Panasonic Holdings Corp
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Panasonic Holdings Corp
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I will go over the consolidated financial results of Panasonic Holdings Corporation for the First Quarter of Fiscal 2023. First, a summary of the financial results. Overall, sales increased year-on-year despite the impact on production and sales of the Shanghai lockdown and shortages in semiconductors, parts and materials owing to increased sales in automotive batteries and others as well as consolidation of Blue Yonder and the effective exchange rates.
Adjusted operating profit decreased. And as increased sales and price revisions and other efforts were unable to offset the impact from changes in the environment, including the lockdown shortages in semiconductors, parts and materials, raw material prices, and higher fixed costs and other negative factors. Operating profit decreased, but other income and loss improved with reduced restructuring expenses. Thus the year-over-year decrease in operating profit was less than that of adjusted operating profit. Free cash flow was secured at the same level as net profit although it was below the FY ‘22 level due to decreased adjusted operating profit and increased inventories.
In terms of consolidated financial results, overall sales increase to ¥1973.9 billion, up 10% year-on-year. AOP decreased to ¥65.7 billion, down ¥53.8 billion year-on-year. Other income and loss improved by ¥13.1 billion due mainly to reduced restructuring expenses. OP and net profit decreased by ¥40.7 billion and ¥27.6 billion respectively, but the year-on-year decrease amounts were less than that of AOP.
This slide shows the results by segment. Year-on-year variance analysis is provided in the next few slides. First sales by segment, overall sales increased. Lifestyle sales were at the same level year-on-year as sales increased for priority businesses such as HVAC system’s European business and overseas electrical construction materials, mainly in India, the Middle East and Africa markets. To offset the decreased sales of consumer electronics in Japan affected by supply issues due to the lockdown and others, automotive sales decreased affected by reduced automobile production.
In Connect, sales increased in avionics, reflecting market recovery in the aviation industry and the consolidation impact of Blue Yonder, despite decreased sales in such businesses as Gemba Solutions due to post-Olympic demand slowdown and notebook PCs affected by the lockdown. In industry, sales decreased due to semiconductor shortages, the lockdown and termination of the semiconductor and LCD businesses. Despite increased sales of capacitors for ICT infrastructure and automotive uses and relays for industrial and EV uses.
In energy, sales increased with sales growth of automotive batteries, reflecting robust EV demand. Among other eliminations and adjustments, entertainment and communication sales decreased affected by component procurement issues, including semiconductors. Housing sales increased driven by building materials such as interior doors, floor materials, rain gutters and exterior wall materials as well as ECO CUTE water heaters.
Next, OP, AOP decreased in all segments and overall OP decreased as well. In Lifestyle, profit decreased affected by such factors as the lockdown increased sales of priority businesses, mainly overseas and price revisions in Japan and overseas countered the deteriorated business environment, such as exchange rates, price hikes in raw materials and logistics, but not enough. In automotive, profit decreased due to decreased sales and increased fixed costs, including depreciation despite cost reduction efforts and price revisions to mitigate the impact of price hikes in parts, materials, mainly semiconductors.
In Connect, profit decreased despite increased sales in avionics, due to decreased sales of notebook PCs and the Gemba Solutions business, raw material price hikes as well as amortization of intangible assets related to the Blue Yonder acquisition and other factors. In industry, profit slightly decreased impacted by semiconductor shortages, the lockdown, the raw material price hikes. These negatives could not be offset by the increased sales of capacitors for ICT infrastructure and the effect of the yen depreciation. In energy, profit decreased despite increased sales due to price hikes in raw materials and logistics and increased development expenses and fixed costs for increased production. Other income and loss largely improved due to mainly to – due mainly to reduce restructuring expenses. Accordingly, decrease in OP was less than that in AOP.
