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Edited Transcript of 6752.T earnings conference call or presentation 9-May-19 10:00am GMT

Full Year 2019 Panasonic Corp Earnings Presentation

Kadoma, Osaka Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Panasonic Corp earnings conference call or presentation Thursday, May 9, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hirokazu Umeda

Panasonic Corporation - CFO, Managing Executive Officer & Director

* Kazuhiro Tsuga

Panasonic Corporation - CEO, President & Representative Director

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Conference Call Participants

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* Kenji Yasui

UBS Investment Bank, Research Division - Executive Director and Analyst

* Kota Ezawa

Citigroup Inc, Research Division - MD and Analyst

* Masahiro Ono

Morgan Stanley, Research Division - Research Analyst

* Mika Nishimura

Crédit Suisse AG, Research Division - Consumer Electronics Analyst

* Yasuo Nakane

Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst

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Presentation

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [1]

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Thank you very much for joining us today. We appreciate your presence.

Let me start with the financial results summary. This is the consolidated financial results for fiscal '19. Overall sales were JPY 8.0027 trillion, about the same as previous year. Overall operating profit increased by JPY 31 billion to JPY 411.5 billion. This was due mainly to the partial revision of the pension scheme and temporary profit, including disposal of assets, despite decreased profits in Automotive, Industrial and Consumer Electronics along with recording restructuring expenses. Net profit increased by JPY 48.1 billion to JPY 284.1 billion with contributions by improvements in income taxes and others. ROE improved by 1.3 points to 15.7% from the previous year. Sales decreased by JPY 97.3 billion compared to the forecast announced on February 4 due mainly to the revised presentation method in certain transactions.

This shows the details of the profit and loss from operating profit to net profit. Income taxes improved due mainly to the one-off effect resulting from the reorganization of subsidiaries.

Next, this is the results by segment. Operating profit decreased in all business segments. For Appliances, sales and profit decreased due to sluggish sales mainly in AVC, along with the weakening demand for devices in China. For Eco Solutions, overall sales increased due mainly to steady sales in overseas wiring devices and the impact of new consolidation and growth of Panasonic Homes. Operating profit decreased overall due to the recording of the impairment loss of fixed assets in solar business, although the adjusted operating profit increased due mainly to increased sales. For Connected Solutions, sales increased due mainly to favorable sales in Process Automation. Operating profit decreased due mainly to the impact of one-off gains recorded in the previous year. For Automotive & Industrial Systems, overall sales increased due to Automotive and Energy despite the impact of decreased sales in Industrial due to weakening market conditions in China. Operating profit decreased due mainly to an impairment loss of capitalized development expenses in Automotive and decreased sales in Industrial.

This shows an analysis of operating profit, which improved by JPY 26.5 billion compared to the forecast announced in February. Adjusted operating profit improved by JPY 2 billion with contributions by businesses such as Avionics despite the impact of decreased sales in automotive cylindrical batteries and Industrial. Other income and loss improved by JPY 24.5 billion overall due to acceleration of disposal of assets and others while restructuring businesses with low profitability, such as solar business.

Free cash flow, net cash position and dividends are strong. Free cash flow was JPY 10.3 billion in fiscal '19, an increase of JPY 45.9 billion year-on-year. Going forward, the company will continue to control investments strictly and improve free cash flow by thoroughly generating cash flows from operating activities, including inventory reduction. Annual dividend, same as the last year, JPY 30 per share.

That's all for financial results. Next, I would explain the fiscal 2020 full year forecast.

We will carry out a reform of its business portfolio in fiscal 2020, the first year of the new midterm strategy. Sales is expected to decrease due mainly to sales decrease in Industrial Solutions. This reflects the uncertainty in the macro environment, including the situation in China, along with the impact of the portfolio reforms, such as the establishment of the joint venture for the town development business announced today. Operating profit and net profit are expected to decrease due mainly to restructuring expenses and factoring in various business risks.

This is the full year consolidated forecast. Sales would decrease by JPY 102.7 billion to JPY 7.900 trillion. Operating profit would decrease by JPY 111.5 billion to JPY 300 billion. Net profit would decrease by JPY 84.1 billion to JPY 200 billion. ROE is expected to be 10.1%.

This is our operating profit analysis. Profit decrease by sales decrease is expected to be JPY 24 billion. This is mainly due to business portfolio reform. We expect a decrease of JPY 10 billion from the effect of exchange rates. Regarding fixed costs, investment in Automotive Batteries will increase. However, business replacement and other reduction efforts will offset the increase to remain at the same level. To offset the impacts such as price declines, additional rationalization efforts will be made. However, the improved amount will remain at JPY 7 billion.

