Panasonic Holdings Corp
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Panasonic Holdings Corp
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Ladies and gentlemen, thank you very much for joining us today despite your very busy schedule. I'd like to now present fiscal 2019 Q3 financial results.
This is the highlight of the financial results. The overall sales increased through a significant growth of automotive battery business in Automotive & Industrial Systems as well as Steady Housing Business in Eco Solutions. Overall operating profit decreased due mainly to decreased Avionics sales in Connected Solutions, along with sluggish sales of AVC and devices in Appliances.
For the full year forecast, sales, operating profit and profit before income taxes are revised downward based on the current business conditions. Net profit forecast is unchanged, anticipating improvements in income taxes and others.
First, let me present the fiscal 2019 Q3 financial results. This table shows the Q3 consolidated financial results. Sales increased by JPY 20.5 billion to JPY $2,074.8 billion. Operating profit decreased by JPY 22.5 billion to JPY 97.6 billion. And net profit decreased by JPY 21.1 billion to JPY 60.1 billion.
Next, let's look at the results by segment. For Appliances and Connected Solutions, sales and operating profit decreased. For Eco Solutions, sales and operating profit increased. For Automotive & Industrial Systems, sales increased. Operating profit also increased with improved other income and loss. I would explain the details around the next slide.
Now let's look at the results for the appliances based on the consolidated production and sales. Sales decreased by 1% year-on-year in real terms, excluding ForEx impact. In Air-Conditioners, sales increased due to steady sales in Japan, mainly large-sized air-conditioners. In Commercial Refrigeration & Food Equipment, sales increased with steady orders in North America. Sales decreased in small and built-in appliances and AVCs, such as TVs. Devices for air-conditioners were impacted by weakening market conditions in China, leading to sales decrease for the segment. Overall operating profit decreased due to the impact of higher market-related costs for major appliance and AVC in addition to lower sales in small and built-in appliance and devices.
Next, let's look at Eco Solutions. Sales increased by 8% year-on-year in real terms, excluding ForEx impact. Sales by Panasonic Homes increased due to favorable orders in new construction and greatly expanded sales in ready-built housing business. The new consolidation also contributed to an overall sales increase in the segment. Operating profit increased due to higher sales, mainly at Panasonic Homes, and strengthened rationalization initiatives, offsetting impacts, such as lower prices in lighting.
Next is Connected Solutions. Sales decreased by 4% year-on-year in real terms, excluding ForEx impact. In Process Automation, sales increased due to the continuously strong sales of mounting machines for automotive and device-related industries as well as welding equipment for the automotive industry. Sales decreased in Avionics and Media Entertainment, which was affected by lower sales of production cameras, and in Mobile Solutions with the impact of last year's large-scale orders. Operating profit decreased due mainly to the impact of last year's reversal of provisions in addition to lower sales in Avionics and Media Entertainment.
Finally, let's look at Automotive & Industrial Systems. Sales increased by 6% year-on-year in real terms, excluding the ForEx impact. Operating profit increased by JPY 1.9 billion year-on-year. As a result, both overall sales and profit increased for the segment. In Automotive, sales increased in infotainment systems for Japanese and North American customers as well as in cameras, sonars and charging systems. However, operating profit decreased due mainly to impairment loss in capitalized development expenses for some of the European projects despite the rebound from the quality-related costs recorded in the previous year. In Energy, sales significantly increased for automotive batteries, especially cylindrical types. Operating profit increased due mainly to initiatives to control fixed costs and improve operations as well as revised provision for legal expenses despite ramp-up expenses made for the automotive battery factory in North America. In Industrial, both the sales and operating profit in Electromechanical Control significantly decreased due mainly to decreased sales of motors impacted by weaker capital investment demand in Japan due to the trade friction between U.S. and China.
Now I will explain the fiscal '19 full year forecast. In light of the current business conditions, we made the following revisions to the previous full year forecast announced on October 31. Sales revised downward by JPY 200 billion. Overall operating profit revised downward by JPY 40 billion, reflecting profit generated from business despite improvement in other income or loss by JPY 45 billion. Profit before income taxes revised downward by JPY 35 billion. However, net profit forecast remains unchanged, anticipating improvements in income taxes and others.