Next, results of Lifestyle by divisional company, in Living Appliances and Solutions, sales decreased on constant currency. Sales in Japan decreased such as for microwave ovens affected by the lockdown and others, while overseas sales increased mainly refrigerators and washing machines in Asia. Profit decreased with lower sales despite price revisions and rationalization to counter the deteriorated environment. In Heating Ventilation A/C, sales increased steadily mainly in Europe, while profit decreased partially due to negative impact of exchange rates. In Cold Chain Solutions, both sales and profit increased with steady sales, mainly for showcases in Japan and the U.S. In Electric Works, both sales and profit increased with steady sales of overseas electrical construction materials, mainly in India.
This is our operating profit analysis by factor. From the left, sales expansion increased profit by ¥1.5 billion despite such negative factors as the Shanghai lockdown in semiconductor shortages. Fixed cost pushed down the profit by ¥19.6 billion. This is due to the increases required by business growth initiatives such as depreciation and R&D expenses. Price hikes in raw materials and logistics pushed down the profit by ¥56 billion. While price revisions in rationalization and others pushed up the profit by ¥27.3 billion. The consolidation impact of Blue Yonder was a decrease factor of ¥7 billion. Blue Yonder’s adjusted operating profit was positive. But with the amortization expenses related to the acquisition as well as other factors, it was negative on the consolidated basis. The overall ForEx impact was minor, totaling zero. It was positive for Industry and Energy, but negative for Lifestyle. As a result, adjusted operating profit was down by ¥53.8 billion. Other income and loss was an increase factor of ¥13.1 billion and operating profit was down by ¥40.7 billion.
Next is free cash flow and cash positions in Q1. The free cash flow was down year-on-year due to the lower adjusted operating profit and increase in inventories. However, we were able to secure ¥48.3 billion, the same level as the net profit mainly through the improved working capital. With regard to cash generation from Q2 and onwards, we are continuing to make efforts to reduce the higher inventories that are affected by external factors and the control of the inventory level of strategically secured parts and materials. On the right, net cash is shown. It was minus ¥635.3 billion, an improvement from the end of FY ‘22.
Next is the impact from changes in the business environment. This shows the impact on each segment by four elements: changes in demand, shortages in semiconductors and parts and materials, Shanghai lockdown and price hikes in raw materials and logistics. The light blue shows factors with a positive impact and the pink areas show a negative impact compared to FY ‘22. The top half shows the results of first quarter FY ‘23 and bottom half explains the outlook for the situation in Q2 and onwards. In Q1, each segment was significantly impacted by shortages in semiconductors and parts and materials, the lockdown and price hikes in raw materials and logistics. From Q2 and onwards, such factors are expected to lessen with the end of lockdown. However, the impact of the shortages in semiconductors in parts and materials as far as price hikes in raw materials and logistics are expected to remain. We will implement countermeasures such as alternative procurement and price revisions to mitigate the impact of those factors.
Now, let me explain our view based on the trends of quarterly results. The graph on the left starts with the FY ‘22 Q1. Since Q2, the impact of semiconductor shortages and raw material price hikes has been significant, which led to low profitability. Also recently, we have faced the impact of the lockdown making business environment more difficult. However, as you can see on the top right, if we look at the Q1 of FY ‘23, the monthly adjusted operating profit, the situation significantly improved in June when the lockdown was lifted, a prolonged weak situation turned to a recovery trend after hitting the bottom in May. Today, each operating company is accelerating its initiatives to enhance competitiveness. We expect our performance in Q2 and onward to shift toward recovery through our efforts, such as thorough enhancement of operational capability, higher sales of energy and heating ventilation AC and further efforts in price revisions to counter raw material price hikes.
This is my final slide. After the launch of our new structure in April this year, we announced our group right medium to long-term strategies as well as those of each operating company. We are making steady progress with assessment and execution of each initiative based on the strategies. For the material matters in supply chain management and automotive battery businesses, we have disclosed and communicated information when the decisions were made. During the second half of FY ‘23, we plan to have briefings on the individual businesses in Lifestyle. As we proceed with the medium to long-term strategy, we will make announcements on individual measures at both group-wide and operating company levels in a timely and appropriate manner.
