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

I will go over the consolidated financial results of Panasonic Holdings Corporation for the First Quarter of Fiscal 2023. First, a summary of the financial results. Overall sales increased year-on-year despite the impact on production and sales of the Shanghai lockdown and shortages in semiconductors, parts and materials, owing to increased sales in Automotive Batteries and others as well as consolidation of Blue Yonder and the effective exchange rates. Adjusted operating profit decreased as increased sales and price revisions and other efforts were unable to offset the impact from changes in the environment, including the lockdown, shortages in semiconductors, parts and materials, raw material prices and higher fixed costs and other negative factors. Operating profit decreased, but other income and loss improved with reduced restructuring expenses, thus year-on-year decrease in operating profit was less than that of adjusted operating profit. Free cash flow was secured at the same level as net profit, although it was below the FY '22 level due to decreased adjusted operating profit and increased inventories. In terms of consolidated financial results, overall sales increased to JPY 1,973.9 billion, up 10% year-on-year. AOP decreased to JPY 65.7 billion, down JPY 53.8 billion year-on-year. Other income and loss improved by JPY 13.1 billion, due mainly to reduced restructuring expenses. OP and net profit decreased by JPY 40.7 billion and JPY 27.6 billion, respectively, but the year-on-year decrease amounts were less than that of AOP. This slide shows the results by segment. Year-on-year variance analysis is provided in the next few slides. First, sales by segment. Overall sales increased. Lifestyle sales were at the same level year-on-year as sales increased for priority businesses such as HVAC systems, European business and overseas electrical construction materials, mainly in India, the Middle East and Africa markets, to offset the decreased sales of consumer electronics in Japan affected by supply issues due to the lockdown and others. Automotive sales decreased affected by reduced automobile production. In Connect, sales increased in Avionics, reflecting market recovery in the aviation industry and the consolidation impact of Blue Yonder. Despite decreased sales in such businesses as Gemba Solutions due to post Olympic demand slowdown and notebook PCs affected by the lockdown. In industry, sales decreased due to semiconductor shortages, the lockdown and termination of the semiconductor and LCD businesses, despite increased sales of capacitors for ICG infrastructure and automotive uses and relays for industrial and EV uses. In Energy, sales increased with sales growth of Automotive Batteries reflecting robust EV demand. Among other eliminations and adjustments, Entertainment and Communications sales decreased, affected by component procurement issues, including semiconductors. Housing sales increased driven by building materials such as interior doors, raw materials, rain gutters and exterior wall materials as well as ECO CUTE water heaters. Next, OP. AOP decreased in all segments and overall OP decreased as well. In Lifestyle, profit decreased, affected by such factors as the lockdown, increased sales of priority businesses, mainly overseas, and price revisions in Japan and overseas counters, the deteriorated business environment such as exchange rates, price hikes in raw materials and logistics, but not enough. In Automotive, profit decreased due to decreased sales and increased fixed costs, including depreciation, despite cost reduction efforts and price revisions to mitigate the impact of price hikes in parts materials, namely semiconductors. In Connect, profit decreased despite increased sales in Avionics due to decreased sales of notebook PCs and the Gemba Solutions business, raw material price hikes as well as amortization of intangible assets related to the Blue Yonder acquisition and other factors. In industry, profit slightly decreased, impacted by semiconductor shortages, the lockdown, the raw material price hikes. These negatives could not be offset by the increased sales of capacitors for ICT infrastructure and the effect of the yen depreciation. In Energy, profit decreased despite increased sales due to price hikes in raw materials and logistics and increased development expenses and fixed costs for increased production. Other income and loss largely improved due mainly to reduced restructuring expenses. Accordingly, decrease in OP was less than that in AOP. Next, results of Lifestyle by divisional company. In Living Appliances & Solutions, sales decreased on constant currency. Sales in Japan decreased such as for microwave ovens, affected by the lockdown and others, while overseas sales increased, mainly refrigerators and washing machines in Asia. Profit decreased with lower sales despite price revisions and rationalization to counter the deteriorated environment. In Heating & Ventilation A/C, sales increased steadily, mainly in Europe, while profit decreased, largely due to negative impact of exchange rates. In Cold Chain Solutions, both sales and profit increased with steady sales mainly for showcases in Japan and the U.S. In Electric Works, both sales and profit increased with steady sales of overseas electrical construction materials, mainly in India. This is our operating profit analysis by factor. From the left, sales expansion increased profit by JPY 1.5 billion despite such negative factors as the Shanghai lockdown and semiconductors shortages. Fixed cost pushed down the profit by JPY 19.6 billion. This is due to the increases required by business growth initiatives such as depreciation and R&D expenses. Price hikes in raw materials and logistics pushed down the profit by JPY 56 billion, while price revisions and rationalization and others pushed up the profit by JPY 27.3 million. The consolidation impact of Blue Yonder was a decrease factor of JPY 7 billion. Blue Yonder's adjusted operating profit was positive, but with the amortization expenses related to the acquisition, as well as other factors, it was negative on a consolidated basis. The overall ForEx impact was minor, totaling 0. It was positive for Industry and Energy, but negative for Lifestyle. As a result, adjusted operating profit was down by JPY 53.8 billion. Other income and loss was an increased factor of JPY 13.1 billion, and operating profit was down by JPY 40.7 billion. Next is free cash flow and cash positions in Q1. The free cash flow was down year-on-year due to the lower adjusted operating profit and increase in inventories. However, we were able to secure JPY 48.3 billion, the same level as the net profit, mainly through improved working capital. With regard to cash generation from Q2 and onwards, we are continuing to make efforts to reduce the higher inventories that are affected by external factors and the control of the inventory level of strategically secured parts and materials. On the right, net cash is shown. It was minus JPY 635.3 billion, an improvement from the end of FY '22. Next is the impact from changes in the business environment. This shows the impact on each segment by 4 elements: changes in demand, shortages in semiconductors and parts and materials, Shanghai lockdown, and price hikes in raw materials and logistics. The light blue shows factors with a positive impact. And the pink areas show a negative impact compared to FY '22. The top half shows the results of first quarter FY '23 and bottom half explains the outlook for the situation in Q2 and onwards. In Q1, each segment was significantly impacted by shortages in semiconductors and parts and materials, the lockdown, and price hikes in raw materials and logistics. From Q2 and onwards, such factors are expected to lessen with the end of lockdown. However, the impact of the shortages in semiconductors and parts and materials as well as price hikes in raw materials and logistics are expected to remain. We will implement countermeasures such as alternative procurement and price revisions to mitigate the impact of those factors. Now let me explain our view based on the trends of quarterly results. The graph on the left starts with FY '22 Q1. Since Q2, the impact of semiconductor shortages and raw material price hikes has been significant, which led to low profitability. Also recently, we have faced the impact of the lockdown, making business environment more difficult. However, as you can see on the top right, if we look at the Q1 of FY '23, the monthly adjusted operating profit, the situation significantly improved in June when the lockdown was lifted, a prolonged weak situation turned to a recovery trend after hitting the bottom in May. Today, each operating company is accelerating its initiatives to enhance competitiveness. We expect the performance in Q2 and onward to shift toward recovery through our efforts, such as thorough enhancement of operational capability, higher sales of Energy and Heating & Ventilation A/C and further efforts in price revisions to counter raw material price hikes. This is my final slide. After the launch of our new structure in April this year, we announced our group-wide medium- to long-term strategies as well as those of each operating company. We are making steady progress with assessment and execution of each initiative based on the strategies. For the material matters in supply chain management and Automotive Battery businesses, we have disclosed and communicated information when the decisions were made. During the second half of FY '23, we plan to have briefings on the individual businesses in Lifestyle. As we proceed with the medium- to long-term strategy, we will make announcements on individual measures at both group-wide and operating company levels in a timely and appropriate manner. Thank you for your attention.

