Panasonic Holdings Corp

TSE:6752

Earnings Call Transcript 2018-Q3

[Hirokazu Umeda, executive]

Thank you very much for joining us today despite your very busy schedule. I'd like to now present the fiscal 2018 Q3 financial results.

First of all, let me give you the summary. Increase in both in sales and profit was achieved for the third quarter following the first half. Sales increases were driven by Automotive and by Industrial, which is making a shift to automotive and industrial related areas. Operating profit increased due mainly to stable growth in industrial.

For the full year forecast, sales will be revised upward. In addition, operating profit and profit before income taxes will be revised upward, mainly due to increased profit in industrial. Net profit will be revised upward by JPY 50 billion due to the increased pretax profit and improvements in income taxes and others. In line with this upward revision, our forecast of annual dividends will be JPY 30, which is JPY 5 higher than the previous year.

Let me now present the overview. This table shows the consolidated financial results for Q3. Sales increased by 9% year-on-year. Even in real terms, excluding the effect of exchange rates and new consolidations, sales increased for 5 quarters in a row and they continued on a growth path.

Operating profit increased by JPY 22.5 billion to JPY 120.1 billion. Profit before income taxes increased by JPY 21.3 billion to JPY 118.7 billion. Net profit increased by JPY 17.2 billion to JPY 81.2 billion. Results for the 9-month period will be given, as a reference, at the end of this presentation.

This graph shows our sales analysis by business based on the businesses whose sales are disclosed. For the third quarter as well, the Automotive continued to increase significantly due to the automotive infotainment systems and the new consolidation of Ficosa. In addition increased sales were contributed by Industrial, where Automotive and Industrial devices performed strongly, Energy with its growth in automotive batteries and Process Automation where sales of electronic components mounting equipment expanded.

Next, let's look at the new year-on-year changes in operating profit. As shown here, operating profit increased by JPY 25 billion, owing to steady sales growth. Following the first half, we felt an impact from price hikes of raw materials such as copper. However, to minimize this impact, we have promoted various efforts such as rationalization.

The increase in fixed costs was up -- kept to JPY 10.4 billion through carrying out reviews and strengthening management. However, we did make investments in growth businesses such as automotive-related businesses. Other income and loss improved due mainly to the revised provision for legal-related expenses. Overall, operating profit increased by JPY 22.5 billion.

This shows an analysis of year-on-year changes in operating profit for the businesses whose sales are disclosed. Looking at profit, air conditioner decreased due to the impact of price hikes of raw materials. Industrial showed a significant increase through profit improvements achieved in Device Solutions and others, in addition to profit growth in Electromechanical Control, which is one of the high-growth businesses. In addition to these improvements, profit increased in Process Automation, Automotive and Energy, in which businesses grew steadily.

This slide shows details of profit and loss from operating profit to net profit. This chart shows the results by segment. Sales and profit growth were achieved in all divisional companies. Details will be given in the following slides.

Let's start with the results of Appliances based on the consolidated production [ in ] sales. Sales in real terms, excluding the effect of exchange rates, stayed at the same level as last year. Sales showed stable growth in air conditioner, commercial refrigeration and food equipment and small and built-in appliance. However, sales decreased in major appliance, due mainly to adjustments in the distribution inventory in Japan and in AVC due mainly to weak sales in home entertainment in Japan.

Overall, operating profit increased due -- with the contribution of increased sales in commercial refrigeration and food equipment and with favorable sales of beauty appliances. These offset the impact from hikes in raw material costs mainly for the white goods such as air conditioners.

Next let's look at Eco Solutions. Sales increased by 4% year-on-year in real terms. In particular, in energy systems, sales increased significantly in step with the favorable electrical construction materials business in Japan and overseas. Profit generated from business decreased due to the price drops and material cost hikes. However, operating profit increased overall due to the rebound from the quality-related costs recorded in the previous year.

Next, Connected Solutions. Sales increased by 6% year-on-year on constant-currency basis. In Avionics, sales decreased as deliveries of in-flight entertainment systems were pushed out of this quarter. Sales increased in Process Automation due to favorable sales of electronic component mounting equipment mainly for the automotive and ICT industries. In mobile solutions, sales increased with the contributions from notebook PCs and payment terminals in Japan.