As a result, adjusted operating profit is expected to decrease by JPY 27 billion overall. Other income and loss is expected to decrease by JPY 84.5 billion. The business transfer in fiscal 2020 will offset the impact of one-off income and loss in the previous year. However, we expect the business restructuring expenses for profitability improvement. Overall operating profit is expected to decrease by JPY 111.5 billion.

This is the forecast by segment. Starting this fiscal year, the company will report based on the 5 segments shown here. For the businesses in each segment, please refer to the final page of this presentation.

First, Appliances based on consolidated production and sales. We will strengthen our businesses in China and Asia mainly through air-conditioners and white goods. Overall sales are expected to remain at the same level year-on-year, with higher sales in air-conditioners and white goods in China and air-conditioners in Asia and lower sales in such products as TVs, where we will accelerate the shift to high-end products. Lower operating profit is expected overall despite increased profit from expanding sales of air-conditioners and white goods, mainly factoring in market risks and business restructuring expenses.

Next, Life Solutions. We are aiming to strengthen overseas businesses in China, India and other markets where we expect market growth in electrical construction materials, such as wiring devices and lighting equipment. In Japan, we will strengthen the solutions business for the non-housing market. Higher sales are expected in Lighting and Energy Systems, the key for the electrical construction materials and in Panasonic Ecology Systems. But overall sales are expected to decrease due to the impact of the unconsolidation of Panasonic Homes scheduled in this fiscal year. Higher operating profit is expected due mainly to gains from the business transfer related to the establishment of the joint venture.

Next, Connected Solutions. We will lay the foundation for solution service businesses, pursuing higher profitability as well as strengthening the profitability of existing businesses. Higher sales are expected driven mainly by PSSJ, which aims to pursue the opportunities provided by the Olympic Games-related demands and to expand businesses that provide solutions to social issues together with stable performance of Process Automation. Lower operating profit is expected overall due to increasing investment for efforts to develop solution service businesses despite higher PSSJ sales.

Next, Automotive. Automotive Solutions will execute management reform that prioritizes profit growth, particularly focusing on projects in areas where we have competitive advantage. For Automotive Batteries, we will make investments in expanding production of prismatic batteries at Himeji and Dalian factories. For cylindrical batteries, we aim to increase profitability by improving productivity and utilization at North American factory. Regarding sales, we expect an overall increase. While Automotive Solutions is expecting lower sales impacted by the product cycle trend, we expect significantly higher sales from the positive effect of increased production of both prismatic and cylindrical types. As for operating profit, we forecast a loss of JPY 15 billion. We expect profit from increased sales of Automotive Batteries and rationalization efforts, but we forecast higher fixed costs due to the ramp-up of production at the Dalian and Himeji factories.

In Industrial Solutions, we will focus investments on growth areas in the automotive- and industrial-use businesses as well as accelerate initiatives to change the business structure and pursue higher operational efficiency. For systems, we will strengthen sales and development structures as well as expand product lineup to provide optimum solutions that meet customer needs. For devices, we will further enhance the competitiveness of our products with the aim of expanding market shares over the medium to long term. But we forecast lower sales, factoring in the impact of the severe macro economy, such as in China. On the other hand, higher operating profit is expected overall, resulting from efforts to strengthen management structure, such as reducing inventory and quantity-related losses in addition to improved profit in Semiconductors and LCD, this despite decreased sales in systems along with impact of temporary gains in the previous year.

That's the forecast by segment.

In fiscal 2020, the first year under the new medium-term strategy, we will carry out business portfolio reform. We aim to improve the competitiveness of our businesses through co-creation with our partners, such as in the automotive prismatic battery business announced in January and the town development business announced today. In addition, we will improve profitability by implementing radical measures for low-profitable and unprofitable businesses, such as Consumer Electronics and Semiconductor businesses. An example is the restructuring of the solar business. During the 3-year period, we will further promote and accelerate these portfolio management initiatives to overcome low profitability and return to a growth track.

Thank you for your kind attention. Now our CEO will talk about the new midterm strategy.

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [2]

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Thank you. Now let me explain our new midterm strategy, starting with a review of previous 3-year period.

