Toshiba Corp
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Toshiba Corp
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Ladies and gentlemen, thank you very much for coming to our presentation today.
Before we start, we would like to ask for your attention about the materials that we have distributed. The materials that we have distributed does include future forward-looking information. These pieces of information are not -- they're past facts and they're only forecasts and outlook that we have. And some of the information pieces are based on the assumption and study.
So now we would like to start the presentation of the earnings report of the second quarter 2018, and we would like to introduce to you our -- present today, Executive Officer and Corporate Executive Vice President, Mr. Masayoshi Hirata; and also Mr. Hideya Takashima, who is Accounting Division and General Manager. And I would like to serve as your emcee today. My name is Midori Hara. After the presentation of the earnings report in the second quarter by Mr. Hirata, there will be a short break. And then later, there will be a presentation on Toshiba Next Plan. For this session on the earnings report, we would like to close it according to plan at 2:30.
Good afternoon, ladies and gentlemen.
So now I would like to present the results of the second quarter 2018. Please refer to the material that we have distributed to you. Please take a look at Page 5. Now before I get into the details, as always, I would like to give you some highlights of the results this time.
First, about sales. While the sales of the Storage & Electronic Devices Solutions business increased, that of Energy Systems & Solution declined due to the deconsolidation of Landis+Gyr through IPO in previous year and also reduced sales of thermal power plant business. As a result, on the company level, the sales declined by about JPY 96 billion or 5.1% year-on-year. According to our estimate, the foreign exchange had a negative impact of JPY 6 billion on the sales.
As for the income, first, about the operating income. It was flat in Industrial ICT Solutions but declined in all the other segments, pushing down the company's income by JPY 29.2 billion.
ForEx had a negative impact of about JPY 1 billion on the operating income and also reduced emergency measures such as bonus reduction had a negative impact of about JPY 14 billion, according to our analysis.
Next is nonoperating income. As you are aware it grew, thanks to an increased equity earnings from Toshiba Memory and a gain on the transfer of Toshiba General Hospital. But income before income tax and noncontrolling interest shrunk because of declined operating income.
For net income. Net income was JPY 1,082.1 billion, which was higher than the same period last year by JPY 1,130 billion as the gain on the sales of the Memory business was posted as discontinued business income.
Please take a look at Page 6. This is cash flow. For free cash flow because there was an impact of JPY 1,460 billion from the sales of the Memory business and free cash flow was JPY 1,564.1 billion, an improvement of JPY 1,480 billion year-on-year. For equity attributable to shareholders Toshiba supported mainly by the net income by the end of Q2 being JPY 1,080 billion. Shareholders' equity improved by 39.9% to -- sorry, the shareholders' equity ratio was 39.9%. And amount was JPY 1,937.3 billion.
Page 7 is the summaries of what I said so I would like to keep the explanation. I would like to do so also with Page 8. But please note that the current currency rate at the end of the quarter was JPY 114 a dollar. Yen declined by ATM from JPY 106 a dollar, the rate at the beginning of that term.
Please take a look at Page 9. Here's a year-on-year comparison of operating income. Operating income of the same time previous year was JPY 36.2 billion as on the Page 7. But if you remove the impact of reduced emergency measures done last year and the impact of Landis+Gyr and Visual Products business, the operating income should have been about JPY 19 billion for the operating income through 2Q -- Q2 2018. First, regarding -- it was about minus JPY 1 billion. There was a negative impact of JPY 8 billion coming from the sales price down, especially in Storage & Electronic Devices Solutions. Lower sales in segments, including Energy Systems & Solutions, which was hit by fewer new thermal power plant projects brought another negative impact of about JPY 20 billion. On the other hand, expense reduction brought by the structural reform mainly in Industrial ICT Solution business in fiscal year '17 and separating out nonperforming overseas operation had a positive impact of JPY 12 billion. And also, we are continuing some of the emergency measures. So that has an impact of JPY 4 billion. So as a result, the operating income of this term was JPY 7 billion. It was in the black. So the profit level by the end of Q2 is in the black of JPY 7 billion. But in the second half of 2018, while we expect government sector business to have higher sales in the second half as it does every year, we also aim to harvest the effect of earning power enhancement measures into next plan and accumulate a profit.
Please look at Page 10. This is a breakdown of nonoperating income. With JPY 45.2 billion as equity earnings from Toshiba Memory and JPY 23.9 billion as a gain on the transfer of the Toshiba General Hospital, nonoperating income went up by JPY 26 billion to JPY 63.6 billion.
Now, as you see at the bottom of this slide, as for the Toshiba Memory, this is outside of the consolidated base results of ours. And also, we are not involved in the management of Toshiba Memory. And therefore, we're not in a position to explain its result. Therefore, today, we would like to refrain from giving you any detailed explanation about this business of Memory.
Please take a look at Page 11. This is free cash flow. As I said earlier, related to the sales of the Memory business, there was an additional cash flow from investment activities of JPY 1,458.3 billion. If this is excluded, the cash flow from investment activities would have been minus JPY 93.4 billion. As you see at the bottom, you see the free cash flow, excluding special factors due to the sales of Memory business, it is a positive free cash flow of a little more than JPY 100 million. It was positive mainly because of working capital improvement, mainly in emergency -- Energy Systems & Solutions. Also please note that the free cash flows, excluding special factors, were negative of JPY 62.1 billion year ago, possibly because we were facing a credit rating deterioration with the annotation of growing concern.
On Page 12, a status of our balance sheet are given. On the assets side, on the left-hand side, while the assets of the -- compared to the 6 month ago, while the asset of the discontinued operations decreased from the sales of the Memory business, we accordingly saw the increase in the cash and deposits and also as the investment account in the other asset increased as we reinvested in Pangea. And the total asset increased by about JPY 400 billion in comparison to the beginning of fiscal year 2018. Through the -- on the liability side, through the various measures being the implementation of last -- with the -- due to the decline of interest-bearing debt, we saw the decline of JPY 770 billion compared to 6 years ago. In the last several years, we have implemented some of the measures. And we were able to liquidate some of the risk-related assets and we believe our financial conditions have improved.
From Page 13, we discuss our business results by segment.
Page 14 shows the consolidated business results by segment. Details will be explained from the next page and onwards.
On Page 15, we have a breakdown of Energy Systems & Solutions segment. Sales declined year-on-year due to the deconsolidation of Landis+Gyr in July last year through the sale and also with the sales decline mainly in the Japanese Thermal Power System business, which is facing the market contraction due to the decarbonization trend.
Operating profit deteriorated year-on-year due to the sales decline in both Thermal and Hydropower System businesses as well as deconsolidation of Landis+Gyr. For your information, both in fiscal year '18 and '17, at the bottom, in the operating loss, we indicate there's some negative of the other operating loss because some of the development costs for hydro-related businesses are included. And in the middle, we also indicate the free cash flow numbers. And for new -- because we see the improvement, the working capital for Nuclear Power, and the Thermal & Hydro, we see the JPY 5.3 billion of improvement from free cash flows.
And next on Page 16, we show the change in the order backlog for Energy Systems Solution business. Order backlog gain in the second quarter declined by about JPY 300 billion or 19% year-on-year. As we see the progress of some unprofitable projects to see the balance decline, we will -- but also with the policy to break away from the sales-oriented-mind businesses, we carefully select the new orders to take in, which may have some impact. In addition to that, the decline in the capital investment by the customers as well as smaller scale of our overseas operations due to the structural reforms have some impact. As a result, the gross margin of the newly received orders are showing gradual improvement year-on-year.
On Page 17, we have the breakdown of major businesses in the Infrastructure Systems & Solutions. In the public infrastructure, higher sales were posted mainly in the Social Systems businesses while the change in the project mix deteriorated the profit. In the Building & Facilities, while -- the sales were almost flat. Because of the restructuring in the elevator businesses resulting in better fixed costs, we saw increase in profit. In the Railways and Industrial systems, because -- the sales were higher because of the transfer of the Industrial Distribution Systems business from the Energy Systems & Solutions segment, as we explained before. But as we increased the R&D spending in order to enhance this future competitive edge, the profit declined year-on-year.
On Page 18, we also indicate the business breakdown of Storage & Electronic Devices Solution in the semiconductor business. While sales of discrete were higher on back of the favorable sales of power discrete for industrial use, higher depreciation cost due to the upfront investment made the profit to be flat.
Also for the system LSIs, they -- LSIs -- system LSIs are for -- saw a decline in both sales and profit as the sales for communication systems and Logic LSI were down. Sales and profit of NuFlare Technology are also down as there were some delay in the sales recognition into the second half. So we expect the -- that decline in use in annual comparison. As for the HDDs and others, it includes the business results of 2 businesses, namely HDDs and the resale of Memory products.
As for the sales, it saw the increase of JPY 38.4 billion. As for the HDDs and others, the HDDs for enterprise has increased. But for the mobile hard disk for the PCs saw market contraction, resulting in lower sales. But the demand for memory has been quite favorable. So we saw a rapid increase in the resale business. As a result, we saw the profit -- sorry, the revenue increase of JPY 35 billion. As for the operating profit for HDDs, because the market price of the products for PCs have declined and we are not able to catch up with that through the procurement cost reduction so together -- all together, we saw the -- together with the resale business, we saw the overall operating profit to decline because the resale business has very little contribution to the profit. For the hard disk, we would like to work closely with the procurement partners so that we can enhance cost competitiveness.
Next, please look at Page 19. This is the current status of Retail & Printing Solutions and also Industrial ICT Solutions. First, regarding Retail & Printing Solutions. In terms of sales in both retail and printing businesses, sales declined. For operating income, although there was a decline of the operating profit of printing business, the overseas retail grew so as a -- and as a whole, it declined. For the Industrial ICT Solutions, it improved, thanks to the increased sales of system projects and effect of structural reform.
Page 20 talks about the segment of others. First, about PC business. As you are aware, on 1st of October, we completed the sale of 80.1% of outstanding shares of Toshiba Client Solutions, which conducts PC business through Sharp. As a result, PC business is no longer included in our consolidated results starting in Q3. So this has -- this was the current status of the by-segment result of Q2 in 2018.
Now I would like to give you the outlook for the -- or the forecast for the full year, starting on Page 21. For the outlook for the fiscal year '18 result, we did publish the number on 15th of May. And the results at the end of the second quarter, which I just explained, are in line with the outlook that we published on the 15th of May. Now -- but in the second half, we would like to reflect the structural reform in order to ensure the targets of next plan in year 2019 and onward to be carried out in the second half. And also, we would like to reflect the impact of the exit from LNG business and also from the nuclear pipeline construction business in U.K. And we would like to, therefore, revise the forecast for the full year 2018.
Please take a look at Page 22. In the center, you have the yellow color-coded new forecast. And on the right side, you see the gap against the published number as of 15th of May. For the sales, there was some change in each segment and yet overall, the number of JPY 3.6 trillion doesn't change.
For the income side, for operating profit, this will be positive at JPY 60 billion, lower than the previous forecast by JPY 10 billion. This reflects additional JPY 25 billion as structural reform expense. I would like to explain about the detail of the operating income later on. For the nonoperating income, there is a negative JPY 93 billion. That is the expense related to the LNG business exit. And also, there's another expense related to the exit from the nuclear power plant construction business in U.K. So in total, we added minus JPY 22 billion negative impact income versus with the forecast previously. And also, for the Toshiba Memory's income from equity earnings, we don't have the outlook or visibility into the results. So we will keep the JPY 50 billion. As a result, income before income tax will be minus JPY 40 billion, which is worse than the previous forecast by JPY 130 billion. The exit from the LNGs and also in nuclear power plant, I would like to discuss later on in more detail.
Now this is the net income. The discontinued operation income loss will now reflect the negative impact of the Memory business sales happening earlier by month than the original assumption and also the performance of indemnity obligations based on the share transfer agreement of Toshiba Memory that was announced in early October. That's also related to it. As a result, the net income will be JPY 920 billion, which is a decline by JPY 150 billion than the previous forecast. For the cash -- free cash flow to reflect LNG exit, we have the positive number of JPY 1.25 billion -- JPY 1.25 trillion, which is JPY 40 billion lower than the previous forecast. As for the equity, shareholders' equity, we will reflect the worsening of JPY 150 billion of the net profit and also we reflect the minus JPY 700 billion of the planned shareholders return. And therefore, the shareholder's equity will be JPY 1.3 trillion, which is lower than the previous forecast by JPY 814 billion. For the net interest-bearing debt, this is going to be JPY 430 billion cash flow -- free cash flow changes and also there's the impact of the shareholders' returns and also change in interest-bearing debt. And the cash flow will be declined by JPY 670 billion.
