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

Good afternoon. I'm Yuki Kusumi, Group CEO of Panasonic Holdings Corporation. Thank you very much for participating in this online briefing despite your busy schedule. Before I start, I would like to express my concerns regarding the current situation in Ukraine. I offer my deepest condolences to those who have lost family members, and I hope the world will return to peace and security as soon as possible. Now I'd like to start today's briefing on our group strategy. Before explaining the details of our new medium- to long-term strategy, I would like to touch on the start of a new structure and look back on the previous medium-term period. Today on April 1, we changed our corporate name from Panasonic Corporation to Panasonic Holdings Corporation, and we transitioned to a new group structure by establishing operating companies as independent legal entities. The previous name of Panasonic Corporation is succeeded by Lifestyle Updates Business division, which was established as a divisional company in October of 2021. Under the new group structure, operating companies play the main role and therefore, we call the system an operating company system. Each operating company will squarely address society and customers, implement thorough autonomous management and accelerate enhancement of competitiveness. Now looking back, our achievements during the previous medium-term period. During the 3 years of FY '20 to FY '22, we focused on eliminating losses from businesses with loss-making structure and enhancing management structure. As a result, our cash generation capability has steadily improved despite major external business environment changes, including COVID-19. At the briefing held last May, I defined FY '22 and '23 as the period to focus on enhancing competitiveness to further improve profitability. And we will continue with such efforts this year. Looking back on FY '22, we did take a step forward in enhancing competitiveness, but there still is room for improvement to firmly embed autonomous management. Thus, during this second year, we need to make further efforts. As for challenges upon formulating strategies, we need to first focus on long-term and customer respectives (sic) [ perspectives ]. In a rapidly changing world, we should envisage major social changes instead of looking at just 2, 3 years, what is best for our customers and how can we translate our great mission into actually achieving our goal by backcasting from these changes. Second, improve adaptability to changes and make our management speedier to an outstanding level. To do so, we need to eradicate wastefulness, stagnation and rework, which exist in many front lines of our business, so all employees can focus on truly value-added activities, also creating a system and corporate culture that maximizes potential of each employee would be necessary. Today, I would like to explain the group-wide vision and measures to achieve the future goals of each business based on the challenges we need to take up. Now the details of our new medium- to long-term strategy. This shows the future direction of the Panasonic Group. Our founder proclaims that we should achieve an ideal society with affluence both in matter and mind. Towards this, our mission today is to contribute to solving global environment issues, support health and well-being of people, both in mind and body, in lifestyle and workstyle for everyone around the world. Being unrivaled in accomplishing valued work, we can make great contributions. Accordingly, we will be able to return profit to society and our employees. Also, we can make investments toward future contributions. This is the cycle that leads to enhancing our competitiveness. To enhance competitiveness, both strategy and operational capability are indispensable. That is strategy built upon long-term perspectives, not simply focusing on short-term profit or extension of the current situation and operational capability to make any business front lines speedier by eradicating wastefulness and stagnation. To attain such strong competitiveness, we will thoroughly implement our basic business philosophy and continue to make contributions to environment, lifestyle and workstyle towards an ideal society. This shows the outline of our new medium- to long-term strategy. Details of each item will be explained later. The past medium-term strategy tended to focus on achieving sales and profit, in particular, operating profit margin in the final year of the 3-year period. With this new medium- to long-term strategy, we will shift to a longer perspective management. Considering the social changes in around 2030, we aim to become unrivaled in competitiveness in terms of speed and scale being in harmony with our employees and business partners. First, I will explain the details of the group's long-term environment vision, Panasonic GREEN IMPACT towards 2050, as an example of our contributions we can make to solving global environmental issues, which is an urgent challenge we face. Second, I will explain the details of medium-term KGIs, our investment policy that drives our future growth with long-term perspectives and also our global strategy. Finally, I will elaborate on the important group-wide initiatives towards enhancement of competitiveness at each operating company, implementation of management that maximize potential of each employees and PX and frontline innovations, which aim to thorough -- which aim for a thorough enhancement of competitiveness, including the operational capability. Details of each operating company strategies will be explained by the heads of each operating company at the IR Day event in June. Let me explain Panasonic's GREEN IMPACT. In May, we announced our commitment to achieve net-zero CO2 emissions at all operating companies by 2030. At CES in January, we announced the group's long-term environmental vision, Panasonic GREEN IMPACT. This shows our firm commitments to make positive impact to expand size of contribution in CO2 reductions for society as well as our action. We stated that Panasonic is responsible for reducing 110 million tons of CO2 in our overall value chain, including CO2 emissions from use of sold products. We should make contributions to these areas through a wide range of business activity. However, detailed numerical targets were not yet included. Today, we announced that by 2050, through group business activities, Panasonic aims for impact of reducing over 300 million tons of CO2 emissions equivalent to approximately 1% of total global emissions as of today. Impact reduction consists of 3 parts. First is from our own value chain. In this category, Panasonic emits 110 million tons. We will achieve net zero by combining acceleration of energy-saving initiatives, decarbonization