Panasonic Management Discusses Q2 2014 Results - Earnings Call Transcript

Oct.31.13 | About: Panasonic Corp. (PCRFY)

Panasonic (OTCPK:PCRFY) Q2 2014 Earnings Call October 31, 2013 ET

Analysts

Kota Ezawa - Citigroup Inc, Research Division

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

J.J. Park - JP Morgan Chase & Co, Research Division

Yasuo Nakane - Deutsche Bank AG, Research Division

Eiichi Katayama - BofA Merrill Lynch, Research Division

Masahiro Ono - Morgan Stanley, Research Division

Unknown Executive

Thank you very much for your attention. Now we'd like to take questions. Give us a few minutes to get ready for the Q&A session.

[Operator Instructions] If you are asking questions about the presentation, please give us the page number. Now we are ready to take questions.

Question-and-Answer Session

Unknown Executive

If you have any questions, please raise your hand. The person in pink shirt in the middle.

Kota Ezawa - Citigroup Inc, Research Division

Ezawa from Citigroup Securities. About batteries, I have one question. Slide #9, you mentioned the additional investments in terms of the production capability, to what extent does this cover? And in the longer term, what kind of investment do you think is necessary? Two billion cells need to be manufactured in the first year, so how much of the investment do you think with be necessary to manufacture that many cells? Also, the automotive batteries are drawing a lot of attention. About the price trend, how do you see the price trend? The 5% decline per year or 15% decline per year, which is more likely your view? So sorry, I have another question in relation to the battery. In the long term, the production of cells is the kind of business that you have in the future. Probably that needs to be evolved. That is to say, that to provide the modules or systems or as a leader in the industry standardization efforts or probably you should be leading at the standardization effort in the industry. So if you can share with us any views on that or prospect?

Unknown Executive

Yes. So 2 billion cells in coming 4 years, so that means that the 500 million per -- it's not going to be a 500 million per year. It's going to increase. And we have to be able to make the investment to accommodate such increase, and we have already made a determination for the addition investment. When we have more cells to be manufactured, what kind of investment are we going to make? This is really up to the car manufacturers. So we'd like to work closely together with them so that we can identify the forecast for the demand so that we can make the timely investments. There are some risks, of course, but together with the car manufacturers, especially in the case of Tesla -- oh, right now it is only one company, so we will be closely, very closely working with Tesla Motors. As for the automotive batteries, the price decline, whether we can provide high value-added battery is very important. In the case of Tesla, we spent 3 years to improve the performance of the electrode and others. So in that sense, this is a business that we closely work and link with customers. But aside from Tesla for the EV [ph] plug-in hybrid, we do not have a very strong forecast for the demand increase in those areas. So in terms of the business, I think that the hybrid battery or lithium-ion battery for the hybrid vehicles is the business that we would like to grow. So in that sense, the hybrid batteries, there are various requirements for the performance from the common factories. Nickel hydrogen is the area that we have a lot of know-how. So how do we utilize that for the lithium ion? So again, we need to really closely work with the car manufacturers, but that's for the format or shape. The new -- even if there is a requirement for the totally new shape or format, it would be very difficult to accommodate. So in terms of the form and the shape, we are trying to standardize it as much as possible. So that even if we are offering the products to different car manufacturers, we should be able to handle it. So 15% decline of the price per year, that is not something that we expect. 15% price decline means that we are not going to survive in this business. So we'd like to make sure that we don't have that kind of situation. I hope that answers your question. Do I need to comment on standardization effort? of course, we'd like to beat that.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Watanabe from Goldman Sachs. I have one big question. JPY 2 trillion sales in each business going forward, you have explained clearly that overall direction. Can you elaborate why Panasonic? How are you going to win the customers making Panasonic a compelling choice? What strategy do you have?

For example, for automotive, Tesla and for hybrid, I understand that your batteries would be adopted in many models. So if you can focus on automotive batteries, be the tier 1 supplier and have the peripheral products being bought as well. Is that the way you're going to differentiate yourself? So in the automotive area, how are you going to differentiate yourself compared to Hitachi or Denso? And for housing, I understand that you already have strong relations with your customers, but then the concern is whether they are really looking into HEMS solutions as well because some already have their own solutions. Why is it that they have to choose Panasonic as the supplier, not of products but of systems? Can you explain that?

