Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Hideaki Kawai - Principal Financial Officer, Managing Director and Director

Analysts

Kota Ezawa - Citigroup Inc, Research Division

Eiichi Katayama - BofA Merrill Lynch, Research Division

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Masahiro Ono - Morgan Stanley, Research Division

Junya Ayada - Daiwa Securities Co. Ltd., Research Division

Panasonic (OTCPK:PCRFY) Q3 2014 Earnings Call February 4, 2014 ET

Question-and-Answer Session

Kota Ezawa - Citigroup Inc, Research Division

My name is Ezawa from Citigroup Global Markets, Japan. First, about the revisions of your business forecast. Could you kindly elaborate what will be the forecast for the fourth quarter? It seems that eliminations and adjustments, allocation to each segment would make it rather imbalanced? I think you have reallocated the eliminations and adjustments from corporate to each segment. What is the proportion of the allocation? And could you also explain the background to those revisions, please?

Hideaki Kawai

Well, it is difficult to explain what the allocation to each segment is. JPY 50 billion would be the entire corporate level, centering on 4 major companies allocations have been made. Compared to the previous forecast and the earlier forecast, let me elaborate. Appliances, JPY 21 billion would be the difference in terms of operating income. Difference from the previous forecast, of which, foreign exchange account for about JPY 14 billion or so. That's a negative impact, which would mean about JPY 7 billion would come from other factors, mainly air-conditioners and other overseas business or worsening more so than we had anticipated, that's factor.

As for Eco Solutions, JPY 18.6 billion positive. JPY 10 billion or so, that's a negative impact from foreign exchange. But the positive is over JPY 30 billion in almost all business divisions doing better than the original forecast.

As for Automotive & Industrial Systems, or rather AVC Networks, minus 28.5 billion, positive, about JPY 10 billion from foreign exchange. So altogether, the net would be minus, especially overseas B to C business and consumer AVC business are doing worse than we had anticipated, which would include the digital still cameras. And AIS, Automotive & Industrial Systems, minus JPY 9.6 billion. Positive impact of foreign exchange of about JPY 20 billion, which would mean that the actual worsening was larger than this. During the third quarter, the restructuring in the printed circuit board, JPY 21.7 billion. This is included in the third quarter and also in the fourth quarter. The Semiconductor business is to be restructured thoroughly, which would have a net -- a significant impact on the operating income. Earlier I talked about the devaluation of inventory which would be a major factor. And these factors are reflected in the figures here. And eliminations and adjustments still remain. There are many factors that are included here. The remainder in the fourth quarter, if you do the math, you will see major impact of the restructuring of expenses and others. And we have done extensive amount of reallocation to each segment company.

Kota Ezawa - Citigroup Inc, Research Division

My next question, you said that during your fourth quarter, there'll be restructuring in Semiconductor, especially in relation to inventory. So with that, the impairment loss, reduction in the number of headcount and others that are deemed necessary as restructuring in Semiconductor, do you think they'll be completed in the fourth quarter, if that accounts for the gap of about JPY 10 billion. Am I looking at this correctly? And also, the plasma display structure plant, is that included in the fourth quarter figures, that is as impairment loss? And LCD panel plant, what is the current forecast in relation to the restructuring? In other words, how much additions should we expect as restructuring expenses for the fourth quarter? And also, could you also talk about the restructuring for the next fiscal year, JPY 17 billion or JPY 170 billion of restructuring expenses for this fiscal year, does it remain unchanged?

