Panasonic Holdings Corporation

i'd like to go over the fiscal 2023 third quarter financial results first the summary overall sales increased due to increased sales of automotive and connect as well as currency translation adjusted op slightly decreased despite increased sales of automotive and connect due to the large profit decrease in energy OP and net profit increase due to improvement in other income and loss. Operating cash flows increased over FY22, despite increased inventories due mainly to improved working capital and other factors. We have revised the full year forecast. At the Q2 earnings briefing, we touched upon the U.S. Inflation Reduction Act, IRA. As detailed rules have not yet been announced as of today, the impact of the IRA in our value is not factored into the full year forecast. As for the group-wide forecast, profit is revised downward, reflecting changes in the business environment. Overall sales remains unchanged, but sales decreased in real terms, excluding the effect of exchange rates. i segment automotive and connect profit are revised upward while lifestyle industry and energy profit are revised downward now the details of the consolidated results for q3 Here you can see the consolidated results. Overall sales increase to 2,160.6 billion yen, up 14% year on year. Sales on constant currency increased by 5%. Adjusted OP was 85.9 billion yen, a slight decrease year on year. Other income and loss improved due mainly to reduced restructuring expenses and gain from the sale of assets. OP, net profit, and EBITDA increased respectively. This is the results by segment. I will explain the year-on-year variance analysis in the next few slides. First, changes in sales by segment. In lifestyle, overall sales increased despite decreased sales of consumer electronics due to increased sales of growth businesses such as air-to-water in Europe and overseas electrical construction materials. Automotive sales increased on the recovery in automobile production of our customers. Connect sales increased on growth in rugged mobile terminals for overseas markets and in avionics, reflecting market recovery in the aviation industry, as well as increased sales of Blue Yonder. This in spite of decreased sales in process automation affected by the slowdown of investments by the PC smartphone customers. Industry sales decreased due to the market slowdown in ICT terminals and FA mainly in China and global automotive applications excluding green vehicles and termination of semiconductor business. Energy sales increased on increase in EV battery production and sales and price revisions despite decreased sales of consumer use lithium ion batteries and power storage systems for data centers with downturn in market conditions. Among other eliminations and adjustments, sales of entertainment and communication and housing slightly decreased due to the market downturn. Next, adjusted OP by segment. Lifestyle decreased due to temporary expenses in China, despite increased sales mainly in growth businesses and price revisions in Japan and overseas, which offset deteriorating external conditions such as exchange rates and higher raw material prices. Automotive profit increased due mainly to price revisions to offset higher parts and material prices, increased sales and cost reduction efforts despite price hikes of semiconductors and others. Connect increased mainly on increased sales of rugged mobile terminals overseas and avionics, improved profitability of Blue Yonder on a standalone basis, and the absence of temporary accounting treatment in FY22. despite decreased sales in process automation. Industry profit decreased due to decreased sales with a sharp downturn in market despite such efforts as price revisions and rationalization to offset the impact of material price hikes. Energy decrease due mainly to raw material price hikes, decreased sales for industrial consumer and increased development expenses for future growth despite increased sales of EV batteries. Results of lifestyle by divisional company. In living appliances and solutions, sales decreased on constant currency due to decreased sales of consumer electronics. Profit decreased due to decreased sales and the exchange rate impact. In heating and ventilation AC, sales and profit increased on favorable sales of air to water in Europe. In cold chain solutions, sales and profit increased with increased sales for Japan and US and price revisions. In electric works, sales and profit increased with continuing steady sales of overseas electrical construction materials. Next, variance analysis of operating profit. From the left, profit from sales expansion was positive $17.4 billion. Fixed costs, negative $17 billion. due to the increased investment in lifestyle and energy for business growth. Price hikes in raw materials and logistics had a negative impact of 67 billion. The counter-effect of efforts such as price revisions and rationalization was positive 61 billion. The consolidation of Blue Yonder and temporary factors in lifestyle, positive 4 billion. Blue Yonder profit increased by 9.2 billion yen. The bottom right shows the breakdown, standalone profit, amortization expenses related to acquisition, and temporary accounting treatment. The net effect of exchange rates was zero, having almost no impact. By segment, a negative impact in lifestyle, while a positive impact