Hitachi Ltd

TSE:6501

Earnings Call Transcript 2021-Q3

[Operator]

The time has come to start the web conference on Q3 fiscal 2020 earnings for the media for Hitachi Limited. Thank you very much for attending this web conference despite your busy schedules. We have the information available on the IR site as well as the news release site of Hitachi Limited for your reference.

Let me introduce the speakers to you. Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO of Hitachi Limited; Tomomi Kato, General Manager of the Financial Strategy division; Yasuo Hirano, Executive General Manager of the Corporate Brand and Communications division.

The outline presentation will be provided by Mr. Kawamura. We'll be switching the screen. Mr. Kawamura, please?

[Yoshihiko Kawamura, executive]

[Interpreted] Thank you very much for attending this web conference despite your busy schedules. We will be announcing the Q3 fiscal year 2020 earnings. In the third wave of COVID-19, we are still able to maintain our business. We appreciate this very much. I would like to express my respect to the respective people who have made this possible.

Now I would like to start off with the basic outline. There are 3 characteristics. Regarding the budget that we have formulated at the beginning of fiscal year, it was very conservative because of COVID-19. And it seems that we are likely to achieve this budget or even exceed this. So we have achieved this level by controlling the COVID-19 impact.

Regarding the environment, this is the first and foremost challenge. And we have been able to capture significant volume of environmental business. We are able to report this to you today. Compared to fiscal year 2019, PL earnings have declined. However, on the cash flow basis, we have had a very good record. This is something that is noteworthy. So this is the basic background in which I would like to present the performance.

Please refer to Page 3. Here, I have outlined what I have just mentioned as well as the major topics for the third quarter. There are 4 key messages here. First is regarding digital transformation. We have been able to capture the wave of the digital transformation. In particular, IT segment is driving Hitachi's performance overall, as mentioned here. In terms of operating income, for the third quarter, we have reached a ratio of 13.5%. Very high level has been achieved in this regard.

And number two, promoting business expansion in China. This is something I would like to refer to later. The Chinese economy is recovering. We are able to capture the recovery of the business in China, especially in the area of elevators, the business is very strong for us. As for the Automotive Systems business, we are experiencing a market recovery in China, expanding our business.

Thirdly, this is regarding the environmental and social value that I mentioned earlier. The environmental theme is very important for the Hitachi's business. We have been able to achieve good results. As seen here, Hitachi Astemo, which has been created, this integration with the Honda Parts company, we have been promoting the xEV-related business. In the summer of --, we have acquired the Hitachi ABB Power Grids, and this is referred to as HAPG. And more than half of the business we are capturing here is environmental related. In the third quarter, backlog is more than 29 billion or 30 billion. And therefore, this is 1 quarter, and it is achieving very good levels for Q3 orders at $2.9 billion. The various applications, such as touchless, is being introduced, which we are capturing as our business as well.

As I mentioned at the outset, cash flow remains very strong. This is one of the major characteristics of the third quarter's performance.

Let me go into the numbers now. Please refer to Page 4.

Here, we are looking at the revenues as well as operating profit ratio. Please refer to the graph on the left-hand side. This -- the curve shows the adjusted operating income ratio. And the revenues is shown by the black bar and the revenues for the fiscal '19 as well as fiscal '20 revenues shown here, we are showing the numbers for Q1 to Q3. Now from Q2 to Q3, the dark gray should be noted. JPY 2.1 trillion has grown to JPY 2.2 trillion.

COVID-19 is having a significant impact. However, having entered the third quarter, revenues have continued to grow. And as for the curve, looking at the operating income ratio, the red is for the -- this fiscal year '20 and the gray curve is fiscal year '19. And you can see in the gray is the ratio has been recovering from 3.7%, 5.7% to 6.1%.

And you can see that on the right-hand side, the significant growth segments are shown here. Looking at the IT segment, for the record, we have shown here 13.5%, which is the highest record ever. For Smart Life segment below, Automotive business as well as in terms of consumer electronics, we have seen household appliances have seen growth.

