Toshiba Corp
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Toshiba Corp
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Good afternoon. I am Kurumatani. And as we did for the last time, we decided to hold this presentation online in order to mitigate the COVID-19 pandemic. It's great to meet you all once again. Now I'd like to guide you through the presentation material.
Now if you move to Page 3. Today, I would like to talk about 4 themes based on the agenda shown on this slide.
Page 4. This is an executive summary. In the first half of this fiscal year 2020, core operating income increased steadily by JPY 21.9 billion year-on-year. With respect to the full year forecast, we have achieved satisfactory results from the efforts to strengthen core earning power, and we are confident to accomplish JPY 220 billion in core operating income. On the other hand, our forecast for the annual negative impact of the COVID-19 pandemic remains unchanged at about JPY 90 billion. With respect to the monitored businesses, we are seeing progress in the restructuring of the System LSI as well as printing businesses. I would like to discuss our progress in the Toshiba Next Plan in 3 distinct phases. The Phase 1 refers to the strengthening of core earning power. We have achieved significant results with a major improvement in marginal profit as well as reduction in fixed costs. Phase 2 and 3 involve our growth strategy with Infrastructure Services at its core, which was presented as a concept in June as well as our evolution into a CPS technology company. I would like to discuss what the phases involve as well as how we plan to implement each phases. Finally, we will continue to further reinforce our ESG efforts, which we believe to be crucial for sustainable growth. As proactive investments are required to achieve the growth, we will also allocate capital judiciously while emphasizing the financial discipline.
Now Page 5 and onwards, I'd like to discuss our current performance during the fiscal year 2020. Page 6 shows our consolidated performance for the first half of this fiscal year. While net sales decreased on a year-on-year basis to JPY 1.37 trillion, we achieved a year-on-year increase in core operating income to JPY 81.1 billion. As a result of restructuring cost of negative JPY 7.8 billion, the negative JPY 70.2 billion impact from COVID-19 pandemic, we reported operating income of JPY 33.1 billion for the first half of this fiscal year.
Analysis of operating income is provided on Page 7. Core operating income increased by JPY 21.9 billion compared to JPY 59.2 billion reported in the first half of the fiscal year of 2019. The breakdown shows that a strengthening of core earning power led to a JPY 29.7 billion increase in operating income. There is an imbalance between the first and the second half of the fiscal year with less income respect to -- less income reported during the first half. This JPY 24 billion negative impact was partially offset by JPY 16.2 billion reversal due to a suppression of SG&A expenses as an emergency measure, leading to a net positive impact of JPY 21.9 billion, as is shown on the bar graph. While we stated in June that we could face operating loss in the order of JPY 10 billion to JPY 20 billion during the first half, we were able to achieve a JPY 16.2 billion improvement mainly through a suppression of SG&A expenses as an emergency measure, allowing us to report positive operating income. As I will be discussed later, the strengthening of core earning power reflects the improved operating capabilities and will also have a positive impact on future fiscal year. We are very happy with our achievements to date in this respect.
Page 8 lists the impact of COVID-19 on each segment during the first half. Devices and storage was hit hardest with a negative impact of JPY 30.9 billion, resulting in installation delays in semiconductor manufacturing devices as well as increased sales of HDD and in-vehicle semiconductors. Retail and printing also suffered from a decrease in global demand for malfunctioning -- multifunction printing machines and POS system.
Page 9 shows our free cash flows. The significant year-on-year improvement reflects payments from the sales of the LNG business, which arose during the last fiscal year. Operating cash flow increased by JPY 24.4 billion when excluding onetime factors. Free cash flows were also positive. Our improved earning power has also had a positive impact on each cash flows.
Page 10 shows trends in orders received. While the total orders in monetary terms fluctuates year by year, we were able to largely maintain our historic average despite COVID-19. Order backlogs have also increased, while can be expected to contribute to sales increase in the second half as well as the next fiscal year.
Page 11 shows our analysis on forecasted operating income for the full fiscal year. We aim to increase core operating income by JPY 58.4 billion year-on-year from JPY 161.6 billion in fiscal year 2019 to JPY 220 billion in fiscal year 2020. Based on our success in strengthening core earning power during the first half, we believe that there is a high probability of achieving this target. The expected full year impact of COVID-19 is JPY 90 billion, implying that the expected impact during the second half will be limited to about JPY 20 billion.
Starting on Page 12, I'd like to discuss our progress in the Toshiba Next Plan. First, Page 13 provides an overview of the Toshiba Next Plan, which is divided into 3 growth phases. The left-hand side illustrates the steps to becoming an infrastructure service company, which was presented in June. Today, I would like to focus on the right-hand side, which provides a time line for Phase 2 and 3 as well as the points to be focused in each phase.
I'd like to start with Phase 1, aimed at strengthening our core earning power. Page 15 shows the results of Phase 1 achieved to date and forecast for the future. Since the formulation of the Toshiba Next Plan in 2018 to the current fiscal year, we achieved a cumulative increase of JPY 130 billion through CFT as well as restructuring efforts. We expect to achieve the same JPY 130 billion increase over the next 5 years as a result of continued CFT activities, the cross-functional teams activities, and fixed cost reduction through the renewal of IT systems.
Page 16 shows a summary of our CFT activities. Of the JPY 130 billion improvement shown on the previous slide, about JPY 80 billion resulted from CFT activities, of which a majority resulted from procurement CFT. We believe that we can increase this figure to about JPY 100 billion over the next 5 years. In particular, we believe significant savings can be achieved from make-or-buy CFT efforts to streamline the JPY 600 billion in outsourcing costs and from engineering CFT involving design standardization and modularization.
Page 17 shows our restructuring and IT renewal initiatives. We achieved earnings improvement of about JPY 50 billion over the last 3 years. In addition to completing our withdrawal from noncore business, we have already achieved 80% of the target 25% reduction in subsidiaries, allowing us to anticipate that the target will be achieved ahead of the schedule. We are considering further reduction of subsidiaries. 50% of 388 subsidiaries are subject to integration. With respect to head count optimization, we initially targeted a reduction of 7,000 over 5 years mainly through natural attrition. However, we now expect to achieve a head count reduction of about 10,000 by the end of this fiscal year, including those resulting from the reduction of subsidiaries and restructuring efforts. Digitalization initiatives are also progressing steadily with 97% of the standardization plan has already been made. Renewal of IT system will not only allow us to reduce system-related expenses but also to streamline our administrative divisions.
Page 18 summarizes the status of our monitored businesses. As announced previously, we plan to withdraw from the System LSI business except for its customer support functions. Restructuring efforts, including early retirement, are underway. As a result, we expect to achieve profit improvement of about JPY 15 billion in fiscal year 2021. We also expect to achieve 6% core ROS in the HDD business in the current fiscal year. On the other hand, we are closely monitoring the business for potential negative impact from COVID-19 as well as from U.S.-China trade frictions. Increase in the service ratio and reduction in fixed costs are progressing steadily in the thermal power construction business, leading to a steady increase in earning power. We expect to achieve 5% core ROS during the fiscal year. Restructuring efforts are also underway in the Toshiba TEC printing business. We will continue to monitor restructuring efforts while discussing necessary measures from a business portfolio strategy perspective for the Toshiba Group as a whole.
Page 19 summarizes the status of our semiconductor business. After withdrawing from new development in System LSI, a substantial decrease in the breakeven point has significantly enhanced the stability of the business. Even if there is a market contraction in the market like the one caused by COVID-19 and sales falls to about JPY 300 billion level, the current structure would still allow for an operating margin well over 5%.
