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

Thank you very much. Let me now start the presentation on the business results as well as forecast. First, this is a summary slide. In FY '21, the results exceeded the revised forecast presented at the Q3 results announcement. Despite lower overall sales due to COVID-19 impact, along with the deconsolidation impact in business portfolio reform, adjusted operating profit increased with steady progress in enhancement of the management structure and contributions from increased sales of businesses capturing opportunities of changes in society. In Q1, both sales and profit were down. Q2 turned to an increase in profit, and second half achieved increases in both sales and profit. Operating profit and net profit decreased due mainly to impact of onetime gains in other income and loss in FY '20. Free cash flow significantly improved due mainly to business transfer and sales of assets, along with operating cash flow. Net cash turned positive even when including lease liabilities. As for the consolidated financial forecast for FY '22, both sales and profit are expected to increase with economic recovery in various countries and continuous initiatives in management structure enhancement. Profit is expected to increase in all segments. In the final year of the mid-term strategy, Panasonic will steadily promote initiatives to overcome the low-profitability structure and strengthen efforts to capture business opportunities from mid- to long-term perspective based on our capital allocation policy. Next, let me explain the details. This shows consolidated financial results. Overall sales decreased to JPY 6.6988 trillion due to COVID-19 impact along with deconsolidation impact in business portfolio reform. Adjusted operating profit increased due to enhancement of management structure and contributions from increased sales of businesses capturing opportunities of change in society. Operating profit and net profit decreased due mainly to impact of onetime gains in other income and loss in FY '20. This is the sales analysis. Overall sales decreased by JPY 791.8 billion, down 11%. Sales in real terms excluding such impacts of deconsolidation decreased by JPY 390.2 billion, 5%, due to COVID-19, mainly in Connected Solutions, while sales increased in such businesses as home appliances. Next is the operating profit analysis. Regarding management structure enhancements set in the medium-term strategy, we made profit contributions of JPY 60 billion with fixed cost reduction and JPY 30 billion with measures to businesses with loss-making structures. In addition, the effect from businesses with higher sales such as home appliances contributed to overall profit growth of -- by JPY 49.2 billion. On the other hand, negative COVID-19 impact was JPY 135 billion in FY '21. Adjusted operating profit increased by JPY 20.5 billion. Overall operating profit decreased by JPY 35.2 billion due mainly to lower other income and loss, impacted by gains from business transfer in FY '20. This shows adjusted operating profit analysis by business. Full year profit increased by JPY 98.4 billion with businesses capturing opportunities of changes in society from mid- to long-term perspective. These positive factors contributed to higher company-wide profit offsetting the decrease in Avionics business which was largely impacted by COVID-19. In particular, profit increased in air-conditioning, indoor air quality, home appliances and Automotive Batteries. Also profit increased in systems, devices of Industrial Solutions; and Process Automation. Next is trends in our sales. Upper graph shows sales in real terms compared to FY '20. The lower graph shows adjusted operating profit. In Q1, sales and profit decreased significantly, mainly in Automotive and Connected Solutions, due to COVID-19. In Q2, company-wide profit turned to an increase due to a -- recovered sales mainly in Automotive and Appliances. In the second half, increases in both sales and profit were achieved company-wide, with Appliances, Industrial Solutions and Automotive exceeding the level of FY '20. In FY '21, sales decreased in the first half due to COVID-19, but in the second half, it exceeded the level of FY '20 and continued on the recovery trend. Next is results by segment. Adjusted operating profit achieved profitability in all segments for the full year after turning profitable in all segments in Q3. I will explain the details in the next slide. This show sales and profit analysis by segment. In Appliances, sales decreased overall, significantly affected by lower sales of Smart Life Network due to the impact of streamlined product lines, while stable sales continued for home appliances. Profit increased due to higher sales of home appliances, along with cost control efforts in each business. In Life Solutions, both sales and profit decreased. This is due to the impact of market deterioration as well as deconsolidation of housing business, while sales of air quality-related businesses were favorable. And thorough efforts to reduce fixed costs were made. In Connected Solutions, sales and profit significantly decreased but achieved profitability for the full year. Strong sales of mounting machines, reflecting 5G-related demand, could not offset the decreased sales of Avionics business. In Automotive, sales decreased. Recovered sales from Q2 onward could not offset the significant impact of reduced production of automobiles mainly in Q1. Profit increased due mainly to reduce fixed costs and material rationalization