Thank you for your attention.
[indiscernible]. I hope you can hear me?
Yes, we can.
Thank you. I have two questions. First, regarding the results and the outlook, compared to the forecast you announced in May, you have not made any changes despite the changes taking place in the business environment, can you tell us the reason why you haven’t changed the outlook or the guidance? In your presentation, you said that you expect the results to bottom out in May, but in relation to that can you explain the reason why you haven’t changed the outlook? My second question.
The government is talking about restarting the operation of nuclear power stations and others, so as to address the power shortage possibilities in Japan. So, the basic policy of the government is control the soaring energy prices. So, I wonder if you have any comments or requests on the part of the industry regarding this government policy.
Thank you for your questions. Your first question about the guidance outlook, of course, at each of the operating companies, the annual forecasts, we have aggregated them which are shown in the latter part of the presentation. So it is – although it is shown in the qualitative manner, that’s what we are sharing. In terms of KGI, given the trend that I mentioned earlier, we felt we did not feel the need to modify, revise the annual outlook. Although pertaining to the foreign exchange, maybe we could have a change revised, but for the time being we decided to keep the original forecast. As for the first quarter results on a year-on-year basis, it may appear to be weaker, but we are focusing on the trend that I mentioned earlier and ¥100 billion in a single quarter. That was for the first time since 2007 the Lehman crisis. And so that was the figure for last year. Other than that, we have a theme, the first quarter, exceeding ¥100 billion. So that is the answer to your first question.
Now, regarding the electricity and the energy price hikes, the requests that we might have of the government, well, as a company, I don’t think we are in a position to make any statements one way or another. We are working with conservative power company and others in terms of promoting the procurement of the renewable energy sources. So, we will just be focusing on what we can do as a company. That’s all. Thank you.
Thank you very much. Next, [indiscernible] from Nikkei.
Yes, this is [indiscernible] from Nikkei. I hope you can hear me. Yes. Thank you. First about Connect or about the Blue Yonder, I have a question. So, here the acquisition has ended and there is a major amortization, it’s about ¥7 billion negative number. So is this something – this is something that is going to continue? So, how do you make a profit in Connect business as a whole? This could be a very heavy burden. So, what do you think of that? And also, the listing of the company or creating a new company is being discussed. So, maybe you can touch up on that? That’s my first question. The second is about the price revision. With the higher materials cost, the operating income was negative and maybe 50% of that is reflected on the prices. So from now on home appliances from August, we hear that you might be increasing the prices. So aside from the home appliances or home electronics, what are the areas that you need to increase the prices?
Thank you for your questions. First, about the Connect, Blue Yonder, ¥7 billion negative. As I showed you on one of my slides and this has to do with amortization of intangible assets. And in Q3 last year, we announced that one-time with the acquisition the accounting procedure in simple terms, the Blue Yonder itself is profitable business, but at the time of the acquisition, this business had already incorporated the profit. So, it’s really a technical matter. So, it’s about the ¥4 billion that is the – it was positive, but on the consolidated basis, it offset or it turns negative. So, there is a amortization of that. So that is the background behind the ¥7 billion, again negative number. So from now on, this will improve. So, that’s about the Blue Yonder and about the listing or the direction of the listing. We have already announced – made announcement on this. So, there is – it has to do with the regulation before the listing. So I am unable to give any comments on the list – the potential listing in the future. As for the price revisions on the July 20 in the Lifestyle business, with the new scheme announcement was made and also from August timeframe, we have already made a press release that we will be increasing the prices of the home appliances. We are very sorry to say, but we will be doing that.
So this will become effective in Q2 and onwards. So the impact of the prices, about ¥45 billion or so, so that was on – in Q1 relation to the raw materials and with the price revisions, about the ¥23 billion through the price revision, we have recovered ¥23 billion. And if I may comment on this, Lifestyle business is the biggest in terms of weakness in price revision. So, we made the progress of the price revision in industry and also energy. So, that’s the pattern. In Q2, Q3 and Q4, the spike with a high material cost year-on-year increase, we would continue to see this we expect that and the price revision will become more effective. So that coverage ratio is currently 50%. So in Q2, Q3, Q4, we expect that percentage to improve, especially, the major one is the Lifestyle business that is where we will be able to recover the earnings with the price revisions.