On Page 23, you see the analysis of the operating income. The -- originally, the forecast in May was JPY 70 billion. Now on this -- this had the improvement in May of the depreciation of yen and also the cost improvement because of the cost reduction effort. And on top of that, we have the JPY 4 billion decline due to the price decline and also JPY 25 billion to be spent for the restructure of the organization toward Next Plan. And so we have the forecast for the operating income of positive JPY 60 billion, which is less than the previous year level -- previous forecast level by JPY 10 billion. On top of that, we have plans to make some of the restructuring, including some of the headcount reduction measures. As for the other headcount reductions, the -- in the Energy System and the Industrial Solutions, we will implement the optimization of the headcount. With this, we expect to reduce the total account -- count of 1,060 with the expense of about JPY 14 billion. After which, 8 -- JPY 9 billion will be taking place in the second half of this fiscal year 2018, and it is already reflected in the other forecast. And after the early implementation of the plan, we expect to reduce the cost by JPY 10 billion every year. And other than that, we will be going through the rationalization of the business bases both in Japan and outside of Japan.
And on Page 14 (sic) [ 24 ], we also show our -- the breakdown by segmentation. And lastly, let me briefly explain about some timely disclosures we made today.
Please go to Page 16 (sic) [ 26 ], where we explain about our plan for share buybacks. So we have been making some announcements about our share buybacks. Based on the provisional financial statement as of September 30, we confirm that distributable amount to be -- was about JPY 1,170,000,000,000. Further, by considering a potential risk such as profit outlook for nonconsolidated Toshiba for the later half of fiscal year 2018, we determine the appropriate amount of share buybacks to be about JPY 700 billion. Also as for the method of our share buyback, considering the planned trading volume of our share buybacks exceeding 30% of the market value and also by considering the applicable laws and regulations, we plan to adopt a combination of -- for our own share repurchase trading through the ToSTNeT-3 and on auction trading based on discretionary trading contracts. The time frame will be 1 year starting from November 9, 2018.
Please go to Page 27. We explain about the dividends from the surplus. In addition to the JPY 700 billion share buyback as part of Toshiba's shareholder return programs, we have also expressed our plan to pay stable dividends. Today, as we have implemented the provisional financial statements, we were able to confirm the distributable amount. Because we have continued to pay no dividends for many years, as of the end of December 31, 2017, we decided to pay special dividend of JPY 20 per share. As for the dividends to be distributed from the surplus with the recorded date of March 31, 2019, expected dividend will be JPY 10 per share, making the annual dividend to be JPY 30 per share.
Next page on Page 28. We talk about the withdrawal from the LNG business. As a result of reviewing the business portfolio as part of Toshiba Next Plan, Toshiba concluded that the LNG business should not be expected -- the synergy should not be expected with other businesses. And we have decided not to forecast on the LNG business as part of our core business considering possible future risks and we have to -- just be discussed by U.S. measures. While considering the withdrawal from LNG, LNG received the order -- Toshiba, sorry, received some orders from multiple potential transfers. Among those offers, Toshiba determined a certain company would be -- and the impact from the withdrawal from the LNG business will be about JPY 93 billion, but it is included in the -- our outlook for the fiscal year 2018.
And also, although guarantees by the parent Toshiba that are expected to remain for a while, Toshiba has an agreement with the company that they would compensate those guarantees if implemented. And in addition, the company is required to provide a credit enhancement of USD 5 million (sic) [ USD 500 million ] in a form of the bank guarantees. And considering those are the facts and the circumstances, Toshiba expects the risks that the -- pertaining to the remaining guarantees will be limited. As for the name of the company we are transferring the business to, we are to make the announcement promptly after we sign the contract later in the afternoon.
On Page 29, this is explanation about the solution of NuGen in the U.K. Toshiba has been negotiating with various entities in view of seeing new investors for NuGen and selling the share of NuGen held by Toshiba Group to prospective investors. This was based on the basic policy to totally avoid risk related to construction outside of Japan of the new nuclear power system there. However, as of now, it is not probable that -- to complete the sale by the end of 2018 and as concerns over increasing costs for maintaining use have grown, from that prospective Board of Directors of Toshiba has resolved today to exit from the nuclear -- new nuclear plant construction business in the U.K. and the -- to dissolve NuGen. And as for the impact, this will be JPY 15 billion. But again, this is included in 2018 forecast also because about a JPY 10 billion loss out of this is expected. This expected loss is already increased -- included as a part of comprehensive income termination. The expected impact of equity attributable to its shareholders will be about a negative JPY 5 billion. With the sales of LNG, the business, as well as dissolution LNG, we believe we have achieved the certain results for the process of realignment of risk-related assets that we have been proceeding with in the last several years.
With that, I conclude my presentation.
Now we will like to receive any question, if you have any. Please raise your hand if you have any questions, we will bring you a microphone. And make sure to please identify yourself before you ask the question. Thank you for your kind cooperation.
I am from [indiscernible]. I have 2 questions. First, is about your own share buyback. So you said that you also use the option trading to buy back your shares. With this information, it's too difficult to understand exactly what is going to happen. If you could elaborate on this. That's my first question.
Regarding our own shares buyback, we will carry out what we just explained. There is a timely disclosure information. So the method, as I said earlier, will be twofold. We will be combine these 2 methods. And also for the period, it will start from tomorrow and will span 1 year.
In relationship with that, so some of the shareholders of yours have expressed shareholders above JPY 1 trillion was required. And on the other hand, for distributable, the profit will be around -- that determines -- determined the JPY 700 billion of sharehold buyback. But going forward, are you going to consider the further -- the additional -- the measures in the future? Or is this going to be the end of it?
So depending on the future development, it is quite uncertain. But as of now, what we concluded is that by considering some of a possible -- the items and risks, we thought the value of JPY 700 billion to be appropriate.
And in the second half, the guarantee -- the cost for the Memory business, you have made some releases in the amount of several billion yen for the price. Are you expecting to see the further expense of this kind to take place? Or what's the time frame of these possible expenses to be seen?
This time, for the patent, the Memory company has been sued, and we were to pay the expense for that. And under the contract with Toshiba Memory, we bear the cost. So from this background, we have been bearing the cost. But for future possible occurrence of such, we do not have any comments to be made at this moment.
Next question. Yes?
My name is [ Kitagawa ]. I'm from [ Nozaki ] Newspaper. I have 2 questions. First, it's about NuGen winding up. What kind of conversation did you -- have you had with the U.K. government about this matter? U.K. side, was there any approval or consent, maybe not approval but consent given by the U.K. government? Or will there be any possible expense related to that?
Thank you for the question. Regarding NuGen, we have had very fruitful discussion, conversation with the U.K. government. And that is why we are having this winding up now. And also, basically, we don't anticipate any additional expense.
And also about Freeport LNG exit? For this matter, again, in the future -- when the market price changes in the future, would the contract has any possibility to have you to pay additional cost?
Right. The Freeport, all the contract that we had about the use of [ ZT ] is going to be sold totally to the company. So in the future, we will not -- that won't -- there will be no expense. But as I said earlier, a little bit, because of the Freeport's intention, Toshiba's guarantee will be continued, but then the buyer side will provide the guarantee for that as a pass-through. So we did have received LLC. So basically, in principal, there will be no -- at this -- still -- at least, currently, we don't anticipating additional costs or expense.
Shall we take our next question?
My name is [ Ito ] from [indiscernible]. As for the Freeport or the LNG business, the company to transfer the business to, you will be making the announcement later. But for the energy-related businesses, both for energy and in the semiconductors businesses, it has been rather affected by some political elements that to result in a unsuccessful -- the agreement of the deal. So if we consider those possible political impact and because we're talking about the energy businesses from the security perspective, could there be some impact for your -- that will result in the risk for your business? What's your view on that?
For the LNG business, I did not have a chance to mention, but the laws in the regulations were anti-monopoly. The regulations needs to be cleared before we close the deal. And for us and for the company we transfer the business to, we have to thoroughly check that we comply to all the legal requirement before we make the decision. So for that point, we should still consider that to be a risk.
Is that how I should understand it?
Yes. To be exact, only after we clear the other legal requirements in all the countries, we can close the deal.
Any other question? At the back of the room, raise your hand.
My name is [ Alicia ], I'm a freelance journalist. Regarding LNG, so you are going to -- you are -- you're not going to sell the business, but you are not receiving the price. But actually, you're paying. What is the conservation for? What is the bidding for?
For [ LNS ], we did explain about this matter for many -- for some times in the past earnings report. Currently, it is better condition, but in -- so if this is to continue for decades, we may incur loss. So by the justification for paying that JPY 93 billion was discussed and just internally. And also, as I said earlier, when we sell this to -- at the -- another entity, we brought this offer to many companies, many parties. And then we carried out a very fair competition bidding, and then we decided to choose one.
Okay. So outside of this onetime payment, you do have -- you do receive price?
No. We just pay and that's it.
So you pay and you have the other entity take it?
Yes.
Are there any other questions? If we see any other -- which we don't see any other people with questions, I would like to call the close to the presentation of our business results for the second quarter of 2018.
Thank you very much for waiting. Now we would like to start the Toshiba Next Plan presentation. The presentation will be given by our Chairman and CEO, Mr. Nobuaki Kurumatani.
Good afternoon, ladies and gentlemen. My name is Nobuaki Kurumatani. I would like to express my sincere appreciation for attending today's presentation of Toshiba Next Plan.
Let me start with today's agenda. First, I would like to explain Toshiba's vision that we are trying to achieve from the viewpoint of the present, past and the future. Agenda 2, 3 and 4 covers numerical targets in specific plans and in which business areas we are trying to achieve those targets and also our policy on shareholders' returns will be covered. In agenda 5 and 6, it's about medium- and long-term growth strategies and Toshiba's digital transformation, which is the core of the strategy. Finally, the execution structure for those plans. It will take a little less than an hour. It's pretty long. And I hope you will bear with me.
First, the vision that Toshiba is aiming at. Each company has its own DNA. Recently, people often say 30 years is the average lifespan of a company. But Toshiba has existed for 143 years by continuously developing itself and have been contributing to the society. Since I joined Toshiba in April, I've visited almost all the regional offices and factories. And I have had discussions with several thousand employees. All along, I have been asking myself, what is the source of strength of Toshiba? What is Toshiba's DNA? Through that process, I've come to recognize that Toshiba is not a mimic. It is not acquiring other people's technology by M&A. But it is a technology company based on its own innovative R&D and has a so-called entrepreneurial venture-type business model. That's what I've come to realize.
Looking back, it started with 2 founders. Mr. Hisashige Tanaka, who had nickname Karakuri Giemon and Japan's Edison, Mr. Ichisuke Fujioka. Those founders has started that DNA, and it's deep rooted in the history of Toshiba. And by making full use of this innovative venture spirit, we want to revive the spirit and DNA of Toshiba through innovative R&D power and tackle various global social problems and challenges and contribute to the society.
Now turning our attention to social problems. There are serious challenges that are ahead of us, and industrial models will be facing an era of major change. In the past 2 or 3 decades, emergence of cyber technology, especially Internet, which emerged at the beginning of 1990s, has led to a major new value creation. However, after the year 2000, there was no major technological breakthrough following Internet. And the new era was characterized by GAFA business model, which contained customers and data in an overwhelming manner. Ever since the industrial revolution, capitalism has evolved, driven by innovative technology. However, the last decade was a period in which world economy was sustained by easy accumulative monetary policy. Looking towards the next 2 decades with the innovative technological development of both cyber and physical areas, the world will face a major revolutionary change in the society, and technology will drive the social system and capitalism to evolve into the next stage.
So cyber and physical were separated in the past. However, I believe that in the new era, in the new industrial model, cyber technology and physical technology will be -- will have a fusion, an explosive fusion. So we will be working in a battlefield where the cyber and physical technology have fusion. So we will strengthen our technology development ability. And in the cyber-physical environment, we will strive to become one of the top technology company in the world.
Sustainability and building future is the keyword. Now in the first 3 years of Toshiba Next Plans, we will establish financials standing, which is strong enough to secure top-level profitability in the industry and at the same time, develop new promising growth businesses. And in addition, in achieving our goal, we will implement cyber technology in all areas of Toshiba, including our products, services and internal processes. We -- I want to achieve this objective of becoming a CPS technology company. Now this process will help us lead to another process in which Toshiba will help solve various probable social problems in the future. That in turn will help Toshiba contribute to achieving SDGs, which the global community is working on now.
Now I would like to touch upon the numerical targets in Toshiba Next Plan and the 4 reforms that are keys in realizing them. First, the objective of Toshiba Next Plan. The basic objectives of our corporate activities is to enhance the value for our employees, customers, business partners and community and also to enhance shareholders' value by maximizing enterprise value. Enterprise value will be maximized based on 3 policies. First, the first policy is to invest aggressively in growth. And nowadays, M&A market is at such a -- is a place where multiple is extremely high. And it's not a good time to do some M&A activities. Therefore, our core activity will be organic growth.
Secondly, we should never let our guard down in managing risks. The nuclear-related business, overseas construction business were all spinned off. And NAND flash memory, 60% have been separated. B2C, an area where volatility is extremely high, but B2C business was separated as well. The business area with high capital costs were -- have been removed from our business activities. We are not going to take excessive risks. We will strengthen the cyber side business by trying to achieve stable and sustainable corporate activity.
And the third policy is to continuously improving and strengthening earning power. This is true with any company. Good companies are always managing costs and try to optimize their process and improve their daily process. So companies who are good at this basic earning power are the good blue-chip companies. And we will continuously strengthen this area and also as a CPS technology company rather than being a capital-heavy business model, but a model in which we do not leverage too much capital. That is how we try to earn revenue and profit. And at the same time, we want to improve our enterprise value and also strengthen shareholders' return.
