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

[Interpreted] Thank you very much. Good afternoon. I am Kusumi. Thank you very much indeed for joining us in this online briefing session. Last week, we announced the financial results of the last fiscal year and the forecast for this fiscal year. So today, I'd like to explain what Panasonic Group will work on during the last year of medium-term strategy. First of all, in the final year of the midterm management strategy, I'd like to first go through the current position. Looking at the management indicators and KGIs, we are likely to achieve the cumulative operating cash flow goal, but the ROE and the cumulative OP are expected to be unachieved. Although the management emphasizing the cash flow has taken root, profitability of the each business have not reached our expectations. Due to unexpected market changes, mainly in automotive battery and air to water, which are included in our investment areas, those were all far from the goals. And also, the businesses which were expected to help the group-wide profitability did not reach the expected level, partly due to the market changes in terms of the competitiveness enhancement. I regard the situation with the sense of crisis as we have not yet met expectations of the shareholders, including stakeholders, including shareholders and investors. In order to change this, I am determined to take the initiatives to improve the profitability. First of all, to strengthen the business foundation of the investment areas -- and in automotive batteries and air quality and air conditioning, the speed of the market growth will be slower than expected, but will definitely grow. So the timing and amount of the investments for growth will be decided flexibly to respond to the market and customer trends. But we would further accelerate the competitiveness enhancement. As for the supply chain management software, under the CEO, Duncan Angove, we are having the Duncan transformation. So this will be carried out steadily, and we will complete the preparation for the innovation and the future growth. The second is business portfolio management and financial strategy started last year. We will rigorously manage each business based on the growth potential and capital efficiency, and resolve issues from all businesses and build a solid base for profitability that can meet the shareholder expectations. The third is the continuing enhancement of the group-wide management structure to strengthen basic capability of competitiveness of each business, this will continue in the long term, not for the single year. So today, I would explain the human capital management, operational frontline innovation and PX. First of all, strengthening the business foundation of the investment areas. This explains the market changes in automotive battery business identified as a priority investment area. The global battery EV, or BEV, market has changed significantly over the past year. We think for the long-term perspective, the electrification of the mobility will progress. However, in North America market, where we focus car manufacturers who once drastically changed their direction to BEV, change their lineup expansion strategy based on the customer needs and announced for route of HEV and plug-in EV models. Therefore, we think that the B-E-V or BEV ratio in 2030 may be lower, and the pace of a shift to B-E-V or BEV seem slowing down right now. And one factor of this is the cost of the batteries, which account for a large part of the vehicle costs, have not become suitable for EVs in affordable price range. Also insufficient development of the infrastructure for BEV energy supply, more specifically the deployment of the charging station, which have not yet caught up with the demand. Moreover, the U.S. EPA has gradually easing the GHG emission standards by 2032. Also in March 24, the EPA announced the scenario for achieving CO2 reduction with various technologies such as P-HEP. As for the trend for battery types going forward, the adoption of the iron phosphate-based prismatic batteries or LFP is expected to increase for BEV models, focusing on safety features and cost, which has been seen in the other global market. On the other hand, the adoption of nickel-based cylindrical batteries, in which we have advantage, is also expected to increase for BEV models along with -- which require a longer range capability. This is due to the advantage in the development of energy density, while insurance safety. In the midst of these changes, in March 2024, to build a strong competitive business foundation, we signed a basic cooperative agreement with Subaru covering the supply of automotive batteries, and signed agreement with Mazda for the supply of batteries. In preparation, we are planning to transform our factory operations in Japan, mainly for Osaka factory, and expand the production capacity. In addition, we continue to expand our supply bases for the customers who adopt cylindrical batteries, including supply for lucid luxury EVs and Hexagon Purus, the commercial vehicles, which we announced in 2023. We are also working to improve the profitability through improvement in productivity at each factory. At Nevada factory in North America, we aim to increase the production capacity by over 15% of the fiscal -- in fiscal 2030 -- 2031 compared to fiscal 2024. Also at the Kansas factory, which is currently under construction, we aim to improve the labor productivity by over 30%. The construction of the Kansas factory is steadily progressing toward the start of the mass production planned for this fiscal year, and in the stage of the bringing in the equipment. At Osaka factory, we aim to improve labor productivity by over 35% in fiscal 2029 compared with fiscal 2023 through the realignment of the floor arrangement of the entire lines and further introduction of labor-saving initiatives. As for evolution of technological foundations, we will start to operate R&D facility in Kadoma and manufacturing development facility in Suminoe which we announced in 2023. With these new facilities, we will accelerate the development of next-generation sales, productivity improvement and capacity expansion. As for 4680 sales with the high -- new high-density technologies development is progressing as planned, and the mass production is expected to start in Q2 of fiscal '25 at Wakayama factory. The introduction of 4680 cells will help us build a strong competitive foundation. Through those initiatives, we will build the management structure in the automotive battery business and to ensure sustainable double-digit ROIC, including RIA from fiscal 2028 and onward, and we will make decisions on the investment strategy in the future, flexibly and judiciously according to the customer demand. Now moving on to the air quality and air conditioning. We explained the growth background of the air to water last year, but the market environment has significantly changed. The gas prices have normalized and subsidies priority have been revised and the European economy has been sluggish. And because of this, the market condition as a whole has been sluggish, and we did not -- we are not seeing the good growth as we expected. But based on the stagnation right now, we are not -- we have no choice but to change the original plan, but the environmental issues are not something that we can avoid. So in the medium to long term, we believe that the demand would expand. And looking at the macroeconomic trend with the consumer spending are likely to recover with the lower interest rate. And we also expect enhancement of the regulation of the gas boilers, and we expect that we go back to the growth trajectory. While market [ struck ] stagnates, we will take steady initiatives to increase the market share so that we can build a superior market position in this business as there are not a predominant player right now. So how do we intend to expand the market share of air to water. In addition to being accepted by the end users, we also need to convince the installers to want to introduce our products. So we would collaborate with the energy providers and utility companies so that we can increase the business partnership with installers and to improve their businesses. For example, we will be providing the predictive maintenance and breakdown services, and also to make sure that we have other business opportunities, we will provide a loan scheme as well as subscription models. And in terms of improving the product competitiveness, we would also focus on the industry-leading compact size for the condominiums and light commercials, and to promote this compact size, which is 70% of the original size. And through the partnership with Innova, we would try to provide optimum indoor air quality, including air conditioner, ventilation and dehumidification. With Tado, we would also work with them to introduce a smart thermostat. And as demand stagnates, in addition to enhancing the product value for end users, we aim to provide higher value to installers so that they would choose our products. And also with Tado, we will try to reduce the energy cost by more than 30%. Let me now talk about supply chain management software. Under the new CEO of Mr. Duncan Angove, who became the CEO in fiscal 2023, we continue to promote the transformation. And the first version of the native sales product was launched last year. To enhance customer contact, we are working with the -- for example, the Snowflake to provide Blue Yonder solutions to the customers and also doing the joint marketing with Accenture and increased marketing and sales personnel at the front line of the Blue Yonder by 50%. And also we -- the Blue Yonder acquired the -- Doddle for return management and flexes for the planning. And we started to see some synergies between the Blue Yonder and Panasonic being generated. We implemented the yard management solution for Penske Logistics, combined Panasonic Connect strength in frontline edge devices and Blue Yonder solutions. And we -- in collaboration with the Rapyuta Robotics, warehouse efficiency and combining with the Blue Yonder solutions, we will continue to generate the synergies. At the end of last financial fiscal year, Blue Yonder acquired one network to achieve overwhelming competitive advantage. The company provides solutions to share, visualize and utilize the demand, sales, logistics and inventory information real time on a single network for multiple supply chain-related companies. By unifying the Blue Yonder solution for highly accurate total optimization and One networks information sharing platform, it is possible to provide supply chain wide