Thank you very much for coming today, despite your very busy schedules. Let me now present the Q3 consolidated financial results for the fiscal 2020 ended December 31, 2019. This is a summary. Q3 sales decreased, however, adjusted operating profit was at the same level as the year before, due mainly to improved marginal profit ratio and reduced fixed costs. Operating profit and net profit increased, gained from business transfer and other factors offset restructuring expenses through execution of the business portfolio reform. For the full year, company-wide sales and profits are unchanged. Segment forecasts are partially biased, reflecting current management conditions and the effect of business portfolio reform. Now, let me give a summary of the Q3 financial results. This shows the Q3 consolidated financial results.
Overall sales decreased by JPY 163.6 billion to JPY 1,911.2 billion, due to such factors as the weak demand for capital investment and slowdown of the automobile market, mainly in China, impact of the consumption tax hike in Japan, along with the effect of exchange rates and special factors. Adjusted operating profit was JPY 95.3 billion, due to the improved marginal profit ratio and reduced fixed costs, despite lower sales and effect of exchange rates. Operating profit increased to JPY 100.4 billion. Net profit increased to JPY 77.2 billion, with improvements in income taxes. Next, I will explain the major increases and decreases of the sales and operating profit by segment. For appliances, sales decreased due mainly to lower sales of TVs and other products in Europe, as well as the impact of consumption tax hike in Japan.
However, profit increased due mainly to sales increase in home appliances and cost reduction efforts for TV. Life Solutions recorded the same level of sales as previous year, with sales increases for IAQ and housing-related businesses offsetting sales decreases in businesses such as lighting. However, the profit increased due to sales increase of housing-related businesses and rationalization efforts. For Connected Solutions, sales and profit decreased due to lower sales of mounting machines, impacted by the weak investment demand, mainly in China, and slowdown of automotive market conditions and other factors. For automotive, sales and profit increased for cylindrical batteries. However, overall sales and profit decreased due to lower sales of automotive solutions, mainly from the market slowdown and factors such as increased fixed costs related to prismatic batteries with the production start of high-capacity cells.
For Industrial Solutions, sales and profit decreased due to impacts such as market conditions in China, deteriorated supply-demand conditions of rechargeable batteries in China, and typhoon-affected Korea factory in Japan. Overall sales decreased by approximately 4% in real terms, excluding special factors. Sales decreased in all segments, in particular in appliances and in Industrial Solutions. Adjusted operating profit was the same level as the year before. Increases in appliances and Life Solutions, as well as factors such as cost reduction at the head office, offset the decreases in automotive and Industrial Solutions. Operating profit increased by JPY 2.8 billion, with contributions from improvements in other income and loss. Next, let's look at the results by segment. I will explain the details from the next slide. First, let's look at the appliances based on the consolidated production and sales. Overall sales decreased in real terms, excluding the forex effect.
However, both adjusted operating profit and operating profit increased. In heating and cooling solutions, sales increased but profit decreased. Room air conditioners showed a stable growth overseas, mainly in Asia and Europe. However, the mild winter led to sluggish sales in Japan, where the profitability is higher. In home appliances, sales and profit increased due to stable sales, mainly in refrigerators and personal care products, both in Japan and overseas. In smart life network, sales decreased due to the impact of the consumption tax hike in Japan, as well as sluggish sales of TVs and digital cameras, mainly in Europe. However, profit increased due mainly to stable growth in older TVs in Japan and global cost reduction efforts. In commercial refrigeration and food equipment, sales and profit decreased due to sluggish sales for showcases in Japan, as well as in North America. Let's look at the life solutions.
Sales were flat, while profit increased. In lighting, sales and profit decreased due to lower sales in Japan, Europe, and the U.S., despite the stable sales in India and Indonesia. In energy systems, overall sales and profit decreased due to sluggish results in solar business, despite increased profit for electrical construction materials, with stable sales of overseas wiring devices. In Panasonic Ecology Systems, sales and profit increased due to favorable sales in IAQ business, such as ventilation systems. In Panasonic Homes, sales and profit increased due mainly to growth in new construction orders.
Next, Connected Solutions. Overall sales and adjusted operating profit decreased, but operating profit increased due to the recording of the gain from security systems business transfer and other income and loss. In avionics, sales and profit increased due to sales growth in digital solutions business, including communication services and contents.