This table shows the details of revised figures in each segment. I will explain the details from the next slide. First, Appliances. Both sales and operating profit forecasts are revised downward, reflecting further market-related costs needed to address the struggles faced by refrigerator and TV sales due to aggressive pricing by competitors. Also reflected are decreased sales of consumer electronics and devices for China on the back of an economic slowdown. Going forward, we will take the following countermeasures: for Air-Conditioner, we will enhance the line-up of high value-added products; for white goods, which includes refrigerators, we will control inventory at optimum levels in addition to enhancing product competitiveness and cost reduction; for TV, we will accelerate the shift to high value-added models aiming for improved profitability.
Next, Automotive & Industrial Systems. For all businesses whose sales are disclosed, both sales and operating profit forecasts are revised downward. This slide shows revisions for Automotive. Sales forecast is revised downward due to the slowdown in China's auto sales. Operating profit forecast is significantly revised downward. We have factored in such impacts as this from impairment loss in capitalized development expenses for some of the projects in Europe and from temporary expenses for quality-related issues regarding a customer in North America. We will continue to strengthen our global development management system, in particular for our business in Europe. Now facing challenges, we aim to improve profitability by promoting initiatives such as a review of our project management system.
Next, Energy. The following are factored into the revised sales forecast. For Cylindrical, production at the automotive battery factory is pushed back. For Prismatic, there is weakening demand for eco cars. Adding other factors such as difference in presentation due to lease accounting, overall sales forecast is revised downward. Operating profit is revised downward due to decreased profit, in-line with revision of sales forecast, more-than-expected delay in improving operational losses at the factory in North America and other factors. For cylindrical batteries, we aim to reach stable utilization at our factory in North America by enhancing operational capabilities. For prismatic batteries, we aim to strengthen our business structure in order to supply competitive batteries to a wide range of car manufacturers as we have recently announced.
Lastly, Industrial. Both sales and operating profit forecasts are revised downward due to a rapid slowdown of capital investment demand on the back of weakening market conditions in China as well as larger losses from decreased sales, particularly motors. For motor business, we will prepare for a further deterioration of the China market by lowering dependency on smartphone applications and on China as well as taking initiatives to enhance profitability.
That concludes my presentation. Based on the current business conditions, company-wide forecasts have been revised. To address the remaining issues of low profitable businesses, we will continue to thoroughly implement initiatives toward improving profitability, and we will strengthen our business portfolio management to enhance profitability on a company-wide basis.
Thank you for your kind attention.
Nishimura from Crédit Suisse Securities. First question, you made a revision for the full year forecast concerning the operating profit. There is a temporary or one-off expenses included or other revenues were higher than expected. So when you look at the -- in real terms -- I'd like to check on the real-term trend. The temporary expenses will not be repeated in the following year. So we believe that there are some positive factors and negative factors pushing up or pushing down the profit. So I would like to know the risk factors. That's my first question. The second question is in relation to the revisions. The worsening market conditions in China was mentioned in your presentation. So to what extent that is incorporated in the forecast? Could you talk about each different business domain?
Thank you for your questions. Well, for the full year operating profit, the temporary expenses, it's difficult to talk about the real terms. But the operating profit after the adjustment, what are the factors that we considered. The major part is the one-off impairment loss and also the China demand, the quick decline and also the tariff-related issue in North America -- or in United States, rather, and also the disasters such as typhoon and earthquakes in Osaka and Hokkaido. We do consider all of those factors. And this is really the hypothetical question, but the operating profit that I just meant is actually at 4% level, and probably those factors that I mentioned account for about 1% of the 4%. So what would happen to those factors next year? The China-related factors started to see worsening since October time frame. So if it continues for full year, the China factor, what would happen to that is difficult to say, but all of those items or factors that I mentioned, when you look at all of them, probably that was the impact, but it's really up to which one to pick. And as for the temporary or one-off expenses, you asked about them. The major one is in 1 -- first quarter, the gain on sales and something that was -- that's not relate -- included in the financial statement, that is the transfer to the defined contribution system, that is about JPY 84.9-or-so billion and also other income and losses included.
And those factors will not be repeated next year, but what about the others?
