Earnings call: Pansasonic sees growth in sales and profit, maintains full-year forecast

In the latest earnings call for the third quarter of fiscal year 2024, Panasonic (OTC:PCRFY) reported an overall increase in sales and profits, with automotive sales and currency translation contributing significantly to the growth. The adjusted operating profit saw a rise, mainly driven by the lifestyle, automotive, and energy sectors. Net profit also increased, bolstered by better finance income and expenses, alongside significantly improved operating cash flows due to reduced inventories. Despite the positive performance, the company faces uncertainties for the next fiscal year, including the impact of the U.S. Inflation Reduction Act and potential changes in the political landscape.

Key Takeaways

• Sales and profits increased, with automotive sales and currency translation being key growth drivers.
• Adjusted operating profit rose, led by lifestyle, automotive, and energy sectors.
• Net profit climbed due to improved finance income and expenses, and operating cash flows increased significantly.
• Full-year forecast for the group remains unchanged, despite revisions in segment sales and profit forecasts.
• The partnership with Apollo for Panasonic Automotive Systems and the sale of Panasonic Automotive Systems are not included in the forecast.
• The U.S. Inflation Reduction Act's impact on financial results and forecasts was discussed.
• The company plans to use proceeds from the sale of certain businesses for growth areas.
• Uncertainties for next year's forecast include the U.S. Inflation Reduction Act and the possibility of Trump's presidency.
• Strong performance in electric construction materials, with successful actions like price revisions and hikes.
• The Automotive Battery business may see a new plant, with discussions ongoing with multiple customers.
• The target of 200 gigawatts by FY 2031 is flexible, dependent on customer demand and the electric vehicle market.
• A potential provision for energy sector quality issues in Q4 could amount to billions of yen.
• Plans to reduce CapEx by JPY 40 billion due to supply chain disruptions, with no change in the Kansas factory construction plan.
• The company is monitoring anode supply concerns and has partnerships for alternative materials.

Company Outlook

• The full-year forecast for the group remains steady, with no major changes expected.
• The next fiscal year's topline is projected to remain flat or slightly increase, with potential growth driven by generative AI-related business and the Kansas factory startup.

Bearish Highlights

• There are uncertainties regarding the impact of the U.S. Inflation Reduction Act and the possibility of Trump's presidency on next year's forecast.
• Reduced sales in Poland have impacted the demand for air to water products.
• The company faces challenges in the HVAC Air to Water business but remains committed to environmental issues.

Bullish Highlights

• The company reported strong business in electric construction materials in Japan and overseas markets like Turkey and Vietnam.
• The Automotive Battery business is considering a new plant to meet customer needs.
• The company aims to increase market share in France, the UK, and Germany for air to water products.

Misses

• TV sales have been lower than expected.
• Quality issues in the energy sector may lead to a significant provision in Q4.
• The company has postponed some investment plans due to confusion in distribution logistics and supply chain disruptions.

Q&A Highlights

• The impact of UL irregularities on financial results is incorporated in the industry forecast, with no material impact expected on this fiscal year's results.
• The Nevada plant's utilization rate is influenced by tax credits, but production for Model 3 and Model Y will continue.
• The company is closely monitoring automotive battery market discussions and regulatory compliance for graphite procurement.

As the company navigates through the uncertainties and prepares for potential challenges, it continues to focus on growth areas and strategic partnerships to strengthen its market position.

InvestingPro Insights

In light of the recent earnings call, it's important to consider the financial health and market position of Panasonic Corporation (PCRFY), as reflected by the latest metrics from InvestingPro. PCRFY is currently trading at a low earnings multiple, with a P/E Ratio of 7.28 and an adjusted P/E Ratio for the last twelve months as of Q2 2024 at 7.32. This could indicate that the stock is potentially undervalued compared to earnings, which aligns with the company's report of increased sales and profits.

Furthermore, Panasonic has shown a commitment to returning value to shareholders, maintaining dividend payments for 32 consecutive years, an InvestingPro Tip that speaks to its financial stability and reliability as an investment. This is a key consideration for investors looking for consistent income streams.

From a growth perspective, the company's revenue growth for the last twelve months as of Q2 2024 stands at 6.51%, despite a slight quarterly dip of -0.02%. This growth is supported by a robust gross profit margin of 28.08%, showcasing the company's ability to maintain profitability amidst various market challenges.

