Hitachi Ltd

TSE:6501

Earnings Call Transcript 2020-Q1

[Unknown Executive]

I'd like to start the meeting. The speakers are Mr. Mitsuaki Nishiyama, SVP and Executive Officer, CFO; and Tomomi Kato, the General Manager for Financial Strategy Division; and Yasuo Hirano, the General Manager for Corporate Brand & Communications Division. I would like to ask Mr. Nishiyama to start.

[Mitsuaki Nishiyama, executive]

Please refer to Page 5, 1-2. This is the consolidated statement of profit and loss. The middle column is first quarter for fiscal year-end 2019. Revenues was JPY 2.0325 trillion, which was 6% decline year-over-year. IT segment saw increase, but for other segments had declining revenues, Hitachi Metals as well as Hitachi Chemicals. In terms of semiconductors as well as Automotive Systems had market decline.

Now in terms of the adjusted operating income came in at JPY 124.3 billion, which is 16% decline year-over-year. IT segment, Mobility and Life segment had increased in operating income but market has been impacted. Construction Machinery as well as Hitachi Chemicals as well as Hitachi Metals were impacted.

In terms of EBIT, JPY 182.5 billion, which is an increase of JPY 2 billion year-over-year. In the last year, first quarter, Kokusai Electric proceeds have fallen off. On the other hand, the Railway's Agility Trains West partial sale of stock appreciated have been boosted and therefore profit increase. For EBIT, we had the highest ever for the first quarter.

At the very bottom, we have the net income attributable to Hitachi Ltd. stockholders, which is net income JPY 120.3 billion, which was JPY 15 billion increase or increased by 14%. And this was also our highest record ever.

In terms of net income, I would like to give you additional information. Please refer to Page 21. Now this is the supplementary information of the consolidated statement of profit or loss. Five sectors total as well as listed subsidiaries total are presented. They are separated in this way.

According to this, in terms of adjusted operating income for 5 sectors was JPY 74.6 billion or 6%. In terms of the margin -- adjusted operating margin, which was also the highest ever.

For the business subsidiaries, JPY 49.7 billion was the adjusted operating income and that is a decline of a JPY 26 billion year-over-year, which was a significant decline.

So for 5 sectors total, we saw an increase in income. For the net income for the 5 sectors total was JPY 103.8 billion. For the listed subsidiaries was JPY 16.4 billion. So for the 5 sectors, JPY 103.8 billion was the highest ever record as well.

Going then to the original slide, please refer to Page 6. This is looking at the waterfall chart. Left-hand side is showing the revenues increase. There was the impact of reorganization as a result of impact of selling sales, which is Hitachi Kokusai Electric, the impact was JPY 77 billion. For the Automotive Systems, Clarion business has been sold. The impact thereof was a decline of JPY 77 billion all together. Foreign exchange impact was minus JPY 25 billion. For U.S. dollars, there was a positive impact, but for euro as well as Chinese renminbi was impacted by the stronger yen. That is the reason why there is a negative impact of JPY 25 billion in terms of foreign exchange. Others was JPY 31.3 billion decline.

Right-hand side is the adjusted operating income. The JPY 5 billion negative was the impact of reorganization; foreign exchange impact, minus JPY 2.5 billion; and others impact was JPY 9.2 billion negative. In addition to this, that's JPY 131.3 billion or 6.5% and we have also increased investment for growth to the tune of JPY 7 billion. Therefore, the operating income was JPY 124.3 billion or a 6.1% impact.

Looking at the next page, revenues by market will be explained. To the right is year-over-year number: for Japan, 98%; Outside Japan, 90% was recorded. Total was 94%, which is a 6% decline. Although it is not written here, I would like to mention that Kokusai Electric and Automotive Systems business sale impact -- reorganization impact. If we exclude that, it's 101% for Japan, overseas is 94% instead of 90% for Outside Japan. So Japanese market was very strong but Outside Japan, our revenues, even if we exclude the reorganization impact, there was a decline.

China was 90%. Automotive Systems was 67%. This is the impact of Clarion. Even if we exclude that, it's 81% or a decline of 19% was recorded. Metals, 79% and Construction Machinery was 82% so that's 90% overall. For ASEAN, India and other areas, 81% was the number year-over-year. Hitachi High-Technologies, 88%; Hitachi Chemicals, 88%, Hitachi Construction Machinery, 87% and Kokusai Electric sales has been reflected here as well.

Beyond this, for North America was 94%. Clarion business was sold, and if we exclude that, it is 100%.

Europe, 95%, which has been -- 95%; and other areas, 91%. The reorganization impact excluded, it means that Europe would be 96%; other areas, 95%.