optimization solution in real time. We aim for growth as a provider that can offer SCM platform with real-time and multi-tier orchestration capability. Next, I will explain our business portfolio management and financial policy. I explained our philosophy on business portfolio management in the group strategy briefing last year. The first is the relevance to group-wide common strategy. Panasonic Group will be making both contribution to global environment and lifestyle contributions to each customer's lifelong health, safety, and comfort, whether each business can continue to make contributions. This is the first criterion. Second criterion is market position and competitiveness to make assessment on market growth potential, sustainability position of business, profitability assessed both quantitatively and qualitatively. Last year, I also explained that the revision or replacement of business portfolio is just a means. Our aim is to continue providing all stakeholders, including shareholders, customers, business partners and employees with benefits. In order to make assessment from that perspective, we added the third criterion, which is best ownership perspective. More specifically, whether Holdings can take necessary actions on business most important issue, whether Holdings can make necessary growth investment if the business needs more cash than it can generate and whether Holdings can evaluate the businesses quality and competence. With this thinking, I committed to set the direction of the revision of business portfolio and execute the decisions during the previous fiscal year. And the one case is the automotive business, which was already announced, I would like to explain to you about this case. The automotive industry is facing the biggest transition in its 100-year history with [ KASE ] in order to survive in the area of cockpit high-performance computer, HPC and EVP Electronics, our automotive business main area, a large-scale R&D investment is needed to respond to the shift of electrification and software-defined vehicles. On the other hand, from best ownership perspective that I explained earlier, we came to the conclusion that we alone cannot make sufficient investment and that we need to tap on capabilities from outside. We consider this matter based upon this judgment, and we were able to welcome Apollo one of the largest funds in the world as our new partner. With this partnership, we'll be able to utilize Apollo's information network, M&A capabilities and human resources for management, and we will have a big opportunity to make a big leap forward as a global top player. We judged that this will benefit our customers and employees. Apollo agrees for us to maintain our basic management policy, to maintain and strengthen relationships with the existing customers and to maintain Panasonic brand. Relationship between Panasonic Automotive and Panasonic Holding will change from parent-child relationship to independent cooperative relationship, PAS will be unrivaled in making contributions as a member of the Panasonic group. In order to further revise the portfolio, Panasonic Holdings has to rigorously manage the market position and competitiveness at each business under the current midterm strategy. We assessed financial soundness of each operating company based upon net-debt-EBITDA ratio and established cash flow management. From this fiscal year, in addition to cash, we will strictly manage return on invested capital, ROIC, to establish a strong financial and profitability structure on business division basis. To be more specific, if a business growth is negative and ROIC is less than WACC by business, that business will be categorized as business with issues and to either improve ROIC by themselves or drastic measures will be executed, such as business transfer or withdrawal. The number of businesses with issues is to reach 0 by the end of FY March '27. And we aim for all businesses to have ROIC level exceeding WACC by business plus 3 percentage points. As the last part of financial strategy, I will explain our capital allocation policy. There is no major change from the announcement we made last year. On the cash flow generation side, it is proceeding smoothly at about 2/3 vis-a-vis cumulative operating cash flow of JPY 2.0 trillion after passage of 2 years. On the allocation side, we are planning to allocate JPY 0.6 trillion as strategic investment to automotive battery business. We will make investment decisions looking at the trend of the TV market that I explained earlier. We are planning dividends of JPY 0.2 trillion, in addition to stable and continuous payment of dividends, will reward shareholders by improving corporate value. We will be promoting group management based upon this policy. Lastly, I will explain our initiatives to enhance management structure of the group. Let me explain Panasonic Group Human Capital Management. The words of our founder: "a company that develops people before making products are the basis of our thinking". In order to realize an ideal society with [indiscernible], both in matter and mind, which is a mission of the group, implementation of basic business policy -- philosophy by everyone is insured. This is the Panasonic Group's human capital management. Also, we formulated Panasonic leadership principles in April last