For investors seeking more in-depth analysis and additional InvestingPro Tips, a subscription to InvestingPro is now on a special New Year sale with a discount of up to 50%. Use coupon code SFY24 to get an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 to get an additional 10% off a 1-year InvestingPro+ subscription. With the subscription, investors can access a total of 5 InvestingPro Tips for Panasonic Corporation, providing a comprehensive understanding of the company's market position and potential investment opportunities.

Full transcript - Panasonic Corp PK (PCRFY) Q3 2024:

Panasonic Representative: I would like to go over the Consolidated Financial Results for the Third Quarter of Fiscal 2024. These are the highlights. Regarding the U.S. Inflation Reduction Act or IRA, the accounting treatment is the same as in the first and second quarters. Proposed rules for section 45X was released last December, but there are no major changes to the contents. Next, the results for the third quarter. Those sales and profit increased, even excluding the IRA impact. Overall sales increased due to increased sales in Automotive and currency translation, despite lower sales in Lifestyle and Industry. Adjusted operating profit increased overall on higher profit and Lifestyle, Automotive and Energy, despite lower profit in Connect and Industry. Net profit increased mainly on above factors, as well as improved finance, income and expenses. Operating cash flows for nine months significantly increased year-on-year, due mainly to reduced inventories. For the full year forecast, the Group-wide forecast remains unchanged. The partnership with Apollo regarding Panasonic Automotive Systems business announced in November is not factored into our forecast. By segment, the forecasts are revised, reflecting changes in each business environment. In Automotive, both sales and profit are revised upward, while in Lifestyle, both sales and profit are revised downward. In Connect and Energy, sales are revised upward. First, the impact of the U.S. IRA tax credit on our financial results and forecast. The accounting treatment and items remain unchanged since the first quarter. The amount recorded for the third quarter and full year forecast are shown on this slide. The full year forecast remains unchanged. Now, the details of the consolidated financial results for the third quarter. For the consolidated financial results, both sales and profit increased. Overall sales increased to JPY2,180.9 billion or 1% year-on-year. Sales in real terms on constant currency decreased slightly by 2%. Adjusted OP increased by JPY40.2 billion to JPY126.1 billion and operating profit increased by JPY43.1 billion to JPY127.5 billion. Profit before income taxes and net profit both increased due mainly to the above factors and an improvement in finance income and expenses on higher interest rates. Even excluding the IRA impact, profit increased as shown on the right. Results by segment are as shown here. Variance analysis for sales and OP are shown in later slides. First, sales analysis by segment. Lifestyle sales decreased overall due to lower sales in HVAC and weakening demand in Europe, lower sales in consumer electronics, mainly in Asia and China, and the partial deconsolidation of the China business, despite continued steady sales for cold chain in North America and electrical construction materials. Automotive sales increased on recovery in automobile production of our customers. Connect sales increased in Avionics, Gemba Solutions and Blue Yonder, despite lower sales in process automation. Industry sales decreased mainly due to market downturn for factory automation in China and ICT infrastructure, despite higher sales for capacitors for green vehicles and capacitors and multi-layer circuit board materials for generative AI servers. In Energy, In-vehicle sales decreased due to lower production and sales at Japan factory, despite favorable sales with stronger demand and improved productivity in North American factory. Industrial and Consumer sales were up driven by energy storage systems for data sensors for -- with expanding generative AI market, despite weakness in batteries for consumer products and power equipment. In Other/Eliminations & Adjustments, lower sales for Entertainment & Communication and Housing due to deteriorating market conditions. Next, adjusted OP analysis by segment. Lifestyle profit increased mainly on higher sales in cold chain and electrical construction materials, and recording of temporary expenses in the previous fiscal year, despite lower sales in HVAC and consumer electronics. Automotive profit increased due mainly to higher sales price revisions to counter higher parts and materials prices and rationalization efforts. This, despite increased fixed costs and persisting impact of higher parts and materials prices. Connect profit decreased due mainly to lower sales in process automation and higher strategic investment of Blue Yonder, despite higher sales in Avionics and Gemba Solutions. Industry profit decreased due mainly to lower sales affected by the market downturn in energy. In-vehicle profit increased due to higher sales in the North American factory and improved balance between raw materials and selling price, despite lower sales at Japan factory and higher tax costs or higher fixed costs. Industrial consumer profit increased due to higher sales of energy storage systems for data sensors, with expanding generative AI, despite lower sales of batteries for consumer products and power equipment. Lifestyle results by divisional company. Sales and profit decreased for living appliances and solutions and HVAC, while sales and profit increased for cold change solutions and electric works. Next, operating profit analysis by factor. From the left, decreased sales in real terms pushed down profit by JPY7.4 billion. The increase in fixed costs pushed down profit by JPY7.5 billion, due mainly to investment in energy for business growth and impact of inflation. Impact