Panasonic Holdings Corporation

I will now start the fiscal 2024 second quarter financial results briefing. Here you can see the point. First, the impact of the U.S. Inflation Reduction Act, IRA, on our financial results and forecast. Although the detailed rules have not been determined, the assumed amount equivalent to the IRA tax credit and to be shared with customers are recorded second quarter and PL, the same as 1Q. Next, the results for second quarter overall sales remain the same year on year due to increased sales in automotive and connect as well as currency translation, despite largely decreased sales in lifestyle and industry. Adjusted operating profit increased due to increased profit in automotive and connect and IRA impact in energy, despite decreased profit in lifestyle and industry. If we exclude the IRA impact, The AOP decreased slightly. Net profit increased due mainly to improvements in financial income expenses on higher interest rates. Operating cash flow for the first half increased year on year due mainly to efforts to control inventories, in particular reducing strategic inventories. Interim dividend is determined at 17.5 yen, an increase of 2.5 yen year on year. As for the full year forecast, group-wide sales, adjusted operating profit and operating profit are revised downward, reflecting changes in business environment, but profit before income taxes and net profit remain unchanged. For the forecast by segment, both sales and profit for automotive and connect are revised upward, while lifestyle, industry, and energy are revised downward. First, the impact of the US IRA tax credit on our results and forecast. The amount recorded for the second quarter and full year forecast are shown on this slide. Please note that the assumed amount for the full year is raised due to the revised forecast of production and sales and change in the exchange rate assumptions. In the second quarter for sales, minus 25.1 billion is recorded as deduction for the amount to be effectively used with customers. For adjusted operating profit, 21.4 billion yen is recorded after the deduction of the equivalent amount to be effectively used with customers from a total of 46.5 billion yen of tax credit. For net profit, 27.6 billion is recorded, which includes 6.2 billion of impact of deferred tax assets. For the full-year forecast, minus 99 billion is recorded in sales, which was not assumed in the initial forecast back on May 10th. Adjusted operating profit is revised to 85 billion, up 5 billion, and net profit is revised to 110 billion, an increase of 10 billion yen, respectively. Now the details of the consolidated financial results for the second quarter. Consolidated financial results for the second quarter were as shown here. Overall sales were 2 trillion 89.7 billion yen the same year on year. Sales in real terms excluding the effective exchange rates decreased by 3%. Figures excluding the IRA impact are also shown as a reference. On this basis, sales increased by 1%. Adjusted operating profit increased to $99.5 billion and operating profit increased to $102.4 billion, respectively. If we exclude the IRA impact, both decreased. Profit before income taxes and net profit both increased due mainly to the improvements in financial income and expenses on higher interest rates. Now the results by segment. For energy segment, you can also see the figures excluding the impact of IRA. The analysis of year-on-year comparison for sales and operating profit are shown in the next slides. sales analysis by segment. In lifestyle, overall sales decreased due to decreased sales of HVAC with air-to-water heat pumps in Europe affected by weaker overall demand, and consumer electronics with weaker underlying demand in Asia and China despite increased sales of cold chain in North America and electrical construction materials with continuous steady growth. In automotive, sales increased due to recovering automobile production of our customers. In connect, sales increased in avionics, Denbus Solutions, and Blue Yonder, despite decreased sales of process automation. In industry, sales decreased due mainly to the downturn in market conditions for FAA in China and ICT infrastructure, despite increased sales of products for green vehicles and AI servers with expanding demand. In energy, sales in in-vehicle increased, excluding IRA impact. Sales in industrial consumer decreased due to weakening market conditions of batteries for consumer use and power equipment, despite increased sales of energy storage systems for data centers and expanding generative AI market. Within other eliminations and adjustments, sales of entertainment and communication increased due to parts and materials improvement in procurement. In housing, sales decreased, affected by deteriorating market conditions. Adjusted operating profit analysis by segment and lifestyle profit decreased overall due to decreased sales of consumer electronics and upfront investment for HVAC business in Europe, despite increased sales in cold chain and electrical construction materials. In automotive, profit increased due mainly to increased sales, price revisions to counter price hikes in parts and materials, and efforts in cost reduction, despite increased fixed costs as well as persisting impact of price hikes in parts and materials. In connect, profit increased due to increased sales in avionics, rainbow solutions, and blue yonder. In industry, profit decreased due mainly to decreased sales affected by the downturn in market conditions. In energy, for in-vehicle, profit decreased due to increased sales in North America and the impact of IRA. Despite decreased sales in Japan affected by reduced production and increased fixed costs, profit decreased excluding the IRA impact. For industrial and consumer, profit decreased due to decreased sales of batteries for consumer use and power equipment. despite increased sales of energy storage systems for data centres. This slide shows the results of lifestyle by divisional company. For HVAC company, additional recall related expenses are recorded in other income and loss related to the recall of clothes drying dehumidifiers