In process automation, sales and profit decreased due to lower sales of mounting machines caused by holdback investment associated with lower automobile sales and trade friction between the U.S. and China. In mobile solutions, sales and profit increased on favorable PC sales in Japan and North America due to growing replacement demand with the end of Windows 7 support. In PSSJ, sales decreased due to PC sales in Japan. However, profit slightly decreased due mainly to changes in sales mix. For automotive, sales and profit decreased. In automotive solutions, sales decreased despite the expansion of growth-expected products such as IVI, which could not offset the impact of lower sales from deteriorating Chinese automobile market conditions and product cycle trend. Adjusted operating profit decreased due mainly to lower sales. Development expenses to onboard charging system for orders received in Europe increased from the previous year.
However, they were in line with the revised forecast announced at the second quarter earnings briefing. A look at the overall development expenses for automotive solutions peaking in fiscal 2020 is unchanged. In automotive batteries, overall sales increased. Sales increased of cylindrical batteries from the investment effect of production expansion at the North America factory for Tesla exceeded sales decrease from Japan factory and prismatic batteries downturn in North America. Adjusted operating profit decreased overall. It increased for cylindrical batteries with profit from sales increase at the North America factory exceeding impact of sales decrease from the Japan factory, but it decreased for prismatic batteries due mainly to increased fixed costs with the production start of high-capacity cells at the Himeji factory.
The North America factory managed to turn profitable for the third quarter overall, exceeding our aim to become profitable on a monthly basis during the second half, as mentioned at the second quarter earnings briefing. Industrial Solutions sales and profit decreased. At the second quarter earnings briefing, we set our outlook for the China market as same level as the second half of fiscal 2019 amid uncertainties. For the third quarter, the company faced a severe business environment as a whole. While certain products seemed to bottom out, the automobile market slowdown mainly in China was more than expected. Sales and profit decreased for systems with sluggish sales such as in factory automation sensors and relays due to the weak investment demand continuing in China. Although industrial-use motors seemed to bottom out, deteriorated supply-demand conditions for rechargeable batteries in China also led to sales decrease.
Sales and profit decreased for devices due to lower sales of capacitors and other products, with the automobile market slowdown, as well as sales decrease of circuit board materials impacted by the typhoon-affected Korea factory in Japan. An impairment loss related to the decision on the semiconductor business transfer is incurred in other income and loss. This slide shows the situation for free cash flow. Due to strategic investments, free cash flow situation had been severe. However, during the nine months ended December 31, free cash flow was JPY 128.6 billion. While investments in the automotive prismatic battery business is to continue until the fourth quarter, free cash flow improved significantly year on year due mainly to inventory control and review of our investments. Next, full year 2020 forecast on a fiscal basis. The company-wide forecast remains unchanged. We are promoting structural reform factored in the full year forecast.
Segment forecasts are revised as shown on this slide, reflecting current management conditions and the effect of business portfolio reform. For Connected Solutions, adjusted operating profit is revised downward, reflecting the impact of the security systems business transfer. Operating profit is revised upward, with gain from business transfer recorded in other income and loss. For Industrial Solutions, sales and profit are revised downward, reflecting the automobile market slowdown and the deteriorated supply-demand conditions of rechargeable batteries, mainly in China. The impact of typhoon in Japan, decreased intellectual property income, and impairment loss of semiconductor business recorded in other income and loss. Elimination and adjustments is revised based on the nine months' results, such as the improved head office income expenses achieved through fixed cost reduction and improvement of elimination for intercompany profits due to reduced inventory.
The macro environment, such as China market conditions, remains unpredictable, but carefully monitoring the situation, we will continue our efforts to enhance management structure. This is the progress in our business portfolio reform. Changes after the second quarter briefing include resolution to establish a joint venture related to automotive prismatic battery business in April and the establishment of Prime Life Technologies as the joint venture related to town development in January. In addition, we announced in November of last year structural reforms in loss-making businesses such as semiconductors and LCD panel. During the current fiscal year, we continue to carry out the structural reforms in a top-down manner, and in the next fiscal year onward, we will accelerate such initiatives to overcome low profitability structure. Thank you for your kind attention.
Thank you, Okazaki from Nomura Securities. First question is about risk in China, if you can summarize that.
