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

Hello, everyone. I am Kusumi. Thank you very much for taking the time out of your busy schedule to join us today. Last week, we had the financial results briefing, and we explained the forecast for fiscal 2024. And today, I would like to explain the medium-term to long-term Panasonic Group's vision and strategy. Two years ago, I said that we will focus on enhancing competitiveness necessarily at all businesses. First, let me look back at 2 years. I'd like to first explain why I said we needed to focus on enhancement of the competitiveness for 2 years. Panasonic Group's mission is to achieve what our founder, Konosuke Matsushita, pursued throughout his life, prosperity with matter and mind as one, to achieve that ideal society with affluence both in matter and mind. In 1932, 90 years ago, the founder declared to achieve an ideal society, which will take 250 years, that is 10, 25-year periods. To fulfill his mission, since the foundation of the company, we have been making contributions to solving societal issues that people faced at the time and for the sake of people throughout our businesses. Now whether we have been making good progress in achieving the mission, in some of the areas we are behind the competition, and we are still not achieving our mission. So we have decided to focus on enhancement of the competitiveness for 2 years, not just to increase the profit temporarily, but to build the foundation for the mid- to long-term growth. The competitiveness requires long-term prospective strategy as well as operational capability. Looking at the supply chain as a whole, those 2 are indispensable to each other. In the past 2 years, we have changed into the operating company system, and we have tried to attain the unrivaled competitiveness. Right now, the biggest challenge that we are faced with, which is inhibiting the realization of the vision is the global environmental issue. The final year of the 200-year plan is coming in 160 years. We have to avoid the situation where that our children and grandchildren do not live happily or cannot live on the earth at all. So based on the sense of crisis, we have set up the Panasonic GREEN IMPACT, which is the long-term environmental vision. And we're working on it as a group's common strategy. In April last year, toward 2050, we set the OWN IMPACT, that is the mission reducing emission reduction in the group value chain; and the CONTRIBUTION IMPACT avoided emission by existing businesses; and FUTURE IMPACT avoided emissions through new technologies and businesses. And through those 3, we said that we are going to reduce more than 300 million tons of CO2, which is about 1% of the global CO2 emission. In July last year, we said that as a milestone, we would achieve a net zero CO2 emission at all operating companies and 100 million ton CO2 avoided emissions. And for 3 years action plan, until fiscal '25, that is the GREEN IMPACT plan to 2024 was formulated, and we are working on this. So for example, as a progress, we achieved 28 net zero factories out of 37, which is the target for fiscal '25. All factories at Panasonic Automotive Systems achieved net zero. CO2 emission reduction in the business operation is a responsibility as a company, but it is also becoming a condition for the transaction, especially with B2B customers. Efficient CO2 emission reduction can be one of the factors of competitiveness. Now as I said, it is our responsibility to reach the net zero, but as for the avoided emission of the CO2, this could be a new indicator to evaluate other companies, whether they are contributing for the environment. WBCSD, definition of this is the difference between the emissions between the reference scenario without the product and services and the situation with the scenario. But this definition is not yet internationally standardized and cannot be called as an indicator to evaluate the companies, so we have been leading in driving the discussion, talking about the necessity of avoided emissions at WBCSD, IEC and GX League. Thanks to those efforts in the COP27 Japan Pavilion, they which the consensus on the importance of achieving decarbonization along with the economic development by implementing concept of avoided emissions. In March, WBCSD and GX League announced guidance above avoided emissions. And also last month, at the G-7 Ministers' meeting on Climate Energy and Environment in Sapporo, they agreed in the joint statement that there is a value in acknowledging avoided emission. So when this indicator is used and recognized by the investors and financial sector, that would support the investment into the company, which are contributing for the environment. And this would lead to an opportunity for us to enter a growth phase. We will continue to aggressively promote activities with companies with a shared vision, engaging with the government and industry. Next, about the enhancement of operational capability. At the front line of manufacturing, we are trying to generate cash and improve value creation, looking at the supply chain as a whole, and shorten the lead time and reducing the excess inventory. We have selected more than 1 leading work site at each operating company, setting up the high targets and work on the constant kaizen activities. For example, in Tsuruga factory of Panasonic Automotive, they have managed to reduce the production lead time and safety stock by 50%. We have seen very good results from different sites. In fiscal '25, we are trying to aim for constant kaizen to become the norm at all group sites. And we are also working on the Panasonic transformation, PX, using digital technology for the work style business and to thoroughly improve the speed and quality of the management using