despite the impact of decreased sales and temporary expenses. In Automotive Solutions, overall profitability was achieved for the full year after turning profitable in Q2. In Industrial Solutions, sales decreased due mainly to the impact from transfer of semiconductor business, while sales of products for data centers and FA usage were favorable, along with automotive-use products showing the recovery in the second half. Profit increased due mainly to increased sales, including capacitors, power storage system and industrial-use motors, along with the effect of structural reform of the semiconductor business and other factors. Next is the free cash flow and cash positions. We generated over JPY 600 billion free cash flow mainly through transfer of business and sale of assets, in addition to operating cash flow. The graph on the right describes the cash positions. Gross cash and net cash largely improved through free cash flow generation. Net cash turned positive even when including lease liabilities. Now let me explain the consolidated financial forecast for FY '22. This slide shows the consolidated financial forecasts for FY '22. Both sales and profit are expected to increase due to economic recovery in various countries and increased sales of businesses capturing opportunities reflecting changes in society and continued initiatives in management structure enhancement. Sales is expected to increase by JPY 301.2 billion to JPY 7,000 billion. Adjusted operating profit is expected to increase by JPY 82.8 billion to JPY 390 billion. Operating profit is expected to increase to JPY 330 billion, net profit expected to increase to JPY 210 billion. ROE is expected at around 8%. So this is our analysis of the FY '22 operating profit forecast. Adjusted operating profit is expected to increase by JPY 82.8 billion, of which JPY 70 billion is expected from the effect of increased sales, including Automotive Solutions; and systems, devices. We expect JPY 20 billion of contributions to increased profit from management structure enhancement set and mid-term strategy. Considering current circumstances, we anticipate various risks such as price hikes for raw materials. We will make efforts to offset negative effects through management structure enhancement and rationalizations. Other income, loss is expected to decrease by JPY 11.4 billion. This is mainly from the impact of onetime gain in FY '21. Accordingly, operating profit is expected to increase by JPY 71.4 billion. Forecast by segments are shown on the slide. Sales of Appliances is expected to remain at the previous year's levels, while sales of all other segments are expected to increase. Profit is expected to increase in all segments. Profit is expected to continue increasing in Appliances, Automotive and Industrial Solutions. Profit is expected to turn to an increase in Life Solutions and Connected Solutions in FY '22 after decreased profits in FY '21. This slide shows our FY '22 forecast by segment. Appliance sales is expected to remain at the previous year's level due to slow demand recovery in Japan related to Commercial Refrigeration & Food Equipment, while growth is expected in areas such as air-conditioning. Profit is expected to increase with increased sales of stable businesses and management structure enhancement despite the impact of raw material price hike. In Life Solutions, sales and profit are expected to increase with growth in overseas wiring devices, air quality and housing businesses, along with rationalization efforts. In Connected Solutions, sales and profit are expected to increase with growth expected in businesses as Panasonic System Solutions Japan and thorough efforts to control fixed costs. In Avionics, decreased demand is expected to persist but with some recovery from FY '21 level. In Automotive, sales and profits are expected to increase due mainly to recovery of the automobile market, starting operation of the new production line for cylindrical batteries in North America, management structure enhancement and material rationalization. In Industrial Solutions, sales and profit are expected to increase with increased sales of automotive-use products and multilayer circuit board materials and others as well as fixed cost reduction measures. Now the mid-term strategy. During the current mid-term strategy started in FY '20, with the aim to overcome our low-profitability structure, we have made steady progress in promoting business portfolio reform, along with management structure enhancement. As on this slide, we expect to improve profitability in FY '22, following '21, even with exchange -- even with changes in the management environment. In the final year of the mid-term strategy, we will continue to promote our efforts in these key initiatives, aiming for further improvement of profitability. Details will be explained in the next slide. In terms of management structure enhancements set in mid-term strategy, we made significant progress in fixed cost reductions, achieving the mid-term target of JPY 100 billion in FY '21 ahead of schedule. In addition, we will aim for further profit contributions of JPY 20 billion in FY '22. In terms of taking measures to businesses with loss-making structures, we already set the directions for semiconductor, LCD panel and solar businesses. TV business has turned profitable in FY '21. We are working on reorganizing manufacturing sites, and we are in negotiations toward comprehensive collaborations with external partners. In business portfolio reform, we have reached an agreement to