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Executives

Hideaki Kawai - Principal Financial Officer, Managing Director and Director

Analysts

Kota Ezawa - Citigroup Inc, Research Division

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Masahiro Ono - Morgan Stanley, Research Division

Eiichi Katayama - BofA Merrill Lynch, Research Division

Koki Shiraishi - SMBC Nikko Securities Inc., Research Division

Shiro Mikoshiba - Nomura Securities Co. Ltd., Research Division

Panasonic (OTCPK:PCRFY) 2013 Earnings Call May 10, 2013 ET

Question-and-Answer Session

Kota Ezawa - Citigroup Inc, Research Division

Ezawa from Citigroup, Global Markets Japan. As for the plan for the new fiscal year, I'd like to clarify some numbers from the OP to net income, the breakdown. I'd like to know the breakdown nonoperating profit income and loss. Aside from the restructuring cost, there are other items, so for example, the pension accounting and others. Could you talk about the factors which are included there? And also, the restructuring cost, JPY 120 billion, how much of that will be spent for what purposes and also on cash and noncash breakdown? Pretax and the net income, if you can give us some details in between those two. Sorry, I asked 2 questions already.

Hideaki Kawai

As for the nonoperating income, restructuring -- how can I explain this? JPY 120 billion for the restructuring. The interest payment, the usual nonoperating expenses, it's about JPY 15 billion. And there are other different expenses. For example, in relation to the pension, including those, I would say, JPY 70 billion. And in relation to the this defined contribution, it's about JPY 80 billion. So excluding the restructuring, it will be JPY 10 billion in positive. Now as for the noncash portion about JPY 120 billion, it's most -- almost 50-50, that is JPY 60 billion for cash and noncash is about JPY 60 billion, so half and half.

The third question, the between the pretax income and the net income, it's about a JPY-90-billion difference. Most of that is that plasma display and LCD displays, the tax effect is not applied. And we still have some deficit or net numbers from it, some loss-making companies. So of course, that the profitable companies are paying tax. As a result of that, or the total of that is about JPY 90 billion. So that is actually reflected here. So pretax to net income, that is the difference between those 2 numbers.

Kota Ezawa - Citigroup Inc, Research Division

As for the restructuring expenses, JPY 120 billion. What are the -- well, you give us the cash and noncash breakdown, but when do you have any plans to spend that money for which business, or breakdown of that restructuring expenses?

Hideaki Kawai

It's still difficult for us to explain that, so I like to refrain from giving you the details. But the purpose of this is that we included quite a big number. Usually, when we make a plan, we try to make a sum of the numbers which come from each business division, and that comes to JPY 40 billion and JPY 45 billion. And the remaining portion is the expedited business restructuring that would be done at the corporate level. So in the second half of this year and the next fiscal year, we'd like to make sure that we have a good recovery or maximized recovery, so we are trying to expedite the restructuring. So that is actually reflected in this number. Sorry, I cannot give you any details -- any more details on that.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Watanabe from Goldman Sachs. I have 2 questions. First, the fixed cost reduction for this fiscal year on Slide 14. JPY 19 billion is being mentioned. What would be included there? The depreciation is not that reduced, only $40 billion for early retirement charge. So where would the reduction in fixed cost come from? Does this include the reduction in salary? And if you could quantify the details that would be appreciated.

Secondly, the restructuring. You just announced the new medium-term management plan in March. But I feel that there are some programs being expedited. For example, with the pension plan, some of it being shifted to the DC, and I think that accounts for some of that expedited portion, am I correct? And for fiscal 2015, you might be incurring some loss. And with the restructuring being expedited this year, that would mean less for next year. So that would mean that the forecast for next year would be different. So could you elaborate on that as well?

Hideaki Kawai

There is JPY 116 billion or so. I'm afraid I can't give you the details. Human resources or the personnel cost reduction is part of that 50% or a little bit more than that.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

No, I want to know about fiscal 2014.