Please refer to the next page, which is 1-5. And the total assets was JPY 9.7327 trillion increased by JPY 106.1 billion. What is noteworthy here is that IFRS #16 lease accounting change. Therefore beginning of the term, JPY 220 billion impact at the beginning and JPY 202 billion for interest-bearing debt. So both sides of the balance sheet increased accordingly. However, the receivables collection made improvement.

Now regarding CCC, it was 66.4 days.

And Hitachi stockholders' equity ratio, 33.8%. D/E ratio, 0.31x have been maintained.

Cash flow is shown below. Cash flows from operating activities, JPY 78.8 billion, that is a decline of JPY 55.4 billion year-over-year. In the last fiscal year, Energy sector impact was C and IEP, Railway is picked out, and as a result, cash flows from operating activities declined.

In terms of the cash flows from investing activities remained at similar levels of JPY 105.1 billion.

Free cash flow was minus JPY 26.2 billion, which is a decline of JPY 56.6 billion year-over-year.

1-6 1, I show -- I talk about the business segment performance. For IT segment, increased by 3% in terms of revenues. System integration expanded, and furthermore, the sales increase of storage and PC servers in Japan has led to 3% increase year-over-year. In line with this, adjusted operating income increased by JPY 5.1 billion. This is driven by the increase of strategic investment for expansion of digital solutions business, which was offset by increase in revenues leading to positive operating income. EBIT increased by JPY 13.6 billion. The gains by selling the land of former production bases had been posted in this period.

For Energy, the decrease in revenues due to the business transfer of power receiving and transforming facilities business for industry field and decrease of large-scale projects in Power Generation Solutions business led to the decline at 88% year-over-year. And the adjustment operating income declined by 0.8.

Next page is Industry. This is the industrial products sales decrease mainly sellware. In the U.S., sales declined. Sales increases in air conditioning system business for industry field was boosted, but we ended with a slight decline in terms of revenues at 99%. Adjusted operating income declined by JPY 0.4 billion because of decrease in revenues.

And Mobility at 99% or almost flat. There was an impact in terms of the foreign exchange for Railway Systems as well as buildings, but there was also a decrease in revenues in the U.K. market of Railway Systems business unit. IEP picked up in the U.K. and for domestic as well as Italian revenues increased, therefore it was almost flat in terms of revenues. For operating income, we posted improvement of JPY 2.2 billion. This is mainly driven by the Railway Systems, cost reduction led to profitability improvement. EBIT increased by JPY 26.3 billion. This includes gains by selling a part of Agility Trains West stocks.

Next is 1-8, Life -- or Smart life. In this segment, revenues were 86% year-over-year, which was the impact of divestitures on the Automotive Systems business. On the other hand, the adjusted operating income improved by JPY 2.8 billion. This is due to cost reduction in the home appliances business.

For Hitachi High-Technologies, the sales increase of semiconductor processing equipment in the U.S. was positive, but the sales decrease in liquid crystal display exposure systems was negative. The revenues was 93% and operating income declined by JPY 2.1 billion because of the declining revenues as well increasing R&D.

Next is Hitachi Construction Machinery was 98%, impact of foreign exchange. Adjusted operating income, minus JPY 4.6 billion was recorded mainly in terms of indirect expenses such as ramp-up costs and R&D.

Next is Hitachi Metals. Decrease in demand for automobiles, semiconductor and FA was negative. And impact of the business transfer of aluminum wheels business in the U.S. has had an impact. Year-over-year, revenues declined by 10% at 90%. Adjusted operating income was minus JPY 10.4 billion because of a decrease in revenues as well as reevaluation losses on inventories. A decline by JPY 10.4 billion in terms of the operating income.

Now Hitachi Chemical decreased in demand for semiconductor and automobiles had a significant impact at 92% in terms of revenues. Because of this, the decrease in operating income by JPY 4.2 billion year-over-year.

1-10, Others. Minus JPY 6.1 billion in terms of adjusted operating income, which is because of the deconsolidation of the Hitachi Kokusai Electric.

For Corporate Items & Eliminations, the EBIT has declined by JPY 20.1 billion and this is the absence of gains by selling Hitachi Kokusai Electric stock recorded in the previous fiscal year. That is the reason why EBIT has declined.

Overall, for social innovation, core business, IT to Life segments were -- have posted increase in profit, but the 4 listed subsidies were impacted by the market in a negative manner, therefore, significant declines were posted. Overall, operating profit declined.

1-11, topics, Page 14. This is the progress of Lumada business. Fiscal year 2019, central part, first quarter, Lumada business revenues is JPY 251 billion, which is 13% increase year-over-year. Lumada core business was a big jump of 34% year-over-year.

On the bottom half of the page, you can see some topics related to Lumada. Global expansion of Lumada Solutions, we rolled out a vehicle-sharing service for Thailand's logistics sector with Hitachi Transport System and also started a partnership with a U.S. company, Virtusa Corporation, to provide AI business solutions for financial field and combining expertise and advantages of Hitachi and Virtusa to develop new solutions.

