Panasonic Holdings Corporation (6752.T) Earnings Call Transcript & Summary

Thank you very much for joining us today despite your very busy schedule. I am Tsuga, CEO of Panasonic Corporation. I'd like to share with you the Panasonic's transformation for sustainable growth. The company came to a conclusion to make a major transformation to pursue further sustainable growth with the long-term vision based on the current midterm plan. Let me explain that outline. First of all, this is a review. Those are the major points of our midterm strategy announced in May 2019. First, to execute each business strategy toward profit growth and profitability improvement based on the 3 business classifications of core growth, co-creation and revitalization. Second, to thoroughly enhance our management structure which involves reducing fixed costs and taking measures to businesses with loss-making structures. Through these initiatives, we aim to overcome our low-profit structure as well as to become a company that achieves lifestyle updates and generate new contributions to society. This shows the current progress of the major points. In terms of executing portfolio management, while our business performance has been partially impacted by COVID-19, we have steadily made progress in formulating and executing business strategies for each business classification. Regarding the EBITDA margin of core growth business, while COVID-19 has had some impact on our market conditions, by excluding this impact, we are expecting EBITDA margin to increase year-on-year and become close to the 10% target we set for midterm strategy. We're also seeing progress in specific initiatives for the Spatial Solutions business. We created new value through promoting the integration of air conditioning and indoor air quality businesses, mainly in China. Panasonic is gaining stronger market presence. For the Gemba process business, targeting SCM area as a growth area, we made 20% strategic investment in Blue Yonder. And in terms of thorough enhancement of management structure, we have steadily reduced cost, mainly fixed cost. The progress at the first half exceeds that of the initial target, including the measures to businesses with loss-making structures. Going forward, we will continue with our utmost efforts in enhancing management structure toward the profit contribution of JPY 100 billion in FY '22. Following this progress in the current medium-term strategy, the company aims to achieve sustainable growth through speedy countermeasures to environmental changes and further enhancement of business competitiveness. Based on this, we will carry out a major transformation in the group's basic structure. Let me explain the details. In proceeding with this midterm strategy, I am now confident that the business areas consisting -- constituting our pillars of the future can be found mainly in the classification of core growth businesses. Our next task is to thoroughly enhance the business competitiveness of those areas and draw a picture that allows us to develop sustainably. To accomplish this, it is necessary to build an organizational structure that enables individual businesses to operate with a sense of speed, always take up challenges aggressively and enhance their own competitiveness. In addition, it is crucially important to further energize the business' Gemba or operating front lines by reviewing various systems such as development of new systems and considering the kind of roles that indirect functions should play. Furthermore, from the group-wide perspective, we aim to achieve stronger growth as a group. This includes defining the next growth areas while improving our flexibility to handle changes in the business environment. Therefore, we have made a decision to drastically reshape the company. To be specific, the company will reorganize its current company system comprised with 7 divisional companies. And in April 2022, we will transition to a holding company system. By focusing on specific business areas, positioning the best-in-class level of expertise will make further contributions to society and our customers with a sharpened competitive edge that are unmatched by our competitors. In other words, we will become specialized and sharpened, which is essential to enhancing our business competitiveness. Through this organizational change, we will accelerate the move in becoming specialized and sharpened in each business by drastically increasing empowerment to the operating companies for thorough autonomous management, and the holding company will actively support each business becoming specialized and sharpened as well as swiftly and accurately implementing growth strategy from the group-wide perspective, including defining, creating growth areas and making investments. By doing this, we will set up a structure that enables us to enhance the corporate value of the entire group. This chart shows the outline of the new structure. First, upon transition to the holding company system, the corporate name of the current Panasonic Corporation will be changed to Panasonic Holdings Corporation. The name Panasonic Corporation will be succeeded to a newly established operational company, as shown on the left, based upon current Appliances Company and Life Solutions company. Under the new Panasonic Corporation, we aim to exert significant synergy effect and comprehensive strengths mainly with Spatial Solutions business, classified as one of the core growth business, including taking up challenges in white goods as well as consumer electronics and residential space in China. And we will pursue value creation that is unique to Panasonic, bringing better health to the mind and body by staying close to people. Also Gemba Process business and Industrial Solutions business, which are also classified as core growth business, will be incorporated as operational companies. Furthermore, regarding the automotive battery business, for prismatic, we established a joint venture with Toyota Motor Corporation. For