I would like to talk about TSR. TSR consists of capital gain and dividends. It stands for total shareholders return. So TSR reflects every results of corporate activities in a comprehensive and objective manner from shareholders' standpoint. We have -- we place importance on TSR as a medium and long-term indicator.
Then let me talk about some other numerical targets of Toshiba Next Plan. In FY 2019, ROS should be -- will be aimed at over 4%. JPY 140 billion is the operating income and JPY 230 billion EBITDA and JPY 340 billion EBITDA. In '21, ROS 6% or over. Within 3-year period, we will aim to achieve top class ROS. That is the ultimate goal within 3-year period. In 5 years from now, in FY '23, JPY 4 trillion of revenue, ROS 10% will be our target.
Toshiba is a company, which is specialized in physical area, and we are -- and for such company, this figure is really a top-class performance level. As for ROE, if -- in FY '19, more than 6% ROE. Our business model has been shifted to become very stable. Our capital cost is going to be lower. And in FY '19, the so-called equity spread is likely to become positive. And in FY '21, more than 10%. In FY '23, 15%. So we want to improve the premium for equity spread.
Page 14. In starting Toshiba Next Plan, selection and concentration has been implemented on a full scale. We tried to put the critical situation behind us, and in order to shift into a stable organization, we have made a lot of efforts, and let me explain on that efforts. The left-hand side is the internal control and also governance strengthening, that's on the left-hand side of the slide. And on the right-hand side, some of the risk factors that might be obstacle to our business. They have been removed, eliminated. Toshiba Memory business was transferred, strengthening financial status, eliminated risk from overseas nuclear power plant business, splitting of B2C business. So as a result of that efforts, our business model has become considerably stable.
B2C manufacturing business and semiconductor, battery, these are the main device for the digital era and also cyber-type business model. So these are the 3 pillars of Toshiba's future business. That is the business model we are aiming at. And through these efforts, financial status has improved considerably. Business volatility has gone down. And through -- so we can say for sure that we have concluded concentration in selection of business. And so we want to really focus on our business in a stable manner.
Next, I would like to talk about the factors that have led to the increase or decrease of our profit from FY '18 to FY '19. Operating income is planned to be doubled in 1 year. As you see on the left-hand side, operating income forecast in FY '18, as Mr. Hirata explained, JPY 60 billion. But excluding that restructuring cost, which is onetime cost, I think it can -- we can say that our operating income can be JPY 87.3 billion. In FY '19, JPY 25 billion by procurement reforms; and restructuring, JPY 43 billion improvement. So we will make improvements through those firm measures. And also considering increase in revenue, operating income can be increased to JPY 170 billion. But by -- we need to incorporate risk factors to be conservative, like exchange rate and market, which is JPY 30 billion. So our goal for FY '19 is JPY 140 billion.
Next, allow me to move on to the next page. This will be -- allow me to speak about the next 3 years towards fiscal year 2021. There's going to be heading towards fiscal 2021 addition to the expanding effects of procurement reform of JPY 65 billion and structural reform of JPY 58 billion. Sales and product mix change and improvement effects of JPY 82.7 billion. That will show as a result of investments for growth should bring us to about JPY 275 billion. And there was -- we will be adding conservative risk buffer to this, which brings us to a target of JPY 240 billion.
In developing the Toshiba Next Plan, we have CFT, which we will be installing as a methodology. Ever since that was installed back in April of this year, we tried to reinforce our base revenue generation capability, and we want to be a very solid company. And we want to make sure that we can invest in a concentrated manner 4 growth areas. And these are the strategic pillars and we'll establish 9 cross-functional teams and have proactively engaged in deliberations. So it was a very heated discussion.
Here's the overall agenda, which I will discuss in detail from the next page and on. First, discussing our plan for structural reform. In order to regenerate Toshiba, we need to first mitigate future risk and we want to make sure that we can optimize production structure and talent allocation, that will be the prerequisite. As announced today, we have resolved at our board to withdraw from our U.S. LNG business. Further, we have decided to withdraw from our U.K. nuclear power station, new construction businesses, and we have decided to dissolve new generation. With all this, our overseas nuclear construction business, together with cut off of the B2C business, will generally mean we have concluded the series of our risk-mitigation measures.
As for staffing, we do have orders 2, 3 years down the line as a company. Therefore, due to the nature of the business, we have determined that a sudden once optimization of talent will be inappropriate. And we will lose trust with the customers, and it will be inappropriate for boosting our corporate value. Therefore, we are going to move ahead with operational efficiency and digitalization. And each year, there should be about 3,000 individuals that will be leaving on an organic basis. Therefore, in the next 5 years, there should be a organic decrease of about 7,000 individuals. And with this number, we are going to be working on trying to execute how we may be able to generate more profit.
And for some business units, we will be introducing some early retirement schemes, as Hirata explained before. With plants as the core, production sites will be reviewed in a holistic manner, and we are currently working on this. And 15% of the sites will be either closed or restructured. Furthermore, currently, we have about 400-plus subsidiaries, of which, we are planning to reduce about 25%. Details of each of the different measures will be made available once we have them.
Next, allow me to move on to procurement-related reforms. Toshiba's cost rate, when we compare with our peers, is relatively high. And that is something that we are -- we know. And therefore, there is solid room for improvement. In the Toshiba Next Plan up until fiscal year 2021, in the next 3 years, we included a 3%, JPY 65 billion cost-reduction effect. This is 3% versus the overall expense. By fiscal year 2023, we are expecting JPY 100 billion.
Already in the area of direct material area, we have completed a survey of 60% of the procurement items. For indirect area, we are trying to minimize our expenditure and we are already starting to see some results. When it comes to procurement-related CFT activities, it just kicked off in a full-scale manner recently. And this is something that we need to use this in a very continued manner. And therefore, we plan to see an accumulation of results going forward.
Next, allow me to move on to sales reform. Similar in sales reform area as well, we are steadying despite business unit. Though not included in the Next Plan in numerical form, we are seeing that there should be a JPY 30 billion improvement in the sales area as a result of sales cost reduction and proper pricing and others. And we are going to be making sure we deliver solidly.
Further, in aims to reinforce our relationship with customers and the market, we will implement key account sales structure as well as CRM and digital marketing. And when we embark on projects, specifically big-ticket projects, there were some loss-generating projects in the past. Therefore, we will make sure that we will have a reinforced corporate-level pre-order taking screening process to make sure that we can prevent future losses and risks at the order-taking stage.
Lastly, allow me to touch upon process reform. To improve sales per employee and boost profitability, we will make a large-scale investment to standardize operations across Toshiba and to promote digitalization. For our next-generation IT investments, we will embark on renewing items, including our core systems. We will leverage cloud very proactively to reduce operational cost and eliminate the numerous individually optimal silo. And we want to try to reduce, eliminate 80% of such obsolete systems and replace them with platform that is suitable for supporting a new CPS technology company. And that is the type of platform that we hope to put together. And at the same time, by investing into engineering reform, we want to have common parts, and we want to reduce the number of design man hours, and we want to minimize lead time. In order to materialize such, we want to make sure that modular design will be a practice across Toshiba Group as a whole, in order to make sure that we can boost productivity and also satisfy customers even more so than ever.
As for capital expenditure for supporting profit growth, we are planning a JPY 810 billion across the next 5 years. Traditionally, we were focusing our investments into NAND flash memory. And therefore, Social Infrastructure business did not see enough investments for growth. They could have achieved more profit if they had some investments. However, there was -- we did not have enough investments in that area, and we want to make sure we can promote profitability in such areas in the future.
So in the Toshiba Next Plan, we will spend about JPY 50 billion more in comparison to the past, focusing investments in renewable energy, power semiconductor devices, Nearline HDD, SCiB batteries that will have solid, promising growth potential, and that is where we want to focus our investments going forward.
As explained before, we have no plans for M&A at the moment. And we will not be using our cash for large-scale M&As.
Moving on to R&D. As noted in the outset, we are a technology company. And as such, R&D is very critical for Toshiba. We are planning for about JPY 930 billion, a little less than JPY 1 trillion, for developing costs across next 5 areas. This will be for renewable energies as well as supercritical CO2 turbines, and it will be more of the environmentally friendly products as well as SCiB batteries, power electronics, power semiconductors, Nearline HDD. These are the growth areas that we want to invest in, together with concentrating our resources into IoT for business reform to address development of future technology in the coming decade or 2 decades for Toshiba.
Allow me to move on to cash flow and financial setup. In the Toshiba Next Plan, we will concentrate our investments in the first year. As I noted before, investment for growth in 2019 will contribute to cash flow from 2021 and on. We plan for our cash flow, a free cash flow, of JPY 185 billion.
Financial setup. Shareholder equity ratio was 18% in 2017, but should remain at 30% levels even after a share buyback of about JPY 700 billion. Our business is very stable as mentioned before. And based on different models, our capital versus the risk, we think this is the appropriate and sufficient level. And we will be in a net cash position, meaning that we have no debt in reality. And that will be something that we will be able to continue to enjoy. So we will maintain a very stable financial setup in order to boost, and also boost our profitability.
Allow me to move on to our business portfolio. As mentioned before, since we are going to be withdrawing from our overseas nuclear business and cutting off our B2C business, we have a very stable model that we have shifted into.
Allow me to now share with you about our current thinking on the business portfolio. On the horizontal axis, it has the growth of the market, and the vertical axis has Toshiba's competitive edge. Based on our internal deliberations, we have broken down this into a more granular business level within each of the business units. As our basic thinking, areas that have growth potential for the future is where we will be investing into in order to seek organic growth. On the other hand, the currently deficit-generating businesses or businesses that may have difficulty in the future will embark on structural shift to seek marginal -- margin improvement to make sure that they can be a very solid business. And we will have a periodical monitoring as well as tollgate management exhaustively in place to observe how they are progressing.
By 2020, we want to eradicate all deficit-generating businesses. And basically across all businesses, we want to aim for an ROS of 5% and more. As I mentioned before, we have been continually investing heavily into our Memory business. And therefore, we have not been able to allocate enough investments into growth potential area businesses. In Toshiba Next Plan, we want to concentrate 80% of our investment in areas that have promising growth potential in order to materialize organic growth.
Next, I would like to touch upon the monitored businesses. For monitored businesses, our game plan is to achieve 5% of ROS. And this is the result of the discussion with the leaders of each business unit.
Now first, Thermal Power business. As you're well aware, in accordance with the decrease of new projects, the new construction projects are really fewer and fewer. Therefore, renewal of power plant, namely the service demand is going to increase. So we will be shifting our resources to those service businesses. And at the same time, the overall pie will be smaller. So we will cut down on the manpower and also reduce production capabilities. And even under this new environment, we will make sure we will optimize fixed cost. And in FY '20, we want to achieve over 5% of ROS.
Now system LSI business, and this is a promising component in the digital era. However, the problem is we cannot secure the scale of business necessary to pay for the R&D cost. So it is in red. However, in automotive and industrial areas are growing, and we are expecting revenue increase in those area. So we want to focus our development resources in those focus areas. On the other hand, we are going to withdraw from areas where we can't get enough scale. In FY '20, through these operations, 5% ROS is our target to achieve.
Next is industrial motors. Rising material costs has led to low profit. So therefore, what is important here is to shift to high-end products. And for some of the lower-margin products, we are negotiating with our customers to increase the price, and also through restructuring and scaling down the production capacity, we will make sure to turn around this business so that it can be a profit-generating business. So at present, ROS is 1%, but we want to achieve 4% ROS.
Finally, HDD business. Currently, we are maintaining around 5% of ROS. However, mobile HDD business in the future, it is expected to decline. In accordance with that, we need to get ahead of that and change the structure. For mobile HDD, we will reduce that production capacity and expand the production capacity for large-capacity HDD for data centers, and we will accelerate a business shift. For those businesses, we will set up stage gate and strictly monitor the progress of the plan. And we make sure that those business can be converted to a profit-generating business.
Now, I would like to talk about the numerical targets for -- by business unit wise. And during the Q&A, we have the people in charge of each business unit. For detailed questions, you can ask them later. Let me just talk about the outline.
First, the Energy Systems. As I said earlier, thermal power business has been -- is being shifted from construction to service business. And in that process in FY '19, we expect the revenue is going to decline temporarily. But by re-evaluating production-based strategy and by reducing fixed cost, we will be able to improve ROS and we will strengthen renewable energy and solution businesses and try to achieve 8% ROS in FY '21.
And I will -- and the next slide explains the operating profit plan for Energy System. JPY 12 billion gain by procurement reform and restructuring will realize JPY 10 billion profit and strengthening the basic earning power. And in FY '21, we want to achieve JPY 52 billion operating profit.
Next is the Infrastructure System. This is the area where we are expecting a -- the largest organic growth. Not just product sales but O&M should be expanded. And JPY 1.5 trillion of revenue is expected in FY '21. Railway, industrial area, building, facilities segment, they are the driving force to increase revenue. And also public infrastructure segment is stable, and profit is expected to increase. In FY '19, ROS 5% or over is planned. And by reaping the fruits of the growth investment, we want to achieve 8% ROS in FY '21, and this segment will be a contributor to free cash flow as well.