Please refer to the next page. This is showing the Lumada business. The major topics for the third quarter is shown in the highlight here. We have been able to launch the Alliance program with various partners: Amazon AWS, Cisco, Google and others. Big names, partners have been captured in our Alliance program. We are working to commence promotional sales with these alliance partners. We believe that this will further accelerate our business going forward.

Please look at the numbers now. On the right-hand side, in the middle is the bar graph showing the fiscal year '19 and the fiscal year '20 forecast. Revenues are shown here. JPY 1.037 trillion is -- and this year's forecast is JPY 1.1 trillion. So we are assuming that we will see growth of 6%. Let's look at the details. Red is the core business of Lumada, which is directly linked to the IT business. Gray is the related business of Lumada. Using IT, power grids as well as railway business, those business will also be captured. That is reflected here in gray.

The core business is growing very strongly. The gray area has slowed down because of the COVID-19. However, we believe it will continue to grow going forward. Specific details are shown on the right-hand side, that is mobility, industry and energy. We are able to offer applications and products for the market. Therefore, we believe that the related business will continue to contribute to growth.

Please look at Page 6. Further details are shown here in terms of Q3 topics. In January, Hitachi Automotive Systems and the 3 Honda Parts Company, Keihin, Showa and Nissin Kogyo have commenced operation. The 4 companies strength will be brought to bear going forward. As mentioned here, we will be promoting technologies in electrification, autonomous driving and connected cars. We will continue to make investments in this area.

The second is relating to home appliances services. Arcelik and Hitachi Global Life Solutions agreed on the joint venture. Arcelik will have the 60% stake, and we will have a 40% stake. Some people may know of Arcelik. This is the home appliance of the largest conglomerate in Turkey. We will be working together with Arcelik to grow the Hitachi business in terms of home appliances going forward.

The environmental business is growing. We will be integrating the Hitachi ABB Power Grids business. This will become an important arm for Hitachi in the environment-related business.

In addition to Norway's substation that we have already announced, we will also have our first Germany-Norway HVDC interconnection. And testing has already begun. In terms of railway, Eversholt Rail has signed an agreement with us to develop intercity battery hybrid train. These are all environment-related business.

Regarding social value, on the other hand, various solutions are being offered. First, the remote touchless products are being provided. The contactless elevator solution is being provided. And these businesses are receiving high valuation because of the current environment. Human-flow visualization technology is being demonstrated at the Tokyo Dome. The season will begin now. We believe that we can continue to develop new solutions in this area going forward. So those are the major topics.

Now please refer to Page 8. This page shows the highlights of the results for the third quarter as well as the Q1 to Q3 numbers are presented here. What is noteworthy is at the very top. We have sold Hitachi Chemical and power grids business has also been included. So there were some changes in our portfolio. Now the dark gray is the revenues and light gray is showing the adjusted operating income. Left-hand side is the Q3 for fiscal '20, and the right-hand side is for the Q3 fiscal year '20, and adjusted operating income ratio is shown in the curve.

Looking at the revenues for Q3, we have seen growth in revenues from JPY 2.1 trillion to JPY 2.2 trillion. For operating income, it has declined, but revenues have continued to increase. On the right-hand side, this is the performance for Q1 to Q3 on a cumulative basis.

Looking at the right-hand side, Q1-Q3 in fiscal year '20 is shown here. It was JPY 316.9 billion in terms of operating income. Compared to JPY 445.6 billion of last year, we have reached a level of 70%. Therefore, we are level similar to last year or similar at the level of the plan or even above. Please refer to EBIT, JPY 503.5 billion. Year-on-year basis has increased by JPY 448.5 billion, and EBITDA is JPY 855.4 billion. Year-on-year basis increased by JPY 482.3 billion.

Cash flows from operating activities at JPY 426.4 billion, an increase of JPY 118.5 billion year-on-year. Cash flow remains very strong for us.

Page 9. Here, we have given the breakdown between the 5 sectors and listed subsidiaries. Regarding the 5 sectors, as mentioned in the highlights, increase in revenues, but a decrease in profit. Power grids business has contributed significantly for the increase in revenues. We have 2 listed subsidiaries, construction machinery as well as metals. They have been impacted by COVID-19. So they have decreasing revenues as well as earnings.