of price hikes in raw materials and logistics turned to a positive of JPY2.4 billion. Positive effect of price revisions and rationalization totaled JPY43.2 billion, as other individual factors, impact of IRA was positive JPY22 billion and negative impact of decreased profit of Blue Yonder was JPY6.8 billion. The breakdown is shown on the bottom right. The effect of exchange rates was positive JPY4.3 billion, mainly in Industry and Energy. As a result, adjusted OP was up JPY40.2 billion and OP was up JPY43.1 billion. This slide shows cash flows and cash positions for nine months in FY 2024. On the left, operating cash flow was JPY598.3 billion, with a significant increase year-on-year, due mainly to reduced inventories. Going forward, we aim to further generate operating cash flow by improving profitability and reducing inventories and Others. On the right, net cash was negative of JPY502.8 billion, improved from the end of FY 2023. Next is the consolidated financial forecast for FY 2024. This shows the consolidated financial forecast. The Group-wide forecast remains unchanged from October 30, 2023. However, the forecast by segment are revised, reflecting changes in business environment. Details are explained from the next slides. This shows the four-year forecast revision by segment. Let me explain the major factors for the revision. In Lifestyle, both sales and profit are revised downward, due mainly to deteriorating market conditions for HVAC business, mainly in Air to Water Heat Pumps in Europe and the downtown in market conditions for consumer electronics in overseas markets, despite steady sales of the cold chain and electrical construction materials. In Automotive, both sales and profit are revised upward, due mainly to gradual recovery trend in automobile production and higher sales. In Connect, sales are revised upward, due mainly to capturing demand for aircraft, as well as for PCs, both in Japan and overseas. Profit remains unchanged by factoring in the risks of the delayed market recovery in China. In Industry, the forecast remains unchanged. In Energy, sales is revised upward. For In-vehicle sales, the sales is revised upward, due to higher sales at North America factory. However, the profit is revised downward. The sales price increase and compensation claims to our customers, such as for utilization, were lower than expected, concerning the Japan factory’s reduced self-production for high end EVs in North America. Additionally, there were increased expenses related to the manufacturing process issues in the past. For industrial and consumer, both sales and profit were revised upward, due to increasing sales of energy storage systems for data centers. This shows the forecast for Lifestyle segment by divisional company. I’ll explain the major factors for the revision. For living appliances and solutions company, both sales and profit are revised downward, due to the following major factors. For overseas, sales decreasing in China, and for Japan, deteriorating market conditions and delayed share improvement of the products, including washing machines. For HVAC, both sales and profit are revised downward, due to significantly deteriorating demand for Air to Water in Europe, as well as lower than expected sales of room air conditioners and indoor air quality or IAQ businesses. For cold chain solutions company, electric works company, both sales and profit are revised upward, due to steady sales trends. Next is the situation of HVAC system for business in Europe. I’ll explain the changes from Q2. The upper chart shows our Europe, European sales trend on the right-hand side. Growth slowed down each quarter and turned to year-on-year decrease in Q3. The major factor is the changes in Air to Water business environment shown in the middle. As of October 2023, we assumed an improved market condition by second half, considering the restart of the subsidies and gas price trends. However, neither factor pushed up the demand, and the total annual demand is expected to decrease significantly year-on-year. Accordingly, our sales forecast is revised downward. Although the current market conditions are challenging, given the ongoing transition to carbon neutrality in the society, this is a business area where we can expect long-term growth. We will continue our efforts in strengthening our business toward the future. As shown at the bottom, on February 1, 2024, we announced a capital and business alliance agreement with INNOVA, an Italian manufacturer. This company has a strength in cutting-edge product development and offering of customer value using IoT solutions. With this agreement, we aim to create unique value with IoT-based coordination and control devices for HVAC equipment, as well as with improved energy saving and comfort. Also, we aim to expand the customer value through sales expansion of products equipped with natural refrigerants and sales collaboration with our partners. Finally, some updates of the progress in our initiatives for three growth areas. In the Automotive Battery business, Energy signed an agreement to purchase silicon anode material with U.S.-based Sila Nanotechnologies Inc., aiming to strengthen supply chains in the U.S. FTA or free trade agreement countries. In the Supply Chain Management Software business, Blue Yonder completed the acquisition of U.K.-based Doddle, a leading technology company focused on returns management toward enhancing its end-to-end solutions. In the Air Quality and Air Conditioning business, as mentioned earlier, a capital and business alliance was signed with Italy-based INNOVA toward creating unique value. Currently, some businesses are affected by the changes in the business environment. However, we are continuing to take necessary actions toward medium- to long-term growth. We respond flexibly to the changes in the business environment and always continue to enhance our business competitiveness toward future growth. And with that, I’d like to end my presentation. Thank you for your attention.