the data utilization across the business divisions. And also, we made progress into the shift to the cloud. But there are still business processes and corporate culture and also the legacy information systems, which are remaining as a negative legacy, and the heads of businesses need to lead to eliminate those negative legacy. So they are fully committed to hurry to transform the business processes, working with IT. But unfortunately, our 2-year competitiveness enhancement, therefore, were not fully reflected on our financial results. As we announced the other day, in fiscal '23, the adjusted OP declined by JPY 43.6 billion. And looking at the quarterly adjusted OP trend in Q1, it came down by JPY 53.8 billion due to the Shanghai lockdown, and we suffered from the shortage of semiconductor and higher material costs than others. So how much did we counter those negative impact with our operational capability? We are gradually starting to see the effects. And we have managed to counter that fully in Q4. But when you look at all the businesses, we are still halfway or we are still not countering all the external factors. So that means that we are still half way in competitiveness and enhancement efforts. In the coming years, we expect the various changes in the environment, including the labor shortage and the higher prices and geopolitical risks and supply chain disruptions. But still, we are maintaining our medium-term KGI that is the cumulative operating cash flow of JPY 2 trillion, ROE of 10% or higher and cumulative operating profit of JPY 1.5 trillion. We will continue to work on the enhancement of competitiveness without slowing down. Now after the 2 years of competitiveness enhancement stage, it is time for us to elevate ourselves to the growth stage. We would further clarify our vision as a group, so that we can move forward to achieve our mission. And today, I'd like to talk about a clarification of the priority investment areas and how we try to orchestrate group's comprehensive strength based on the customer's perspective. Let me first share with you the group strategy. So this is our group vision. In order to achieve our ideal society in the long term, there are so many various challenges. So for example, global warming, depletion of natural resources and extension of the healthy life expectancy. They are not just predictive for the long term, but they are in front of us already. To squarely address such societal issues and to make the 250-year plan highly probable, we will focus on 2 aspects of contributions within the group. As I said at the outset, solving the global environmental issues is our top priority. So in achieving the Panasonic GREEN IMPACT, we will make sure that we make the necessary investments. Another aspect is what we used to call well-being of people in the world. So this has been changed to the lifelong health, safety, and comfort for everyone. So we'll try to achieve that. Now I'd like to explain 2 group-wide common strategies. First is the environment strategy that is including the global warming prevention and circularity of the natural resources. In order to expand the group-wide avoided emissions, we will use the knowledge and technologies in electrification, energy saving, energy transition, and resource conservation. So for example, in the area of manufacturing, using the solar and hydrogen energy, there's a RE100 solution. And also, we will try our energy saving technology and solutions in our own factories and apply them to the customers' plant and other sites. In the area of supply chain, we will provide a solution to optimize the overall supply chain, optimizing the inventory and transportation, and contribution in the environmental burden reduction, and to improve the efficiency of our energy through our products and solutions by utilizing the hydrogen energy and also replacing the current electricity with renewable energy. And the biggest impact in terms of the avoided emission is the replacement of the devices that use the gas and the gasoline and fossil fuels in mobility, town and home areas. As Panasonic Holdings, we will look into the 10 years to come and try to prioritize the investments in automotive batteries that account for about 60% of the avoided emission. Now let me talk about automotive battery, the priority investment area. Electrification of the mobility is considered to be one of the most effective area to realize carbon neutral society, and EV market is going to expand globally. We are focused on North America, and we are seeing the rapid growth of about 35% per year. In addition, the U.S. government is promoting the building of the EV supply chain in the United States and has been making a strong request to manufacture automotive batteries in the United States. And the cylindrical type cells with the higher density with safety and cost advantages, this demand is growing because it is suitable for the cooling upon fast charging. We will focus on the cylindrical automotive battery and the North American market and to expand our businesses. Now how can we compete in this automotive battery market, which is becoming extremely competitive and becoming red ocean? Let me talk about our competitive advantages. In the area of technology, for the past 30 years, we have been leading the industry in the higher capacity and less rare earth or rare metal, and also safety. In the area of high capacity, we have tripled the volume energy density from the first generation. And by 2030, we are aiming to achieve 1,000 watt hour per liter. With this, we can extend the range and also improve the performance of the cars with our batteries. And responding to the expanding automotive battery demand, it is critical whether we can manufacture with less rare metals. For