's what we are working on, and this -- due to the COVID-19, it has been delayed. So for the full year, the reduction of the loss is something that we plan to do in 2021, but the deficit is likely to remain for fiscal 2021. But without it, we should have become profitable, but due to the current situation, we could not do so.
And toward fiscal 2022, 35 gigawatt hour, with the introduction of the technological innovation, we would like to achieve the shift to that. And the cars sales, especially EV, is with a tailwind. So with that, we can turn it around. And next year, probably it will not happen. But in 2 to 3 years to come, the depreciation burden or load will be much less. So 5% is something that we are currently looking at.
As for the Gigafactory agreement, you mentioned, mutually, the facilities, investing on our own -- from our side is efficient, and it's good for them. So it's a win-win relationship. But we have not yet reached an agreement, but it doesn't mean that we have ended that negotiation. Because of the delay in the generating profit, we are making sure that we stay in discussion. And we are considering the possibility of that.
And as for the annual guidance of JPY 220 billion, in the presentation material, we do talk about that on Page 14.
So fiscal '21 will be increase is shown. And adjusted OP, if you look at that, for 2020, JPY 286.7 billion was the actual number and the impact of the COVID-19 was about JPY 30 billion. So excluding that, we have that number.
And from that, in 3 years, we like to achieve JPY 100 billion effect. So we'd like to make sure that we harvest that. And so JPY 30 billion, the management structure enhancement and the JPY 15 billion measures to structural loss-making business and the profitability improvement of automotive business.
And as a result, before or excluding the COVID-19, JPY 50 billion. As you see at top right, excluding COVID-19, approximately JPY 370 billion is the adjusted OP that we'd like to achieve.
And from that, based upon our experience in Q1 and as [ Ono-san ] asked, looking at the intercompany differences, and there will be an impact of about JPY 150 billion. So as a result of that, we come to JPY 220 billion.
So as for the variables, the COVID-19 is one of them, and it could be bigger or smaller than this. But what would happen to that impact would be the variable that we must consider.
But if it's the minor one, what we have been doing in fiscal 2020, we believe that we can offset that impact. And on the left-hand side, we are talking about JPY 100 billion improvement, and that's something that we would keep unchanged and continue to work on. Thank you.
From Mizuho Securities, Mr. Nakane, please.
Nakane from Mizuho. I hope you can hear me.
Yes.
I have 2 questions. First, about the structural reform, JPY 50 billion. By segment, I think some will involve cash, others would not. So can you give us the breakdown? Looking at Page 15, other income and loss doesn't give us much. So could you elaborate on that? And the effect to be expected for next fiscal year and the structural reform for next year, a qualitative explanation about that as well.
And my second question, this is related to [ Ono-san's ] question about Avionics. For the next 2, 3 years, this difficult situation is expected to continue. So at this point in time about this demand over the next couple of years, how do you -- what's your view about that? And of course, fixed cost needs to be reduced, but what other measures do you have to address the situation as a strategy?
Thank you for your questions. First, structural reform, JPY 50 billion. The breakdown was your question. Again, this is a sensitive question, so it's very hard to give you the details. But the biggest item we believe is LS, followed by AP and then Industrial Solutions, IS, in the billion yen level. And given CNS, given the current situation, again, billion-level negative. All put together, JPY 50 billion.
As for further details, we are mainly talking about the loss-making businesses, is all we can say.
As for fiscal 2022, I'm afraid it's too early to talk about that, but of course, we are thinking of much smaller amount than this. Up until fiscal 2022, we will do everything to complete, to thoroughly execute the structural reform. And I don't think there are any big items, surprisingly big item that you should expect. And as for the effect of such efforts, there are different types of structural reform efforts that we are implementing, and therefore, we can't really talk any further, I'm afraid.
Avionics. This year, expect to be difficult year and in the ensuing years. IATA recently presented some indices, and we subscribe to that. Domestic airlines or flights, for fiscal 2022 -- no, '24, only then would it return to the 2020 -- fiscal 2020 level. And for international, fiscal 2025, it's going to take until fiscal 2025 to recover to the fiscal 2020 level.
Now narrow-body aircraft hasn't been our strength, mostly widebody. And the sales had reduced -- had been reduced quite a bit, as was mentioned, and we took various measures. But the narrow-body market and the communication or entertainment, should I say, we are to strengthen our business in those areas under the new CEO of Avionics.
Now profit. The reduction in profit in CNS was largely affected by Avionics. And the structural reform efforts will continue. So next year, in fiscal 2022, we are hoping to achieve profitability because we are assuming that the recovery will take some time. So by reducing the fixed costs and by narrowing our business areas, we are hoping to achieve profitability in fiscal 2022.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]