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Edited Transcript of 6752.T earnings conference call or presentation 18-May-20 10:59am GMT

Full Year 2020 Panasonic Corp Earnings Presentation

Kadoma, Osaka Aug 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Panasonic Corp earnings conference call or presentation Monday, May 18, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hirokazu Umeda

Panasonic Corporation - CFO, Managing Executive Officer & Director

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Conference Call Participants

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* Damian Thong

Macquarie Research - Head of Asia Technology Research

* Kenji Yasui

UBS Investment Bank, Research Division - Executive Director and Analyst

* Kota Ezawa

Citigroup Inc., Research Division - MD & Analyst

* Masahiro Ono

Morgan Stanley, Research Division - Research Analyst

* Ryosuke Katsura

SMBC Nikko Securities Inc., Research Division - Senior Analyst

* Yasuo Nakane

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

* Yu Okazaki

Nomura Securities Co. Ltd., Research Division - Research Analyst

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Presentation

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

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Good evening. This is Umeda speaking. Thank you very much for joining us on our conference call on financial results for fiscal 2020 ended March 31, 2020.

Please turn to Slide 1. Summary of the fiscal 2020 financial results. FY '20 results were broadly in line with the revised forecast announced on April 27. Overall sales decreased due to COVID-19 impact, in addition to business portfolio reform and weak investment demand in China. Adjusted operating profit decreased with decreased sales despite the steady progress of efforts such as fixed cost reduction. Operating profit and net profit decreased due mainly to business restructuring expenses. Free cash flow improved significantly. In addition, the company ensured sufficient cash liquidity. We will close the FY '21 -- or disclose the FY '21 forecast when reasonable calculation becomes possible, considering the great uncertainty caused by COVID-19 impact.

Slide 2, the consolidated financial results. Overall sales decreased to JPY 7.4906 trillion. Adjusted operating profit decreased to JPY 286.7 billion. Operating profit decreased to JPY 293.8 billion, due mainly to restructuring expenses. Net profit decreased to JPY 225.7 billion despite improvements in income taxes due to one-off effects resulting from the reorganization of subsidiaries. ROE was 11.5%, which decreased year-on-year, but achieved the level of above 10%.

The annual dividend is JPY 30, the same as in the previous year.

Slide 3, operating profit analysis. Decreased sales lowered profit by JPY 89 billion. This was due mainly to weak capital investment demand in China as well as COVID-19 impact. Rationalization and others led to an increase of JPY 43.2 billion, mainly through efforts at the automotive cylindrical battery factory in North America. Fixed cost reduction improved operating profit by JPY 30.6 billion, due mainly to efforts to enhance management structure by reducing various indirect costs and others, despite an increase in Automotive Batteries related to expanding production subsidy. Deconsolidation impact of Housing business and others was a decrease of JPY 13.3 billion. Adjusted operating profit decreased by JPY 40.3 billion overall, although efforts such as fixed cost reductions partially offset the impact of lower sales.

Other income and loss decreased by JPY 77.4 billion overall year-on-year. Major factors in FY '20 include JPY 122.6 billion of gains from business transfer and JPY 115.5 billion of restructuring expenses and others resulting from promoting business portfolio reform. These 2 factors nearly offset each other, but there was also rebound impact from onetime gains, et cetera, reported in the previous year. As a result, overall operating profit was down JPY 117.7 billion.

Slide 4, FY '20 results by segment. The charges differences from FY '19 results as well as differences from the revised FY '20 forecast as of February 3. First, the figures in comparison to FY '20 forecast, as of February 3, which did not factor its COVID-19 impact. Adjusted operating profit was below forecast by JPY 13.3 billion, while we further promoted fixed cost reduction efforts, COVID-19 impact was felt mainly at Appliances and Connected Solutions. Other income and loss was above forecast by JPY 7.1 billion. This was due to increased gains from business transfer, despite an impairment loss related to the Automotive business and other factors affected by COVID-19.