Hideaki Kawai

The structure is similar. Depreciation and R&D expenses are major items, and then there are others included in those. Including personnel costs, there is still rooms for reduction and we are trying to define the programs, and some are being promoted. Some have not yet been defined or fixed, so I'm afraid I can't share with you the actual amount. So there are some group-wide special measures being implemented. Another major factor is the effect of the restructuring last year amounting to about JPY 40 billion reflected here. The breakdown is as follows: JPY 30 billion during fiscal 2013. And for this year, the affect's about JPY 10 billion. These are already reflected in these figures. These are the major breakdown items.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Just to make sure I understand. In the appendix, depreciation for this year remains the same as last year, and R&D only down by JPY 10 billion. And when I add JPY 40 billion that you mentioned, that would be JPY 50 billion. So what happens to the remainder JPY 70 billion. You can't elaborate, but there are things, is that correct?

Hideaki Kawai

Yes, not just 1 but there are some initiatives that we have in mind. And restructuring overall, as I've been saying, I know many people are concerned about this, so we want to expedite this as much as possible. That's a major policy that we have. So if there are any surplus in earnings, we will like to translate this into expediting the business restructuring. It's not just the intent. And of course, we need to get the approval from the accounting -- accountants. We have to make sure that the accounting process is appropriate. The #5 plant of plasma display in Nagasaki, that is part of it.

For fiscal 2015, it's not that we'll incur loss without these measures. The intent of our restructuring need to be clarified. Until last fiscal year, we were incurring loss in convincing many people. So we want to make sure that net income -- net profit would be secured and that we can resume dividend payment. And over medium and long term, we have to maximize profit. And so, the restructuring to enhance this profitability over time would be implemented as well. So there might be some contradiction, but we want to make sure they are pursued in a compatible manner. And it's not just cash financial position improved but we want to improve the balance sheet as well. So if you look at that big picture, you will see that management stability and improvement in management efficiency can be pursued from -- in a compatible manner. We want to secure a framework where we can ensure profitability and earnings.

Unknown Analyst

Kanye from Deutsche Securities. I have 2 questions. First question is about numbers. In the presentation material, the goodwill and the fixed cost, it's -- there's some JPY 500 billion remaining. Could you give us a breakdown of it as you did in the past? And at the end of this fiscal year, if there are something that you plan to do, so what would be the changes at the end of this fiscal year?

Hideaki Kawai

As for the goodwill, JPY 510 billion or so on the consolidated basis, and the tangible asset is JPY 20 billion or so, and ABC is about JPY 40 billion. Sorry, let me talk about the goodwill first. JPY 40 billion in ABC; in Appliance, a little less than JPY 30 billion; SNC, a little more than JPY 50 billion. ES is JPY 110 billion. PASS is JPY 70 billion; Device, JPY 90 billion. Energy is also JPY 50 billion. So this is based on the former segments. As for the intangible, mostly they're much narrowed down or reduced, but JPY 20 billion in Device, Energy JPY 60 billion. For intangible, the system related and software related are in others. So those are the major ones. So you talked about FY '14. There are no major numbers expected. So it would be about the same as those numbers that I just mentioned.

Unknown Analyst

Another question. As for the sensitivity of the exchange rate on sales and the profit in the area of the Appliance and Eco Solutions, when the weaker yen would be negative on those businesses, so just roughly speaking, what would be the expect or impact of the depreciation of the yen? As for the appliance, in fourth quarter, in our institution in China in the air conditioner compressor, not very high and -- but the inventory, I just meant my take until June time frame, that's what you said in February. So the recovery of the Appliance business if you talk about the qualitative or quantitative aspects of this business.

Hideaki Kawai

Yes, about the exchange rate, I like to give you some details because it's a little complicated, where JPY 85 billion and the JPY 110 billion are used assumptions for the exchange rate. And of course, those are very different from the current level. And when we make a business plan, we look at the average of that term. And we make our calculation. And those are the levels that we had when we made the plan.