in industry and energy. Adjusted OP slightly decreased by 1.6 billion yen. Other income and loss improved by 13 billion yen. Operating profit increased by 11.4 billion yen. Next, free cash flows and cash positions. Operating cash flow was $313.7 billion for nine months and increased year-on-year due mainly to improvement in working capital and other factors despite increased inventories. as for inventories a large number of businesses turned to a decrease since the end of q2 further efforts to reduce inventories will continue mainly by revis revising strategic inventory level on the right net cash was a negative 657.2 billion a slight decrease from the end of fy22 next the full year forecast As explained at the outset, the impact of the US IRA Inflation Reduction Act is not factored in the forecast. We have received many inquiries and have heard much interest from a number of stakeholders, including the capital market since Q2 earnings briefing. So here I would like to elaborate on our assumption of its impact based on currently available information. This is an overview of the IRA information relevant to our business. Among the rules related to EVs, section 45X on the left stipulates a tax credit for sales of EV batteries. Section 30D on the right stipulates a tax credit for purchases of EVs. We expect Panasonic's EV battery business to be eligible for section 45X on the left. According to Section 45X for battery cells, a tax credit of $35 per kilowatt hour can be received for 10 years from 2023 to 2032. Eligible battery cells are those produced and sold in the U.S. The details of both rules have yet to be announced, but since the Q2 briefing for Section 30D, additional guidance on tentative measures prior to rulemaking was provided, but no additional information on Section 45X has been made available. This is an overview of our EV battery factories and once eligible for IRA. The Nevada factory already in operation is eligible from this January. The new Kansas factory is expected to be eligible after the start of the production and sales. Factories in Japan are not eligible. On the right side, simple calculations for tax credit amount multiplying $35 based on production capacity at each factory is shown for your reference. The amount of impact on our financial results needs to be examined and quantified based on the IRA's rules to be announced and other factors. Since detailed rules have yet to be announced, the scheme of monetization, PL recording, and others have yet to be determined. Therefore, we have not factored in the impact in our full year forecast. At the bottom is a summary of the incentive program by the state of Kansas for investment promotion announced last July. The new Kansas factory is eligible for this incentive program aside from the IRA tax credits.

Next is a revision of the four-year forecast of fiscal 23. This slide shows the consolidated financial forecast of all sales remains unchanged. The sales in real terms excluding forex effect is decreased by 80 billion yen. As I said, OP is revised downward to 300 billion yen, down 40 billion yen operating profit, 280 billion yen, down 40 billion yen net profit, downward revision by 25 billion yen to 210 billion yen EPS 89.98 yen down 10.71 yen ROE 6.6% EBTA 710 billion yen. This is a forecast by segment. Adjusted or paid-in-profit, automotive and connect are revised upward, but lifestyle, industry and energy are revised downward. Next, I will explain the details of the revisions, in particular for industry and energy segments with larger revision amounts. Starting with the industry, the major factor for revision is the lower sales due to the sharp deterioration of the market. The breakdown of the revised suggested OPEA amount of 20 billion yen is shown here. The market conditions deteriorate to three areas, 11 billion yen for ICT terminals including notebook PCs, 4 billion yen for automotive use, and 5 billion yen for FA in China. For ICT terminals, the outlook for the notebook PC production in fiscal 23 is expected to show the significant downturn. While we expect the challenging situation to continue throughout fiscal 24, for notebook PC, we will capture the demand for data centers, where the early recovery is expected. For automotive use, the growth of the global automotive production is expected to be slower. than previously anticipated due mainly to COVID-19 in China. We assume that production recovery will be different among the car manufacturers. For FA in China, investment demand in the semiconductor and others is weaker than expected, continuing a year-on-year decrease. However, there is an optimistic view of the recovery after June. Reflecting expectations toward the new economic stimulus measures in China, we are carefully monitoring the market situation. Based on these, we will prepare for the market recovery by enhancing our management structure with improved marginal profits such as rationalization and fixed cost reduction. In addition, we will improve the accuracy of SCM information and strengthen our pipeline. Energy, the major factors for revision are rapidly decreased demand in industrial and consumer and raw material price hikes for in-vehicle. The breakdown of the revised adjusted OP is of 15 billion yen is 8 billion yen for industrial and consumer and 7 billion yen for in-vehicle. For industrial and consumer, the market rapidly