the first in the world, we have achieved less than 5% cobalt content with cobalt-free within reach. In the area of quality since 2012 calendar year, we have delivered batteries to equivalent of 2 million EVs with 0 recall. We have developed high operational capabilities at Nevada factory in North America, especially in North America, where turnover of operators is high, manufacturing, which can be done by less experienced operators is a key to competitiveness by improving production processes and accumulating know-how. Production exceeded more than 10% of the initial target. Kaizen mindset is now firmly established, and the factory is now poised for a further increase in production capacity. On the cost structure front, we will improve investment efficiency in view of the mid- to long-term expansion. Know-how accumulated in Nevada factory is leveraged for Kansas factory from the stage of factory design and equipment cost and preparation items production reduced, and equipment productivity and assembly personnel productivity are improved. Upon construction of the factory, the state government of Kansas provided us with tremendous support, including tax incentive program and personnel-related support. As for material supply chain, we are working for stable procurement and reducing lead time and promoting local procurement in North America. With progress of the competitive advantages, we are ready for expansion of automotive battery supply in North America. In order to further strengthen our competitiveness in technology and production that I explained earlier, we'll consolidate and enhance the group's R&D structure. We'll establish a site for production and technology development in Suminoe Osaka in 2024 to accelerate productivity improvement and production expansion. And in 2025, we'll set up a new R&D site in Kadoma to accelerate the development of next-generation batteries and materials. We'll input resources in these sites as a group for R&D of batteries. Now I will explain the effect of GREEN IMPACT from automotive battery business. In addition to realizing net zero carbon dioxide emissions at our own sites by FY 2031 for Scope 3 on the upstream side, we are moving towards adopting low carbon footprint print materials of Redwood and NMG. Also establishing a supply chain in North America will reduce the distance of materials transportation. Furthermore, by expanding supply capability of EV batteries, electrification of mobility will be promoted, resulting in increasing avoided emissions 5x in FY '31 versus FY '23 to 59 million tons. Next, I will explain the outline of strategies for these. We will be strengthening partner relationships with the customers, and with the new customers we entered into supply contract, specifically Lucid for high-end EVs. And for Hexagon Purus for commercial vehicles we entered into supply contract. We are receiving other inquiries as well, and we will develop more customers. We will now move to full-fledged growth phase backed by preparation of capacity expansion. Last year, we made a decision to make strategic investment as a group. We mass produced 2170 in the new Kansas factory, which is under construction, to expand supply in North America. As for 4680, we aim to establish stable production at Wakayama factory at the earliest point and to roll out new large-scale production capacity in North America. With this, we aim to increase our production capacity by 4x to 200 gigawatt hour by FY '31, realizing business expansion will require a large investment, not only investment by Panasonic Energy, but we will also consider various financing options and we will flexibly make investments. Next, I will explain the outline of strategies for 2 businesses we'll make investment in after automotive batteries. First is air quality and air conditioning. In Europe, in addition to being a top runner in the environment, there has been rapid shift to move away from gas due to their relationship with major natural gas supplying nations. In this market, we'll expand our business with a focus on air to water to change energy source from gas to electricity and contribute to avoided emissions. In Europe, where cold temperature areas require heating, we'll enhance business foundation to increase our contribution by leveraging our advantages of excellent performance to maintain heating capacity at low temperature as well as IoT remote monitoring. To this end, we established management structure of local production for local consumption, seamless operation of development, production and sales within Europe. Also, in order to respond to the increasing demand, Czech factory, which used to produce AV equipment will be converted to air to water production site and new building will be added. We aim for global 1 million unit capacity in the future. In response to Europe's F-gas regulation, we became the first Japanese manufacturer to launch models using natural refrigerants. We will preempt the strengthening of regulations and accumulate know-how on product design and maintenance to safely handle natural refrigerants and build competitive advantages in the future. We also acquired Systemair AB's commercial air-conditioning business by combining Panasonic's sales platform and Systemair's technology and parts and materials centered on chiller. We can expand our target market to light commercial areas and making contributions in Europe. Next is supply chain management software solutions. Rich software solution package, which cover the entire supply chain technologies to supply total optimal solutions with high accuracy and a strong customer base of over 3,000 companies. Leveraging these advantages of Blue Yonder will contribute to reducing environment impact by optimizing inventory and transportation on the