One point of clarification in Connect ¥7 billion has to do with the amortization of the intangible assets in Q2 and onwards. This includes the technical factor, but this will come down to ¥3 billion level, is that the correct understanding?
Well, about the Blue Yonder, talking about the future has to do with the regulation before the listing. There are some restrictions. But in Q1, the actual, as I mentioned, was a pure technical factor. And it has worsened about ¥4 billion and this would be alleviated or mitigated. At the same time, as for the sales on Page 17 you can see, it’s steadily growing. So this deficit, a number will improve and will turn to the positive or the profitable business.
Thank you very much.
Thank you.
Thank you. Next is from Bloomberg, [indiscernible].
Thank you. Mochizuki from Bloomberg. I hope you can hear me?
Yes.
I have a question regarding the price hikes, price revisions in household appliances. You said that for second quarter, third quarter onward things are going to get better, but when it comes to the upstream of the supply chain or the material prices, I think the secondary tertiary price revisions are taking place, which means increased cost. So I wonder if already announced price hikes in August and September would be sufficient or do you see a possibility of further rounds of price hikes?
Well, it’s hard to predict about the future, but of course Q2, Q3, Q4 the raw material price hikes are being expected. Now, would it expand? Currently, the copper price over $10,000 per ton, down to $8,000 or thereabout, aluminum and others, those material prices have come down compared to one point in time. Still, instead of counting on those lower prices, we are expecting the price hike impact of around ¥50 billion yen on the full year basis in our forecast. Most is in the Lifestyle business area. And it is with that in mind that we are planning to implement the price hikes, price revisions. Should we see further changes in the environment, of course, first, we will try to absorb that through our efforts, but we may need to take further actions. But that would all depend on how things will turn out.
I see. Thank you.
Thank you very much. Next from [indiscernible].
[indiscernible] speaking. I hope you can hear me?
Yes.
About the price increase of the home appliances, you mentioned that you would revisit this based on the situation. So the – do you mean the price increase or in different ways, for example, on the August 1 and onwards, there could be some different genres of the home electronics. So the range – that range could be expanded. And also in May, you mentioned that you hit the bottom in May. So hitting the bottom and the higher material cost and parts cost have come down you mentioned, but once again the biggest factor and the reason why you think that now you have hit the bottom in there, could you explain that once again?
Yes. Maybe, I don’t want to cause any misunderstanding. So once again, let me explain. So, what we are, we have announced about the price increase of the home appliances, this we believe is the best possible way as of now. So, we are not saying that we would make any changes to that. Having said that, if there are any major changes in the environment it is possible that we will make changes. So, that’s what I met. So, we are not saying that we are thinking about the making changes about the price increase and whether to increase the prices or not, we have to consider whether products are competitive and we have our new scheme where that we have a responsibility for the inventories and the Lifecycle, the product is not for a year, but rather we like to provide more value to the customers and we want to spend our resources to enable that. So, we want to create such a virtuous cycle. So, this new scheme will be applied to the products and we want to increase the number of the products that comes under the new scheme. So, that’s the meaning of this. That’s my answer to your first question.
The second question on Page 9, we are showing the qualitative information and raw material price hikes we are not saying that it will get better next year, but the similar impact is going to be expected as we did in the past. So, we had a lot of pink areas mainly due to the lockdown in Shanghai. So in China, and also there were supply from China to Japan and also there was an impact in the car business. So in the Q2, the bottom half of the slide, this is our prospect. So now we have a small pink area and we have the wider blue and more stable situation is shown in white. So – and on the following page, this shows the trend in Q2, Q3, Q4, it came down. So especially if you compare it with the year before, we would not expect to see the trend that we saw in Q1 last year, so that’s what I meant when I said that we hit the bottom in May. And for the full year forecast of the each operating company, they are likely to get better. So, that’s the background behind this scheme. Thank you.