Slide 5, the major increase and decrease factors of sales and operating profit by segment. For details, please refer the reference materials from Slide 16. For Appliances, sales decreased overall due to lower sales in Smart Life Network and COVID-19 impact despite higher sales in air-conditioners. Operating profit decreased due to lower sales, restructuring expenses and others despite profit increases for Home Appliances in Japan as well as air-conditioners.

For Life Solutions, sales decreased due mainly to deconsolidation impact of Panasonic Homes, et cetera, despite steady sales such as electrical construction materials, including wiring devices and housing systems. Operating profit increased due to profit increase in housing-related businesses, along with reporting gains from business transfer.

For Connected Solutions, sales decreased due to lower sales in Process Automation and Avionics as well as COVID-19 impact on all businesses. Operating profit decreased due to lower sales despite profit increases in Mobile Solutions and PSSJ and gains from business transfer.

For Automotive, sales decreased due to investment effect of production expansion for Automotive Batteries being unable to offset decreased sales resulting from market slowdown, COVID-19 impact and product cycle trend of Automotive Solutions. Operating profit decreased. The North American factory for automotive cylindrical batteries was profitable in the fourth quarter following the third quarter, thus significantly improved profitability. However, increased fixed costs for automotive prismatic batteries, increased development expenses and onboard charging systems for orders received in Europe, goodwill impairments and others led to decreased profit.

For Industrial Solutions, sales and profit decreased due mainly to U.S.-China trade friction along with COVID-19 impact. Impairment loss of semiconductor business and other factors led to decreased profit.

Slide 6, free cash flow and cash. Free cash flow was JPY 224.2 billion, a significant improvement year-on-year. While we made upfront investment in automotive prismatic batteries, such efforts as thorough control of other capital investments and reductions of inventories contributed to this improvement, along with business transfer and others.

The graph on the right describes our cash position. The company ensures sufficient liquidity. Gross cash was secured over JPY 1 trillion towards the end of FY '20. And while there was a repayment of trade bond of JPY 220 billion this March, improvement of free cash flow as well as issuance of bonds and other factors contributed to this amount. In addition, the company has entered into commitment line agreements of a total of JPY 700 billion. During FY '21, there will be no repayment of straight bonds.

Net cash balance was minus JPY 419.5 billion, a significant improvement from the beginning of FY '20. This was contributed by the improvement of free cash flow and the exclusion of lease liabilities related to Housing business due to deconsolidation as part of business portfolio reform.

Page 7 shows our progress made in the business portfolio reform. During FY '20, the company promoted initiative for co-creation with partners in automotive prismatic batteries, town development and security systems to enhance competitiveness of each business. In terms of loss-making businesses, we have firmly set the direction for semiconductors, LCD panels and solar.

Page 8 shows a review of FY '20. There are 2 major points I'd like to make. First, we have pursued steady execution of our business portfolio reform. As explained in the previous slide, we have promoted co-creation and made progress in setting the direction for loss-making businesses. Second, we enhanced our management structure. We have made efforts to reduce fixed cost and, at the same time, significantly improved free cash flows. While sales and profit increased compared to the previous year due to the decreased sales mainly affected by the weak market conditions in China and COVID-19 impact, we continued and accelerated our initiatives to overcome the low profitability structure.

From this slide, I will explain our outlook for FY '21. First, our response to the spread of COVID-19. Second, factors affecting financial performance, including COVID-19 impact.

Page 10. Here, I would explain 3 aspects of Panasonic Group's response to the spread of COVID-19. First, securing the health and safety of various stakeholders including customers, business partners, employees and others. In accordance with the laws and policies of the government in the nations or regions, we are taking initiatives to prevent further spread of the disease as a top priority, including work from home, taking infection prevention measures at factories. Second, we will continue to contribute to the society. Company is mobilizing resources to help solve social concerns by providing products and services as well as medical supplies and others, according to the situation in each nation. The third is business continuity planning. In order to fulfill its social responsibilities, we are taking measures for business continuity from various perspectives, including factory production, maintaining and securing supply chains and ensuring cash liquidity in case of prolonged COVID-19 impact.