Page 20 summarizes the status of HDD business. Our business strategy will mainly focus on the transitions from the shrinking mobile HDD business to the expanding Nearline HDD business targeting data centers. From a technological standpoint, we will catch up with the competition with our 18-terabyte HDD in the current fiscal year. The significant investments in manufacturing facilities were also completed up to this point. Customers' certifications are also expected to be completed during the current fiscal year. As a result, we plan to increase our share to 15% by fiscal year and to over 20% by the end of the next fiscal year.
Page 21 summarizes our thermal power business. We shifted our resources from new construction to the service businesses, leading to a steady increase of services within the revenue mix. We forecast that the services will account for over 70% of the sales in fiscal year 2025. Fixed costs are also decreased by 24% over the last 3 years as a result of a review in staffing and optimization of manufacturing restructuring sites. We are also engaging in efforts to improve operating efficiency by aggregating engineering resources. As a result, we expect core ROS to exceed 5% in the current fiscal year.
Page 22 shows the post-merger integration situation for the 3 listed subsidiaries, which are now wholly owned subsidiaries by Toshiba. The performance of fiscal year 2020 is above the level that we had expected at the time of acquisition. We will enhance activities to maximize synergy to increase corporate value by improving EPS and ROE from our initial projection.
Page 23 illustrates our targets for fiscal year 2021. Based on this year's core operating income of JPY 220 billion, we expect an additional JPY 20 billion from the restructuring impacts and another JPY 20 billion to JPY 40 billion from the increased core earning power based on CFT activities and other efforts. Therefore, we anticipate core operating income of JPY 260 billion to JPY 280 billion. On the other hand, we will remain vigilant of the risk, such as the lingering period of COVID-19 pandemic and U.S.-China trade frictions, and take timely actions as determined as necessary.
Starting on Page 24, I'd like to discuss all the growth initiatives focused on Infrastructure Services, which will be implemented beginning in the current fiscal year. Page 25 shows our medium-term targets for fiscal year 2025. We established these medium-term targets for FY 2025 in order to discuss our future growth strategy. We target net sales of JPY 4 trillion, operating income of JPY 400 billion and ROS of 10%. We established target of 12% of ROIC and 15% of ROE in order to execute growth initiatives focused on capital efficiency.
Page 26 illustrates our target earnings structure for FY 2025. Infrastructure Service will be the revenue driver, which will drive from JPY 1.3 trillion in fiscal year 2019 to JPY 1.8 trillion in fiscal 2025, and account for majority of our sales growth. While marginal profit improved by 4% to 36% compared to 2 years ago, we plan to continue and step up our CFT activities. We'd like to improve by 5% to achieve 41% of margin profit by fiscal year 2025. We aim to reduce fixed costs by JPY 130 billion in fiscal year 2025 through restructuring, production and engineering CFTs and the renewal of IT systems.
Now on Page 27, this shows recent results and the current fiscal year forecasts of each new segment. Based on the categories' classifications explained in June, we held internal discussions and created categories based on which we can calculate ROIC. These categories will be utilized beginning in fiscal year 2021 and will be included in the next medium-term plan. High profitability and returns on investment are being achieved in Infrastructure Services with the sales of almost JPY 1.3 trillion, operating margin of 9% and ROIC of 26%. Infrastructure System reported the sales of almost JPY 800 billion, with profitability improving as a result of strengthening core earnings power. And its ROIC of 9% also significantly exceeds its cost of capital. Device Products reported revenue of about JPY 1 trillion, with profitability improving as a result of restructuring and other efforts. ROIC in this segment also exceeds the cost of capital.
Page 28 provides an overview of growth in Infrastructure Services. We plan to expand the Infrastructure Services segment from sales of JPY 1.3 trillion and 9% ROS in fiscal year 2019 to sales of JPY 1.8 trillion and 12% ROS in fiscal 2025, implying sales expansion of 40% in addition to an increase in profitability. ROIC also exceeds 20%, leading us to expect high returns in investments, including possible M&A transactions. The 3 growth elements for the segment are streamlining of service operations, expansion of service locations and evolution into value-added services. The first element leads to increases in profit margins and capital efficiency, the second element leads to sales expansion, and the third element leads to an increase in profit margins.
Growth of Infrastructure Services based on 2 expansion styles is illustrated on Page 29. The left side involves services, which cover a large number of customers in a certain area, including building-related, POS and IT. These services require a large number of locations and personnel, and rapid response and cost competitiveness are the keys to success. Of the Infrastructure Services' size expansion of almost JPY 500 billion, we expect organic growth by this area coverage type to account for about JPY 70 billion. We will provide field engineers with IT equipment and multiple skill sets while integrating service locations and reducing administrative costs to achieve a significant ROS improvement in the area coverage type business from 7% to 12%. We are targeting ROIC of over 40%. The right side shows the major infrastructure type of services, which cover key specific infrastructures such as power plants, water purification plants and roads, and involves full-time on-site support. Technical capabilities relating to individual devices and systems as well as the ability to make operation-related proposals are the keys to success. We plan to expand sales by JPY 410 billion by 2025. We expect JPY 230 billion growth through M&A to acquire additional locations and JPY 100 billion growth mainly through renewable energy-related efforts. We also plan to maintain double-digit ROS or 12% and to achieve ROIC of about 20%.
Page 30 illustrates the steps for growth of Infrastructure Services. First is the streamlining of service operations, with key growth drivers being operationally optimized through IT and AI, consolidation of administrative functions, and streamlining of service locations. Study and some actions have already begun, and we expect improvement in profitability of about JPY 20 billion by 2025. This activity will be in full scale next year. Second is expansion of service locations. We aim to achieve size expansion in the order of JPY 500 billion through new installations in existing businesses, a committed execution of service contracts, expanding the scope of services to other companies' equipment, and M&A. This will also be rolled out in full for study next year. Third is the evolution to value-added services, which consists of transition to a profit share model, and development of other new services, such as PPP and matching. We have already commenced proof-of-concept for several businesses and expect some to be launched as early as 2020.
Page 31 provides more detail on streamlining service operations. We will launch remote service operations center next year to support worldwide field operation remotely. Although traveling to overseas are restricted with having COVID-19 pandemic, we have had cases where we completed test runs and electrical tests remotely and commenced operation successfully. We will proceed on skill enhancement and development of multiple skills or field engineers simultaneously through utilizing VR and AR for educational purposes. We will also streamline our back office and administrative functions. We seek to improve operational efficiency and to reduce costs by standardizing systems and by integrating and optimizing offices.
Page 32 shows replacement of other companies' steam turbines as an example of expanding service sites. To date, we have delivered over 2,000 steam turbine units around the globe. In addition to inspection, repair and operational support, there are annual replacement demand of 5 to 10 units. On the other hand, we have received orders to replace 32 units of other companies' turbines over the last 10 years. As we see rapid growth in opportunities, we will continue our activities targeting a total of 100 units. Clients often give us high evaluations regarding stability of quality, advanced technology such as laser measurement, and comprehensive engineering and technical capabilities. We will use this strength as one of the means to expand our location.
This is Page 33. We believe that the business opportunities derived from realizing carbon-neutral shall become a possible major pillar for service location expansion. Our company's position in terms of renewable energy, we have top shares in domestic mega solar and hydropower generating equipment, adjustable speed pumped storage globally, and in addition, we are a global leader in geothermal power generator turbines. We are also planning to build state-of-the-art windmills domestically to add wind power as a new area of focus. With respect to energy management, we have top shares domestically for the high-voltage transmission equipment and advanced power control systems. In addition, to prepare ourselves for the future energy storage demand, we are developing secondary batteries and participating in a world-class pilot program in Fukushima. With respect to CO2 utilization, we commenced the operation of a large-scale carbon capture facility in Omuta, Fukuoka. This is the first facility in Japan which can capture over 50% of CO2 emitted from a thermal power plant.