Hideaki Kawai

Well, let me start from the Semiconductor business. The press release was announced today. Compare -- in addition, to the press release that we made recently, that completes our scenario of restructuring of the Semiconductor business. When would the new company start operating? Not all would be completed by the end of March. There'll be some that will continue into the next fiscal year. But all of the necessary measures will be made during this fiscal year. So for these major unprofitable businesses, we had expectation for the improvement for this fiscal year and there are some delay in progress with regards to the Semiconductor restructuring. But with the added measures, we expect the profitability to be quite different next fiscal year. So to answer your question, we would like to complete ahead of schedule by the end of this fiscal year. And PDP, PLD business, again, to give you a big picture, I'm sure you understand this. But just to make sure, within our medium-term management plan as for the unprofitable or challenging businesses, we are going to change the profit structure extensively and there will be restructuring expenses incurred as a result. For PDP, given the current situation, it's hard to say to what extent in terms of the figures, but we'll take necessary measures by the end of this fiscal year. And as an extension to that, for the PLD, we are seeing progress in terms of profitability. But some additional measures will be taken during the fourth quarter, if necessary. So you should see that the restructuring efforts for this fiscal year would be implemented ahead of schedule, which should translate into improvement in profitability next fiscal year. And we also expect reduction in the restructuring expenses next fiscal year. We've been talking about JPY 250 billion over a 2-year period. It's hard to say at this juncture, but it might be larger than that. One factor is that JPY 170 billion for this fiscal year. We have been talking about implementing ahead of schedule, and there is a possibility that the figure might be larger for this fiscal year because we are expediting the process, which will be less for next fiscal year. And to respond to the changes in the business environment, we might be spending more. As for the business plan for fiscal 2015, we are finalizing the plan and there are nothing that we can share with you at this juncture. So when it comes to what the business restructuring expenses would be for next fiscal year, it's hard to say. All we can say is that it might be larger than what we have been telling you. But the point is this, the figures might be larger, but we want to make thorough efforts and we want to expedite the process as much as possible for this fiscal year. That's our policy.

Kota Ezawa - Citigroup Inc, Research Division

So JPY 300 billion and I mentioned before that this year, it would be more than -- JPY 200 billion or so, more than JPY 175 billion. Is that the overall picture?

Hideaki Kawai

It's difficult to say, to give you the final number. We don't want to have such a large expenditures. But the increase that we have already realized this year, we would like to see the reduction next year. Okay, and another question.

Eiichi Katayama - BofA Merrill Lynch, Research Division

Katayama from Merrill Lynch. One question, in Q3 operating profit, JPY 120 billion or a little less in comparison to the plan or the results by segment? That's my first question.

Hideaki Kawai

If you look at only the third quarter in comparison to our plan, we made a revision previously. So based on the full year of JPY 270 billion and based on that number in terms of operating profit, Appliances, JPY 5 billion, exceeding the plan. And ES, about JPY 8 billion higher and AVC, JPY 2 billion, AIS, JPY 10 billion or JPY 12 billion, rather, higher. So all of them are higher than our plan.

Eiichi Katayama - BofA Merrill Lynch, Research Division

So overall, as a total, what was the upward revision, if you include everything?

Hideaki Kawai

Including others as well, it's about JPY 50 billion, okay?

Eiichi Katayama - BofA Merrill Lynch, Research Division

So originally, you expected JPY 70 billion. So it's JPY 50 billion higher than that, is that right?

Hideaki Kawai

Well, if you combine them, no.

Eiichi Katayama - BofA Merrill Lynch, Research Division

So originally, it was JPY 116 billion. And you mentioned that you exceeded that JPY 50 billion. Or originally, the upward revision part is JPY 50 billion. The number is very high, so could you give us the others, as well as elimination?

Hideaki Kawai

As for the eliminations, the others is about JPY 5 billion and the elimination is about JPY 20 billion. So JPY 20 billion, you mentioned, you considered certain risks and that risk was not realized. So that was one of the major factors.

Eiichi Katayama - BofA Merrill Lynch, Research Division

My second question. So Q4, the profit estimate is less than JPY 10 billion, so how do you interpret this? Up to Q3 based upon the results, you did not make the major revision, is that the reason, or is it just a conservative number that you included? Or up to Q3, you have already achieved the target? So based upon the operating number, you are spending more for the business restructuring, so that you can expect better results next year. And that would end at around JPY 270 billion. Is that the kind of the message that you want to send to the market? So the number expected for the Q4 is so low. So how do you explain that?

