Panasonic Holdings Corporation (6752) Earnings Call Transcript

Before presenting the financial results, I would like to express our deepest condolences to the families of those who lost their lives in the Kumamoto earthquake that occurred 2 days ago on the 28th and to extend our heartfelt sympathies to everyone affected. While no significant impact on our business operations has been confirmed at this time, the group will continue to closely monitor the situation, place the highest priority on ensuring the safety of our employees and take all necessary measures. We'll consider providing necessary support, taking into account the situation in the affected communities. We sincerely pray for the earliest possible recovery and reconstruction of the affected areas. Now the consolidated results of Panasonic Holdings for the first quarter of fiscal 2027 ended June 30, 2026. First, the summary. Sales and profit increased to mark the highest first quarter profit driven by higher-than-expected sales of AI infrastructure-related businesses and adjacent businesses benefiting from the growing data center demand. Overall sales increased on higher sales of Connect, Electric Works, HVAC & CC, Energy and Industry. By business, AI infrastructure-related posted a significant sales increase as previously communicated and so did adjacent businesses, including FA Solutions and Process Automation. Adjusted operating profit or AOP increased in all segments, particularly in Connect, Electric Works and Industry. OP and net profit increased on an increase in AOP. Full year forecast has been revised upward, both for sales and profit, reflecting growing AI-related demand and its spillover effects. By segment, sales and profits are revised upward for Connect, Electric Works and Industry, reflecting strong first quarter results. Now some details of the first quarter results. For the consolidated results, sales totaled JPY 2,018.9 billion, up 6% year-on-year. AOP was JPY 186.4 billion, an increase of JPY 94.9 billion year-on-year. OP increased to JPY 182.5 billion, surpassing the previous record high set in 1985 to mark the highest first quarter level in 41 years. Profit before income taxes and net profit also increased. Next, results by segment. The following few slides show the year-on-year variance analysis of sales and AOP. First, sales by segment. Connect posted a sales increase on higher sales of Process Automation, capturing demand for ICT, including AI servers, Avionics and Blue Yonder. Electric Works saw sales increase owing to steady sales both in the Japanese and overseas markets. HVAC & CC posted higher sales overall, owing to increased sales of room air-conditioners, Air-to-Water in Europe and Cold Chain. These factors offset the non-recurrence of the year earlier large-scale environmental engineering order. In Energy, sales of In-vehicle increased due mainly to higher sales at North American factories and price revisions. Sales of Industrial/Consumer increased due to higher sales of energy storage systems for data centers on strong demand from the growing generative AI market. Industry posted increased sales on higher sales of products for AI-related infrastructure businesses as well as FA equipment, including servo motors and servo sensors for semiconductor manufacturing equipment supported by data center demand. Smart Life posted an overall sales decrease despite higher sales in Japan, mainly of personal care products due largely to lower overseas sales, including large-sized appliances in China and AVC products in Europe. Next, AOP by segment. AOP increased in all segments, particularly Connect, Electric Works and Industry are driving the group's profit growth. In Energy, AOP increased overall. By business, AOP in In-vehicle slightly decreased due mainly to increased fixed costs resulting from the ramp-up of the Kansas factory, while AOP in Industrial/Consumer significantly increased due to higher sales of energy storage systems for data centers. Next, year-on-year OP analysis. From the left, increased sales in real terms, positive JPY 40 billion. Fixed cost, positive JPY 19 billion, reflecting a JPY 35 billion effect of restructuring undertaken in fiscal '26, despite strategic investments and inflation. Raw materials and logistics prices, negative JPY 37 billion, due mainly to price hikes in copper, resin and memory. The price revisions and rationalization and other initiatives, positive JPY 54 billion. Blue Yonder, positive JPY 9.9 billion or JPY 6.9 billion rather due to higher sales of SaaS products driven by Cognitive Solutions and improved gross margin, in addition to lower strategic investments. Exchange rates, positive JPY 12 billion. As a result of the above, AOP increased by JPY 94.9 billion. OP, including other income and loss increased by JPY 95.6 billion to JPY 182.5 billion. Cash flows and cash positives. (sic) [ positions. ] On the left, operating cash flow for Q1 significantly increased to JPY 372 billion year-on-year due mainly to the monetization of the U.S. IRA tax credit through direct pay. Net cash was negative JPY 558.3 billion. Next is consolidated financial forecast for fiscal '27. This is the consolidated financial forecast. Overall sales is revised upward by JPY 200 billion and AOP is revised upwards by JPY 50 billion, both reflecting growing AI-related demand and its spillover effects, particularly in Industry and Connect. Operating profit is revised upward by JPY 40 billion and net profit up by JPY 30 billion. This shows the fiscal '27 outlook for