During the previous 3-year period, we tried to increase both sales and profit especially in the area of the Automotive-related business. But as you can see on the right-hand side, in fiscal '19, we did achieve the higher sales, but the adjusted operating profit was much lower than what we expected. In high-growth, the sales increased, but in Automotive, the R&D expenses increased significantly. In cylindrical automotive battery, we did not manage to fully deal with the ramping up and that pushed down our profit. In stable-growth, in Consumer Electronics, aside from Japan and China, the profitability was sluggish. And in Housing, the new detached house order was not as high as what we expected and product mix worsened. In low-profitable, we lacked the speed in structural reforms. In fiscal 2020, we expect lower profit, but with the new midterm strategy, we will try to overcome low profitability and try to return to the growth track.

Now let me explain the new midterm strategy. Those are the 3 key points. First is the execution of portfolio management. Based on what we learned in the previous 3 years and also the megatrend in social issues, we have now established a new business classification so that we can pursue the growth in profit and higher profitability. The second is thoroughly strengthen the management structure in order to become more efficient and competitive and also to realize JPY 100 billion profit contribution and to reduce fixed costs. And also, we would work on the selection and concentration of the businesses. And last is the lifestyle updates. We will try to become a company that achieves lifestyle updates, reflecting ongoing social transformation.

Let me start with the portfolio management review. Until now, we had 3 categories. That is high-growth, stable-growth and low-profitable. And so basically, this is the growth strategy using our own resources. But in high-growth, we did achieve higher sales but profit did not grow so much. And in some of the stable business, the competitiveness was declining and there was a limitation as to how much profit we can generate in a sustainable way. So in the new midterm strategy, we would try to redefine the businesses so that we can also consider more collaboration with other companies so that we can improve the competitiveness. The new classifications are core growth, revitalization and co-creation.

In core growth, we will try to focus our resources and expand the solution-type businesses to drive the profit growth. In the Automotive-related business, where the profit is sluggish, we consider this as a revitalization business so that we can focus on the customers and products where we are strong to improve the profitability. And last, with Consumer Electronics and Housing, those are in co-creation and we try to work with regions and other companies to improve our competitiveness, to improve profitability.

This is the positioning of the core growth business. Recently, we see the urbanization and decline of the labor population and based upon those changes on the society, there are many social issues. So core growth of businesses can, directly and indirectly, contribute to solving other social challenges, and this is where we can take advantage of our competitiveness. The Spatial Solutions has to do with providing the comfortable living space to people. Gemba Process, or the shop floor or factory floor process, is for the B2B customers so that they can improve their productivity to innovate where they work or in Gemba. Industrial Solution can support the evolution of the technologies, which can contribute to resolution of the social issues.

Next, the growth strategy for the core growth business. In Spatial Solutions, we will strengthen response to BIM, or the building information modeling, which is a mainstream in the construction industry. We'll be combining BIM with the strong products that we have, such as the electrical construction materials and lighting fixtures so as to expand the solution business that covers the entire process from design to maintenance and operation. In the Gemba Process, we will contribute to the innovation of manufacturing, transportation and selling by the customers. In addition to the manufacturing know-how and robotic strength that we have through the collaboration with others, we will provide the integrated solution and expand the recurring business. In the Industrial Solution, we will capture the megatrend and using the competitive device, expand the top-share product and enhance the system and module products to provide optimal solution. In each of the core growth business in such areas as software in order to strengthen the organizational capability, we will pursue M&A and other possibilities.

In here, you can see the EBITDA for the core growth business. In addition to the cash flow indicator, we will focus on EBITDA as the core value enhancement metrics going forward. For fiscal 2020, we estimate the EBITDA in the core growth business to be around JPY 390 billion, accounting for about 70%. Towards fiscal 2022, we will increase the profit by additional JPY 100 billion. As for EBIT margin, for the past 3 years, it's been around 10%, and we will aim at the same level going forward. The core growth business is to drive the profit growth of the entire company. Using these KPIs, we will verify the progress in the growth strategy.

Next is the Automotive-related business, which is positioned as the revitalization business. In the Automotive Solutions and cylindrical automotive batteries, I will be spearheading the efforts to rebuild the business to improve the profit in the Automotive Solutions. To ensure the control of R&D costs, we are going to optimize the R&D resources by region and product. As for the cylindrical batteries, we will ensure the productivity improvement for the return on investment. As for the prismatic batteries, as a challenge to the new business model, we will establish a joint venture with Toyota to integrate the strengths of the 2 companies so that we can provide competitive batteries to wide range of auto manufacturers.