Hideaki Kawai

First of all, the third quarter number was quite high and the difference between the third quarter and the fourth quarter, especially the sales promotion difference, for example, based on the operating profit, there will be a difference of over JPY 20 billion. And the fourth quarter business restructuring, I mentioned that we will have a lot of that. So there will be a huge impact on the operating profit because of the business restructuring expenses. And also other miscellaneous expenses, there's about JPY 20 billion other, for example, R&D and other expenses, which would impact our earnings. So in comparison to the third quarter, the fourth quarter income or profit would be lower. But if you look at the actual numbers, that is the case. And in addition to that, we are trying to improve our profitability and one is to focus on the business restructuring. And also, we wanted to talk about the challenging businesses and how we are trying to make improvements. Some of them are going well and others are not going very well. So for those, we need additional business restructuring, so that we can complete the restructuring. So including all these, we would like to make sure that we can have the better next year. So that is the reason why we have those forecasts right now.

Eiichi Katayama - BofA Merrill Lynch, Research Division

As for the gap or the changes in expenses, I understand that. But for example, the business restructuring overall budget or the expenses of the business restructuring, what would be the total number?

Hideaki Kawai

Well, it's very difficult for me to say exactly. It could be probably around JPY 20 billion level. From first quarter to third quarter, you have seen the increase of the profit but -- year-on-year, but in the fourth quarter, it's not going to happen. So with the business restructuring expenses, having the impact on the business profit, it's -- the difference is about JPY 40 billion.

Eiichi Katayama - BofA Merrill Lynch, Research Division

And however, basically your earnings or the profit is improving. So how can we understand this?

Hideaki Kawai

It's difficult, maybe we are a little too conservative. But in Japan, we are seeing very strong market, especially the demand search before the consumption tax increase. But in some of the areas, the consumer areas are weak. So, including that, we have to come up with our forecast. So the full year forecast, of course, we'd like to exceed that as much as possible and we would take measures.

Eiichi Katayama - BofA Merrill Lynch, Research Division

The last point about the Semiconductor, the joint venture that you started with the company with Israel. And so including that, as a Semiconductor business, what would be the impact of the Semiconductor business on the consolidated Panasonic business results in the next year?

Hideaki Kawai

There are several announcements this year. And about the TowerJazz, it'll be -- we will try to bring advantages from each other. And there would be some fixed costs. So we would try to reduce that. However, we need a certain growth of the sales, so that we could improve the profitability. So in that sense, in addition to our own sales, the TowerJazz sales are needed to be combined, so that overall, profitability can be improved. But as of now, whether it would be deconsolidated or not, that is not yet decided. So depending on that decision, there would be differences. So there are some uncertainties. But with this measure, the reduction of the fixed cost will be realized. So the profitability of the business itself will improve. And today we made announcement about the back end, the plant, the disposal or the sale of it and integration of that into the new company. And so the Semiconductor business, which were separate will be consolidated and rationalized and the efficiency will be approved. So a series of those efforts, as I said, for the FY '15, we have not yet completed our business plan but we are going to make those disruptive changes through those measures. Thank you. Next question?

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

Watanabe from Goldman Sachs Securities. I have 2 questions. My first question, if I could go back about the fourth quarter, how conservative it is by segment from third quarter to fourth quarter? For example, in terms of Appliances, JPY 9.8 billion to JPY 1 billion. Why do have to be so aggressive in that reduction expectation? And I think, we're talking about reduction in other areas as well. I think more appropriate estimate would be a slight decline or flat. And B to C, I think fourth quarter should be where the profit is the largest. So even with B to C deterioration, you should be expecting a profit increase by JPY 20 billion or JPY 10 billion, why is that not the case? And as for Semiconductors, maybe that accounts for JPY 10 billion. But for other sectors, why is it that you're expecting so much decline in the fourth quarter? And altogether, you are expecting a decline of about JPY 70 billion, expansion of sales of JPY 10 billion and maybe JPY 40 billion could be explained, including the time lag in expenses. But I wonder if that makes sense? So for the fourth quarter, it appears that your expectation is way too conservative. So I really would like to know what is the upside potential? And my second question, again, more general question. Profit for next fiscal year and the year after that. I think for this fiscal year, you are expecting some upside, whereas for fiscal 2015, with the bonus reduction for this year returning that should have negative impact, but at the same time you're expecting a profit increase as a result of restructuring, which should offset that. But in Semiconductors with reduction in automotive and housing related, I wonder what your expectations are for next fiscal year? Are you expecting flat growth or are you expecting growth? And for fiscal 2016, I think 5% was the OP margin, which would be about JPY 320 billion in terms of operating income. But given the current situation, it looks like JPY 320 billion is an easy target. So what is your internal goal? And in [indiscernible] I think there was an article about reducing the personnel costs, which would mean that the profitability would improve furthermore. So internally, what is your target in terms of operating income for fiscal 2016? That's my question.