Next is the breakdown of that operating profit target. The procurement reform, it is based on highly likely improvement prediction. And we believe that reform will lead to JPY 29 billion in improvement, and restructuring will have the gain of JPY 15 billion. And by reaping the results of investment, in FY '21, operating profit is expected to be JPY 121 billion.
And the next page is explaining the specific expansion plan. Infrastructure System business sales will increase from this fiscal year's JPY 1.26 trillion to JPY 1.49 trillion in FY '21, which is JPY 230 billion increase in revenue. To give you a specific example, lithium-ion rechargeable batteries is really promising in growing automotive market. Japan, India, the United States, we are planning to invest in the increase of production capacity in those countries. In HVAC area, China business is really good. So we are planning to invest in products for overseas where we can expect market growth.
Next is Storage & Device. This is -- System LSI is a monitored business. So we -- it should undergo a structural reform so that it can revive earning power. At the same time, automotive and industrial power devices, Nearline HDD, those growth areas, we will invest in production capacity increase. And in FY '21, JPY 940 billion revenue is expected, ROS of 9%.
Next page, we have the breakdown. By procurement reform, JPY 20 billion (sic) [ JPY 21 billion ] effect. And by structural reform and restructuring, we will identify new focus products, optimize manpower and optimize R&D costs. Through these strategies, JPY 16 billion improvement is expected. And add some growth business sales increase in FY '21, we will increase the operating profit to JPY 82 billion.
Finally, Industrial ICT business. This -- we will focus on our strength area, mainly factories. By that, we want to propose solutions that can differentiate ourselves. And the major challenge in this area is high cost. So we need to reduce the cost ratio and also reduce fixed cost as we did last year. We were able to improve within short period. And by FY '21, 8% ROS is the plan to achieve.
And the next page shows the breakdown. By FY '21, JPY 8 billion improvement by restructuring. We started with JPY 6 billion. In FY '21, JPY 8 billion improvement. With the expansion of IoT business, the operating profit, which was JPY 6 billion in FY '18 is to be increased to JPY 20 billion in FY '21. So JPY 35 billion risk buffer is incorporated, but this is before that. This is the basis of JPY 275 billion operating profit. Although I said, this is based on JPY 275 billion revenue, not the JPY 240 billion. So for the details, I think I can explain further during the Q&A session.
Next is our policy and shareholder returns. As our CFO explained to you earlier, it's been decided at today's Board of Director meeting to implement JPY 700 billion stock buyback. It will be a considerably large-scale stock buyback. But we will -- we want to make sure we can implement it as quickly and smoothly as possible. At the same time, for the first time in 4 years, first time since 2014, we have decided to resume dividend payments. We have caused a lot of trouble to our shareholders who -- some of you may be present today. We have caused a lot of nuisance and problems to you. But we will resume dividends payments of JPY 20 per share with end of December 2018 as the date of record.
Over the 5-year course of the Toshiba Next Plan, average consolidated dividend payout ratio of 30% will be the target. We will try to provide a stable and continuous dividends and exercise stock buybacks whenever appropriate in order to improve shareholder returns. For the time being, returns and/or losses from Toshiba Memory shares will not be included in shareholder returns. Therefore, it is excluded from cash-based shareholder return policy.
Now -- so, so far, I've talked about building the foundation of Toshiba, and I will talk about the breakdown of that plan, and that's what I have been talking about. And next, I would like to talk about the development of new growth fields. In Toshiba Next Plan, the Toshiba Next Plan has identified medium- and long-term growth area by comparing the technology assets that we own in the megatrends. It is possible in this megatrend that disruptive innovation will make a major social change. So we are driven by technology, and Toshiba recognizes this change as a major opportunity. We have -- Toshiba has its unique digital technology, AI technology, abundant business domain assets, high-performance core components. We will gather all of these technologies and invest them, and we want to aim to grow a new business. And let me show you some examples.
First is the SCiB, lithium-ion rechargeable battery. Our lithium-ion rechargeable battery has a lot of strength, such as high safety, rapid charging enabled by our unique anode material. This is really unique to Toshiba. And we believe, it's really one of the best batteries. And by making use of this strength, we want to capture market share in automotive and industrial markets. The demand is beginning to increase. That's what I feel. And for mass production, increase has already been decided. And collaboration with our strategic partner is underway. I mean, negotiation is underway. We have various offers. And by 2030, JPY 400 billion business is what we are trying to achieve. But if possible, we want to accelerate the achieving of that target.
Next, power electronics area. Together with battery, power electronics is really the key device in digital era. Battery and semiconductor are really the 2 pillars. Low loss next-generation power device and its systemization technology are Toshiba's strength. High growth is expected in power device market. Toshiba is investing in our competitive silicon power device and also silicon carbide and gallium nitride. They are the next-generation power device, and we want to work on them as well. Inverter module with high-efficiency, automotive LSI, sensors will be combined to make an automated systems. And those technology will be provided to industrial and mobility areas within Toshiba where we have abundant domain assets.
Next is -- next new growth business is the precision medicine area. With the high-tech medical technology advancing, regenerative cellular medicine market is expected to grow. And Toshiba has a lot of promising products, technology and customer connections in order to achieve cutting-edge precision medicine. For example, Japonica array that analyzes genes unique to Japanese efficiently and Micro RNA that can detect cancers of multiple organs simultaneously by blood test alone and Heavy-ion radiotherapy that focuses only on the cancer lesion. These are the element technologies and products ranging from prevention to treatment.
Image diagnosis. Imaging diagnosis is the area we excel in. And it's been out of Toshiba. But the basic technology remains within Toshiba. And under the Toshiba Next Plan, we will have a full-scale reentry into the medical business with precision medicine at the core, providing very early detection and individualized treatment.
From here, allow me to discuss Toshiba's digital transformation strategy. When digital revolution progresses, device -- key devices as well as semiconductors as well as batteries that I noted before, which are components -- key components that support the digital society will become increasingly important. At the same time, operation and services will expand by leveraging data.
When we look at products in the center and also the device on the left is what we have been embarking on. Products will be B2C and B2B was traditionally what we addressed. But B2C has been cut off temporarily. So now, we have a B2B stable customer base, where we are going to be concentrating our resources, and that will be our device and model going forward. And digital society will be supported with semiconductors and batteries towards the right.
As you may observe, the physical area, meaning devices as well as the real area will be where we have data available. Therefore, all the data that we have available is going to be an asset that we want to leverage going forward to make sure that we have an overarching cyber business that we would be able to enjoy.
There are big, giant cyber companies already existing. But when it comes to their business, they will try to deploy data to each of the different businesses, and they want to dominate data. And they are creating a very giant business. However, a business model limited to the cyber world is reaching its limits. And all the GAFAs companies will need to move to the physical side. Otherwise, they won't be able to leverage data.
Basically, data comes from the physical side. And this is where you need to place the core. Cyber business is going to be exhaustively carried out from here and on. So we want to make sure that physical data can be used efficiently and operated in an efficient manner to optimize the society. I think companies that are capable of doing so will be the winners in the next stage. And we want to be the winning company.
And by capturing this overarching trend, we ourselves, Toshiba, will need to make sure that we implement digitalization to every corner of our organization. And we need to reform ourselves. And I declare that we shall do so.
As I noted, the platform, which is going to be IT system, will be renovated. And together with this, not only our operational process, which will be renewed through IT developments, we want to make sure that we reform our thinking process to suit the cyber-physical security arena.
Currently, we have 42,000 engineers, and there are 7,000 that are digitally abled. But I want to make sure that all 42,000 individual will be digitally abled. These engineers have a lot of technology, and it's more difficult than cyber technology. So the way they think or so long as direction is clearly defined, we know that the technology group can become a very strong technology group in the order of tens of thousands.
And another thing to note. In order to implement IoT into the society, what is going to be our architecture? Toshiba's IoT architecture is going to be made public to all. All of our technology achievements will be made public to all. The industry reference models as well as customers' practical technologies, as well as our AI R&D knowledge accumulated over the years will be consolidated and standardized, and we have developed Toshiba IoT reference architecture based on these elements. Operational optimization technology for the physical ground and services will be connected to generate new value. And we want to make sure that human knowledge can be inherited in digital form. And we want to make sure that with this as the core, IoT technology will be evolved further. And reflecting this in the global standards, we want to make sure that we return to customer society and help develop existing businesses.
In Toshiba, fusion between cyber technology and physical technology has already started. Services to optimize power generation plants for power plants based on demand projections and factory IoT that support production line yields improvement and utilization rates, sophisticated maintenance and operational support using digital twin retail platform, using in-shop data such as POS data and making demand projections and inventory info are areas to address.
Of course, we will be answering in the Q&A session. But we have from IBM and Siemens, we have Mr. Yamamoto and Mr. Shimada. Together with them, we will be embarking on new areas of IoT. And we're currently developing our new game plan. And this is where we want to see a very big shift and change at the source, which will be AI technology.
Currently, Toshiba's AI digital technology is basically top level. Outside sources have given us quite a bit of credit. Data mining productivity and semiconductor productivity improvement technology has been rewarded the gold prize from -- grand innovation prize by the Japan Society for AI. And Tokyo Electric Power Holdings has hosted a electrical power demand projection technology. And in the first, I think, round of contests, we have won an excellent prize and object assumption technology using deep learning and image recognition as -- by utilizing multiple cameras in order to identify the same individual, these are areas that we are very excellent in. And for all of these different technologies, we have many different, I think, areas that we can embark on. When I visit all of these R&D facilities, it seems like they're not really seeing the light even though they have great technology. We want to make sure that we have a solid game plan in place, so that we can merge this with our technology, so that the mindset of the engineers can be changed significantly to make sure we can commercialize all of these technologies that we have.
Toshiba has been continuing to grow the past 140 years based on our physical strength in the area of production. But in AI and digital technology, we have people as our core competence, and we have quite a bit of business domain assets, and we want to make sure that we have gathered our collective strength to merge cyber and physical to create an even better business, and we want to make sure that we can create new services and businesses that address the problems that the society is facing. And we want to be a CPS technology company that can lead digital transformation.
Lastly, allow me to touch upon the structure for how we will be executing our Toshiba Next Plan. First, venture spirit needs to be awakened. This is Toshiba's DNA. And of course, this is going to be part of our business. But when we generate new businesses, we want to make sure that there is a solid mechanism in place.
At Toshiba, even though it may not be large, we have many, many attractive, I think, on technologies, and I'm sure many venture capitalists will want to commercialize some of these technologies. And we want to promote commercializing all of these different capabilities. And as part of this promotional, I think, function, we want to proactively leverage all, I think, resources both in-house as well as outside. And we are going to be launching a JPY 10 billion scale CVC fund. There will be a lot of outside technology that will be subject to the CVC fund.
And next, as I have been noting, we want to increase the number of digital talent. Of course, the 4,000 -- 40,000-plus engineers will be converted into digital talent, and that will be most important. However, we want to invite extremely talented individuals from outside as well so that we can try to boost our digital capability and also to accelerate our digital capabilities.
And in July, corporate digitalization CTO, we have welcomed Mr. Yamamoto from IBM, who was the top in the global arena. And from Siemens, we have welcomed Mr. Shimada as CSO.
In Toshiba, we are running various programs in order to develop digital talent. Of course, we will recruit from outside as well. Allow me to repeat. Toshiba is a group of very strong engineering talent, and we want to make sure that we can further leverage our strength and expand our strength.
Allow me to move on to the next theme. We want to make sure that we reflect the opinions of the younger generation. In line with the next -- Toshiba Next Plan, younger employees that are in their 20s and 30s have been gathered together. And we call them the younger next project, and we had asked them to make different proposals. And that has been reflected in many of our new Next Plan. It is made of 24 members. They have discussed about business that leads Toshiba's future and structure for generating new business. I did say that this was reflected in Toshiba's Next Plan, but there are areas that we need to work more in granular detail. In the medical arena as well, and we are going to be discussing the realization and the feasibility of each of these ideas going forward.
And now moving on to our corporate structure. I mentioned in the outset that Toshiba is a venture-type technology company. And that is the core for our development. Toshiba, historically, has been multilayered. Based on our features, I think our organization should be very simple and very flat. That's my thinking. When we look at the current Toshiba Group's organizational structure based on historical significance, it is very multilayered and very complicated. Currently, we are reviewing this organizational structure. As an idea, we want to try to make sure that consolidating of business units and simplification of hierarchy will be happening, so that we want to have quick decision making. We want to expedite the speed, and that is the type of structure that we want to have in place. Namely, we are going to be reorganizing our business units, and we'll be consolidating them. And we are going to be slimming down our corporate organization, and we will make sure that we optimize our staffing and also seeking efficiency. And also we will be reviewing our executive officers' compensation scheme.
As performance-linked index, there will be ROS, our ability to generate profit, and absolute target will be set as well ROIC as well as ROE. It will be targets that we will be setting. And depending on the achievement levels, the compensation will be adjusted. As I mentioned in the outset, TSR, total shareholder return will be accounted for.