We are in different businesses and promoting different businesses, so it's very difficult to say. Now worsening of the Chinese market conditions. In Q2, the impact of more than JPY 10 billion was mentioned. And November-December time frame, we started to see higher impact or bigger impact, actually, more than double. So quick changes in China is affecting the worsening profit and revenue. And especially in AIS, the industry business, the Electromechanical Control, the motors, especially, the motors for the equipments and facility that is decelerating. In the Automotive, the Chinese cars -- car sales is declining quickly. So that is also another factor. So AIS has had the major impact. The next is Appliance. In Appliance, home electronics business was also affected. So Air-Conditioner -- for the air-conditioner manufacturers, we sell compressors and other devices, and this business is also declining quickly. And it is said that about -- there are JPY 40 million inventories in the distribution. So those are the reductions that we are seeing on the part of the customers.
One follow-up question. In relation to the first question, the temporary expenses, the impairment loss in Automotive and also the cost for the North America, there are some -- could you talk -- point out some of the expense items?
You are asking how much for each item? So those -- some of the factors will push up the profit next year. So in Automotive, the temporary impairment loss and also in relation to the tariffs in infotainment, something that we manufactured in China, was shifted to Mexico and also the substrate or the circuit board that is something to be manufactured in Mexico. So there is a reduction in production in China. And also lower demand on the part of the customers are being observed from November time frame. So how long is that going to continue is difficult to say, but it's not probably going to recover very easily. That is our view. So in terms of the amount or number for each item, I'm afraid that I won't be able to give you those numbers.
Next person, please. Yes, I see a hand over there.
Katsura from SMBC Nikko Securities. I have 2 questions as well. Slide 15. This is a follow-up to the earlier question, question for clarification. This table, and I'm looking at Page 2 of the supplementary materials. As per revisions, the impairment in capitalized development expenses and quality issue in North America were mentioned. What happened in Europe? I think -- I'm wondering if this was a new development since the second quarter. And quality and environment, I think, are different. So can you talk about the size of the impact? And depreciation, amortization and R&D, I think you have changed the figures quite a bit for AIS. So are they related as well? The projects that are ongoing are being delayed and, therefore, you're not seeing the project costs. Can you elaborate on these factors? My second question. During the second quarter earnings briefing, you said that inventory is increasing, but it is kept under control. But there is a rapid decline now. I think it was a little over JPY 1 trillion, the inventory level. How are we to look at the breakdown of that? You are a big company and so when you make a revision, I think, a rapid slowdown in China would have a major impact. And starting this year, I think it has further slowed down from November-December. So can you talk about the impact?
Page 15, the impairment of the capitalized development expenses. I think this is not a familiar term, so let me explain what we mean by that. This is limited to European region. In the infotainment area, when orders are received, in about 3 years' time deliveries begin. So right after the orders were received, we do the development. IFRS stipulates that the incurring of the development expenses and the sales recognition need to be in sync. So the development assets are to be amortized after 3 years of the start of the -- amortized or depreciated in 3 years' time. Now the projects in Europe entail lots of software development with lots of development expenses. And when you take a closer look, we find that when development expenses are increasing, they are weighing on, on the profit, and we decided not to be optimistic. So assets that we originally were thinking of starting to depreciate in 3 years were depreciated altogether this time around, and that is the impairment loss. So in the second quarter, development expenses increased. And for the third quarter, this increase is due to depreciation of the development expenses incurred in the past. Now for the quality issue, I think this table should give you a size overall. This is for a customer in North America. The quality-related cost was incurred, but this is one-off expense. And AIS capital expenditure, investment and depreciation, Yoshitomi-san can talk about that. So let me talk about inventory. JPY 1.1 trillion inventory. By the trend, it's increasing for 3 reasons. First, up to the end of the third quarter, JPY 200 billion sales increase, I think, entails operating -- working capital increase. The second factor, although the situation is changing more recently, but in the electronics area, there is pressure and so we made a strategic inventory increase. And the third is what you referred to, in China, since around November, there was a major slow down, and the production adjustment and sourcing adjustment were not made appropriately. In the fourth quarter, of course, we consider this to be a major management challenge and, therefore, we will work hard to reduce inventory level.
Can you talk about AIS?
