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

Good evening, ladies and gentlemen. Thank you very much for taking time out of your busy schedule to attend this online conference. We will now start. Today's participant is Yuki Kusumi, CEO of Panasonic Corporation. Yuki Kusumi will present under the title of Future Direction for Panasonic Group.

I'm Yuki Kusumi, the new CEO of Panasonic. I assumed the office in April. Today, I would like to share our future direction based on the current midterm strategy. In particular, contributions to solving global environmental issues and our constant improvement efforts to enhance competitiveness. Looking back during Mr. Tsuga's Presidency, we started addressing the losses recorded in fiscal years '12 and '13 and executed various growth strategies such as thorough turnaround efforts, eliminating losses, selection and concentration of businesses, proactive investment in growth areas such as rechargeable batteries and building a business structure with initiatives taken outside Japan such as China. Under the current midterm strategy, we have made steady progress in the initiatives toward overcoming low-profitability structure. As a result, in terms of financial figures, adjusted operating profit margin reached 5% level for FY '21 despite COVID impact. I would like to express my deep appreciation to Mr. Tsuga for his great efforts over the years. The challenge I must take up is to specialize in shocking each of our businesses. In other words, each business must enhance its competitiveness in the respective industry they should address and make further contributions to customers and society. Our management philosophy expresses our mission of devoting ourselves to the progress and development of society and enhancing the quality of life throughout the world. To fulfill this original mission of the Panasonic group, we are determined to become a company that is outstanding in competition to gain the capabilities to be selected by our customers and to continue refining our competitiveness with speed. The specific initiatives going forward are currently under deliberation at each business. And the details are scheduled to be announced around May of next year, along with the medium- to long-term vision under the new structure. So today, I will focus on the big picture and on the management direction. First, the direction Panasonic will take going forward, referencing the original mission in the company's early history. Back in 1932, reflecting the social circumstances of Japan at the time, the founder of Panasonic, Konosuke Matsushita presented the idea of tap water philosophy as a guideline to overcome poverty and bringing wealth to society by producing an inexhaustible supply of goods. This is based on the idea of matter and mind as one. That is, only after there is spiritual peace of mind and limitless supply of material goods will humanity achieve true happiness. He then presented his long-range plan of reaching an ideal society in 250 years. It's been almost 90 years since, and even with advances made in society, the essence of this tap water philosophy is still valid today based on the idea of matter and mind as one. True today, society is affluent in terms of goods, mainly in advanced nations. We do not feel inconvenience in many aspects. However, when asked if people feel affluent in mind and peace of mind, I'm afraid that's not necessarily the case. There are many people having continuous concerns and worries and feeling a sense of loneliness. In terms of environmental destruction accelerating each year and depletion of natural resources, there is serious concern whether the generation of our children, grandchildren or generation further can live a life in affluence. In this sense, while Panasonic has been engaged in business activities mainly to offer products in pursuing affluence, consequently I'm afraid this path is slightly off-track to reach an ideal society. But we cannot go back. So the question is, how we can correct the direction toward where we should have been from where we stand today. The mission to fulfill today is to squarely address societal issues and make contributions in eliminating concerns of today and the future toward an ideal society with affluence both in mind and matter. To achieve this, we must clarify what needs to be done, adding on to wisdom and pave a new way. I believe repeating and building on such efforts represents the true feature of Panasonic and what the founder intended when he established the company. Among the societal issues, what Panasonic should prioritize is to address global environmental issues. We cannot avoid this global issue if we want to sustain enriched society for our children, grandchildren and the generations beyond. We already face the impact of climate change with increased greenhouse gases, including CO2, in many different parts of the world. The issue of depletion of natural resources, including various mineral resources, is becoming serious each year. The situation is critical. In 1991, 30 years ago, Panasonic was one of the first companies in the world to establish the environmental charter. We have been addressing these issues since. With this background, we are determined to make even greater contributions, leading in addressing such issues as greenhouse gas emissions and resource shortages. These efforts will be made in all of our business activities at factories and offices as well as through our businesses, including energy business, supporting the reduction of CO2 emissions from automobiles, Gemba Process business, reducing losses of inventory and logistics through efficiency in the supply chain and reducing environmental burden through such products and services as hydrogen fuel cell and air-to-water business, offering comfortable and environmentally friendly living. Other initiatives include the promotion of recycling and reuse, minimizing waste loss within the supply chain and contributions in effective utilization of resources with longer product life by updating the product after sales to customers. This assumes offering better value, surpassing our customers' expectations for the product itself, not just the environmental features. And we will offer these products at affordable and appropriate prices so they would be selected and used by many customers. In other words, we aim to be the top runner in both perspectives of our inherent contributions and the environment. This will enable us to make greater contributions to the environment in the true sense. This is not easy, but we believe that taking up the challenge today, we