effects on society, which will progress towards 2050. Second is related to our existing business areas where Panasonic currently emits 100 million tons. We will achieve this reduction through expansion of environment-friendly vehicles with our automotive batteries, supply chain software and energy savings technologies in products such as air quality and air conditioning to reduce consumption at customer side. Third is related to energy transformation for society. We will contribute 100 million tons through new technologies such as hydrogen energy and creation of new businesses. Altogether, we will make a reduction over 300 million tons of CO2 emissions. We set this Panasonic GREEN IMPACT as the center of new medium- to long-term strategy, and we will make strategic investments as well as take actions for our contributions. Next, medium-term KGI. As a group, cash generation capability is essential, in particular, for tax payment, dividend and employee salary. Also, it is necessary for investments in our contributions to society in the future. We all set accumulated operating cash flow for the next 3-year period as one of the medium-term management indicators. Specifically, we aim for JPY 2 trillion of accumulated operating cash flow and JPY 1.5 trillion of accumulated operating profit during the 3-year period. To achieve these, we must thoroughly enhance competitiveness at each operating company. For instance, China & North Asia Company managed to decrease over 20% of manufacturing costs in appliances as part of competitiveness enhancement initiatives. It gives us confidence to compete in pricing while also securing profit even in a very competitive market like China. This is just one example, which taught us there still is a lot of room for improvement in cost competitiveness and profitability as a group. Another medium-term indicator, we set ROE of 10% or higher in fiscal '25, which measures cost of capital efficiency. Accumulated operating cash flow and ROIC will be the medium-term management indicators for operating companies. This slide shows our investment policy. In principle, each operating company will make investments with the cash generated through its own business for further growth toward its long-term goals. With strategy formulated from long-term perspective and operational capabilities strengthened by elimination of wastefulness and stagnation at any front line, by enhancing competitiveness, we will accumulate cash and input JPY 2 trillion of accumulated operating cash flow. I will elaborate on this later. And while maintaining financial discipline, we will make group-wide strategic investments with the cash generated through enhancing competitiveness as well as the investments made by each operating company. A total of JPY 600 billion in 3 years will be invested to achieve our future goals: JPY 400 billion in growth areas and JPY 200 billion in technology pillars, respectively. Panasonic will make medium- to long-term investments in 3 growth areas: first, the automotive battery. From the global environment perspective, it is essential that the cost and safety level of electric vehicles should far surpass that of internal combustion engine vehicles. To enable this, we will make group-wide investment to thoroughly and rapidly strengthen battery capacity, safety and cost competitiveness. We will commercialize new high-capacity cells with 46-millimeter diameter at full speed by refining our high quality and safer automotive battery technologies and achieving industry-leading cost competitiveness. First, we will verify productivity at Wakayama factory and mass production are to start in fiscal '24. From the sustainable perspective, it is essential to be considerate of the use of precious and limited materials. With our lithium-ion batteries, we have already achieved a significant reduction of cobalt. Our battery contains less than 5% as of 2021. We have also developed technologies to realize cobalt-free cells and mass production is in our target when requested. Second is the area of supply chain software. Due to the decline in working population, we face labor shortage at the front lines of manufacturing and logistics industries. There are strong demands for higher efficiency and standardization. Solutions that autonomously improve the overall supply chain are necessary. Even if the solutions run autonomously, there is a limit to how swiftly we can optimize the frontline operations, which requires higher skills. Therefore, solutions enabling people at the front lines to eliminate wastefulness and stagnation in supply chain without having special knowledge are needed. To achieve this, we will offer the wide range of software solution packages and optimize operation processes by collection, accumulation, analysis and utilization of various data at front lines. Through these, we will contribute to optimize overall supply chain and improve efficiency of management for customers. In addition, Blue Yonder's AI accuracy will be enhanced and software solutions will evolve. We will also contribute to reduce environmental impact through energy savings, which are achieved by eliminating wastefulness and stagnation in supply chain. Third area is air quality and air conditioning. Due to COVID-19, there are growing demands for solving people's anxiety about bacteria and virus. Since air conditioning equipment consume a large portion of the global electric power, we can make huge contributions to the global environment while people enjoy clean and safe air and comfortable lifestyle. To achieve this, Panasonic will continue to develop unique technologies, including nanoe X and Ziaino and humidity control technologies. We would also develop advanced coordinated system, integrating air quality and air conditioning to manage both comfort and energy savings. We would make investments mainly in Europe, China and Japan. We will establish foundations for sales, engineering and services to continuously offer our customers with clean, safe and environmentally friendly air and expand lineup of advanced coordinated products. Integrating our customer contacts with knowledge and technologies accumulated over 100 years of R&D, we will vitalize the future with air. Next is our global strategy. Panasonic will implement strategies that address local customers with regional characteristics and enhance operational capability. Through businesses, we will expand Panasonic GREEN IMPACT. In China, we will refine our cost competitiveness and speed of management nurtured in China to become the best lifestyle partner rooted in China with perspectives of environment, health, elderly care and cleanliness. In lifestyle applications, we will apply our cost competitiveness and speed of management throughout the other Asian regions. In automotive and factory automation, we will