Panasonic Holdings Corp
TSE:6752
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Panasonic Holdings Corp
Earnings Call Analysis
Q2-2025 Analysis
Panasonic Holdings Corp
In the second quarter of fiscal year 2025, the company reported a modest overall sales increase of 2% year-over-year, totaling JPY 2,129.6 billion. Notably, while Lifestyle, Connect, and Industry segments achieved sales growth, Automotive and Energy segments continued to struggle. Adjusted operating profit improved to JPY 122.2 billion, reflecting favorable conditions in generative AI-related products, particularly in the Industry sector.
Sales within the Lifestyle segment rose due to steady demand for consumer electronics in Japan, which offset weaker performance in China and Europe. In Automotive, sales faced decline primarily due to sluggish market conditions and production halts. The Connect segment showed an upward trend, largely driven by process automation and Gemba Solutions sales. Meanwhile, the Industry segment benefitted from generative AI server sales, although traditional relay markets encountered downturns. The Energy sector struggled, with in-vehicle sales in decline, particularly in Japan.
The Automotive segment recorded increased fixed costs and lower sales, prompting price rationalization strategies that slightly improved the profit mix. The Connect segment has reported a downward revision in profit expectations due to challenges in avionics and a decline in demand linked to ongoing global uncertainties. This situation is further complicated by competitive pressures and delivery delays in the manufacturing process.
In a promising trend, the company's efforts in the generative AI sector are translating into increased sales. The Industrial segment's sales from generative AI products are expected to hit JPY 35 billion, marking an 80% growth compared to the previous year. Likewise, the Energy segment could witness annual sales exceeding JPY 100 billion, driven by demand for energy storage systems for data centers.
The full-year forecast for fiscal 2025 remains largely unchanged; however, revisions are evident across segments. Sales expectations have been revised upward for Lifestyle, while anticipated declines in Automotive and Energy have been noted. Specifically, the company retains its full-year forecast with operating margins expected to stabilize. Importantly, for Q3 and Q4, the company has set a target operating cash flow improvement, buoyed by expectations surrounding the IRA tax credits.
The annual dividend is projected to reach JPY 40 per share, an increase of JPY 5 year-over-year, with a payout ratio of 30% of net profit. This signals the company's commitment to maintaining stable shareholder returns while balancing growth through strategic investments.
As the company moves toward the next fiscal year, continued investment in new technologies and capacity enhancement, particularly in generative AI and energy storage, will be critical. The management acknowledges the pressures from the competitive landscape and the need to adapt swiftly to evolving market dynamics. The returns from these initiatives are expected to begin materializing significantly in the coming fiscal periods.
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Good evening. I will present the results for the second quarter of fiscal 2025 ended September 30, 2024. For the second quarter, the sales and profit increased year-on-year. Overall sales increased due to increased sales in Lifestyle, Connect and Industry as well as currency translation despite decreased sales in Automotive and Energy.
By business, positive factors were Industry and Energy with favorable sales of Generative AI-related products, while negative factors were Energy's automotive battery business affected by the year-on-year decrease in demand continuing for batteries produced in Japan and price revisions reflecting lower raw material costs.
Adjusted operating profit increased overall with increased profit in Connect, Industry and Energy, despite decreased profit in Lifestyle and Automotive. Net profit increased, adding the improvements in other income and loss and other factors. Operating cash flows increased year-on-year due to monetization of the IRA tax credit through transferable method.
As for the full year forecast, the group-wide forecast remains unchanged. However, the forecast by segment are revised, reflecting changes in each business environment. I will explain the details later. Annual dividend is forecasted at JPY 40, a year-on-year increase of JPY 5 with the payout ratio of 30% as announced on August 30.
Now the details of the consolidated financial results for the second quarter. For the consolidated financial results, sales increased year-on-year by 2% to JPY 2,129.6 billion. Sales, excluding the effect of exchange rates remained the same year-on-year. Adjusted AOP increased to JPY 122.2 billion, operating profit increased to JPY 132.2 billion, and net profit increased to JPY 118.3 billion.