can achieve even greater competitiveness. Toward the same, in 2017, we laid out Environment Vision 2050. Our initiatives and responsibility includes not only scopes 1 and 2, but also Scope 3. According to the GHG Protocol, which is greenhouse gases emissions standard, Scope 1 and Scope 2 are the classification of energy used for own production; Scope 3 is energy used throughout the life cycle of our products and services, starting from the raw materials, energy consumption by customers to waste recycling. At Panasonic, energy used in Scope 3 is equivalent to 40x the total amount of energy used in scopes 1 and 2. Our aim is to reduce energy use by our products and services in society, including energy used at our factories and offices, and to provide clean energy as well as utilization exceeding energy used by Panasonic. Through this, Panasonic aims to realize a structure being self-sufficient with energy and make our society sustainable. This means that we are not only depending on clean energy from the supplier side but also creating and utilizing clean energy which exceeds used energy in our business activities. This is a very challenging target, but we will proactively make efforts in all businesses of Panasonic group towards reaching an ideal society. Through these efforts, Panasonic will make huge contributions to solve issues in climate change, one of the biggest global issues, and aim to become a global leader in this field. As a milestone, we are committing to aim for 0 CO2 emission or carbon neutrality of energy used in our own production activities by 2030 in all operating companies under the new structure. We believe this is the target that we as a manufacturer should fulfill immediately. More specifically, to achieve this target, we'll accelerate 3 initiatives for further energy saving at our own sites, equipping with and utilizing in-house renewable energy system and procuring renewable energy. In particular, regarding renewable energy at our sites, we are proactively promoting equipping with and using solar and hydrogen energy and proactively taking up the challenge to make our sites sourcing 100% renewable energy. Already, we established 5 0 CO2 sites globally, including Panasonic Eco Technology Center in Japan and Panasonic Energy (Wuxi) Co. in China. In addition, we will implement these initiatives at Kusatsu Factory of Smart Energy System Business Division in Japan. Full operation will start in April 2022. At Kusatsu Factory, we will promote RE100 initiatives, combining hydrogen energy, solar power and power storage systems to offset energy consumption in the production process with these generated renewable energy. Peak power consumption at Kusatsu reaches 680 kilowatt, and annual consumption is approximately 2.7 gigawatt hour, which is the equivalent to energy consumption at 900 typical households in Japan. We will continue these initiatives at Kusatsu and improve our capability in RE100 solutions business. And going forward, we will proactively expand similar projects to other sites and offer these solutions to customers so as to make further contribution to solving issues in climate change. Another aim for Panasonic is to become one of the leading companies toward reaching an ideal society by taking up the challenge of constant improvement. To offer greater contributions to people's living and society, as I said before, it is indispensable to gain overwhelming competitiveness even in the severe competitive environment. The major key is to make constant improvements. There are 2 perspectives. One is to thoroughly eliminate waste and stagnancy and effectively use the value management -- valuable management resources entrusted to us from society to the full extent. We are determined to make constant improvements to eliminate any waste and make every second count. Another is to set up a high target toward reaching an ideal future based on our customers' essential value, and we should refine our capabilities toward such targets every day. We want to come up with the products leading the new era and pursue overwhelming cost competitiveness to accelerate the penetration of the product. And also, we will make efforts to fill the gap. In 1930s, our founder set a goal to deliver radios to more households by having the conventional price, and it became possible to have the production cost of the radio. This represents an essential tradition of Panasonic. Now is the time to spread this idea at all business operations. For example, set clear targets such as operational capability, product and environmental performance by each business to pursue improvements. By doing this, we aim to increase business competitiveness and make each business #1 in the industry. By pursuing these things, we will naturally achieve our goals in terms of cash. This is my way of thinking. Based on this idea, for the next 2 years, we will determine areas to address and enhance competitiveness at all businesses. We want to focus on enhancing competitiveness except for the business is clearly forecasted to be damaged in the future such as expected radical market shrinkage. From my experience of leading various businesses from B2C to B2B, I have learned that the strategy and operational capability are indispensable to each other for enhancing competitiveness. Strategy consists of 2 factors: customer target area to establish advantage among various factors of business -- business model to gain cash and partner selection for business growth. That is how to plan out the winning path of the business. Operational capability means enabling a high level of efficiency and productivity as a result of eliminating waste and stagnancy as well as increasing speed at all operational front lines not only in the area of manufacturing but also in direct operations, including R&D and planning as well as supply chain. No matter how excellent the strategy might be, it cannot prove effective without the capability to execute in actual businesses. To develop business to contribute to customers and society, it is most important to gain excellent operational capability that enables the smooth flow of goods and information and agile response to changes, along with having a strategic advantage. I define these 2 as indispensable to each other. In the past, we had emphasis on the strengthening of the strategic capabilities to gain new advantages, moving the business into new areas and transforming business models. However, in terms of operational capability, I believe there is still a lot of room for improvement at all businesses, functions and operations. I have just mentioned that we