Next is the co-creation business. Here, through the co-creation with external partners, we will aim at improving the profitability. In Consumer Electronics, with the establishment of China and Northeast Asia company, we are going to leverage the strength in Japan and China to improve on our competitive edge in cost and others. Eventually, we would be using their expertise in Greater Asian business. In Housing, today, we announced the establishment of the joint venture with Toyota for the new town development. Through this, we are going to integrate the mobility services initiatives by Toyota and the lifestyle update initiative of Panasonic so as to create new value of living in an entire town.

In addition to the execution of the new portfolio management, we will ensure the strengthening of the management structure. More specifically, we will implement fundamental measures to address the low-profitable business. So -- and to improve on the efficiency of the indirect operations to reduce the fixed costs so that we can expect a JPY 100 billion profit contribution in 3 years' time. We will be looking at the profitability of future businesses, looking at all of the business areas to identify areas where we need to withdraw from or to carve out. We will accelerate the selection and concentration. As for the senior management structure, we will clarify responsibilities for company-wide management and move toward a flexible business-execution structure, aiming at March 2019 for this execution.

Here, you can see the management KPIs. For fiscal 2022 and beyond, we are to build the group management that can stably achieve the EBITDA growth of 5% to 10% and EBIT margin of 10% or higher for the core growth business and ROE of 10% or higher for the entire company. By expanding the profit driven mainly by the core growth business, we are to enhance the corporate value of the company. And as for the capital allocation policy, we will allocate capital for midterm strategy with cash flow generated from business, but we will respond flexibly when investment opportunity arise before sufficient cash flow is generated from business.

Before I close, let me elaborate on our lifestyle update initiative. This will be not just B2C but also through B2B business. We are to provide the benefit to customers, both the individual and corporate customers, by providing the optimal, most suitable products and services on a continuous basis. Over the next 3 years, we will be focusing on the B2B area business, the core growth business, so as to evolve the solution-type business model. And we are to eventually lead to a company that can realize the lifestyle update initiative. Thank you.

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Questions and Answers

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Masahiro Ono, Morgan Stanley, Research Division - Research Analyst [1]

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Ono from Morgan Stanley. I have 2 questions. First is to Mr. Umeda and another is to Mr. Tsuga. So first question to Mr. Umeda about the financial results. Automotive fiscal 2020 of JPY 15 billion minus, so new Himeji and Dalian start-up fixed cost increase, you mentioned. So what is the size? And if without these fixed costs, the revenue or sales in North America, how much of the improvement can we expect?

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [2]

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Thank you. So Automotive, up until fiscal '19, infotainment, Tesla business and prismatic automotive battery and Ficosa, those are included. So this deficit number, red number, is actually almost all prismatic. As we announced for the next year through collaboration with Toyota, we'd like to make sure that we need -- we can start this up. So Dalian and Himeji, there will be a CapEx and fixed cost increase. Aside from them or in other businesses, of course, Ficosa is positive. But as for Tesla, we are trying to make it profitable. As for infotainment, of course, we want to turn it around to be profitable. Automotive prismatic deficit still remains. That is the size of the profit or negative profit that we have in Automotive.

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Masahiro Ono, Morgan Stanley, Research Division - Research Analyst [3]

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Second question to Mr. Tsuga about the new midterm strategy. In the co-creation, already the Semiconductor, there's a matter of [Rome]. In solar, you made the announcement today and also PanaHome together with Toyota. So Consumer Electronics business, what is the time frame? And how do you prioritize? What is your image? And in a similar way as Housing, the similar actions, is that something that we should expect? Or is it different from the Housing? Could you elaborate?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [4]

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Thank you. Frankly speaking, Housing and Consumer Electronics are different. Not just us but Toyota also agreed with this because manufacturing business and the town development business, those are 2 different businesses. So we want to lower the limitations. We want to have the business suitable for particular business. As for the Consumer Electronics at Panasonic, this is the most important business, and in terms of the brand image, the most important business. So in co-creation, we are trying to increase our competitiveness. Panasonic brand in Japan is highly evaluated, but to what extent can we maintain this competitiveness? When you think about that, we should really look outside of Japan. And when you consider IoT home appliances, unless we shift to those products, we cannot take advantage of the partnership or comprehensive capability. So we will be just competing against the private brands or mass merchandisers, which is not very good for us.