This slide shows the results by segment. In the following slides, I will explain the analysis of year-on-year comparison for sales and operating profit. First, the sales analysis by segment. In Lifestyle sales increased overall. This is due to steady sales of consumer electronics in Japan and electrical construction materials despite decreased sales of consumer electronics in China affected by weaker economy and air to water in Europe, in which the rate of year-on-year decrease as become less severe compared to the first quarter.
In Automotive, sales decreased due to such factors as discontinuation of production for certain modes and sluggish sales mainly in China. In Connect, sales increased with increased sales of Gemba Solutions due to steady orders process automation by capturing certain investment opportunities, even with economic slowdown in China and a Blue Yonder with growing SaaS business.
In industry, sales increased with increased sales of products of Generative AI servers despite decreased sales of industrial use relays and automotive use relays and capacitors due to market slowdown mainly in Europe. In Energy, sales in in-vehicle decreased. This is due to a continuing decrease in demand at the Japan factory. In addition, sales value decreased at the North American factory due to price revisions reflecting lower raw material prices despite increased sales volume.
In Industrial and Consumer, sales increased due to significant growth of energy storage system for data centers driven by Generative AI advancement. Within other eliminations and adjustments. Sales of both Entertainment and Communication and Housing remain the same year-on-year. Next, our adjusted operating profit analysis by segment. In Lifestyle profit decreased due to lower sales of consumer electronics in China and air to water in Europe despite steady sales of electrical construction materials.
As for Air-to-Water in Europe, the year-on-year GPs amount has improved from the first quarter. In Automotive, profit decreased due to lower sales and higher fixed costs despite rationalization and price revisions to offset price hikes in parts and materials along with improved product mix. In Connect, profit increased due mainly to higher sales of process automation and Gemba Solutions. Despite such factors in avionics, as upfront investments and impact of delivery delays by slower manufacturing of aircraft as well as deteriorated market conditions for media entertainment.
In industry profit increased due to higher sales of products for Generative AI servers rationalization, price revisions and effective yen depreciation despite decreased sales of industrial use relays and automotive use relays and capacitors. In Energy, profit in decreased only slightly. This is due mainly to the impact of decreased sales of the Japan factory, increased ramp-up costs for the Kansas and factories as well as upfront costs for new customers.
While efforts such as improving productivity at the North America factory, contributed to reducing this decreased amount. Profit in Industrial and Consumer increased due to a large contribution from increased sales of energy storage systems for data centers and improvements in material market prices. Within other, elimination and adjustments, profit increased due mainly to improvement of elimination and income intracompany profits with the reduced inventories and improved head office income and expenses.
Results of Lifestyle by divisional company. Adjusted OP in Living appliances and solutions due to lower sales of consumer electronics in China. Adjusted OP in HVAC decreased largely affected by lower sales of A-to-W in Europe. In cold chain solutions and electric mode, though sales in adjusted AOP increased on continuing steady sales.
And this is the year-on-year operating profit analysis by factor from left Increased sales in real terms had a positive impact of JPY 6.9 billion. Increase in fixed cost pushed down profit by JPY 18.7 billion due mainly to investments in energy for business growth and impact of inflation. The net impact of raw materials and logistics prices was positive JPY 12.7 billion. The effect of price revisions and rationalization was positive JPY 18.8 billion.
Among other individual factors, impact of IRA was positive JPY 0.5 billion. Baked down of Blue Yonder is shown in the bottom right box. Adjusted AOP on a stand-alone basis increased by JPY 1.2 billion on a constant currency basis. On a consolidated basis, adjusted AOP increased by JPY 0.9 billion. Excluding the impact of strategic investments and synergy investment, adjusted AOP was up JPY 4.7 billion. Effective exchange rate was positive JPY 1.6 billion mainly seen in Industry and Energy.
As a result, adjusted AOP increased by JPY 22.7 billion and AOP increased by JPY 29.8 billion.
This slide shows the situation of cash flows and cash positions on the left, operating cash flow was JPY 457.6 billion, up year-on-year due to monetization of IRA tax credit through transferable method. Going forward, we will continue to generate further operating cash flows.