will take up the challenge of constant improvement to enhance competitiveness. This means we will continue to increase this operational capability to the full extent. Based on these views on management, today we use an example of 3 businesses under the new structure, and we'll explain how we enhance competitiveness while we expand areas of our contributions to solve environmental issues. First, I will explain Gemba or operational front lines process business in Panasonic Connect under the new structure, currently the CNS or Connected Solutions. As we explained at the recent announcement of making Blue Yonder wholly owned subsidiary, we made the decision of this acquisition with an intention to become global leading solution provider, bringing revolution to the Gemba in the global supply chain. Panasonic will leverage the CNS capability in digital and data and eliminate waste and stagnancy at each Gemba of supply chain. And then, we will provide solutions to enable continuous autonomous enhancement of the entire supply chain by combining initiatives for autonomous enhancement at Gemba and Blue Yonder solution, enabling the continuous improvement cycle through end-to-end visibility and optimization of the entire supply chain. Through these solutions, Panasonic will reduce waste and stagnancy at each Gemba of the supply chain and contribute to customers' management transformation. In addition, we aim to contribute to solve societal issues such as effective use of resources and work style reform. From the perspective of strategy on the previous slide, we aim to increase our advantage in this field by leveraging the partnership with Blue Yonder and enhancing our software and solution capability. As for operational capability, first, we will adopt these solutions for supply chain transformation at Panasonic's Gemba prior to customers to enhance our own solutions capability and bring such capabilities to enhance the operational capability of the entire group. Second, let me explain energy business, which will be operated by the newly established Panasonic Energy. In automotive cylindrical battery business, which is core energy business, we have strategically collaborated with Tesla, the leading EV company, and expanded our business, taking advantage of our strengths. However, due to our insufficient operational capability for manufacturing to meet the rapid increase of the demand at Tesla, we had to focus mainly on the profitability improvement up until now. In this fiscal year, we will expand our production line in North America in response to surging demand. And at the same time, we will thoroughly refine our operational capability and aim to increase production capacity while we achieve superior cost competitiveness in the industry. Furthermore, for technological development, our current main product, 2170 cell, has been leading the industry from performance and environment perspective. We will also lead the industry with the development of 4680 cell, which is expected to become the next-generation standard. For nonautomotive application, we will expand the power storage system business. Our system is already highly appreciated to support a stable and reliable operation of data centers, which becomes the mission-critical system as the data protection becomes increasingly important along with development of digital society. Going forward, as more renewable energy is used globally, we continue to take up the challenge in the area of the living area infrastructure such as home use power storage system, which enable the stable supply of electricity. In Panasonic Energy we will thoroughly improve battery performance, reliability, cost competitiveness and provide solutions to environmental issues and contribute to the development of the social infrastructure. Third is the life style area in newly formed Panasonic Corporation. Here, our aim is to create new value towards society with affluence in mind and matter, leading the global trend. Indoor air quality and air conditioning is one of the growth pillars of new Panasonic. Our strength in this area is that we not only obtain the unique sterilization technologies, such as Ziaino and nanoe, but also obtain a wide range of technologies such as moisture control, which is the key for preventing virus; highly efficient heat exchanging; and technologies that improve air quality with minimum environmental impact. With the spread of COVID-19, interest in air quality is increasing globally, and we have seen surge of demand for products that integrate intelligent air quality technology and air conditioning technology. In the new Panasonic Corporation, our aim is to create new and unique Panasonic value by integrating advanced technologies, which were separately established in Appliances and Life Solutions in the past, and make them into one product or a system. In this way, we will provide a healthy and comfortable air. In March 2021, Panasonic launched integrated air conditioning, indoor air quality system, which enables comfortable control of humidity according to the temperature. We accelerate to expand this large-scale system for nonresidential use and solution-type business. In consumer electronics, we have been acquiring the speed of product development and cost competitiveness in China since the establishment of China & North Asia Company (sic) [ China & Northeast Asia Company ] in 2019. In overseas B2B, Panasonic has successfully expanded the wiring device business overseas, leveraging our strong manufacturing capability. This success is seen in such markets as in Asia, India and Turkey, mainly for residential use. Going forward, we will continue to expand nonresidential business for building and retail outlets, leveraging distribution channels and trustworthy reputation built among customers in these countries. I'd like to sum up by emphasizing what we must do to return to the basics of our management philosophy, devote ourselves in generating contributions toward achieving an ideal society and sustained development. To accomplish this, we cannot be satisfied by merely achieving target figures. We should always have the perspective from the customers and Gemba and pursue improvements day by day toward our ideal. To become a team of employees who can attain such goals, we will focus on the enhancement of competitiveness at all businesses for the next 2 years. Since this is the first year, the entire group will make efforts to enhance operational capability to be able to accelerate the cycle of improvements as early as possible. I'd like to ask for your continuous understanding and support. Thank you.