And for the restricted stock portion, it will be expanded significantly. And with this, we want to make sure that management will be motivated to be responsible for contributing to improving and boosting corporate value in the mid-, long term together with the shareholders. And that is what we are hoping to achieve.
Now moving on to internal control. And so based on Toshio's self-regulatory ideas, when it comes to our internal control, that has been given quite a bit of credit, and they said that it should be fine to move ahead with the current scheme. We will continue to have business units in the first line to be accountable for profit and loss and operate the businesses. They need to be rock solid. And therefore, the first line will be most important. And as the second line of defense, we will have corporate staff, which will be enhancing horizontal alignment in monitoring and supporting. And lastly, internal audit in the third line will focus more than ever in risk management, group governance and compliance, and we will be making enhancements in each of these different areas.
Lastly. As I explained, in order to build a solid Toshiba, and to make sure that we are in line with the overarching trend of the world, and for us to make sure that we execute this next plan in a very solid manner, we need to make sure we have a good structure and mechanism in place. Each and every employee of Toshiba Group will need to commit to Toshiba's Next Plan and they need to have a conviction to make sure that this will be surely executed and delivered. And we need to make sure that we share this thinking across the whole group. That would be most critical. As I said, the philosophy of Toshiba Group, which is available on the left and the right, and the 10 Toshiba commandments for Toshiba Next Plan execution, from today and on, each and every one of the employees will need to make sure that they embark on activities and make Toshiba Next Plan theirs. Together, HR schemes is being reviewed by HR currently to make sure that the action and results that contribute to the achieving of these targets will be rewarded. And that is going to be embedded as a supporting factor for Toshiba Next Plan.
For the people, for the planet and for tomorrow. This is Toshiba Group's management philosophy. We will work as one, as a group to materialize Toshiba Next Plan and make sure we respond to all of what our stakeholders, including our shareholders, are asking of us. And we want to contribute further to the development of the society.
Thank you very much for your attention. With this, we would like to conclude our briefing for Toshiba Next Plan.
So thank you very much. We would like to now move on to Q&A session. We would like to introduce to you the additional members. We have Mr. Shinichiro Akiba, President and CEO for Toshiba Infrastructure Systems & Solutions Corporation. We have Mr. Masayoshi Hirata, Representative Executive Officer, Corporate Executive Vice President, CEO. We have Mr. Hironobu Nishikori, President and CEO, Toshiba Digital Solutions Corporation. We have Mr. Hiroshi Fukuchi, President and CEO, Toshiba Electronic Devices & Storage Corporation. We have Mr. Mamoru Hatazawa, President and CEO, Toshiba Energy Systems & Solutions Corporation. We have Mr. Taro Shimada, Chief Strategy Officer at Corporate Digital Business.
So now we would like to open Q&A session. Regarding the specific way of buying back our shares, I am sorry but we are not able to answer to your questions. But other than that, we would like to welcome your questions. Thank you very much. We would like to bring you the microphone when you raise your hand. Please, could you kindly identify yourself before you make a question -- you ask a question, your organization and also your name. Thank you.
My name is [ Seta ] from Asahi Newspaper. I have a question to Mr. Kurumatani. In principle, it is about the plan for your organization, headcount reduction. In the timely disclosure, you referred to -- it was mentioning of the early retirement of 1,000 people, and also you are considering additional headcount reduction. Now in Toshiba Group, already in the past, you have done significant restructuring. So in addition to natural attrition, you -- why do you think it is necessary also to conduct early retirement? And also regarding the headcount reduction, you are referring to 7,000. Do you -- so is it possible to expand the scope of the early retirement? And also, how do you regard your responsibility as a top management team regarding the use of the early retirement program?
Thank you very much for your question. Regarding early retirement, this time this is Energy department, Energy corporation, and also Systems Solutions. Those are the areas that we're going to conduct headcount reduction or early retirement. So we're not going to do it across the company. But regarding those parts of the organization, where there is a problem in terms of business management, we are going to conduct early retirement. So in order to raise the profitability to a proper level, each business unit thought about the possible options. And for these 2 organizations, they decided -- they judged that the reduction of fixed costs was necessary, that is -- so therefore, it's not that we made a judgment to conduct significant, major reorganization. Regarding the number of the headcount, the total headcount, how many people do we need? It is tied to IoT investment and how much efficiency we can gain. So headcount issue is always tied to investment. And when we don't do any investment for IoT, we need to increase the headcount to some level in order to achieve the plan. But then we did invest in IoT ledger, and now we have the plan that we can achieve the target with higher efficiency, with 7,000 people reduction. Most of them are really coming from attrition, natural attrition, 3,000 people, 4,000 people a year. It's just that the age structure of the current employees are such that it will be the case. So of course, we will do hiring in parallel, so we have to balance the 2.
Regarding early retirement, so I understand that it will be about 1,400-some. Do you think it will increase in the future, the retirement -- early retirement people? And also it's not the shift of the resources, but you are using early retirement method instead. How do you regard your own responsibility as a management team for this decision?
Well in the future, we don't have any plan to carry out this kind of early retirement once again in the near future. Of course, it's about the future, things are subject to change. But at least currently, we don't have any plan to carry out similar method. In the top management team, although this is limited to a few department, and also although that is tied to the current performance of the departments, we of course regret that we have to use this method.
In relationship with the plant reorganization, again you are talking about the reduction of the locations by 15%. Now for industrial motors and some power plant monitorings activities are done to look at the appropriate level of the facilities. Is that the reason -- is that the data or the basis for you to decide the 15%? Can you talk about that?
Regarding the plant reorganization, of course it's tied to the local community impact. It is a very sensitive issue. So in [ terminal 2 ] we have done very careful study, review. And therefore, we would like to -- we probably need to disclose after everything is finalized and decided. But the idea is to consolidate more larger, more efficient plants and in that sense we believe that we can have efficiency and also aligned rationalization. That is the basic thinking.
Thank you very much. Now, the next person please. The 2 reporters down, if you would.
I am Yamada of Toyo Keizai. I have short question, actually 3 of them. The first question is, sorry, this is kind of straightforward. But this is such a fancy hotel as a venue, and the fact that your president is not here. I wonder why you have chosen this venue and why you have the lineup of management as you have in there. So I think some of the comments that you are -- have delivered kind of lack the ground.
The hotel was arranged by public relations. We're kind of late in deciding the venue. So we didn't have much choice.
Well, I think you have used your headquarters office, haven't you?
Yes, true. But this time around, public relations department thought that this is a big announcement, and therefore it will be nice to have a larger venue. So the management have acknowledged such a need to have a large venue.
And the fact that, Mr. Kurumatani, the chairman and OIC, not there?
We talked about that within the management representatives group. It's a mid- to long-term announcement we're making today. I thought that I'll be more suitable person to deliver the message, and that's all.
The second point, you talked about organization. You said you're going to split the company structure. And how do you judge the effects, positive effects of it, although there are some negative comments with regard to your split earlier? So what is your assessment now? You talked about making your organization more flat. Does it mean that you're envisioning a smaller organization? This is the second question.
Well in terms of splitting -- company split, we're going to keep status quo next year and ongoing. But in terms of decision-making line, we currently have a complex decision-making line. So as we go through the business units structure, we want to simplify the decision-making procedure. That simplification is the very aim of our business unit structure. And in terms of the number of units, we're going to have large groupings so that we can focus on the necessary areas where our resources need to be injected, thus quick decision-making is also important.
So do you think that having -- splitting your structure and having different business units, that's successful?
Well I think it's more -- some people say this is more granular outside both company management. But I myself think that there is good unity as long as we have good, unified thinking in place. We have 9 CFTs. I think CFTs functionally, very efficient, and the side, CFT-to-CFT kind of communication becomes quite smooth. This is really the way our company is united. And I feel that day in, day out, every day I went to work and I felt that there is good unity in place. So vertically and horizontally, there are some benefits to the command and the structure to both extents. And I would like to emphasize the benefit of business units.
The third point is regarding the risk management. My question is whether you are confident to manage your risks very well? Usually risk management is looked at from the point of the value or amount. [ CB&I Stone & Webster ], the amount, not such a large amount, so this had not been taken kind of seriously or deeply. So how are you going to learn from your previous experiences when it comes to risk management? The Freeport is a JPY 100 billion loss, and I think that needs to be a put under focus.
Well my earlier business role also forced me to look at risk management. So I think the rule of thumb is, when it comes to project management, there's project supervision and there's some criteria that we have set forth. And once it hits the criteria, then it will be looked at a deeper level. And we have that system, we're putting that in our risk management system now. So what used to kind of go through without the necessary deeper look now is going to be caught at those levels. And so we have the system in place now. Regarding M&A, of course this is needless to say, that all of the M&A projects or possibility will be scrutinized by myself, specifically. So we will make sure that we'll do the duly process.
I understand the criteria you talked about. But usually the real risky ones do not have the price tag, so to speak. Or at that time of contract signage, you don't know what the potential risks are. How are you going to catch them?
Well regarding them, we would make sure that the headquarters makes a decision on those activities directly. Of course, there is that guideline that talked about that serves as the criteria. But the ones, which could possibly come through the criteria barrier also needs to be caught. So beyond and above the guidelines and criteria, each department head, for example, is on a watch. And if there is anything of a fishy nature, then it comes to me directly. So the screening, so to speak, is going to be very deep and wide, at least for the time being.
Yes, this first person in the front row. Thank you.
My name is Moriyama. I'm from JPMorgan Securities. I have 2 questions. First, it's about the future of the domestic nuclear pipeline projects. What do you think about that in your midterm plan or midterm strategy? EVWR, basically, that is the technology that you're using, so the restart of the plans are very difficult, it seems. And also according to news articles, Hitachi, Mitsubishi and you may establish a -- jointly company under the leadership of the government. So if such a thing should be proposed, what would you -- be your thinking about that idea? If you could share your thinking as much as you could, appreciate it.
I would like to have then, Mr. Hatazawa, who is from Energy Systems. Thank you.
Regarding domestic nuclear pipelines. Within the government's energy strategy, the nuclear pipeline is supposed to account for some certain level of the percentage in order to contribute to a stable supply of the power. That's how we understand. So into the future, we would like to put our efforts there continuously. Now second question, about the possibility of the restart of the operation. It will be discussion between the government and also power companies, and we are there to support their decision. And for the reorganization of the industry, we're sorry, but we cannot make any comment on the -- based on the hypothetical questions. Sorry.
And I was trying to -- I'll just summarize, these 3 questions are in one question of the nuclear bubble. So I would like to ask you the other 2 questions. There's a business portfolio on Page 22 in monitoring scope, those companies. I'm talking about Page 26, I'm sorry. So everything to be monitored, and also, when you decide to terminate the monitoring, what would be the trigger to end that monitoring? Especially in the latter half of the presentation, storage companies power, HDD, when you want to focus on these 2? In midterm sales growth seems to be quite aggressive. So power and HDD System LSI, including your strategy about these 2, 3 items, if you could share with us your thinking?
Monitoring is very important, I think, we believe. And actually very detailed monitoring is being done 3 months, 6 months, sometimes every month we conduct monitoring. I mean, that is the assumption. And we have established -- we set KPS for each entity. And we judge -- we see if the KPS are met, not met. And also if it is not met, why it is not met. And so we will follow up on this to ensure the execution of the plan. And if the goal indicated here cannot be achieved, and with a very big gap, maybe we need to carry out some different mass activities. So some kind of a criteria for judgment is held internally. For System LSI and mobile?
I would like to cover that. My name is Fukuchi, I'm from Device, Electronic Device. Now for HDD, traditionally HDD for PC is an area that we've been very strong. But it's been shifted to SSD in the market, and also Near [ LI ] image will be the bigger role though and would be the case, Nearline HDD. But then last year, we announced large volume -- large capacity Nearline HDDs have been very strong. And yet, the segregation by the customers takes time, because they're very careful. But this is bound to grow, we believe. So in terms of the sales, we do not believe that our forecast or our target is that aggressive. For System LSI, we do regard -- we have been regarding that as an issue. So finally, SOC for automotive industry and also industry-purpose logic, we have, getting more probably difficult [ subsets ] for these 2. So now we are going to shift our engineers to the discrete size, so that we can control our fixed cost, while we can achieve the 5% SO -- ROS through structural reform.
Just another question for -- on buyback within 1 year, you want to execute this. Now in your midterm plan, cash is indicated there. If that cash is built up healthily, then within the scope of the shareholders' return, all this time, you said that you're not that aggressive. But in that aspect, maybe do you think you will be using possibly the original buyback in the future?
Well regarding that, we have this -- calculated the distributable cash. And also, we need to consider the risk to some extent. So when we refer to -- when we think about these 2 for some time to come, the JPY 700 billion is maximized that we can do. But, of course, depending on the cash condition in the future, we also would like to consider the investment opportunities. And of course, it is not impossible to use the method of our own share buyback. But currently, JPY 700 billion is quite a big of a size. So our focus now is to carry this out very successfully. For cash basically, it's not like -- our thinking is not to put it into M&A, or focus on organic growth and also buyback and also dividend. That is the purpose of the use of the cash, roughly, in our mind. Thank you.