supply chain. As new CEO, Duncan Angove, explained in the strategy briefing of Panasonic Connect Blue Yonder on May 10, we will first enhance business foundation of supply chain management software. We will make R&D investment for cloud-native SARs and security enhancements as well as the enhanced touch point with customers, including sales and customer support. And we will make further contributions by delivering autonomous solutions by linkage with various data obtained from frontline edge devices, which is an edge of Panasonic Connect. Next, I will explain the next pillar of our strategy, our initiative for making contributions to each customer's lifelong health, safety and comfort. We have many touch points with our customers. For instance, channels such as showrooms and specialized shops of building materials, products such as consumer electronics, electrical construction materials and building materials and related services and repair and support. Through these, we make contributions. We aim to become a lifestyle solution provider that can propose value tailored to its customer through diverse customer touch points in their lifestyle and use of digital technologies and AI. In order to accelerate this group-wide initiative, we established future business division, which is led by Executive Officer, Yoky Matsuoka, who used to work in Google and Apple. From this current fiscal year, towards shifting to a growth phase, we will proceed with the management initiative by taking into consideration the revision and replacing our business portfolio. Needless to say, the revision or the replacement of business portfolio is just a means and our aim is to provide all stakeholders, including shareholders, customers, business partners, and employees with benefit as well as increasing the value of the group. Thus, to make stakeholders benefit sustainable for years to come, we have set 2 types of criteria for determining the group's business portfolio. The first criteria is the relevance with the group's common strategy. From the environment perspective, we will look at our businesses, whether they can make contributions to reduction of carbon dioxide in society or saving resources. From the perspective of lifestyle, we will look at businesses whether we can propose value tailored to each customer through divest touch points according to their lifestyle and the use of digital technology in AI. In addition, we will look at businesses in line with financial discipline. In other words, whether they can make profit contributions. Then we will determine our business portfolio by looking at their market position and competitiveness as the second criteria. The market growth and sustainability for next 10 years, the position of business in the market, as well as profitability perspective will be assessed thoroughly quantitatively and qualitatively. If businesses can contribute to make contributions to society and customers going forward, we'll continue to enhance its competitiveness for the growth in the Panasonic Group. On the other hand, if it is better to accelerate the business growth by taking the position outside of Panasonic Group, that will be beneficial for all stakeholders as a result. Therefore, we set detailed criteria to assess our businesses. And based upon this criteria, we will set the direction of revision of business portfolio in the current fiscal year, and we will execute the decisions made accordingly. This slide shows the change of sales composition after the review of our business portfolio. Green part indicates businesses that contribute to solving environmental issues, blue part indicates businesses that contribute to each customer's lifelong health, safety and comfort. We continue to transform the way we address society and customer at each business. Through these initiatives, in fiscal 2031, we will have all our businesses make contribution to either green area or blue areas. I strongly believe that solving global environmental issues is of the utmost necessary challenges for management in the world for the next 10 years. Therefore, we, the Panasonic Group, will continue to greatly expand our businesses that can make contributions to solving global environmental issues towards 2030. Lastly, I would like to explain our financial strategy to conduct the group strategy that I explained. Our capital allocation policy remains unchanged for the 3-year period from FY '23 to FY '25. In principle, necessary cash will be managed within the cash generated through our businesses. The generated cash will be allocated in an appropriate manner. As for cash flow generation, we aim to generate JPY 2 trillion of cumulative operating cash flow as well as cash generation mainly through sales of assets under the current mid-term KGIs. As for cash flow allocation, we are planning to make investments of JPY 1.8 trillion, which JPY 600 billion will be invested mainly in the automotive battery business from priority investment areas as strategic investment to achieve our group's strategy. As for dividends, JPY 300 billion is expected, and we strive to stable continuous dividend payment, targeting payout ratio of approximately 30%. In terms of financial discipline, we set approximately 1.0x in net-debt-to-EBITDA ratio as a target financial indicator, and we thoroughly maintain financial discipline. To ensure this, we will strengthen financial discipline to operating companies. More specifically, we will apply monitoring indicators for borrowing at operating companies and conduct a strict operation and implement necessary improvement measures. Based upon this capital allocation policy, we will conduct the group's strategy. That concludes my explanation of the group's strategy. I thank you very much for your kind attention.