One point of clarification, you talked about that this new scheme about the prices. So price revision and this new scheme are those new wheels – two wheels to go forward?
Well, the new scheme and the higher value for the customer, those two are the things that we want to realize. So, when you talk about the price revision, new scheme and current products and when we have launched a new product, we want to increase the prices, not all of them, but for some products that are being launched, we will have the higher prices than before. Thank you.
Thank you. We are coming to the – close to the end of the allotted time. We have three individuals raising hands. So we will take one question per person [indiscernible] please.
Thank you. Can you hear me?
Yes, I can.
I am from [indiscernible] one question. The COVID-19 infection situation, the new cases are increasing again. And in terms of impacts in Page 9, for example, avionics, the aviation industry is recovering it says, but there could be some impacts continuing from COVID-19 going forward. So Q2 onward, what is your projection of the possible impact of COVID-19?
The avionics business, the first quarter results show compared to FY ‘20 that is before COVID-19. For domestic and international flights, we have already – the industry has recovered to 70% of that level and for domestic flights higher in the U.S. and North and South America. As for international, Europe, U.S. and Middle East, flights are back to about 60% of the pre-COVID level, but overall about 70%. So, although avionics are seeing an increase in profit and this is because flight operation recovering the operational services sales, are increasing for other factors. COVID-19, of course, we don’t know about way down the road, but looks like the situation is worse in Japan right now. This morning, the number of new cases in Japan topped the list globally. I think I saw that news this morning, the largest number of new cases in Japan. And of course, everyone is being very careful. As far as our business is concerned, there will be some businesses that will be affected, while other businesses will benefit from the support from other customers. So, it varies. So regarding the COVID-19 impacts, we are not paying particular attention to what the possible impact would be on our businesses.
Thank you.
Next, [indiscernible] please ask one question.
Again, [indiscernible], thank you very much. I hope you can hear me.
Yes.
So, one question. Earlier, the price or new scheme about the home appliances in Japan, I think has created a certain controversy. So I think that are you focused on the bringing happiness to three parties, the buyer, seller and community. So, how do the distributors are responding to this new scheme, if you are getting any information, Mr. Umeda?
Well, whether or once this starts to function, well, I think it will be good for buyer seller and communication, but it requires very detailed explanation, communication. And of course, with the distributors, you ask the question, so whoever it is, I think that the price should be the same. So, if that is the case, that stores will be just like our showrooms and it would no longer be a price negotiation. So, the products with the lower prices would be advantageous – will be advantageous. But there are different opinions about that. So this new scheme, price at a reasonable level should be stabilized. And we want to support and help customers truly and we want to spend our resources to enable that. And by creating such virtuous cycle, I think we can create a situation where we can please the three parties: buyer, seller and community. So that’s what’s [indiscernible] said, and I understand that there are different views. So we will continue to provide the – for communication and detailed communication.
Thank you very much.
So, the last question from journalist from Kyodo News Agency with [indiscernible] please. We ask you to limit your questions to just one question, please.
Thank you. Watanabe from Kyodo News Agency. I hope you can hear me.
Yes, we can.
Okay, one question about Connect. Looking at Slide 17, Blue Yonder KPIs, regarding revenue, Q1 figure seems to be going down, meaning it appears that the profit is going to go down. Maybe there is no impact of the logistics costs increase, but I wonder what the factors are? And as for Q2 Onward, what kind of changes do you expect?