announced on April 20th. Operating profit analysis by factor from left decreased profit from decreased sales in real terms, negative impact of 10.3 billion. The increase in fixed costs, negative impact of 20.6 billion do mainly to investments in lifestyle and energy aimed at business growth and inflation. Price hikes in raw materials and logistics, negative impact of 2.5 billion. This impact is gradually mitigated. Effective efforts, such as price revisions and rationalization, positive 24.4 billion. Looking at individual factors, the impact of IRA was positive 21.4 billion, and increased profit of Blue Yonder was another increased factor of 0.9 billion. The breakdown is shown below. The effect of exchange rates, positive 6 billion, mainly in industry and energy. Adjusted operating profit increased by 19.3 billion yen, operating profit by 16.3 billion yen. The situation of cash flows and cash positions in the first half. On the left, operating cash flows was 391.8 billion, increasing year on year, due mainly to efforts to control inventories and improvements in working capital. In inventories, We will continue to reduce inventories toward optimization of inventory level from the second half onward. All right, net cash was negative 481.2 billion, an improvement from the end of FY23. Now shareholder returns, the board of directors result today, the interim dividend of 17.5 billion per share with an increase of 2.5 yen year on year. the same amount as the forecast announced on August 31st. We will distribute stable and continuous dividends reflecting the progress of our medium-term strategy. We aim to achieve enhanced corporate value through business growth and increased profit by making investments mainly in our growth areas. At the bottom of the page, our approach to using the IRA tax credit explained at the FY23 March full year results announcement. Dividends will be determined based on the amount of net profit excluding the IRA impact.

Now let me explain the 4-year consolidated financial forecast. This shows the fiscal 24 consolidated financial forecast sales is revised downward by 100 billion yen. Both AOP and operating profit are revised downward by 30 billion yen respectively. However, pre-tax income and net profit remain unchanged from the forecast of July 31, reflecting The factors such as improvements in finance, income and expenses by the rise of interest rate. EPS forecast is 197.07 yen, ROE 12%. The forex assumption is also changed as shown here. Next is buy segment. Major factors for revision of sales and AOP are explained on the next slide. In lifestyle, both sales and profit are revised downward due mainly to lower sales of the HVAC and consumer electronics, despite steady sales of cold chain. In automotive, both sales and profit are revised upward due mainly to higher sales with automobile production recovery. In connect, both sales and profit are revised upward due mainly to favorable sales in avionics and blue yonder. In industry, both sales and profit are revised downward, due mainly to lower sales affected by lingering market slowdown, despite higher sales of products for AI servers. In energy, both sales and profit are revised downward. This is due to the lower sales and production in Japan affected by demand slowdown for high-end EVs, despite steady sales in North America in vehicle, and the slower market recovery for industrial and consumer. This shows the forecast for the lifestyle segment by divisional company. For living appliances and solutions company as well as heating and ventilation AC company, both sales and profit are revised downward. This shows the analysis of 4-year OP forecast by factor. It explains the changes made from the forecast made on May 10th. To elaborate on the revised forecast, the impact of the lower sales in real terms for lifestyle, industry, and energy is larger than the improvement by the Forex effect fixed cost reductions. Therefore, trading profit is revised downward by 30. Next, I will explain the current situation and future initiatives for the areas that were heavily affected by changes in the business environment during the first half HVAC business in Europe, industry segment and automotive battery business. First, starting with HVAC business in Europe. Upper part shows the business environment and changes from our view when the operating company strategy briefing was held on the June 2nd. The major change is the slow-to-demand growth of air-to-water as we entered fiscal 24. The graph in the middle shows our air-to-water sales and year-on-year trend with labels indicating major factors impacting demand. Until fiscal 23, the market in Panasonic grew significantly backed by gas price hikes and strong support by subsidies from each government. However, for fiscal 24 first half, overall demand decreased year-on-year and so did our sales. This is due to the slowdown in the European economy, gas price drops and subsidy scheme changes or payment delays in some countries. For the second half, we anticipate that the challenging market condition to continue despite seeing some signs of improvements. At Panasonic, we aim for a higher-than-market growth at each market we operate in. To be specific, as shown on the bottom, for markets with top-class share position, we would enhance our service business leveraging customer base, and for markets where we want to further strengthen, we will strengthen our sales capability. This shows the outlook of the HVAC business in Europe for the medium to long term. We expect the demand to recover toward the six medium units in 2030, backed by European policies for GHG gas reductions. We will take actions flexibly, responding to changes in the market, such as subsidies, policies, and economic situation. The bottom part shows our progress of the medium to long term strategy. There is no change to lifestyle segments focus on investing in hydronic system business in Europe. While we respond to the changes in the business environment, we will accelerate our efforts to strengthen business foundation toward achieving the leading industry position with a medium to long term perspective. Next is industry segment. Here I would