cylindrical, profitability has improved in our business for Tesla. The direction for our next challenge is becoming clear. Combining the nonautomotive battery business, the energy business will be incorporated as an operating company. We'll steadily grow this business by reclassifying it to core growth business. These 4 operational companies will play the central role for the development of the group going forward. For businesses such as automotive and housing businesses, we will refine sound competitiveness as individual operating companies to overcome current issues as well as clarifying their own growth path. In this way, they will contribute to raise corporate value of the Panasonic group. Panasonic Holdings Corporation, the parent holding company, and the newly established company in charge of professional services, will be supporting each operating company's aim to enhance competitiveness in their respective areas. The holding company will support each operating company's growth strategy to become more specialized and sharpened and enhance competitiveness from a functional aspect. In addition, it will formulate and execute the group-wide growth strategy to realize higher corporate value from a group-wide perspective. The aim of the professional services corporation is to become an organization of experts, being highly efficient and providing high added value by visualizing and continuously revising the value provided by indirect functions. In terms of the system, the following reforms will be made. First, to promote specializing and sharpening of each business, we'll broadly increase empowerment to operating companies for speedy decision-making. At the same time, we'll clarify the responsibility on results for those in management responsibilities as well as enhanced corporate governance to improve quality of decision-making through clearer accountability. And we will optimize cost structure by flexibly introducing various systems including personnel systems suitable to the environment each business operates in. That will enhance competitiveness required to address each industry. Regarding the multi-layers and overlaps at indirect functions, in line with changes, we will simplify the indirect functions by establishing a separate corporation for professional services. Through this, we aim to achieve further management efficiency and contribute largely to the competitiveness of the operating companies. Now I will explain which direction our growth strategy will drive us under the new structure based upon the 4 core growth businesses. These are the 3 major areas where Panasonic aim to make contributions. We expect significant market growth for the future in these 3 areas. On the left, the area closely related to people as our DNA. Here, the new Panasonic Corporation will play a major role to take up the challenge to provide value through lifestyle updates. Concerning the COVID-19 circumstances and further aging of society, the possibilities to offer contributions in this area will expand much further. In this area, we aim to be unique and unmatched to offer a contribution in air conditioning and indoor air quality, leveraging synergy between appliances and Life Solutions, which means former Matsushita Electric Industrial and Matsushita Electric Works. In the center, the area to address issues at the Gemba or operational front lines, such as manufacturing, logistics and distribution. Here, we aim to bring greater innovation to the processes at the Gemba by combining strengths of our manufacturing expertise and digital technology. This business is about getting involved in the Gemba of our corporate customers who face various issues and offering them solutions. By doing this, we can greatly contribute to transforming their management. I have a strong feeling that our business opportunities are expanding already, and we can expect long-term growth. Finally, on the right is the area related to supporting the foundation for the development of society from the electric-electronics perspective, mainly with our device and energy businesses. Without evolution in these technologies, communication infrastructure, such as 5G, batteries for mobility, digitalization and green society cannot be materialized. We'll ensure to capture the ever-increasing important business opportunities by value-enhancing technologies and manufacturing capabilities as well as establishing presence. In the area of people and electric/electronics, we'll further pursue our strengths. Between them is the area of addressing issues at the Gemba where we will expand new businesses. This is our idea of approaching growth and contributions as the Panasonic group. What we are aiming for with this transition to a new structure is, first, achieving sustainable growth in a highly profitable business structure with the 4 businesses serving as our future pillars. This will be done through specializing and sharpening along with increased competitiveness of all our businesses. Second is making Panasonic a brand that shares values with the society. Under the new structure, the Panasonic brand will become an ever more important asset that connects the entire group. We want to share values with our customers and society and continue to generate new value with them. By doing this, we want to further evolve the brand and the company itself. The raison d'être for Panasonic is always to contribute to the society, and this will never change. Thus, we view this reorganization is a necessary process for us to fulfill our reason of existence during an age of radical changes. Under autonomous management, we will thoroughly refine the specialization at each business area as well as staying close to and making further contributions to people's lives and society. This is how the Panasonic group will continue to develop as a group of valuable businesses that is indispensable for the development of the society. I would like to ask for your continued support to Panasonic. I thank you very much for your kind attention.