What’s shown on Slide 17, the numbers there, they are in $1 million. So, you can compare on an apple-to-apple basis on the left – upper left $272 million last year up to $309 million this fiscal year. So, the revenue itself grew. What’s shown on the lower left hand side, this is for SaaS, Software-as-a-Service recurring revenue? And on the upper right hand side, you can see the recurring ratio and you can see that it has flattened, for example, 68.8% in Q4 ‘22 to 68.3% in Q1 ‘23. This is because of an increase in license selling business. So, it makes it appear that the recurring ratio went down. As profit model, the contents of the recurring ratio, the annual contract for software being paid on a monthly basis, there is new contracts and the service maintenance fees, those are the two elements that constitute this. So, 108% in Q1 from the previous year, service as – software-as-a-service saw new contract acquisition based on the recurring basis that has increased. So, it’s not that the growth rate has declined. The value – the amount itself is increasing. And because the amount is increasing, it looks – it makes it appear that the growth rate has moderated somewhat. Now, Q2 onward, there is a concern of recession on a global scale and the investment priorities on the part of the customers maybe affected. That’s one concern that we have, but for the time being, that is our current projection, what’s shown on Slide 17.
I see. Thank you.
Thank you. So that concludes the questions from journalists.
Thank you very much. Now, we are taking questions from analysts and investors. [Operator Instructions] From JPMorgan, Ayada-san, excuse me.
This is Ayada speaking from JPMorgan. Two questions, please. First, on Page 9, you are showing the impact from the management environment changes and you are not making any changes to the full year guidance, but compared with 3 months ago, I think that macroeconomic data direction has changed. So, what are the areas that could change for the full year guidance? You don’t have to talk about all segments, but for example, lifestyle, automotive and industry, the customers and the distribution inventory. Do you – are you seeing any changes or you are not making any changes to full year guidance, but are there any areas that you really need to catch up?
The second question on Page 7, the profit increase and decrease you touched upon this, but the raw material cost and logistics of ¥56 billion in Q1 so ¥180 billion for full year, as you said the market assumptions are also changing. So, the way of thinking, for example, if the prices, the current situation contains, this ¥180 billion negative impact, how would that change? That means that about the raw materials, you have already probably made the reservation. So it would be just an impact in Q4 or for the logistics maybe this be more obvious in the following year or maybe from Q4 you will start to see the effect. So maybe you can talk about those areas? Thank you.
On Page 9, the changes from the past, first of all about the Shanghai lockdown in Q2 and onwards, it will change. About the raw materials the hike, there are some materials which the prices went up, for example, lithium price has stayed at the high level. So, we want to make sure that we need to – we will take countermeasures about the prices. But then operating companies now after ending the Q1 and Q2 and onwards, they are likely to manage well for the demand changes. How would that change after Q1, now, the media TSMC announced that for PC and smartphone, the demand for those more recently, of course there was a shortage of the semiconductor, but from the second half of this year, it will get better. So, that’s what TSMC said. And that’s what I saw through the media. And from the industry business of ours, we are getting similar information. That’s just the information though. So, all the semiconductors are quite tight in supply, but the leading edge ones, and also the large scale ones, there could be some relocation from the leading edge to the larger scale. So, we are hearing that too. In automotive, the production has been quite tough. And this could continue, but there could be some signs of changes. So, concerning demand, what we are concerned about is the global economic recession, whether that could happen or not. If that happens, when do we see that happening. So, that’s something that we analyze the information internally so that we can reflect or factor that into our guidance. That’s my answer to your first question. And the second question on Page 7, ¥56 billion of all the first quarter, so ¥180 billion for the full year. So, of course, we don’t know until it’s over, but the raw materials prices, probably it will continue to be at the level and also the price revisions that we will be making. So, higher materials cost and also the rationalization and price revisions, we have to look at both of them in Q2 and Q3, we have to make sure that we take those countermeasures against the higher materials costs. I hope those answered your question. Thank you.
Next is from Morgan Stanley, Masahiro Ono. Please.