year as a common guideline of conduct of the group to implement basic business principles. Next, I will explain key measures of human capital management. In order to realize employees well-being, we are accelerating initiatives from the perspectives of assets of fulfillment, individuality and work in a state -- safe, secure and healthy state. As an example of work together by giving full play of all individuals, we introduced diversity target to realize an organization with diversity. Also for implementation of basic business philosophy, PLP is incorporated in each measure of HR management. Also, PLP-based 360-degree assessment is applied to management and business heads. We ask employee well-being and implement basic business policy as Panasonic Group. Each operating company strongly implements its HR measures which are suitable for their business characteristics. As one example, I'll introduce the case of Panasonic Industry. Panasonic Industry has introduced a job-based HR management system, clarifying roles and requirements. Based upon defined roles and requirements, they introduced a voluntary-based open transfer system to support autonomous carrier development of each employee. In addition to the conventional system of staff level positions, openings for management -- managerial and higher level positions are also subject to open recruitment within the company. Over 1,000 transfers have been conducted since the introduction of the system in November 2022. Also, in terms of evaluation and reward, the new system expands career options of individuals. The conventional system places emphasis on managerial positions, but the new system provides appropriate reward for specialists who may prefer pursuing their expertise to become managers. Going forward, we will place emphasis on changing the mindset of each employee. In particular, middle management are the connection in between management and people. They must deeply understand that human capital is an important management capital through the new understanding of HR management and shift in the behavior of middle management, we aim to influence the behavior of all employees. These initiatives will be shared as a precedent towards unlocking employees' capabilities and potential implementing group-wide human capital management, encouraging employees taking up challenges. Next is operational frontline innovations. We are working to thoroughly eliminate waste and stagnation in order to acquire outstanding operational capabilities by each business. This activity was started in '22. A corporate culture, encouraging challenging theoretical limited taking root. Specifically, more than half of the global sites, 124 sites, have embedded constant Kaizen activities with initiatives of each one on the front line. In 2 years, as a result, lead time was reduced through streamlining of overall supply chain, leading to cash generation of JPY 23 billion. Cost reduction through streamlining of engineering led to a profit contribution of JPY 28.7 billion. Tools were developed with image recognition and AI technologies to visualize waste and stagnation, which lead to Kaizen and streamlining. Also streamline the data of the front lines are visualized, enabling swift decision-making. We will accelerate these activities and with operational frontline innovations, we aim to embed constant Kaizen activities at all sites by the end of fiscal year March 25. Next, I would like to talk about the digital transformation. We started the PX project in '21, Panasonic transformation, which includes cultural transformation, i. e. change of workstyle and mindset. First, in development out of DX development, manufacturing and sales, Smart Lab, for example, full automation of materials development lab was implemented from this year by combining generations of the experiment plan by AI and Metro informatics development, which demanded -- dependent upon engineers, [indiscernible] became much sophisticated and development time was significantly reduced. This enabled remote development and enhance the motivation of engineers. Next is manufacturing sales. Integrated ERP was introduced in 15 sites in China. Inventory reduction and shortening of lead time was realized based upon accurate information with no human involvement. Panasonic generative AI was introduced in July, understanding instilling of AI with employees mindset is changing. -- there is the conversion of the work style improving the efficiency for simple repetitive work by using generative AI and employees are able to focus more on works, which generate value for our customers. Our goal is to continuous transformation. We'll continue to strongly promote PX. Lastly, this is a summary of today. For group-wide investment areas, we'll expand market share and improve profitability in preparation for expected market expansion. We aim to maximize our ability to secure profit in the expanded market. Our business is expected to help group-wide profitability, who implement through ROIC discipline to improve profitability and aim to reach 0 number of businesses with issues by the end of fiscal year March '27. I take the views from the capital market seriously and am determined to transform profitability structure towards medium- to long-term growth. This concludes my presentation. Thank you very much for your attention.