As for the sensitivity, last year, FY '13, I think that we tried to compress the sensitivity vis-à-vis the dollars with the JPY 1 change that is JPY 2 billion impact on the operating profit and JPY 1.7 billion in terms of euro. And renminbi is also included, as I mentioned, because of the Appliance. And there was a major impact in the fourth quarter. And JPY 1 billion is the sensitivity in fourth quarter. So for the full year or as a total, JPY 8 billion are positive for vis-à-vis the dollars; and JPY 3.4 billion for euro; and renminbi, minus JPY 2.3 billion. So that accounts to JPY 3 billion in total. And in the second half, of course, when yen depreciated significantly. In that midterm to long term, like to compress in the exchange rates risk as much as possible. That's what we have been trying to do and we continue to do so. So FY '14 vis-à-vis dollars JPY 1 billion sensitivity and vis-à-vis euro, it's JPY 1.7 billion, and in renminbi it will be JPY 5.2 billion. This is a negative impact. So there are pluses and minuses, so including all that, I -- it is JPY 5 billion. So if you look at the whole -- full fiscal year, dollar, euro, there will be a plus, but there's a negative or minus from renminbi. And today, yen has weakened further, so if I may continue, it's not going to be a linear impact increase. But in the simple calculation, JPY 35 billion level of sensitivity based on the operating profit is expected, including the renminbi. And for each company, we need to look into this more in detail. We need to clarify, but the negative impact is expected mainly in Appliances and Eco Solutions, both of them with JPY 1 change the operating profit -- on the impact on the operating profit will be in the single digits, the latter half of single digit or JPY-100-billion level -- JPY-100-million level. So for example, in the JPY 200 -- JPY 2 billion or more is expected, but we need to look into the details. And as for the appliance, there are lot of products imported from China, so currently, renminbi is about JPY 16 to the yen -- JPY 60 to the yuan. So the sensitivity is still in the single digit, late single digit. So it's not a major number. But in the air conditioner for this fiscal year in relation to China, JPY 25 billion recovery of sales is expected. We saw the decline last year, but we plan to have a recovery. It might take a little bit of time, but we expect this type of recovery for this fiscal year.

Masahiro Ono - Morgan Stanley, Research Division

Ono from Morgan Stanley. I have one broad question. Starting this fiscal year, you're going to change the disclosure method on new segment system. What's not visible from outside is the following which is really questionable: sales organization. The organization under the direct supervision of SANYO that is. I know you still need to decide on what to do. But before the full consolidation, it's been 5 years since it's been part of your operation in 2008. And I think it is high time you summarize and disclose what's happening today. For the last several years, you were -- you incurred loss because of this part of the operation. So what is the size of the operation today? And what will be the direction going forward within this period under the medium-term management plan, including this fiscal year? And in this new segmentation system, where does it belong? My rough calculation indicate that in fiscal 2013, including the intangible write-down, the loss resulted in JPY 70 billion to JPY 80 billion. I know this is too broad a question, but if you could share any information with us, I'd appreciate it.

Hideaki Kawai

The business itself has been reorganized quite extensively. And already, where we can expect synergy, that's been pursued and some have been consolidated and that's already been incorporated in the medium-term business plan and management plan. And from outside, you may feel that there's still room for improvement and that the improvements are slow going. But compared to the initial state, we need to work on over a medium term, over several years. Compared to the plan, we are actually seeing the improvement progressing ahead of the initial plan. So against the internal plan, we are on schedule. There is no delay. Still, as you indicated, it's still money-losing. We have really consolidated under the new segmentation, it falls under other the -- with the divestiture of DI, the sales would go down by JPY 50 billion or so. But including the reduction in fixed cost, we have been implementing what we can. Lithium-ion and the Automotive, those would also be -- need to be addressed to make further improvement going forward. Lithium-ion batteries, we expect profitability going forward as shown in the appendix. So the size of loss is being contained extensively, but for fiscal 2014, we still expect loss. I'm afraid that's all that I can share with you.