So when you consider those, the China consumer electronics and housing that -- strengthening that, which means that we can strengthen the different part of our DNA and we would be able to find something new. And that will also bring some positive impact on the Japanese consumer electronics. So we try to think about all of those. So to use co-creation for -- so that we can improve the competitiveness, that is what we are thinking about the Consumer Electronics and this is something that we need to maintain. But considering the capital, we have been very flexible. But in terms of brand, again, this is very important to Consumer Electronics. Thank you.

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Unidentified Company Representative, [5]

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We'll take the next question.

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Mika Nishimura, Crédit Suisse AG, Research Division - Consumer Electronics Analyst [6]

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Nishimura from Crédit Suisse. I have 2 questions. First about the new management policy for the core growth, JPY 100 billion growth in EBITDA, additional JPY 100 billion in 3 years' time. But how are you going to improve the profitability? That's my first question.

Can I now go on to the second question? Okay. My second question is on Automotive. Revitalized business is the designation. Now previously to Tesla and to Toyota for infotainment, you have been making investment. So for this year, I understand you will be seeking breakeven. But next year onward, even if it is positioned as revitalizing a business, are you sure you can turn to profit?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [7]

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I'm not CFO so I'm going to be -- a less precise response. The revitalization business, as I said in my presentation, one is the R&D cost control, especially in Europe. Especially in our European business, we are seeing a large increase in R&D costs and that had to be treated in the impairment loss. Now the biggest expenses would be during fiscal 2020, and fiscal 2021 onward is going to be lighter. And so in that sense, as the CFO Umeda said, infotainment, we expect the breakeven because we expect R&D expenses to go up. And then there are depreciation expenses that will increase. So for this fiscal year 2020, it's going to be difficult. And starting in 2021 fiscal and actually starting in fiscal 2020, IVI and other areas that -- where we have invested in the past, we'll be able to start harvesting the outcome. And therefore, the R&D expense is going down and are -- are being capitalized through the combination of the 2. For 2021 fiscal year, we expect to increase. 5% has been the target that we have been floating. So to what extent can we get close to that? It would be the goal that we'll be aiming at. The meaning of revitalization is -- can we really implement that? Can we really deliver? We are not confident enough. And therefore, we decided to have this revitalization business designation.

Now co-creation, Consumer Electronics, business as usual. Based on the lessons learned from fiscal 2019, we are going to prioritize profit. So over a short term, it's not going to make a dramatic change. But fiscal 2019, air-conditioners and refrigerators, we struggled in those areas and we know the reason why. And therefore, for those large consumer electronics, we expect some slight improvement. And so in the core growth business, JPY 100 billion plus. To what extent that can be realized, I'm afraid we can't give you any further specifics.

And Tesla question. For Tesla, 35 gigawatt-hour, the initial investment, the investment has been completed already. And as for the operating rate or the utilization rate, as was mentioned by Elon, maybe 24 gigawatt-hour currently. And this year, we want to increase this rather significantly. One is including the lines that have yet to start. We have 3 fast-speed, higher-speed lines. And when they become operational, we will see improved efficiency. And when we shift from [I should say 500] to others, we were not really able to do sufficient verification of the facilities. And we saw disruptions and we know the reason. And so in June, we're going to start replacing the jigs. And therefore, the number of cells and the yield would improve quite a bit. And through the localization of the workforce would mean that we'll have fewer Japanese expats, and that is progressing. And we are seeing an increase in the number of lines that can be operated only by the local personnel, and that can reduce fixed costs as well. So overall, we can expect improvement. And of course, the demand from Tesla is going to be good enough for the full capacity operation is the assumption. But should that assumption hold, then the Tesla battery business for this year can break even.

As for demand, Model 3 demand, how much would that increase is something that we need to clearly identify. And as for Model X, in our quarter, we saw some decline. But already, Tesla is making efforts to -- and taking actions to revamp that demand. And we are talking with Tesla on this. And so I think there is the upside potential there.

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Unidentified Company Representative, [8]

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Thank you. The gentlemen in the third row.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [9]

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Nakane from Mizuho Securities. I have one question to Mr. Tsuga. On page 17 of the new midterm management, you mentioned the U.S. company and the China and Northeastern Asia company. So concerning that, the size of the company and also the responsibility and authority of the head and the contribution in terms of the profit and what is the expectation for [Mr. Matsuda]? Could you talk about all of those?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [10]

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First, this new midterm strategy, this is, of course, for 3 years. And in 3 years, what would be the KPIs that we look at? Those are the things that we decided. But toward 2031, in order to realize the sustainable growth, what needs to be done, that is the major focus. So the Spatial Solution, Gemba Process for these, from 2022, we will focus on those KPIs and we will spend a year or 2 to enable that. So that is the message. And of course, that's about the core business. As for the revitalization business, it's in red. So we want to turn it around as soon as possible and to bring it to the 5% level. We want to get close to that. So that's something that we'd like to do in 3 years.

