Panasonic Holdings Corp
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Panasonic Holdings Corp
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Good evening. Thank you very much for taking time out of your busy schedule to attend this meeting today. I would like to review the financial results for fiscal 2020 second quarter.
First, a summary of the second quarter financial results and the full year forecast. Overall sales were down but in real terms, excluding the effective exchange rates, they were higher. Adjusted operating profit increased. Operating profit and net profit decreased year-on-year due mainly to costs related to business structural reform and impact of one-off gains in the previous year. As for the full year forecast, sales are revised downward due mainly to revised exchange rate assumptions, but no change for adjusted operating profit, operating profit and net profit.
First, summary of the second quarter financial results. These are the consolidated financial results. From this quarter, adjusted operating profit is added. Since adopting IFRS at the end of fiscal 2017, we have been disclosing operating profit and other income and losses. Aiming for an easier to understand disclosure, we now include adjusted operating profit as profit generated from businesses in light of the feedback that we received from you, which indicated that the earlier disclosure format was not clear enough.
Overall sales on a constant currency basis increased slightly to JPY 1,953.3 billion. Adjusted operating profit increased by JPY 1.9 billion to JPY 94.1 billion due mainly to higher sales in housing-related and consumer electronics businesses in Japan, this in spite of the impact of increased development expenses in Automotive Solutions in Europe and persistent weakening of capital investment demand in China. Operating profit and net profit decreased to JPY 83.9 billion and JPY 51.1 billion, respectively.
Sales and profit analysis by segment. Appliances posted higher sales and profit due to stable sales of consumer electronics in Japan and overseas air conditioning, despite continuing sluggish overseas sales of TVs.
Life Solutions, following the first quarter, posted higher sales and profit owing to favorable sales of housing-related businesses in Japan and electrical construction materials.
Industrial Solutions and Clinical Solutions posted lower sales and profit due to lower sales impacted mainly by continuously weakening demand for capital investments in China.
For Automotive, overall profit decreased due to increased costs related to R&D expenses for existing issues in Europe Automotive Solutions despite sales and profit increases at Automotive Batteries. As a result, company-wide sales increased by approximately 2% in real terms, excluding special factors and the effective exchange rate.
Adjusted operating profit increased by JPY 1.9 billion despite negative impact from exchange rates and other factors. Operating profit decreased by JPY 11.3 billion due mainly to costs related to business structural reform and impact of one-off gains in the previous year in other income and loss.
Here, you can see the results by segment. Details will be explained from the next slide. First, Appliances based on consolidated production and sales. Overall sales increased by 3% on constant currency. Both adjusted operating profit and operating profit increased year-on-year.
Heating and Cooling Solutions posted higher sales and profit due to stable sales in room air conditioners in Asia and Europe and sales growth in large-sized air conditioners mainly in Japan.
Home Appliances posted higher sales and profit owing to favorable sales in consumer electronics in Japan and stable growth in refrigerators in Asia.
In Smart Life Network, sales and profit decreased due to continued sluggish sales of TV and digital cameras mainly in Europe despite stable sales of TVs and recorders in Japan.
Next, Life Solutions. Higher sales and operating profit. For Lighting, sales and profit remain unchanged with favorable sales in India and Indonesia and lower sales in Europe and the U.S. In Energy Systems, growth was driven mainly by high-functional products, including home-use distribution panel boards in Japan. Housing Systems posted higher sales and profit owing to stable sales mainly in water-related products and building materials.
Next, Connected Solutions. Overall, sales and profit decreased. Avionics posted lower sales and profit due mainly to impact of held-back investments by certain airline companies. Process Automation posted lower sales and profit due to impact of held-back investments in China along weakening market conditions. Mobile Solutions, on the other hand, posted higher sales and profit coming from favorable results for PC business due to growing replacement demand with an end to Windows 7 support. In PSSJ, sales and profit increased driven by PC sales in Japan and sales for Olympic-related projects.
Next, Automotive. Sales were up 3% year-on-year on constant currency basis, but adjusted operating profit and operating profit were down. For Automotive Solutions, sales decreased as expansion of growth expected products such as IVI could not offset the impact of deteriorating automobile market conditions in China and lower sales resulting from the product cycle. Adjusted operating profit decreased with significantly higher development expenses and the impact of lower sales. This was due to an impairment loss on capitalized development expenses due to deteriorating profitability coming from increased development expenses of highly challenging onboard charging systems based in -- on orders received in Europe.
Automotive Batteries posted higher sales for both prismatic and cylindrical types. As an effect of investments to expand production for adjusted operating profit, the amount of loss was reduced owing to expanded sales at the prismatic and cylindrical battery factories in North America, which offset lower sales at the cylindrical factory in Japan.