Next is the expansion of co-creation business utilizing digital technology. We started proof of concept of a new digital ticketing solution for the public transportation operator in Italy. And we also received an order from TOA Oil for high-temperature parts management platform for gas turbines.

Next page, please. Continuation of topics. Progress of structural reforms in Automotive Systems business. Agreed to acquire Chassis Brakes International to create an industry leader in automotive safety solutions. We announced this the other day we will become the industry leader, and this is scheduled to be completed by the end of 2019.

And noncore business in Automotive Systems business, pallet business. We agreed to transfer shares issued by PALENET, which engages in rental business of cargo handling materials, pallets to Hitachi Transport System.

And in the Railway, we strengthened management base of Railway Systems, sold parts of shares of Agility Trains West additionally in April 2019.

And in Mobility sector, we are further expanding the global business. There are 3 orders that were gained: first, we received an order for delivery of 174 units of elevators, escalators and moving sidewalks for Thailand international airport and we received an order for the delivery of 106 units of elevators for large-scale office businesses in India and also an order from Italy for 14 high-speed train sets with Bombardier Transportation in June.

Next, 2-1. This is the outlook for fiscal year 2019. We announced this on April 26 and the forecast has remained unchanged. Revenues, JPY 9 trillion; and adjusted operating income, JPY 765 billion, 8.5%; and JPY 435 billion for net income attributable to Hitachi Ltd. stockholders. So the segment details have not changed from last forecast.

That concludes my explanation. Thank you.

[Unknown Executive]

We would now like to take questions.

[Unknown Executive]

[Operator Instructions]

[Unknown Analyst]

For the decline in revenues as well as earnings, what has been the impact of China? Please elaborate as much as possible which parts have been impacted. Please elaborate with the details, and what will be the outlook for China going forward?

[Mitsuaki Nishiyama, executive]

For China, there has been significant impact in the area of Hitachi Metals, have been significantly impacted and there has been significant declines.

In terms of sectors, Hitachi Metals as well as Hitachi Chemicals and other materials businesses have been impacted as well. Semiconductor, smart trains have been impacted. And Automotive Systems has been impacted significantly. A significant decline was experienced. For Hitachi Metals, so Automotives as well as semiconductors as well as FA, demand has declined.

For Hitachi Chemicals. By the same token, Automotive Systems, business declined.

And for Hitachi Construction Machinery, the renminbi impact was significant.

Especially for semiconductor business as well as for China, it is not just limited to China specifically, but the smartphones and semiconductors, Automotive Systems have been beset with very difficult market with declining demand.

The situation remains opaque. For semiconductor, we don't know when the market is going to recover. We have to watch the market very carefully. However, having said that, the market demand recovery is opaque, therefore, we must brace ourselves for a difficult market, reduce fixed costs as well as continue our restructuring so that profit can be secured.

[Unknown Analyst]

Further question regarding semiconductor. For Korea, this is going to be regulated. Going forward, there will be impact of government policy. The impact may be limited now but what is the outlook, and how is this going to impact your business?

[Mitsuaki Nishiyama, executive]

The direct impact is very limited. But the semiconductor customers' investment or CapEx, the timing thereof must be monitored very carefully.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

I have 2 main questions, first is in IT sector. In your full year forecast, you expect a profit decline but increase in profit in the first quarter. So where did you see a strong demand? And what is working, what is favorable now?

[Mitsuaki Nishiyama, executive]

System integration is increasing. Finance -- financial sectors, large business, large deals have completed. Large projects are almost complete. But overall, system integration demand is strong especially industrial and public sector, we see strong demand.

And another is in financials, fintech, AI demand is strong in these areas. Not just in IT, but also in the industrial sector, customer demand is strong especially in labor-saving and rationalization and utilizing of AI and fintech, we see strong demand there.

And among the SMEs, small- and medium-sized enterprises, labor savings or measures to cover the labor shortage, solutions to cover these challenges is very strong. We see strong demand.

So material-related is difficult due to market factors. But in the solutions business, we are enjoying a tailwind. BOJ issued the TANKAN, the outlook, on July 1. Software demand investment in manufacturing and nonmanufacturing, 12.9% increase is the survey result.

So our demand in IT and solutions, in IT sector, industrial sector, we see a strong demand. And in orders, excluding materials, the first quarter demand was strong. So we want to do a good job in the short-delivery timing business. Thank you very much.

[Unknown Analyst]

Your full year forecast and first quarter results, if you compare the two, do you think you are progressing in line with the plan? Are you overachieving or underachieving any particular sectors?

