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

Good evening. I will present the results for the second quarter of fiscal 2025 ended September 30, 2024. For the second quarter, the sales and profit increased year-on-year. Overall sales increased due to increased sales in Lifestyle, Connect and Industry as well as currency translation despite decreased sales in Automotive and Energy. By business, positive factors were Industry and Energy with favorable sales of generative AI-related products, while negative factors were Energy's automotive battery business affected by the year-on-year decrease in demand continuing for batteries produced in Japan and price revisions reflecting lower raw material costs. Adjusted operating profit increased overall with increased profit in Connect, Industry and Energy, despite decreased profit in Lifestyle and Automotive. Net profit increased, adding the improvements in other income and loss and other factors. Operating cash flows increased year-on-year due to monetization of the IRA tax credit through Transferable method. As for the full year forecast, the group-wide forecast remains unchanged; however, the forecast by segment are revised, reflecting changes in each business environment. I will explain the details later. Annual dividend is forecasted at JPY 40, a year-on-year increase of JPY 5 with the payout ratio of 30% as announced on August 30. Now the details of the consolidated financial results for the second quarter. For the consolidated financial results, sales increased year-on-year by 2% to JPY 2,129.6 billion. Sales, excluding the effect of exchange rates remained the same year-on-year. Adjusted OP increased to JPY 122.2 billion, operating profit increased to JPY 132.2 billion, and net profit increased to JPY 118.3 billion. This slide shows the results by segment. In the following slides, I will explain the analysis of year-on-year comparison for sales and operating profit. First, the sales analysis by segment. In Lifestyle sales increased overall. This is due to steady sales of consumer electronics in Japan and electrical construction materials despite decreased sales of consumer electronics in China affected by weaker economy and air to water in Europe, in which the rate of year-on-year decrease has become less severe compared to the first quarter. In Automotive, sales decreased due to such factors as discontinuation of production for certain modes -- models and sluggish sales mainly in China. In Connect, sales increased with increased sales of Gemba Solutions due to steady orders Process Automation by capturing certain investment opportunities, even with economic slowdown in China and of Blue Yonder with growing SaaS business. In industry, sales increased with increased sales of products of generative AI servers despite decreased sales of industrial-use relays and automotive-use relays and capacitors due to market slowdown mainly in Europe. In Energy, sales in In-vehicle decreased. This is due to a continuing decrease in demand at the Japan factory. In addition, sales value decreased at the North American factory due to price revisions reflecting lower raw material prices despite increased sales volume. In Industrial and Consumer, sales increased due to significant growth of energy storage system for data centers driven by generative AI advancement. Within Other/Eliminations and adjustments, sales of both Entertainment & Communication and Housing remain the same year-on-year. Next, our adjusted operating profit analysis by segment. In Lifestyle profit decreased due to lower sales of consumer electronics in China and air to water in Europe despite steady sales of electrical construction materials. As for air to water in Europe, the year-on-year decrease amount has improved from the first quarter. In Automotive, profit decreased due to lower sales and higher fixed costs despite rationalization and price revisions to offset price hikes in parts and materials along with improved product mix. In Connect, profit increased due mainly to higher sales of process automation and Gemba Solutions, despite such factors in Avionics, as upfront investments and impact of delivery delays by slower manufacturing of aircraft as well as deteriorated market conditions for Media Entertainment. In Industry, profit increased due to higher sales of products for generative AI servers, rationalization, price revisions and effective yen depreciation despite decreased sales of industrial-use relays and automotive-use relays and capacitors. In Energy, profit in In-vehicle decreased only slightly. This is due mainly to the impact of decreased sales of the Japan factory, increased ramp-up costs for the Kansas and Wakayama factories as well as upfront costs for new customers. While efforts such as improving productivity at the North America factory, contributed to reducing this decreased amount. Profit in Industrial and Consumer increased due to a large contribution from increased sales of energy storage systems for data centers and improvements in material market prices. Within Other/Eliminations and adjustments, profit increased due mainly to improvement of elimination and income -- intracompany profits with the reduced inventories and improved head office income and expenses. Results of Lifestyle by divisional company. Adjusted OP in Living Appliances and Solutions decreased due to lower sales of consumer electronics in China. Adjusted OP in HVAC decreased largely affected by lower sales of A2W in Europe. In Cold Chain Solutions and Electric Works, both sales and adjusted OP increased on continuing steady sales. And this is the year-on-year operating profit analysis by factor. From left, increased sales in real terms had a positive impact of JPY 6.9 billion. Increase in fixed cost pushed down profit by JPY 18.7 billion due mainly to investments in Energy for business growth and impact of inflation. The net impact of raw materials and logistics prices was positive JPY 12.7 billion. The effect of price revisions and rationalization was positive JPY 18.8 billion. Among other individual factors, impact of IRA was positive JPY 0.5 billion. Breakdown of Blue Yonder is shown in the bottom right box. Adjusted OP on a stand-alone basis increased by JPY 1.2 billion on a constant currency basis. On a consolidated basis, adjusted OP increased by JPY 0.9 billion. Excluding the impact of strategic investments and synergy investment, adjusted OP was up JPY 4.7 billion. Effect of exchange rate was positive JPY 1.6 billion mainly seen in Industry and Energy. As a result, adjusted OP increased by JPY 22.7 billion and OP increased by JPY 29.8 billion. This slide shows the situation of cash flows and cash positions. On the left, operating cash flow was JPY 457.6 billion, up year-on-year due to monetization of IRA tax credit through Transferable method. Going forward, we will continue to generate further operating cash flows. On the right, net cash was negative of JPY 540.6 billion. Next is fiscal 2025 full year financial forecast. This shows the full year forecast for fiscal 2025. The group-wide forecast remains unchanged from the initial forecast of May 9. This shows the forecast by segment. Reflecting the changes in the business environment, revisions are made as shown in the columns labeled "Revised amount from May 9." This shows factors for sales and adjusted OP revision by segment. Sales forecasts are revised at all segments, reflecting currency translation and business environment changes. Sales are revised upward in Lifestyle and Connect; revised downward in Automotive, Industry and Energy. Adjusted OP is revised downward in Connect; revised upward in Other and Eliminations and adjustments. However, the remaining segments are unchanged. The revision in Connect is made by factoring in the impact of delivery delays by slower manufacturing of aircraft for Avionics and costs related to M&A by Blue Yonder. The revision in Other/Elimination and adjustment is made due mainly to improvement in head office income and expenses. This shows the full year forecast by of Lifestyle by divisional company. Adjusted OP, revised downward in Living Appliances and Solutions company and China and Northeast Asia company factoring in the impact of lower sales of consumer electronics in China. Next, let me explain the status of our generative AI-related businesses, which are now rapidly growing. On the left, in Industry, the relevant products include conductive polymer capacitors and multilayer circuit board materials for generative AI servers by capturing the market expansion opportunity, sales are rapidly growing, and annual sales are expected to reach a level of JPY 35 billion, 1.8x higher year-on-year. On the right, in Energy, with the expansion of gen AI market, demand for energy storage system for data centers is rapidly increasing. Annual sales are expected to grow to a scale of above JPY 100 billion, also 1.8x higher year-on-year. For both Industry and Energy, the full year sales forecast significantly exceeds the initial forecast. Growth is expected to continue in gen AI-related market. So we will enhance our capabilities to ensure capturing such demands. Lastly, let me explain shareholder returns. Today, the Board of Directors resolved that the interim dividend of JPY 20 per share for fiscal '25, up JPY 2.5 per share year-on-year. For the annual dividend, we forecast JPY 40 per share, up JPY 5 year-on-year. The payout ratio relative to the net profit forecast will be 30%. We will distribute a stable and continuous dividend and aim to achieve enhanced corporate value through business growth and profit increase realized by our investments. Thank you for your attention.

