Panasonic Holdings Corp
TSE:6752
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Panasonic Holdings Corp
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Thank you very much for joining us today. Now let me present the fiscal 2021 second quarter financial results.
This is a summary of the consolidated financial results. Overall, Q2 sales decreased year-on-year similar to Q1, although there was noticeable recovery from Q1 due to the improvement mainly in automotive and appliances. Profits in Q2 significantly improved from Q1 by maintaining the level of fixed costs, while sales recovered. Moreover, profits increased year-on-year.
Free cash flow significantly improved to a solid positive in Q2 from the negative Q1 due to the COVID-19 impact. The full year forecasts remain unchanged for both company-wide and segment. We will accelerate the enhancement of management structure and promote capturing business opportunities arising from changes in society brought about by COVID-19.
This shows the consolidated financial results for the Q2 of FY '21. Overall sales decreased to JPY 1.667.3 trillion due to the deconsolidation impact as well as COVID-19. Adjusted operating profit increased due to steady progress in reducing fixed costs despite the impact of lower sales. Operating profit and net profit increased due to higher adjusted operating profit as well as improvement in other income and loss.
This shows our sales analysis. Overall sales decreased by JPY 286 billion or 15%. Excluding the Forex effect and the deconsolidation impact, sales decreased by JPY 153.8 billion or 8%, of which the COVID-19 impact was JPY 150 billion. About half of this impact came from Connected Solutions, including Avionics.
Next, I will explain the sales trends after the spread of COVID-19. The graph on the left shows the trend for company-wide sales versus FY '20. Company-wide COVID-19 impact expanded from April. However, sales recovered to above 90% in June and also in Q2.
The graph on the right shows the sales trend by segment. COVID-19 impact was seen mainly in Automotive, Appliances and Connected Solutions. In Automotive, sales halved from April to May. However, sales sharply recovered due to the increased production of our automobile manufacturer customers. Also in Appliances, sales was heavily impacted until May due to restrictions of movement and impact of lockdown. After restrictions were lifted, the recovery trend is continuing.
On the other hand, in Connected Solutions, Avionics has been impacted by sharply reduced flights and significantly decreased aircraft production. Overall sales in Connected Solutions continues to face a severe situation at below 80% of the same period last year.
This shows our operating profit analysis. Adjusted operating profit increased by JPY 0.9 billion, due mainly to efforts in management structure enhancement, which offset the COVID-19 impact. Mid-term management strategy initiatives of profitability improvement are showing steady progress following Q1. For example, management structure enhancement was an increase factor of JPY 15 billion, and countermeasures for loss-making structures pushed up profits by JPY 4 billion.
As for Automotive business, we achieved JPY 20 billion profitability improvement. On the other hand, COVID-19 negative impact was JPY 25 billion. Connected Solutions accounted for a large portion of the impact.
Regarding the fixed cost reduction, we achieved about JPY 70 billion company-wide in Q2. We have been enhancing fixed cost reduction efforts as countermeasures to lower sales costs by COVID-19. The breakdown of reduced fixed cost is shown on this chart in blue box. Overall operating profit increased by JPY 8.9 billion due to the higher adjusted operating profit as well as improvement in other income and loss.
This shows the results by segment. I will explain the details on the following slide. This slide shows major increase and decrease factors by segment. Sales decreased in all segments. For adjusted operating profit, Life Solutions and Connected Solutions decreased. Appliances and Automotive increased in Q2. Industrial Solutions continued to increase following Q1.
In Appliances, sales decreased due to COVID-19 despite recovery trends in regions such as Japan. Profit increased due to increased sales of refrigerators and air conditioners in Europe, along with the efforts to control costs such as reduction of sales promotion expenses, offsetting the impact of lower sales caused by COVID-19.
In Life Solutions, sales decreased due to the decline in new housing start despite the stable air quality-related businesses. Profit decreased due to the decreased sales despite thorough efforts to reduce fixed costs.
In Connected Solutions, sales decreased. Favorable mounting machine sales in China was unable to offset the decreased sales in Avionics. Efforts to improve costs such as through fixed cost reduction were unable to offset the impact of decreased sales. Profit decreased largely.