A - Unidentified Company Representative: From Nikkei, Ando-san [ph], please.

Unidentified Analyst: Ando, from Nikkei, thank you for the presentation. First, my question is on Panasonic industry. In addition to the UL certifications, the ISO certifications have been suspended temporarily, as was announced today. I am sure you’re looking into the details of the impact, but what is the likely impact on your full year forecast? Is there a possibility of making the downward revision as a result of this incident?

Unidentified Company Representative: First, the UL irregularities have caused significant inconvenience to our customers and all the stakeholders. I’d like to take this opportunity to apologize for the inconvenience and the concerns raised. Let me answer your question. As of today, impact on our financial results, was your question? What we can estimate now, the amount, is already incorporated in the industry forecast that we disclosed today. And to most of our customers, we are directly explaining the situation and we have been accused significantly. The safety performance and Others of our products are explained fully to our customers. And regarding the actions going forward, with the consent of our customers, we will proceed with the shipment and the recruiting of the sales.

Unidentified Analyst: So as of now, what would be the impact on this fiscal year’s results?

Unidentified Company Representative: We currently do not expect material impact. Certain related costs have already been incorporated in our forecast. Was that helpful?

Unidentified Analyst: Yes. Thank you. My second question. Electric works, especially the electric construction materials are presenting a very strong positive. So regarding this strong business of this electric construction materials, what are the factors? Can you elaborate on that? Thank you.

Unidentified Company Representative: Electric works company in Japan. Lighting, fixtures, especially not for individual customers but for commercial facilities. That part of the business is proceeding very strongly. And overseas market where the company is focusing on in Turkey and in Vietnam, in those countries, the electric construction materials are enjoying strong business. Since the last fiscal year, various actions have been implemented and price revisions, price hikes, have been proceeding with the understanding and the consent of our customers and that has translated into a strong business. Was that helpful?

Unidentified Analyst: Yes. Thank you.

Operator: Let me move on to the next question. Umegaki-san from Toyo Keizai Shinko [ph].

Unidentified Analyst: Thank you. Umegaki speaking. I have two questions. First of all, about the sale of a PAS. What is the current status and through the sale, how would you use the proceeds? What is your plan if anything has been decided? And the second question is about the forecast for next year, without the PAS or PAS, the Lifestyle and Others, there are many segments which are suffering. So concerning IRA, there is a risk of Trump becoming the president again. So it’s very difficult to forecast. But what is your view? You can probably give us some guidance from the qualitative point of view.