Lastly, the Industrial Solutions. Sales and profit decreased. Sales and profit decreased for systems on sluggish sales of FA sensors and motors mainly impacted by weakening demand for capital investment in China. Sales decrease for portable rechargeable batteries by strategically shifting applications from ICT usage to industrial-related areas. Sales and profit decreased for devices on slower investments in the server market and lower sales of products such as capacitors due to China's weakened automobile sales. For other, sales decreased for semiconductors and LCDs with deteriorated market conditions, but profit improved due to many other contract changes in semiconductor business.
This slide shows free cash flow. During first half of fiscal 2020, free cash flow was JPY 18.6 billion, showing year-on-year improvement with better operating cash flow mainly due to improved working capital, including reduction of inventory. Review of the investments also contributed to improved free cash flow. For full year, we will continue to improve free cash flow while making investments in prismatic battery business.
Next is fiscal 2020 full year forecast. As shown here, sales are revised downward by JPY 200 billion from May 9 forecast due mainly to revised exchange rate assumptions. Adjusted operating profit, operating profit and net profit remain unchanged from the initial forecast. Forecast by segment is revised reflecting current management conditions and future business environment. Details will be explained from the next slide. For eliminations and adjustments, business risks included on a company-wide basis in the initial forecast are now shown in each segment according to the business conditions.
Next is the revised forecast. For Appliances, sales are revised downward due to lower sales of TVs and other products. However, profit remains unchanged with efforts to recover consumer electronics in Japan and air conditioning overseas. For Life Solutions, both sales and profit are revised upward with favorable sales growth in housing-related business in Japan in the first half.
For Industrial Solutions and Connected Solutions, sales and profit are revised downward due to revised outlook of China impact as of the beginning of fiscal '20 from gradual recovery in the second half of fiscal 2020 to the same level as the second half of fiscal 2019. For Automotive, sales and profit are revised downward due mainly to increased development expenses, Automotive Solutions' delayed productivity improvements at automotive batteries, North American factory and impact of lower sales at Japan factory. On a company-wide basis, both adjusted operating profit and operating profit remain unchanged due to business risks that were factored into the eliminations and adjustments in the initial forecast.
Finally, progress of midterm strategy. This shows our communication schedule regarding the midterm strategy announced on May 9. As shown on the left, on May 9, we announced our midterm portfolio strategy, specific initiatives in portfolio reform, enhancement of management structure and optimize senior management. In relation to our midterm portfolio strategy, reference materials titled Relevance of portfolio classification in midterm strategy and disclosed segments and core growth fiscal 2020 first half results are newly disclosed in this presentation. We will hold a Panasonic IR Day 2019 on November 22. Kazuhiro Tsuga, our CEO, will explain midterm portfolio strategy and its progress. And the company presidents from all business segments will explain their medium-term business strategies in detail. Regarding specific initiatives in portfolio reform, we will announce individual developments as soon as they are resolved. For enhancement of management structure, specific contents and amount will be explained at IR Day.
Thank you for your attention.
Okazaki from Nomura Securities. My first question, in Japan, prior to the consumption tax rates, the last-minute surge in demand, what impact did you see in your business? And secondly, regarding the midterm strategy, you showed us the relationship between the portfolio and the disclosed segment. You waited 6 months to show that to us. So what kind of internal discussions did you have before getting here? And the area of the Commercial Refrigeration & Food Experience, is it included in the Spatial Solutions? Can you explain the reason why? Since this is rather complicated.
Thank you for your questions. First, regarding the last-minute surge in demand as a run-up to the consumption tax rate increase, it's very difficult to quantify, but the Consumer Electronics and Appliances and the Life Solutions are the areas that are affected. We have made a basic calculation for AP and LS companies, maybe JPY 30 billion impact in terms of sales. We believe that was an increase in sales coming from this last-minute surge in demand.
But when we talk to different people, we find that when the tax rate was raised from 5% to 8%, there was a very big last-minute surge in demand as well as a rebound afterwards. But this time around, with the raise from 8% to 10% with the government programs in place, the impact is much smaller, limited to what happened the last time.
More specifically, in relation to Panasonic business, appliances, cashless points return programs, in Japan, we have 8,000 stores in Panasonic shop network, and we are using our Panasonic card to promote the sales with this point-return system. And as for the point system for this that are building next-generation homes, meaning highly durable and longer longevity and more eco conscious -- environmentally conscious design and contributing to the lifestyle, our work style reform, for example, more eco-friendly bath-warming system. So there is a very good correlation with what we're doing and what the government is proposing. And through these programs, we believe that the aftershock of the sales tax -- consumption tax hike could be alleviated.