In Automotive, overall sales were slightly lower. Sales were up in batteries but lower in Automotive Solutions due to lower sales of display audio and others despite steady progress in product portfolio replacement such as the sales growth of IVI, where we focus our resources. Profit increased, due mainly to fixed cost reduction in Automotive Solutions, along with rationalization at battery factory in North America. The segment achieved profitability overall. And for the cylindrical battery business, we will further promote technological development of higher-capacity batteries, leveraging our maximum strengths to enhance competitiveness of this business.
In Industrial Solutions, sales decreased due to lower sales for automotive use products despite favorable sales for information and communication infrastructure. Profit increase despite lower sales was due mainly to fixed cost reduction efforts. As a result, company-wide sales in real terms, excluding the exchange rate and deconsolidation impact, decreased significantly by JPY 153.8 billion. But adjusted operating profit increased by JPY 0.9 billion, and operating profit increased by JPY 8.9 billion.
Next, I will explain the situation of free cash flow. Free cash flow in Q1 was negative JPY 54.2 billion. However, in Q2, free cash flow turned positive and improved to a solid positive of JPY 158.1 billion. This mainly came from operating cash flow turning significantly positive, with net profit turning positive, along with solving such issues as a temporary increase in inventories due to COVID-19. Free cash flow for the first half was JPY 103.9 billion, exceeding net profit of JPY 48.9 billion. In the second half, we will continue to aim for free cash flow above the level of net profit.
From the next slide, I will explain the impact of COVID-19 in FY '21 and the progress in key initiatives in response to COVID-19. First, the impact of COVID '19, mainly the changes from the initial assumptions as of the Q1 results announcement. As for sales, company-wide Q2 results were broadly in line with the initial assumption of Q1. While there were some differences depending on businesses, we expect the same for the second half.
By segment, in Appliances and Automotive, earlier-than-expected recoveries were seen in Q2. While in Connected Solutions, the situation became severe in Q2 and is expected to continue in the second half due to worse-than-expected deterioration of air passenger demand.
As for the profit, company-wide Q2 results were better than the initial assumption. For the second half, the impact is expected to slightly worsen, but the full year assumption remains unchanged.
This slide shows the progress in key initiatives for FY '21 explained at Q1 results announcement. First, we made steady progress in management structure enhancements and improvement in profitability of Automotive business as per the mid-term plan. We will accelerate our initiatives in the second half aiming to exceed the full year target. Regarding business portfolio reform, we are continuing to execute specific measures for investment for growth, enhance competitiveness through co-creation and improved profitability, as shown in the slide.
With regard to countermeasures to COVID-19, we are undertaking thorough fixed cost reduction initiatives company-wide and reduced approximately JPY 70 billion year-on-year in both Q1 and Q2.
We executed structural reform, particularly in the businesses heavily affected by COVID-19. We are also promoting capturing of business opportunities, as will be explained in the next slide.
These are the examples of our initiatives to capture business opportunities arising from changes in society brought about by COVID-19. Under COVID-19, we expect increase in demand related to public hygiene, air conditioning and indoor air quality; expansion in demand for investment in ICT infrastructure; and expansion in EV demand supported by such policies as green recovery in Europe; and increase in demand for manufacturing equipment for servers.
We will -- we intend to steadily promote expanding and strengthening products with growing demand and expand production capacity as follows: for public hygiene, air conditioning and indoor air quality, expand line-up and promote products with nanoe X as well as expanding production capacity of Ziaino.
For ICT infrastructure, increase the supply of conductive polymer, electrolytic capacitors and power storage systems. Regarding EV, further enhance the technological development of automotive cylindrical batteries aiming for higher capacity. And for manufacturing equipment, respond to demand with full utilization at our mounting machine factories.
Thank you for your attention.
This is Ono from Morgan. Two questions. First, Q2 business results. You do not announce the quarterly guidance. But in comparison to the expectations, I think it was better. So could you give us the situation of each segment?
Second question is also related to the first question. You did not change the fiscal year forecast. But based on the first half results, are there any segments that you expect better results in the second half? Or the segments that you expect some difficulties? So could you give us some information as to the differences of each segment?