On Page 11, I would explain the COVID-19 impact on our businesses in Q1 as possible factors affecting FY '21 financial performance. In the press release dated April 27, we qualitatively explained the impact for Q4 of FY '20. During the current Q1 of FY '21, we are seeing some changes that are underlined on this slide. First, in terms of demand affecting our sales. During Q4 of FY '20, that impact was felt mostly in China. In Q1 of FY '21, the impact is expanding beyond China due to weak market conditions of automobile and aviation industries and restrictions on movements within various nations. Second, in terms of supply affecting our production. While the supply chain issues in China seen in Q4 are gradually being solved, the impact of temporary factory suspensions due to the lockdowns in Asia and others is starting to arise. The impact on this segment is shown on this slide.

Finally, Page 12 shows our initiatives to improve profitability as possible factors affecting FY '21 financial performance. During FY '21, we will continue to enhance management structure such as reducing fixed costs and taking measures for loss-making businesses. For our Automotive business, which needs to be turned profitable urgently, we'll make efforts to improve profitability by reducing development expenses at Automotive Solutions and by expanding sales and improving productivity of automotive cylindrical batteries. We'll continue our steady execution of our business portfolio reform. While we anticipate further uncertainties in the management environment due mainly to the further spread of COVID-19, we will steadily promote these initiatives to overcome the low profitability structure.

Thank you for your attention.

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Questions and Answers

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Operator [1]

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We will now take questions. From the Nomura Securities, Mr. Okazaki, please.

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Yu Okazaki, Nomura Securities Co. Ltd., Research Division - Research Analyst [2]

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This is Okazaki from Nomura Securities. I have 2 questions. First, the impact of COVID-19. You did describe the situation by -- situation for the first quarter. Can you talk about the size of the impact by segment?

My second question in terms of the business portfolio reform. I understand that there is a very strong message at the very end to promote this. Now in the current situation, there's a disruption, some of the weaknesses that were not visible in the past. And now I think you do see some visibility in terms of the improvement as well. So -- and there's a current situation. I wonder if there has been any change made to key business reform efforts in terms of the direction -- overall direction.

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Unidentified Company Representative, [3]

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Thank you for your questions. The impact of COVID-19 in the first quarter by segment, which is more affected than others. In terms of sales, for April, maybe that will be -- that will give you some idea as to which segment is more effective than others. Sales in April overall, about 80% level compared to the previous year, a little less than 80% compared to the previous year. By company, automotive-related business reduced to less than 50% due to the impact of lock down in different parts of the world. In Appliances, in Japan, compared to the previous year, the level was somewhat similar. And in China, it was at the same level as in the previous year. But in India, where the size of our business is not that large, the sales were 0. So the impact was different from region to region, market to market. So Appliances, about the same impact as the average for the company overall. For Life Science -- Life Solutions, over 80% level compared to the previous year. CNS, Avionics, somewhat affected, but other areas, higher sales than the company average in terms of comparison to the previous year.

And Industrial Solutions are doing pretty well. 5G-related service, there is a strong demand. So close to the previous year's level of sales recorded in April. For the first quarter overall, very hard to foresee what the results are going to be. But based on the results for April, we believe that the overall characteristics would be the same for the 3-month period as well. And as for the portfolio result, anything related to the mobility, like airline business, although our business is only limited to Avionics in that field, that our customers are really suffering, I think we need to pay close attention going forward. In automotive industry, the automakers are announcing rather difficult results. And there are difference from region to region. China and Japan, for instance, the decline is not that significant, whereas North America, Europe and Southeast Asia are a more difficult situation, given that there has been nationwide lockdown in those regions. And going forward, as automakers are saying, toward the second half of the fiscal year, some recovery is expected in our business related to automotive industries, the factory solution and parts. So we do business with different aspects of the automotive industry.