Page 34 illustrates the expansion of the renewable energy business. Based on IEA calculations, global energy-related investments required to achieve targets established by the Paris Agreement will expand from JPY 80 trillion to JPY 140 trillion over -- per year. Investments of JPY 50 trillion to JPY 80 trillion are believed to be necessary in Japan over the next 10 years. In line with such rapid market growth, we would like to leverage our leading technologies discussed on the previous slide, to aim for a threefold expansion in 10 years for our renewable energy business.
Starting on Page 35, I would like to discuss Phase 3. We aim to evolve into a CPS technology company to pursue further growth. We expect full earnings contributions from this phase beginning in fiscal year 2023.
Page 36 illustrates 3 approaches for evolving into a CPS technology company during Phase 3. The first is through the evolution of existing infrastructure services. We will provide as-a-service and CPS services and create value-added through resulting data. The second is social implementation of new technology as new infrastructure services. Examples include quantum-encrypted communications and precision medicine. These services will also lead to data creation going forward. Finally, the third is a matching platform for physical data. In addition to data created from the first 2 approaches, distribution data can be used as big data and transform into a platform, leading to a data service which provides value to users.
On Page 37, I would like to touch upon the evolution of existing infrastructure services by taking renewable energy as an example. I've already explained our strength in renewable energy generation and energy management. New renewable energy investments will expand for the next 10 years. This falls under expansion of service locations resulting from delivering new infrastructure systems. In addition, we believe that there will be abundant excess power which is generated with renewable energy but is not consumed beginning in around 2030. We, therefore, believe that there will be demand for managing and matching such excess power. We have competitive advantages in areas crucial to energy management, including grid stabilization, energy storage, hydrogen and VPP.
Page 38 illustrates our preparation towards establishing a VPP business, which can become an enormous market going forward. This month, we established a new company together with a major European renewable energy supply/demand management player, Next Kraftwerke, to commence domestic energy resource aggregation services. As shown in the chart on the right, data on weather, power supply and demand, grid network and energy storage capacity can be collected and used for optimal energy data matching to provide services to generators, consumers and aggregators to meet planned electricity supply/demand balance and to support best suitable trading operation in the balancing market. We expect enormous energy management demand with a forecasted market size of JPY 300 billion in 2030 and JPY 1.2 trillion in 2040.
Page 39 details new infrastructure services and data services. The value chain is illustrated on this slide. Taking retail as an example, data entered on POS terminals are sent from outlet systems to central systems used in various applications such as CRM and SCM. POS itself is a product but is also linked to business operations with subsequent system construction and maintenance. We aim to strengthen as Infrastructure Services components involved, which include system maintenance and operations. The consumer trends data business using smart receipts conducted by Toshiba Data allows for matching with consumer trend data owned by other companies, creating new value. The CPS technology area represents a portion of the value-added services from data services to Infrastructure Services. Quantum security and precision medicine are new examples of social implementation of new technology in new infrastructure services. We aim to become the global pioneer in services supporting security and advanced medical infrastructures instead of selling hardware. We will aim to become the global leader in each new infrastructure and data service.
Page 40 provides more detail on the matching platform for consumption data. Toshiba Data's data-matching platform allows to enhance value by taking data received from customers and associating them with various types of data. Consumers' consumption activity data accumulated in the database are used in digital services, such as B2C advertising and sales promotion while also being converted into statistical data, which can be used in business services in various settings. As the value of usage increases for both consumers and corporate users as data volume increases, we are considering alliance with over 100 corporate partners, including convenience store chains, drugstore chains, advertising agencies and consumer goods manufacturers. We aim to establish a data economy centered around the individuals, not corporations. Our privacy policy states that rights to all that originating in a person belong to that person. The general premise is that confirming, controlling, freely transferring and connecting data should all be done based on an individual's free will. We aim to establish a convenient, rich and safe society by connecting data based on this policy.
Page 41 illustrates Toshiba Data's domestic targets. It is important to first increase affiliated stores. We are also considering coordination with Toshiba TEC as well as other companies' POS systems. We are targeting 30 million members in 2025, which implies an extremely high growth rate of 65% per year. The total distribution amount, which is important for corporate users, is also expected to grow at a fast pace of 90% per year to JPY 4 trillion in 2025.
Overseas development of data services is covered on Page 42. There are enormous advertising markets in Asia and in North America, both of which are worth over JPY 20 trillion, as well as the fast-growing financial data market. Toshiba TEC enjoys high overseas POS shares in these regions, being, first, #1 player in Mexico, #2 player in the U.S. and #3 player in China and South Korea. Toshiba TEC plans to develop distribution data matching services in Asia and in North America based on these sales and service networks.
Page 43 describes the commercialization of quantum key distribution, a core component of the quantum key security infrastructure. In line with the enhanced performance of quantum computers, the security market has recently gained a strong attention. The market size is expected to expand to JPY 1.4 trillion by 2030. The transmission speed is 50x faster than that of our competitors' systems, and the communication distance is also 1.6x that of our competitors. Pilot testing has already begun both domestically and overseas, with plans to launch services during fiscal year 2021. We aim to become the global market leader based on our overwhelming product performance.
Page 44 describes microRNA for cancer detection, which plays an important role within our advanced medicine infrastructure. The global market for liquid biopsy is expected to expand to JPY 700 billion by 2030. The technology detects 13 types of cancer from stage 0 using a very small amount of blood. We have an overwhelming competitive advantage with respect to detection and accuracy, time and stage. We aim to become the global leader after commercialization in fiscal year 2021.
Page 45 describes our new effort aimed at commercializing operations relating to decarbonization. We are developing next-generation solar power, such as tandem solar and perovskite solar power. We aim to commercialize these products in around 2025. We have achieved the world's largest size in perovskite solar power, which are thin and can be applied to roofs and windows and have also succeeded to reach the highest efficiency with respect to film types. We aim to achieve the efficiency level similar to that of crystal silicon by 2030. We are also developing CCUS and hydrogen energy, which are crucial for the decarbonization process.
Page 46 describes initiatives to commercialize precision medicine products. Liposomes carry therapeutic genes to cancer cells, with an orientation to cancer cells which is 30x stronger than to normal cells. We will begin to provide liposomes as research agents beginning in fiscal year 2021. We will also launch genetic risk determination services using genomic information and solutions to mitigate forecasted risk of disease.
Page 47 describes efforts to commercialize quantum-related technology and services. The Simulated Bifurcation Machine is an Ising machine, which finds the optimal solution while integrating massive amounts of data. We are providing services to solve complicated calculations with 100,000 spins. The platform side is already being used in Amazon Web Services, AWS, and a service to Azure Quantum will also begin in 2021. On the application side, the first proof-of-concept demonstration in financial arbitrage transactions is being planned for 2021. We are engaging in talks with financial institutions and pharmaceutical manufacturers to pursue rapid commercialization.
And Page 48. Up to this point, I have explained the 3 phases of our corporate evolution. In the current Phase 1, we will further deepen our efforts to strengthen our core earning power to pursue 10% ROS. Phase 2 involves stable growth as an infrastructure services company, which we will pursue via initiatives in both area coverage and major infrastructure-type expansion styles. In Phase 3, we strive to evolve into a CPS technology company by establishing a next-generation model in data services in addition to infrastructure services as a service and a transition to CPS.