From Nikkan Kogyo Shimbun, [ Ohara san ].

I have 2 questions. First, regarding the results and the outlook. Compared to the forecast you announced in May, you have not made any changes despite the changes taking place in the business environment. Can you tell us the reason why you haven't changed the outlook, the guidance? In your presentation, you said that you expect the results to bottom out in May. But in relation to that, can you explain the reason why you haven't changed the outlook? My second question. The government is talking about restarting the operation of nuclear power stations and others so as to address the power shortage possibilities in Japan. So the basic policy of the government is control the soaring energy prices. So I wonder if you have any comments or requests on the part of the industry regarding this government policy?

Thank you for your questions. Your first question about the guidance outlook. Of course, at each of the operating companies, the annual forecasts, we have aggregated them, which are shown in the latter part of the presentation. So although it is shown in the qualitative manner, that's what we are sharing. In terms of KGI, given the trend that I mentioned earlier, we did not feel the need to modify, revise the annual outlook. Although pertaining to the foreign exchange, maybe we could have revised, but for the time being, we decided to keep the original forecast. As for the first quarter results on a year-on-year basis, it may appear to be weaker, but we are focusing on the trend that I mentioned earlier and JPY 100 billion in a single quarter, that was for the first time since 2007, the Lehman crisis. So that was the figure for last year. Other than that, we have seen the first quarter exceeding JPY 100 billion. So that is the answer to your first question. Now regarding the electricity and the energy price hikes, the request that we might have of the government. Well, as a company, I don't think we are in a position to make any statements 1 way or another. We are working with Kansai Electric Power Company and others in terms of promoting the procurement of the renewable energy sources. So we will just be focusing on what we can do as a company. That's all.