Thank you. And I would like to make a follow-up announcement regarding what we announced at 12:00. ENN Ecological is a company in China with whom we have signed a contract. And now in the new, we disclose this, as a timely disclosure. And we're going to distribute to you this news release, so please refer to this. So we would like to continue our Q&A session.
We'll continue with the Q&A. The first line. Yes.
I'm Hirakawa, Merrill Lynch Securities. I have 3 questions. The first question is with regard to your 5-year plan, which is quite grand. And you said that you will spend a lot of effort during the first year for quick sort of a start. You talked about reorganization. And regarding, in terms of your profit, the first year is going to be in the negative zone. How are you going to make that even and in a positive territory going thereafter?
From '17 to '19, we talked about how we want to improve our net sales and OP profit. Yes indeed, it's negative JPY 200 billion. But if you were to look at what contributes to that, this is detachment of the PC business, which actually works to the positive side. And we talked about Memory, the sales of the Memory business. This is going to be independently managed on the part of TMSC. So there's net sales, which will not count to us, which will not be on our account, so to speak. So we need to really look at it from a realistic point of view. In essence, our business is actually more profit-generating, and that is about JPY 25 billion in revenue size.
You talked about restructuring a little bit, if you would supplement.
Yes, in terms of reorganization restructuring, we're going to use JPY 27 billion this fiscal year. And in next fiscal year, we already will see a JPY 43 billion benefit as a result. So the restructuring that we will do this fiscal year with cost incurring will end up with 10 billion worth of improvement in the following fiscal year. Kurumatani has just explained earlier that there is a natural decrease of staff. And that's quite a large contributor that amounts to JPY 15 billion in amount. And also System LSI staff members will be transferred to other business divisions. Usually, it would end up with an increased number of staffs in the new business unit. But we have a rationalization for that, and it's about JPY 13 billion positive impact. Altogether, there's about JPY 40 billion impact as positive effects as a result of restructuring.
The second question is, looking 3 years down the road, you talked about OP margin being 6% being the target. I heard Mr. Kurumatani talk about 5% as a figure. Even 5% I think is an aggressive target, but you talked about 6% today. So what makes you so confident to achieve even higher OP margin?
Well, this 6%, this is not our firm -- firmly to be achieved target, so to speak. But I have talked with heads of each business unit many a times to come up with a good vision as to how far we can go, and what will be the level, achievable level, of OP. And as a result, JPY 275 billion came out to be the number that we think we shall keep in mind. But we also need to have a buffer. Of course, margin of error needs to be taken into account. So what I can say here is it's not the number being the firm target first. We want to go somewhere beyond 5%. As a result of in-depth, repeated discussions, we all decided that 6% will be a likely target.
The third question is regarding IoT. Mr. Shimada, you have the experience of working for Siemens, so perhaps you'll be the right person to answer this question. Siemens has worked on this issue for about, over 10 years, including M&A activities. You came from Siemens. Now you're on board with Toshiba. How do you evaluate positioning of Toshiba IoT globally? And in your eyes, what will be the areas where opportunities are, and also where the areas of necessary strengthening efforts are called for?
Well, thank you for your question. I think Toshiba is a little lagged in terms of a global IoT standard. There are a couple of things I can cite as important points when it comes to IoT. One is technology level. The second point is, how large a clientele do you have and what large a database do you have. The third is how are you going to digitalize everything. Regarding the first 2 points, of course Toshiba has no shortfall whatsoever in terms of the technology level and the client database size. So the very question is, how are you going to digitalize everything and have IoT business mind. We need to create the ecosystem vis-à-vis the digital systems to be put in place. That is the key point. This is a cultural transformation. And at Siemens, this was the biggest challenge that Siemens faced when it comes to IoT. In a sense, Toshiba is a bit lagged, a latecomer, but I think Toshiba has a good chance of coming forward strongly to the forefront.
Thank you. The next person, please.
My name is [ Shiran ] from Nihon Keizai Shimbun. I have 2 questions to Mr. Kurumatani. First is a little bit philosophical, but what kind of company do you want the company to be in 5 years? It's a little bit abstract, but that's my first question. What kind of company do you want to make Toshiba to be in 5 years?
Maybe I didn't -- I couldn't explain very well, but I tried to explain what that is in my presentation. When you look at Page 9, for example, in 5 years, not even that very far into the future, we are living in a very fast-changing world, however. Now I joined Toshiba and I realized that this has a very strong basic capabilities. So for Toshiba to become a very solid organization, that's the first thing, like operation should be sufficient and very good and appropriate, so that it can bring the appropriate profitability seen in Japan, seen in the world. So that's the first step. And so in 5 years, we want to be an excellent company with a growth potential. That means that 10%, when I say 10% physical, among the manufacturers who only work in physical society, 10% means one of the top level companies. So at least on the side of the physical world, we want to ensure the profitability of the top companies. That's my -- one of my first goals. And as I said earlier, cyber world and physical world are bound to converge with each other. So there, we believe there's a huge potential for growth. So in 5 years, we would shape some kind of business to relatively high level, so that's another aspect that we would like to -- I would like to see realized.
Another question, it's about the cyber and physical convergence. And also I think it's tied to Shimada-san's comment. When it comes to IoT, Hitachi is there, Mitsubishi is there, Mitsubishi Electric is there. Already, many companies are doing this in Japan. Now for Toshiba, what -- where are -- where can you -- where do you think you can win? What are your strengths?
Well this is very much -- has to do with the fact that how fast we can move forward, of course with the engineering technology, and how we can actually digitally implement everything. Of course even with Siemens, this was a challenge, to digitalize everything. And I think the key word is how quickly can we achieve it digitally. Of course our dominance in the physical area, we're a platformer, so to speak. And the size of the platformer that we are, we're very unique and a sense, in size. So in terms of the grid and whatnot, we are at the very center of where all the data goes in and out. We have all those terminals under control, therefore we have the grasp of the large database. Of course this is competitiveness. Just to cite one. We have many other competitive edges compared to our competitors. So the very key question is, once again, how are we going to make that into our business? Of course, each company has its own strengths. So digital implementation with speed, and I think it all boils down to that point. Shimada just explained, in terms of clearing targets 1 and 2, having the technology itself and the customer base, we have cleared those 2 points. Now we need to implement quickly.
So thank you. Yes, yes, the person in -- you in the third row, thank you.
Maekawa from Credit Suisse. I have 2 questions. First, it's about Page 26. It's about the business portfolio management. Now you said that there are 4 monitored businesses, monitoring businesses. And across the company, you have 22 businesses. And if you include subsegments, how many businesses are now under monitoring? That's my first question. And also, you said that you set up the KPIs and monitor the profits of each KPI. But in 2021, if a unit cannot achieve the goal of KPI, then that in '23, maybe you would carry out some more fundamental structural reform of that organization, or if you decide to just drop it. Do you have an option to reduce the number of the business?
Monitoring, regarding monitoring, we just explained what it is earlier. And in the future -- what will happen in the future, now, according to our current game plan, we believe that we can reduce the fixed cost and return -- recover the profitability according to our current business plan. That's what we believe. But if it turns out that we couldn't do it at all, or it turns out the environment changes so fundamentally, then we have to -- we may need to reduce the cost, fixed costs further. And maybe it will necessitate the closure or exit from a specific business. So we carry out the monitoring and -- however, the basic idea is to make sure that each business will generate profit under the monitoring.
Another question. You talked about hard disk and also semiconductor. And then you're talking about the potential growth or decline of the sales and profit. Within this 5-year plan, the increased sales, backed by the extra capacity is also part of the plan. Like is this possible that we can -- you can draw the sales if you have additional capacity, let's say with the lithium-ion. But when it comes to railways, I don't know. I'm not so sure. And also, you have the JPY 200 billion for another division as well. So it sounds a little bit optimistic to me. Can you talk about that?
We have done very thorough study review for these items. Akiba-san can talk about that, maybe.
I'm responsible for Infrastructure business. Thank you very much for the question. Now in our socio-infrastructure business, the main part of the sales is that we want to focus on the growing market. And including CVS, we want to focus, even to use our strong technology to win the projects and then execute those projects, during which we can enhance the productivity and technology further again, and then achieve the higher sales. That's the idea. And for the rechargeable batteries, basically this is for the static, stable budget and also for automotive mounted ones. We are getting very good demand. And the strengths is long life and also lower temperature operation and also lower -- high power and durability. And hybrid EV, in EV bus and also around transport systems is also railway systems. These are the applications that we can -- we are looking at. When you look at the '21 sales plan, already 60% are -- have been ordered. So we're a major investment for Japan. Kashiwazaki plant expansion of the capacity. And also at Yokohama R&D site and also Minato, Tokyo site will be added. Also out of Japan, working with [ Suzuki Samurai ], we are going to make a plan to ensure the key into our Johnson Controls in the United States. We have signed an agreement for collaboration. So there, we are going to manufacture batteries as well. So in this way, we have a very solid business plan when we conduct investment. For railways, for domestic market, it's been very strong. For Asia, the business is expanding. And so in Europe, hybridization is going to increase. So for those items, we do have strong technology, SCiB, SIC and another one, so 3 items. So we like to use these [ risk ]. As for SCiB, PSMS uses a permanent battery. It's motor engine. So in comparison with traditional engines, the recovery is not -- efficiency is 97%. And also, we have another technology, which has very low power generation. The heat generation, because of the number of the switch is very low. And also a power unit can be minimized in size. And also for inverter equipment, 38% compact size is -- size declining is possible. And now, this allows us to add more components into car and for railways. And also for China, we are talking about the new steam engine trains. And also for Japan, we are working on Shinkansen. In Europe, German National Railways, the hybrid car supply to Europe has been signed off already. So they will be the electric trains using our batteries. And so we are getting other inquiries, and so they are also for long-term, mid-term contract. And we're going to use metric insight in Europe. Once we finish the supply to Germany, the maintenance facilities will be used there, so that we can supply and participate in the rest of Europe as well. For HVAC, for that, globally outside of Japan, CAGR 5% growth is expected. And also for Europe, central air conditioning to individual air conditioning is -- there's a shift. And also for China, our main market building multi-HVAC air conditioning sets, we are growing faster than the market. And also for the future, for '18 to '20, CAGR of 10% is expected. And actually, we have a plan, which goes farther than that. So again, we are investing in the development, to speed up the launch to the market. And also Fujita factory, we're going to build new technology lab. And also in Ku-hsü, in China, we're going to add another plant there for manufacturing. And also, we want to build manufacturing plant in India. And they will be in service in '19. For elevators in Japan, there are many buildings that were built in -- during the bubble time era, and they're going to replace their elevators. So there's going to demand for that. For new build, new supply, Southeast Asia, India, China, they are going to grow in terms of the demand for the new elevators. So globally we have a very strong demand for elevators. Our CVS technology, beam building information modeling is very important, so let me talk about this. A Toshiba elevator in 2021, 3CAD information has been distributed to our customers, and based on that, our customers look at the details for their designing. And now, Autodesk in the United States are going to provide a cloud-based technology for beam. And they -- we have signed a joint development of that technology. More specifically, digital twin will be run on cloud. So the 3D data can be held on the cloud and also attributes also will be held there. And using that simulation, analysis can be done. And based on that quotation pickup and detailed drawings and also weight information and other information can be available on the digital platform. And also I can make all those data on the cloud, so that the confirmation with the specification with the customers can be done more quickly. That's the best advantage that we have there. For physical world, when we activate those data on the cloud, we can bring it back to the physical world. And we can use that in the elevator design and manufacturing processes. And based on that, bond can be created, from -- new type of bond can be created. And also the development of the drawing also use that technology. And also that can go to the construction site, the confirmation of the schedule, the auto-ordering of the accessory units will be done. And also, once the elevator is in service, the data can be updated coming from the sensors and also the maintenance and also the predictive maintenance can be done. So in this sense, cyber technology, physical technology can be combined. For CVS company, we can really grow the infrastructure business.
Regarding Storage & Device, I would like to explain. Now there are 3 business units regarding storage. We have explained in full earlier, we're going to a large size, Nearline. And in terms of the sales increase, we're not accounting for a large increase, about JPY 400 million or so in size. And we have a very good situation with a discrete semiconductor. And we have a backlog. It cannot produce enough. So the growth in this area is quite firm. The problem area is actually System LSI. FY '19 aims to achieve a profit. And we will have CapEx injected, so we would be stimulating the market. And as everything goes as planned, I think we will see a positive outcome. So I think if you could look through FY '23, but we have an interim time frame of FY '21.
Thank you, any other questions? Yes, the second line.
I am Furukawa of Bloomberg. Regarding your LNG, you are going to -- you just made an announcement, you talked about different possibilities. Why did you decide on ENN? And the timing of this announcement was somewhat unusual. Did you want to -- intend to make a full announcement at the time of this press conference? Why was it in the middle of a Q&A that you made that timely disclosure?