So from business-to-business, I think the size of the impact is different. So we have to continue to monitor the situation closely.

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Operator [4]

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Let's move on to the next question. From Citigroup Global Market Japan, Ezawa-san.

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Kota Ezawa, Citigroup Inc., Research Division - MD & Analyst [5]

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This is Ezawa. I have 2 questions. On the actual trend, the higher profit, there's a slide for that. So on that slide, others, minus JPY 77.4 billion, on Page 3. So first time that is mentioned here. Among those Q4 changes, could you explain that? Q4 specific items, the positive ones and negative ones, maybe you can take them up? Also, another question about the structural reform or restructuring. I think you touched upon this, but the major pillar is the business portfolio reform. And that will be one of the major pillars for the restructuring of the new fiscal year. Is that correct? So aside from the corona impact, what you are trying to promote as a restructuring, what are the major ones? Could you talk about that? Reduction of the fixed cost and, for example, aside from the TV business, nonprofitable businesses, do you need to expand that therefore to other areas?

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Unidentified Company Representative, [6]

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In Q4, major profit and other losses occurred and the housing company transfer was about JPY 100 billion. That is, again, positive side. And as for other incrementals, the negative side, the impairment loss was incurred. There are impairment losses related to other businesses or on Page 4 here under other income and loss, there are positive numbers and negative numbers. So Life Solutions, as I mentioned, this is positive. But for Automotive, costs are related -- key costs are related. Impairment loss was booked. Most of the amount was already included in this impairment loss. This is the China business and others, and we estimated the loss. Also, company-wide, a JPY 20 billion level, this is 2002 -- the delisting of the Matsushita wiring business. And we organized the business portfolio. And as others, this was not booked. And those are the major ones in Q4. That was for the [Matsushita electric works. And you mentioned the business platform reform. Yes, as you said, that we will continue with this reform. And for the loss-making business and how to eliminate those businesses, JPY 100 billion, that is JPY 40 billion for the nonprofit business and also the fixed cost reduction is about JPY 60 billion. And nonprofitable businesses, the direction was set in 2020. But the loss-making businesses in comparison to '19, there were no major changes in terms of the amount. So the change of the JPY 40 billion, that would be incurred in 2021 and 2022. So after the 2021, then those efficiencies, we will be reducing the deficit from.

And in addition to that, we will also make sure that we will promote the improvement of the management structure at JPY 60 billion level. And when we can make an announcement, which we've also been talking about result, as we did in fiscal 2020, we'll be able to give you the update on the other. I hope that answers your question.

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Kota Ezawa, Citigroup Inc., Research Division - MD & Analyst [7]

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Sorry, talking about the unprofitable business, one more thing. The JPY 40 billion, by eliminating that, how much of the increase of the profit do you expect? It is -- has been flat. So this number, JPY 40 billion, is unchanged. Is that correct? And this fiscal year and the next fiscal year are the ones that you got to see the effects. But compared to this fiscal year, it will be eliminating further losses in the coming fiscal year.

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Unidentified Company Representative, [8]

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Right, JPY 40 billion in the 2019 and also JPY 40 billion in 2020. We continue to have that number. So the direction was set in fiscal 2020. Yes, that's correct. And 2022, we are also working on the promotion of this and 50% progress can be expected for that timing.

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Operator [9]

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From Macquarie Securities, Damian-san, please.

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Damian Thong, Macquarie Research - Head of Asia Technology Research [10]

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Damian Thong. Can you give us some troughs into the amortization and the depreciation, especially in relation to the prismatic battery business? How much CapEx are you planning? Year-on-year, are you going to be reducing CapEx? That's my first question.