So when you look at this from that perspective, the China and Northeast Asia company has Consumer Electronics and Housing that is in co-creation. And what used to be B2C will be sold in B2B. So that is, first of all, the priority for CNA. So in CNA, AP and LS are being combined, that kind of business is already started and they are taking measures with necessary resources. So how much resources will be spent for this? It is up to Mr. Homma, who is in charge. So you should ask him. So those 2 circles at the bottom as one company, they will be focused on those 2. And moving upward the Gemba Process, so cold chain and [PASA] is included. And because of that, in Gemba Process, U.S. is -- also has a circle there.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [11]

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So in China, the fresh food distribution logistics, what should that be?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [12]

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It's not just refrigeration and the case business but we want to get closer to the front end. We want to make that shift. So the person in charge is Yokoo in China. And so he used to be the president of the company. So that is where they will be focused upon.

And as for U.S. at Automotive Battery, the localization of Tesla, as I mentioned, is going to be one thing. So the U.S. company, making sure that the local business will grow. And a British -- non-Japanese actually, British person will be the leader.

As for Automotive, it's not just setting components but the mobility solution business is something that we would like to shift to and we have already started that. So Automotive, we had the PASA. That is our organization. So we would shift some people from there so it would be more focused on the services. So that's one of the areas that we would work on. So the meaning of those circles on this page is what I described. But other than that, you need to really check with Homma-san. Thank you.

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Unidentified Company Representative, [13]

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Thank you. Next person, the person in pink shirt.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [14]

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Ezawa from Citigroup Capital Markets Japan. I have a question for Mr. Tsuga. The core growth business, revitalization business and co-creation business, you have the matrix on Slide 17, but it's really hard to say which business belongs where. Appliance and Life Solutions, Spatial Solutions and Gemba Process, where does that fall into? And Industrial? You have circle only for the core growth business, but LCD and Semiconductor, I think, is part of Industrial Solutions. So for the low-profit or nonprofit business, is it in here? Or is it going to be outside of these 3 new classifications? So can you talk about products or the businesses' examples so that I'll have a better understanding of what this is trying to show?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [15]

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Understood. As for the unprofitable business, we are to take drastic measures. So towards fiscal 2031, it's outside of that view. But the question is whether we can resolve the unprofitability or not. That would be the final decision. So currently within the Industrial Solutions, there are businesses that are there, only that who are promising. And as for Spatial Solutions and Gemba Process, and Connected Solutions are there and Appliances. And what we're aiming at is just like houses, the living environment or the comfort are to be established in nonhousing environment as well, the public areas. So that's included here. But for Housing, what we call the Consumer Electronics and Housing, do not exist in the non-Housing. And therefore, Consumer Electronics are not part of that.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [16]

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So air-conditioning, would that be core growth business?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [17]

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Yes.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [18]

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And what about the AV for non-housing applications, for example, media, entertainment type of applications and products and businesses?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [19]

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Not in the form of TVs, but within the public space. They play a very important role. And therefore, spatial and people sensitivity related-things, for example, sound, air quality and ambiance, how can we improve the comfort? This is related to that. It's included here. Conversely, Housing would be -- really Housing-oriented. That's not part of this. That is in the Housing business areas. And there are things that contain both and they are classified in either of the 2. But mostly in terms of profitability, the decision or the classification is being made.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [20]

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So for core growth business, you are looking on a business division area. And you're using a profit of JPY 4.2 trillion for this year, correct?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [21]

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Yes.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [22]

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Another question about profit and loss. My impression listening to you is that EBITDA, JPY 390 billion for this fiscal year, 5% to 10% growth each year so that in 3 years' time within core growth business, about JPY 500 billion EBITDA and JPY 5 trillion sales. Now for Panasonic overall, you did not show the overall figure. I understand that. But revitalization business and co-creation business, to what extent would they improve -- contribute to improving the profitability? Or is it something that we shouldn't be really discussing today? Improvement in profit there, I think, would have a greater contribution in terms of profit contribution from the core growth business. So can you talk about the profit improvement possibilities in revitalization business and co-creation business, please?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [23]

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Again, I am going to attempt a not-so-precise response to your question. Core growth business over the next 3-year period was shown here to this level. To realize that, M&As, mergers and acquisitions are indispensable because conventionally, the business division framework being recombined, if that is going to generate the profit, then we would not have made such investment in high-growth. So unless we make further investments, this high growth and profitability cannot be attained but -- rather than making individual, pinpoint investment, we want the mergers and acquisitions that will have a more wider implication with a wider breadth, but the actual selection would be something for the future. But these 3 classifications, they all have such potential.