Hideaki Kawai

True, the fourth quarter figures may seem lopsided if you do the math. So compared to the budgets or compared to the forecast for each segment, we are seeing a decline. But in Appliances, we are seeing growth in air-conditioner and other overseas business. There are some uncertainties which are included in our forecast. And for AVC Networks, again, with overseas or additional consumer products profitability, improvement efforts are being made. But for this fiscal year, still there are lots of uncertainties and that's why we are being conservative. As for AIS, I talked about Semiconductor earlier, and I talked about the figures we have in mind. In addition, there are many other things that we have to work on. And in order to be very strict in implementing those, we're not being conservative in order to fulfill in our efforts. We feel that these are the figures for ES, true, especially related to housing systems. We are seeing the demand surge and so there are some positive factors. True for Appliances as well, we are seeing some increase in demand as well. Having said that, with the current exchange rate level, we should feel some of the disadvantages resulting from the exchange rate. So, including ES overall, the situation is rather bullish, but be it solar or LED, there still are some negative impact of foreign exchange, which are taken into consideration. Of course, we'll be making efforts for an upside, but the current situation does not warrant upward revisions and that's why we have not made revisions which may make the fourth quarter figures being lopsided, but that's in terms of operating income. In terms of sales, it would go up. So in terms of sales, most probably, given the current situation, around JPY 200 billion or so upside. If I could repeat myself, not that we are going to be complacent with the figures here. We will like to achieve upside, but there are various uncertainties that we have to keep in mind. For fiscal years 2015 and '16, well, the business plan for fiscal 2015 will be refined this month, so it's hard to say. But our strong decision, determination is to fulfill the targets for medium-term management plan, including shifting from B to C to B to B. We are making efforts to restructure the profitability system or structure. And of course, all the efforts are being made at the front line as well. To fulfill the targets under the medium-term management plan, that is our overall goal.

And that would bring the question of what needs to be done for fiscal 2015. We also need to eliminate the unprofitable businesses, which are to be completed during fiscal 2015. And, including the operating income for fiscal 2015, we should be able to calculate what would be the ideal level of operating income. Of course, we do not feel that the decline in income would be desirable.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

But during the 3-year period, various improvements and various foundation making would be made. And therefore, for fiscal 2016, can we expect a big growth in income?

Hideaki Kawai

Not really. Although, we'll be trying our best to increase the profit.

Takashi Watanabe - Goldman Sachs Group Inc., Research Division

A follow-up question. As for the additional restructuring efforts, I understand that you'll be addressing the new unprofitable businesses. But I think there are many businesses, which are profitable, but less than 5%. So for the restructuring for next fiscal year, would you be addressing those businesses in addition?

Hideaki Kawai

We will be addressing the necessary issues. Although, we doubt that will translate into big restructuring expenses. Thank you. So the next question.

Masahiro Ono - Morgan Stanley, Research Division

Ono from Morgan Stanley. I have 2 questions. First, about the automotive batteries. I'd like to have some update on that topic. So the Compact Portable Rechargeable Battery include the product for Tesla. If you look at the quarterly profit level, October, December profit has come down. So maybe this is not related to Tesla, it's due to the seasonality, I'd like to clarify that? And also the automotive batteries, in terms of the segment, do you think that this would become a segment or it's too small? For example, the plug-in, the Prismatic or the square-type, what is the current status? Could you give us the update? That's my first question. May I continue? So to my second question. Recently, there was a news that the Sanyo team, or the team belonging to Sanyo, you might be focusing on that team in terms of restructuring. For example, based upon the operating profit, I think, you have come to improve, but the former -- based upon the former Sanyo's financial, the pretax number, my feeling is that around minus JPY 50 billion still remains at former Sanyo. So when you booked the business restructuring expenses, you are making profits or the improvement on the operating profit. So if this former Sanyo business continues to be the burden, I think that size of it is quite big. So could you also give us some update on this former Sanyo business?