I would like to move on to our ESG enhancement policy, starting on Page 49. Toshiba Group's ESG efforts are summarized on Page 50. Toshiba Group's basic commitment is committed to people, committed to the future. We have an unwavering policy of aiming to contribute to the resolution of social challenges, such as SDGs through our businesses. As stated earlier, in terms of business activities, we will continue fundamental research to support the future in addition to making transition to renewable energy and remaining to support labor and energy conservation. With respect to corporate operations, we are focused on promoting environmental management, sustainability and also compliance.
Page 51 describes our approach to ESG. While we focused particularly on strengthening of governance, which is G, in the past, we are similarly reinforcing our initiatives relating to environment, E, and social, S. Sustainability management to achieve a dynamic, sustainable society will be discussed in detail starting the next page.
Page 52 illustrates our environment, or E, initiatives. Decarbonization efforts aimed at the target of well below 2 degrees involve ceasing to accept new orders for coal-fired thermal power plant construction work and to reduce GHG emitted by proprietary products by 2030. We also formulated the Toshiba Group's Environmental Future Vision 2050 in order to contribute to the realization of a GHG net zero society by 2050. In addition, we will support transitions in infrastructure aimed at decarbonization as a unique measure. Specifically, we will provide a new renewable energy for power generation, VPP, grid enhancement and CCUS.
Page 53 describes our social, or S, efforts. The Toshiba Group respects human rights as a key issue and engages in efforts to respect the rights of all persons with any involvement in our business. As new lifestyles, work styles and behavior changes are called for in response to the changing environment resulting from COVID-19, we make the safety of all stakeholders as a top priority and engage in efforts to fulfill our social responsibility. With respect to our employees, we aim to create new value-added by enhancing the productivity of each through safety and health, work style reforms, human resource development, and diversity and inclusion. As a unique measure, Toshiba also continues to engage in fundamental research for the future. We will continue to invest resources in fundamental research, which may not directly lead to short-term profits but may provide humankind with more affluent future in the long term.
Page 54 describes our governance, or G, initiatives. In the past, we have focused on strengthening the Board structure, compliance, including the establishment of a compliance advisory meeting, internal audit and ongoing educational activities. We will continue and step up these activities, of course, while focusing on financial discipline as a key governance theme. Specifically, we are committed to financial discipline from an investor's perspective, including ROIC and IRR, as well as to enhancing transparency in our capital allocation. We also would like to engage ourselves in financial management to win the trust of our shareholders and investors.
Finally, I would like to go over our financial management policies, starting on Page 55. Page 56 describes our approach to growth investments. Our basic financial management policy remains unchanged from our previous announcements. We also maintain our basic policy to achieve an annual consolidated dividend payout ratio of at least 30% during the Toshiba Next Plan. The adequate capital level is not a fixed figure. It is reviewed based on risk assets, contingent liabilities, our portfolio and business plan and is also subject to periodic Board review. We also believe it is important to apply appropriate leverage to lower cost of capital as the focus of growth changes over time. We target a net debt/equity ratio of 30% and a net debt/EBITDA ratio of 100%. Pursuant to this policy, we will increase borrowings by fiscal year 2025 and use proceeds to fund strategic investments. While we anticipate strategic investments to take the form of M&A transactions which meet our ROIC and IRR criteria, we will consider returning excess funds to our shareholders.
Page 57 illustrates our approach to capital allocation for the 5 years from fiscal year 2021 to fiscal year 2025. We forecast operating cash flows of JPY 1.3 trillion. The left graph also illustrates further cash accumulation through asset sales and increased leverage. The graph on the right side starts with dividends, which we plan to increase steadily based on our basic policy of maintaining an average consolidated dividend payout ratio of at least 30%. We anticipate capital expenditures of JPY 700 billion in order to execute our growth strategy. As explained so far, the remaining capital will be used to strengthen Infrastructure Services through growth investments, including M&A. We will consider returning funds in excess of adequate capital to our shareholders possibly in the form of a share buyback.
Shareholder returns and our dividend policy is discussed on Page 58. As announced in June, we have no strategic intention to remain in the memory business. Therefore, Toshiba intends to realize the value of its investment in Kioxia and continues to evaluate alternative means of monetizing its stake. Once such a monetization event is completed, Toshiba, in principle, intends to return a majority portion of the net proceeds to shareholders. For the dividend forecast, at the end of this fiscal year, based on our outlook, we were able to confirm the adequacy of our shareholders' equity and stability of our financials. The dividend forecast for fiscal year-end is to be JPY 30 per share, which represents a year-on-year increase of JPY 20. We will continue to pursue stable dividend growth by steadily executing the Toshiba Next Plan going forward.
With this, I would like to conclude my presentation. Thank you very much for your kind attention.
That was regarding the progress in regard to the Toshiba Next Plan. Next, we would like to call upon Mr. Kamo to present on FY 2020 second quarter consolidated business results. We will refer to the presentation material.
Now I will be presenting on the key points in regard to the 2020 second quarter consolidated results and the full year forecast. I would like to pinpoint to the important point only. However, if you could exceed the scheduled time of 3:30, please allow me to do so.
Page 3, please. This is the key points of my explanation. There are 6 points. First of all, core operating income was JPY 21.9 billion increase year-over-year. And there is no change in COVID-19 impact. There's no major change at least. And the third point is regarding the operating income, which was decreased year-on-year. However, it was actually improved vis-à-vis the previous forecast that at the beginning of this year, there will be about JPY 10 billion to JPY 20 billion losses to be expected. However, we were able to make a remarkable improvement from the previous announcement. And free cash flow was that -- compared to the last year, where there is a significant improvement, and we were able to hit the positive position of the free cash flow. And the fifth one is that orders received remained steady. And the sixth one is that, as Mr. Kurumatani mentioned earlier, we decided to increase the dividend for the fiscal year.
Now turning to Page 6, please. Now this is the first half results for the whole company. The first point, if you look at net sales, compared to the previous first half, there is a reduction of the net sales of about JPY 340 billion. On the upper right-hand side, you will see impact of COVID-19 at minus JPY 227.5 billion. And there are some gap between JPY 340 billion versus JPY 227.5 billion. That is mostly because of the difference in the timing of the sales we posted from the first half to second half. We expect that to happen in the first half, but there are some delays in making the net sales because of the major projects and so forth, and there is about JPY 80 billion shifted to the second half. If you look at the number at the very bottom, this is net income for this first half. There are some gains from the share disposals, and there are some losses posted last fiscal year in regard to the transfer of LNG businesses and all these factors going this year. And therefore, we were able to mark the positive position for the net income.
If you could look at Page 7. This is operating income. This is the composition of the operating income. In the center, you will see procurement reform, sales reform and restructuring. So these are what we call CFT activities as well as restructuring efforts, and a total of JPY 14.7 billion positive impact to be marked. And there is other as the item, which is a positive JPY 7.2 billion. As a result, core income has increased by about 29 -- JPY 21.9 billion. And the breakdown of this JPY 7.2 billion is that a decrease of JPY 2.4 billion (sic) [ JPY 24 billion ] in sales and JPY 31.2 billion positive. And there are first half, second half balance shift in regard to the timing of posting sales. And therefore, the JPY 80 billion of margin on profit of about minus JPY 24 billion was a negative factor in this profit. However, there are a reduction in fixed cost, and there is that JPY 31.2 billion positive impact. As a result, JPY 7.2 billion is a positive as others. And JPY 16.2 billion was in emergency cost reduction efforts that the company had made, and the remaining JPY 15 billion is -- and also JPY 14.7 billion. A total of JPY 29.7 billion is the improvement of the core operating -- core earning power improvement.