This is Okazaki from Nomura. So now you also announced a new CEO. And I think that Tsuga-san has continued a very healthy and constructive dialogue with us. So we appreciate that very much. Two questions about the Panasonic Holdings. Under the Panasonic Holdings, what is the purpose of establishing Panasonic Corporation? So Panasonic Industrial and Panasonic Electric Works were combined, and you would expect to have a synergy? It's been a long time since those 2 companies were combined, but maybe there was something that you could not achieve. So what are the challenges? And under this new organization, what do you intend to achieve? Second question is about energy. This time, the batteries is now upgraded to the core growth. So what are the changes that you experienced in a year? And why did you make this decision? And the investments for the battery business, could you give us any update on that?

Thank you for your questions. First, about the new Panasonic. As I said, the core business, that is the home appliance of Panasonic Industrial, Matsushita Electric Industrial and also Matsushita Electric Works, have lighting, wiring equipment and also the food refrigeration and including [ hazmat ]. So under this new Panasonic, it took time, but finally, they are combined, and we are now determined to do so. Why did it take so long? When I became the President, the -- Panasonic was too big. So the challenges of each business. As for the nonprofitable business, we conducted the structural reform. So that's what we did. But as a whole, how can we manage this big Panasonic? That's what we were thinking about. And the business division system and 4 company system -- the company system was introduced. So dividing the businesses is how I try to manage the big company. So those 4 businesses, as for now, has been divided into 7. And at that time, the electric appliance business, the [ PE ] company and also the Electric Works, that is [ AS ] company. It was -- those were too big to be combined, the appliance and [ AS ] business. So to manage them in the small-sized units was not something that we could do. But for example, the directors of the Matsushita Electric Works come into the headquarters. And by doing so, we try to maximize the capability of Matsushita Electric Works. And also, we have promoted the exchange of the personnel. So we reduced the sense of resistance among people. And by doing so, for the first time, the housing will be coming out of it. And Smart Life, that is AVC business, is now out of this. So now we have smarter or more compact. And now finally, we can combine those 2. So we have been taking time to do this. So I hope that's how you understand it. So we have taken a long time. So based on our feelings, I think that people are more positive about this combination, and we are ready to do so. Concerning your question about energy, now in terms of automotive business, this was changed from the revitalization to the core growth business. Simply, when we had the losses, we could not call it a core business -- core growth business. So investments for Tesla, is it possible for us to continue? Or for the prismatic battery, can we continue to invest? So there are a lot of anxieties. So because of that, within the automotive, that was considered to be revitalization business and to improve the profitability and the prismatic, we started the joint venture with Toyota. And by doing this, I think that the time has matured, and we now consider that this automotive business should be the core growth. So we have divided into this automotive business and now is in the core growth business. So we no longer use the revitalization for automotive business, but we will continue to make efforts so we are still in the process of doing this. And under new CEO, Kusumi-san is currently working on this. So that's how we made this decision. I hope those answer your question.

Mr. Ezawa from the Citi Global Markets, Japan.

I'm Ezawa from Citi Global Markets Japan. One of the challenges is -- for you is speed and executing what you said you have -- you will do. When you become a holding company or establish a holding company, then you'll be increasing the speed, as Mr. Tsuga said. And you said for that, you'll be increasing empowerment. So including passing on to the next generation, more specifically, the increasing empowerment for increasing speed, what are you going to empower? It may not be easy, but can you be more specific as to what you're going to do to increase empowerment? That's my first question. Secondly, in the presentation material, with the blue and white boxes, you are showing clearly that housing, Smart Life, automotive and other group companies are going to be split out of the group. Can you clearly show the direction? And if that is not the case, then what does that mean? Can you explain more specifically? And by classifying by different colors, the time required according to Mr. Tsuga, how long do you think this has to be done? For example, Hitachi, they said that they will be doing this in 3 years. So what is your time frame?