North America AIS battery production for Tesla. The investment amount. The scheme ensures a full recovery. So on IFRS basis, it will be treated as the risk accounting on the lessor side, which means that facility's depreciation will be suspended, and those nonrecurring depreciation are treated differently. And depreciation has been revised downward starting this period, JPY 32 billion in AIS, not all, but the majority, are related to depreciation. Initially, [ when we made ] the announcement, we were showing on a regular depreciation basis, but now that the depreciation has been suspended, we made the disclosure based on the IFRS. But in the lease accounting, the profit is being accounted for, so the lower depreciation does not directly impact the profit figures.
Thank you. Next question, the gentleman in the middle.
Ezawa from Citigroup Securities. I have 2 questions. About the downward revisions. This time, the operating profit after the adjustment, the reason why it was lower than your plan? And also, could you talk about the factor in relation to the third quarter and the fourth quarter concerning the downward revision?
So quarterly -- to talk about the plans quarterly is quite difficult to do. As for the impact, the impact is higher or bigger in the fourth quarter. And the downward revision that we made, first of all, is in AP and AIS. Those 2 are the companies. CNS and ES, we have not changed the forecast. So because of that, those factors include the business in China, which has started to decline quickly that will continue -- is likely to continue in the fourth quarter. Especially Industrial, the impact is actually -- almost all of them is in relation to the Electromechanical Control and infotainment in Appliance also is the same. So rather than the third quarter, the impact is bigger in the fourth quarter. Those are the reasons behind the downward revision. And in Q2, we -- it was pointed out that the operating profit forecast is too high for the Q3 and Q4, and that actually happened.
Okay. Eco Solutions and CNS, October-December time frame, it was same as expectation and full year forecast were not changed for those 2 companies.
Yes, that is the correct understanding. Concerning CNS, there are major decline in sales and profit, but from the beginning of the New Year, the construction of the major project was also mentioned, and there were some adjustments, and this decline was actually expected from the beginning of the fiscal year.
Another question, the overall downward revision. I have another question. Now in the real terms, operating profit that is down by JPY 85 billion, and at the time of the Q2, you mentioned JPY 50 billion. And in comparison to the number at the beginning of the year, it is downward revision of about JPY 100 billion. So the Chinese factor and U.S. tax factor, you pointed out those factors. Now as -- if you look at the technology companies in Japan, this major -- there are not so many companies who actually revised downward so much. So maybe you should have done something at the mid-term, maybe something that you could have done to avoid this up to the second quarter. Actually, it changes everything. The original forecast was very much changed. The numbers are quite different. So other income and loss are actually supporting, but how you are managing the forecast of each business? Why did you not manage to have a good forecast? If you look at overall technology industry, you made the major downward revision. And could you explain the background behind that? And could you tell us how you will be able to make improvements?
Well, it is true that we had the factors which goes beyond expectations. For example, Appliance and AIS. Starting with Appliance, until now, in the past several years, we have been growing steadily, but market in Japan, we started to see the changes in environment. For example, the OEM manufacturers are present in the mass merchandisers, and also the competitive environment is becoming more severe. And the cost competitiveness probably is the reason, and we fully -- we are fully aware of that. So that means that we were not well aware of that factor. And also, in Asia and India and South America, we are also struggling. Competitive environment in those countries have become more difficult so that we could not catch up with it. So we need to enhance those markets as well as to shift to the high-end products and strengthening e-commerce in China and also strengthening the large-sized air-conditioning business by -- through the investments. Those are the things that we need to do so that we are -- we believe that this is regrettable that we have to make this type of a downward revision. And same happened in AIS. We disclosed 3 major businesses in AIS. Concerning industry, the environment in China had a major impact on this. What we do is that the smartphone dependence and also dependence on China, we would like to move away from such dependence. So the major reason was not due to our products themselves. But in Automotive Infotainment, the major downward revision for that, now this is related to the digitization and software. We were wrong in making growth forecast, and it's not just showing the smartphone in the display, but we have to link with the smartphone. That was something that we did not have much experiences in, and we could not get a lot of orders. And in Japan, we do not have any problems or in North America -- the United States -- but the problem is in Europe alone. So we are trying to manage that. So this is an operational error or mistake based upon our initial plan. Now about Energy. This year happens to be the year to start up the production quickly. So there was a delay in making improvements, and we sent a lot of Japanese employees to handle that quick ramp-up of the production. So that led to a lot of losses. So we struggled with this quick ramp-up of the production. Especially in Energy business, the difference or the change is a very major change. So as a result, that had the major impact on our financial results numbers. That's all. Thank you.