On the right, net cash was negative of JPY 540.6 billion. Next is fiscal 2025 full year financial forecast. This shows the full year forecast for fiscal 2025. The group-wide forecast remains unchanged from the initial forecast of May 9. This shows the forecast by segment. Reflecting the changes in the business environment, revisions are made as shown in the labeled revised amount from May 9. This shows factors for sales and adjusted OP revision by segment.
Sales forecast are revised at all segments, reflecting currency translation and business environment changes. Sales are revised upward in Lifestyle and Connect revised downward in automotive, industry and energy. As a OP is revised downward in Connect, revised upward in Other and Eliminations and Adjustments. However, the remaining segments are unchanged.
The revision in Connect is made by factoring in the impact of delivery delays by slower manufacturing of aircraft for avionics and costs related to M&A by Blue Yonder. The revision in Other, Elimination and Adjustment is made due mainly to improvement in head office income and expenses. This shows the full year forecast by of lifestyle by divisional company.
Adjusted OP, revise downward in living appliances and solutions company and China Northeast Asia company factoring in the impact of lower sales of consumer electronics in China. Next, let me explain the status of our Generative AI-related businesses, which are now rapidly growing. On the left, industry, the relevant products include conducted polymer capacitors and multilayer circuit board materials for generative AI servers by capturing the market expansion opportunity, sales are rapidly growing, and annual sales are expected to reach a level of JPY 35 billion 1.8x higher year-on-year.
On the right, in Energy, with the expansion of Gen AI market, demand for energy storage system for data centers is rapidly increasing. Annual sales are expected to grow to a scale of above JPY 100 billion, also 1.8x higher year-on-year. For both Industry and Energy, the full year sales forecast significantly exceeds the initial forecast.
Growth is expected to continue in Gen AI-related market. So we will enhance our capabilities to ensure capturing such demands. Lastly, let me explain shareholder returns. Today, the Board of Directors resolved that the interim dividend of JPY 20 per share for fiscal '25, up JPY 2.5 per share year-on-year.
For the annual dividend, we forecast JPY 40 per share, up JPY 5 year-on-year the payout ratio relative to the net profit forecast will be 30%. We will distribute a stable and continuous dividend and aim to achieve enhanced corporate value through business growth and profit increase realized by our investments. Thank you for your attention.
From U.S.
This is I hope you can hear me. Two questions. First, the focal investment areas. Heat pump -- heating. What's the current status? What is the market situation? And the other area is EV. So can you talk about the current situation and future prospects? My second question, well, this is the end of your medium-term plan. In terms of operating cash flow, I think you expect to achieve the target, but not for others, it looks like -- so with that in mind, what is your current take? And any improvements that can be expected going forward?
Thank you for your question. First, EV and Air-to-Water. Regarding EV, we have been saying that North America, mostly focusing on North America in our business. Globally, EV demand is slowing down. But in North America, compared to the past, the growth has slowed down, but 10%, about 110% or thereabouts has been the growth in units. So moderate growth.
And at our plant in North America, depending on the situation of production in our customer sites, especially during the first quarter, we were largely affected but towards the second quarter, about 0.5 gigawatt increase has been observed. But our capacity is not at 100%, but the third quarter onward, we expect the supply of batteries to continue.
So in Q3 onwards, with the current plant we expect we'll get closer to the full capacity. And as is shown in the IRA, 38 gigawatts or there about would be the target of our capacity increase as for Japan for 1,865 produced in Japan, we do not expect further decline, but we can't expect further increase either. And we are replacing the production line to a different model for So that's the current situation regarding EV. Especially for Kansas and 4680 Hakama plant, the new plant, we are making investments into these new facilities. That is for EV batteries.