acquire all shares of Blue Yonder, a global leader specialized in supply chain software as an investment for growth. In automotive battery business, we are making steady progress in increasing production capacity. To improve profitability, we made decisions including share transfers of our lighting device business in Europe and North America. We are promoting portfolio reform in individual businesses from the perspectives of region and product. In terms of profitability improvement of the Automotive business, this segment turned profitable in FY '21 after a loss of JPY 30.5 billion in FY '20. In FY '22, JPY 50 billion of profit is expected. Profitability has been significantly improved through fixed cost reduction, improved productivity, material rationalization and other measures. Next, I will explain our mid-term capital allocation policy. In the current mid-term strategy, which started in FY '20, we carried out capital allocation activities based on our policy to allocate necessary cash with cash flow generated from business. However, to capture growth opportunities, we respond flexibly when investment opportunities arise before sufficient cash flow is generated from business. Panasonic recently announced the acquisition of all shares of Blue Yonder. This is indeed an example of capturing a growth opportunity. Total acquisition value is expected to be approximately JPY 750 billion, a large-scale investment. However, the framework of our capital allocation policy remains unchanged. The details of cash flow generation and allocation are as follows. Cash flow generation allocation for the 2 years for FY '20 and FY '21 are shown up left of this slide. Cash flow generation was a total of approximately JPY 2.2 trillion, including reduced lease liabilities from portfolio optimization. On the other hand, cash flow allocation was a total of approximately JPY 1.2 trillion, including investments, dividends, restructuring expenses and others. As a result, we have approximately JPY 1 trillion of excess funds after using the necessary capital for investment and others. The forecast for FY '22 is shown on the right. The acquisition of Blue Yonder will be made within the framework of our capital allocation and complementing capital with such means as hybrid financing. With regards to investment, we will execute in a well-focused manner according to business conditions, such as capturing growth opportunities. At the same time, we will continue to promote cash flow generation. Finally, Panasonic's initiatives toward growth from mid- to long-term perspective. Triggered by COVID-19, change in society are accelerating in various business areas. The raison d'etre for Panasonic is to offer solutions to social issues through its business activities under such circumstances. In the left-hand top, the area of lifestyle in Appliances and Life Solutions. In response to increasing demand such as air-conditioning and indoor air quality, we are strongly communicating the value of our core devices, in particular nanoe and Ziaino. We aim for further penetration of the related products through deeper understanding of our technological capabilities and value among consumers. With regard to the right-hand side, the Gemba Process in Connected Solutions. We are facing a number of issues in the area of supply chain such as extreme fluctuation in demand caused by COVID-19 and greater burdens on logistics. Panasonic aims to accelerate its growth strategy together with Blue Yonder and offer solutions to our customers' management issues. At the same time, we will strengthen our own operational capabilities as well as contribute toward a sustainable society through reduction of energy consumption and using resources efficiently. In the area of fine processing, to respond to expanding demand of ICT-related equipment, we will continue to expand production capacity as well as introduction of new models of [ welding ] machines. In the left bottom, in the area of Automotive Batteries in Automotive. To respond to the expanding EV demand related to climate change and to contribute to a sustainable society, we will continue to expand production capacity in North America factory and maximize use of Japan factory. On the right-hand-side bottom. In the area of devices in Industrial Solutions, we will particularly focus on 3 core businesses which we regard as high-growth areas such as CASE in the automotive industry, information and communication infrastructure and labor saving at factories. We will make preparations for the future and expand our investment. With the initiatives mentioned, we will continue to strengthen our businesses by thoroughly enhancing competitiveness and concentrate management resources on areas where we should focus on. This slide shows our plan schedule for IR activities in FY '22 and FY '23. On May 27, we will host a CEO briefing. In October 2021, our current company system will transition to a virtual structure based on the new organization. Therefore, we plan to disclose financial results based on the new reportable segments from the FY '22 Q3 announcement. As for other IR events, we will host briefings on individual businesses and ESG-related topics. In April 2022, we will transition to the holding company system. Following this, around May 2022, we plan to announce our medium- to long-term strategy under the new structure. Then we plan to host an IR day and present detailed strategies on how each operating company will strive to become specialized and sharpened. Thank you very much for your kind attention.