demand by segment. Blue is the positive changes, red is negative changes. Key changes are highlighted. At this point, we expect a limited impact from lower demand in our various businesses affected by the situation in the Middle East. AI-related products demand, including BBU, capacitors and multi-layer circuit board materials are growing steadily as expected. Another positive development has been the growing demand for mounting machines in Connect and FA solutions in Industry. These businesses continue to grow, surpassing our initial expectations, along with adjacent businesses such as semiconductor manufacturing equipment, which are benefiting from strong demand from AI data centers. This is the full year forecast by segment. As mentioned on the previous slide, overall forecast has been revised upward, particularly for Connect and Industry. Starting with the next slide, the assumption of the revised forecast and the key factors behind the changes will be explained. This shows the AOP forecast analysis by factor in comparison to the initial forecast. Upper graph is the initial forecast. Bottom is the revised forecast. The middle row is the revised amount. As shown in the far right of the middle, OP is revised up by JPY 40 billion from JPY 550 billion to JPY 590 billion. This consists of higher AOP by JPY 50 billion and a deterioration in other income and loss by JPY 10 billion. About AOP, positive impact of higher sales is JPY 30 billion. About raw materials and logistic costs, negative impact of material price hike is expected to be JPY 66 billion, while price revisions and rationalization to have positive impact of JPY 59.6 billion. As for Blue Yonder, positive impact of JPY 4.4 billion and ForEx is positive impact of JPY 12 billion. Those are expected. In the initial forecast, we factored in JPY 30 billion risk related to the situation in Middle East and memory price hikes, and we have reduced this to JPY 20 billion. With JPY 50 billion increase in AOP and the impact of other income and loss, we revised our operating profit forecast upward by JPY 40 billion. Now let's look at the individual businesses. First, AI-related business of Industry. The lower left graph shows the results and the sales forecast for AI-related businesses. Q1 of fiscal '27 sales reached a higher-than-expected JPY 74.9 billion, 1.4x year-on-year, driven by strong customer demand. Reflecting the current favorable business environment, the full year sales forecast is revised upward by JPY 40 billion to JPY 310 billion from the initial forecast of JPY 270 billion. In response to the strong demand, we are rapidly expanding our supply capacity. For multi-layer circuit board materials, we are strengthening our supply chain, including multi-sourcing of key raw materials like glass cloth, in addition to building new production plants. For conductive polymer capacitors, we are accelerating plans to expand the capacity at our manufacturing sites. Furthermore, supercapacitors are attracting increased attention due to the surging power consumption of AI servers. In addition to the CBU solutions under development with Energy, as previously discussed, we plan to start mass production of devices for external customers at the Chitose Plant during fiscal '27. With strong demand, AOP margin is steadily improving, and we will continue to pursue proactive business expansion going forward. Next, the outlook of energy storage systems for data centers in Energy. The lower left graph shows the results and the sales forecast for energy storage system or ESS for data centers. Strong growth continues as expected. We are also rapidly expanding our supply capability. For cell production, we are converting our production lines in Japan from automotive applications and also plan to start the mass production of cells at the Kansas factory in fiscal '29. For module production, the second Mexico plant is scheduled to start mass production in Q2 of fiscal '27, followed by the third plant in fiscal '28. To support the expansion of the module production in Mexico, we are steadily advancing the localization of the broader supply chain, including power supply manufacturers. Furthermore, we would accelerate the evolution of our products to further strengthen our industry position. For CBU solutions, which are becoming increasingly essential as the chips continue to evolve and become more sophisticated, we plan to start mass production of CBU solutions in fiscal '27 in collaboration with the industry, leveraging our unique strength of having in-house core technologies in both batteries and capacitors will further enhance our competitive edge. We also plan to complete preparations for mass production of next-generation BBUs built for HVDC within fiscal '27. Lastly, the outlook for In-vehicle. The line graph on the left shows the sales volume trend of In-vehicle batteries in gigawatt hour in North America. And the bar graph shows the EV unit sales trend in the United States. EV sales volume in the U.S. has been steadily recovering from the temporary slowdown experienced in fiscal '26. Demand for our batteries from our strategic partner remains strong. On the supply side, however, we faced challenges in ramping up the Kansas factory. We were unable to achieve the initially planned supply volume for Q1 of FY '27. Given the continued strong demand for our strategic partner, we plan to supply 46 gigawatt hour for full year, in line with our initial forecast by optimizing production mix between Kansas and Nevada from Q2 of fiscal '27.