Thank you for your questions. First, our Q2 guidance, it is not announced, but I think that results was a little bit better than what we expected. The COVID-19 impact was smaller. That is JPY 15 billion smaller than what was expected. But at the same time, aircraft-related in the second half, we expect some difficulties or toughness. So second half COVID-19 impact, we expect to be higher in Avionics. So those are the factors.
The -- in relation to your second question, if I may answer your second question at the same time, the Q2 results and the first half results. As for -- the stronger segments than expectation include Appliances and Automotive and IS, or Industrial Solutions. Those are stronger -- those showed stronger results than our expectations.
Now in terms of our sales, I did talk about some numbers. The CNS was tougher. And we expect some toughness in CNS, so it's a bit weak.
As for Life Solutions, COVID-19 impact will emerge in the second half rather than the first half because of the new housing starts and nonresidential business are declining in this industry. So I think some weaknesses are expected. So as a whole, the fixed cost reduction is getting better, and we are making progress in overall numbers. It's too difficult to forecast, for example, due to the presidential election in the U.S. and also the COVID-19 situation and U.S.-China trade friction. Due to those factors, the full year forecast continues to remain the same. Thank you. Does that answer your questions?
Yes.
Next person, please, from Citigroup Global Markets Japan. Mr. Ezawa, please?
Yes, from Citigroup Global Markets Japan. Ezawa is my name. First, about the focal initiatives -- key initiatives on Slide 11. You mainly talked about the cost control. JPY 30 billion is the target for improving the profitability -- or the enhancement of management structure. So enhancement of management structure and improvement of profitability of Automotive business, the full year targets are JPY 30 billion and JPY 15 billion, respectively. I think there is a possibility that the actual at the end of the year would exceed this target. What do you think? That's my first question.
My second question is on cylindrical automotive batteries. Tesla organized a Battery Day event and announced that they are going to secure the internal supply of batteries and that they are thinking of collaborating with other battery suppliers. And the way they presented, it appeared that Panasonic was positioned on par with other suppliers, which resulted in your stock price declining. Now your cylindrical automotive battery business short term and medium term, is it going to expand? Or would the expansion end? If it's going to expand, in what form do you expect your business to expand? If you can talk about that big picture, I would appreciate it.
And the stock market, your -- it is expected that your sales from the cylindrical automotive battery would decline. What would you say to that?
Thank you for your questions. First, on Battery Day, Musk, Elon made various messages -- delivered various messages, including the internal supply of batteries. We are aware of that, but that's something for the future. It's not certain as to what time frame he has in mind. We have a close communication with Tesla regarding the new battery, 4680, and Tesla invited us for cost cooperation on this high-capacity and safer battery. That's the strength of our technology, and 4680 really leverages our strength. So we have already started the development effort on 4680.
Now you said some view that our sales will decline. Currently, the capacity is around 32 gigawatts. And going forward, with stable operation. For this year, as was mentioned earlier, we are going to modernize the lines so as to start supplying the higher-capacity batteries. And 35 gigawatts is to be achieved next year maybe.
And also, as has been announced, we are going to add one more line. In fiscal 2022, the operation of that new line is to start. So that in fiscal year 2023-or-so, 35 to 38 gigawatt capacity would be achieved. So with that in mind, whether sales would increase or decrease, as far as we are concerned, with -- we are implementing measures to ensure increase in sales.
Now Cylindrical business, battery business of Panasonic, will this business grow or not? Well, this is a very important strategic business for us. That remains unchanged. And what Elon referred to, the 3 terawatt in 2030, once we achieve 38 gigawatt, we're talking about 80x that capacity, 3 terawatts to be achieved in 2030. I don't think that can be accommodated by just one supplier. So Chinese market, we consider, is not fit for our high capacity battery. So we're not going to go into that market. But for the U.S. market, by looking at the profitability prospect, we will make necessary investment. And therefore, 3 terawatt, that will be divided amongst multiple suppliers. But with the steady development of 4060 -- 4680, we will pursue expansion.
Can you comment on fixed cost?
Fixed cost. As shown here, we are getting close to the target. Since last year, enhancement of management structure is something that we have been working on. And with COVID-19, our employees seriously considered what they can do and so there is a very solid awareness of -- cost awareness amongst the workforce.