In terms of revenues, for 5 sectors, JPY 4.8 trillion, for the listed subsidiaries, JPY 1.1 trillion. Below, comparing year-on-year basis of 5 sectors, 108% or higher than 100%, for the listed subsidiaries 60%.

Adjusted operating income is also reflecting this trend. For the 5 sectors, JPY 308 billion and listed subsidiaries, JPY 8.9 billion. Adjusted operating income ratio, we will also reflect this, for 5 sectors, 6.3% and listed subsidiaries, 0.8%. Therefore, the impact was very significant for the listed subsidiaries.

Now looking at the EBIT ratio. Five sectors at 10.8%, and listed subsidiaries 2.2% negative. Therefore, there as the contract is very strong between the 5 sectors and listed subsidiaries because listed subsidiaries are focused on the upstream business, so this is inevitable.

Page 9 -- Page 10, from the left to right, we are comparing the Q1 to Q3 fiscal '19 to Q1 to Q3 fiscal '20 revenues above and adjusted operating income below. The changes are shown in this waterfall chart. Please look at the upper side, looking at revenues, starting at JPY 6.3 trillion. This is the starting point. And to the right, JPY 5.979 trillion. And the changes are shown from the left to right, divestiture of Hitachi Chemical has declined. Hitachi ABB Power Grids increased, foreign exchange adjustment as well as others. And as a result, we ended at JPY 5.979 trillion.

Looking at the adjusted operating income, similar trends can be seen. Divestiture of Hitachi Chemical, increase by the Hitachi ABB Power Grids on the right-hand side. Others, including the various adjustments, minus JPY 90.3 billion, ending at JPY 316.9 billion.

Page 11. This table shows the financial position and cash flows. What is noteworthy here is the balance sheet. The total assets should be noted. The gray shaded area shows the situation as of December 31, 2020. In terms of total assets, last year, total assets was below JPY 10 trillion. But now as of the third quarter, we have been able to increase assets above JPY 10 trillion, JPY 10.94 trillion. This is because of the ABB acquisition that is being reflected. And you can see, interest-bearing debt has increased to JPY 2.6 trillion, and the increase is on the right-hand side.

We have acquired ABB Power Grids financed by borrowing. That is the reason why we have seen an increase in this line. The ratio should also be noted, what I have already explained is reflected. The ratio was very strong at 0.35x. But because of the financing using debt, it has deteriorated to 0.71x temporarily. But in near future, we should revert back to a level of 0.5x shortly.

Cash flow is shown below. Cash flow position has been very strong. Cash flows from operating activities compared to the previous year increased by JPY 118.5 billion and cash flows from operating activities was JPY 426.4 billion. We had major investment and therefore, cash flow from investing activities was negative. But looking at the core free cash flow, excluding the M&A, it was JPY 181.7 million, which is an increase of JPY 174.2 billion. Once again, I'd like to emphasize that cash flow remains very strong.

So that was the 3 months third quarter and the first third quarter cumulative results. Next, from Page 13, let me explain the full year forecast for fiscal year 2020. Please turn to Page 13.

The same diagram is shown here. Left side is the revenues and right side is the adjusted operating income. Left side, revenues. The light gray is last year and dark gray is this year. As you can see, revenue is down. But as you can see on the right side, the operating income is JPY 420 billion. It is a decline year-on-year. But in October, we announced JPY 400 billion. So after 3 months, we now improved this by JPY 20 billion. So it's both decline in revenues and operating income. But the adjusted operating income is now up from JPY 400 billion to JPY 420 billion.

Now the cash items on the right side. Second from the top, EBIT, JPY 680 billion in October. This is up by JPY 94 billion compared to previous forecast. And the net income is JPY 370 billion, which is JPY 70 billion up from the previous forecast. This is the record high number. This net income is record high.

EBITDA is JPY 1.174 trillion. This is plus JPY 121 billion compared to the previous forecast. And cash flow from operating activities, as I mentioned earlier, is up by JPY 50 billion, JPY 550 billion. So to repeat myself, cash flow is very strong.