Unknown Executive

So automotive and housing, JPY 2 trillion each in sales, right? Yes. Automotive for batteries, we would hope to continue to be #1 in the industry, so we need to evolve our technology by collaborating with the auto manufacturers and also evolve the process. When auto manufacturers are operating in China or U.S., how can we support them? Through close collaboration with auto manufacturers, we can respond to those changing needs. Photo in -- or in the auto entertainment industry, we are #1. We do have -- we used to have global #1 share in the car navigation system, the genuine, and we are now focusing more on -- by combining our efforts with the software companies, we have the car navigation plus the entertainment system being provided, and we do have #1 share. And when we visit the auto manufacturers, we find that the systems are becoming more complicated, and therefore, the conventional tier 1 are not being able to help them, and therefore, they're asking for our help. I can't specifically give you the names of those companies, though. So we believe that we can increase our market share by responding to those needs. So the audiovisual system resources and mobile resources will be allocated to those emerging markets. And the entertainment general manager used to be the general manager of relevant technology in the past. So the auto manufacturers want a stronger taste or the flavor of consumer. So the automotive system with consumer taste, that is something that only Panasonic can provide. Denso can't do it or Bosch can't do it. And as for the homes, HEMS and in terms of systems, we're not really looking into the global market. We believe that Japanese market will have to be turned into the showcase and on your demonstration, testing ground, and this is a matter of will. We do have the materials business, we have other businesses. So we all had potentials, but we have not put efforts in combining them of -- as solution in the homes. So smarthouse, Panasonic is #1, is where we are going to be headed. The home appliances for that purpose and the housing system, for that purpose will be launched. So PanaHome smarthouse, we are going to be the leader so that other housing manufacturers can follow suit. If we pursue that strategy, it would mean that Panasonic would be able to come up with the structure that only we can provide. I think there are various ways to do that in terms of pricing.

Unknown Executive

Any other questions? Are you going to be asking questions in Japanese? You can ask questions in English.

J.J. Park - JP Morgan Chase & Co, Research Division

This is J.J. Park from JPMorgan. I have 2 questions. Number one, you divided up the full year guidance for the proceed [ph] and the operating profit. So I'm just wondering how much the upside to the sale of the OP division? Was it driven the FX impact and the implement in the core operations?

Unknown Executive

All right now. The operating profit, can generate difference, so we estimate [Japanese]

Unknown Executive

JPY 15 billion.

Unknown Executive

[Japanese] So JPY 15 billion. The USD 150 million. That's for operating profit. Regarding the sales amount, that's around JPY 400 billion. [Japanese]

J.J. Park - JP Morgan Chase & Co, Research Division

My second question just placement. You said you guide here. You did a restructuring in the Panasonic. So what's the biggest issue or registers either from the employees or time management when you restructure the downside, the unprofitable EBITDA and then how you overcome those issues or registers?

Unknown Executive

To speaking, I'll answer your question in Japanese. Laying off people is not possible for us. So we cannot fire people. So if the business is not going well, we'll try to absorb that extra personnel in different business. So when we do that, for example, relocation is sometimes necessary. So those people that we cannot keep in a certain business, we would sometimes ask them to retire at the early stage. So with the certain additional compensation, we ask for the early retirement. So within those measures, I think that we are promoting the current restructuring. So in that sense, we have managed the restructuring until now and we will continue to do so. [Japanese] I hope that answers your question.

Unknown Executive

[Japanese] Next question.

Yasuo Nakane - Deutsche Bank AG, Research Division

Nakane from Deutsche Securities, Deutsche Bank. I might have missed during your presentation JPY 270 billion operating profit on a full year basis. Do you have a breakdown by segment? And the actual operating profit for the first half, can you compare that to the plan also by segment?

Unknown Executive

JPY 270 billion, you want the breakdown by segment? Maybe I can talk about the difference from JPY 250 billion. Basically, foreign exchange, as was explained earlier, JPY 15 billion, ForEx related. For others, Appliance may be JPY 1 billion or JPY 2 billion less; ES, over JPY 20 billion, JPY 22 billion, JPY 23 billion up and down JPY 17.8 billion for AVS [ph] and JPY 3 billion or JPY 4 billion increase excluding the ForEx. For ForEx, Appliances, JPY 12 billion less; ES, minus JPY 10 billion or so; AVC, plus JPY 10 billion or so; and AIS, JPY 15 billion to JPY 16 billion plus. So that should explain the difference. And your second question was the breakdown of operating profits for the first half, the difference between the actual and the forecast, the breakdown by segment, rather rounded figures, Appliances, a little less than JPY 10 billion less; ES, JPY 12 billion, JPY 13 billion, plus; ABC, minus JPY 10 billion or so; AIS JPY 15 billion or so plus, and then there are some others. So for the 4 segments, that's basically the figures, so in total, plus JPY 50 billion or so.