Thank you very much for your attention. Now we'd like to take questions from journalists. Please note that questions are not accepted on the English channel. [ Sugoi-san ] from Nikkei, please.

[ Sugoi ] is my name. I work for Nikkei. I have two questions. First, this time, the target of the battery business, you used to say 3x or 4x. But now this time, you said 4x. What kind of investments do you plan to make in order to compete against other major competitors? That's my first question.

Well, competitors, I think, for example, it's not really only in North America. There are companies which are not focused on the North America. But in our case, we are first focused on North American market. So Kansas, and then JPY 500 billion to JPY 600 billion. After that, it's not yet clear, but we have to consider what kind of earnings and what kind of options do we have? We are considering all of those. I hope that answers your question.

Yes, a related question. In case the areas or the targeted market is different from the competitors, and of course, you need to increase the volume so that you can avoid the same situation what happened to the semiconductor and others. I'd like you to talk about your enthusiasm.

Well, unlike the semiconductor situation, batteries -- semiconductors, through the mutualization of the processes, you need new plant. And accordingly, you need to increase the size. But in the case of batteries, 2147 and 4860, and I think that theoretically, they reached at the optimum level. So the inside of the can and the chemical composition will change for the evolution. So unlike the semiconductors, we will not be building one plant to another or increasing the number of the factories.

I see. So I would like to ask the second question. So you talked about Suminoe and Kadoma production technology and the material developments were explained. And actual investments, what is the size of the investments for those? If you can give us more details.

Well, concerning that, it's not as big as building a new plant. Of course, we need to increase the number of the headcount. But as for the details, based on the total amount of the investments, I myself do not know the total amount, and we do not disclose the details of the investments.

Sorry, as I said, I would like to know the aim of it. It's the same question as before.

Well, as for the aim, the production technology. So for example, creating one production line is not the end of the story. We have to improve the efficiency, and we have to automate the production line. And together with the equipment manufacturers, you have to make efforts. So having sufficient number of the people and inviting partners, we need to accelerate and we need to work together with other players. So that's what we are going to do. I hope that answers your question. Thank you very much.

Now, we'd like to entertain the next question. Nikkei [indiscernible] san, please.

I have one question, if I may. Portfolio review will be conducted. Page 21, the current situation, you have the graph and the gray portion in that pipe. And what kind of businesses fall under this category?

Well, I was anticipating such a question. But if I answer, then there may be various negative impacts. So please excuse me from responding to that question. But often speculation is, are you going to carve out the gray portion of the business? People tend to ask these questions. But on our part, in this gray portion, those which can move to green and blue, we will be asking them to move to green and blue. So we will do that simultaneously. Hope that answers your question. Thank you.

Next, [ Omega-san ] from Toyokasei.

I also have two questions. First, you talked about the possible negative impact. So how to make a judgment in setting up the criteria is what you mentioned, I think. So what would that be? As of now, anything that you can add?