Next, Page 14, please. Here, once again, let me explain the forecast by the 5 sectors and the listed subsidiaries. The trend is similar to the 3-quarter cumulative numbers. So the center part, the 5 sectors. From the top, revenues, JPY 6.780 trillion and listed subsidiaries, JPY 1.52 billion. And year-on-year level, ratio is around the same as the earlier numbers, so 107% and 62%, respectively. In total, consolidated revenue is JPY 8.300 trillion. This is 95% year-on-year. And adjusted operating income, JPY 391 billion and JPY 29 billion, and the total is JPY 420 billion. EBIT JPY 699 billion and minus JPY 19 billion. So total is JPY 680 billion. EBIT ratio is 10.3% and minus 1.3%, total 8.2%. And so the bottom part, net income is total JPY 370 billion. This is our forecast.

Next, Page 15, please. So here, let me explain Hitachi Astemo. We integrated and this is the number we are announcing for the first time. For this Hitachi Astemo, our plan is as follows: this table on the far left, you can see the previous forecast. This is excluding the integration impact, Hitachi Automotive Systems numbers. And in the center, you can see the integration impact and the forecast Hitachi Astemo numbers. And to the right, you can see the acquisition-related amortization of intangibles. And on the far right, you can see the net total.

Revenues before the integration forecast was JPY 749 billion. And of course, the business increases with integration. So including the integration impact, it is JPY 974 billion and the total JPY 974 billion. Adjusted operating income before the integration, JPY 22 billion. This increases to JPY 32 billion.

On the other hand, EBIT. In others, you can see minus JPY 27 billion. This is the impairment. Hitachi Automotive. We had some partial impairment in the factory plants. So total EBITDA is JPY 52 billion on the far right because of the amortization of intangible of JPY 7 billion, and EBITDA ratio, 5.3%.

On the far left, you can see the -- without the integration impact, 8.1%, and it's lower than this. But this is because of the impairment. It's down to 5.3% because of the impairment. So from next fiscal year onward, there will not be this big impairment. So we think this will improve to 10%. So please understand this is a one-off level, one-off figure.

Next, Page 16, please. So the fiscal year '19 revenue all the way to the right side. Like I explained, in the third quarter, similar trend can be seen here. So the divestiture of Hitachi Chemical negative. And then power grids is added. That's a positive. And then Astemo integration impact in January and the foreign exchange adjustment and others on far right, JPY 8.3 trillion.

Adjusted operating income. Similarly, you can see the trend. JPY 661.8 billion all the way to JPY 420 billion this year.

Page 17. This fiscal year, we had large asset ins and outs. So on the far right, you can see JPY 420 billion. From the left, JPY 420 billion to JPY 370 billion on the right, this shows the changes. The business reorganization profit, you can see the description in small letters, Hitachi Chemical. And then in medical modality, the diagnostic imaging-related business will be transferred. So that's an impact.

And Agility Trains, the European train companies, part of this East stocks, the business is going well. So we sold part of it. So this is plus JPY 435 billion. Next, Hitachi Capital, impairment loss of Hitachi Capital stock and others, this is negative JPY 30 billion. And Hitachi Metal and Automotive Systems business, this is the impairment loss negative JPY 60 billion. And to the right, you can see this leads to JPY 370 billion. So this is the fiscal year 2020 full year forecast.

And let me just touch on the Appendix, too. Page 19, please. IT segment, the center one of the adjusted operating income. Left side, 2-bar graphs is the first to third quarter cumulative last year and this year. And the right one is the full year last year and this year, 11.8%. So the operating income ratio is very strong. JPY 232 billion operating income. And at the bottom, you can see the reasons or factors of income decrease -- increase, decrease. The new application is being developed, and project management is being reinforced. So profitability is improving, thanks to that.

Next, Page 20, please, Energy segment. The center part again, FY '19 and FY '20 in the center, the dark gray, JPY 43.7 billion. This is power grids acquisition result. On the bottom, you can see minus JPY 71.8 billion. This is the related expenses. This is the amortization of the intangibles. So the total is minus JPY 14 billion.