As for Air-to-Water. If you can look at Page 29, towards the bottom, you can see the Air-to-Water situation. And if you can look at the graph on the lower right-hand corner, in the first quarter of last year, we have seen a rapid decline. And for the first quarter of this fiscal year, we feel that, that was the bottom. And towards the third quarter and the fourth quarter, in terms of year-on-year comparison, we expect flat growth for sure as opposed to a decline, and that is because we are seeing improvement day by day, the rapid growth that we saw there is not expected, but at least we are seeing trend improving as reflected in the results for the second quarter. And given that situation for each country, we are embarking on new initiatives where we had not implemented for the medium-term business plan.
The investment phase was where we were in, and therefore, cash flow was our focal point, of course. And there are some issues that became clear. One is the low profitability and ROE. In other words, the return on the investments made. The absolute value is low, and the rates, the return was though -- and so to address these aspects, we will be making efforts and that has been the message from our CEO, as well. And so that by the end of FY '27, there will be no businesses that did not meet the WACC requirements.
Next from.
Again, is my name. I have a very focused question about the lifestyle business. the reasons behind the sales changes, the domestic consumer electrics did well. So looking at the consumer electrics in Japan, where are the products which have grown? And how much was the growth? Could you give us some details.
Well, as for the consumer electronics in Japan, the industry as a whole is still faced with the difficulties, but the market share has been increased on our part. So a little like 1% growth in comparison to the previous year, that's the growth that we saw. So it's almost flat.
And at our company, the washing machines, laundries and cleaners, and upon in Shaver, those are the products which are selling well. So Japanese consumer electronics, I think we achieved high profitability. So you asked about the Japanese market. So as a whole, we have seen the strong trend in Japan. Southeast Asia is also recovering also the Vietnam, which is 1 of the major markets, we sold the upturn. And China is still tough, and that was very clear in Q1 and Q2. That is our understanding. Thank you.
Next -- this is from.
Marista from Mikan I have 2 questions. First, the impact of exchange rates -- the yen is depreciating now turning from the deep appreciation. So what is your current view? And what impact do you expect on your business? That's my first question.
And my second question, the full year forecast, how am I to read this? No major revisions from the previous forecast, but when I see the factors for the revisions and seeing that there is a slowdown in the domestic production. Is that the factor? And if the overall full year forecast remains unchanged. The slowdown in sales in domestic EV had already been incorporated. And therefore, that is the reason why the full consolidated forecast remains the same.
Thank you. For exchange rates for the second half, we have not changed the assumed rates dollar, JPY 140 to the dollar for JPY 150 to the euro for renminbi JPY 20. So that's the unchanged assumptions for the second half. As you know, the yen and euro have fluctuated by more than JPY 10 and the sensitivity -- as mentioned at the beginning of the year, regarding and the dollar and euro, the yen depreciation would push up our profit where for renminbi mainly in lifestyle, when we import the depreciation of the yen against the renminbi would negatively affect us. But given the range at the current rate, slight increase -- a slight gain on exchange rates is expected.
In any event, the currency effect -- when they fluctuate over a very short period of time, of course, that's not good for our business, running the business that is JPY 140 within that range, that's the assumption that we have in our business. that is against the U.S. dollar. As for the full year forecast Yes, Automotive. That's a complete OEM business. So automotive OEMs production unit volume. Is a direct driver of our business. So the production volume of the customers when they increase, we make sure that we have sufficient supply. But currently, we the decline in volume. So through the reduction in fixed costs, we like to overcome that. And as for a sales decrease -- the material price related or linked selling price is the formula that we use.
So in the second quarter alone, JPY 18 billion is the size of the price reduction, it appears. But in terms of volume, in our North American plant, we expect increase. And that is not the factor for a decline in sales. Overall, so there is the foreign exchange impact and yet, we are maintaining our forecast, meaning that on a year full year basis, we expect some decline in sales. But in the Generative AI-related business, and through the product mix, we can't maintain the profit while the sales is expected to go down, and that is the reason why we are keeping the original forecast.
Next question is from TV Tokyo Yamada-san.
This is World Business Satellite. I hope you can hear me. Yes. So you just mentioned the foreign exchange. I have 1 additional question on that. Today, the BOJ had the meeting. And most recently, the yen has been weak. But slowly, the yen is strengthening again. So the -- what do you hope for from BOJ policy? Are there any things that you like them to do? Well, basically, strong an wean.that is not the purpose of BOJ, the government.