Well, we have in-depth talked about how we're going to handle this business, including the external directors on our board. The question is, whether this is our core business or not. And the clear answer is no, this is not our core business. And risk going forward, no, nobody can really fully assess the risks of the 2 decades going forward. So we think that, at this point in time, we would like to start from ground zero for the company's growth. We don't want to hold within ourselves something that could potentially backfire at our strategy. So we felt that detaching this away from us would be a wise decision. Of course, many investors, any potential buyers have been in dialogue with us through the process, as you know. As a result, ENN was decided as a purchaser -- as a counterparty, should I say. In terms of the procedure, ENN is a listed company. So of course, there is a due process they have to go through. The announcement timing just happened to be now as a result. That's all about the timing. There's nothing particular I shall mention about the timing.
Thank you for the question. Regarding this LNG business, we have talked on many occasions about the risks that we might have over the 2 decades. We wanted to clear everything all, and every risk for the future at this point in time. And a lot of people have actually given us proposals and we assessed that ENN's proposal was the best, that's the reason why we've chosen them as a counterparty.
Yes, the gentleman on the first, front row.
My name is Yasui. I'm from UBS. On Page 16 of your materials that's '18 to '21 operating profit going over JPY 240 billion, roughly speaking. If you include the buffer, there will be increase of JPY 200 billion increase. Now in that, your own effort, like cost reduction, how much can be done by your own work, like cost reduction? And the rest could be subject to your external world and also M&A. So if you divide this amount between the ones that is under your control, that's -- how much would that be? That's my first question.
Thank you for your question. The procurement reform and also structural reform, very roughly speaking, these are 2 things that we can really control, I believe. But for the growing earning, of course we need to do some investment, we have make a return. So we do receive orders. We do -- have received orders for some of the business already. In case of auto industries, actually we -- the lead time is very long. They talk to us quite early sometimes and they give us really ahead of the time orders. So these numbers are really -- have a good justification substance behind it, in many aspects. Now the rest, JPY 30 billion is a buffer.
Exactly as Mr. Kurumatani said, the impact on the greater earnings, it seems to be quite big. But the financials department and also management planning sessions, we look at the proposal provided by different business unit, and also we very fairly -- and also of course, the idea is to execute the activities but still we reflected some risk buffer and then we came up with this number 240 billion.
My second question for new businesses, and power, semiconductor the medical equipment, what is the growth potential? Currently, I don't think these businesses are very big so what is the expected sales growth and profit growth coming from them? For the electronics, I mean the semiconductor including auto industry, everybody is all more or less after the same customers. So once again, if you could share with us your outlook, your sense of achieving these goals.
For SCiB alone, how much sales will be made, we're not disclosing that, particularly today. But this time, we are estimating the growth coming from this in a relatively moderate way. When we are talking with the businesses, customers, probably we can be even more aggressive but it's just that we are not being able to respond to all the demand. And at the same time, and therefore we'll be able to -- we have a sense that we'll probably be able to maintain relatively high profitability. So we make in estimates, the impact to be greater than what we are thinking. But still in the plan, we are relatively moderate, not very aggressive. Also in addition to that, this battery, this is going -- this doesn't go into EV market.
Is that right? Like HEV and bus or other ones? And Tesla, Panasonic and activity in Europe, do you think you also participate in that space?
For commercial vehicle passenger car batteries, for that, the energy density with our current SCiB is not enough. So in order to supply towards the market, we need to have a lot of units. And if we can double the energy density by 2, we can -- we are trying to -- we are working with CBMM company in Brazil. This has the biggest production of the battery materials and so we are trying to develop the anode material using the sulfur -- titanium sulfide. We have passed the time allocation. So can we have just one last question?
The first row. Question please.
I am Ezawa of Citigroup Securities. Now regarding your business, your positioning is not so much of a risk-taking position. In other words, you cannot take much risk. You talked about backlog. Looking at 5 years down the road, how do you position Toshiba against other companies in terms of because you cannot take the risks, you may have to forgo on some of the opportunities. And if that is the case, that would become your handicap as a business entity. I wonder if you have taken that factor into account. Or to the contrary, are you just going to seek profitability and larger size of activities? So if you could comment on that point, please.
Well, as for myself, I said we would rather not go with a high-risk business. I didn't say we cannot take risks whatsoever. So in terms of business opportunities, I think cyber-physical is the area where we can generate a lot of profit. So as far as sales, we have a very stable B2B model. And then in that profile, we would like to first pick and choose the businesses, which will firmly deliver profit to us. In other words, there's no reason for us to take risks blindly. Of course, some businesses will require a large capital and who wants to inject a lot of capital and go for that additional business area with much risk involved. It does not sound rational to me.
I have another question. This is particular to IoT and digitalization. Your reform, so to speak, you talk about short-term cost cut. But in some of the pillar core items, I think it will take time to achieve. But at the same time, your margin is going to jump up rather quickly in the near-term vision. So I wonder what could be the explanation there. IoT, when is it going to generate profit for real?
Well, this time around, this plan, we did not take account of a lot of profit generated by IoT. In other words, the one -- the plan that we have unveiled in front of you is something that we have tallied up in a bottoms-up approach, and it's important that we transform ourselves to a stable firmly profit-oriented company, and that is the basis of this presentation. Additionally, cyber-physical is an area where we think we have a good cutting edge. This is a high-margin business model, and I personally think that there's a large potential for us there. We would like to start projects in that business area as quickly as possible, but that is not taking into account with this current plan that we have explained to you. We have just explained the cyber-physical area as a direction that we might in the future might materialize upon.
Thank you. Thank you very much, and this concludes the presentation regarding Toshiba next plan. Thank you very much for your participation.
Thank you very much for your patience. Since it is time, we would like to move on to a Q&A session for 2018 second quarter earnings report for analysts and institutional investors. We would like to introduce the members. Representative Executive Officer, Corporate Executive Vice President, Masayoshi Hirata; Accounting Department General Manager, Hideya Takashima; PR and IR division, Head of IR, Kohei Hayashi. We would now like to invite questions from the floor. If you have any questions, please raise your hand.
When you ask your question, please state your organization name and your name. The first row.
I'm Moriyama, JPMorgan Securities. I have 2 questions if I may. First of all, regarding Slide 23, 24 pages, you gave us a annual overview. You talk about JPY 25.3 billion for reorganization restructuring efforts. And if you could give us a breakdown of it as part of business unit and also fundamentals analysis is the second question. If you could tell us what were good areas, what were bad areas.
First, this is the second quarter consolidated business results, right? This JPY 25.3 billion, it's Page 24, and as for the segment, you can refer to the slide. And if I could talk about the roundup figures, energy is about JPY 10 billion, infrastructure about JPY 6 billion and then industrial ICT solution is about JPY 6 billion. And then others is about JPY 3 billion. So those are the kind of roundup breakdown. Sorry, if you could restate your second question.
So taking into account such restructuring efforts, if you could tell us your annual projection on the fundamentals analysis, if you could tell us which are good ones and which are bad ones.
You mean...
Sorry. Let me rephrase the second question, if I may. To restate, your first half is explained on Page 14 of the same packet. So in the first half, profit was JPY 7 billion. If you could give us further detail about that. And as for the business segment, if you could give us analysis as to which business segment basically generated good profit as for the investment made.
I'm trying to think of the best way to answer that. In the first half, as I -- do you want year-on-year analysis?
Maybe versus plan, if you would.
I see. Versus plan. Well, our overall assessment first, if I may, is that infrastructure and retail, those are the good ones, infrastructure and retail. And energy was better than expected. So versus plan, it was somewhat better. Industrial ICT, also better versus plan. Storage, on the other hand, as I have explained earlier, we suffered a little bit in hard disk and NFT lagging factor. Those are the reasons why we came short of our plan, okay? So storage, this is basically a time line factor then. It was a lagging factor, right? And then annually for the full year, JPY 8 billion profit is, yes, made in storage. That's right. So the second half will be the recovery period. The first half would be lower but second half will be higher. For NFT, there's a bit of lagging. And as you said, it's JPY 8 billion worth. So this greatest plus factor. System LSI, no change. I'm not sure exactly how to phrase it but it's not -- it wasn't expected to be a rosy future. So that had been taken into account.
Now moving on to the individual in the very front seat.
I'm from Mitsubishi UFJ Morgan Stanley, Miyamoto. First question, this is around the storage device profitability. And especially in semiconductors, there's JPY 5.6 billion for profitability in the first half and then JPY 16.4 billion for the annual number. And if you break this down with discrete and others, what would it look like? That's one.
Give me a moment please. First, for the first half. When we look at the total, I think it was JPY 10.6 billion for the first half.
I think it's JPY 5.6 billion for semiconductors only. Can you give me a breakdown of that?
Discrete was about a little less than JPY 10 billion, and NFT was about JPY 3 billion-plus and the variance is System LSI.
And what is the number on an annual basis? Same number.
Total is about JPY 16 billion with discrete, about JPY 16 billion, and NFT is about JPY 12 billion. So the variance is System LSI. And the second point is energy orders. On Page 16, it's minus 19%. I think this is relevant to the Next Plan as well. In the Next Plan, next year is going to go down and going into fiscal year '21, it's going to be shifting to a very strong increased sales. That's the story. So the order is decreasing right now.
And what is the probability of increased sales achievement? How do you interpret this, Hirata-san?
Fiscal year 2019 is going to be the bottoming out of sales, and that's because we don't have any large-scale orders. I think that's the significant factor. And then for recovery to happen after that, it would be in the service area or maybe in the conversion area. Especially for services area, orders did not come in early. Therefore, it's probably going to be from mid fiscal year 2019 that we'll start seeing how the orders will look like. If so, we can't really project from the past. And it would be all contingent upon future efforts. And the energy Next Plan is based off of future efforts, yes.
And third area would be LNG. You're going to be selling that business to a Chinese company. In CFIUS -- there could be CFIUS risk, and it could be that maybe this, I think, deal may not be concluded. If so, then would you need to revisit this from scratch?
Somebody asked this question before. We need to make a payment. Toshiba needs to make a payment. We asked quite a few companies to bid. And condition-wise, this company by far gave us a very good condition. And yes, we narrowed down to a couple of companies in the final stage, but then we determined that this company was probably good. And we have discussed about CFIUS internally as well. There is a U.S. China trade war that is on the table at the moment and there were some concerns. And so there were trade issues. That was the trigger. When you export from the U.S. to China, I think from a U.S. point of view, I thought maybe it could be a positive story. And China is lacking LNG. Therefore, according to some information that I've heard, all of the duties, it will be less duty that will be imposed. Therefore, we thought maybe our interests were in line. They and our interests were in line. And then the company that will be buying this, they have actually addressed CFIUS in the past as well. And this is something that the U.S. authorities will be determining. Therefore, we can't say anything decisive. But we think the probability of this deal concluding is quite high and that's why we decided to transfer the business to this company, this Chinese company. Thank you.
Any other questions? The person sitting in the -- a little behind that person.
I am Matsuhashi of Goldman Sachs. I have 3 questions if I may. The first question is regarding System LSI, your profit and loss situation. Looking at next fiscal year, what are the concrete vision for improvement? And for this fiscal year, of course, you're going to go through impairment right away. Does it have any fundamental reason or a technical reason, which might actually alter the story? So if there is any risks of that, please mention.
Thank you. Regarding System LSI, I feel sorry to have to say this with the -- with regard to those who are on the forefront of this activity. But this area of business definitely needs an improvement. So looking at the first half, the products, which are lower revenue-generating, we're starting to discontinue them. So shifting to discrete is one way of improvement. In System LSI, we have highly talented engineers. So they can be repositioned to work for other business unit and we would like to at least be par with the level. So discontinued part somehow can be canceled out. That would be nice. And in terms of the second half, of course, we are in conversation with customers who would like to be efficient, and a lot of the plan is now basically more finalized. So we're going to turn to a black number, profitable number in the second half.
Okay. And the next fiscal year, you don't have to think about impairment.
Impairment will be taken into account as we see it necessary, but you will go through the basic trend of improvement, yes.
The second question is regarding ROE. You talked about the Next Plan and the ROE. If you could tell us the way of calculation, that would be quite appreciated. So as I understand this, 3 years later, your capital cost -- it will be somewhat exceeding your capital cost. That seems to be your plan and vision. But of course, OP profit improvement is quite clear. But in terms of the final profit size, it doesn't seem to be ample. Please tell us how you calculate this.
Well, the way of calculation, the way we generate our statement is quite clear. It's net divided by PO. And this calculation is quite straightforward. And in terms of against the target, what is our sentiment? We are taking a position of returning back to our investors. Vis-à-vis, we talked about dividend payment that we will restart, and we would like to basically make sure that our capital basis is quite healthy. And in terms of the JPY 140 billion that we have talked about, we certainly would like to achieve it at the 6% level of margin. As I said, we want to land somewhere above 5%. And this was built up from the bottom kind of analysis. And we thought that next year, we will go beyond capital threshold.
And so in terms of equity share, that's taken into account? You cannot talk about the specific number, can you?
Your understanding is correct.
In terms of the free cash flow expectation, I looked through the document that you have given to us. Free cash, you will be generating down the road and it will take some time to see that. Please tell us why. And then in terms of CapEx, where you want to spend your investment money. How did you allocate? What was the rationale?