And regarding the core growth and segment relationship with the growth, maybe we mentioned this back on May 9, but we are separating this in terms of core growth because when we look at the future strategies, we feel that this would be the framework that we need to base our thinking to secure growth. But the existing [ guidance ], we have 260,000 employees all together, and they belong to different business divisions. And they might be worried as to what happens to their current organization, whether it will be divested or not. So that kind of confusion was anticipated. So the strategy and the current management structure pertain to different layers. We have been explaining that, clarifying that. And the participants in the capital market might have felt that it's awkward that what we say -- Panasonic is saying that we're going to promote this, the content is not clear, and I can sympathize with that. And therefore, we decided to make this announcement at this juncture ahead of the IR Day event.
Now your question about why Commercial Refrigeration & Food Equipment is in the Spatial Solutions. On IR Day event, it will be explained by the head of each division. But the distribution and the manufacturing, factory automation and from manufacturing to sales to delivery, that whole supply chain is covered under the concept of Gemba Process.
Now the Spatial Solutions and the Commercial Refrigeration & Food Equipment, by combining the 2, we felt that the synergy effect will be better felt. Now this is not the place to talk about the midterm strategy, but I just wanted to explain to you the framework in which we made such classifications. So please look forward to our IR Day.
Next question.
Katsura from SMBC Nikko. I have 2 questions. First, before the tax hike, there was a kind of temporary effect, and it's JPY 30 billion to JPY 40 billion. So in terms of the profit, it's maybe JPY 2 billion to JPY 3 billion. And Windows 7, the replacement demand was there, so this might continue in the second half. But is there any quantitative additional comments that you can make on those points?
Second question. On Page 15, currently, in relation to the first question, at the beginning of the fiscal year, the impact of the consumption tax hike was not going to be big, as you mentioned. So for the full year, do you still think that the impact will be limited and the kind of a buffer of the corporate is distributed to the segment? So in that sense, the buffer that you had at the corporate, the deteriorating macroeconomic factor was offset. So would you say that those can be controlled? And I think in Q1, you mentioned that those are on track. So what is the current feeling or status?
Thank you. First, about the consumption tax. The impact on sales and the impact on profit probably is as you mentioned. As for the Windows 7, in January or -- to December, so it's likely to continue until then. And with the work style innovation, our PCs are quite strong in demand. So I think we expect that this would trend well, rather than we expect a holdback from the surge. So that's about the PC.
Second question on Page 15, the -- whether there will be an impact from the consumption tax hike for the full year. As I mentioned at the outset, yes, there is an impact from the consumption tax hike. For example, for the Consumer Electronics, especially on -- between the 1st of October, 2 to 3 weeks between that, there was a quick surge in demand. In the first week of October, maybe 30% to 40% decline year-on-year was observed. Now we are at the end of October. So as we approach the end of October, the impact has been lessening. So we have to wait and see. But the consumption tax impact is not likely cool down the demand of the consumers.
Now as for the changes to the -- each segment, as we mentioned in May, there are some uncertainties, many uncertainties. So we consider risks in others and adjustments, and we started to see some of them. So we distributed that to each segment. So as you said, it is on track or it is as we expected. So our -- the balance of the profit, in our case, JPY 48 billion to JPY 49 billion in the first half and JPY 51 billion to JPY 52 billion in the second half. That's the balance. And last year, there was a impact from China in the second half, so it has worsened. But that impact was not there in the first half of fiscal '19. So that happened this time. And if it continues or if it's flat, then the -- we can continue to have same balance of the first half and second half. So JPY 150 billion is exactly the half, so we are more than that right now. So the corporate-wide number, I think we can say we are on track. Thank you.
Next person, please.
Nishimura from Crédit Suisse. My first question is on macroeconomic impact for Industrial Solutions, Process Automation. In these areas, do you see any signs of recovery? You said that for the second half, you originally assumed gradual recovery, but now you're thinking the same level as in the previous year. So when do you expect the recovery to take place and how much?
And as for the Automotive Batteries, Tesla Energy, profitability has recovered in second quarter. So what's your projection for the second half? And what do you think will be the rate of recovery going forward, next fiscal year in particular?
Thank you. The macroeconomic conditions, basically, they backed off China. Originally, JPY 40 billion compared to the previous year, we thought was the size of the impact. So year-on-year, JPY 50 billion difference last year. So this year, additional JPY 10 billion. That is what we said earlier. And Process Automation and Industrial Solutions are the areas where we expected that to be felt.