explain the sales increase and decrease in comparison to the market situation. As shown on the left pie chart, four major industries account for almost all the segment sales, automotive case, information and communication infrastructure, factory labor saving, and ICT terminals. On the right, the market outlook and our sales forecast for fiscal 24 for each area of business. For automotive case, the overall market is growing. We expect higher growth with sales growth of devices for green vehicles. For information and communication infrastructure, the market is expected to decrease largely year on year due to a slowdown in capex. However, we expect to achieve the same level year on year with the sales growth of products for gen AI servers. For factory labor saving, the overall market is expected to grow year on year. However, we expect a large decline year on year because 40% of our sales come from China, which is experiencing deteriorated market conditions and intensifying competition. For ICT terminals, the market outlook is a year on year decrease due mainly to a longer replacement cycles. We face a similar trend. next the situation of each voluntarily disclosed businesses electronic devices fa solutions and electronic materials the charts show the quarterly results trend for each business the sales and profit declined largely in q4 affected by the sharp demand decrease for ict terminals and market deterioration in china FA solutions continue to face challenges, but electronic devices and electronic materials show a recovery trend. In electronic devices, automotive case-related business, which accounts for about 50% of sales, show a recovery trend overall, with growth in relays and capacitors for green vehicles. However, we expect to see the slight slowdown in the second half. In FA solutions, we do not expect a recovery in the second half. Our China business, which accounts for about 40% of the sales, is facing weakening market conditions and intensifying competition. In electronic materials for ICT infrastructure-related business, which accounts for about 40% of the sales, we see the recovery trend with the favorable sales of generative AI use products. Finally, the situation for automotive battery business. Q2 results are shown on the left. Excluding IRA impact, profit decreased or near to a loss, which is a factor for the downward revision of energy. The reason for this loss is that the demand for high-end EVs, which are not eligible for IRA tax credit according to 30D regulations, slowed down more than expected. at the Japan factory until Q1, we produced at a certain scale responding to customer demand. However, from Q2, we adjusted the production to meet the appropriate inventory level in response to the demand change. The production was down by about 60% compared to Q1. And the profitability of Japan factory deteriorated considerably. Also, upfront costs for future growth are recorded as planned. As a result, we saw a large year-on-year profit decrease for the overall automotive battery business. As shown on the middle left graph, sales in North America are steady. For the second half in Japan, we will prevent further deterioration in profitability by optimizing fixed costs to align with the lower demand. In North America, we will respond to the strong demand, aiming to increase profitability. Thank you for your attention. From Bloomberg, Furukawa-san, please.

Thank you. Furukawa from Bloomberg. I hope you can hear me. Yes, we can. I'm looking at slide 22. I have two questions. First, automotive, I think means Tesla business. It's in red for the first time in three quarters, excluding the IRA impact. Please elaborate on the reasons why. My second question, regarding the adjustments or adjusted production at the Japanese factory, what is the projection going forward? The graph indicates that the production level will remain low in the third quarter. Do you expect recovery? And if so, when? Thank you for your questions. Slide 22. The automotive battery, we are in the red. The factors are twofold, basically. One is the situation in Japan. 18650, as has been explained for quite some time. This is for Tesla Model S and X for high-end models. But IRA is... uh has a price ceiling up to eighty thousand dollars and since uh there's a high-end models exceed that level the demand decreased up to the first quarter from the customers a very strong demand had been indicated but we did not see that progress as planned and so As explained during my presentation, we reduced production by 60% compared to Q1 to achieve the appropriate inventory level. For Q3, production and sales are to be balanced, well balanced and well related. Although we are projecting a low level, But even with that, the fixed cost and the production activities will be implemented at that level. At the same time, at the Wakayama factory, the 680 production and development efforts are accelerating. We are making investments. And so the big reduction in production in Japan as well as R&D expenses are the two factors. Now the plant in the US, 36 gigawatts is the initial amount, but that has been raised to 37 gigawatts in relation to IRA, and we do see very strong demand for the products produced there. So domestic production and the R&D expenses are the two factors. For Q3 projection, It's indicated on the slide, but the customer is trying to reduce the price of the high-end models to below $80,000 and have the options installed free of charge. Those efforts are being made. So I think we can expect some recovery going forward still. We do not expect big growth like what we see in the U.S. plant. So we'll be running our Japan factory based on that assumption. Thank you. A follow-up question. During the second quarter, I think you stopped the operation of the Japan factory. Is it back in operation again? the line production line. We have several lines and they were suspended. Because we had inventory build up reflecting the strong demand projection in Q1. And so to adjust the inventory, we adjusted the production. So we did not completely stop or suspended the operations, but we try to strike the right balance of inventory. I see. Thank you.