Unidentified Company Representative: Yes. Already about the Automotive business, the agreement was done at the -- will be done at the end of March and we are proceeding with the negotiation at this moment. And steadily, the negotiation is progressing. And as for the, I mentioned that this is not factored into the business performance, reflecting that is something that we are still in the negotiation process, and again, the end of March is our target. So on the daily basis, we are discussing various things and try to finalize the agreement. So that’s about the progress of the Automotive. And also the proceeds, how would we use the proceeds from this? Well, it’s difficult to explain, but we need to look at the total capital allocation and we showed the growth areas, and so we basically believe that we’ll be using the proceeds for the growth areas. That is our view. So that’s about the Automotive question. The second point about the next fiscal year business performance. Internally, right now, we are discussing about the next fiscal year, so it’s difficult to say. But there are some businesses which might face difficulties from now onward, before talking about that, so agreement we are trying to finalize at the end of March, but as for Automotive, FY 2025, this business will remain under the consolidation. So actual closing, we have to, of course, go through the various screenings process. So the timeframe is that fiscal 2025 -- even in the fiscal 25, this business or company will remain under the consolidation. So that -- from the -- in terms of the difference from this fiscal year, some of the businesses which have been struggling, I think, that mostly have already hit the bottom. So in lifestyle, so consumer electronics and other businesses in Japan and Southeast Asia and China, the overall demand was lower than the year before. Whether it would become worse, I think that the plateau or slight increase is what we expect for these businesses. So especially in Japan, in our case, we usually suffer in the first half and in Q3, the washing machine, we struggled with the washing machine in Q3 as well. But starting with the fourth quarter, I think that we are starting to see the good, better signs. So, of course, we cannot be too optimistic for the next fiscal year, but we do not believe that this would be the negative factor. As for the Air to Water, as I explained in my presentation, as we faced in the past, up to fiscal 2023, it was doubling and starting with the fiscal 2024, it started to decline quickly. And the recovery probably will take about two years in our expectation. So next fiscal year, we expect a plateau or flat performance, or depending on the countries, there will be some differences. So flat or slight increase are something that we expect so that we can improve the performance. So in that sense, as of now, we do not see the profit to come down. We have already seen the declines until now. Concerning IRA, the presidential election will be done. So, of course, we cannot do anything about that. So the plant in Kansas, we are starting it up and construction has been starting up. So before IRA was announced, we already made the decision about it. So cost is already factored in and already we have a plant in the United States and the productivity of that plant is increasing. So we are working on that and then when IRA will be considered as an added -- additional factor.

Unidentified Analyst: Okay. Thank you very much for your details -- detailed explanation. That’s all.

Operator: We’ll move to the next person. Glen-san from Denka Shimbun [ph].

Unidentified Analyst: Again, from Denka Shimbun, thank you for this opportunity. I have two questions. First, this was asked by an earlier question about the HVAC, the Air to Water business in Europe is really impacting, and you did talk about various measures being implemented and you also commented that over a long-term, you regard this as a growth industry, growth business, still for the time being for next fiscal year, you expect flat. So as a Group, it is categorized as a growth industry. So I see a risk of being affected by the environment. So do you still consider this business as a growth business or are you having a second thought? That’s my first question. My second question, consumer electronics are not good, but Entertainment, the Pico TV digital camera, the situation in Japan and overseas, could you elaborate on that part of the business?

Unidentified Company Representative: Thank you for your question. The HVAC, Air to Water, subject to many factors, particularly the subsidy policies and programs. Yes, you are correct. In our business portfolio, the basic thinking has already been explained in our strategy briefing sessions. One is to contribute to resolving the global issues, which may sound rather grand, but environmental measures in other words. CO2 emissions, environmental burden to be reduced. Is that essential question for planet earth? I think is the important question. There might be some ups and downs along the way, but it’s not subject to policies, situations in each country. But since environment is a global issue, there is no change in our policy regarding this as a growth business. Having said that, since we are running business, we have to be mindful of the impact to the speed of the business execution. We have been announcing many measures in this area since last year, especially regarding the production increase, production expansion, either delay the start or to refrain from placing necessary orders. We are revisiting those aspects, but overall, over a long-term, we are to address the long-term issue. That’s the Air to Water business. That’s the answer to your first question. Second, Entertainment & Communication. In terms of sales, we have shown you the results. TV sets overall lower sales, rather challenging situation. In the meantime, digital still cameras and others with the traveling demand returning, the cameras for smartphones we thought would have an impact on the demand, but digital still camera is still being very appreciated by the consumers. So within the Media Entertainment, regarding the digital still cameras, that is doing well on the profit increasing trend as for TVs, a bit challenging. But towards the end of the second half of the fiscal year, we are seeing an improvement in the market share and collaboration with Amazon (NASDAQ:AMZN) has been announced in the CIS recently and so we are hoping that these will contribute to better results.

Unidentified Analyst: I see. Thank you.

Operator: We are running out of time for Q&A session for journalists, so we would only take one question per person. Nakamura-san from Asahi Newspaper.

Shiro Nakamura: This is Nakamura of Asahi Shimbun. Thank you very much. So according to the consolidated business results, the -- you’re managing the company based on the assumption that you’ll be revising the business portfolio and there was news about the Automotive System business. And should we expect some other examples like this in the near future?