We will now take questions. From Morgan Stanley MUFG Securities, Mr. Ono, please.

I hope you can hear me.

Yes, we can.

Two questions. Ono from Morgan Stanley MUFG Securities. My first question, regarding Blue Yonder. Mr. Kusumi, you just said that, that will be one of the examples of the enhanced operational capability. So as you started as a new CEO, over JPY 700 billion acquisition investment was decided on. What kind of return on investments are you expecting? And so you made this very big investment as you started as the new CEO. So what's your thoughts on that? My second question. I understand that for the next 2 years, you'll be concentrating on enhanced -- enhancing the competitive edge. I suppose that means fiscal years '22 and '23. So how are you going to assess the results? What criteria or metrics would be used to measure the success? I don't think you have the numerical targets yet, so are there any qualitative aspects on that? Those are my 2 questions.

Thank you for your questions, Mr. Ono. Yes, Blue Yonder, frankly speaking, as I was in charge of Automotive business last year, I regarded this to be a very large investment, so I was a little intimidated by this amount. So I was one in charge of Automotive. I could not make that decision. You asked about the return on investment. We're not expecting a short-term return whether -- the CNS, how we are to transform that company. That aspect is important and also to utilize the Yonder capability to improve our own operating capability. So as to bring about new services to bring in the transformation of the supply chain, it's not purely through -- from Blue Yonder but as a research and development efforts in the Gemba process. Sensing and AI technologies are being pursued to identify the waste and stagnation in the supply chain, and we expect the independent stand-alone capability to do that. And through that, we want to come up with new solutions. So we are to expand the business based on what have yet to materialize. So in that sense, I can't say exactly by when. But in order to capture that opportunity, we felt that now is the time to acquire a Blue Yonder. We felt that this was the right time to make the investment. That was the rationale. True, the investment is large. In terms of S&OP, how much? But that alone cannot justify that amount. So please understand that this was the investment decision based on a more long-term view. Now what kind of measurements are we going to use? What discipline will be used to measure the success? Of course, the financial -- numerical targets in terms of cash generation, that would be the important metrics. But then the question is, how can each business enhance its capability to generate cash? That would be measured not by looking at the numerical values but looking at nonfinancial KPIs. And those should be used to measure and monitor the progress. So I'm afraid I am not directly answering your questions, but that's the thought I have in mind right now.

From Nomura Securities, we have Okazaki san.

This is Okazaki from Nomura Securities. My first question, now the issue of the global or the environmental issue is a top priority, and you did talk about this in the first half of your presentation. So for Panasonic, environment-related businesses have been important from the past. And this time, your message how is it different from the past, any changes from the conventional efforts that you made in there of the global environment? Next -- second question is about energy. In the past, it was a challenging business. And now it has come back to one of the important business. So what is the plan for the investment? And how do you work with the other partners and other companies in the area of the energy?

So once again, about the environment, have there been no -- major changes from the past? In terms of the direction, improving or increasing the priority for this environment-related business, the major contribution is in the energy or fuel cell business. But at the same time, whether we have been really determined to work on those areas, unfortunately, what we inherited from Sanyo PV business, photovoltaic business, I think that our own production, we gave up on that. So in a way, to sharpen our competitiveness in that area and to try to contribute to resolving the environmental issue, I think we lacked sufficiently strong determination. That was my evaluation. Now as for the prismatic automotive battery, 3 years ago, I myself was in charge of this. And together with Toyota, we established a joint venture. And one thing is that together with Toyota, doing this business together, and by doing so, Toyota's production method, we needed that input and -- in the area of the manufacturing. Without it, we were not fast enough. So that is why we decided on this direction. I was in charge of that for only 1 year, but that was the way of thinking. We needed some help or the power of Toyota injected to us. So based on that, the matter of environment, this is one of the top priority. And to be competitive in that area is something that I want to emphasize. And I want to do that internally, and also I want to make a commitment externally so that everyone in the company will move toward the same direction. Also, about energy, especially the cylindrical battery together with Tesla, we are conducting this business. And are we changing the way we were thinking about this business or not? Right now, I'd like to refrain from giving you a specific direction because this has to do with competitiveness, and we have to have a good level of competitiveness inside. Right now, we are not sufficient in that area. We need operational capability. We have to show you the good way forward or directions so that we can move forward in this business. Am I answering to your 2 questions?

[Operator Instructions] From Crédit Suisse, Ms. Nishimura, please.