From Nihon Keizai Shimbun, Nikkei Newspaper.

This is [indiscernible]. I hope you can hear me.

Yes.

Two questions. First, the focal investment areas. Heat pump -- heating. What's the current status? What is the market situation? And the other area is EV. So can you talk about the current situation and future prospects? My second question, well, this is the end of your medium-term plan. In terms of operating cash flow, I think you expect to achieve the target, but not for others, it looks like. So with that in mind, what is your current take? And any improvements that can be expected going forward?

Thank you for your question. First, EV and air to water. Regarding EV, we have been saying that North America, mostly focusing on North America in our business. Globally, EV demand is slowing down. But in North America, compared to the past, the growth has slowed down, but 100% -- about 110% or thereabouts has been the growth in units. So moderate growth. And at our plant in North America, depending on the situation of production in our customer sites, especially during the first quarter, we were largely affected but towards the second quarter, about 0.5 gigawatt increase has been observed. But our capacity is not at 100%, but the third quarter onward, we expect the supply of batteries to continue. So in Q3 onwards, with the current plant, we expect we'll get closer to the full capacity. And as is shown in the IRA, 38 gigawatts or thereabout would be the target of our capacity increase. As for Japan, for 1865 produced in Japan, we do not expect further decline, but we can't expect further increase either. And we are replacing the production line to a different model for 2170. So that's the current situation regarding EV. Especially for Kansas and 4680 Wakayama plant, the new plant, we are making investments into these new facilities. That is for EV batteries. As for air to water. If you can look at Page 29, towards the bottom, you can see the air to water situation. And if you can look at the graph on the lower right-hand corner, in the first quarter of last year, we have seen a rapid decline. And for the first quarter of this fiscal year, we feel that, that was the bottom. And towards the third quarter and the fourth quarter, in terms of year-on-year comparison, we expect flat growth for sure as opposed to a decline, and that is because we are seeing improvement day by day, the rapid growth that we saw there is not expected, but at least we are seeing trend improving as reflected in the results for the second quarter. And given that situation for each country, we are embarking on new initiatives where we had not implemented initiatives for the medium-term business plan. The investment phase was where we were in and, therefore, cash flow was our focal point, of course. And there are some issues that became clear. One is the low profitability and ROE. In other words, the return on the investments made. The absolute value is low and the rates, the return was low. And so to address these aspects, we will be making efforts and that has been the message from our CEO, as well. And so that by the end of FY '27, there will be no businesses that did not meet the WACC requirements.