Thank you. Ono from Morgan Stanley. My two questions, first, at the beginning of the fiscal year, Shanghai lockdown impacts was not included in your annual guidance you said. But when I look at a waterfall chart on Slide 7, it does show that through the price revisions, you covered that. So, is it because of the measures you took were enough to make up for the impact of Shanghai lockdown, you are not changing the annual guidance? That’s my first question. Secondly, in your monthly breakdown, you are showing that there was a huge recovery in June. So, if this could be verified, do you feel that it’s going to be a good month in July as well, or do you still see possibilities of further fluctuations and therefore you are not really assured of the future course? So, what about the risks of the whites turning to pink in Slide 9?
Thank you for your questions. At the beginning of the year though Shanghai lockdown impact was not included in the guidance and after the fact, it’s really hard to say, but Shanghai lockdown and semiconductor shortage is about over ¥20 billion negative impact on the profit is how we analyze the situation. And through increased sales, we tried to make up that and we were successful in doing that. As you can see in this graph, that is what we tried to show in that waterfall chart. So, April, May, June situations, on a monthly basis, July and August due to seasonality, the air conditioners and refrigerators sales tend to increase. So, it’s really hard to say. But what’s shown on Slide 9, these are the assumptions that we have in not modifying, revising the guidance. We felt that there was no way we can make accurate revisions. Now, are there still some concerns, that is your question. And what are the strengths and weaknesses were some of the questions asked earlier. In terms of automotive, on the annual basis, the guidance initially, the impact of reduced production in automobiles was rather sizable, and therefore, we do foresee a more dimmer situation. But for lifestyle, things are moving as we projected, that is, as of June. And through the price revision and other measures, as we have announced, we feel that we can secure this at least that’s what we are going to try. Industry, at the current situation, we feel a bit bullish. But there is a question of should or would there be any recession and if so, when, that’s what we are paying attention to. We haven’t changed the foreign exchange rate assumptions either. So, those are the basis of our projection. Energy, the reduced profit from the very beginning, we felt that in the first half, we will not be able to recover and we are planning to recover in the second half, not in the first half. Looking at the results in the first quarter, things are moving as we predicted. And currently, overall, automotive is slightly weaker than we projected, but other businesses are doing stronger than our projection. So, overall, we felt that we can’t really revise the guidance. So, if that answers your questions?
Yes. Thank you.
Next, Mr. Okazaki from Nomura Securities.
Thank you very much. This is Okazaki both energy for Q1 profitability, that is where I have a question. About energy, the raw material cost increase was tough. But in comparison to the previous quarter, the profitability was up. So, the price revision went well or in terms of profitability has improved quarter-on-quarter. So, could you tell me the reasons for that? And in Q2, and onwards, if – as you mentioned the raw material costs might stay at the high level and do you think that you can recover or improve the profitability? And the second question is about energy, the day the automotive battery or the investment into the factory was announced. So, in generating free cash flow, I think that you are making good progress in the investments. So, as a holding, are there any changes in thinking about the investments?
Yes. About the energy, company profit structure, mainly the automotive batteries and then industrial and the consumer, so those are the two major areas. And the level of the – size of the profits is that automotive is about 30% or more and the rest is a little less than 70% industrial and consumer. So, energy solution and energy devices concerning those high profitability is maintained. Morbidity energy, if you calculate, it will be a little less than 5%. And of course, right now 4680 development cost and also the production expansion investment is necessary. So, the fixed cost, higher fixed cost is impacting. And from the previous Q1, you mentioned that there is an improvement, the price revisions in the first half, of course, we did not catch up fully, but this compared to last year it is improving. Since last year we are recovering and seeing improvements. So, that has contributed to improve their profitability. Also the automotive factory, the investment in it, there is a major project and as of now, in July in Kansas or the State of Kansas, the contractor by incentive was established and we made announcement together with the State. So, in the past it was vertically integrated, we did everything. But now, in this area, there are different flows of money and we are seeing the changes in such flow. So, energy announced that doing everything on our own vertically integrated, those are very rough numbers that they announced. So, 4680 type in Wakayama plant, we are doing the verification on the mass production. We are currently working hard on that. So, this is something that we will be doing in Wakayama plant, so that we can make sure that there is the profitability in making 4680. And based on that, we would like to do the capital allocation, which will become necessary based on the different scenarios. So, how much do we need is not fixed. So, there are various simulations that we need to do. Thank you.