Well, in terms of the free cash flow, and it takes time for us to become positive, Kurumatani had explained earlier we want to be front loading our investment activities. Thus, the CapEx spending will be up front. That's why. And also FY '19, we want to have good liquidity. We want to have a smooth payment. In terms of liquidity strategy, we would like to -- of course, we need to take a cautious stand as we make our decisions.
And the third question. CapEx, your breakdown of CapEx, headquarters and others, how did you allocate?
Well, it's over a 5-year time frame. So we want to have a good, strong pillar of IoT. JPY 110 billion in total, as you see on Page 21, is the reason. That's basically the big pillar of investment.
Well, I have not heard of any company other than financial institutions that invest this much amount of money for IoT.
Well, I personally don't think this is too large a number. As Kurumatani explained earlier, looking at the existing system, 80% of the existing system will actually be scrapped and then we will make a one packet system altogether with this new CapEx. So we think that this size of CapEx is quite rational. Of course, we will look at detailed plans going forward. So we might have minor adjustments but we think that for the size of the company we are, this is quite appropriate.
Any others? Okay. The individual in the very front, please.
I'm Hirakawa from Merrill Lynch. There are 2 questions. One is surrounding energy. This may be redundant. When we look at energy orders, in the first half, if there are new orders that you have taken on and backlog that is being reduced, we understand the net number. But do you have a breakdown?
I'm sorry. I couldn't hear you. Which portion are you referring to?
Energy orders. I know that there's the new orders as well as the backlog and we understand the variance. But if there's a breakdown of the new orders and the ones that have shrunk in terms of backlog, can you give us details? And end of March 2019 for energy order, what level do you think it's looking like? And you said that gross profit margin has been improving. But how much gross margin improvement are you seeing? And would that pace be maintained towards the second half?
So us taking on the orders, I don't have any calculations, but when there's sales, then it would be a negative. And I think we do have track record from last year.
So allow me to address this in a different way. Of the orders, there are original orders and there are backlogs that have shrunk, and that's not included in sales. Is that correct?
So the ones that have been included in sales, yes. Basically. That's exactly as you said.
And there are 2 things related to energy. End of March 2019 and for this year-end, what do you expect as a level of orders? And then how did you try -- can you quantify and explain about gross margin improvement?
End of this fiscal year when it comes to backlog of energy, I think it's basically going to be flat. As mentioned before, especially in area, we are going to be very, very cautious and be selective when it comes to taking on orders. So this is not going to increase. And when it comes to gross margin improvement, conclusion-wise, it's -- we've already seen a 1% improvement year-on-year, the reason being that many of the orders that we have taken on have very high profit, gross profit. But the ones that are backlog remaining, basically, the gross margin is counted as 0.
It's a follow-up question. So gross margin being 0. So these are unprofitable projects from the past. So what proportion is that amongst all of the projects that you currently have?
I unfortunately don't have that number with me right now. So allow me to follow up.
Second question. This is something that we asked before, so I want to clarify. So when it comes to Memory's 42.5 -- JPY 45.2 billion, which is equity method profitability. And I think what has been recognized is after-tax. Is that correct?
Yes. Correct.
Any other questions? The person who's sitting in the second row, please.
I'm [ Shimutaru ] of Mitsui Sumitomo Asset. Regarding the Memory, you talked about second quarter was JPY 13.3 billion. First quarter, was it one month worth? Is it right, for equity method number? So it didn't quite reach JPY 36 billion. You said you cannot answer questions regarding the Memory, but I thought this is a rather good number given the market condition. As looking at it from an objective point of view, it's a rather good number.
I agree with you.
And regarding the Next Plan, because you are here to answer questions, Mr. Hirata, I thought that your plan is quite steady and I like the type of the plan that you have set forth. But as you roll this out, is it basically that you've grounded yourself and then went step-by-step towards the future? Is that more like the style of your planning? Some companies actually give more aggressive, more dreamlike vision but it seems like your plan was more down to the ground. So if you could tell us a little bit about the backdrop through which you came up with this plan.
Okay. If we were to look at the past, of course, many people, many being people from rating agency and whatnot, in the last 10 years, we have not been able to achieve what we said we will do, and therefore, our internal control have been questioned by different corners of professional people. So Mr. Tanaka was the head of the company for 3 years, and some of those numbers was somewhat regrettable. Kurumatani has spent 0.5 years reviewing the status of our company internally. And of course, there are many tasks involved with the improvement plans. Some are somewhat in transparent, but we need to invest and try to capture larger net sales. And that's the kind of thinking we had behind this plan. And as you can see in this plan, there's a risk buffer in each fiscal year of JPY 10 billion size or double-digit to a JPY 1 billion size. So of course, those who are on the forefront of those business activities, they have a lot of passion for what they do, and they have their own vision of what they think they can achieve. But with Kurumatani and the senior management, we have basically looked at every potential risk factor and made sure that we cautiously come up with a plan that we think is quite reachable. So this is how it should have been in the past as well. Well, that's kind of a management-style question you're addressing. Some people actually go with a higher stretch and then this is what we are -- can possibly achieve. But even the state of the company now, we think that the buildup process to the vision was more appropriate to us.
I'm Yamasaki from Nomura Securities. There are 2 things. First is the breakdown of semiconductors that you touched upon and I want to touch specifically on discrete in first half and second half. Second half will see a bit of a decline. And on the other hand, if the stock price, about JPY 105 -- exchange is JPY 105 to the dollar, then I think this could change. And in your presentation, I thought you said that it was very tight. How are you observing the market at the moment for the discrete market?
Exactly to your point. The prerequisite of the ForEx is a bit more stringent. So that's why the numbers may look smaller. Coming into November, I think it's about JPY 113 to the dollar today. And from a ForEx point of view, yes, there's a little bit of maybe a rise potential. And starting with Fukuchi, as well as all the business unit people's comments are saying that for the time being, the market is looking pretty solid and pretty healthy.
Second question. This is something that I should've asked in the Next Plan session. When it comes to your global development, I think in the past, your, I think, portion of overseas business was bigger. And when you changed the business portfolio, overseas business is reduced. And now it's at about 40% levels, and it shrunk to about 40% levels. When we look at the Next Plan, how much is reflected as global development plan? When we look at the overall plan, what is your thinking? And 7,000 individuals who are going to be reduced organically. I think that's predominantly probably domestic. And so what about overseas talent?
I don't have detailed numbers at the moment or maybe I'll touch upon that later. But as you have pointed out, Westinghouse or Landis+Gyr or PC or Visual Products, they were basically overseas business operations, and that's gone. And now I think maybe the overseas portion of the business has been reduced to about 45% levels. But as Akiba explained before, when it comes to China as well as Southeast Asia or India, we're working with Suzuki. Rather than wanting to expand our overseas operations, we want to look for areas of opportunity, and that's where we want to invest our resources. And maybe as a result, we will see sales increase overseas.
I think it's probably going to be about over 50% levels in the next 5 years or so?
Oh, excuse me, currently it's a little over 40%. And by 2023, it's going to be about 45% levels.
So it's not going to be a significant jump. And for personnel, do you have any comments, the global talent, that is global personnel?
In fiscal year 2023, I think it's going to be about 120,000. So I think 60% plus is -- correction. So domestic will be about 60-somewhat-percent and overseas will be the remainder.
The person sitting next to him.
I am Yasui of UBS Securities. I have a question regarding the Next Plan, Page 22. This has to do with CapEx. If you could tell us how I can look at this table. As Hirata-san -- Mr. Hirata, you explained this Page 31 CapEx, this is your presentation, '17 -- FY '17 '18 was JPY 96.5 billion. And then FY '18 is about JPY 10 billion. And then '17 - FY '17 is JPY 170, JPY 180, something of that range. It seems like FY '17 has a large portion for energy. If you could tell us how I can understand this correctly.
'17, FY '17 energy has kind of a special factor involved. I will take that as an inquiry. If I could follow that up later, that would be appreciated. This has to do with the put option for the Westinghouse. I think. I think that could be the reason.
So it's not like you made a large investment?
Yes. This is more like correcting what we have done in the past kind of thing.
So whatever the cash outflow, is JPY 170 billion, JPY 180 billion size, is that for the foreseeable near future, the correct number?
Yes. The cash payout for CapEx -- just a second, let me verify. Okay. Roughly speaking, FY '18, '19, it's about JPY 170 billion. And then FY '21 is close to JPY 200 billion in terms of the cash payout, and that peaks out basically. And then FY '23 is a decrease from that peak level.
I see. So FY '20, as additional question, you seem to have a lot of investment for the headquarters.
Yes. That has to do with the IT investment. The payment is expected to come in, in lump sum at around that time frame.
Any others? Okay. The individual right there.
I'm again Matsuhashi from Goldman Sachs. Three things I'd like to clarify. First, as a message from the Next Plan, I think that a number of businesses in the next 3 to 5 years is pretty much going to remain unchanged. If so, a conglomerate discount probably will not be improved but you're going to tolerate that situation, and that's the management's thinking? Is that the correct understanding?
A conglomerate discount. Well, the businesses that we are trying to embark on will not require a large-scale investment. Each and every one of those businesses will not require large-scale investment. Overall, we think all of the businesses should be growing organically. So the company does not think there's much of a discount.
Second question. The service solution energy system. I think on Page 29, in fiscal year 2019, it dropped. And after that, it's going to recover. I think that's the assumption. When it comes to power companies in Japan, they're trying to protract the lifespan of their facilities. And with that in mind as well, what is the prerequisite for these changes that are described here?
When it comes to thermal area specifically, fiscal year 2019 or maybe going into fiscal year 2020, all of the new projects will be constructed. The construction for new orders will start to happen. And we need to, I think, make lean the thermal area personnel. So we are going to be focusing our resource into the orders that we have taken in this area. And when it comes to service area, both domestic as well as overseas, so we are trying to allocate personnel into this area in order to boost our sales. And when it comes to electric transformers, and renewable energies will be the base for a group business, and that's something that we want to expand and that's already included in the plan here. Therefore, from fiscal year 2019 and now, we'll be embarking on this. But from fiscal year 2021, sales should start to be booked. So electric transformer service is going to be included. Now service is going to be predominantly in Thermal, and electric transformer will be renewable energies. That would be the base. That's domestic as well as overseas. We assume that they will grow. So our advanced electric transformer technology will be applied. And if it is applied, then our sales should be growing.
And the third question is the following. When it comes to procurement reform, as the number from fiscal year 2018 to 2019 is going to be JPY 25 billion. And then from fiscal year '21, it's going to be JPY 65 billion. So direct material cost should be hiking. And this could be -- many companies are saying that this is a reason for, I think, reduction in sales. But with design changes, are you going to go for volume discount or are there going to be less components? And going into next fiscal year and going all the way up to fiscal year 2021, what is it looking like? Are you going to ask vendors and suppliers to go for a stretch? Or what's going to happen?
To directly answer your question, for fiscal year 2019, we're having -- we will probably have a series of discussion with the suppliers. Especially from the latter half of fiscal year 2018, we will start doing so. And we have consultants that are supporting us right now. And when it comes to our procurement material as well as components, we are exhaustively revisiting the situation. And consultants are researching. And they have data available about at what price our peers are purchasing these items. And of course, the volume of purchases is very different from us with our peers. So maybe there's a difference in discount levels. However, based on such analysis, we are studying whether there would be possibility for negotiation, and that's where we will be having dialogues with our suppliers. In the midterm, there are VA activities, which is going to be the base for cost reduction activities. And from the first half, we have been starting to embark on such initiatives but this will take some time until we can see some results.
So in light of the time, I would like to make this the final question. The front row, please.
I'm Moriyama of JPMorgan. Regarding power device, you consider this to be a midterm growth area, and I think you have the most visibility. That's my personal opinion. Please let me check some of the numbers. Your semiconductor is JPY 36.55 billion for this fiscal year. Power device, how much accounts for -- as a part of that? And regarding Page 34 of the midterm plan, you talk about net sales JPY 870 billion to JPY 1.1 trillion. That is JPY 18 billion on the upside or increased side. So HDD is flat. System LSI is your kind of homework area. So a lot of the increase comes from power device. That's kind of my understanding. And so of the JPY 118 billion, how much specifically is from that area? And you talk about capacity increase. This production increase specifically is going to contribute. That's my next question. Immediately and also in 5-year time frame, if you would.
I understand your questions. We do not segregate power contribution specifically but gains to FY '17 as a discrete or as a total number, about 15% increase through FY '21 is our plan. And regarding System LSI, as you said, it's flat. And HDD, it's about -- increase of about 10% on sales volume. So discrete is, JPY 220 billion to JPY 230 billion is driven by discrete. Is that right? Commenting specific -- sorry, number revised JPY 120 billion to JPY 130 billion by discrete. Is that the right understanding? There's only so much we can disclose as a straightforward number.
Well, what about the capacity?
FY '21, for us to achieve this level of net sales, we have not injected enough CapEx, vis-à-vis production capacity buildup. So we will be injecting capacity buildup CapEx as time goes.
Thank you very much. This concludes our Q&A session.
Well, again, I would like to extend our appreciation for your kind attendance today. We'll be closing this session. Those who would like to remain here and do some work, if you could leave the venue by 6:30 at the latest. Thank you again for your participation.