Now this full year target in the fixed cost reduction, internally, we are aiming at going beyond the target. And in the structurally loss-making businesses, we divested the solar business. And so we now have a good visibility in achieving the target.
Next question. From JPMorgan, we have Ayada-san
This is Ayada from JPMorgan. I also have 2 questions. First is on Slide 5. We have a step diagram and cost reduction of JPY 70 billion, and breakdown is shown. On the right-hand side, you have JPY 45 billion that is below COVID-19 impact. So for 3 years, JPY 100 billion cost reduction is what you have been talking about. But is this separate from that? Now the impact from this in Q1 or for the full year, what would be the impact that you consider? Because of the urgent situations, it's -- is it possible that you have a negative impact from this? So could you explain the meaning of this JPY 45 billion fixed cost reduction?
Now second question is about Automotive. The cylindrical battery is now profitable. But Automotive Solutions in the second quarter in comparison to Q1, how was it? Was it profitable or not?
Also, the demand is recovering, and Automotive, I think, is recovering. So for the Automotive Solutions in the second half, do you think that the profitability would improve? But at the same time, there will be a lot of expenses so maybe it's not that easy. So could you talk about those?
Yes. Thank you for your questions. First, about Page 5, that is the fixed cost reduction. In Q2, that is JPY 45 billion. The marginal cost is -- marginal profit is down. But accordingly, the production fixed cost and -- was reduced, and that is JPY 45 billion. So Ayada-san's understanding is correct, that is the JPY 15 billion that is a management structure enhancement is separate from that.
So in this JPY 45 billion, for example, due to the restriction of the movement, the -- we could not exhibit in the European exhibition or in the United States or other events were canceled. Those factors are included. So because of these, the cost reduction was achieved. So JPY 45 billion, we'd like to make sure we've analyzed the content and -- so that we can move or we can make sure that we would avoid the cost increase of the management structure enhancement and others. So they are separate from each other. After the COVID-19 impact, it doesn't mean that we will lose this factor. And depending on the content of it, it could be a sustainable or continuous cost reduction.
As for Q1, larger than this number was the negative impact of the COVID-19. So this JPY 45 billion in Q1, actually, the COVID-19 impact was higher in Q1. So we are trying to make this kind of a continuous cost reduction.
As for the Automotive Solution, in Q2, JPY 22 billion improvement was realized. And out of that, 1/3 is the cylindrical battery business, higher profit or improved profit. Because of this, 2/3 is the battery solutions improved profit. So both of them are profitable in the business results in Q2. And the monthly sales chart was included.
Now the Automotive is seeing the highest recovery of sales. Auto industry was suspended in Q1, and there is a recovery -- quick recovery from that. So very rapid start-up is what we are seeing. So because of that, the marginal profit is increased. And also, we have been working on the fixed cost reduction. And due to that, I think that the profits were higher.
Now the Automotive Solutions. In 2020, that was the development peak, as we said. And in '21, I think that the development expenses has normalized, and that led to the higher sales.
So when we have a higher top line, the profitability should stabilize. So if you look into this, for Europe, the recharger business for Europe, in 2021, there are some development cost. But it is included in the actual business results. And also, there will be some full year fixed cost so we do not expect the lower impact on the Automotive Solutions. The recharger business for Europe, again, will have some remaining development expenses. I hope that answers your questions.
From Crédit Suisse Securities, Nishimura-san, please.
Nishimura from Crédit Suisse. I have 2 questions. First, on AP appliances. In the second quarter, the profit has improved in Home Appliances and Smart Life Network. Reduction was a big factor you said. Could you elaborate on what you mean by that? And what about the sustainability of that?
And my second question, Automotive. Profit rate improvement prospect for next year onward, what would you -- do you think would be the speed of that? You have turned your profitability and so I think the speed of improvement is better than you have been indicating earlier. Some say that 5% operating profit in 2, 3 years. And Automotive, 5% could be achieved is what you said in relation to the mid-term plan. So what do you think would be the profit ratio for next year onward for the automotive battery?
