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

Good afternoon. I am Masahiro Shinada from Panasonic Corporation. Thank you very much for taking time out of your busy schedule to attend this session. I also would like to express my sincere gratitude for your continued support to our company. As just described, today, we will cover what we couldn't explain at the business strategy business briefing in June, the business strategies of our HVAC and Cold Chain Solutions businesses. The company President, Katayama, will give the presentation on these two companies. But before that, I would like to give you an update on Panasonic Corporation's progress this fiscal year. And we will have a Q&A session at the end to answer any questions you may have about our Lifestyle business -- Lifestyle segment overall. This is our adjusted operating profit for FY 2025. During the first half shown in pink portion on the left-hand side, profits decreased by JPY 19.8 billion year-on-year, mainly due to sluggish LAS and HVAC businesses with LAS mainly affected by the worsening market conditions in China; and HVAC due to decreased profit of air to water in Europe, as explained at the second quarter earnings briefing. Now for the second half, we expect profit to increase for both LAS and HVAC. So let me explain the reasons why including an update since the second quarter earnings briefing. First, LAS expects a continued increase in domestic market share since the first half. Again, pink represents the first half; blue, the second half. For the domestic home appliances market, we have been able to increase our domestic market share by about 1.6 percentage points since the first half. In addition to this continued market share increase through cost reductions and improvements in businesses with issues, we expect a profit increase of JPY 9.3 billion year-on-year. By region, as you can see on the right-hand side, half of this will be for Japan; and China, flat; and the remaining half overseas, excluding China. For Japan, while demand is expected to remain the same year-on-year, we expect to counter the impact of foreign exchange with further market share increase through the launch of new products in the second half as well as cost improvements through rationalization. For China, a big decrease in profit in the first half, but the deterioration in demand is expected to ease due to government measures to stimulate consumption, and we expect a decline in sales to be limited compared to the first half given the positive impact of the recent Double 11 sales season, that is November 11 sales day. We saw very positive results and the industry overall, increased by 111% year-on-year, while we were able to make an improvement of 121% year-on-year. And we are seeing progress in the fixed cost reduction through rationalization. And for Asia, there is a gradual recovery in demand, and we expect to see an increased revenue and profits, especially in Vietnam, thanks to new products that performed well in the first half. And then there is a bar that says improvement in businesses with issues. Here, we're talking about the kitchen appliances. And we are now seeing the results of the measures implemented so far, the management reform measures. So we are to see improvement as a result. So in addition to our cost competitiveness vis-a-vis Chinese companies, we have optimized fixed costs by consolidating facilities and shifting personnel, and we have increased sales through new product launches. The effects of a series of structural reform efforts across development, manufacturing, sales will be felt primarily in Japan, but also in China and Asia. And we have been profitable for the past 2 months. And we expect the adjusted OP margin for the second half to improve by approximately 2 points from last year's 5.3% to exceed 7%. This is going to be a very important half year. And on the next page, I'll explain the details about the expected increase in profits in Japan. And here, you can see the operating -- adjusted operating profit for white goods in Japan. In our June meeting, [indiscernible]-san explained the details about the Japanese market. So I'd like to give you some update on that. On the extreme left, top left, the adjusted operating profit compared to the previous year for the first half and second half, in terms of adjusted operating profit, you can see what the contributions are. For the first half, demand was almost flat at 100% or 101% year-on-year, but our market share increased by 1.6%, contributing greatly to profits on expanded sales. That's for the first half. However, the impact of exchange rates was serious, and there were some one-time expenses as well, and therefore, we posted a year-on-year decline. Still looking at the second quarter alone, we have overcame the worsening exchange rates with profits on expanded sales to retain the same profit level as the previous year. For the second half, we will maintain the structure of the second quarter, and we expect to see the impact of new products for further market share increase and increased profits through rationalization. As in the first half, we expect a worsening exchange rates and raw materials situation continuing. But with onetime expenses almost eliminated, we expect to see an increase in profits year-on-year, and major drivers are market share increase and rationalization. So let me elaborate on this. First, regarding the market share increase. This is a busy slide, I apologize. Especially on the lower left-hand corner, you can see our products, especially the products in the high-priced areas. We have many products with enhanced product appeal by combining our design and technical capabilities, such as palm-in shavers, flagship nano ULTIMATE dryer, front-loading drum washing machines equipped with new settings jointly developed with Kao Corporation and strengthening the appeal of bistro products in the mid-price range. We have increased our market share in all of these products since new -- since last year. And we have some micro-mist vacuum cleaners as well. In the second half, we will be launching more new products. And we recently made an announcement about the tilted drum washer dryer. And this is self-designed to fit in a smaller-sized apartment buildings in the metropolitan area. And the price is going to be affordable at below JPY 200,000. And since we started the new pricing scheme, one price approach is going to be applied for the very first time. Manufacturers have been controlling the price and the price decline has been controlled by the manufacturers. But here, we have a new challenge of maintaining the same single price throughout the year. And through the synergistic effects of these, we are to increase our market share. And regarding the rationalization, as [indiscernible]-san of LAS explained in June, we are applying what's called the global standards cost. We have achieved this by narrowing down the functions through subtractive product planning, the subtraction product planning and the building costs by sharing parts and reducing the number of items through design reviews. And the oven range released in September has achieved a 20% reduction in direct material costs through this global standard cost structure. And the compact-sized tilted drum washer-dryer that I mentioned earlier will be priced at less than JPY 200,000. And this was launched in time for the year-end sales season, and this is to contribute to the upsell. Including the changes in the industry structure, we are to see the effects of all the measures that we have implemented so far. Now the HVAC outlook. During the first half, we saw a significant decline. But for the second half, we expect a big increase. The largest driver for this is the air to water. As was mentioned by Umeda-san in the second quarter earnings briefing for the first half, market situation deteriorated significantly year-on-year resulting in a big decline in profit. But with the bottoming out in the first quarter, we are seeing an improvement year-on-year. And for October, on a value basis, 120% improvement year-on-year; and for November, 115% to 120% compared to the previous year. There are differences from country to country, but thanks to the lower interest rates and gas prices and with improvement in external environment, we are seeing the issue of distribution inventory being eased as well. And with the effect of support for installers in each country, including the sales measures to stimulate the demand, we expect profits to improve in the second half year-on-year. And the second driver is the profits in businesses. Other than air to water, room air conditioners saw an increase in profits in the first half, and we expect to see an increase in the second half mainly in Asia and Europe. In the engineering devices business, in addition to providing close support to our customers, we expect to expand orders in the second half by cultivating growth markets through differentiated technologies. We expect that the acquisition of projects for EV batteries using environmental technologies, some projects using differentiated compressor technologies will contribute to profit. The strategy on HVAC business will be explained in detail by Katayama-san later. Over the medium to long term, this is our vision. And this is the slide that we showed you back in June. The basic concept remains the same. As I just explained, for the second half of the year, we are to see the positive impact of all the measures taken so far. We want to ensure that we reap these benefits. So that we can achieve the EBITDA 10% and ROIC 10% at the earliest time. We will continue to address management issues head on and continue to make reforms in the medium to long term, and we appreciate your continued support. Thank you for your attention.