Thank you. First of all, speed and exercising what we said we would do were the challenges you say. You're right. Now what is it that we are not able to have increased speed? Firstly, if you accelerate, then there's a problem. And then you have no other choice but to brake -- to put your foot on the brake pedal. So it's not the case that we have not pressed the accelerating pedal. But if you accelerate too much, if you increase the speed too much, which may undermine profitability, for example, automotive business. Hence, in the past, we -- it's not that we were not focusing upon increasing speed. However, if you increase speed, then risk is also going to increase. Who is going to take the ownership or the responsibility for the risks? The organization for responsibilities of the result were not clear. Where does that come from? This all boils down to big Panasonic. And there's a slogan we say, growth value, innovation, taking advantage of the strengths of Panasonic. We are going to increase value for the customers. With growth value, we are still sending this message. If you look too much horizontally, then the vertical access becomes weak. And if you try to be smooth in the horizontal manner, and resources were shifted, for example, exchange of human resources, which was fine as a vehicle, Panasonic, but the speed, the vertical access was slower. And then if there are 10 businesses, then making decision from 1 business, other remaining 9 companies also participating in the decision-making, does that increase the speed? No, speed will be slower. So expertise for making decisions need to be enhanced. Then we can have both the speed and depth. Then in what area can we do that? If we remain as a big Panasonic, we are not able to do that. So it has taken time, it is true. But we are able to see better, and it is more focused, therefore, speed and exercising what we said we will do are being done. Therefore, it's become easier to increase the empowerment. And depending upon how we are going to structure, but we will be increasing empowerment. With speed, risk will increase. So not just expertise, but other areas of governance will have to be taken into consideration carefully. With regards to your second question, white boxes, where will these businesses go was your question. One option would be for them to go to somewhere. But rather than that, as I mentioned, for example, housing, how to take synergy, horizontally, we have been paying attention to synergy. But the housing, where does it -- this continue? And what is the profit situation was not visible at the beginning. It wasn't really a business division to speak of. But we have the manufacturing, sales and development integrated and moving this to head office, areas in [ AP ] with these businesses. We can see the inflow and outflow, including money. It became visible. Automobile, it was used -- part of the [ AS ]. But it's -- as an automotive, it became more visualized, including losses, Smart Life Network as well. Next President, Mr. Kusumi, when he was engaged in TV business, he visualized the business. So it has to be made visible. But making that visible does not mean the business will go outside the company, but inside. Competitiveness of the business needs to be enhanced. Everything hinges upon increasing competitiveness. If partnership is needed, and something new might be done, in which case, we will consider a partnership, and it should be done on a voluntary basis by the business operating company. So top-down, Panasonic Holdings is coming up with such idea is not the objective of doing this. And the time horizon, at an early stage, enhance competitiveness early unless we can -- if we're not able to do that, we have to increase profitability first. And we have to make clear, revitalization area and increasing profitability, these need to be done in a short time horizon.

Nakane-san of Mizuho Securities.

And I hope you'll continue for next 5 months. Two questions. So this time, you become the holdings company. And I'm sure that you cannot talk about everything. But as an image, what kind of size of the head counts are you thinking of? And also expenses or costs, what kind of costs should we expect for the next fiscal year? Usually, holding company should be thin and the other businesses thicker. So could you talk about what we should expect? Second question is about before starting the medium-term business plan, management plan, you mentioned that under revitalization, the automotive batteries and automotive solutions are under here. So it's been 18 months since that time. So what could you achieve? And what could you not achieve? Or what do you expect to achieve? And how do you pass it on to Kusumi-san? As much as you can discuss.

Well, the first question probably can be better answered by Katayama-san, who is with me here. I can talk about generally, but as for specific head count, I cannot talk about that. But with this reorganization, the major purpose is with this Panasonic Corporation to make sure that there is a good synergy. And second is the operating companies can become more specialized and sharpened to create those companies as a specialized company and also to have a more competitive flat indirect section. So those are the purposes.

So Nakane-san asked about the Holdings Corporation and the new Panasonic Corporation. So there will be a very thin layered companies, both of them. So this time, this will be 2 tiered. As Ezawa-san asked, it's also related to speed. In 2003, we introduced the domain system. And at that time, the number of the domains and also underneath there we had BUs. One domain had about 10 BUs. And then Mr. Tsuga, we introduced company system, 4 companies and about 50 areas. So one company had about 10 different businesses. And this time, under Panasonic Corporation, we have companies, and those are close to business domains or business companies. So 9 companies, 1 company or 1 operating company would have 3 different businesses. So it will be more focused areas of the businesses each company is responsible for. So they can become more competitive and indirect cost can be reduced. So based on that, we'd like to come up with the optimum size of the head count. So in that sense, we want to create a slim or flat and less layered companies as possible.