Operating profit increased significantly due mainly to sales expansion in Process Automation and improved model mix in media entertainment and revised provision for -- legal-related expenses.

In Automotive & Industrial Systems, sales increased by 15% year-on-year on a constant-currency basis. In Automotive, increased sales came from the growth of automotive infotainment systems and the new consolidation of Ficosa in addition to favorable sales of ADAS-related products such as cameras and sonars. Energy saw an increase in sales of both cylindrical and prismatic automotive batteries.

In industrial, sales increased driven by industrial use devices such as motors and FA sensors, in addition to devices for eco cars, such as film capacitors. For operating profit, profit generated from business saw a significant improvement with profit expansion of devices and increased sales of automotive batteries despite some amount of losses such as quality-related costs.

Now fiscal 2018 full year forecast. Sales will be revised upward by JPY 150 billion from the original forecast to JPY 7.95 trillion, mainly driven by automotive. Operating profit will be revised upward by JPY 15 billion to JPY 350 billion, with contributions from industrial and other businesses. Net profit will be revised upward by JPY 50 billion to JPY 210 billion due to increased profit before income taxes, improvements in income taxes and decreased noncontrolling interests.

This chart shows our analysis of the sales forecast revisions. Automotive saw sales expansion in automotive infotainment systems in Japan and the U.S. as well as stable growth in Ficosa. Industrial saw a significant sales expansion, mainly in electromechanical control through a shift to Automotive & Industrial related areas. In Process Automation, sales of electronic component mounting equipment for the ICT industry were higher than expected. For Energy, we factored in sales of automotive batteries in North America, being pushed out to future periods.

Next revisions of the operating profit forecast. Other income or loss improved by JPY 5 billion, due mainly to revised provision for legal-related expenses. Profit generated from business will be revised upward by JPY 10 billion, mainly driven by increased profit from the sales expansion in industrial. Profit growth in Industrial and other businesses offset the impact of short-term profit downturns in Automotive and Energy. As shown here, businesses with steady profit growth are to support our mid- and long-term automotive-related business strategies.

This chart shows improvements in operating profit from the previous year. Other income or loss is expected to improve by JPY 21.8 billion as a result of improvement efforts. Profit generated from business is expected to increase by JPY 51.4 billion. Steady growth can be seen in industrial, which is making a shift to different areas as well as in Automotive and in Energy, which are promoting further efforts as high-growth businesses.

This slide shows revisions by segment. For Appliances, sales will be revised upward. But operating profit will be revised downward due mainly to higher raw materials cost. For Connected Solutions, sales and operating profit will be revised upward due mainly to favorable situation in process automation. For Automotive & Industrial Systems, sales will be revised upward with the sales growth in automotive infotainment systems. However, operating profit will be revised downward in line with revisions to the sales plan for automotive batteries.

This slide shows revisions to the forecast for TV and 6 large-scale business divisions. Automotive infotainment system sales will be revised upward, but operating profit will be revised downward due to one-off losses and additional costs needed for the launching of the vertical takeoff of new products. We will continue to promote measures to normalize these operational issues.

Rechargeable battery will be revised downward for sales and operating profit, in line with revising the sales plan for the automotive battery business in North America. Sales for this fiscal year will be pushed back, but strong demand for automotive batteries continues in North America. For the next fiscal year and onward, we will continue to communicate closely with our customers and thus steadily produce and supply automotive batteries.

Last but not least, our annual dividends forecast. In line with the upward revision of net profit announced today, the forecast of this fiscal year's annual dividend will be JPY 30, JPY 5 higher than the previous year.

And that concludes my presentation. We ask for your continued support and understanding. Thank you.

[Yu Okazaki, analyst]

Okazaki from Nomura Securities. First question is about the forecast, January to March, about your thinking on the fourth quarter. There is a seasonality factor. And the -- usually, the profit level goes down in Q4. But with the structural change and others, what is your perspective on the Q4? And the next question is on the tax, the impact of the lower corporate tax in the United States. What would be the expected impact from this reduction of the tax rate in the United States in the following or in the coming quarters?