Yasuo Nakane - Deutsche Bank AG, Research Division

So about JPY 30 billion plus for second quarter alone.

Unknown Executive

Yes. For second quarter alone. No, not that much. Actually, more difference in the first quarter. Maybe JPY 12 billion, JPY 13 billion difference during the second quarter.

Yasuo Nakane - Deutsche Bank AG, Research Division

My second question. Roughly speaking, good ones and bad ones, there are clear line between the 2. What's the results? JPY 250 billion business restructuring for this year and next fiscal year, is it going to increase or not? And do you -- and I believe JPY 250 billion would suffice for a 2-year period, but do you think you can save more or it could be less in total but more this year? So could you talk about the time frame and the size and which segment mainly? Could you, in other words, elaborate on the content of that JPY 250 billion?

Unknown Executive

In the past, you said that -- you asked whether or not we can actually afford business restructuring, but more recently, we do have the surplus to do business restructuring. So we are being more aggressive in implementing the business restructuring efforts ahead of schedule and also taking early actions for the emerging issues. JPY 120 billion for this year is what we were saying, but we decided to do more. JPY 250 billion during the 2-year period isn't going to be more or less than that was what you asked. Maybe it's going to be -- it's not going to be less than this necessarily, or we will be making efforts for the business restructuring with that intent. In other words, we would like to do the best we -- that we can do during this 2-year period. So there is a possibility of spending more, which would take place during this fiscal year, but that's not final yet. But we'll be spending more, maybe JPY 170 billion. That's the limit that we have for this fiscal year.

Unknown Executive

[Japanese] The person in the first row.

Eiichi Katayama - BofA Merrill Lynch, Research Division

Katayama from Merrill Lynch. I have 2 questions. First, about the Tesla battery cells and this agreement. So in coming 4 years, 2 billion cell is going to be purchased by Tesla. Is that the minimum level? Or 2 billion is the whole business? With this big 2 billion, maybe some people say that they might buy from Samsung, LG -- and LG. So do you think that you'll be able to maintain as a sole provider to Tesla? I'm looking forward to that. But do you think that -- I'd like to know the background behind their evaluation of your battery. What are your strengths and why did you manage to get this strong commitment from Tesla? That's my first question. And the second question, the Eco Solution Automotive, those are the driver of your profit, and already in the second quarter, 6% and 4% of OP margin was achieved. So as restored sugar [ph] in 2016, the total of the 5% and probably higher will be margin is something that you're targeting. So in 3 years, for example, do you think that you can achieve much higher profit level? I'm sure you believe that, but to what level do you think that those major businesses can increase their OP margin, too?

Unknown Executive

So the negotiation mainly was done by Mr. Yamada, the Senior Managing Director, so they are discussing with their CEO. And as you said, 2 billion cells in 4 years. When their business goes well, it is likely that this number will be higher. We have a feeling that might happen. But frankly speaking, we are supplier to the OEM manufacturers. So car manufacturers, how do they see the future? Even if we talk with them, we are not in the position to say that to them, so you have to really ask that question to Tesla. So that's the only thing I can say. But -- so for example, whether to maintain our dominance vis-à-vis the Korean player, we are not sure, but if they ask for us, we like to make sure we provide highly reliable products. And together with Tesla, we'd like to take risks together with Tesla. So that, I believe, is as much as I can say. Yes, AIS profitability, the profitability is not so high for that business, and to increase that profitability might not happen. Highly profitable business, energy system is one of the highly profitable business, [indiscernible] that is from the Matsushita Seiko that also has a higher profitability. In the housing, profitability was low, but it's now as high as 5%. And as for the lighting, if we go to the consumer area, it would be more commoditized. So we'd like to control the percentage so more than or higher than 5% is something that we can expect, but whether we can go to 10% or not, that would be too high a hurdle. So as for the AIS, there are clearly the profitable businesses and nonprofitable businesses. So if we can eliminate the unprofitable businesses, we can make that business more profitable. But in relation to the automotive, if we have more automotive-related products and sales, we have to deal with the car manufacturers. They're manufacturers and we are also manufacturers. So they are not going to give us a high profit margin. So it's really up to how much margin they have. So at least or at minimum, we try to maintain 5% OP margin in related to the car business. If we can combine that with the battery and if we can utilize our capacity more, maybe we can increase the profitability. So if we can combine the business like that, we can have even higher OP margin. I'm sorry, I cannot give you the precise numbers, but that's what I can say.