As for the second question, the automotive business is now moved from the revitalization to core growth. Now there is Automotive Solutions and batteries business. So let me talk about each about the Automotive Solutions. There was an explosion of developments. That is to say that how do we solve this development problem. That was the biggest challenge that we were faced with. Second is the -- how can we focus more based on the regions? For example, what do we do about Europe? That was the biggest challenge that we had. So concerning those, Kusumi-san has come up with a very clear policy. And business processes have been changed. And the way of development, I think, to change that, it would take time. But including the direction, I want to make sure that we can generate profit. And now it's in sight. So in that sense, major change is happening. But one thing, the recharger or charging system, this is going to be a kind of a lingering issue. So we are currently taking measures. But as of now, that is still remaining. As for batteries, 1.5 years ago, Tesla, we did not know what would happen to them and also about prismatic. The discussion with Toyota was progressing, but we were not sure how this would end. There a lot of anxieties. So we wanted to accelerate, but we could not do it in both of them. as for Tesla, it's not just the efforts made by Japan. But also locally, there were a lot of efforts made. So with the COVID-19, the Japanese people cannot travel, but the local people try to start the switch to the new line that was accomplished. So now the people with the visa from Japan, we can dispatch people. For the high energy density battery, we are switching to that. And the profitability should improve with this. So in that sense, in 18 months, batteries are -- the environment surrounding the battery business has changed. As for the cylindrical -- this was mainly for the PC, but now the servers for [ GAFA ], for backups, I think they are choosing our batteries. So that has been pushing up our profit. So totally, I think that we are seeing major improvements. So those are the changes that we saw in the past 18 months or so.

Nishimura from Crédit Suisse Securities.

Nishimura from Crédit Suisse Securities. My first question, in terms of specialization and -- specializing and sharpening, you are going to compete against dedicated companies. You have a strong product and each business division was autonomous. But what will change going forward? And related to that, human resources, the change of the human resources and strengthening and training of human resources, I would like to hear your policy on that. Second question, batteries. There have been discussion about batteries going forward. Tesla will enter into phase for contributing to profit. In the long run, for Tesla business, there are competitors, and it has produced manufacturers as well. Is there a possibility for you to change the options? What are the possible options that you're envisaging? These are my questions.

Of course. We are at the phase to determine, so I have -- the details, so I am going to just give you a general idea. Dedicate -- competing against dedicated manufacturers, that is required in almost all the areas. For instance, maybe in the Consumer Electronics business in Panasonic Corporation, it is mostly specialized companies that we are competing against. So the companies with comprehensive capabilities are rare. But the capabilities are needed to compete against the specialized companies. So at Panasonic Corporations, we should be focusing upon the areas where we can compete. So that's going to be subjected to specialization and sharpening. But comprehensive powers and synergies are important in terms of geography and sales. We have to look at that. In that sense, we have to take advantage on our comprehensive capabilities. But for example, device and energy in these areas, we -- it used to be a part some of the components, Matsushita Electronic Components, for example. But Matsushita Electronic Components, then we became big Matsushita and device business of Matsushita Electric Works and Sanyo as well. And we became a part of bigger Panasonic. So media -- mass media come up with the announcement of the competitiveness of parts companies. And the name of Panasonic is not on the list any longer, which is unfortunate. So our positioning needs to be clear and we have to increase our position. That is called for. But in spite of that, under the umbrella of Panasonic, using -- taking advantage of the brand of Panasonic, if people are complacent, that is a big mistake. So we dared to make this decision. With regards to human resources, there are success cases that is [ PSSJ ], and solution company under CNS, and they're recruiting by themselves. But in some cases, more excellent people than people in Panasonic are working, and their performance is getting better every year. So such --success cases are such that the extent of human resources are attracted and younger people as well. So in total, I think this is the right way to go. With regards to batteries, Tesla business. And although it is 49%, the business [ versus ] Toyota, we are focusing upon both of these areas. But the question is mainly in relation to Tesla, 4680 is cylindrical new battery. They -- Tesla made an estimate that they will be producing in-house such batteries. But it is not something that Tesla can do by themselves alone. For example, CATL is trying to do it, but CATL has never done cylindrical batteries. [ Audi ] is doing cylindrical, but they are mainly pouch type. So if that is the case, the one with the greatest know-how in cylindrical is us. Then we have -- they had a strong partnership with us. And for them to think about 4680 as the mainstay, without a strong partnership, it is not viable. Hence, their announcement we take as positive. And we started the development of 4680. And specifically at what timing -- what kind of investment are we going to make is yet to be decided. But on our side, the business of 2170 and 1865, we are going to generate profit. And we'll be making development and investment for new 4680. But in the longer term, Tesla, we don't know. They are -- in what way we can go with them, we do not know yet.