[Hirokazu Umeda, executive]

Thank you for your questions. As for Q4, last year, there were provisions related to nonoperating numbers which worsened. As we said, JPY 45 billion other expenses are already included. So we believe that we should be able to achieve the level that we expected. As for the operating profit, we are seeing a little lower profit. In solar business, for example, there are some challenging situations. So the risk of such business is included or considered. So Q4, I think that is our perspective for Q4. As for the U.S. tax rate -- tax reduction, there are 2 things, where it would be implemented in April and onward and also, there is an impact for this fiscal year. As for the impact in April to -- and onward due to the reduction of the corporate tax rate from 35% to 21%, there will be a positive impact since we generate profit in United States, so it would be beneficial for us. As for this fiscal year, one-off profit and loss. In our case, deferred tax asset and deferred tax debt in the United States are basically balanced in the United States. So due to that, we do not see any major loss. Maybe rather, we would expect some positive impact and that's already discounted or included in our forecast. Thank you.

[Masahiro Ono, analyst]

Ono from Morgan Stanley. I have 2 questions. First, related question on tax affairs. This year, after the revision, the revised guidance net profit has been increased quite a bit. So when we used a current effective tax rate, I think we'll be in the lower 30s percent. The assumption for this year was 42%, I think. So can you talk about the difference? You did talk about the impact of -- in the U.S. You said that's slightly positive. Can you talk about that? And for next fiscal year, I think the forecast was effective tax rate of 35%. To the extent possible, can you talk about next fiscal year as well in terms of the effective tax rate? That's my first question. Can I continue? My second question is this. Similarly, for the annual guidance-related question. Connected Solutions, I think, are doing very strongly, and Process Automation, I think, has been a contributor. What about the sustainability of that, of smartphones? And there's a final demand product, but what is your current view?

[Hirokazu Umeda, executive]

Thank you for your questions. Effective tax rates. Yes, you're right. For this corporate tax and others, JPY 135 billion for this year forecast. The income tax itself, JPY 118 billion is the current forecast. The difference, about JPY 17 billion or so, comes from the noncontrolling interests. So that will be about 34% to the revised net profit forecast, as you have correctly indicated. Now the impact of the U.S. tax revisions, that is factored in, but in addition, I can't say where exactly, but there are some countries in which the transfer pricing issue have been discussed. And over JPY 10 billion, as a result of the resolution of such negotiations, are factored in. So those are the things that were not included in the original guidance, and they have favorably impacted the effective tax rate. For next fiscal year, 35% is your forecast. So it will be around 35% when we exclude those one-off effects. But business strategies are being developed as we speak. So of course, it will depend on how big the profit is going to be. So 35%, the benchmark, for the time being, we don't believe it's going to be changed from the current 35%. Your second question, the Connected Solutions, C&S. The Process Automation was a big contributor for ICT industry and investments. There are differences in the industry, of course, but we believe that this will be sustained. And media entertainment is another area that was strong. The high-brightness projector, especially for the opening ceremony for Olympics, could be used. And so sales for those applications are increasing, which contributed to increased revenue and increased profit. And in mobile solutions, as I stated in my presentation, especially for the Japanese market, are personal computers. With the work style reform and others, more people are working at home. So the flexibility in where you work, in that respect, we have very good personal computers with a long battery life, which is well appreciated. And the terminals, the payment terminals are increasing in Japan as well in terms of sales. So as a trend, we do not expect this -- the momentum be lost all of a sudden next year. So we believe that this could be sustained.

[Kota Ezawa, analyst]

Ezawa from Citigroup Securities. I have 2 questions about the Gigafactory. We understand that there has been delay. And what is your prospect? Could you give us update? Or we believe that it was an image of 3-month delay, but I think it's longer than that now. So what is your forecast, including the January, March time frame? And also, how much capital investments were made, was not disclosed in detail. So what is the breakeven point? We are not sure, so next fiscal year, whether this business would drive the profit or not. Will you consider that question? What would be the availability rate and with -- what kind of demand you would reach the breakeven point, if you have kind of an image on that? Second question, it's a bit too early, but JPY 450 billion, operating profit target for the next fiscal year, you made upward revision of JPY 350 billion, so you need JPY 100 billion more. It seems that's a quite a high hurdle. So if you feel confident in achieving that, which business do you think will grow so that you can get to the JPY 100 billion more to achieve your target?