Next [ Naganawa san ] from Nikkei.

First, about Connect or about the Blue Yonder, I have a question. So here, the acquisition has ended and there is a major amortization. It's about JPY 7 billion negative number. So this is something that is going to continue. So how do you make a profit in Connect business as a whole? This could be a very heavy burden. So what do you think of that? And also, the listing or creating a new company is being discussed. So maybe you can touch upon that. That's my first question. The second is about the price revision with the higher materials cost, and maybe 50% of that is reflected on the prices. So from now on, home appliances from August, we hear that you might be increasing the prices. So aside from the home appliances or home electronics, what are the areas that you need to increase the prices?

Thank you for your questions. First, about the Connect, Blue Yonder, JPY 7 billion negative. As I showed you on 1 of my slides, this has to do with amortization of intangible assets. And in Q3 last year, we announced that 1 time with the acquisition, the accounting procedure. In simple terms, Blue Yonder itself is a profitable business. But at the time of the acquisition, this business had already incorporated the profit. So it's really a technical matter. So it's about JPY 4 billion. It was positive, but on a consolidated basis its offset or it turns negative. So there is an amortization of that. So that is the background behind the JPY 7 billion negative number. So from now on, this will improve. So that's about Blue Yonder. And about the listing, or the direction of the listing, we have already made announcement on this. So it has to do with the regulation before the listing, so I am unable to give any comments on the potential listing in the future. As for the price revisions, on the 20th of July, in the Lifestyle business, with the new scheme, announcement was made, and also from August time frame, we have already made a press release that we will be increasing the prices of the home appliances. We are very sorry to say, but we will be doing that. So this would become effective in Q2 and onwards. So the impact of the prices, about JPY 45 billion or so. So that was in Q1 in relation to the raw materials. And with the price revisions, about JPY 23 billion -- through the price revision, we have recovered JPY 23 billion. And if I may comment on this, the Lifestyle business is the biggest in terms of weakness in price revision. So we made the progress of the price revision in Industry and also Energy. So that's that pattern. In Q2, Q3 and Q4, the spike or the high material cost year-on-year increased. We would continue to see this. We expect that and the price revision will become more effective so that coverage ratio is currently 50%. So in Q2, Q3, Q4, we expect that percentage to improve. Especially the major 1 is the Lifestyle business, that is where we will be able to recover the earnings with the price revisions.

On point of clarification, in Connect, JPY 7 billion has to do with the amortization of the intangible assets in Q2 and onwards. This includes the technical factor, but this will come down to JPY 3 billion level. Is that the correct understanding?

Well, about the Blue Yonder, talking about the future has to do with the regulation before the listing. There are some restrictions. But in Q1, the actual, as I mentioned, was a pure technical factor and it has worsened about JPY 4 billion. And this would be alleviated or mitigated. At the same time, as for the sales, on Page 17, as you can see, it's steadily growing. So this deficit number will improve and will turn to the positive or the profitable business.

Next is from Bloomberg, [ Mochizuki san ].

I have a question regarding the price hikes, price revisions in household appliances. You said that for second quarter, third quarter onwards, things are going to get better. But when it comes to the upstream of the supply chain or the material prices, I think the secondary -- tertiary price revisions are taking place, which means increased cost. So I wonder if already announced price hikes in August and September would be sufficient? Or do you see a possibility of further rounds of price hikes?

Well, it's hard to predict about the future. But of course, Q2, Q3, Q4, the raw material price hikes are being expected. Now would it expand? Currently, the copper price, over $10,000 per ton, down to $8,000 or thereabout. Aluminum and others, those material prices have come down compared to one point in time. Still, instead of counting on those lower prices, we are expecting the price hike impact on the full year basis in our forecast. Most is in the Lifestyle business area. And it is with that in mind that we are planning to implement the price revisions. Should we see further changes in the environment, of course, first we will try to absorb that through our efforts, but we may need to take further actions. But that would all depend on how things will turn out.

Next from Sankei, [ Kojima san].