[Interpreted] From ToyoKasei we have [Indiscernible].

[Interpreted] Thank you. My name is [indiscernible] of ToyoKasei. I would like to ask my first question on Page 5, automotive battery, the domestic production capacity is mentioned here. So here, the pie is growing quite a bit. So in Japan, the new plant, is that something that you plan to build? That's my first question.

[Interpreted] Concerning that, as of now, I cannot tell you where and when. But the car manufacturers in Japan through the discussion with them, for example, in Suminoe or outside of Suminoe when the volume increases, where do we manufacture? So that is something that we will decide depending on the discussion that we have with our customers.

[Interpreted] My second question, on Page 13, the revision by business division. So how do you plan to do this? Is this something that the Holding would do or operating companies would be doing or both? Could you talk about how you proceed?

[Interpreted] Concerning that -- the ROIC-based discipline by business division, is that what you're asking?

[Interpreted] Yes, that's right.

[Interpreted] Well, primarily, the businesses with issues. So the ROIC becoming lower than WACC by business. So first of all, the operating company will try to consider that. But when the target of the WACC plus 3 percentage point, that is a kind of rule. And if you cannot exceed that in the first year, the operating company will try to improve the level. But then if the continues, the Holding will start to get involved. So that is the internal system that we are building so that we can focus on this.

[Interpreted] Next question [indiscernible] please. [Indiscernible] Can you hear me?

[Interpreted] Yes, we can, my first question, the initial page, the businesses which have to support the business, more specifically, what are these businesses? And how are you going to deal with these businesses, once again, the businesses which are expected to help group find profitability?

[Interpreted] Basically, as Holding. Three businesses which will grow, other than these three. Basically, these need support for the group-wide profitability. On the operating company basis, for example, ROIC, taking ROIC, WACC plus 3%, exceeding WACC plus 3% on the divisional company basis. But when it comes to divisional companies, not necessarily the case. So these businesses have to be -- the number of these companies needs to be reduced to 0. That is how you can interpret this.

[Interpreted] One more question. Best ownership perspective, what is the speed, I would like to ask you, already, automobile systems best ownership, and you made a decision that it goes outside. And then next, going forward, how are you going to do the business structure transformation? Are you going to take other measures? And do you have the time line, for example, in this fiscal year, what is your thinking? Can you please enlighten me on that?

[Interpreted] Always, I am not able to come up with a clear-cut answer, sorry. But doing this will require -- well, if I come up with specific names, then internally, there will be considerable confusion. So thoroughly, preparation has to be made before we come up with any specific name. This business -- or we cannot cite any concrete name of the business. But on the operating company basis, Automotive as a whole, the industry is moving in this direction, and we made a decision. But what we are going to consider going forward, it could be a business unit or divisions or the businesses then -- on the operating company's level, there are things that they are examining. And this fiscal year, there may be something that we might be able to share with you. But in addition, as Holding, we look from the perspective of ROIC, how do we compare against the competition? We are going to assess this with a very strict perspective and make necessary decisions.

[Interpreted] Next is Bloomberg. We have Furukawa-san from Bloomberg. Thank you Furukawa from Bloomberg, I hope you can hear me, yes?

[Interpreted] I have two questions, please. First, Page 5, the automotive battery. So as of now, the ROIC, what is the current level of the ROIC, including IRA and excluding IRA, could you tell us those numbers? And once again, about the automotive battery business, this use of the ROIC, what is the purpose of using the ROIC goal or target? That's my first question.

[Interpreted] Yes. But the automotive batteries, as I mentioned, after '28, we'd like to have a double-digit ROIC, and invested capital, the denominator currently is quite big. In addition, the TV demand structure is such that the ROIC is coming down. So in that sense, as I said, the domestic business reform, productivity improvement and North American business -- right now, the plant in Nevada, the profitability is strong. But as we start up the plant in Kansas, there will be a lot of investment there. So fiscal '25 and towards the end, we will start the mass production. So from fiscal '27, we expect to see some revenues coming in. So that's why I said that fiscal '28 and onwards. And also in Japan and the plant in Japan, the Japanese car manufacturers, the demand is likely to expand. And that would be happening at about the same timing. So that's how we hope you would understand.