[Hirokazu Umeda, executive]

Thank you for your questions about the Gigafactory, the Model 3, the finished car, the prospect. Tesla, based upon their announcement, we understand the current situation at the end of March, 2,500 per week, and at the end of June, 5,000 per week. So a 6-month delay compared with the original plan. So based on that, we have those numbers. So whether how -- to what extent this would drive our profit? When you consider that question, the Model 3 in United States, how much impact do we have for this fiscal year? So if you turn to Page 19 about the rechargeable battery, you see that the JPY 45 billion difference and also JPY 12 billion in terms of the operating profit is a downward revision. So for the Model 3, what was the impact from Model 3, both for sales and the profit? The impact was double of those numbers. That is to say that in terms of profit from -- this was actually the actual decline compared with the year before. As for the rechargeable battery business as a whole, the sales was quite difficult. But as for profit, profit has been increasing. The Model 3 was delayed but Model S, X and other prismatic batteries and also the power system related batteries, for example, the electrical motors and the grass mowing machinery and so forth, the profitability is improving for those products. So the impact in United States was offset by about 50% as our overall rechargeable battery business. So to what extent or -- would this business become the driver? It's very difficult to come up with that kind of forecast based on the number of -- the production of the Tesla cars. And ultimately, the 31 gigawatt is the capacity of the gigawatt -- Gigafactory. So right now, the variability is not, of course, high. So our understanding, it needs to reach 10%, not the 5%. So when that facility operates fully and of course, that we should be able to reach that kind of profitability. So for next year, based upon the assumption that we still have a deficit in the United States, but there is no question that the number of cars would increase. So that will be the improvement that we can expect. And in relation to that, I would like to ask your -- answer to your second question what about the JPY 450 billion, JPY 100 billion more in addition to JPY 350 billion. My personal view is that if the Model 3 started up as planned, and if the infotainment did not have any downward revision and if it was JPY 350 billion, then JPY 450 billion would have been very difficult to achieve. I think on one of the pages on my presentation material, on Page 16, so JPY 15 billion upward revision was made to the operating profit this time. So Automotive was down but -- and Energy went down. So compared with the original forecast, in other businesses, actually, the performance was better than expected, but we expected higher results in Automotive and Energy. But still, we ended at JPY 350 billion and we expect JPY 450 billion. So to what extent can we improve those pink or the red part and how can we increase the blue part? So by offsetting the decline of Automotive and Energy with other businesses, we reach this JPY 350 billion. So that means that we achieved this level in an even better way. So are we confident in achieving JPY 450 billion? I think we are starting to feel that it's likely to be achieved, but it's not an easy number, easy target to try to achieve JPY 450 billion. So that is our current feeling. Sorry to be lengthy.

[Kota Ezawa, analyst]

As for your revision battery, you mentioned the Gigafactory's impact was twice as large as those numbers on Page 19. So that means that JPY 19 billion and JPY 24 billion, that is the impact of the Gigafactory based on the sales and the operating profit?

[Hirokazu Umeda, executive]

Yes. In that -- it's not wrong. That is basically correct.

[Kota Ezawa, analyst]

You mentioned that not all the equipments and facilities are actually working right now. So right now, you do not have that depreciation based on the 35 gigawatt. So with the increase of the production, the capital -- the capacity would increase and ultimately, we'll reach 35 gigawatt and depreciation would increase accordingly. About the next year, you mentioned that Gigafactory will improve at production. So that means that the downward revision was JPY 24 billion. Does that mean that it will be the profit or do you think that it's likely to breakeven? Or do you expect an even larger profit?

[Hirokazu Umeda, executive]

The profit from the Gigafactory in the next fiscal year, that is not something that I can discuss today. But a JPY 24 billion deficit, the red figure is, of course, is the decline in profit and we would like to recover from that. We expected the ramp up and of course, that we need to make the investment. But this is a big deficit and this is due to the fact that the production is not increasing as expected, and we believe that red figure can be minimized from now on.

[Mika Nishimura, analyst]

Nishimura from Crédit Suisse. I have 2 questions. My first question, about the full year forecast assumptions, the materials cost and fixed cost increases. What revisions have you made to these 2 costs? My second question, about the automotive infotainment systems. At the last meeting, you said that many things are being launched at the same time and therefore, efficiency was bad and therefore, profitability was not as high as you had expected. How much recovery have you made in the third quarter? Now sales figures are strong, so can we expect a big growth to continue into the next fiscal year?