How that government looks at the level of the foreign exchange is important. But from our perspective, as a private sector, the range and the rapid change of the currency level is something that we like them to avoid as much as possible. So this time, it remains the same. So in the medium to long term, as Panasonic, the interest rate, the world with interest rate to maintain it and gradually increasing interest rate is something that we assume in managing our company.
Thank you. This time to end the session. So we will let me take 1 more question from again only in Japanese. Maki from Toyosi.
Towards the next medium-term management plan. Is there a possibility of revisiting the portfolio of focal investment, especially in the industry. The Generative AI related, I understand it's very strong. And my understanding is that it's not included in the focal areas. Do you have any investment plans.
It's been 2.5 years ago. And so things have changed dramatically in society. And the investment speed is adjusted accordingly. So in terms of the investment areas going forward, just because the business is doing well, it doesn't mean we will be making more investments there. For maintaining these 3 focal areas is not on the store. So it's subject to change, of course.
In the battery business, Panasonic is criticized for being very slow in making construction investments. So we've been very careful. And the investment peak is behind us. So where would be the next investment is what we are revisiting. That is all.
Thank you very much. That concludes the Q&A session for journalists. Thank you very much. Now we'd like to start the Q&A session for analysts and investors. If you have any questions, -- please let us know. We are only taking questions in Japanese channel.
Thank you. This is Harada speaking. Two questions. First is in Energy. IRA Tax credit excluded the first half and second half profitability is something that we are looking at. It seems that it's worsening. So with the tax credit, it's about 13% flat. So I would like to know the background. Is it because of the higher investments.
Another second question is about the NAI. The growth is expected, you said. So Gen AI, I'm sure that there are a lot of activities going on. And the growth rate is shown here. And with this realized, probably the growth rate will be much higher. So the manufacturing capacity. Will there be any bottlenecks? 1.8x were mentioned, if it doubles or triples probably that's more likely. So if I'd like to know whether there is some impact expected.
In Energy, from the first half to second half, yes, it appears that way. But -- it is in the mass production started. And right now, we are in the verification phase with customers. So there is cost related to that and Kansas startup rather than start-up. We introduced the production line and operating it. And by the end of fiscal '25, we are working on that. So because of those development activities, that will be occurring in the second half.
So in terms of the balance between first half and second half, as said, the investments would be necessary. So because of that, the number looks that way. Related to the Generative AI, this growth is going to be big. But at the same time, the production capacity -- so for example, the automotive battery, we're making a lot of them, that's not something that we expect rather something that the customers evaluate is the storage battery in energy.
So for example, creating a module and the thermal capability and also the higher density module, the customers evaluate our products. So a number of the batteries is not so huge. And of course, we will respond to the needs of the customers, and we want to make sure that we can manufacture them, and that is always in our mind. As for the investments and the volume that is not really the case.
And in Industry, the electronics materials and the conductive polymer capacitors, they are growing. So necessary investments are being made. In Industry, the investment is increasing. I'm sure you can see that. So the batteries were unlike batteries, which we need to prepare several years before and started up. That is not the case for the automotive and also for the harsh environment, the thermal characteristics and so forth, we have been responding to that.
And that generative AI demand emerged. So we are responding to that. So we would like to make sure that we catch up with such growth -- and we believe that we can manage such increase.
Next, from Nomura Securities.
Nomura. My first question is on Slide 6. The second quarter results year-on-year, others and eliminations getting better I know that their intercompany and others. Can you elaborate on that? It was not really clear.
My second question is on Slide 33, the Blue Yonder indices rather strong recovery. So booking is strong. I understand about how sustainable is this. One network addition, is that pushing up the overall picture? Or is this attributable to the organic growth, which is it?
For others positive. There are 2 major items. One is inventory. This is a year-on-year comparison. So it's rather complicated. But in the previous year, inventory did not -- was -- did not go down much. So with increased inventory, there will be the intercompany profit, which will have to be eliminated. Whereas for this year, with the inventory control in place, for the intercompany profits.