Thank you, Katayama here. So I'd like to explain the Cold Chain Solutions, that I'd like to refer to as CCS. Next page, please. So these are the three points that I'd like to talk about: first, the progress of the current medium-term strategy; second is the direction of the next medium-term strategy; and then the executive summary. This page shows the KGI trend since the establishment of CCS, so fiscal '25 targets are already achieved last year. So expected to achieve the JPY 400 billion in sales, AOP of JPY 21 billion and EBITDA of JPY 30 billion. So as for the profitability, there's an improvement of about 4 percentage points. And with the higher market share in the Americas and Japan, we have realized this improvement in the current medium-term plan. Next page. At the time of the IR meeting previously, we showed this slide. So when the CCS was established, as you can see on the left-hand side, there were three issues or challenges. In the past 3 years, we have made the major improvements on all of those three. More specifically, the modernization of the facilities and introduction of the digitization have progressed, and also through the integrated strategy, we launched new products to increase our market share. And also the biggest asset is Hussmann and working with Hussmann and the transfer of the CO2 refrigeration system. And also in the area of the digital, we have seen the major progress. Now about the major business, display cabinet. In each area, we have focused on the growing areas and existing key customers. And as shown here, the 3% or more increase of the market share in the United States and also 2% increase in Japan. And we have expanded the factories and also introduced the new products. So we are building the foundation to improve our position further. Now let me talk about the refrigerants. We are promoting the strategy to promote the non-Freon refrigerants. It might be difficult for you to understand because using the greenhouse gas, CO2, it's not really intuitive. So I would like to explain that. So CO2, of course, is the greenhouse gas. But when it's released into the atmosphere, the greenhouse gas, as you can see here, is much smaller than the fluorocarbon. So in the refrigeration system, where we can use this in the circular way, the contribution is big. So we talk about the CO2. So this is the concept that we have for that. So refrigeration systems with the more stringent environmental regulations, the market is expanding for the natural refrigerant in Japan and Europe. So we have been capturing this strong demand. And also in the United States, mainly propane, the sale of the refrigeration system is expanding. And we would improve our product lineup in these areas so that we can expand our businesses. For the new big large-scale stores, we are increasing and expanding our target. As for the services in Japan and also Americas, we have high MIF, or machine in the field. So with that, we are expanding our businesses steadily, especially the highly profitable maintenance services that we have shown here. We are improving this and we have created such a good cycle. And the -- developing the service and engineering personnel is important. So we have an industrial academia collaborative development program and in-house training center to work on this. Now the major business of CCS is what we call commercial refrigeration or CR. This is not something that you are familiar with. But the -- so you might think that the Japanese companies are our competitors. But actually, those companies focus on the kitchen equipment. But in our case, the display system is we have focused upon. So our major competitor is the competitors in the United States and Europe. Those two companies are the major competitors. Compared with the competitors, about the ROIC, in the past several years, we have generated above 10%. And as for the size of the sales, in the past 3 years, we have become #1 in comparison to the competitors. And in realizing the growth, I think that we are one step ahead of the competitors. Now this page shows the next medium-term strategy. So in the next medium-term business plan, those are the three areas: The differentiation, network and the complementary goods strategies. Those are the three major points. And in each area, the natural refrigerant and the digital and equipment and service, those are the major drivers. First, strategy on natural refrigerants. On the left-hand side, the bar charts represent a less than 3% growth of the industry overall. For natural refrigerants, close to 7% growth is expected on the other hand. And currently, we have about 13% global market share. By 2030, we'd like to increase this to 20%. The biggest driver is that in the U.S., we are the largest -- or Hussmann will be promoting the natural refrigerants, which -- and Hussmann, of course, has the largest market share in North America. And let me elaborate on this strategy on natural refrigerants for Japan, the non-Freon or CO2 refrigeration systems, and the strategy is how to expand this to rest of the world. In the U.S., together with propane, large CO2 and small-sized refrigeration systems will be starting next years. And the biggest growth is seen in Europe. The Area Cooling Company was acquired recently, we made that announcement, which means that in North America, Japan and Europe, we have the production bases and can cater to markets. Next is digital. They are 2 contributions that we can make it to our customers, as you can hear -- as shown here, one is the reduction of loss cost. Store connect is the service provided by Hussmann, and automatic dispatching can be provided to control the compressor failures as well as to minimize the refrigeration leakage. And when engineers are dispatched after a failure, that would prove to be costly. But we are trying to reduce that, and that is well accepted by our customers. And in terms of improvement of productivity, we are dramatically expanding the spare parts business through web-based services, selling to our competitors as well. And electronic shelf labels business is contributing to our customers as well. Next is the collaboration between equipment and service. Showcase refrigeration systems and service are the normal form of business altogether. But in Japan, we are the only company that has refrigeration systems and showcases altogether. Whereas in the U.S., that is the norm, but their service capability is much smaller than us, meaning that in Japan and the