[Interpreted] My second question may be a similar question to the previous question. But as of now, the businesses with issues, if you have any specific businesses with issues as of now and how many of them are there?

[Interpreted] Well, again, specifically to talk about the businesses with the issues. I have not talked about that internally. So if I mention any, that would lead to confusion. But there are several factors. Right now, for example, the businesses affected by the market conditions or the businesses -- the enhancement of the competitiveness and cost capability being delayed in some of the businesses. Our business structure itself probably is not sufficient. So there are different factors. So first of all, the market impact, for example, is on the factory automation. And in terms of the competitiveness and the cost capability and reform or transformation is being delayed or in that sense, the lifestyle appliances, some of the businesses and also the air conditioning and air quality air-to-air related business. So the industry as a whole, I'm sure, interested that the TV business is a tough business. So I cannot really mention the specific businesses, but I think you will be able to speculate based on those factors.

[Interpreted] Next Sato-san from NICI Asia, please. Sato from NICI Asia. Can you hear me?

[Interpreted] Yes, we can. I have two questions, if I may. My first question is about the business of automotive battery KGI, it was not achieved. Of course, there was a deterioration of the market. But compared to the forecast, there was a difference from the forecast. What are the reasons you should have improved productivity, but the productive did not go up as much as expected or your forecast of the market was too optimistic? Or you should have known the diversification of the customer, but you are not able to do so? What are the challenges that you should overcome?

[Interpreted] Now, if I am to talk about the major points, productivity improvement, Nevada factory productivity improvement has gone up -- proceeded more than expected. The largest is producing in Japan and supply to strategic partners. The batteries that we are supplying, there was a big drop in demand, unexpected drop in demand. I went to the United States, and I met with the President of that company. And because of the reason, and this model, they say that they do not want to sell now. This was unexpected. So if I did say the true intention of the customers. So we are not able to hear the true intention of the customers. We have to reflect upon that. Then from FY '27 onwards, the quantity to be manufactured in Japan. For Japanese OEMs, we -- do we wait until the demand for Japanese OEM will pick up? Resources in Japan, the surplus capacity in Japan? Well, improvement of Nevada is hard, and we have been using that for Nevada, but it hasn't taken root. And are we going to maintain the capacity in Japan. For example, during COVID-19, the airline companies made a contribution outside the companies. And rather than staying idle, they were working outside their realm. So we look at them and considering utilization of the capabilities that we have at hand.

[Interpreted] I confirm. Strategic partner, you met with the President of the Strategic Partner company last year. Is that what you said?

[Interpreted] Yes, that's what I said.

[Interpreted] I understand, thank you. My next question, businesses with challenges. This is a rather rough summary. But this we reserve for finding best owner, is that the positioning? Or that in other case, but forward-looking positive improvement of the business, is that what you intend to do? How you categorize them?

[Interpreted] Thank you for your question. businesses with issues. There are different factors for issues that they are faced with. I always say in the same industry compared to peers, structurally, business structure-wise, there are factors that we are going to be behind the peers, then we have to take some continuous measures. If that is not the case, then it is a management employment. So what are the reasons for poor management? Is that the management people or other factors? We have to make that clear and then take necessary measures.

[Interpreted] We are running out of time for the questions and answers from the journalists, Sorry. We can take one more question from journalists. So from [indiscernible].

[Interpreted] This is [indiscernible]. I have two questions. First of all, about the automotive batteries, kind of a basic question, if I may. And in fiscal '28, you mentioned that you want to have a sustainable double-digit ROIC. And how is IRA related to that? More specifically, fiscal '25 in adjusted OP. So how would that be related to the ROIC?