The elimination of intercompany profits are being returned. And therefore, that is accounted for in the eliminations and adjustments. And that amount was quite sizable. And the other is the head office expenses reduction, which continues. And as a result, other eliminations and adjustments increased pretty strongly.
And the other question, Page 33, the Blue Yonder KPIs. So our 1 network has been consolidated as of August. So this 16% increase is not totally attributable to that, but our sales and marketing have been reinforced and we are already seeing effect of that in the second quarter. So compared to the previous growth rates, we see an improvement. And on top of that, 1 network enterprises was A+.
Going forward, towards Q3, the 1 network it's already part of the business in second quarter, and that will continue. Synergy will have to be incorporated. And the orders received by Blue Yonder to improve. We have that expectation. And therefore, SaaS/ARR towards Q3 expects even greater growth. That answers your question.
Next is SMBC.
This is Katsura speaking. About the battery and also operating cash flow I have questions. First, about the batteries. On Page 23 9.4 gigawatt hour, I think, was mentioned. So based on that, December time frame, about 10 gigawatt hour. So in that sense, toward next year, in Nevada, that will be the level that we can expect. I just wanted to confirm that. That's my first point.
And the second question is about the investments. In Kansas for I think that in energy, to say you're going to reach the peak level. And next year and onwards, when you consider free cash -- so for this year, first of all, with the IRA tax credit and also the 1 network cash out.
And also in Connect, there was a sale. So compared with the beginning of the fiscal year, there have been pluses and minuses. So could you talk about the operating cash flow this year and the next year?
Yes. IRA on Page 23 in Q1 and Q2, there is a lack of a strength, and we explained that -- this has to do with the production module of -- on the part of the customers. So it's starting up of the production. And we are starting seeing the start-up and the capacity that we have based on that right now, we are slowly operating. So from now on, we will award the full capacity utilization of 38.2 gigawatt hour is what we expect to reach.
In addition, the productivity improvement is something that we are always working on. So towards the second half, capacity will be increasing. So at the full utilization in the U.S., the factories which are operating, the capacity will slightly increase. So that will be the image that we have. So that's about a gigawatt hour.
And second point is about the free cash flow. So for this year, Kansas Hakama investments, we expected big investments. So free cash flow, we aim -- we want to aim for 0, but the operating cash flow we have seen the solid trend. But about -- there are some investments that we have already decided upon. So free cash flow probably will be negative. But we have not given up on reaching 0. Next year, rather than big buildings, introducing the facilities and equipment would be what we will be doing.
And in Blue Yonder, more than JPY 100 billion acquisition was what we did. But the major investments will not be happening next year. So because of these free cash flow will improve compared with this year. So that's what I can say, and that's the image that we have.
Next, from Citigroup.
Ezawa from Citigroup Global Markets Japan. Two questions. First, related to battery question. you talked about next year's free cash flow target of 0, you said for the battery business -- might not be able to talk about exact amount. But given the current full year, forecast for this year with CapEx and depreciation and operating profit expectations. I cannot imagine achieving 0 free cash flow in next year.
So what are the elements that give you the confidence that you can get close to or achieve 0 cash flow next fiscal year?
Achieving or targeting -- that is -- that was not for the battery business in Energy. I was talking about the entire Panasonic group on a consolidated basis. For the Battery business, with Kansas factory, not likely to start the full capacity operation until FY '27, and therefore, the battery business, FY '26 is when the facilities are built up. And therefore, for the battery business, the free cash flow would be in the negative territory. But the cash flow generated on a company-wide basis as well as the investments in as a net to we expect a better situation next year than this year. That was my intent.
My other question on a consolidated basis, your business results. In Q2, when you focus on July, September quarter. Compared to your forecast, what was the delta? During the first quarter, you said that it was not really spectacular in light of the original forecast and that indicated that you were lagging behind the full year forecast. Whereas this fiscal -- this quarter, Q2, got a different impression. So what changed in Q2 that made you sound more positive? And also, can you elaborate on the revised forecast. And compared to the revised forecast, as CFO -- where do you expect the upside opportunities as well as downside risks.