Hideaki Kawai

Yes, about the Portable Rechargeable Battery, it is true that in the third quarter that profitability was slightly down. But for the full year, it's going to improve. So I think you're right that the third quarter profit or profitability is lower. But for the full year, once again, it's going to improve. The reason behind is that -- it's not related to Tesla, no. It's going very well with Tesla. As I mentioned in my presentation, for the notebook-type piece PCs, based upon the current exchange rate, the sales should have grown to some extent. But on the -- based on the local currency base, it did not happen. So it was difficult for us. So that's one of the factors reflected. And we are growing in the new areas. And for the full year, we are going to show you the better numbers. As for the automotive batteries, we do not disclose that particular business as a separate business. So it's difficult to say.

Masahiro Ono - Morgan Stanley, Research Division

But what about the profitability in the third quarter?

Hideaki Kawai

I can give you the qualitative explanation. It is -- it has been profitable. And it's growing very steadily, so please understand that. As for the former Sanyo business, we are seeing a lot of improvements. They are doing a lot of restructuring. But based on the operating profit, as you said, we saw some improvement that we do have the deficit as a pretax number. So we have discounted some of the restructuring costs for that. And I think the structure will change dramatically in a year or so. So we are still at a transitional period. And in the midterm management plan, the measures that are included, whether we are making good progress, I think we are making progress. I think we just need a little more time. I'm afraid the next question will be the last question. Yes?

Junya Ayada - Daiwa Securities Co. Ltd., Research Division

Ayada from Daiwa Securities, I have 3 questions. First about the figures. In your presentation, you said that JPY 20 billion for the fourth quarter for the restructuring expenses, that will have an impact on the operating income. Is that included in the JPY 170 billion? And also, I think JPY 40 billion was the effect of restructuring next year for fiscal year. So if JPY 20 billion is included in next year, would it be JPY 60 billion or not? My next question, as was explained earlier, JPY 50 billion for risk with the revision in the guidance, elimination only accounts for improvement of JPY 20 billion. So in your full year forecast, how much change from JPY 50 billion? And my third question, eliminations and adjustments, I still don't understand. Third quarter, JPY 32.7 billion, fourth quarter, minus JPY 37.6 billion. So what's the difference between the third quarter and the fourth quarter, please?

Hideaki Kawai

Restructuring expenses, JPY 170 billion has been the estimate full year which include various factors. Semiconductors related restructuring expenses to some extent are included. JPY 20 billion or so is the full amount outside of the original plan, not really. There are some ups and downs in terms of the amount. So some are included, others are not. So altogether, they'll be incorporated, which would push up the figure above and beyond JPY 170 billion.

[Japanese]

Junya Ayada - Daiwa Securities Co. Ltd., Research Division

To extent would this be implemented, need to be refined going forward?

Hideaki Kawai

So it's hard to give you the exact figures. But some will be implemented ahead of schedule, which would have impact, which will have the effect next fiscal year, not JPY 20 billion per se immediately. It will be felt over several years to come. So JPY 20 billion to be felt during the fiscal 2015 is not the case. It's hard to explain the risk portion because there are various factors involved. For the fourth quarter, there are things that are still being considered. And as for eliminations and adjustments, which are related, true, if you do the math, it will be around JPY 40 billion or so. Restructuring related expenses do have certain impact. And also, there are some adjustments that are made in relation to the time lag of the expenses from the third quarter. So there's 2 of the major factors amongst many others.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Panasonic Management's Q3 2014 Q&A Session (Transcript)
This Transcript
All Transcripts