Thank you very much.
We are coming to an end. So, we will take questions from two people. One question per person, please.
From Citigroup, Global Markets Japan is awesome, please. Yes. Thank you. Just one question on energy. In vehicle and industrial, and consumer, I think sales are rather strong. The appreciation of the yen, how much is the effect of that, or is it limited? So, is it really prices going up and sales volume going up that resulted in increased sales? And compared to the full year forecast, I think that Q1 progress was very good. Is that simply the case that we can expect the annual sales to be larger than your projection, or is it that there were some special factors in Q1 and therefore we should expect smaller sales in Q2 onwards. Thank you.
Energy, exports are quite sizable, so both in sales and profit. We see an upside as a result of the impact of exchange rates change. I am not going to go into the details for Q1, but to a certain extent, at energy company, about ¥40 billion increase in sales were achieved which approximately two-thirds benefited from the exchange rate changes. But sales did increase and sales increase was particularly large in vehicle Penon operation in the U.S. This saw the biggest increase in sales. Going forward, sales in the U.S. Penon sales, we have the 14th line in operation and the operating rate is increasing. And so that should make a difference. So, we believe that the expected sales increase could be achieved. That is our current production. That answers your question.
Yes. Thank you.
Last question is Mr. Nakane from Mizuho Securities.
Thank you. This is Nakane speaking. One question about the inventories, in Q1, it’s up to ¥1.3 trillion. Of course, it has to consider the foreign exchange impact. But my question is that the final finished products and other work in progress and so forth? Whether the inventory level is higher or lower than the regular level? And when you look at different segments, which segments have higher inventories? And what is the size of the higher inventory? The third is that maybe March or September, you mentioned that you would revisit the inventory levels. So, it’s not yet final. But when we think about the cash flow, what will be the level of the inventories that we should consider if you can give us any hints? So, semiconductors and the other materials, if the prices come down, and is there any risk that the loss will incur from the inventory? Maybe it’s not likely and it’s not likely, but if you can comment on that.
About the inventories from the beginning of the fiscal year is increasing. If I calculate this in terms of the actual numbers ¥50 billion to ¥60 billion and that is the foreign exchange translation related and also the inventory is up in volume, mainly strategically secured the inventories including semiconductors. So, for the manufacturing production, the materials that we need to secure that was up in Q1. So, year-on-year comparison, when you do the comparison, it’s about ¥300 billion or higher, but actually, it’s about ¥286 billion increase. So, more than half of them is a strategically secured inventories. So, when we have manufacture products there are - so, they are bought by the customers right away. So, what about the remaining half, there are accompanying materials and also PSI due to the different factors will change and there are materials related to that. And the inventory that we are focused upon, first of all is to differentiate whether it is strategic inventory or not, and whether this will lead to the disposal – potential disposal. So, operating company is currently verifying that. But they are unable to manufacture. So, the risk of having a disposal of the inventory is not something that we are seeing right now. And whether we are keeping the inventory of the finished goods or working progress, there are differences depending on operating companies. But mainly the finished goods is small. When we have finished goods, they sell very quickly. So, as much as possible, we won’t to have inventory as materials. But at the same time from Japan for example, cylindrical battery, for those products at the ports of U.S., they were stopped. So, some work in progress inventory increased in energy because of that. But basically, we want to have the inventory of the raw materials. And so the finished goods inventory is very few. Towards Q2, we will try to reduce the inventory level. But there was a confusion in Q1 and Q2 is right after Q1. So, we want to make sure that we capture the opportunities. So, there is a direction to reduce the inventories. But towards the end of the fiscal year, we would make sure to reduce the inventories. So, that’s how we look at this. Thank you very much.
Thank you very much. I understand.
Thank you very much.
With this, we conclude the earnings webinar for Q1 of FY ‘23. Thank you very much for participation.