U.S., our competitors are missing 1 of these 3 elements, whereas Panasonic has strength in all 3 areas. In Europe, we don't have the case business. And so for small-sized CO2 refrigeration, we are trying to expand our bases there. And the last area is the kitchen equipment business. With the inbound effect in others, we are seeing a strong growth in the domestic market. Starting next April, we are to launch new products for this market. Our market position in this market is not that strong, but as shown on the upper right, we are #1 in terms of the CR business, and we can make the packaged bundled proposals for showcase and refrigerations to our customers, which should contribute to our profit increase as well. As for the kitchen equipment, Asian market still has a potential for larger growth. And in terms of contribution to the food value chain, there is a potential there as well. We are complying with the Panasonic Holdings' guidance at CCS, and we're always thinking of how to maximize our contribution to the group corporate value maximization. And we will continue to achieve the ROIC 10% and, at the same time, trying to expand both the sales and profit. Natural refrigeration, digital and equipment and service collaboration is the area where we can expect further enhancements. And we're hoping that we can achieve the double-digit profit margin as early as possible. And this is the summary. The takeaway message is that we are global #1 in the area of CR. In terms of scope, coverage and value contribution, we are still not #1, including in terms of profitability. We want to be #1 in all those aspects so that we can further contribute to our customers' business as well. That is all for CCS. Thank you for your attention. Now concerning HVAC, we are often compared to the major air conditioning companies. But this slide shows that the top portion is where we compete in the area of the room air con, RAC; commercial aircon, CAC; and air to water. These are the high competition areas. And the ones shown, for example, that -- in the bottom, we are showing the low competition areas. That includes IAQ, devices and engineering systems and engineering. The percentage of the top part is 70% and the low part is about 30% of the overall business. Next is KGI. On the left-hand side, we are comparing the previous medium term to the current one and for the 3 years comparison. So from both point of view, there has been the 4 percentage point worsening for both of them. And this is what we talk about, the KGI. So how can we eliminate this 4 percentage points? That is where I am focused upon. On the left, we are showing the conventional comparison, mainly air to water investments; and in IAQ, the integrated air quality and conditioning increase; and also the return to Japan of the RAC production. Those were some of the burdens, and that pushed down our profitability. On the right-hand side, we are showing the adjusted OP of fiscal '25 comparing first half and the second half. As Shinada-san mentioned earlier, I think that what you do not understand is that why sales grew so much in the first half but the profit didn't grow? Now about the double-digit sales increase in the first half, the low-margin products were the drivers, that is a fact. And air to water sales in the first half, of course, we have some. But the production capacity utilization was not so high. So the first half and second half were so different, and that explains the lower profit for the first half. As for the second half, with the recovery of Europe, which will be the main driver; and frankly speaking, until now, the first half was larger in terms of the profit, so maybe you have difficulty accepting this number. But what I can say about this is that this is still at a low level, but first half was on track and October exceeding the plan. So in October, we achieved a higher profit and a higher sales. And it's been more than 4 months since I became the President, and we have been working on the reduction of the fixed cost. And finally, from October, we started to see the effect of these efforts. So what I can say now is that the monthly framework is something that we have been trying to create. And based on that, we'd like to show the better numbers. And that's -- I'm sure that still you might have difficulty understanding or accepting the full year number. But anyways, towards the improvement of the profitability, this page shows the comparison to our competitors. This might be easier for you to understand. So in terms of ROIC, we are the lowest. That is very clear. But what we'd like you to understand is that in the past 3 years, the top line growth has been low. One of the major reasons is that the U.S. and Asia, those are the growing markets. And our percentage, as you can see on the left is low. We are more dependent on Japan. And when you look at the development resources, most -- half of them goes for Japan. So to grow the top line, we do not have the structure and the fixed cost allocation. There was a mismatch for that. So that is the major reason why we are still struggling in terms of our profitability. Now in June time frame at the IR meeting, we showed the business structure, shown in the left-hand side. So before I became the CEO of the HVAC, we talked about the region-based management. So a long-term view this, I think, is not wrong. But frankly speaking, the size of our business compared to the Japanese peers and overseas peers, it's much smaller. And when you distribute them to each region to try to improve the competitiveness, that was extremely difficult for us to do. Therefore, at the July time frame, we have started to enhance our product competitiveness to optimize our resources based on the competitiveness of the product. So that's why -- that's what we are doing right now. Next, let me talk about the priority measures for the next medium-term plan. That includes the differentiation global and the customer strategies. The Page 1, I talked about the 6 businesses. So 2 businesses are included in each strategy: so air to water and IAQ, we're preparing the killer content; and RAC/CAC, we are maximizing the fixed cost performance; and engineering and devices, we are trying to focus more on the growing market and take the measures to be closer to the customers. About air to water, the HPA, I mentioned the number, 6 million in fiscal '31. And that was the assumption for our strategy. But for the medium-term plan, the half of that, 3 million, is the