Unknown Executive

Any other questions? Yes, the person in the third row.

Unknown Analyst

Kobayashi from Pure [ph] Investment. About the business portfolio. You're selling health care business. Think that your competitors are interested in just health care. Housing and automotive, yes, I understand, but maybe it's not necessarily your health care. But medical or health care, I think, is important for the home business, the housing business, and yet you decided to sell that, why? And why is it that you decided to sell health care to that particular company amongst many others? My second question about the semiconductor and the LCD, some report that you might be interested in selling those to businesses as well. Do you -- could you care to comment on that?

Unknown Executive

Semiconductor, LCD, PDP, are we going to sell that? To answer your second part of your question, you're asking that, right? No, we will not sell that. And we're making desperate efforts so that we can continue our business. That's because they are advantages in continuing with these businesses, especially semiconductor business. We are going to retain the businesses that will have -- that will provide benefits to us by having those. Now for PLD, yes, profitability is improving, used to be a money-losing business, but now it's getting close to breakeven. The -- with the evolution of display technology, the strength of and the advantage of having a display business within our business portfolio, as long as we can retain that, I think that will have various positive impact be it automotive or AVO [ph] or whatever. If it's a panel for TVs, maybe we can sell that. And your first question about the business portfolio, you said that maybe health care is important for us in addition to automotive and housing. Yes, I thought so, too, initially, but the difficulty of health care business has to be taken into consideration. We felt that there's a limit to what we can do ourselves, especially the blood glucose sensor and others are profitable. But in 5 years' time, 10 years' time, can we have a structure that can continue to be profitable? When we asked that question, we decided that, that cannot be ensured by relying on our internal capability, and so we decided to look for the partner with synergy in KKY [ph] was the answer. The information capability and in terms of into the future, we decided that KKR would be the right decision.

Unknown Analyst

Follow-up, so KKR -- so you're not going to withdraw from the business 100%? You will continue to cooperate?

Unknown Executive

That is true. We are going to continue to hold 20%. We do have various businesses under the Panasonic brand, which will continue to be used. So it's not going to be totally separated. But KKR, we feel that this is a really long-term relationship. We're not thinking of withdrawing altogether.

Unknown Executive

Our time is almost up. Is there any questions? Yes?

Masahiro Ono - Morgan Stanley, Research Division

Ono from Morgan Stanley. I have one question I'd like to clarify. This time, you decided to discontinue plasma business. And then the air conditioning and digital still camera were also nonprofitable businesses. You have made progress in the restructuring and probably now some of the things that you were unable to do are now possible. As for the cost or the expenses for the business discontinuation, to what extent do you think that you can tolerate? Because in order to discontinue business, it will be some cost incurred. So what will be the additional burden on the part of the cost reduction? Sorry, my question is rather vague.

Unknown Executive

All right. Concerning those businesses, DSC and air conditioners, we are not going to conduct a restructuring, which requires additional cost. So as for the air conditioning business, the internal operation capability was weak, especially in the Chinese market. The -- we were weak in forecasting the distributor's inventory. So we are making changes to that. So in terms of the investment for the large-sized air conditioner, we need to change ourselves so that we can make investment in that area. And when we are ready, we will make some major investment, but we have not yet reached that level. As with the DSC, not just Panasonic, but other camera manufacturers are suffering. So we would like to focus on our strength and what kind of camera manufacturer are we going to become so that the customers would recognize us. That is something that we are trying to find out. Until now we try to focus more on volume just like the other consumer goods, but camera is very unique. So the image or expectation from the customers are very important. So we need to focus on that more. As for the cost burden concerning the plasma TV, it doesn't mean that because of the higher cost, we are discontinuing this business. We need to finalize many things, and P5, we have already stopped the operation of the P5, and there has been an impairment. But we have not yet clarified everything. So we'd like to look at the total picture. We'd like to make sure that we will not postpone this. But if we cannot finalize everything this year, we will do so next year. So it does not mean that because of the shortage of the money, we are not going to do this. Now JPY 120 billion plus JPY 50 billion, so the total of the JPY 170 billion for the restructuring is our plan. So we'd like to make sure that we can bring some of the things forward, and we expect that effect of the JPY 40 billion.

Unknown Executive

It is now time to...

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