Thank you, Mr. Umeda.

Now we take questions. Mr. Katsura from SMBC Nikko Securities.

Can you hear me? This is Katsura speaking.

Yes.

Two questions, please. First, on Slide 18. Cash allocation is explained. For the fiscal '21, in Q4, I think the appendix 5 of your presentation, JPY 194.8 billion, that is quite big, positive. And sale of the assets. What were the major ones? Also on Page 18, on the right-hand side, cash flow generation, the -- from the business and the asset sales. In terms of the size, what are the expected cash flow generation? If you can share with us some details. My second question is on Slide 13. There is a profit -- operating profit analysis, the rationalization and raw material price hikes. The offsetting the raw material price hikes with rationalization, I think this is a net number. So what were the gross forecast or expectation? The background of the question is that, in 2016 or '17, the raw material price hikes, hundreds of billions, were incurred. So could you tell us, what is the current status?

Thank you for your questions. First, about the free cash flow. The investment cash flow is usually negative, but here this is the major positive figure. There are 2 major types. One is the portfolio replacement, and because of this, the cash in was recorded. And also, for the gross holding of the shares for the policy purposes, we always review this. So that was also reviewed. So as for the individual names, I cannot disclose this at this moment, but that's the breakdown of the cash flow allocation, '22, fiscal '22, the operating cash flow and the basis of the free cash flow. The fiscal '21 that is the double of the net income or more is usually the level of the free cash flow. So exceeding that level, that comes from the replacement and so forth. As for '22, the free cash flow. Now the double of the net income or net profit were exceeding that level. That is a free cash flow level that we expect. Asset replacement and so forth, I cannot make any additional comments, but usually that is the situation that we have. So that's my answer to your first question. And FY '22 operating profit analysis. It is true that the rationalization and raw materials, minus JPY 1.2 trillion, is shown here. As you know, the raw material prices are at a very high level. Copper, for example -- we use a lot of copper. The copper price in futures, $10,000 per tonne, that is the current level. And the impact from that is actually more than JPY 50 billion that is already incorporated. And through the rationalization and also other management efforts, well, we can almost offset that. And that is included here.

Let's go to our next question. From Citigroup Securities, Ezawa-san, please.

This is Ezawa from Citigroup Securities.

We hear you very clear.

I have 2 questions. I am referring to Page 14 for the slide. This is the by-segment forecast. And it is about CNS and it is related to the financial result. In Q4, for financial result, the other income and losses, it was around 22 -- minus JPY 22.4 billion. I would like to know the contents of this negative. And in Q4, about JPY 22.4 billion is already there. There is minus JPY 1.2 billion of negative, and so further the minus for the other income and losses. Why is it occurring? That is my first question. Second is about Automotive business. In the new fiscal year, for the other plan, you said that you're going to be creating JPY 50 billion for profit. However, it is utilizing half of your profit. And so why is it that it is becoming the half of what you are going to be creating? And for the joint venture for the prismatic battery, what is going to be the impact based on the consolidated profit? And how is it going to be impacting your financial result because it is also run on equity-based method?

Thank you very much for your questions. The Q4 for CNS and for other income and loss, it is JPY 22 billion recorded. This is coming from the Avionics businesses. The demand for Avionics beyond border is slow in resumption. Regarding Avionics business itself, we have been working on various merger and acquisition to grow the business, and the goodwill impairment has happened temporarily. That is coming from CNS in Q4 and was incurred in the size of JPY 22 billion for other income and loss. That is the answer for the first question. And for second questions. So you mentioned, why? We have already said the direction. And regarding ITC Global, which was already announced, the actual deal is going to be finished at the end of April. Therefore, financial result is going to come in fiscal year 2023. And so I would like you to understand in that level. So that was related to CNS. And the second issue, about Automotive and for other income and loss, you said there is still JPY 22 billion. And we have been mentioning from the past that the prismatic battery business is still under the investment phase. Because of that, the equity method portion is including this part. Currently we are now making investment for capital -- or production increase. Therefore, we're going to be having to wait in order to harvest the result. And this is included now in the others and increase in loss. I would like you to understand in that way.

From Nomura Securities, we have Mr. Okazaki.

This is Okazaki of Nomura Securities. Can you hear me?

Yes.

First question is about your concept on cost. The SG&A trend, if you look at the quarterly trend, in Q4, Q-on-Q and Y-o-Y, cost is increasing. January to March, there were one-off items. Is that the case? I would like to clarify. And also, fiscal '22, the SG&A and costs, what are your views? My second question is on you are enhancing the management structure and I have a question on that. And because of the pandemic -- and also there are some measures that you have taken even before the pandemic. And now that you will be handling the -- your responsibility to the next management team -- and for Mr. Tsuga: What was the level of the achievement at the end of your term? And what are your expectations for the next CEO and President?

As for the SG&A, there is a seasonality, and we usually look at it annually. In addition, in comparison to the previous year, last year, there was some impact from COVID-19, but this year, we have done well. So SG&A or preparing for SG&A, that is an increase. And that is how you can understand this.