If you could turn to Page 8. This is the COVID-19 impact. The second from the right is summarizing the second quarter only financial impact. At the top, you will see Devices & Storage. In the middle, you see Retail & Printing. At the bottom, you will see other segments. These 3, if you could look at during the first quarter versus first half, the second quarter impact was becoming smaller, much smaller than the first quarter. On the other hand, in regard to Buildings and Energy Systems, because of the delay in the construction work, construction and installation of the large facilities and the construction materials, that is affecting in the second quarter largely. And therefore, the impact is more or less similar between first quarter and the second quarter, or the second quarter impact seems to be larger. And we are trying to normalize this in the third quarter and so forth, and that is something that we expect going forward.
Page 9, please. This is nonoperating income. There are 2 key points: first, for the losses from the sales of disposal of fixed assets; and also loss on the sales of securities. Now in regard to the loss of the sales of securities, personal computer business, which had the price adjustment for that transaction that had happened in the past and the adjustment made this year. And there are the JPY 7.1 billion positive impact here. And also, the Toshiba -- Kioxia profit was actually made this fiscal year, and that had a positive impact in this area.
Now on Page 10, just one point. On the free cash flows on the top, JPY 7.1 billion positive on the free cash flows.
And on Page 11, there is the breakdown of this number. Now about the free cash flow numbers, there is onetime factor described in the middle of the slide. And onetime factors as -- are as follows. Now in the first half of FY 2020, there were some pressure from the cash flow from operating activities, which is the revision in the subcontractors law. On the other hand, investing activities were a positive JPY 15.7 billion because of price adjustment of the personal computer businesses that is positive, so offsetting each other. As a result, onetime factor for free cash flow was only JPY 0.1 billion negative. And JPY 7.2 billion was made for the onetime factors -- excluding onetime factor for cash flow. If you look at right-hand side, EBITDA, cash flow from operating activities, calculation was starting for EBITDA. And if you could look at others, JPY 60.2 billion is described. And inventories and accounts receivables and advances reduced about JPY 130 billion. So on the other hand, accounts payable advance were actually changed as well. As a result of that, the working capital has improved significantly at JPY 60.2 billion. As a result of that, we had a positive position on the free cash flow.
And if you could look at Page 12 and 13 as you wish.
Next is Page 15, showing the result by segment. And this is a summary, but I would like to pick up on key points regarding each of the segment.
Please refer to Page 16, Energy Systems & Solutions. Here, for the full year, on a core basis, year-on-year, we are expecting an increase. But there is a timing difference between first and second half of the year. And for the first half of the year, JPY 12.6 billion of profit decrease. And if you could look at Thermal & Hydro Power, the operating profit on a core basis, last fiscal year, this was loss-making, but we have been able to increase by JPY 9.5 billion year-on-year, which is now profitable. And centered around India, we have had a larger delay in terms of the progress of construction. And as a consequence, the COVID impact has become quite large in the first half of the year, JPY 5.5 billion. Full year, JPY 7 billion of impact was operating income.
Next, Page 17, Infrastructure Systems & Solutions and Building Solutions. For both of those segments, we have been able to increase our profit in the first half of the year. The COVID impact, as for infrastructure, this ended up being larger than what we had initially assumed. And for the first half of the year, the decrease in fact was JPY 6.2 billion. For the second half of the year, some of this will be removed. And so infrastructure, the full year COVID impact is expected at JPY 5 billion.
Next is our device and -- excuse me, Devices & Storage Solutions. With regards to this segment, the structural reform, the CFT activities that we have been conducting so far have enabled the core base to achieve the highest profitability pickup. But it was also a segment that have been hit by COVID the largest. A hard disk factory operation had to be stopped as well. So in the first half of the year, we had a large COVID impact of JPY 30.9 billion for the first half of the fiscal year. In the second half of the year, we feel that there is going to be improvement. The COVID impact for the second half of the year is JPY 7.1 billion at the operating level. And for the second half of the year, as we have already made a press release, System LSI business related restructuring will be conducted.
Next is the Retail & Printing Solutions. And TEC has made their earnings announcements. So I will skip this, and I'll just talk about the Digital Solutions on this page. As for the Digital Solutions, the project tends to be registered more in the second half of the year, and we had a circular transaction of TSC last year. And so we have seen the sales come down by JPY 29.4 billion. But despite that, on a core basis, we were able to improve our profitability by JPY 1 billion. So we are seeing profitability situation improving.
Please refer to Page 20 and also if you could also look at the Kioxia-related remarks later on.
Then please go to Page 24. This is the forecast for the full year. The breakdown, I would like to explain using the following slides. But here, I would like to explain a little bit about the net sales. Net sales compared to the previous forecast, we have seen a decrease of JPY 90 billion.
The reasons include COVID-19, JPY 50 billion impact from COVID-19. Other than that, impact from Huawei was big, as such -- which was JPY 40 billion -- JPY 500 billion -- JPY 400 billion -- in COVID-19 and JPY 50 billion from Huawei add a total amount of JPY 90 billion impact is forecasted.
But on the other hand, profitability is improving. So therefore, operating income stays the same, remains unchanged. And the final line, let me just say one word about the final line, which is the free cash flow compared to the previous forecast, we have seen an increase by JPY 20 billion. There is a shift in the timing of the investment. We have decided to revise the -- make an upward revision by JPY 20 billion.
In the first half, we have spent JPY 14.7 billion for restructuring efforts. For the full year, JPY 21 billion plus JPY 4 billion and JPY 13 billion, the total amount is JPY 38 billion. And together with JPY 24 billion, the total amount is going to be JPY 58.4 billion.
The JPY 20.4 billion for others, I talked about a shift of the recording of sales was incorporated in the first half, and that problem actually resolved for the second half. And due to the cost -- fixed cost reduction, that's going to have an impact of -- on our operating income by JPY 20.4 billion.
This is by segment, Page 26. On the right-hand side, we have the core forecast compared to the previous forecast. In Device & Storage Solutions, in sales, we see a JPY 32 billion decrease in the sales. The main reason for that is the impact from Huawei.
And COVID impact, second line column from the right, compared to the beginning of this fiscal year, we made some adjustments in energy and systems solutions (sic) [ Energy Systems & Solutions ] because of the impacts in India have become bigger, COVID-19 impact has become bigger compared to the beginning of this fiscal year. On the other hand, the total amount of JPY 90 billion remains unchanged.
Page 27 talks about dividend. This is just for your reference. And lastly, I would like to talk about the new business segments. I would like to make some additional or supplementary explanation to the presentation made by Mr. Kurumatani.
And Page 29 shows the diagram of our new business segments, Data Services, Infrastructure Services, Infrastructure Systems, Devices & Products. They are 4 business segments.
The 3 segments at the bottom, I categorized in detail so that ROI and ROIC can be properly calculated. And the thoughts behind that is explained on Page 30. So basically, for the concept of segment classification, we have 4 basic rules.
The first is business units are separated as much as possible with the smallest units to calculate ROIC. And the second rule is Infrastructure Service businesses are defined as a business where service gross margin accounts for 50% or more of its core operating income of fiscal year '20.
Structural reform/monitoring business to be separated from the 4 segments, incubation businesses are also segregated. And business segments will stay the same throughout the duration of the midterm plan.
And based on these basic rules, we made the calculations, which are shown on Page 31. These numbers are the same as the ones that I showed you earlier. But on the other hand, the numbers have changed from the numbers that we showed you in June. The differences are we used the definition that I explained on Page 30 and categorized the business segments.