Next from [ Gen-san ] from Denki Shimbun.

[ Gen, ] is my name. I have a very focused question about the Lifestyle business. The reasons behind the sales changes, the domestic consumer electrics did well. So looking at the consumer electrics in Japan, what are the products which have grown? And how much was the growth? Could you give us some details?

Well, as for the consumer electronics in Japan, the industry as a whole is still faced with the difficulties, but the market share has been increased on our part. So a little like 1% growth in comparison to the previous year, that's the growth that we saw. So it's almost flat. And at our company, the washing machines, laundries and cleaners and Palm shaver, those are the products, which are selling well. So as Japanese consumer electronics, I think, we achieved high profitability. So you asked about the Japanese market. So as a whole, we have seen the strong trend in Japan. Southeast Asia is also recovering. Also the Vietnam, which is one of the major markets, we saw the upturn and China is still tough. And that was very clear in Q1 and Q2. That is our understanding.

Next, this is from Nikkan Kogyo Shimbun, [ Morista-san. ]

[ Morista ] from Nikkan Kogyo Shimbun. I hope you can hear me. I have 2 questions. First, the impact of exchange rates. The yen is depreciating now turning from the deep appreciation. So what is your current view? And what impact do you expect on your business? That's my first question. And my second question, the full year forecast, how am I to read this? No major revisions from the previous forecast, but when I see the factors for the revisions and seeing that there is a slowdown in the domestic OEM production. Is that the factor? And if the overall full year forecast remains unchanged, the slowdown in sales in domestic EV had already been incorporated. And therefore, that is the reason why the full consolidated forecast remains the same. .

For exchange rates for the second half, we have not changed the assumed rates for yen and dollar, JPY 140 to the dollar; for euro, JPY 150 to the euro; for renminbi, JPY 20. So that's the unchanged assumptions for the second half. As you know, the yen and euro have fluctuated by more than JPY 10 and the sensitivity, as mentioned at the beginning of the year, regarding yen and the dollar and euro, the yen depreciation would push up our profit, where for renminbi, mainly in Lifestyle, when we import, the depreciation of the yen against the renminbi would negatively affect us. But given the range at the current rate, slight increase, slight gain on exchange rates is expected. In any event, the currency effect, when they fluctuate over a very short period of time, of course, that's not good for our business, running the business, that is. JPY 140 to JPY 155, within that range, that's the assumption that we have in our business, that is against the U.S. dollar. As for the full year forecast, yes, automotive, that's a complete OEM business. So automotive OEMs production unit volume is a direct driver of our business. So the production volume of the customers, when they increase, we make sure that we have sufficient supply. But currently, we expect the decline in volume. So through the reduction in fixed costs, we'd like to overcome that. And as for sales decrease, the materials price related or linked selling price is the formula that we use. So in the second quarter alone, JPY 18 billion is the size of the price reduction, it appears. But in terms of volume, in our North American plant, we expect increase. And that is not the factor for a decline in sales. Overall, so there is the foreign exchange impact, and yet we are maintaining our forecast, meaning that on a full year basis, we expect some decline in sales. But in the generative AI-related business and through the product mix, we can maintain the profit while the sales is expected to go down. And that is the reason why we are keeping the original forecast.

Next question is from TV Tokyo, [ Yamada-san. ]

This is World Business Satellite. I hope you can hear me?

Yes.

So you just mentioned the foreign exchange. I have one additional question on that. Today, the BOJ had a meeting. And most recently, the yen has been weak. But slowly, the yen is strengthening again. So what do you hope for from BOJ policy? Are there any things that you like them to do?

Well, basically, strong yen, weak yen, that is not the purpose of BOJ, the government. How that government looks at the level of the foreign exchange is important. But from our perspective, as a private sector, the range and the rapid change of that currency level is something that we like them to avoid as much as possible. So this time, it remains the same. So in the medium to long term, as Panasonic, the interest rate, the world with interest rate to maintain it and gradually increasing interest rate is something that we assume in managing our company. That is our stance.

Thank you. I think it is time to end the session. So we will only take 1 more question from journalist, again only in Japanese. From Toyo Keizai, Maneki-san.

Maneki from Toyo Keizai. Towards the next medium-term management plan. Is there a possibility of revisiting the portfolio of focal investment, especially in the Industry, the generative AI related? I understand it's very strong. And my understanding is that it's not included in the focal areas. Do you have any investment plans?

It's been 2.5 years ago. And so things have changed dramatically in society and the investment speed is adjusted accordingly. So in terms of the investment areas going forward, just because the business is doing well, doesn't mean we will be making more investments there. For maintaining these 3 focal areas is not on the stone. So it's subject to change, of course. In the Battery business, Panasonic is criticized for being very slow in making construction investments, so we've been very careful. And the investment peak is behind us. So where would be the next investment is what we are revisiting. That is all.