The first questioner is from Nihon Keizai Shimbun, Nikkei. Taketatsu-san, please.

Actually, I'm using Taketatsu-san's link, but I am Masami. I have a question on data center demand. The benefit of demand for data center, not just the storage systems and capacitors, the so-called AI-related, but I understand that, that effect is spilling over to the periphery areas as well like FA. Do you think this is a special demand, a temporary one? Or do you think this could be sustained?

Thank you for your question. In the periphery areas, the demand growth that we are seeing now, is it temporary or sustained is your question. We believe this could be sustained. Let me talk about the structure of our business. At the beginning of the year, the BBU in Energy and in capacitor industry and electronic materials, we've been talking about that in the initial part of the year, but now it's expanding into the peripheral areas like mounting machines of Connect as well as servo sensors of Industry. We are seeing demand in the servo motors as well. In other words, our beginning of the year forecast has been rather conservative, looking only at a more assured demand growth. But now we do see the demand growing in the periphery areas as well, which was reflected in the results of the first quarter.

I have another question about Blue Yonder. AOP upward revision, $30 million, resulting from improvement in gross margin. What was effective more specifically? And then there is the JPY 23 billion or JPY 23 billion loss in AOP. So what measures will you be implementing to improve on the profitability going forward?

Thank you for your question on Blue Yonder. I'd like to show you some specific figures to be more clear. So if you can look at Page 26 of our material, you can see the figures related to Blue Yonder. So gross margin improvement, where does it come from? If you can look at the upper left, this is the stand-alone in million U.S. dollars, Blue Yonder stand-alone basis. And if you can compare the first quarter of last fiscal year and this, you can see JPY 36 million increase in sales, but a JPY 51 million increase in terms of AOP, which contributed to the profitability improvement. There are 2 factors. First, strategic investments. With Cognitive Series deployment to make hit the native SaaS, we have been making investments last year. Now it's been narrowed down and $25 million or so less this year, which is accounted for in the profit last year. For the remaining $25 million comes from profit. So $36 million improvement in sales, and this had a major contribution for the adjusted operating profit improvement. Once the product is solidly developed, the marginal costs for the sales in the ensuing period would be limited. And therefore, we are seeing the pipeline being developed this year, and we are seeing the orders coming in as well, which is contributing to the margin improvement. And you asked another question. Again, going back to the same slide, JPY 23 billion loss this year. What about next year was your another question? It's very difficult to talk about specifics, but JPY 23 billion is the total of the stand-alone and the intangible amortization. Following the acquisition, we expect the stand-alone operating income to improve -- AOP to improve significantly next fiscal year.

Next question from Toyo Keizai. Yamashita-san.

This is Yamashita from Toyo Keizai. I also have some questions.

Yes, please go ahead.

First question. Once again, the Q1, the structural reform in the previous year, the results of it have been emerging. So how would you evaluate that? Smart Life, I think in terms of profit, the effectiveness of the restructuring is reflected. But more recently, I think that the core is the AI strategy. But after the structural reform in the consumer electronics and others, did the positioning of the different businesses such as consumer products change. Could you give us your response to those results?

Yes. Let me answer to your question. First of all, the restructuring that we have conducted since last year, and we are seeing the good results of it, and we are seeing the reflection of that. The total number, about JPY 35 billion per quarter up to Q3 mainly. So for the full year, we expect JPY 100 billion or so. And I think we are on track in achieving that. As for the cost of the restructuring, the major areas as of the last fiscal year, we already explained that. But conducted in all of them, Industry and Smart Life and also the Corporate, I think those are the areas that we spend the most. And for each segment, if you can check on the results, I think you can see that higher profits are realized. And as for Smart Life, as you asked in your question, since last year, we have worked on the restructuring and the revenue due to the lower demand in China led to some decline. But in terms of profit, I think we have seen the clear recovery. Does that answer your question?

I do have another question. Earlier, you mentioned the Connect and the mounting machine business is doing very well. That's very interesting. So it is -- there are ups and downs, but in Q2 and onwards, can we expect that the strong demand of AI-related to continue?

Yes. In Q2 and onwards, we believe that we can continue to expect that. Until last fiscal year, the demand cyclicalness of the demand in China that led to the downtrend or there was a risk of that for the mounting machines. That's what we said last year, but is it cyclical or is it super cycle? Without entering -- without starting the downtrend, I think that we are seeing a strong demand, and we are getting the strong pipeline from the Taiwanese manufacturers. So we expect this trend to continue in Q2 and onwards.

[Operator Instructions] Ono-san from Nikkan Kogyo Shimbun, please.

Yes. Ono from Nikkan Kogyo Shimbun. I have two questions. First, to Waniko-san. Upward revision has been made and the operating profit is expected to set a new record for the first time in 42 years, I understand. What is your personal take on that? And things that were difficult in decades. And for the first time in 42 years, the new record is to be set. I know that AI-related business is a plus, but what others are the factors? My second question is on Kansas Energy factory. You said that you are struggling with the ramp-up. And since the business environment is favorable, I think you need to really expedite the ramp-up to catch and capture that momentum. So what are the reasons for the difficulties you are facing? Is it materials? Or is it the infrastructure, the facilities-related or the shortage of labor?