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Unidentified Company Representative, [11]

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For fiscal 2021 CapEx, with the absence of major investments like prismatic batteries, of course, we will see how the COVID-19 impact is going to be. JPY 270 billion was last year. It may slow down to JPY 200 billion this year because the prismatic battery-related investments is not going to be made this year. And so that should account for this year-on-year decrease in CapEx. So the relationship between CapEx and depreciation, well, the investment in itself is not going to hurt the cash flow. We don't foresee such investments to be made going forward.

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Damian Thong, Macquarie Research - Head of Asia Technology Research [12]

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I see. My second question. In Avionics, showing Airbus, they are really suspending production, and I think that is going to have an impact for the first quarter and the second quarter as well. Now cost reduction in others, this effort will be made. But can you give us a clue as to what actions are feasible?

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Unidentified Company Representative, [13]

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Thank you for your question. In the month of April, we did not see a surprising effect. But looking at the aircraft companies, we do expect an airline to sell. There might be some major impact. And as is already reported by the media, large reduction in workforce has been implemented in April as an industry. The impact of COVID-19, because there has been a strong restriction on the mobility of the people, it's very difficult to foresee how things will evolve going forward. And the same -- the products themselves might be affected, but the services and maintenance orders are coming in. And currently, it's hard to see what the impact on those aspects are going to be. The airline company -- the government in different countries are supporting the airlines. And so we're going to have to take a closer look at that to see what the impact on our business is going to be.

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Operator [14]

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We are still taking questions. Yasui-san from UBS Securities.

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Kenji Yasui, UBS Investment Bank, Research Division - Executive Director and Analyst [15]

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This is Yasui from UBS Securities. (inaudible) sales, minus 20%, as mentioned. In terms of the level, quite tough level. That's my personal impression. So based on that, in a year, your cost reduction for something that you can do right away in the first half or in a year, are there any cost reduction master plan or plans, maybe without numbers, whatever you were doing as a cost reduction, maybe you can share them with us? The second question, we have global businesses, and it's also mentioned that -- well, the impact of that on the business in India is huge and we are seeing the impacts in different regions. Are there any regions which had unexpectedly bad impact or at a very difficult situation? I'm sure that would impact other companies as well, but can you talk about that?

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Unidentified Company Representative, [16]

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Well, the COVID-19 impact is quite tough. But for example, in Avionics, the restructuring -- and because our (inaudible), for example, according to the government law, kind of a temporary cessation, depending on the region that we are taking measures, including further -- for the master plan at JPY 100 billion, strengthening of the management structure is something that we have been doing for fiscal 2022. So we'll continue to do so. We'll make sure that we will not move away from it. And also, out of that JPY 40 billion that include unprofitable business elimination and would be imagined in fiscal 2021 and onwards. And for JPY 60 billion, 1/3 is 2020 and so in the future, depending on the situation, we would try to promote it further. And at the same time, as for India, this is an extreme example. The size of the business, let's not forget. Also whether for how long would it last? That is the impact of COVID-19.

It has to do with the secondary wave of pandemic if it -- whether it would come or not. But in a sense, the situation of the sales in different regions is something that we understand. That's for our impression. Q1 probably was the bottom, and Q2, we start to see some recovery. And in the second half, maybe we'll be able to secure the same level as the previous year. When we look at the overseas markets, that's something that we expect. If that is the case, the April growth probably is the bottom or might continue somewhat in May. But that is something that's very difficult to rationally foresee. So that's why for 2021, we are not announcing the numbers, but that is the feeling that we are getting.

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Operator [17]

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From SMBC Nikko Securities, Mr. Katsura.

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Ryosuke Katsura, SMBC Nikko Securities Inc., Research Division - Senior Analyst [18]

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I have 2 questions. First, I'm looking at Slide 4, comparison with what you disclosed on February. Third, what was the impact of COVID-19? Is the difference shown on that slide be sufficient to look at the impact of COVID-19 or do you have some other figures in mind? So impact of COVID-19 on sales and operating profit forecast. And my second question is Slide 3. Some others have already asked a question, but the restructuring effort using JPY 6.5 billion, what will be the effect of that effort for fiscal 2021? I know there are positives and negatives, but looking at what you mentioned already, eliminating loss-making businesses, JPY 20 billion plus JPY 20 billion, approximately JPY 40 billion. I think it's the figure that you mentioned. Are there any other factors that you can talk about in that COVID-19 on fiscal 2020 results?