Now currently, maybe this changes on a daily basis, but the U.S.-China trade talks, we don't know what the conclusions are going to be. And so the current projection is we don't see reasons for gradual recovery. And therefore, we are now assuming same level as in the second half of the previous year, last year.
Now when can we expect recovery? At the beginning of the year, we expected that to happen in the second half, but now it seems to be pushed back. So when exactly, rather than that question, we felt that it is more important that we focus on the things that need to be done now. More specifically, we're talking about the fixed costs reduction and initiatives to improve the efficiency of the site operation as well as to improve the financial foundation. Given the situation that we're in today, we felt that it is important that we focus on those areas. I think it is more accurate to say that we are uncertain about the fourth quarter. So the question, when we can expect recovery, we can't say for sure. It will be affected by the macroeconomic factors.
And as for the Automotive Batteries, the basic structure, same as in the first quarter. The structure being that model SX, the batteries produced in Suminoe in Japan supplying into model SX. In terms of the number of units delivered, the same, no change as it's been announced by Tesla. And more or less, we expect a decline going forward and profitability to decline as well, trend-wise. But at PENA, P-E-N-A, at our Gigafactory in U.S., for Giga -- for Model 3, since Tesla is renewing the maximum number of unit sold, and so we are increasing supply. We are not making profit yet, but we are now seeing a possibility of improvement in profitability. So when would Tesla business turn to profitability? The production efficiency and improving on the quality loss, those are the areas with big room for improvement. So we are focusing on those 2 areas. The target is the factory in the U.S. During the second half, the monthly basis, at least, turned to profitability. That is what we are aiming at. But we know what needs to be done. That's very clear. So we are concentrating our efforts there.
Thank you. Next question?
Ezawa from Citigroup Securities. I have 2 questions. For the full year plan forecast, one question is about the automotive. In the second half, the operating profit is minus JPY 25 billion. And from the first of -- you were in red and you do not expect to make any improvements. In the first half, automotive equipment, there was an impairment loss. Because of the impairment loss, I think you had a big red number. So why do you not expect improvement in the second half? The prismatic and cylindrical, what are your expectations in the second half? So another question is on the industrial.
Thank you. Well, the -- in the first half, what happened in the Q2 was the charging systems, that is the European manufacturers' demand or order, so charging systems from the power source to the battery restore that power, and we use that on car. So this is not the charger for the condominiums, but they are on board of the cars. And the development of that is very difficult, and that took a lot of energy. And compared to the time receiving the order, the development cost was high, and there was a impairment loss. The size of it is about -- it's not as high as JPY 10 billion, about JPY 5 billion, JPY 5 billion to JPY 6 billion or so. So that's what happened.
And Automotive Equipment. As for Automotive, it has settled down. So fiscal 2020, we are at the peak of the development. And from '21 to '22, we will start to harvest this. But as for the charging systems because of the deteriorating profitability, capitalized development expense was included as a impairment loss. And that requires more additional development costs. So in the second half, that part will be a major factor. So the battery is improving, but the automotive charging system will have a deficit. So as a whole, we do not expect major improvements. That's the content.
So charging system, the deficit would expand in second half, but the battery would improve? Is that what you said?
Yes. Yes. The one-off were temporary ones. If you exclude that, it will be bigger in second half. That is to say that there is a loss, more loss in relation to the development cost in the second half.
So the charging system, do you think this will continue in the next fiscal year? And it would continue, the deficit would continue? Is that the case or not?
Well, honestly speaking, the technical matters and also the negotiation with the customers are currently done. But as I said, infotainment has -- is going to settle down. But as for the charging system, this impact will remain in the next fiscal year. That is what we see right now.
Another question about the Industrial Solutions. Similar way, the forecast of the second half, I tried to calculate. In the second half, JPY 33 billion is the operating profit, and in comparison to last year, higher profit. And the op margin is a little less than 5%. So second half number is -- must be very good, although you made a downward revision. So this number seems high. So what is expected in the second half to come up with those numbers?
May I answer? For semiconductor, it's related to semiconductor business. Because of the changes in the contracts, there are some improvements. In the second -- first half, there was none. But from Q2, we started to see some improvements. In the second half, it would be fully felt as a positive impact. Basically -- so profit -- sorry, the PLD-related improvements are expected. So a deficit-making business improvements will be -- will progress. So if you exclude that other regular businesses, it will be same as previous year. That is how you should understand this. Thank you.
Thank you. Next person, the gentlemen in front row, center.
Ono from Morgan Stanley. The midterm strategy breakdown and the portfolio have been disclosed.