With the new coronavirus causing pneumonia, I'm sure that it's very difficult to predict, but as of now, the impact on the production and sales, what are the risks that you are assuming right now? The second question, this time for the prismatic battery, there was a press release. As much as you can explain, what would be the impact on your business results in the next fiscal year? Also, with this different scheme, how would that business be impacted? The transfer here says that it's about JPY 65 billion. What would be the impact in terms of the gains from the transfer of this business? Thank you very much.
Now, about the China risks about the coronavirus, concerning that, it's very difficult to assume. Based on the annual forecast, we did not, of course, include the risk due to this coronavirus.
Our utilization rate, for example, for today, it's February the 3rd, and we plan to start or resume the operation today, but right now, we plan to resume the operations on the 10th of February, so one week later. Our basic policy is to work with the government of China and the local governments in China. We would watch what would happen in coming days and make decisions accordingly. One week delay, I think we should be able to recover or manage this with using the different sites or alternate sites, but if it becomes longer, it might be difficult. Right now, it's difficult to assume anything. That is our understanding about this new coronavirus. As for the second question about the joint venture on the prismatic battery and what would be the impact on the next fiscal year and what happened this fiscal year.
After the 1st of April, this would be under the consolidation of Toyota. It is very difficult for me to talk about the numbers, but right now, for EVs, high-capacity batteries, we are currently trying to start up. The startup cost is being incurred at this moment. Maybe a little less than JPY 10 billion, that is the deficit cost for the startup that we assume. What would happen in the next fiscal year? This would be de-consolidated from our book, so it would be the company under equity method for us. Toyota is going to start up this company very quickly, so there will be some cost related to the startup. In terms of our business results, that would be the loss under the equity method, so it would be booked as other income and loss.
If the joint venture is in red, that would be 49%, and if it is in black or profitable, that 49% would be included in our business results. The IP royalty will be incurred from April, so that would be included in the adjusted operating profit. In terms of the numbers, specific numbers of the sales and profit, I cannot disclose, but that would be the IP royalty. JPY 65 billion, which we disclosed, I think when you calculate the details, you would find out, but due to the NDA, I cannot really mention the specific numbers. This is really after the 1st of April. In terms of the income or loss, it would be on the profit side or income side, and it would be the cash in for us.
That is something that I can say in a qualitative manner, but quantitatively, I cannot really mention any specific numbers. Thank you.
Next person, please. The second row from the window.
The third row from front. From JP Morgan, Ayako is my name. I have two questions. My first question is on the cylindrical batteries. Umeda, you said in your presentation the reduction in sales in Japan, and I am thinking of this in relation to Suminoe factory. The utilization rates of that plant, what is it this year and what about last year, last fiscal year? Model SX production is not likely to go up, so I wonder whether or not there is a risk of hurting the profitability going forward, or are you thinking of producing other types of rechargeable batteries as well? I will wait for the second question. Thank you.
Cylindrical rechargeable battery in Japan.
We have a Tesla business entity. For the Japanese operation, maybe about 10% of the total sales are for non-Tesla business. For the battery recharge storage, IC, and the heavy equipment, all produced in Suminoe plant, and that part is really hurting. Volume-wise, it's not large, so Model SX reduction in sales is having the greatest impact in retrospect. Between second quarter and the third quarter in our fiscal year, Model SX is recovering, and for Tesla, Model SX is a very important premium model, is what we're told. It is bottoming out, is the way we see it. We understand that Tesla is making various efforts to improve their business, so as far as the utilization rates of our facilities of that business is concerned, we expect recovery going forward somewhat. Now, currently, Model SX, for Model SX, we are not losing money. It is profitable.
That is the answer to your question. Thank you.
My second question is in relation to free cash flow shown on page 11. The operating cash flow, JPY 287.8 billion. In the Tanshin report, you are showing the breakdown, the depreciation, appreciation, other items in the third quarter, JPY 126 billion minus. I think the negative figure was large in the last fiscal year as well. Can you give us the detail of that negative figure, if possible? Free cash flow for next fiscal year onward with the portfolio management enhancement that is currently underway, what will be the cost associated with that? Should we expect that there will be the negative, in other words, outflow, or not?
The free cash flow question, I'm going to give the floor to Uemura to answer that question.