Masahiro Ono - Morgan Stanley, Research Division

If possible, you said that there'll still be a loss in fiscal 2014. Could you elaborate on that, what the size would be? And when you can expect a return to profitability, at least in the minds of the management? Because as you implement major restructuring over the next 2 years, I think the employees of Panasonic Group feel -- I think most of the people feel that the loss was mostly attributable to this SANYO operation. And in implementing the restructuring, I think the morale of the people would be very important. So I wonder if you are clearly explaining that to your employees internally. And I think a message -- clear message to the outside world is also needed. So when do expect to return to profitability?

Hideaki Kawai

Just to make sure there is no misunderstanding, within the group, the reorganization of business has already been completed. So the SANYO part, what's remaining is how we are going to consolidate or withdraw from. It's not that things are beyond our control. Everything is under control. So on this SANYO issue, what's the mindset? Internally, people are aware of what the roles are in each business entity. What the consolidation should be and how the growth should be pursued, those are already clear. But it takes 2 to tango. So it's a matter of how to proceed going forward. Now when can we expect to turn to profitability? I'm afraid I can't share the information with you today, but we have been shrinking. We have been consolidating to make sure there is no increase in loss. As things become more clear, I think I can share that with you.

Eiichi Katayama - BofA Merrill Lynch, Research Division

Katayama from Merrill Lynch. I have 3 questions. The first 2 questions on about numbers. As Mr. Kawai mentioned, the restructuring for this year, JPY 120 billion and JPY 134 billion next fiscal year. So out of JPY 120 billion, JPY 10 billion is for this turn. And for the effect of the next fiscal year's restructuring, what would be the effect of the JPY 130 billion restructuring that you expect for the next fiscal year? So for the FY '14, I think that you mentioned that there would be a JPY 10 billion effect from the JPY 120 billion. And the remaining for the next fiscal year, how much effect do you expect?

Hideaki Kawai

Well, JPY 120 billion, out of that, most of them are in fourth quarter. So even we expect the effect of the JPY 10 billion for -- from that amount. So that means that 3x or 4x higher effect is expected for the next fiscal year. So in the net terms, you would expect JPY 30 billion.

Eiichi Katayama - BofA Merrill Lynch, Research Division

Yes. So for the FY '16, again, you would expect another JPY 30 billion, is that right?

Hideaki Kawai

In a similar way, yes, based on that assumption, yes, that's correct.

Eiichi Katayama - BofA Merrill Lynch, Research Division

The second question is about the TV. On Page 22, the deficit of JPY 88.5 billion isn't going to be coming down to JPY 34 billion. So in terms of the number of the TV sets, most of the deficit, I think, is relation to the fixed cost. So for example, the utilization rate of the Himeji Plant, in order to make the improvement of JPY 50 billion, could you talk about those points in the quantitative manner?

Hideaki Kawai

Yes, let me show you some numbers first. As for the TVs, now talking about the panels or including the panel for the FY '13, PDP, 1.92 million units. And in the past it is actually 40% of the previous year. And LCD is 13.65 million. There's 92%. So the total is 13.65 million and that is about 78%. And out of that, as a total number, 11.5 million. So 84% of the previous year. So set itself is about 9 million. In the appendix, you'll find the TV business explanation and the TV business for this fiscal year is going to be profitable. It's not going to be a big number, but it's profitable.

So as for the panel business, in terms of the utilization rate, PDP is 50% -- 50% is expected; LCD, most recently, 100%. It's close to 100%. So there is a current status. As improvement of the profitability, I mentioned the fixed cost is the major factor. And in the set business, we are conducting the production innovation and this is a major factor. In the panel, non-TV application is going to be expanded and we accelerate that. So in LCD this year, 80% is going to be non-panel or non-TV applications. So that is our target. In addition, the distribution also needs to be included. The sales promotion cost reduction is also reflected or included.