kind of assumption that we have for our plan by fiscal '31. But still a CAGR of 13% is very high. It's a growing market. There's no question about that. So for air to water, what is important, as Shinada-san mentioned, is that right now the inventory adjustment and the market share increase in the past several months, we do not have a clear data in this industry. So it's difficult to say. But in the past several months, I think that our market share has been recovering. So going back to the basics, as you can see on the right-hand side, the capability of the products such as T-CAP and the commercial air to water and the natural refrigerant, [Technical Difficulty] to other companies. Those are the three pillars. And as soon as possible, we would like to increase our market share so that we can go back to the healthy double-digit profitability. So that is something that we need to achieve as soon as possible. Of course, that is still the market which is taking off and might be difficult for you to believe. But as for the air to water, in the past 2 years, the -- we did not experience the deteriorating margin or profit level. So the inventory adjustment being completed and as long as we maintained our market share, the double-digit profitability is something that we have achieved. Next is IAQ. This is the core business in our differentiation strategy. Originally, in Japan, China and the United States, we have had a leading market share. And in coming 3 years, we try to achieve the higher than the market average sales growth. And the core is shown here. The salt-free water softening and others, those are the technology-driven differentiation. And we are hoping to achieve the results from them. As for the regional strategy is shown on the right-hand side, in coming 3 years, the pillars is that the integrated systems that we have been building so far will be launched to the market. And air conditioning, we have a very strong sales channel. So we'd like to take advantage of them so that we can realize the good results. The right bottom shows the fact that in the different regions, we have different competitors. As of now, as for the ventilation fans, we have twice as large a size. But we have each region and we are the only one who has the coverage of all the regions. So we'd like to leverage them so that we can realize high revenue and high growth. Now RAC and CAC. I suppose you think that the profitability is lower than our competitors and scope is smaller. So how we are to make a recovery? What I can say is in terms of profitability, we find that there are areas where we have extremely high profitability and those that are not. To put it differently, we should be focusing on this high profitability area and geographical area. So simply put, for these two businesses, RAC and CAC, even when we are inferior in terms of scope, we should really be selective in the areas where comparable profitability is achieved. You need to focus on that. So we should make a strategic focus in terms of strategic regions and customers and have collaboration amongst the development, manufacturing and sales to enhance the cost structure of our mother factory, collaborate with other materials as well as to expand our market share in the high profitability area. Lastly, but not the least, engineering and device businesses. Compared to 4 other businesses, the number of customers is extremely low, which means that as long as we focus on the customers that are growing, we have a bright future, and we need to add these customers one by one to be the overwhelming winner. Currently, HVAC company's ROIC is below WACC, and therefore, we are hurting the corporate value of Panasonic Holdings. We are aware of this a grave situation. We need to resolve this as quickly as possible. As you can see on the left-hand side, in terms of product strategy, the alliance strategic and organic, especially when it comes to our product strategy, air to water, we need to enhance these so that we can have the ROIC over WACC as quickly as possible. in the initial year of the medium management plan, if we find that there is a big gap, then we will reduce the fixed costs so that we can achieve this framework as much as possible. And on the right-hand side, you can see the projection towards FY 2031, air to water global strategy and RAC, we are to improve on the profitability in those areas. As mentioned earlier, we cannot compete successfully against global dedicated air conditioner manufacturers in terms of scope. And that's not we are focusing on. Still, the ROIC below WACC cannot be accepted so we need to resolve this as quickly as possible. We know that we do have a very good position in the industry of the air conditioning. So we need to improve on our profitability worthy of this. For that, for these 6 industries that -- 6 businesses, as shown here, we need to focus on where they cross each other. And we also need to pursue synergy with CCS company. We need to focus on regions, areas, geography and customers in these 6 different businesses. We have to be extremely selective in where we fight. We believe that is the focal area under new medium-term management plan. And of course, a soft alliance would be important as well. We will not be resorting on hard cash-based alliance and acquisition. Rather, we are going to pursue soft alliance with the companies that have synergy, good affinity with our existing businesses. And this is a typical example of that, the air to water business in North America where growth is expected. Going forward, there will be more regulations in North America. And therefore, the heat pump water heater business growth is expected. Through the collaboration with A.O.S., the A.O. Smith, we will be launching new products in North America starting FY '26. And this will be the most appropriate strategy for us to grow without resorting much on the hard cash. This is the executive summary. I have already mentioned this, most of what's shown here. So I'm not going to read out. What is needed is to improve on the profitability to exceed WACC. And the pillar for that is the differentiation strategy, the global strategy and the customer strategy to be strengthened. If we can't achieve the target profitability through this, then we will address the fixed cost to achieve this. Focus is the key in the new medium-term plan. So that we can live up to your expectation as quickly as possible. I apologize for running over time, but that concludes my presentation.