And ROIC and ROS calculations, we -- loss-making contracts, and there was an impact from loss-making contracts as well as a Subcontract Act. To avoid the impacts, we made some adjustments so that we can make apple-to-apple comparison between fiscal year '19 and fiscal year '20.
With this, I would like to conclude my presentation.
Thank you. This concludes presentation for our company. Now we'd like to open the floor for questions.
First, Nikkei. Mr. [ Niwa ], please.
This is [ Yao ] of Nikkei Shimbun. There are 3 questions, if I may ask. First of all. You are trying to make an ecosystem where -- how do you grade your progress so far in building your own business platform? And the second question is that back in 2018, you have announced the next -- Toshiba Next plan.
In that plan, the JPY 4 trillion or over of sales and ROS of 8% to 10% target set at 2023. And 25 -- FY '25, the JPY 4 trillion of sales and JPY 200 billion and ROS 10% was set as the target for FY '25. And how do you describe the difference between the target initially set for '23 versus FY '25 this time?
And the third point is that your presentation said that renewable energy is going to be your focus? And what is your specific strategy at Toshiba on that point?
Thank you for the question. First of all, how much progress have been made so far, was your question. Now in our efforts in Phase I, I would say that we were able to achieve 50% -- 40%, 50% we achieved in the Phase I.
But as we envision, we would like to be a CPS company to be competitive enough to operate in the world. And when we envision that, and we are only the very first stage of our progress so far. And looking at the company such as Siemens and others, IBM included, I have studied their ways of turning around the company.
And other company would take at least 10 years to turn around their company's performance. From that point of view, Toshiba has started our initiative, and that is a very true, honest feeling of myself. But Toshiba is changing drastically in many ways. And all the behavioral principles have actually changed in Toshiba.
Therefore, from the perspective of the first 2 years, I think we were able to accomplish very well. Now Toshiba Next plan initially, was scheduled for a 5-year period, and we committed 3 years results, and there were 2 open years, which is that there are reference targets set for the last 2 years.
And in fact, we decided that the financial targets needs to be elaborated more. And we also have our targets for 2030. For example, when we become a full CPS company to endeavor into the global markets and such discussion was made internally in the company. And out of such discussions, we only announced the figures that is relatively foreseeable, thinking about the society -- changes in the society as well as the technological change, and that's how we presented the plan up to FY 2025.
And regarding ROS 10%, well, in the previous medium-term plan, we set the target between 8% to 10%, but we are committing to 10% this time.
Now in regard to your questions of renewable energy, if you could refer to the slide materials. On Page 33 of the -- moving on to gross presentation material. Renewable energy market is destined to growth in the global market. That will be the global trend. Well, U.S. presidential election has not been concluded yet. Perhaps, however, the presumptuous President, Biden, is asserting that green strategy, green investment worth the several trillion-dollar levels. And Japanese government is also announcing that a JPY 350 trillion announcement, although the number could be tentative, so around the world, there are great paradigm shifts in energy sector all around the world. That is something for sure.
From that point of view, the carbon-heavy, coal-based thermal power plant, for that, we stopped taking new orders any longer, and that was a decision made by our company.
On the other hand, what is our more aggressive side? In the renewable energy, regarding our competitiveness on our company, PV, solar power, hydro power, I would say that installation capacity is the largest around the world. And geothermal is also the global leader. And regarding wind power, regarding the generator parts of the wind power, we're proud to have a very high level of technology and we will work in addition to the blades and also installation area where we could collaborate with other companies, so that, ultimately, the wind power facilities could be produced in Japan.
Well, there is a initiative to make domestic wind mills in Japan, and that will be a strong source of competitiveness of the Japanese economy, and therefore, we would like to get involved in that as well. And regarding the grade, historically speaking, we are enjoying the very top share. We have the top market share. In storage as well as CCUS, there are many items being written here that, at least, we have a very high level of technological capability and the capacity as well.
And as renewal energy market opens up broadly, then we will be able to target at a very strong and good position, and we'd like to keep our competitiveness in these areas. Did we answer your question?
Thank you very much.
Next, Mr. Okamoto of The Yomiuri Shimbun.
This is Okamoto of Yomiuri. Can you hear us?
Yes.
Three questions, if I may ask. As is discussed just now, regarding coal, thermal power, a new order taking was stopped. And when did you start discussing about this in the company in the first place? And could you elaborate on the reasons behind this? And in addition, when exactly are you going to stop taking orders? If there are a clear threshold and time line, could you elaborate on that?
Now second question is, in the presentation materials, you are talking about the renewable energy in 3 segments. And could you give us the rough estimate of the sales, the current sales number and the future targets of these 3 kinds of renewable energy be appreciated. And on the different subjects as a third question, Kioxia listing IPO, which was postponed recently. And what is your perspective about the renewed schedule and the postponement, would it have an impact on the shareholders' return policy?
Thank you very much for the question. Regarding the coal-based thermal power generation, according to the Paris agreement, there was observed a significant impact on a global basis. And at our company, a number of projects for the coal, thermal power generator has been reduced significantly.
In such a trend, since last year, we started to take a second look at this situation, and we've discussed a possible suspension of taking new orders. And this time around, the ESG is becoming ever more major trend and the national government of Japan has started to talk about the restriction in regards to the thermal power plant, the new build, and therefore, we've decided to stop the new order taking for the thermal power plant, coal-based power plant.
And regarding renewal energy, Mr. Kamo will answer later. And regarding Kioxia matter, in fact, regarding the IPO procedure of Kioxia will be decided on the side of Kioxia. Therefore, we are not in the position to speculate at any rate. And from our point of view, as is mentioned earlier, we try to generate cash out of the Kioxia shares. And therefore, after the IPO of Kioxia, we are simply hoping for the smooth transitions to IPO.
And regarding the shareholders' return policy, already, the -- more than the majority of that proceeds is going to be returned to the shareholders, and that remains unchanged. As the deal proceeds going forward, then as we have announced earlier, we will proceed as is scheduled. So there is no change in our basic principle. That's all.
And with regards to renewable energy-related business. Let me explain about the breakdown to the extent possible. And if you could refer to Page 34, Mr. Kurumatani's material, on the right. And you can see number is JPY 190 billion in 2019 to JPY 350 billion in FY '25. In FY '30, JPY 650 billion. This is the total. But if you can look at the darkest portion at the bottom, that's Infrastructure Systems, as you can see towards the right, and it includes things like solar power and wind power.
As for solar power, in fiscal '18 and fiscal '17, it had already become quite a large market. But we are seeing this kind of a converge right now. And from around 2025, a new type of solar is likely to create an even larger market based on our assumption. As for wind as well, we are making preparation for offshore wind power right now.
And from around 2025 towards 2030, we're expecting the market to become quite large. But even prior to that, from 2020 to 2025, and what is expected to become a large market is Infrastructure Services area, which is responding to the existing -- the grid system. And for 2025, the light blue portion account for 70% of total just by looking at the graph and this includes improving efficiency of our existing generation facility.
More specifically, hydropower, the efficiency improvement or responding to feed. So those are included here. And also the measures to be implemented regarding the grid systems. That's also included as a large number as part of that.
And leading to 2030 beyond, the gray portion at the top, Data Service and new business, we expect that to account for larger volume, and this would include things like VPP business. As we have explained in our explanation today, we expect that business to have been launched by 2030. And some utilization of hydrogen in the renewable energy. For energy storage, we expect that to be started by that point in time. And that completes my response. Thank you.