Eiichi Katayama - BofA Merrill Lynch, Research Division

The last question. In the appendix material Page 3, the segmented forecast. The number of the segment is -- has been reduced so it's much simpler, but in the era -- it seems like that we are back in the era of Mr. Nakamura. And when you look at this, it's difficult to see which business is strong, which business is weak. In the past, you mentioned that the sales of the nonprofitable -- unprofitable business is so-and-so or double-digit profit is generated by this or that business and what would happen to that. Could you give us some additional explanation? It just shows us the overall business and very rough numbers. So it's very difficult for us to understand the true reality of the Panasonic.

Hideaki Kawai

So we have 49 business divisions in those segments. So if you look at all the 49 business divisions for FY '13, maybe 30% of the BDs are unprofitable. Maybe 20% in terms of sales. There are some business BDs, which are generating more than 5% profit and that used to be 30% of the overall sales. As for this fiscal year, the forecast, the nonprofitable, unprofitable one is now down -- is reduced by 10% to 20%. In terms of the percentage of the sales, maybe a little less than 10%. So which one increased? I think that less than 5% of ones are about the same. So more than 5% profit is actually more than 10% increase in terms of the percentage. Also, based on the number of the BDs and based on the sales in both terms, we see those improvement.

Koki Shiraishi - SMBC Nikko Securities Inc., Research Division

Shiraishi from SMBC Nikko Securities. I have 1 question. Slide 22, 23 and 24, with regards to the improved profitability of unprofitable businesses. On Page 14, where you make the various analysis, I think that the profit is improved by JPY 89.1 billion. And I think with the improvement in unprofitable business, the improvement should be about JPY 95 billion or so in total. So we can see the improvement coming from the businesses that are not disclosed in the way you're showing us. So if you could elaborate on that, I'd appreciate it.

Hideaki Kawai

True, in terms of numbers the figures shown here, I think this relates to the earlier question as well. Under the economic situation, we really need to really control the businesses. Fiscal 2014 and onward, we want to make a very clear, transparent disclosure of the improvements being made. And the figures shown to you today are based on that principle. So unprofitable businesses shown here and in others over the next 3 years, as we make various differences on a single year basis, I don't think there'll be much difference, but we want to exceed what are shown here. So the figures shown are the sum of the various plans. It may appear that they are nothing else if you just look at the figures, but actually behind those are various programs and initiatives being planned.

Shiro Mikoshiba - Nomura Securities Co. Ltd., Research Division

Mikoshiba from Nomura Securities. About the number of employees, I have a question. At the end of the previous FY, 293,000 was the number. In the coming year, through the restructuring excluding the reduction of the headcount, because of the restructuring, what will be the attrition, natural decrease? Do you think that the thousands of people or 10,000 reduction is possible through the attrition? If you have any forecast of that.

Hideaki Kawai

I'm sorry, I -- we don't have those -- that numbers with us. The attrition, yes, we do have attrition every year. Number of the people who were recruited and the current number of the recruited is quite different. So there are some attritions. So we'll continue to go down in terms of the headcount. And this time, FY '13, the reduction, most of them is in overseas, outside of Japan. So looking at the demand and the production level, there are some fluctuations. So it's difficult for us to discuss the future.

Shiro Mikoshiba - Nomura Securities Co. Ltd., Research Division

A very simple question. Starting from the first quarter of this fiscal year, I understand that most of the segment's information will be provided. I can't wait until that disclosure for the numbers. But what companies or what entities would be involved? Can you share that information with us?

Hideaki Kawai

Clarification. We are only going to disclose the sales of business divisions. As for operating income, we can only show you a qualitative information, not the quantitative information, as far as the operating income is concerned. Appliances: air condition, refrigerators, laundry, cleaners and cold chains. Are you with us? That's for Appliances. Eco systems: lighting, energy systems, housing systems and PASS. In AVC: AVC Network, DFC, IT products, security system, AIS, infotainment, capacitor, controllers and PFSC. We plan to disclose it...

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