Industry segment wise, on the center, adjusted operating income. In the beginning of the year, the industry controlled -- the entire industry controlled the investment, but now we're seeing a recovery. So the income ratio is now up to 5%.

Next, Page 22, please. Mobility segment. There are 2 main points here, elevators and escalator business and the rail business. Dark gray is the elevator and escalator business build system -- building systems. We are capturing the recovery in China. So on the far right, FY '20, we are recovering to JPY 63 billion. On the other hand, railway system light gray, the production hub is in Europe, which is heavily impacted by COVID-19. And so we have a long list of the order, but we have to manufacture to turn this log into cash. Overall, this is a one-off event. So we are not particularly concerned about it.

Next, 23, Life -- Smart Life segment. We see some strong characteristics here. Dark gray is the home appliance, from JPY 23 billion to JPY 32 billion this year. In response to COVID-19, people are spending more time at home, so they're replacing home appliances. So we captured such demand and grew strongly. And light gray, this is high-tech measurement equipment, and we think this is also due to COVID-19. It's a slight decline, but we -- this is constantly contributing to our profit.

Next, Page 24, Hitachi Construction Machinery. As mentioned at the outset, it was heavily impacted by COVID-19. So adjusted operating income in the center, last year was JPY 75.5 billion. This year, JPY 39 billion, and operating income ratio is 5.1%. Profit declined sharply.

On Page 25, Hitachi Metals. The financial results was already announced, so I think you know. The adjusted operating income in the middle last year was JPY 14.3 billion. This year, it's negative JPY 10 billion. This is because of the impairment treatment, and we -- it's unavoidable. But the materials business is the centerpiece, and therefore, it's heavily impacted.

Page 26 and 27 is by segment. So please take a look at it later.

And lastly, Page 28. This is the revenues by market. So in a clockwise manner, North America, Europe, China, Japan, ASEAN, India and others. North America, in the circle, you can see the ratio between last year and this year, negative 8%. So it's not fully recovered. Europe is plus 5%. It's an increase. As you see on the bottom, power grids was a positive factor. So it's a plus. China is plus 8%. This is that we captured the recovery in China. Japan is difficult. Compared to last year, minus 11%. And ASEAN India is also difficult. On the other hand, other areas, plus 19%. So this was areas where we -- Middle East and Africa, where we were not particularly strong in the past, is now growing with ABB. So this reflects the world economy now.

As you see at the bottom, overseas revenue ratio is now 53% -- up to 53%.

This concludes my explanation. Thank you very much.

[Operator]

We would now like to proceed to the Q&A session. Those of you with questions, please use the Raise Hand mark below. [Operator Instructions] Ihara-san, please?

[Toshihiro Ihara]

[Interpreted] I have 2 questions. First question is regarding Lumada referring to Page 5. For overseas sales, what is the ratio of overseas sales? And please give us a breakdown between core and related business? Within core, what kind of services have been strong? Please elaborate.

Regarding the partner program, how many partners you have today in the Alliance program? Solution hub service, I think that is going to be included in core. What is the current level? And what is the contribution made in terms of increased revenues?

Regarding Lumada revenues, '21 goal of JPY 1.6 trillion. And I think for next fiscal year, the target is similar. Do you think it can be achieved through M&A? North America, in such regions, what is the direction that you're going to be pursuing? Is it just to increase revenues or rather to provide best solutions in answering to the questions or the problems by customers. Is that the case? Are you going to bring to bag your strength in manufacturing? Furthermore, do you have -- if you have a very significant client base, you're going to be focused on AI, such as in the case of Malaysia. Please elaborate further. That's my first question.

[Yoshihiko Kawamura, executive]

[Interpreted] Regarding the Lumada breakdown, Mr. Kato will provide details. Regarding North America, I would like to elaborate further.

First of all, regarding overseas results, for this fiscal year, we have not disclosed the number. So let me give you the number for fiscal year 2019, for core business is 30%, related 50% overall, 40%. Basically, for this fiscal year, the ratio is unlikely to change this Q.