Okamoto-san, did that answer your question?
Well, and for fiscal 2030, the breakdown of JPY 650 billion. Can you give a breakdown of the actual numbers at that point in time?
Well, we are not disclosing that at this point in time. As for the 3 group, 35%, 40% and 25%. That's the kind of image if you could have for that portion.
Next is Koide-san from Asahi Shimbun, Asahi newspaper.
It is Koide from Asahi Shimbun. I have 2 questions. And that relates to the previous person's question. And in 2018, the next plan, when you have announced, you said JPY 4 trillion in '23, between 8% and 10% was also a target that you have referred to. But this target for 2023, that target has been restructured based on the announcement that you made today. Is that the right way to look at it? That's the first point that I wanted to confirm.
Basically, so the target has been reset on this occasion, so if you could think of these numbers has been revised. If that's the case, well, the way you look at it then, it seems -- or one can say that the target has been kind of pushed back. And the reason for this is because that the numbers become more realistic and visible? Or is it COVID or the U.S.-China situation? I feel so you have taken that into consideration in these numbers. But if you could explain in some more detail as to why the target has been pushed back by about 2 years.
Well, basically speaking, and when we talked about 5 years out previously, we were considering that more as kind of a target -- a rough target type of thing. And for the 3-year portion, we said that we were going to commit to that. As for 5 years, it was a kind of a target. That is how I have given explanation previously.
But on this occasion, we are showing the numbers as our commitment. So the positioning of the numbers are very different this time vis-à-vis the previous time. So -- and the target and committed number may be different as the word you used to explain but in terms of where we want to achieve as the next plan, JPY 4 trillion, was 2023. I think people have considered in that way. So I'm sure COVID should be considered as a reason for this. Am I right in that?
Well, for me, rather than net sales, I feel that the profitability is more improved, more important, not just the profit number, but profit, the ratio as well. And before achieving profit based on high-risk capital costs, it doesn't make much sense. So we are looking at infrastructure services and data. And we are trying to focus our management resources into these areas so that we are able to achieve greater quality earnings.
Of course, this may make it more difficult for us to grow our net sales, but having greater quality in terms of profitability, we are trying to generate greater corporate value. It's not the case that we have kind of pushed back the timing. We don't have a thinking like that.
And in that respect, you haven't extended it. So you have kind of the redirected the course. But -- and you were talking about cyber physical and data utilization back in 2018 but how has that changed on this occasion? And if you could be more specific?
Well, basically speaking, I think, infrastructure system. Before, we were talking about infrastructure service concept, we said that we are going to really have a focus the management resource in this area. But the plan had not really made much progress at that point in time. And after I joined the Toshiba, I put together this plan just in a 6-month period.
And after putting together in the 6-month period, we first wanted to address cost to improve profitability. And up until now, we have been able to achieve an outcome of some JPY 130 billion. And we've made effort for the first year, and we have entered into the second year.
And during this period, we are seeing the total flow towards the digital and other as a service, I mean, it's also a large trend seen on a global basis. And in that backdrop, I have started to have even greater and deep understanding about the technology that we have at Toshiba, and we looked at what can we do at Toshiba.
And so from infrastructure system of the device and shifting the resource and we wanted to look at where ROIC, return on the investment capital is higher. We wanted to focus on there more.
Even if this could had a impact towards the increasing the net sales, if we've just done a infra systems in areas like that, if we put our bet there, then we could have increased our net sales more. But we wanted to really focus on quality and we reconfirm on that point, and we spent 6 months period this fiscal year, and we have redesigned and thought about capital allocation. And as a result, put together the plan on this occasion. Thank you.
And in terms of environment or the renewable energy area, you have added that to the next plan on this occasion. And I think you have referred to the environment area. How could I put this?
Until now, what you have invested in previously or the target for investment previously, but by being more focused on environment, will you be spending more money on environment by reducing the investment in other areas?
And if you start to look at that, you said that's JPY 650 billion you will do for the environment area, and that will require a certain portion of investment to enable that. But which part of the plan did you decrease in order to enable this new initiative?
Investment itself is JPY 700 billion. This has been decided in advance. And that in itself, has not changed all that significantly. We have slightly tweaked the details. But going forward, we feel that we can generate greater leverage. We are still in close to net cash position. And for us to grow going forward, we will need some fund. And that will be JPY 1.3 trillion of cash flow that we will generate going forward, but we will also divest them from additional assets.
And there will be cash from Kioxia as well, the possibility there, and we can also raise debt more by reducing capital costs. We are able to make more investment for example, expanding location infrastructure, JPY 230 billion or even JPY 400 billion, and we are thinking of those levels.
So reducing investment in other is not essentially going to enable investment in other areas. If you could consider that we have expanded our ability to invest.
This is related to return to the first section of TSE, return to realize such growth. Can you explain the relationship between the growth and return to the first section?
When I am back to the first -- when we are back to the first section of TSE, we'll be part of the index. And we will -- we can expect investment from index investors. For Toshiba, we can -- it can become a milestone of a symbolic return to the market. So even if you're not back to the first section, of course, these things that we are willing to do. But in that sense, Toshiba's -- a major transformation we're working on can be accelerated, and we can become a major milestone. So therefore, we believe that this milestone is very important for us. Thank you very much.
Thank you. If not, we would like to move on to Q&A with the analysts.
Now we would like to take questions from the analysts and institutional investors.
From Citigroup Securities, Ezawa-san, please?
My name is Ezawa from Citigroup Securities. I have 3 questions for you. My first question is related to Page 48 of the slides. You talked about pursuing 10% ROS.
According to the slide, ROS 10% will be achieved by 2023, according to the slide. But ROS 10% is targeted to be achieved by 2025. So in the previous Next Plan and our Next Plan this time around, there are difference between the two. ROS 10% to be achieved by 2023. Is that the target? If that is the case, so is ROS going to stay -- remain 10% up until 2025? I would like you to explain more on that.
And 1 similar question. Net debt-to-EBITDA of 100% is the long-term target. And the EBITDA target is JPY 530 billion. So therefore, net debt is JPY 530 billion as well to be achieved in 5 years' time.
But when I look at capital allocation, debt funding is expected to be about JPY 400 billion according to the graph. Does that mean that you go into 5 -- as of today, I don't think you have a lot of net debt.
So in funding, you will fund about JPY 400 billion, and net debt is going to be JPY 530 billion. So there will be cash generated from businesses and shareholder returns, the amount will be almost the same for the coming 5 years. The profit generated and cash to be returned to the shareholders, the total amount seems to be similar, almost the same. Is that the correct understanding?
First of all, 10%. By 2025, we would like to achieve 10%. But for the track record till then, we do have some internal targets, but we have not disclosed those numbers, and we haven't -- we will not do so. 2023, 8% to 10% was range that we disclosed. So therefore, we are targeting close to that number.
And for your second question, I think Kamo-san is -- should be answering to that question.
So let me check your question. Are you talking about Page 57, blue and pink bar chart? Are you talking about this chart?
Yes, exactly.
So if you look at this chart, I wasn't really able to understand. Can you explain once again what you just explained?
Our financial target. EBITDA target is JPY 530 billion, according to my understanding. And net debt EBITDA margin target is 100%, which was also mentioned in the presentation, which means that net debt is going to be somewhere around JPY 530 billion.
And on Page 57, you talked about borrowings. The blue bars. I think it should be somewhere around JPY 400 billion roughly. Looks like it. So therefore, if net debt is JPY 530 billion, if that is the target, JPY 400 billion will be covered by -- with the increase in borrowings.