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Unidentified Company Representative, [19]

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Again, it's very difficult to have a very precise, accurate calculation. Based on these assumptions, we foresee that the JPY 130 billion impact on sales and the major one, Appliances, CNS and Automotive, in that order. In fact, our profit, about JPY 30 billion -- a little over JPY 30 billion is what we estimate. This impact on operating profit, again, would be the same as impact on sales in terms of different segments. That is our current estimate. The restructuring effort and its effect for fiscal 2021 restructuring efforts. Earlier, I mentioned that there are various impacts on different parts of the business, about JPY 20 billion. The structurally loss-making businesses, in particular, would be addressed to generate that effect. For fiscal 2022, we expect further effects we can't eliminate immediately. So we are working towards fiscal '22.

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Operator [20]

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A question from 2 persons. One question, from Morgan Stanley Securities, Ono-san.

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Masahiro Ono, Morgan Stanley, Research Division - Research Analyst [21]

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I'm Ono from Morgan Stanley. One question. So because impairment loss was booked in 2020, aside from that, in the past, customer that we acquired or the rechargeable battery, the temporary loss of onetime buff, how much of that should we expect for FY '21? Could you comment on that?

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Unidentified Company Representative, [22]

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(inaudible) the goodwill, the whole goodwill was the potential impairment loss customer profitability itself. We looked at it under a lot of stress, but it looks okay. For the rechargeable battery, demand is strong, especially for Tesla. We are in the phase to expand production. So there were no need for the loss -- impairment loss. There is corporate-wide impairment loss, that is the Matsushita electric work, the delisting of it. There are some remaining, but in relation to the corona impact or COVID-19, our accountants and advisers have conducted the analysis and a lot of stress. So FY '21, due to the COVID-19, the new impairment loss is not something that we expect.

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Operator [23]

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From Mizuho, Mr. Nakane, please.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [24]

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This is Nakane from Mizuho. Just one question. My second question was actually asked by Mr. Ono, so I'm just going to focus on one. April sales, I guess, YoY was almost flat, which I think is good news. But Mechatronics and U.S. Solutions -- Energy Solutions, many other businesses. And I think -- I guess that's good, thanks to 5G. But for Automotive Solutions, I think some suffered. So on a gross basis, by segment, can you explain what the results were in April and what the momentum is for May?

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Unidentified Company Representative, [25]

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Thank you. You're right. There are positives and negatives. But overall, the driver was 5G-related business, as you mentioned. Electronic devices, materials and SP-Cap, POSCAP are the conductive capacitor. These were the drivers. Basically, in China, recovery has already taken place. So for Automotive Solutions, there's still some challenge. But for communication business and for the storage data centers, for energy storage, very strong demand there. So in IS, Industrial Solutions, even in post-COVID-19 phase, or even with the impact of COVID-19, we believe that the results were positive, that's it.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [26]

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For Automotive Solutions, how much was the negative? Do you expect a recovery going forward?

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Unidentified Company Representative, [27]

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Are you asking about March in IS?

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [28]

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No, April. Well, the Automotive Solutions alone, how bad was it, is my question. In other words, how much was positive other than Automotive Solutions?

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Unidentified Company Representative, [29]

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Very hard to say. What I explained earlier was the overall situation. But in terms of more specifics, they are negatives and positives, you're correct. But the -- we're still trying to identify what the quantitative impact is.

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Operator [30]

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Thank you very much. Our time is up. So we'd like to end the briefing session now. Thank you very much for joining us today. Thank you very much. Please make sure to turn off your phone. Thank you.