First, upward revision. First time in 42 years, that is the full year operating profit. What is my personal take? I believe this is just a starting line. Not that we have achieved something, but rather towards fiscal '29, we are to aim for even higher standards. That's what we have been communicating as a group. So we really need to work towards that. That's my frank reaction. So what are the factors for this new record? Lots of factors. Last year, we implemented structural reform that have really inconvenience and caused pain to many people. And we have also worked on the businesses with issues, and we need to continue with these efforts. But including the capital market capitalization, which we really haven't seen much progress, I think everything that we worked on diligently has come together for a big effect. And your second question was about our Kansas factory. It's really the operational factors, the proficiency factors that is resulting in the current situation. We had assumed various situations based on our experiences, but there were some unexpected cases as well, not just Kansas factory, but from Nevada, we will be providing a support for a quick recovery because there is a strong demand coming from our customer. So we consider this to be the top priority, the ramp-up. As for recovery in Q2 onwards, there are two things. One is to make sure we go back to the initial trajectory of the ramp-up of Kansas factory, and we need to catch up on the cumulative basis. Since we do have a factory in Nevada, it's including the model mix. So our plan is to have a combined results to achieve the initial forecast.

Next question from Nikkei Business, [ Yuto-san. ] Go ahead.

[ Yuto ] speaking from Nikkei Business. I have two questions, if I may. First, well, this time, you exceeded your plans and for the full year for more than -- the first time in more than 40 years, you're updating the results. But the share price has gone up and maybe it's in the adjustment phase. So AI-related name is a part of the reason, I think, to push up your share price. But there could be some risks involved as an AI manufacturer. So how do you see the risks and opportunities? Another question is about the highest profit is expected for the full year. The fiscal discipline, investment discipline, could you comment on that as well?

Yes. Let me answer. The highest profit for the full year is expected and how do we evaluate the current share price? Yes. As you commented, as AI-related name, that's kind of a big category. And some time ago, we went up to the very high share price. And more recently, it's in the adjustment period, and you're right. About that, well, we are not in a position to determine our share price in the market. For us, we need to do what we need to do. So this highest profit is not our goal. We want to go higher in the next fiscal year and onwards. And we want to take actions for that, and we want to communicate so that you can understand that. And as a result of it, I think that how our company is evaluated is something that is decided in the market, and how the share price is determined. As for the second fiscal discipline in the medium to long term, we would like to maintain the good discipline to expand it. So including the AI-related businesses, there will be some upside. And if there continue to be upside in revenue and cash, I think we should consider further increase. But as for the AI-related businesses, I think it's growing more than our expectations. So additionally, I think that without a delay, we need to increase the investment and increase our production capacity. So I think we have to look at both of those factors in a good balance so that we can control it well.

We're getting close to the end of the journalist question time. So we will only take one more question from journalists. From Yomiuri Shimbun, Masuda-san. One question, please.

Masuda from Yomiuri. One question. This fiscal year was positioned as the year to transition into the growth phase. Looking at first quarter, how successful do you think you are in terms of transitioning into the growth phase?

Thank you for your question. Yes, we are to transition into the growth phase this fiscal year, and that was the message of the management at the beginning of the year. And we do see the effect. If I could repeat what has been said, for FY '29, generative AI products in Energy & Industry are the core areas expected for growth. So how can we actually see the financial results in these areas would be the key. And as far as the first quarter is concerned, as you have seen, we have seen the results as expected.

Thank you very much. So that's all the time that we spend with the journalists. So now, we'd like to take questions from institutional investors and analysts. [Operator Instructions] First, from Goldman Sachs, we have Harada-san.

This is Harada speaking from Goldman Sachs. I have two questions. First, AI-related has been the driver. I think that was one of the characteristics. On Page 11, you are showing the Connect FA and FA Solution in Industry and AI-related and the semiconductor-related, how much of those businesses out of the total? And related question about the Industry on Page 14. What I'm interested is in the Edge area, the robotics is mentioned. So physical AI, for example, China, Korea, there are some movements that we see in some of the names. And is the physical area also related to your business? Could you comment on that? That's my first question. The second question is that the BBU and MEGTRON and capacitors are much talked about. So in your case, MEGTRON capacitors, technically, you are, I think, leaders. But at the same time, Taiwanese players, I think that they are expanding their capacity. So competition, it's not just based on the technology, but you have to also consider the capacity and the sales channel and so forth. So vis-a-vis the global competitors, how do you plan to compete against them? If you can talk about the strategies. Thank you.