Your first question on free cash flow, the cash flow segment, especially the operating cash flow, others. I think you asked a question about that. This includes the short-term liquidity or the short-term debt, what we paid last fiscal year, FCPA-related return is reflected here. In addition, for this fiscal year, security business transfer portion, it is in the net income, which is included in the operating cash flow, so that negative is included. I hope that answers your question. How about next fiscal year onward, the portfolio management enhancement currently underway? I'm wondering if there are any impacts on cash flow. Should we expect net cash outflow, or would the impact on cash flow be almost negligible? Portfolio reform are not just negatives, the deductions.
In terms of the investment areas, we are keeping in mind the disciplined financing, financial management, and we are always watching the investment cash flow. The negative impacts of the portfolio reform, if there is any, it is not just for fiscal 2020, but for fiscal 2021 as well. We will continue with our business portfolio to eliminate loss-making business, non-profitable business. That is how we position fiscal year 2021. This will be in relation to profit and loss, but we do not believe that the impact is going to be that significant. Overall, general cash flow trend is JPY 100 billion investment exceeding the cash flow. JPY 850 billion has been the amount of investment. We are not managing the budget from that perspective anymore.
In terms of cash flow, way exceeding the depreciation expenses, we believe that that phase is now behind us, meaning that cash is to be generated going forward. At the same time, including mergers and acquisitions, if they are good business opportunities, we will be flexibly taking advantage of such opportunities. We are expecting to enter that phase.
Next question. Attention remaining in the third row.
Thank you, Ezawa from Citigroup Securities. Two questions. First, for the full-year forecast, page 13. Based upon the nine-month results vis-à-vis the original target, the profit was higher or lower in some of those areas. Could you elaborate? Also, the elimination and adjustment, the profit is revised. At the time of the midterm, the buffer, I think you stopped all the buffers that you expected. What was the reason for the upward revision for this?
Q4, having a certain buffer and compensating for this, is that something that you expect? That's my first question. Mr. Umeda, thank you.
When you look at different companies, their strengths and weaknesses, appliance and LS Life Solutions, after the increase of the consumption tax, there was an impact in terms of the or we focus on the profitability and try to narrow down some of the products, but we achieved a higher profit. It was not higher than expectation, but it was in line with the four-year forecast. In addition to that, in the industrial solutions, as I mentioned, the automotive or the cars are lower than the previous year, and it continues to do so. In Korea, there was an impact due to the disaster. There was an impact on the profit.
Because of these factors, this was negative, and we made a downward revision. What about the eliminations and adjustments? There is minus JPY 3 billion, which we expected as securities. This is shown here, and there are three factors. First is the head office. This is the global head office, including the different regions, and the reduction of the fixed cost was where we made progress. In comparison to the previous year, solar business was transferred mostly. Until then, we had the polysilicon long-term purchasing contract, and there was an evaluation loss, which was in the tens of billions of yen level, and that is gone now. In the original forecast, the inventory reduction was where we had some concerns. The inventory, the sales are down, but the absolute value of the inventory is down to the JPY 800 billion level.
What is happening is that on the consolidated basis as a group, when we have a remaining inventory, we try to eliminate under the elimination and adjustments. When there is a higher inventory, we try to eliminate it. If the inventories are down, we try to get back as a profit. We made good progress there, and as a result, the fixed cost reduction and we can expect the improvement of the elimination for the intercompany profits. That was also a factor behind the upward revision. One point of clarification. Industrial solutions, the downward revision is based upon the nine-month results, and the profit was lower by JPY 20 billion, and that was reflected. As for the elimination and adjustments, three points that you mentioned in terms of adjusted operating profit, you gave us three factors breaking down those upward trends.
Yes, polysilicon. The evaluation loss was considered, and also the fixed cost was reduced, and inventory was down. There was an improvement of the elimination for the intercompany profits. Now we have a good view on those, and because of this, we made these revisions. As for the IS, industrial solutions, we expected to have difficulties, but we were not sure, and we expected some recovery of the automotive, and we expected the same level as the previous year. Because of the restriction of NEV in China, we continued to see the stagnation of the EV. That became more conspicuous, and also there was a matter of a Korean plant. We were not sure what would be the impact at the time of the second quarter, and that was now discounted or included.
Just one quick point.
The previous person who asked the question asked about the prismatic battery, and after the deconsolidation, what would happen to the business? Now, aside from the Toyota Group, the prismatic batteries, you plan to sell some of the prismatic batteries buying from the JV. The size of the sales, of course, you will not be able to mention, but this business, is that going to be profitable or not so profitable? Could you tell us that?