Ezawa from Citigroup Global Markets. I have two questions to Katayama-san, First is about asset allocation and fixed costs. You talked about those. It appears that your point of view is quite reasonable. But in the past, the white goods -- the global and the Japanese market, we should not have such a perspective because each country has a different -- differences. So we have to really look at each one of them. I think that's what Katayama-san said in the past. But what you talked about today, you talked about focus. So by region or by products, the profit model, creating the different profit model and also to have a global optimization, which way are you going? And how do you think that you can win? Could you respond to that? And if possible, that fixed cost allocation, I think you touched upon that. So that included, what are you trying to achieve specifically? Another question that I have is that HVAC, under Katayama-san to make a big recovery or revival, that is the expectations that we all have. So from your perspective, I would like to hear from you. So why at Panasonic HVAC has struggled, and with you now, maybe this would go well? So the -- what are the differences from other businesses from the management perspective? I think that only with Katayama-san, you can make it better. So if you are the only person, that might make it difficult. So you talked about the profitability improvement, and we are very much focused on that, and you talked about that a lot. So in Panasonic, I think that was different from other businesses of Panasonic. So is that the major point in making improvements?

But your first point, I cannot mention the name of the company, but the competitors, the major competitors in Japan, if you consider them, this competitor has all the plants in all the countries. So here in [indiscernible] of Malaysia, that is our core plant. And in -- from -- we are dependent on that plant in Europe and Japan. So in terms of sales, to have -- we have to really focus on the region, and we have to find the good customers. But how to optimize the operation of the plant is also another thing. And Japan and Malaysia is where we are dependent on Europe, for example. So I said that the region-based management has become difficult. Because the major car company, for example, the regional allocation, when you have become a huge company, maybe you don't face that problem. But now JPY 800 billion is the size that we have. So this is a very global business. HVAC is the most globalized business in Panasonic. So if you look at the region-based management capability, we would lose in everywhere. So HVAC businesses, the current situation, we have to have a global coverage, and we have to -- we see the opportunities to generate profit outside of Japan. So Japan, Malaysia, Asia, Europe, how can we link them? So the product-based leaders have to have a strong leadership, especially about the development resources. Without it, we cannot compete. And from a different perspective, frankly speaking, the high profitability, of course, in some countries, we have a high profitability because we are #1. But high profitability when we are #5 is also possible. So what we need to do, so for example, having the high profitability, even if we are #5, the market share in that particular country is not so important. So since I became the CEO, we have to really consider the segmentation from the significant way. That's what I talk about. So even the Japanese competitors, when you look at the global RAC share, they have only single digit. So when it improves from the 3% to 5%, it's not meaningful. But as we talked about RAC in the coming 3 years or coming 3 years, at least 10% to 15%. That would be -- those would be the regions that we focus. When we try to do so in different companies, we have to have a global leverage to have a good efficiency. So that's what I meant. Second question, do I -- I don't know who said I have to be the person. I don't believe that only I can do it.