Unidentified Company Representative: Well, whether we’ll be setting any other businesses in the near future or not, it’s difficult to answer. But the portfolio management, of course, is something that we’ll be working on and the various things are being studied. And about the Automotive Systems, right -- we made an announcement right after we announced the business performance. So when we can disclose any potential news, we will be doing so. So it’s not just the sale of any business, but consolidating the existing business and what will be the best portfolio management. As I said, the PAS portfolio management and also whether we are the best owner or not, we are studying and continuing our study based on that way of thinking.

Shiro Nakamura: Thank you very much.

Operator: We’re getting close to the Q&A session for journalists. So we’ll take only one question from the journalists. From Nikkei Asia, Sato-san, please.

Fumika Sato: Sato from Nikkei Asia. Can you hear me?

Unidentified Company Representative: Yes.

Fumika Sato: Thank you. I have a question on Automotive Battery or In-vehicle Battery. For FY 2024 new factory decision for North America is to be made, you said. The momentum for that decision, does that remain unchanged when the EV market itself is changing? I do not feel the speedy action on the part of your company. So is that speed the same or are you having a second thought? Are you thinking of making any revisions looking at the current situation?

Unidentified Company Representative: Thank you for your question. In FY 2031, 200 gigawatts was the target that we announced. The purpose is not to expand the production capacity. That is not the objective. We need to squarely respond to the customer needs. So the current situation is as follows. With multiple customers, we are talking about and we are studying the possibility of building the next plant. FY 2024 -- by the end of FY 2024, we were saying that we will be sharing any decisions that we make, but since they are counterparties and there are state governments and other stakeholders involved, so I cannot commit to making any announcements during FY 2024. So it’s not just about the capacity on our part, we have to respond to the needs of the customers. So that is the way we are addressing this question.

Fumika Sato: So FY 2031 plan, there is a possibility of that being revised?

Unidentified Company Representative: Yes. 200 gigawatts by FY 2031. We are not going to be bound by that. We’ll look at the demand on the part of the customers, as well as the situation of the EV, electric vehicle market. If we see the need, we will move towards that, and if we see that it is going to be pushed forward, we will respond accordingly. The overall direction remains unchanged. We are to make contribution through our In-vehicle Battery, the Automotive Batteries, but the actual timeframe might be adjusted.

Fumika Sato: Thank you for your very detailed response.

Operator: Thank you. That’s the end of the Q&A session for journalists. Now we’d like to take questions from institutional investors, as well as analysts. Again, we are not taking questions in English. Okazaki-san from Nomura Securities.

Shigeki Okazaki: Thank you very much. First question is about Automotive Batteries or about Energy In-vehicle Batteries. So about the -- there was a mention of the cost in relation to the manufacturing issues. I think that the other batteries did well this time, for example, data centers. So why did it improve in Q3 quickly? Could you talk about the prospect? The second question is that, it’s probably related to the Industry, but these days, the Japanese car manufacturers’ production level could go down. So your -- what would be the impact on your outlook for Q4?

Unidentified Company Representative: Thank you. First of all, about Energies, the issues with the manufacturing, the production that we had in the past in the manufacturing process, for actual use of the batteries, there would be no concern about burning or generating smoke. But in terms of the capacity, the capacity could go down, and concerning that already, the countermeasures have been taken. So with the current batteries, no issues will occur. But the provision for the quality issue toward the Q4, we are making preparation for that. So because of it, the U.S. business itself is doing well and going well and for production manufacturing in Japan, for the high-end EVs, it’s not doing well. But aside from that, this has to do with the past inventories related to the manufacturing issues. So it will not be leading to any accidents, burning or anything. So gradually, already, the countermeasures to make improvements have been taken. Also, about the Automotive and Industry or more recent trend, still it’s difficult to forecast any impact and because of that, Q3 Automotive, already we have exceeded the yearly forecast. But as for Q4, there has been some results from the higher prices from Q3. So for Q4, the lower profit is forecast. So the -- we are trying to see probably to absorb the fluctuation of the demand, but again, we are not really seeing the clear impact of that and I hope that answers your question.

Shigeki Okazaki: Thank you. But provision in Energy, that would be billions of yens?