deteriorated, similar to industry. For example, demand for lithium-ion batteries for ICT and power equipment has weakened. The sharp slowdown in IT infrastructure investment reflecting the economic slowdown has resulted in the weakened demand for power storage systems for data centers. For these areas, we are expecting a demand recovery in the Q2 of fiscal 24 and onwards. For in-vehicle price hikes for certain materials, such as lithium hydroxide, have been higher than expected in the second half, temporarily pushing down the profitability. Price fluctuations of these materials can be reflected in the sales price, but there is always a time lag. Therefore, input costs look worse than we originally assumed vis-a-vis the sales price. We expect the impact to be mitigated in Q1. fiscal 24 and onwards, with the market price becoming stable, being able to reflect in the sales price. Prices of the raw materials such as electrolyte, where we cannot automatically apply a market index to the sales price, are continuing to reach the higher level than our assumptions. For these materials, we expect the situation to be mitigated in fiscal 24 by revising contracts with customers and multi-sourcing. For in-vehicle areas, strong demand continues and our growth strategy remains unchanged. We regard these negative factors as temporary and we will take measures, necessary countermeasures. Now I explain the revised factors by segment. In lifestyle, sales remains unchanged. SSLOP is revised downward due to lower sales in living appliances and solutions as well as higher temporary expenses in China. In automotive, sales remains unchanged due to currency translation despite expecting the reduced automobile production of our customers from the previous forecast. AsiaCell OP is revised upward due to the efforts in price revisions and fixed cost reductions despite lower sales. Inconect sales is revised upward due to the improved procurement issues in mobile solutions and avionics. AsiaCell OP is also revised upward due to the improvements in avionics and Blue Yonda. The factors for industry and energy are as I explained earlier. In other eliminations and adjustments, adjusted operating profit is revised downward due mainly to lower sales of the TVs in entertainment and communication and effect of exchange rates. This shows the forecast for the lifestyle segment by divisional company. It shows our analysis of the revised forecast of operating profit in fiscal 23 by factor and explains the changes made from the previous forecast of October 31st last year. The upper graph shows the analysis of year-on-year increase and decrease factors from October forecast, and the lower graph shows the analysis of increase and decrease factors in this February 2nd forecast. Figures in the middle shows the revised amount in each factor. As an overall picture of operating profit in fiscal 2023, we are expecting improvements in the profitability of Blue Yonda and the effect of exchange rates, but the impact of lower sales in real terms for industry energy and raw material price hikes in energy is larger than these improvements. Therefore, operating profit is revised downward by ¥40 billion. Finally, let me explain the initiatives in growth areas. In October 2022, we announced the construction of a new EV battery factory in Kansas, U.S. Let me explain our current assumptions on how to fund this investment. As of today, the amount of investment for the new factory is estimated to be 500 to 600 billion yen for the three-year period of fiscal 23 to 25. Please note that the various fluctuations could affect this figure. Based on our capital allocation policy in principle, the operating company will make investments with its own cash generated by business for the amount beyond Their capacity, Panasonic Holding Corporation, will supplement the funding. The Kansas factory investment, the amount to be funded by the group, is expected to be below 400 billion yen, which is the amount allocated for growth areas, as announced in April last year at the group strategy briefing. Group-wide funding will be in line with our capital allocation policy, that is to fund investment with operating cash flow and other measures such as sales of assets. Next is the progress of our initiatives in growth areas. In the automotive battery business, Energy started land leveling work for the new factory in Kansas in November last year, and it also signed a contract with Lucid Group Inc. in December last year. In the supply chain software business, Connect is continuing its transformation toward further growth. In Q3-23, we saw some improvements in the financial results. In air quality and air conditioning business, the growth in air-to-water business in Europe is continuing. Furthermore, in November last year, Lifestyle announced acquisition of the commercial air conditioning business from System Air at €100 million. Going forward, Panasonic Group will make announcements on the progress of these three growth areas in timely manner. This is the last slide showing the list of the announcements related to IR information in this year after the launch of the new structure last year. In fiscal 24, group strategic briefing is planned on May 18th this year, and each operating company is planning to host its own strategy briefing in early June this year.

From Nihon Keizai Shimbun, Nagano Assam, please.