Well, until now, HVAC has been sluggish. The profitability is low single digit. Why was it like that? What is -- what do you think? So what needs to be changed?

The current HVAC before the establishment, 6% to 7% was achieved in total. So it was not always low single digit. Only several years ago, it was like that. But the Matsushita Denki Sangyo and Matsushita Seiko and Sanyo. That was the total of the 3 companies. It was not the current HVAC. So 3 companies becoming together, the fixed cost performance, the air quality, air conditioning, we are focused on that, and that is significant. And merging those 3 companies into 1 organization, cost structure, I think, was high. That was my understanding. In the initial stage, probably that was unavoidable. But when you look at the competitiveness of each product, it was not sufficient. So air-to-water market expansion, which is a big superstar. So what we need to do was not very clear. We could not see that very clearly. So what we need to do in air-to-water and the RAC and IAQ, they are so different. And when air-to-water, recovering is everything go well, and there have been the crossing point, but there were different actions. And how can we improve the clarity or resolution is something that we are focused upon so that we can generate outcome because the current status of the performance is still too low. I'm sorry, I don't sound very convincing, but that's how we try to improve the performance.

About the fixed cost, the product strategy, if the strategy doesn't work very well, the -- I think you talked about lowering the fixed cost as an emergency measure, but strategically, as a result of the 3 companies being integrated, the cost structure was not good enough. So strategically, on the constant basis, low fixed cost, more strategic fixed cost reduction. Is that something that you're not doing?