Next person. Yes, gentleman over there.
Ono from Morgan Stanley. I have 1 question. The downward revisions, there are many factors, China being a big factor. We came from outside. As analysts, we're wondering at what timing you can have the structure to counter that. Can you explain that to the extent possible? The new medium-term management plan, I think, will start this year. And at the start of that new plan, there are many uncertainties in China. So for 2020 -- fiscal 2020, how much uncertainty do you foresee in China? So in terms of proactive measures for fiscal 2020, what do you plan to do? Of course, I'm aware that details have yet to be worked out, but what are the areas that you are looking into? And what's your view on the background, that is, the macro economy in China?
The China implication. Yes, I think we are feeling that. The economic situation in China is beyond our control. So we will have to be more conservative in our projection. For fiscal 2020, we are currently working on our plan as we speak. Area where we have yet to work on is what to do about the project -- or the businesses -- low-profitability businesses. When environment -- business environment is deteriorating, that impact is felt even stronger, and we believe that fiscal 2020 would be the year where we would squarely address that issue. Internally, we are stressing that and the capital earnings capability to be thoroughly pursued. These are the major thrust in fiscal 2020.
Any other questions? The gentleman in the first row.
At this time, you mentioned that one of the factors was the impairment loss in capitalized development expenses. How do you see the risks for the future other than this impairment loss?
Now this impairment loss in capitalized development expenses happened in Europe, and this is in the area of the infotainment. Other than that, we did not see the major loss in Europe. So we do not expect a major risk there. Aside from them, we apply this accounting method, that is IVI in -- for Japan. And this business, starting with this fiscal year, we are starting to see the good forecast, and we are starting to see the gradual recovery. And we are getting the good forecast. So one of the purpose of the IFRS is that -- to make sure that we have a good balance in terms of the capitalized development expenses. So that's what we expect to happen.
About the net profit this time, the JPY 250 billion is kept unchanged. So you mentioned improvement of your corporate income tax. So why is that? And in the coming fiscal year, it seems that the bottom line must be higher.
The reason why we kept it unchanged is that due to the change of the capital structure, the consolidated tax and so forth, we can expect a good impact. And this capital structure change is something that we foresee in the Q4. So the business corporate tax will be lower. And that's what we mean by the improvement of the income tax.
We're getting closer to the [close time], so I'm afraid the next question will be the last question. I see a hand over there.
Nakane from Mizuho Securities. I have 2 questions. First, on Automotive. Towards fiscal 2020, in relation to this situation in Europe, changing the order receipt and production, I think you're going to change that system. What will be the impact on the sales projection for next fiscal year as a result? And my second question is a follow-up to what Ono-san asked earlier. We're in February now, and yet you say that there are many uncertainties. Are you going to really announce your next medium-term management plan? Or would you not be hesitant to postpone the announcement so as to have a more refined portfolio? Or are you going to keep the schedule? The ROC, return on capital, was mentioned earlier. What kind of revisions do you plan to do? I'm thinking about portfolio revisions or revisiting the portfolio to shift the crisis to opportunities. What kind of discussions are you having internally? Sorry for this rather qualitative question.
The figures for fiscal 2020, including Automotive, we can't really say. But for IVI in fiscal '22 to '23, we expect growth. So display audio, I don't think we should be too pessimistic, given IVI. So that's the qualitative feel that we have about Automotive. I'm afraid that's all we can talk about Automotive business. Of course, many of the initiatives will be implemented to reform -- restructure the business. Now are we going to announce our new medium-term management plan? It has yet to be completed, but we are working on it. If we postpone the announcement, does it mean we will have a better sense on figures? Not necessarily, and the state that we are in today, as many people point out, when are we going to address the low-profitability business? That is the question. Business alliance and capital efficiency, there are -- unfortunately or fortunately, there are many things that we need to address. And it's not that we are going to be addressing those because we anticipate even difficult time during the next medium-term management plan. No, we have always considered these to be the major issues, the low-profitability business, what to do about them. So it's not a question of whether we are going to announce the plan on schedule or not. Thank you.