Unidentified Company Representative: Yes. That’s about right.

Shigeki Okazaki: Thank you.

Operator: Thank you. Hirakawa-san from BoA Securities.

Mikio Hirakawa: Thank you. Hirakawa-san from BoA Securities. I have two questions. First, on Lifestyle, year-on-year, Q3 profitability improved. So 2.1% margin expected for Q4 seems rather conservative given the situation last year. So why is it that you are taking such conservative view regarding the profit margin for Q4? My second question on Energy. You said underachievement. I understand that the profit with Tesla (NASDAQ:TSLA) was already established. So this underachievement, is it going to have an impact going forward about the compensation?

Unidentified Company Representative: Yes. For Q4, as you can see in one of the slides, that’s slide 29, yes, slide 29, and slide 30 as well. I think that’s a better slide to use. Air to Water for HVAC, until last year we saw an increase, and therefore, a profit decrease expected for this fiscal year. So given that, and also for Q3, this profit increase, as was explained earlier, recorded the one-time expenses in the Q3 of last fiscal year and that explains for the year-on-year difference, which is shown under China and Northeast Asia company. So there is a difference, year-on-year difference resulting from what happened the last fiscal year. Now, consumer electronics, we do expect improvement this year for cold chain and electric works, about the same as in the previous year and that is impacting our profit margin expectation. So this has to do with the quarterly characteristics, a difference between production and sales, the seasonal lag. Q3 appears stronger than reality, I think, would be another way to put it. That’s for your first question. The second question, regarding Energy, the underachievement of what was guaranteed, especially related to the startups, the compensation claims were underachieved and this was largely affected by IRA. And the vehicle models, the higher end models above the price of $80,000, which would include some of the high end models of Tesla is having an effect, because the consumers or the buyers of such high end models cannot benefit from the 30D Section and that part is lagging behind in terms of compensation claims.

Mikio Hirakawa: I see. Thank you.

Operator: Next, Nishimura-san from Okasan Securities.

Mika Nishimura: Thank you very much for this opportunity. So for the next fiscal year outlook, I’d like to know some information. I have two questions related to that. First question, you mentioned that you already hit the bottom, so there are no additional negative news. But when you look at the overall topline, the drivers as of now, what are the expected drivers, if you can? Second question is on page nine of your material, Operating Profit Analysis, the rationalization. When you look at the next fiscal year, the fixed cost and the rationalization, what would be the balance between the two? The price revisions, I think, for this fiscal year and last fiscal year, there were quite a bit of price revisions. So including that factor, what would be the balance between that and the rationalization?

Unidentified Company Representative: Well, for the next year’s topline, the driver for this fiscal year, the Industrial or Industry business in China and Energy were affected, and the factory automation was affected as well. And among them, the factory automation, the labor saving investment might be tough next year. But from Q3, what is becoming clear is the generative AI business or generative AI-related business that will be improving further next year. Also, the major growing business that we can expect, Energy, we increased the productivity and increased the utilization or operation rate, and Avionics and Others is still continuing to be very strong. So starting up of the Kansas factory is at the end of fiscal 2025 and fiscal 2026. So during those years, topline will see the major increase. So this could be a major driver. And other than that, for the next fiscal year, the major increase of the topline probably is not something that we expect. So the flat to slight increase is what we expect. But the situations are changing and we are still coming up with the plan. So this is just one of the possibilities. And as for the fixed cost and the price revisions and rationalization, this is mainly in Japan, with the rising wages and inflation, the virtual cycle is emerging. So in the fixed cost, the labor cost is occurring already in this fiscal year. So with the price revisions and rationalizations, we are offsetting that. So the price revisions, the very rapid price revisions, whether we expect that to happen in the future, depending on the industries, there are differences. Of course, I cannot give you the specific industries, but the way of thinking is that with the inflation and wage hikes, that is to boost the Japanese society and economy. If we go along with it, the appropriate price revision is necessary, and as a manufacturer, we want to provide a good value for the customers. So for example, Palm in shaver, it’s like a -- just like an earphone case, the five blades, it’s a shaver or a washing machine for a single home and so those are the products that would provide a clear values to people. So this is something that we have been trying to do. So with the new sales scheme, so that’s something that we’d like to continue.

Mika Nishimura: Thank you.

Operator: Next from JPMorgan (NYSE:JPM), Ayata-san [ph], please.