Now revitalization business and co-creation business, about the -- if I make too ambitious a remark, we may not be -- we might be stumping the potential. As for the co-creation business, to contribute to the lifestyle update initiative, we are going to change in -- that format. And we are going to transform so that we will be successful in China. Not stalling, I think, would be more important over this short term. As for the revitalization business, as I mentioned earlier, how -- to what extent can we get close to 5%? Maybe not 5%, but with some investment, we might -- we can expect improvement. But for fiscal 2020 for the reasons cited earlier, R&D costs will be a challenging factor. I'm afraid that's all I can say.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [24]

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I have a follow-up question, if I may. For Consumer Electronics -- well, housing and construction, that's going to be unconsolidated, I understand. Now I'm confused, the Consumer Electronics, in 3 years' time, you are not going to rule out the possibility of that being unconsolidated? Or are you saying that that's not what you're saying today?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [25]

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Well, as of today, I haven't gone that far. As I said earlier, Housing and Consumer Electronics are different in terms of business positioning. Consumer Electronics does fit in our business model, but business, as usual, would hurt competitiveness. In other words, we need to change the approach, whereas Housing, not just the industrialized housing, from that, we want to expand to the town development, which means that the nature of business is going to change. And I think this is the same for Toyota as well. So what we are proposing now, we feel, is more desirable. So we made a proactive decision to go in that direction.

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Unidentified Company Representative, [26]

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Okay. Next question.

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Unidentified Analyst, [27]

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[Katai] from SMBC Nikko Securities. I have 2 questions, one to Mr. Umeda, another to Mr. Tsuga. First of all, to Mr. Umeda, looking at results and your plan, the -- how do you evaluate the financial results? This time, you have made a downward revision. The operating profit -- adjusted operating profit was about the same but nonoperating probably items were also included. And as for the inventory at the end of -- in December, I think you've mentioned that you wanted to reduce it, but it has not yet been reduced. So now 3 months has passed. So what is the starting point? That's my first question.

And the second probably should go to Mr. Tsuga. So this fiscal year, JPY 90 billion that is PanaHome or Panasonic Home and other income and losses. You -- so it means that you would be doing many things. So in terms of -- you mentioned lack of speed. What is the speed that you need to work -- realize? So what I'm trying to ask you is that, are there some deconsolidation and also consolidation? So as a shareholder of Panasonic, what would remain as a corporate value and what we need to look at? If you can -- or I think there were some hints. For example, JPY 100 billion for EBITDA or JPY 100 billion increase of profit in other, but it's still difficult to see the overall picture. So could you talk a little bit more on this?

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [28]

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Yes. Thank you. First, fiscal '19 numbers, we made a downward revision twice. So I think -- we're sorry that we lost some of your trust. So adjusted operating profit, there are positive side and negative side. And I think at that timing, I think we were quite right. But the higher other income and loss, it doesn't mean that the expenses were lower. Rather, the operating profit, a JPY 40 billion downward revision, as you -- as mentioned, is -- has to do with the solar business provision. Actually, the number was highly -- higher than that, so the upward part or upside included. There are several things going on simultaneously. So a disposal of assets was the major reason behind the upside.

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Unidentified Analyst, [29]

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So how precisely can you forecast?

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [30]

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It has to do with our partners and so forth. So it's difficult to say. As for the inventories, from my perspective, this has a direct impact on cash. So it's declining. And from the end of Q3, about -- the decline is about JPY 90 billion. So compared -- year-on-year, we wanted to decrease further. And Industrial, for example, still, there was lower sales. And because of that, we could not realize, but I think that we have already bottomed out.

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Unidentified Analyst, [31]

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So fiscal 2020 numbers, what would it be?