Of course, we will. I talked about the region-based management in the past 2 years, we became more of a regional companies and the cost became not very visible. But we went back to the product-based management from July so that we can redefine the optimum cost. So the integration of the 3 companies, we have a kind of vague hypothesis. But doing the benchmarking with the peers and how much do we lack in the cost competitiveness, we have been setting up the targets. Of course, it's not just the emergency measure. As a whole group, this is something that we committed to the capital market, and we have to achieve that. So what we need to do ongoing and also in addition to that, we will be taking those measures. But we are partially going back to the product-based management, and it's kind of become a double standard. So we would like to make the corrections as much as possible where we can make those corrections.

Next person.

Hirakawa from BofA Securities. One question. RAC, you said that they are regions with high profitability. You said you're going to focus there to be the driver. The sales from that high profitability region, what is the percentage in terms of sales? And what are the factors for high profitability?

Thank you for your question. I know that's where your interest is, but I'd like to defer that until we actually see the results. Sales is not low. Is it 10 versus 90? No. If that's the difference, no way we can rebuild. So the difference is not that much. And this is true for CAC as well, not just RAC compared to our competitors. So there are regions where we have better profitability than our competitors, while others not. So how do we grow the high profitability regions is the key, and we have not been able to do that. For example, CAC labs in Oizumi, we have a very good resources there, but we are not leveraging that. We have to allocate the development resources in a better way. When we say region strategy, that's good. But when it comes to the product development, unless we have the local capacity, currently, we only have the sales functions, sales capability in most of the markets locally. And therefore, we have shifted to focusing on the product access so as to improve and enhance the product competitiveness. And the sales force or the service capability, the regions with better ability in those functions do have better profitability, generally speaking.

From Toyo Keizai, we have [ Misaki-san. ]

I hope you can hear me. I have 2 questions. First, about the high profitability area and not so high profitability area. There are 2 areas. Could you tell us which areas? So -- and more specifically, in Japan, the market share is not so high. The development cost probably is too high. So could you talk about the RAC for Japan market? And what is the direction? Also, Panasonic Holdings as Panasonic Holdings, within this fiscal year, if it does not improve in terms of the lower than WACC, do you think that would that be one of the reasons for withdrawing? In the second half, JPY 12.1 billion adjusted profit probably is difficult to achieve. So if that is the case, eliminating the current status, ROIC below WACC, maybe you won't be able to achieve that. So those are the 2 questions.

Yes. Thank you very much for your questions. About the second point, maybe there was a misunderstanding. Fiscal '27, that was what Kusumi-san said. So it's not within this fiscal year. And to -- having said that, it doesn't mean that we still have 2 years. But if that is the case, of course, we are trying to meet with the group guideline. That's my response. But as for your first question, as I said, CAC and RAC, they are combined. So the difficulty is in Japan market. That is with issues. So profitability is better in Europe and Asia. That's my answer to your first question.

Okay. So development cost too high in Japan. To lower the cost, for example, reducing the number of the models in Japan is one way. But are there any future measures?

We, [ Misaki-san, ] I think you're referring to RAC, but RAC, our market share is not too low. So together with CAC or CAC, the market share is not so high. But in CAC, gas heat pump and ABS, various things are included. So in one word, talking about the market share and profitability in Japan, it's not very easy to explain. But on top -- having said that, number of the models being reduced, of course, depending on the products, I think that you might have a different image. But generally speaking, the number of the models too many is something that we fully recognize. But -- so the direction is to decrease, but it's not specifically for RAC, but rather for the commercial ones. We have maybe more models than are needed.

Next person.

Yasui from UBS Securities. I have 2 questions. First, air conditioner. You talked about 3 different entities coming together, having a bit of a problem in terms of a good matching for production and region. I think this is true in other businesses as well, not just air conditioners. You are former analysts, and now you are with Panasonic. So manufacturing and sales mismatch, do you think that's too big of an issue that cannot be resolved immediately? And so no improvement in efficiency for Panasonic overall. Do you think that is an issue, is my question. My second question, cold chain. With you as President, I think productivity -- the profitability has improved dramatically. Were you just lucky? And as part of the management now, what were the things that worked? What are the things that didn't work? You said that cold chain is improving, market share is improving. So now that you are part of the management as a former analyst, what is your observation is the question. Thank you.