AP appliances, second quarter results. Basically, for the air conditioning and others, that suffered a bit. But for the rest of the segment, it was good. Refrigeration and air conditioning suffered, but others were good, leveraging the demand in relation to the stay-at-home circumstances. Last year in October, the consumption tax rate was raised, and there was a big difference in demand in relation to that. And so we believe that those factors contributed to the increase in profit.
In terms of sales in Japan of appliances, in September, it was 60% to 70% the previous year's level. That's for September. Whereas for October, looking at the current situation, last year, because of the consumption tax rate, the demand declined. So compared to last year, about 1.3x the sales level, for this past -- this October. That's for the industry overall, and that's the same for us as well. So we believe that the sustainability will be kept.
TV sets, the AVC. The improvement in the loss-making business in the second quarter, what we showed as a result. Actually, the biggest improvement came from the TV business. And so those are the factors for AP.
As for Automotive AM, next year and onward about the profit rate, that's kind of hard to touch upon, but the challenge is the business in Europe. That's the same for our recharger and the Automotive Solutions. Since the development for solutions have been completed in 2019, all but -- and therefore, we believe that the profit rate would improve from 2%, 3% to 5%.
As for recharger business, the development efforts will have to continue for some time. So those profitable ones and nonprofitable ones will have to be combined. So profit increase this year would have been for certain under normal circumstances, but we need to take into consideration the special factors for this year.
Next question is Okazaki-san of Nomura Securities.
This is Okazaki from Nomura Securities. About CNS, I have a question. Avionics, you're faced with difficulty. But excluding Avionics, what is the current status? Especially after -- or in relation to COVID-19, new business opportunities, there could be a big one. So excluding Avionics, what is the prospect of CNS?
Yes. Thank you. Well, in Q2, Avionics was tough. That is a fact. But another is Mobile Solutions and Media Entertainment. Windows 7, there was a recovery from the last-minute demand and media event. The events were canceled. Projectors, sales declined. So there is some toughness there. But some recovery started to be seen in process automation from Q2. So higher sales and higher profit. In the second half, we expect this to accelerate further. So because of this, Avionics and Media Entertainment, we see some toughness, but Mobile Solutions we are trying to enhance the management structure so that we can catch up. As for Process Automation, we'd like to capture the new demand. So growth and profitability improvements are something that we are trying to realize. So there are negatives and positives.
And for the full year targets or forecast, the actual target or the forecast probably is a little bit conservative. I hope that answers your question.
We're getting close to the end time so we can only take question from one more person before we close. From SMBC Nikko Securities, Katsura-san.
I have 2 questions. First, about inventories. I understand that you successfully reduced inventories, but can you talk about the supply chain situation by segment? During Q1, there were some that were stronger than others. So can you tell us the current situation, the way you see it, where you feel that the inventory levels could have been higher for better supply, where, on the other hand, you see the inventory level being heavy? And what's your prospect going forward towards the year-end?
Secondly, with regards to free cash flow. Blue Yonder, I think, is already in place, the Blue Yonder. And maybe we should wait until the next business management meeting. But in terms of the use of cash, is there anything that you can share with us?
Thank you for your questions. Regarding inventory levels, in all segments, amount-wise, it's been reduced from the first quarter. As for the turnover date, CNS, it went up in terms of days in relation to the lower sales. And inventory level differences from segment to segment. AP, ISP can't be controlled both positively and negatively.
Now the sales are being normalized. So we have a better visibility. But when it comes to TV set supplies, we're hoping that there will be better supplies. And Ziaino air conditioning, for example. In September, we were finally able to resume. So there was a gap between supply and production. So we are expediting our efforts to expand our production capacity. So that's where we see some shortage.
In Automotive, with the recovery on the part of the OEMs, we are producing to supply sufficient amount. And in Industrial Solutions, while the inventory value and turnover rates are being declined, we are managing the situation. So in terms of which products have greater inventories, I just explained.
As for the free cash flow, Blue Yonder investment has already been announced. And after that, what would be the purpose? One is in relation to Tesla. The higher-capacity batteries will make the investment for that. And for the capacity expansion, we will be adding one line so that would be incurred in the second half. So we will be making those investments. And within the operating cash flow, we will be replacing the portfolio for better management. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]