Now I have 2 questions related to the results. LS. Life Solutions were very good for the second quarter and upward revision for your forecast. But if you exclude that impact since all other segments are doing worse, especially in relation to China, as has been a question earlier in IS and automotive, including the charger system, they are all pushing down the profit. So to make up for that difference in adjustments and eliminations, those buffer portion were almost fully utilized. So if there hadn't been Life Solutions upside, I'm afraid it could be lower than JPY 300 billion. Did you have to or would you have had to expect lower? In other words, the buffer being assigned to different businesses, is that in light of additional risks? Or is it that you can commit to JPY 300 billion and therefore you want to continue with that? Which is the case? You said that fourth quarter is still uncertain. So are you not incorporating all these factors that I just mentioned? So can you talk about additional risks? That's my first question.
Thank you. Well, Life Solutions, LS, true, good performance, but Appliances as well. The profit decline had been the trend, which was the case for the first quarter as well. But in the second quarter, it held to the situation, and we have the China company as well focusing on the Consumer Electronics are making contributions for stabilizing the profit in Appliances. Well, profitability hasn't recovered to the previous level, but we see a sort of bottoming out. And eliminations and adjustments, have we used up that buffer portion in terms of risks? What we say that it is within our assumption. Well, we were expecting this risk. So a part of AN and IS, we had those adjustments and eliminations portion being assigned.
Hypothetical question, it's very difficult to answer hypothetical questions. But should the current China situation continue, and when we can't really expect whether it is going to improve or not, we have to be very careful in making the projections. And so fixed costs of JPY 100 billion, what are we going to do about that will be explained in our presentation on the RR Day (sic) [ IR Day ], but we are looking at those factors. We're trying to really control the fixed costs so as to achieve the projection.
So on the annual basis, JPY 300 billion, is it all clear? It's very difficult to answer that question. Well, in order to enhance, improve the certainty in achieving that, all efforts are being made. In other words, we don't expect to easily achieve that. We do see the need to make every effort needed, especially given the very challenging situation and environment that we're in.
I see. My second question. Again, I'm afraid this is a hard-to-answer question. But now that the first half is over, the stock market -- equity market is now focusing on the profit level in the next fiscal year. Now very frankly, in next fiscal year, are you going to be targeting profit increase? Or because we are revisiting the business portfolio, you want to continue with this effort into next year as well? Maybe Mr. Tsuga is going to comment on that on November 22, but as CFO, Mr. Umeda, what perspective do you have regarding the next fiscal year? And what will be the factors that might change that?
True. Figures for next fiscal year, we don't have any figures right now. And therefore, it's very difficult to answer your question. But my priority would be: first, portfolio reform to be thoroughly executed, the loss-making businesses to be eliminated, make thorough efforts for that. And those might continue into the second -- into next fiscal year, some of the major ones. But fixed cost reduction will also be promoted in parallel.
So on the adjusted operating profit basis, I do not envision significant deterioration barring major impacts from the macroeconomic situations. So everything being equal from what it is today, I can't say exactly how much, but the operating -- adjusted operating profit for next fiscal year is not likely to go down dramatically, rather priorities would be to make sure we do everything that needs to be done when we add up all of the loss-making businesses, the loss amount to over JPY 100 billion. So we want to eliminate that. That will be a very high priority issues.
Clarification. So some of the loss-making business might not be eliminated this year. And given that charger issue, you are going to continue those efforts into next fiscal year and make sure that they are eliminated next fiscal year.
Yes, Mr. Tsuga is saying that we are going to eliminate all loss-making businesses. So we are going to fulfill that.
One last question.
Hirakawa from Merrill Lynch Securities. I have one question. You mentioned the loss-making business and you want to eliminate them. In the first half, loss-making businesses, for example, the semiconductor and solar TVs, how much of the loss did you see? And how would that improve in the second half? If you can mention any of those businesses, please.
Yes. Thank you. Well, TV, for the full year, more than JPY 10 billion deficit is expected. So just taking that portion, it is a big loss.
Semiconductor. The semiconductor market is a little difficult. So semiconductor business is in red and making the breakeven. That is what we were targeting for the fiscal 2020. And due to -- due partly to the environmental change, the red figure is big; but structurally, it's quite difficult. So we expect those loss numbers.
As for PLD, a double-digit loss is still there. And as for solar, double-digit herculean-level deficit is what we have.
As for each one of those, as for the announcement, when we know the situation, we will make them, and we are taking measures for each one of them. And as for the progress, as soon as we are able to announce, we would do so. So that's what we have been doing. Sorry, I cannot give you the exact numbers, but those are the major size that we can mention.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]