Regarding North America, nothing has been decided yet. And there is no progress made. But in the past several years, we are trying to look for candidate partners and dialogue is taking place. So all options are open in negotiating today.

For Lumada's related business, how the core business can be linked to related business is the major challenge. We have to make sure that we can establish a relationship to bridge this gap in various areas. In various sectors, we are now looking for the various companies and engaging in dialogue. We will continue this process going forward. But nothing has been decided yet. This is a process that is still ongoing.

[Toshihiro Ihara]

[Interpreted] Now Tokunaga-san as well as CEO of Vantara, are they going to be involved?

[Yoshihiko Kawamura, executive]

[Interpreted] Yes, I think that is the correct understanding.

[Toshihiro Ihara]

[Interpreted] Regarding environmental value, decarbonization is being promoted inclusively of the value chain, 50% decline in 2030 and by '50 decrease by 80% has been proposed. Are you going to front-load these targets or review your target by '30? Inclusive of supply chain, you're going to be carbon neutral, perhaps? What are the activities taking place in terms of target? In order to achieve your target, will capital expenditures as well as R&D required? What is the current level that is being spent? Is there -- are there any initiatives that have been decided in this area?

Now in the trend of decarbonization, renewable energy, the usage visualization is becoming more important. What kind of revenues can you expect in this area? What kind of expectations do you have? What kind of inquiries are you receiving? Please elaborate further. And if possible, give us a quantitative response.

[Yoshihiko Kawamura, executive]

[Interpreted] The points you have made are areas that we are working very hard today. We will have a new division in charge of the environment-related business, and we'll have the executive officers in charge of this area as well.

So what kind of investment we are going to make and the return expected has not been outlined in terms of schedule going forward. But as I have already mentioned, this is first and foremost important management challenge for us. Therefore, we will not only reduce CO2 emissions within the company, but we will work with customers to reduce emissions further. So this will be enacted both internal and external.

In this wider context, best measures will be considered. We have not changed the schedule currently. But in the new organization, we will deal with the environmental issues appropriately. And this could lead to a review of the targets going forward. But I don't have the numbers to present to you regarding the specific questions that you have asked today.

[Toshihiro Ihara]

[Interpreted] Mr. Dormer, is he going to lead this effort?

[Yoshihiko Kawamura, executive]

[Interpreted] Yes. That is a correct understanding.

[Yasuo Hirano, executive]

I have also some supplementary information regarding the numbers. We are considering the numbers regarding carbon-neutral investment that is being considered today. But in terms of substance, energy saving investments will be made, renewable energies will be introduced and certificate will also be acquired as well. So I think the investment will be several tens of billions per year. And details will be worked out going forward.

I'm sorry, to go back, but going back to Ihara-san's question regarding the Lumada Alliance program, the number of partners was asked. Currently, we have 24 companies with which we have a partner program. And within 1 year, we want to increase that to 100.

[Operator]

[Operator Instructions]

[Unknown Attendee]

[Interpreted] This is related to the earlier question. So IT and Lumada is very strong, you said. Since the outcome or outbreak of COVID, it's been a year. Are you seeing some changes on the demand side? Any concrete products or solutions you're seeing COVID impact on? And if you look back on 1 year, in Japan, the environmental awareness is changing, I think. So do you see any new solution opportunities? Or you see a trend, the change in the current? So that's my first question.

[Yoshihiko Kawamura, executive]

[Interpreted] The first IT-related part. New solutions are now emerging. And we are dealing with, for example, we work from home, so how to do the attendance management, working our management of the work-from-home staffs and remote work, those who are in the field site, the construction progress and the attendance ratio, this can be -- this information can be shared remotely, and now IT is utilized with work from home, and so security becomes an issue. And so the certification, authentication is done remotely.

So these COVID-related new applications are emerging. And so we are launching them one after another. [ ATO ] instead of touching the hand, there's a touchless panel being introduced.

Next on the environmental side, as mentioned earlier, the solutions are, for example, Lumada, there are more than 1,000 use cases. We have more than 1,000 applications. So CO2 monitoring application is one of them. So those will be deployed more broadly going forward.