About the price increase of the home appliances, you mentioned that you would revisit this based on the situation. So do you mean the price increase, or in different ways, for example, on the 1st of August and onwards, there could be some different zones of the home electronics. So that range would be expanded? And also in May, you mentioned that you hit the bottom in May. So hitting the bottom, the higher material cost and parts costs have come down, you mentioned. But once again, the biggest factor and the reason why you think that now you have hit the bottom in May, could you explain that once again?

Yes. Maybe. I don't want to cause any misunderstanding. So once again, let me explain. So we have announced about the price increase of the home appliances. This, we believe, is the best possible way as of now. So we are not saying that we would make any changes to that. Having said that, if there are any major changes in the environment, it is possible that we will make changes. So that's what I meant. So we are not saying that we are thinking about making changes about the price increase. And whether to increase the prices or not, we have to consider whether products are competitive. And we have a new scheme where that we have a responsibility for the inventories and the life cycle of the products is not for a year, but rather we would like to provide more value to the customers, and we want to spend our resources to enable that. So we want to create such a virtuous cycle. So this new scheme will be applied to the products, and we want to increase the number of the products that comes under the new scheme. So that's the meaning of this. That's my answer to your first question. The second question. On Page 9, we are showing the qualitative information and the raw material price hikes, we are not saying that it will get better next year, but a similar impact is going to be expected as we did in the past. So we had a lot of pink areas, mainly due to the lockdown in Shanghai. So in China and also there were supply from China to Japan and also there was an impact in the car business. So in the Q2, the bottom half of this slide, this is our prospect. So now we have a small pink area, and we have the wider blue and more stable situation is shown in white. And on the following page, this shows the trend in Q2, Q3, Q4 came down. So especially here, if you compare it with the year before, we would not expect to see the trend that we saw in Q1 last year. So that's what I meant when I said that we hit the bottom in May. And for the full year forecast of each operating company, they are likely to get better. So that's the background behind this scheme.

On point of clarification, you talked about this new scheme about the prices. So price revision and this new scheme, are those 2 wheels to go forward?

Well, the new scheme and the higher value for the customer, those 2 are the things that we want to realize. So when you talk about the price revision, new scheme and current products. And when we have launched a new product, we want to increase the prices, not all of them, but for some products that are being launched, we will have the higher prices than before.

We're coming to the close to the end of the allotted time. We have 3 individuals raising hands. So we'll take 1 question per person. [ Hatanaka ] san from Yomiuri Shimbun.

I'm from Yomiuri Shimbun, [ Hatanaka ]. One question. The COVID-19 infection situation, the new cases are increasing again. And in terms of impact, in Page 9, for example, Avionics, the aviation industry is recovering itself, but there could be some impact continuing from COVID-19 going forward. So Q2 onwards, what is your projection of the possible impact of COVID-19?

The Avionics business. The first quarter results show, compared to FY '20, that is before COVID-19, for domestic and international flights, the industry has recovered to 70% of that level. And for domestic flights, higher in the U.S. and North and South America. And for international, Europe, U.S. and Middle East flights are back to about 60% of the pre-COVID level. But overall, about 70%. So although Avionics are seeing an increase in profits, and this is because of flight operation recovering, the operational services sales are increasing for other factors. COVID-19, of course, we don't know about way down the road, but it looks like the situation is worse in Japan right now. This morning, the number of new cases in Japan topped the list globally. I think I saw that news this morning, the largest number of new cases in Japan. And of course, everyone is being very careful. As far as our business is concerned, there will be some businesses that will be affected, while other businesses will benefit from the support from the customers. So it varies. So regarding the COVID-19 impact, we are not paying particular attention to what the possible impact would be on our businesses.

Next, [ Gen ] san from Denki Shimbun.

So 1 question. Earlier, the price or -- new scheme about the home appliances in Japan, I think, has created a certain controversy. So I think that you focused on bringing happiness to 3 parties, the buyer, seller, and community. So how do the distributors are responding to this new scheme? If you are getting any information, Mr. Umeda.

Well, once this starts to function well, I think it will be good for buyer, seller, and community. But it requires very detailed explanation and communication. And of course, with the distributors, you asked the question, so whoever it is, I think that the price should be the same. So if that is the case, that the stores would be just like showrooms. And it would no longer be a price negotiation. So the products with the lower prices will be advantageous. But there are different opinions about that. So this new scheme price at a reasonable level should be stabilized, and we want to support and help customers truly, and we want to spend our resources to enable that. And by creating such a virtuous cycle, I think we can create a situation where we can please 3 parties, buyer, seller, and community. So that's what Shinohara san said. And I understand that there are definite views. So we will continue to provide the full communication and detailed communication. Thank you very much.