Unidentified Analyst: Thank you. Ayata from JPMorgan. Air to Water in Europe. I understand that the current situation is expected to continue into next fiscal year. Can you elaborate on country-to-country situation? I thought that this is going to be expanded to larger markets. So if you can share with us some details by different countries, including the inventory level. That’s my first question. Second question is on Energy. I’m looking at the supplementary materials. It looks like the CapEx has been reduced by JPY40 billion or so for this fiscal year and some of the Model 3, I think, is going to be reduced in relation to IRA. So in terms of the utilization rate at Kansas, it’s going to be substituted by Model Y. So is it going to be the same in terms of utilization rate?

Unidentified Company Representative: Thank you. Air to Water situation by country. I’m afraid I can’t give you the details, but the major impacts came from Poland, where we enjoy lion’s share. The reduced sales there had a major impact. Of course, it’s not just in Poland. The overall demand is turning to a smaller demand, lower demand. So in countries where we have a big demand and we want to focus on is France and U.K, and in terms of the size of the market, Germany would be part of that. On February 1st, INNOVA and Panasonic assigned the alliance, business alliance, particularly for a coil fan indoor design ability and ventilation functions. By acquiring that capability, we would like to expand our business to even greater markets in Europe. So in terms of the market share itself, while the overall demand -- market demand is expected to remain flat for some time, but in terms of the market share of Panasonic, we are hoping to increase. That’s the answer to your first question. Secondly, regarding the Energy investment, CapEx, JPY40 billion deduction. Regarding Energy, it’s not that we cancelled projects. Rather, when we put together the investment plans, the distribution logistics were in confusion, supply chain was in confusion, and therefore, we were making the CapEx plans ahead of the overall decisions. But with the situation returning to normal, we now feel that some could be postponed, could wait for some time. So that is translating to those differences. Regarding the construction plan of the Kansas factory, no, no change there. It is proceeding very steadily and the CapEx decrease includes the Air to Water portion as well. The business alliance that I just mentioned will proceed and the expansion and renovation of the facilities will be implemented as necessary. But when it comes to the timing, we would be very flexible and all of that resulted in the different figure for the capex overall.

Unidentified Analyst: A follow-up question. Regarding the utilization rate of Nevada plant and the forecast?

Unidentified Company Representative: Right. There is a counterparty to this. So 30D, the tax credit for the consumers, that had an impact. As far as we are concerned, Model 3 and Model Y batteries, they’re not excluded the way we see it, and therefore, the utilization rates of the lines producing batteries for those models will continue.

Unidentified Analyst: I see. Thank you.

Operator: We are running out of time, but we will take one question from one person. From Morgan Stanley (NYSE:MS) MUFG, we have Mr. Ono.

Masahiro Ono: Thank you. This is Ono speaking. Thank you very much. About the Automotive batteries, what is being discussed in the market, I’d like to have some comment. On page 18, the anode, this is a discussion about anode. So graphite production, more than 60% comes from China, and I think, that they are increasing the exposure to North America. So concerning that, including the timetable, we don’t have to be concerned about this. And about the silicon material, for the cylindrical, it’s the metal. So the capacity could come down. So maybe it’s better to go with the prismatic. But I think that the next year, you’re working and Sila, you have a great alliance with those companies and so that the material which would not expand is something that you already have. But from your perspective, if you can make a comment on this point?

Unidentified Company Representative: Well, concerning that, yes, we are monitoring this closely so that we can be proactive, we can take measures quickly. And as Ono-san said, you’re right, and Nexeon U.K. and also Sila Nanotechnologies, we already announced the alliance, and we are taking the measures steadily. And as for graphite, in terms of rules, the potential impact is from January 25 from China, the graphite from China, and the use of that, if we are still using it, that will violate the regulation of the use to minerals. So it’s still a year ahead. So concerning that, we are taking measures, countermeasures. So as for the graphite procurement itself, there is export regulation restriction from China, which is already going on. So with the authorities, we are working closely with them so that we are taking necessary measures. So as for the suppliers, for the procurement, we want to make sure that we watch what would happen to the regulation, so that we can take necessary measures. So that’s what we have been doing.

Masahiro Ono: Thank you very much.

Operator: Thank you. With that, we conclude the earnings briefing for Q3 fiscal 2024. Thank you very much for your participation.

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