continue to localize operations from product planning to sales and expand our contributions to our customers. In North America, we will take advantage of our local presence and aim to help group-wide growth. More specifically, we will refine our software capabilities swiftly in order -- so that to make the contributions to solve issues of front lines and optimize customer supply chain. In avionics, we will develop and propose lightweight models by collaborating with aircraft manufacturers to accelerate reduction of fuel consumption of aircraft. We regard Europe as an advanced and important region for environment regulations and global rule-making where we expand businesses in air to water with increasing demand for environment aspect and integrated air quality and air conditioning system suitable to European market. Let me give you 2 examples for investment in technology pillars. First is initiative in hydrogen energy. To achieve carbon neutrality, it is essential to significantly reduce the use of fossil fuel and to reintroduce larger scale of renewable energy. As renewable energy such as solar power generation and wind power generation is not stable due to the weather, we need to accelerate full-scale implementation of hydrogen energy. We do have an industry-leading high-efficiency electrode technology, and we'll apply this to produce hydrogen. And we would also develop high efficient hydrogen power generation technology based on this technology to contribute to the stabilization of power grid. The development of high efficient fuel cell is also under way. We will apply this to the next-generation residential fuel cell system, ENE-FARM; and pure hydrogen fuel cell generator, H2 KIBOU, in order to accelerate decarbonization in power generation area. Furthermore, we aim to establish energy management technologies, which linked distributed energy located in various facilities such as houses, factories and others and power storage system and EVs to improve effective use of electric power and contribute to clean energy transformation for society. Next is Cyber Physical System. With CPS, we can find and offer optimum solutions for issues in lifestyle and workstyle by linking physical world and cyberspace. Let me give you an example. Panasonic is trying to better understand what customers really need. Here our products using AI and software technologies, we aim to bring better value in lifestyle experience with our products and services. toward achieving this goal, we will leverage the experience and high level of technologies gained from Yohana's Lifestyle Service Business started in the United States in September last year and become flexible and speedier to meet ever-changing customer values. Also, we continue to engage in R&D for the technologies that understand people and aim to create new value for customers. The core is biosensing, emotion recognition technologies. Users can visualize issues in physical space by modeling, people's emotions and conditions in cyberspace and provide optimum solutions, we will expand this technology to a wide range of businesses, including offices, lifestyle and automobile space. As for workstyle situation, we will continue to develop digital technologies to visualize and optimize wastefulness at front lines. I will talk about this when I talk about frontline innovations later. This shows Panasonic group-wide technology pillars, including technologies. I explained in the previous slide. Towards the ideal society with affluence both in matter in mind, we will strengthen technology pillars, which contribute to empowerment and well-being of lifestyle and workstyle as a group. We also proactively invest in ventures in our research for new technologies. Lastly, I will expand group-wide key measures toward enhancing competitiveness at each operating company. Our employees will play a major role in enhancing competitiveness. So talk about the management that maximize the potential of each employee. Then about group-wide DX and frontline innovations as measures to very enhanced competitiveness, including operational capabilities. To maximize the potential of each employee, we will attentively listen to employees who are willing to take up challenges and create a working environment that maximizes the potential of unique characteristics. First, we will provide equal opportunities for employees with diverse characteristics to accommodate the various backgrounds and situations of our employees. We introduced various ways of workstyle, so they can continue to initiate their own actions. We will introduce job-type employment in HR management to clarify the required role, responsibility and skills. We will continue training to support improvement skills. In addition, we would eliminate excessive burdens on -- in the promotion and screening, so more employees will be able to take up the challenges for higher position regardless of their situations. We will also support each employee in taking up challenges. HR and development systems will be optimized according to each operating company, supporting employees acquiring the specialty skills required in each business, and we will revise the internal recruitment system by easing application requirements to activate HR exchange across companies to generate opportunities. Through those measures, we will create a working environment that maximizes the potential of the diverse capabilities and unique characteristic of our employees to enhance competitiveness at each operating company. Next is Panasonic transformation towards enhancing competitiveness by DX. Since last year, we have been implementing Panasonic transformation or PX to transform our workstyle and business processes beyond IT transformation. In workstyle innovation, we will eliminate work that does not create added value and make work more efficient with use of IT. More specifically, we will reduce workload of our employees, in particular, middle management. For example, middle management are overloaded with work such as personnel management, including time sheet management and accounting management. We Will unload those works with further efficiency in using IT. In business process innovations, we have started with various initiatives distinguishing between the actions that can be dealt by operating companies and actions that can be dealt by Panasonic Group as a common target because of the economic scale. The range from R&D design manufacturing sales to procurement. In this Panasonic transformation, we will invest JPY 124 billion for the 3-year period from FY '23 to '25. We have already identified 150 themes to change workstyle and business processes. The group will support competitive enhancement at operating companies with DX. Next, I'll show you a video introducing the frontline innovation initiatives. [Presentation]