Kato would like to add some information on Lumada.

[Tomomi Kato, executive]

[Interpreted] Page 5, we mentioned that the 3-quarter cumulative, Lumada has a growth of 3%. Our first quarter was minus 2%, but third quarter alone grew by 12%. And so this was a big growth, of which IT segment was a big growth driver. So we think we are enjoying a tailwind here.

[Unknown Attendee]

[Interpreted] So the record-high net income, you said, on Page 17, Hitachi Chemical, is it because of Hitachi Chemical reconsolidation? Or are there any other factors you are enjoying this record-high net income this year?

[Yoshihiko Kawamura, executive]

[Interpreted] So as I explained in the material, the 2 large asset divestiture, the Chemical, Hitachi Chemical and the -- in medical, those 2 contributed. That's more than JPY 200 billion in net income.

[Unknown Attendee]

[Interpreted] I'm sorry, this is not to do with the financial results, but Hitachi Metals announced the other day. In 2018, in Hitachi Chemicals, the group-wide inspection took place, I believe. So the inspection of the system, this practice continued, but you could not find it. And so what is your view on this fact?

[Yoshihiko Kawamura, executive]

[Interpreted] This problem with Hitachi Metals is very unfortunate, and we regret, and we feel very sorry about this. Now Hitachi Metals is a listed company, and they are run independently. So under President Nishiyama, the new structure, we are confident that this will go back to normal.

This is the third party, independent party's investigation report that was released last week. And so we will deal with the customers and the regulatory authorities. So under President Nishiyama, we expect things will go back to normal. So we are very regret -- we regret this, and we are very sorry.

[Unknown Attendee]

[Interpreted] On the other hand, in the mass media, it says that the divestiture preparation is underway. So is there any information you can share with us at this point?

[Yoshihiko Kawamura, executive]

[Interpreted] There's nothing we can share with you at this point. Hitachi Metals is now exploring various opportunities. And so at the right timing, Hitachi Metals will come up with a proposal, and we will scrutinize and look at this proposal very deeply. There's nothing that's been decided at this point.

[Operator]

We have many hands up, but in the interest of time, the next question will be the last one. [indiscernible] san, please? [Operator Instructions]

[Unknown Attendee]

[Interpreted] Hitachi ABB Power Grids is what I would like to ask question about. The profit target '24, EBIT ratio of 12% is the target by '24. What is the possibility of being able to achieve this target? The order backlog is around JPY 1 trillion. What is -- what has happened after 6 months? Do you think that profit target can be met? On their negative assets, did you find any negative assets? What is the near-term forecast with the impact of COVID? What are the positive and negative? Are you being able to steward this successfully? Please elaborate further.

[Yoshihiko Kawamura, executive]

[Interpreted] Let me talk about the overall situation, and Kato-san will discuss the specific numbers. So far, the numbers -- target remains intact, and we will continue to achieve this target. HAPG, regarding this business, it has 4 segments, basically. The first is the transformer business, the substation business, and second is the high-voltage D.C. for gas. And third is the integration in designing the overall system. And what we want to grow is the area of automation and -- utilizing Lumada. However, this is only accounting for 10%. We hope to grow this business significantly going forward.

Now there are green shoots. The management could become automatically. On the ground, this is the general tone in society. We would like to leverage this to grow the business. We have a bias significant on transformer. And the grid automating, where it will be transferred? And let me ask Kato-san to give you the numbers.

[Tomomi Kato, executive]

[Interpreted] Regarding the backlog, on Page 3, this is USD 12 billion, and that is an increase of 5%. We have 4 divisions, and they are all showing growth. The HVDC as well as transformers are also included.

[Unknown Attendee]

[Interpreted] It seems that there is no negative factors. Is that correct understanding?

[Yoshihiko Kawamura, executive]

[Interpreted] We have not received any report about negative factors, so your understanding is correct.

[Operator]

I'm sorry that we were not able to have everyone ask questions, but the time has come to bring this meeting to a close. We'll now like to close the web conference on the Q3 fiscal year 2020 earnings for the media. Thank you very much for your attendance.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]