For July, September quarter objectively compared to the first quarter, we did make recovery to a certain extent. The positives or durative AI-related demand that I mentioned for industry and energy, they had a big impact in profitability. Generally speaking, is high in this particular business, and that was 1 driver. And in connection process automation for implementation of those. Again, this is a profitable, highly -- high profitability business. It had been suffering for quite some time.
But this quarter, it contributed to increased profit. The Chinese government is implementing various initiatives to stimulate the economy. And I think that's 1 factor. As for process. There are still some uncertainties. We can't say that it has recovered for sure. Maybe what we saw in the second quarter was very specific and maybe not sustainable.
So Generative AI, that's certain to grow continue to grow, and that's where I see the upside opportunities. And of course, we are looking at the latest situation to make their forecast. So on -- regarding the full year forecast, I expect each business to achieve the revised forecast. For Connect, the aircraft manufacturing OEM saw the worker walk out the strike, and that could have an impact.
So there are some uncertainties, making it very difficult to make very precise projection. Whereas in the industry and energy, -- the foreign exchange factor, I believe, would be positive to our profit -- so some are doing better than others. But overall, we believe that the current forecast is at the appropriate level. And that is the reason why we retained the original forecast.
Next, from Mizuho Securities.
Two questions, please. First, about Connect. Operating profit about JPY 5 billion or adjusted OP, I think you made a revision. And Blue Yonder 4.5 Could you give us the difference -- the breakdown, 4.5 and 0.5 -- and is it related to the customer demand, I think the demand is strong. So talking about the recent shipment and also the balance of the order, could you give us some numbers. That's my first question.
The second, Air-to-Water. Maybe you can give me further details. So inventory adjustment progressed and sell increase. Is that the case? Or towards the winter, the demand -- is it increasing more than the expectation. So in addition to the inventory adjustment, the higher demand, is that something that you are seeing?
Also by region, are there any as a background?
Yes. In Connect, the lower profit. The reason for that is avionics is the major factor. So -- the body has been much lower. So based on the current situation, we have made a downward revision, and that was unavoidable. Also, the project related. The demand of the Olympic has come to the end and also U.S. and Europe, the demand has been weakening. So that is weaker than what we expected originally.
Also Blue Yonder, of course, it is in the investment phase, including the restructuring costs and so forth. But mainly 1 network acquisition at that time. The cost for that acquisition in the original plan, we did not have that in our plan. So in terms of profit and loss, that is another factor, which shows this number. So about the process automation, the demand balance. In Q2, it was very strong. Q3 and Q4, lower demand is what we expect. I cannot give you the specific numbers, but maybe the level of the Q1, it will be about the same level, especially in China, the labor saving investment and so forth.
So we have already hit the bottom. So Q2 was strong, temporarily. In Q3 and Q4, we are not expecting a major decline, but not much recovery. So that's about Connect. The second point, Air-to-Water as I showed you a chart, the actual sales volume in Q1, yes, at the bottom, right? We seem to have hit the bottom in Q1. So Q2 every month is increasing. And most recently, the trend still continues.
So the inventory in transit increased or accumulated. So our production utilization rate at our factory was lower but the inventories with the adjustment of the inventories progressing, production from -- toward the Q4 Production activities will be ramping up. So that will contribute to the profitability. So last year in Q3, Q4, it went down. So in comparison, this year's Q3, Q4, it's not going to increase drastically, but the lower level of the previous year is not something that we expect.
By region or country, Of course, there is an impact of the tax credit for the subsidy or the subsidy. So subsidy progress and some changes and concerning the subsidy, our competitors and players -- other players also have strength and weaknesses depending on the countries. And we also have some strength in some countries where we have reached the bottom and high demand. Aside from the specific name of the country, we will be taking the necessary measures. So that moving away from the bottom level of the Air-to-Water. So that's what we are doing. Thank you.
Thank you very much. Now it is time to end today's briefing. Thank you very much for your participation. We now conclude the second quarter financial briefing.