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [32]

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We are very conservative. And what we need to do, of course, we would be doing that and we have already incorporated them. Now lower sales has to do with the portfolio management. And through the portfolio management, we expect our lower sales. But as for expenses, there's an impact from China and ForEx. And we talk with each business and we try to incorporate all the risks. And as for the other income and loss, last year, there was a change in the pension scheme and the sale of the land. And there will be -- those will not be repeated so that in the area of Housing, I think that there will be an increase so that will offset each other. So if that is the case, the profit will not go down that much, but we are looking at fiscal 2031 so that we incorporate the restructuring costs and so forth. So what will be the speed, you asked. There are many things going on. So JPY 60 billion, we do have a plan for that.

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Unidentified Analyst, [33]

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So just one thing. But the cash flow, you will be able to achieve this?

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [34]

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Well, we have to, of course, work on the portfolio and restructuring. It doesn't mean that cash would go down, but sometimes, it could go up, so various investments. Of course, we reduced the operating cash flow for that. But of course, there's a timing issue. So it's not just shrinking. So when time comes, that cash should come in, but we should use it when the opportunity arises. So that's how we intend to manage.

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [35]

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So from my side, as -- if I may add to what Mr. Umeda said, the sense of speed is important. For example, we make sure that we need to do things that we need to do this year. In the past, we had the low profitability business. That was the category. But now this is in the revitalization, and that's only the Automotive Solutions and that's one of the decisions that we've made. Now in the revitalization, the Automotive Solutions, if it goes well and whether that would come into the core growth or go to the co-creation for the prismatic, already, it is co-creation. But in coming 3 years, we will try to make a decision on that.

So fiscal '19, one of the lessons that we learned is that higher sales, higher profit were expected originally. But in the final year, we saw the decline in profit. So even if this year was good, then if the profit goes down next year, we have to do the same thing again. So we really regret that. So 2022 and onwards, we'd like to make sure that we can increase profits, and that's how we want to make changes in coming 3 years. So we have a very strong determination. Thank you.

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Unidentified Company Representative, [36]

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Thank you very much. We're getting close to the end time. So I'm afraid we'll -- we can take only one more question. Please raise your hand.

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Kenji Yasui, UBS Investment Bank, Research Division - Executive Director and Analyst [37]

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Yasui from UBS Securities. Tesla, based on what is reported regarding the Gigafactory for the future investments looks like you are wavering on whether to make the investment or not. Cylindrical, NCA battery is very difficult is my understanding. So exclusive supplier and multiple supplier structure, I think, would mean quite different. So in terms of relationship with Tesla over a long term, what kind of relationship do you want to establish?

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Kazuhiro Tsuga, Panasonic Corporation - CEO, President & Representative Director [38]

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Thank you for the question. First, what's reported, I mean actually, the earlier session with the media, there was a question as to we have bad relationship, we're not getting along with Tesla. Well, we are making sure that we have a partnership relationship, not a supplier relationship. And since we are partners, we are very frank and candid and honest to each other. So on this battery business, as for the investment facilities -- for the facilities that we have invested, can we maintain the battery operation with the orders coming in, the demand there? From Tesla's point of view, with the batteries being supplied, they can manufacture their vehicles on a full capacity basis. Unless that is established, this would not be a win-win relationship. In the past, what hurt us that we were told that "This is the capacity you'll need," but we couldn't sell that much batteries. That's the worst case. And within -- in that sense, Tesla is purchasing everything that we manufacture. And they have not just the electric vehicles but they do have the storage batteries as well, and they are asking for the capacity increase all the time. And therefore, we have capacity but not being produced. That situation is not envisioned for Gigafactory for now. So I think we have a very good relationship between ourselves.

Now going forward, would it be single supplier to always respond to the demand request from Tesla and continue to make investment? For now, we have not made that decision because priority-wise, we have already invested into the Gigafactory and we want to improve on the productivity and therefore, we can produce as many batteries as possible so as to ensure return on the investment. Unless that is completed, we can't afford to consider further investment. I'm afraid we will lose focus if we do that and we will fail, and we have already communicated that clearly to Tesla. Now because of what happens in China, Tesla is considering a multiple supplier structure, which makes sense for Tesla maybe given the very special nature of doing business in China, and maybe they need to have that structure so as to be approved by China authority. I don't know. So on the part of Tesla, they might prefer -- they might start considering getting multiple suppliers, but that doesn't mean that our relationship is being hurt and is being unstable, no. We continue to have very solid, very strong relationship with Tesla.

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Unidentified Company Representative, [39]

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Thank you. Our time is up. So we are going to conclude today's briefing. Thank you very much for coming despite your busy schedule. Thank you, and have a good evening.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]