It was Panasonic Group's frontline innovations. I hope you enjoyed it. The idea of making front lines lean to contribute to the global environment and the happiness of the people can be applied anywhere beyond Panasonic. We will make contributions to our corporate customers in the perspective of their management and supply chains, reducing their environmental impact and well-beings of their employees. Now on March 30, we placed ads in major newspapers regarding the start of our new structure. Live Your Best, this is our new brand slogan, for Panasonic Group. Our founder, Konosuke Matsushita aimed towards prosperity with matter and mind as one. Throughout his life, back in 1932, he recognized the mission of the company as a true mission of industrialists, only after there is special peace of mind and limitless supply of material goods will humanity achieve true happiness. He said his aim to achieve this with a so-called 250-year plan. Konosuke described 1932 as the first year of Meichi, which means recognizing the mission. This year is the 91st year of Meichi. Basic management objective states that we will devote ourselves to the progress and development of society and the well-being of people through our business activities, thereby enhancing the quality of life throughout the world. This expresses our aim to achieve affluence both in matter and mind together. Our former brand slogan, A Better Life, A Better World, directly expressed our basic management objective. However, there were cases where we will try to offer better products from a self-centered perspective, lacking a proper understanding of the slogan and the main idea behind the basic management objective without sufficiently thinking of customers' perspective. Therefore, we have decided to adopt this new slogan, Live Your Best. To remind all of us of our mission to contribute to the prosperity with matter and mind as one for humanity to achieve true happiness, revisiting our 2 mission that Konosuke recognized. This slogan also embodies my hope that each employee will turn their thoughts to each customer's happiness. Towards what we aim to be in 2030, everyone at all operating companies of the Panasonic group is determined to continue our efforts to help our customers live their best. Please stay tuned for more developments from the Panasonic group. Thank you very much for your kind attention.