Yes. What it says here, what is written on this page is exactly what we like to do. So whether it's appropriate or not, and it's not just doing what is written here, but we have to make sure that we can continue to do this in the future. And whether we have the competitiveness, which can go beyond our competitors. And that is important to have that kind of capability. So here, also says competitiveness. And number two, so the market share and the cash generation and others, the operational capability and strategy, we have to be better than the competitors in order to get the quantitative better results vis-a-vis the competitors, and that's what we mean by this. So how do you make a judgment or how you evaluate the competitiveness? For example, for the expansion of the batteries, and some people say that we are not making a quick decision about it. But one of the example is what we did with the batteries.

Another question is about the SCM or Blue Yonder. Here today, I think it was explained, but I think the investment phase continues and the negative profit continues. So as CEO, how do you want to grow this business? Could you talk about the time frame or the size, specifics?

Well, this area requires the bolt-on investments. For example, it's a kind of a software solution. So if you look around the success, for example, they go through the M&As and making investments. So software, in combination with the software, and through them you can widen the solutions, and that is likely to continue. So inside the Connect, they can utilize what they earn, and maybe they can do everything with that. So of course, the timing of the listing is not yet decided, but through that, including the financial strategy, we need to also make sure that there is a funding for that.

We'll move on to the next question. Sankei Shimbun, [ Kuwajima-san ], please.

[ Kuwajima ] from Sankei Shimbun. First, fundamental point. After you assume the post, 2 years enhancing competitiveness, and that period has ended, and this time, as you have explained in the briefing, but the target and competitiveness enhancement, were you able to achieve the enhancement of competitiveness? Are there any shortfalls? Can you enlighten me?

Now how should I say it, historically, looking back, with the philosophy with high target and enhanced operation capabilities, we have not been able to do that. And we have to do this all at once, then it may not be possible. And hands-on, including how to proceed, in our company, we have those missionaries. After Kaizen, we developed such people and increased the number of people who can focus upon kaizen and have representative sight to lead the way. As I explained in my briefing, I talked about the Tsuruga factory in automotive. We can do this. We understand that it can be done. My expectation is that at a higher speed, it could be deployed horizontally. That should be all the better, but we haven't quite gone that far. And finance leading to the financial results is where we are lagging behind slightly. In the 2 years, if you ask me, no progress. That is not the case at all. By at least 1 in some places, several sites are showing remarkable results. So we will be rolling out, and we have the foundation ready. So 2 years of enhancing competitiveness showed results. At the same time, we have come to this level. Is this the end of enhancing competitiveness? No, not at all. Over the past 2 years, we have worked to enhance competitiveness, and we are going to refine this further. Competition will be evolving as well. So we have to accelerate our speed of enhancing competitiveness. Group as a whole, this is a common understanding within the group. So this will be the foundation for further accelerating the competitiveness going forward.

Along with that, when you made the announcement 2 years ago, you said that you will not be conducting major reshuffle or rebalancing of the business portfolio. But 2 years have passed, and from this fiscal year, you will be enhancing competitiveness, and at the same time, you will be reviewing, replacing the business portfolio. You couldn't hear the question? Sorry, let me repeat my question. As you explained, first, in the 2 years you were able to achieve enhanced competitiveness. But in the meantime, you were not changing the business portfolio in a major way and focused upon enhancing competitiveness. But from this fiscal year, you will be changing the business portfolio. So you have 2 focuses, competitiveness enhancement and also reviewing the business portfolio. That's a fair understanding.

As I explained in my presentation, restructuring or reorganization may have different interpretations. Before I assumed the current post, the major reorganizations was carved out, the businesses which were impaired. But reorganization or reform of the business going forward is medium to long-term perspective for portfolio management. So this is different from the past. I hope that answers your question.

One point for clarification. So you will not be carving out? You will be taking options other than simply carving out the businesses?

Depending upon the businesses. Diverse businesses are there. So for each business, we look at the future of the business, and if there are challenges, then various different prescriptions are needed. So uniformly, we don't say whether it's carved out or not. That is not the case at all. For example, the structure of the operating companies are such, and this one can be combined with others. So within the group, there may be change of the portfolio, which may result in medium to long-term growth. I hope that answers your question.