[Hirokazu Umeda, executive]

Originally, the higher materials cost, JPY 18 billion difference compared to last year. At the last meeting or maybe at the first quarter earnings briefing, we said that the amount was expected to be about JPY 40 billion. And now we are expecting over JPY 50 billion impact for the full year. In the meantime, about JPY 100 billion fixed cost was expected as investments. But in accordance with those changes in environment, we want to control the fixed costs. And so about the corresponding amount, cost -- fixed cost increase is being controlled, AIS mainly is the fixed cost that is assigned. And as for the automotive infotainment systems, the very quick launch is what I talked about in the second quarter earnings briefing. During the third quarter, although not to the same extent, but mainly in Mexico, we did see some concentration of productions. So we did see some loss associated with that. In the fourth quarter, we expect significant improvement. In the meantime, this is not Mexico, but sales are increasing rapidly. And so generally speaking, condenser and capacitors, those electric components, electronic component, is becoming very difficult -- the procurement is getting tougher, so B2B deliveries are very strict. So for the airlifting -- or we are seeing some loss associated with having to airlift or use our airlines for the delivery to make up for the deliveries. And for fiscal 2019, we are making efforts so that we can make up for those losses.

[Kenji Yasui, analyst]

Yasui from UBS Securities. I have 2 questions about the recent performance, the January to March. Other segment, it seems that it's minus JPY 40 billion. Last year, you changed to IFRS and changed the segments. So last year, there was an impairment loss. So last year, it was minus JPY 40 billion. So the breakdown of that minus JPY 40 billion, and for this year, you also have also minus JPY 40 billion. So could you give us some of the details? That's my first question. The second question is on the batteries. Fourth quarter sales number is JPY 122.6 billion and you have higher profit and achieving that profit level, I would like to just clarify that.

[Hirokazu Umeda, executive]

The -- as for the second question, I'm sorry, I did not understand your second question.

[Kenji Yasui, analyst]

The January to March, the rechargeable battery sales number and the operating profit plan. If I calculate those, you assume that you will be profitable in January to March. So JPY 4.3 billion profit and Q-on-Q, sales is up by JPY 15 billion. So in terms of the profit, JPY 5 billion to JPY 6 billion increase. So with the changes of the expenses, you are likely to achieve the profit in 3 months. So could you probably explain about the differences of the expenses or the costs?

[Hirokazu Umeda, executive]

Thank you for questions about the rechargeable batteries. Yes, for U.S., on a daily basis, we are seeing the ramp ups, that is a fact. So -- and the chart looks as though that the rechargeable battery is not doing good. But in comparison to last year, the sales and profit are up. In absolute numbers, for the year, we still have some deficit remaining, the profit from the business. So especially the Q4, the battery business itself, the sales is on the increase so we made a downward revision. So I do not think that those numbers are difficult to achieve. That's my answer to the rechargeable.

[Kenji Yasui, analyst]

As for the expenses, is there any changes that caused structural changes and so forth? And you think that we should expect in January, March time frame?

[Hirokazu Umeda, executive]

Well, U.S. utilization rate, it's very low, so depreciation continues to incur.

[Kenji Yasui, analyst]

So as the production increases, is it 0 or profitable?

[Hirokazu Umeda, executive]

It's either, and there has been the major loss of the sales and profit, which would be recovered. So it's quite different from the regular, the usual increase of the business. It would be a very rapid increase. As for the fourth quarter last year, the other profit, JPY 70 billion was the number for last year, JPY 70 billion in loss. And this year, it is more than JPY 30 billion loss. So for the full year, JPY 45 billion other loss.

[Kenji Yasui, analyst]

No. I'm talking about the other businesses, especially the depreciation, elimination, rather.

[Hirokazu Umeda, executive]

I think you're talking about the difference of the IFRS, but if you -- the elimination, the increase from last year, I cannot disclose the number, but we are celebrating the centenary. So there would be some extra costs to celebrate that, that is included into this number. Also, in Silicon Valley, some new efforts are being promoted, for example, something down by BABA is one of the things, and we include some of the fixed costs from that. So that is the additional cost that we expect compared with last year.