Your first question, maybe you are a bit misinformed. What Matsushita was doing was air conditioner and Matsushita Seiko was doing the fans ventilation and Sanyo was doing something else. So there was no redundancy in the product areas, and they all came together for HVAC. So it's not overlapping that resulted in redundancy or waste. That's not the case. Still, we're talking about 3 different entities coming together after years of independent operation. And so of course, there's always room for improvement in terms of efficiency. And your second question for Japan and overseas. Since day 1 of being the President, I had always focused on market share because in this industry, no indicator is more important than market share. Market share has been larger, declining and then focused on certain areas. And because of that, we were able to raise prices, and that's under the previous leadership. So I don't think me becoming the President, the timing of that had anything to do with the recovery in our business. And the monthly settlement is what I mentioned in relation to HVAC. And for CCS and HVAC, I don't think the companies -- either companies had looked at the results so closely on a monthly basis. I'm a firm believer that what can't be done in 1 month cannot be done -- can be done in 3 months. So for cold chain, I think we were able to streamline that whole process, and that had a -- that made a big difference.

I see. Okay. About the first point, I apologize for being misinformed. But air conditioning overall, I think personally that this is an industry with an economy of scale that could play. So if the scope scale is lacking, I think that is an issue with Panasonic. So once you gain sufficient market share, do you think you can grow your business? Or will you continue to pursue on the profitability from region to region?

I think what you have in mind is the Chinese players. If you just focus on RAC, all Japanese manufacturers are in the single-digit range. Still, my projection is Japanese players with their normal business can enjoy a pretty good profitability. Energy saving features will becoming more -- will become even more challenging going forward. So I think there will be fewer players, not more players. In Japan in terms of number of units, the market is still growing. And of course, scale can be part of your competitiveness. But as I said, there are certain regions that are more profitable than others. And the major manufacturers already have the manufacturing facilities in most of the markets, and yet they are not leveraging that global production capacity. Most of the basic technologies components are made in China, but for others, it's very diverse. So some industries have 30%, 40% market share, but I don't think this is such an industry. I don't think there'll be a dominant player with a market lion's share of 30% or 40%, for example.

We are getting to the end of the first half. We will take one question online and one question from the room. [ Tokio Kaijo Asset Management, Nemoto-san, ] please. Sorry, that was not the question. So we'd like to take 2 questions from the room.

Okazaki from Nomura Securities. During the presentation, you talked about the M&A or investments, not spending too much time -- too much money. And as somebody else asked, the global scale has been discussed in other countries. So U.S., India, Indonesia, the issue of the tariff is not something that we can ignore. So you have to do local production, local consumption. I think in this industry, that's important. But in your case, you're going to the different direction.

Okazaki-san, thank you. For example, air-to-water has to be manufactured in Europe. So we established a plant there. So as for the air-to-water, it will be mainly manufactured in Europe. Right now we export from Malaysia, but in the future, that is what we do in Europe. So if the regulation requires that, that's the only way. But as for India, it's kind of complicated. I do not have a good answer. But the market share in India, for example, in RAC, I think that the share is fragmented. So in India, the companies who can make the key devices, there are not so many. So the superficial local production, local consumption can be done. But to answer your question, the local production, local consumption if it is absolutely necessary, of course, we would do that. But of course, having the one factory in the global market, whether it is better in terms of cost. For example, in RAC, manufacturing only in Europe is not realistic. So we want to take advantage of what we have. But in the case of air-to-water, penetration is only like 2%. And because of that, we can be #1 and the regulation is very stringent in Europe. So that's why we manufacture in Europe. So we cannot really explain it in the simple terms. So if you have any additional specific questions, I can answer. So it doesn't mean that we are moving away from local production, local consumption.

So this will be the last question for the first half of the Q&A session.

Ayada from JPMorgan. I have 2 questions. RAC, CAC, profitable regions is where you're going to focus, and you say, Europe and Asia. But when I talk to your peers, they say that European markets from country to country, distributors are different. The commercial business practices are different, languages are different. And therefore, it will take time to really be successful in all countries. Now Asia, China and Korean manufacturers are selling affordable products and, therefore, pretty competitive. So with that, what is your sales strategy in those 2 regions? And my second question is regarding the production. You said that you are mainly manufacturing, producing in Malaysia, and it's efficient, I can agree. But in air conditioning manufacturing, the competitiveness of parts and components, how much of that is a factor in terms of your competitiveness, motors, the heat exchange and many other parts and components that are involved. And if your peers are doing the local production for local consumption, maybe that would not be much of a factor. Can you comment on that?