Originally, our joint venture with Toyota, the spirit of partnership is that from Toyota's side, they wanted to expand the trend of the EV to all the car industry. As for the sales, the IP royalty that I mentioned, we will be getting that royalty fee. It is now deconsolidated, so that would be sales 100% profit.
Now, for Toyota, we are not booking the sales, but for others, we are currently discussing the accounting, so it is possible that we book the sales or not. The IP royalty fee would be the revenue that we can expect.
Next person, please. Yes. The gentleman in the front row. Thank you.
It is from SMBC Nikko Securities. I have two questions. First, a follow-up question on free cash flow. Inventory is being reduced quite a bit, so JPY 879 billion. I think there have been ups and downs so far. What is the current situation? In slide 11, free cash flow. For this fiscal year, what is the expected level of free cash flow? JPY 150 billion without the strategic investment, I think, has been the guidance you have been giving us. Is it going to be the same level?
For next fiscal year onward, with the portfolio reform, what will be the impact? Because there will be changes in the business portfolio, this JPY 150 billion benchmark, so to speak, would that still hold or not is the question. Inventory reduction. Year-on-year, JPY 225 billion reduction for Panasonic Homes. That is deconsolidated as of January 1. If you look closely, you will find that the inventory asset will be eliminated. That has been shifted, and that impacts a total of about JPY 120 billion, although this is a really detailed accounting treatment. Given the current situation, the inventory, days of inventory, not much change year-on-year. Usually, inventory would go up with the reduced sales, but we have been successful in managing the inventory turnover, but we need to reduce this further. That is the way I see it. Area-wise, any comment? Lighter, heavier?
It will be automotive currently. Especially the automobile market itself is reduced year-on-year, and I think that is resulting in a large reduction in sales. Therefore, we have not been able to really catch up on the inventory turnover in terms of days. About JPY 150 billion, that benchmark is what we are keeping in mind for next fiscal year onward. That is investment-related aspect, the investment itself. Conventionally, we have been making investment exceeding the depreciation and amortization, but that is going to change. Free cash flow-wise, it is going to improve. With portfolio reform, as was mentioned at the outset, it is not just deductions, but there are some positive impacts as well. While keeping in mind the disciplined financial management, we would like to prepare for necessary investment as well. Thank you.
My second question is on slide seven.
I think this relates a little bit to this earlier question about the Panasonic Homes' adjusted operating profit, Panasonic Homes. The note says the depreciation would not be recognized for assets held. Does this mean that it's a one-time effect?
I don't think we saw this in the first half. For Panasonic Homes, the establishment, after it's been resolved, it is being held for about a month or so. No depreciation. It's not going to have major impact, the material impact. It is going to become the equity method subsidiary, and that is going to take effect in January. Thank you. We are running out of time, but we can take one more question. A gentleman in the second row.
Oh, no, from Morgan Stanley. Thank you. Two questions, but maybe they can summarize into one.
About the structural reform expenses, you said JPY 60 billion was the plan. What is the progress? For this fiscal year, do you think you'll be able to complete it, or it will continue in the next fiscal year? That's my first point. Another point is that in May, new portfolio efforts were started, and we start to see some numbers. As CFO, Ms. Umeda, what kind of instructions are you giving to those business divisions as much as you can tell us? Thank you.
First, about the structural reform expenses, JPY 60 billion or a little more, we make sure that we do so. We have a list of menus, and many of them, we have been making progress. In the portfolio reform, we are starting to see the results.
Of course, we have to consider the different environments, so there might be something carried over for the next fiscal year. We will make sure that we make steady progress. It's possible that there might be some delays. There are things that we can quickly do, and there are things that we need to continue to do. In fiscal 2021, in addition to the non-profitable businesses, we'll try to make sure that we work on the low-profitability businesses. We'll continue these efforts. There are some projects which are going on, many of them, actually. When we can make an announcement, we would do so. Another point about the business divisions, the ROIC, if you look at ROIC. We compare against our peers, and we review quarterly, and we try to break away from the low-profitable businesses.
If we cannot do so, as I mentioned in a comment, there have been the top-down decisions. There will be top-down decisions. That is something that we decided, including the head of the companies at the highest executive level meeting. We make sure that we make good judgments, and we ask each business division to work hard to follow this. Thank you.