[Mitsuaki Nishiyama, executive]

In materials business, Hitachi Metals and Hitachi Chemicals, against our plan, about JPY 5 billion underachievement -- fell short by JPY 5 billion. In other 5 sectors, JPY 5 billion improvement. So in total, we are basically in line with the plan.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

Now relating to the prior question in relation to China, even if the situation remains very difficult, you said that you will be unwavering in terms of restructuring -- structure reform. What is the details -- what are the details?

[Mitsuaki Nishiyama, executive]

Regarding Hitachi Chemicals as well as Hitachi Metals, for these 2 companies, in fiscal year 2018 in the latter half, we knew that market was unfavorable. Therefore, we have been made to reduce fixed cost in terms of expenses as well as fixed cost reduction have been made. And low-profit business will go through structural reform efforts. Furthermore, this will continue in the first quarter. And the timing of recovery is still opaque, uncertain. Therefore, we will have to accelerate the structure reform as well as reduce fixed costs further, so then the appropriate measures can be taken.

[Unknown Analyst]

Further question. Regarding consumption tax increase slated for October, what is going to be the impact? You may not have that much B2C business, but what are the negative impacts of this?

[Mitsuaki Nishiyama, executive]

We don't think there is significant impact on our numbers yet. However, there will be surge before the consumption tax hike and there will be a decline thereafter. The macroeconomic environment will remain unchanged nevertheless. Therefore, high volatility business will be focused on reducing fixed cost. Where the market is weak, we will continue to make efforts to reduce fixed costs, so that when the market recovers, we should be able to generate better profits.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

I have 2 questions, one is about your CapEx. You earlier said about the China market. So in line with the market situation, will you adjust the CapEx? Do you have such plan?

[Mitsuaki Nishiyama, executive]

Hitachi Metals in fiscal '17 and '18, we had sizable CapEx. But looking at the current market, we will suppress or reduce where we need to. So we will try to prioritize our measures. So that is what we are planning on Hitachi Metals, reducing the fixed costs and expenses, but not only that, we will also plan for reviewing the CapEx in accordance with the market. And including all that, we will increase the fixed cost reduction.

[Unknown Analyst]

What about to Hitachi Ltd., I don't see any large CapEx in Hitachi Ltd.

[Mitsuaki Nishiyama, executive]

Delivery resource or the human labor costs, we are seeing a strong demand. So in Lumada business, SI business, we will increase the delivery resource.

[Unknown Analyst]

About your Smart Life sector. You earlier mentioned that you are promoting the structural reform in automotive parts. What about home appliances and the medical equipment, the operating profit was 2.7% in the first quarter. So how are you feeling about this and how do you think the progress is going?

[Mitsuaki Nishiyama, executive]

Automotive Systems, material costs meaning direct costs and the indirect cost fixed costs has been reduced. And we continued that in the first quarter and we will continue doing that going forward. As a result, Automotive Systems on Page 26, there is an appendix on Smart Life segment. So if you could take a look at that page, on a year-on-year basis, revenue is down. So operating income is down by JPY 300 million and this has the impact of the business divestiture. So in essence, practically, it is increase of profits. So our profitability is improving.

And in the Smart Life & Ecofriendly Systems business, this is the home appliances, we are continuing our fixed cost reduction. In addition to that, home appliances overall cost reduction is promoted. With that, we have an improvement of JPY 2.7 billion year-on-year. So that is contributing to the improvement of Smart Life segment.

[Unknown Executive]

Any other questions? Any questions?

[Unknown Analyst]

Regarding the Lumada business, I have the following question. For Japan and Outside Japan, what is the ratio in terms of revenues? How many use cases have you accumulated so far for 2019 outlook? What is the likely number?

[Mitsuaki Nishiyama, executive]

Regarding the Lumada business, overseas, it is accounting for only 10% currently outside of Japan. Most of the revenues are being generated in Japan domestic, 90% is accounted for by Japan. We are working in co-creation as well as PoC with customers and end multiplier effect can be expected.

For predictive diagnosis as well as maintenance are areas that we're very hopeful in terms of end multiplier effect, we believe that it can be deployed globally as well. But currently, revenues, 10% of revenues is accounted by overseas business but we have the intentions of expanding going forward.

In terms of use cases, we have accumulated around -- at the end of 2018, we had 650. Currently, we have 650 increased to 660. So that is the likelihood.

[Unknown Analyst]

In terms of 2019 forecast, which regions outside of Japan look promising?

[Mitsuaki Nishiyama, executive]

U.S., Asia look promising. Furthermore, for 2019 outlook, forecast is JPY 1.17 trillion. We believe that this can be increased further. Thank you.

[Unknown Executive]

Are there any other further questions? There seemed not. Then, this, we would like to bring to this meeting to a close. Thank you very much for your attendance today. Thank you.

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