From Nihon Keizai Shimbun Nikkei, [ Hiroshima-san ], please.

[ Hiroshima ] from Nikkei. I hope you can hear me.

Yes, we can.

Strategic investments totaled JPY 600 billion. I have a question on that. Compared to other dedicated companies, I think, looking at specific areas, you are inferior. At the same time, you have expertise, technologies, for example, air quality and air conditioning technologies being able to have synergies. You do have the advantage. So how do you regard the size of this investment that you have in mind?

First of all, [ Hiroshima-san ], thank you very much for your question, and thank you for supporting us. If you can look at the slide more closely, you will find that the operating companies will be making investments based on the cash that they generate on their own. And they are shown on the upper part of the slide. And then JPY 400 billion, plus JPY 200 billion investments to be made by Panasonic Holdings as a group. So those would be the businesses or the areas that are important for the strategies for this group overall. So operating companies' investments will be on top of what's shown there. Hiroshima-san was that helpful?

Yes. I have another question, a follow-up question, actually. In air conditioning, over JPY 100 billion investment over 3 to 4 years, I think. So do you feel that they are good enough to be called a strategic investments if you include investments to be made by the group as well. Now operating cash flow, you do have the target there. How challenging are these targets that you have set for yourself?

Air quality and air conditioning, what action should we take? Depending on those, the size of the investments required with very, but in any event, each operating company, including the air quality and air conditioning will be enhancing the strategic competitiveness. And there's still room for improvement, I think. So in Japan, Europe and China as well, we need to make investments for further growth. And I think we can secure needed fund for that. And there was another question that you asked about the KGI I think. Yes, about the operating profit level, I think you asked a question about that. The -- compared to the past operating profit, I think this is rather ambitious. It may appear to be ambitious targets. And given the current circumstances around the business, including the situation in Ukraine, there are various uncertainties. And I think that is giving you a concern. Now the targets -- the basis or internal discussions, depending on what happens in the current situation, we are expecting the material cost to go up, but they are not fully incorporated. But in terms of cost of goods, COGS, there is a big room for improvement. And as you saw in that video, Tsuruga, Saga, Kusatsu, Kobe, those factories, we are already seeing a major improvement effect. And therefore, we are already getting a very good feel about the effectiveness. JPY 2 trillion operating profit and JPY 1.5 trillion the cumulative profit. These are the targets that we set for ourselves. And with that ambitious target, we want to continue with our improvement efforts. Was that helpful Hiroshima-san?

Next question is from [ Du-san ] of Toyo Keizai.

This is [ Du ] speaking of Toyo Keizai. I also have 2 questions. First, you disclosed the KGIs. In the process of coming up with those numbers in each business, you have different KGIs and KPI. And did you accumulate all of them to come up with a group-wide number since you became the CEO. I think that setting the numerical target was not something that we are very enthusiastic about. So what was the background of coming up with those numbers this time?

Well, basically, as you said, [ Du-san ], we have summed up or accumulated numbers. And of course, there are some adjustments. And frankly speaking, -- after Kaizen and the series of Kaizen, when we ask the operating company, they come up with a very high, very high target of the KGI in some of the operating companies. So in some of them, we made adjustments, and we came up with JPY 2 trillion. -- myself. So for example, operating margin, I don't want to set the target of the operating margin. In the medium term, we want to show you like our capital allocation is more important. So when we try to do so, the target is the operating cash flow. So in that sense, this time, JPY 600 billion for each operating company making investment. And aside from that, for example, JPY 120 billion for IT that is outside of JPY 600 billion. So those are the things that we will be doing. When we try to explain that, in order to give you an image, a cumulative operating cash flow is important. So it's not for the single year, accumulative. So in the first year, maybe you won't be able to achieve that. And then in the second year, we will make further efforts.

Some additional question. In each operating company, they have their KPIs and KGIs, I think. So from each operating company, they disclose their own KPIs and KGI.

Yes, please wait until June. Please look forward to it.

My second question, you announced the medium-term strategy and also the 2-year time frame for the enhancement of the competitiveness, I'd like to understand the relationship. So 2 year -- having 2 years to improve the competitiveness was something that you mentioned. So are you making a good progress or not? So that 2-year and the medium-term strategy that you announced this year, how are they related with each other? If you can give us some additional explanation.

Yes. Well, out of 2 years, 1 year has passed. So in that sense, not all the targets, whether we achieved all of them or not. In some of them, yes, we did. But in others, we did not. But generally speaking, in PX or frontline innovation, as you saw in the video, we are making progress, especially, but the cash generation, so for example, to reduce inventory, what do we do? What needs to be done, we are visualizing those challenges and issues. So from my perspective, as a second year goal of competitiveness enhancement, with a much faster cycle, we are, I think, going through the Kaizen cycle faster. So employees are sharing their issues and using IT where necessary. And as you saw in the frontline innovations, we are making progress, and we are visualizing things. So that's the second year. And we are starting to make very steady progress toward that.

So competitiveness enhancement. If everything goes well, the KGI of the medium-term strategy will be achieved. So that's the kind of assumption?

Yes, that's correct.

We're getting close to the end of the allotted lot of time. So the next question will be the last question from the journalist from Kyodo Agency, [ Kojima-san ].

This is [ Kojima ] from Kyodo News Agency. I have 2 questions. First is on cumulative -- accumulated operating cash flow, JPY 1.5 trillion over a 3-year period and Kusumi-san admitted that it could be regarded as rather ambitious. Segment-wise, which do you think will be the drivers for that?

Thank you. The profit growth is expected from the new Panasonic Corporation several businesses such as air quality and air conditioning as well as China cost being transferred to other parts of Asia, living in appliances and Blue Yonder and Avionics recovery included Connect and industry. In terms of the amount of profit, we expect growth from those companies.

May I ask another question?

Yes, go ahead.