So if that is the case, the profit or cash flow generated from the business, most of that will be spent, as, for example, shareholder returns and would not have any impact on the -- on your cash position.
So ultimately, I would like to know what your -- what the shareholder returns are going to look like in the future?
So it's not a very good diagram, I would say. So that is not our way of thinking, but rather on the right-hand side for strategic investment, IRR well over that. If there are such opportunities, we would like to use them proactively for investment.
But on the other hand, such projects or whether it's CapEx or whether it's M&A, doesn't really matter, but if they are -- if there are no such available options, it is possible that we do share buyback. But it's not that we are going to choose one of those options. That is not our intention.
And the height of the bars do not have any meaning to it. So that is the reason why I said that this bar chart is not very well drawn.
Understood. One more question. When you were answering to the questions asked by representatives from the media, you said you don't really want to focus on the top line, but rather, we would like to generate quality profit. So high-quality profit are high in ROIC, I believe, is what you meant. But ROE target is 15% in the previous target. So 2025, 15% is the target that you just announced. So therefore, it seems as though the targets are the same, so can you -- how are you going to measure high-quality profit?
As you mentioned, I think that -- I would like to measure it with ROIC, ROIC. Business with our high ROIC, we would like to concentrate our investments is all that I can say.
ROIC target. By 2023, that you -- the target that you had previously, 12% by 2025, is that a higher target.
The previous target, the final year for plan for '25, as I mentioned earlier, we didn't have a very solid target objective. So it's not easy for us to do an apple-to-apple comparison, but basically, your understanding is correct.
Next, from Merrill Lynch Japan, Mr. Hirakawa, please?
My name is Hirakawa. Now BOB Security is the name of Merrill Lynch Japan. The name has changed.
The first point is regarding the renewable energy. Broadly speaking, there's only 1 question. However, I would like to pinpoint 2 specific questions. The first point is that regarding infra systems, the windmill, wind power generation is one of your focuses in the renewable energy.
According to written understanding, the windmill market is quite highly competitive. And as I recall, it was in FY 2019, Hitachi decided to be withdraw from the windmill market completely. And in such a situation, why Toshiba enter present markets and be able to be successful in this area?
I would like to -- a detail explanation about this. Without the system, perhaps, I can figure, probably you will not be able to win services? And could you elaborate the relationship between the equipment side versus the service side? That's the -- one question.
Right. Can't we acquire the service business unless we sell the service -- the system? That is, in a way, correct. In a way, that is wrong. Of course, it is possible to simply acquire the service businesses, like I mentioned, regarding the turbine business. We are able to provide the services of the equipment provided by other manufacturers. It is very much possible. Therefore, we could simply try to acquire the services business only.
And of course, our company aims to enhance their activities. But we need to cultivate our own farm lands. And that effort is required and because if they provide equipment and the service will entail afterwards. And services generating 80% to 90% of the sales for the business, that service will account for 80% to 90% of revenue, then we'd like to endeavor into the system business as well. And that is an infrastructure system business that we are aiming at.
So we are not aiming at simple production of the system without securing a high margin. And even after providing the services, we cannot raise ROIC. If that is the case, such business will be very difficult for us to endeavor. So that is a positioning of this business.
Having said that though, if we are dedicated to infra services only, then ROIC is about 9% for Infrastructure Services. And although that is much higher than a WAC, be it system, be it services, we need to lower the fixed costs and try to increase the marginal profit and the results from shareholders' point of view. We would like to maintain the level that is convincing enough from their point of view. So our business has to achieve that threshold.
Now in regard to the wind power generators, well, Japan is actually have more promising sites on offshore areas rather than onshore areas. And therefore, the government is determined to increase the number of appropriate sites for the offshore windmills.
And in order to compete in this market, we need to produce in Japan. And that is one of the critical factors in the future. Therefore, the area which we excel, for example, the power generation components as well as blades and others or poles, and some other companies would have strong technologies in blades and poles. And so we need to cooperate with strong partners, excels in the areas which our company do not have strong competitiveness.
Partnership is going to be critical. We need to get together by exerting to the strong areas each other and try to compete in the market. On the whole, the market itself will continue to expand in a drastic pace.
Follow up question. Then in regard to your plan, you are now poised to manufacture your blades on your own. You are looking at possible partnership with others.
Correct. We have not finalized this plan yet, but that is the direction which we'd like to move ahead.
I would like to ask Mr. Kamo for any additional comments.
Well, there are different components in the wind mill, for example, blades, the poles and also the generator, substations and so forth and transmission distance is going to be extremely long in -- therefore, they received and transmission components, that is also a part. And we will identify the strengths of our company, and we'd like to try to produce in Japan, in the company. And if we are able to enjoy such strengths, and we'd like to exert to such strengths in the future.
So that said, that business model that you were in the solar business is something similar to the wind business. Is that right?
Correct, exactly.
And the second, is regarding the financial results for this fiscal year. During the first half, emergency measures were put in place and JPY 16.2 billion was generated as a result of that. And although it is emergency measures and yet under such situation, the cost was small for the office use and also travel cost was very small and so forth.
And if that's the case, such impact will continue to affect in the second half. I'm not sure of meaning of an emergency countermeasures. That's first part. The benefit will continue in the second half, isn't it?
According to the Page 25 of the results announcement presentation, the impact of the emergency measures, where are they? For the portion happened in the first half, it doesn't seem to include emergency measures impact. And how do I interpret the numbers as such?
Now emergency measures were something that basically to reduce the spending expenses. That were the major components of the emergency measures. And based upon my own understanding, the fixed cost of Toshiba Corporation, of course, has been reduced significantly, and the marginal profit was improved by 4% or so.
Having said that, the -- still Toshiba's fixed cost is far away from the best practices. And we describe this as emergency measures. However, we will not have a rebound back from this reduced level of cost. So reduced level of the cost is the basis. And basically, we would like to further reduce the cost deeper. Otherwise, we will not be able to catch up with the best practices. And therefore, we've done more so than what we expected, but the emergency measures cost reduction will be the common practices going forward.
I think I do understood that. But how that number be presented in the results announcement presentation?
So of course, you said that emergency measures are the basis. And in your annual budget, JPY 220 billion core operating income or the forecast of JPY 110 billion, where is it?
Now in projecting in the full year forecast, of course, there are day-to-day spending, but there are some research and development costs were because of the situation, we were not able to spend R&D in the first half and some need to catch up with that in the second half.
And so as Mr. Kurumatani mentioned, we are trying to lower the baseline of the cost. But at the same time, emergency measures is reversed back in the second half to some extent. And that is our forecast for the full year basis.
Next is SMBC Nikko, Mr. Yoshizumi, please.
This is Yoshizumi of SMBC Nikko. Can you hear us?
Yes.
Now 3 questions. And the Next Plan presentation, 2 questions and 1 question for the results. And I just wanted to go through the clarification of the numbers.
The first question is that in the next plan presentation, on Page 25, as well as Page 27, you have indicated ROIC numbers. And for example, FY '20 expected ROIC, it's going to be 6%?
For that, on Page 27, according to the new segment, all the new segments we're exceeding 6% in terms of ROIC. And what calculation would that make sense to make a total of 6% at a whole company basis?
And of course, Page 27 says some impact from COVID-19. So I don't think that calculation is quite different at this point in time. So I would like to ask you that question first.
And also capital cost. How are you looking at this right now? And to what extent do you intend to reduce this going forward in accordance with this plan? If you have a quantitative image, please share that with us? That's the first question.
So let me respond. As for ROIC. On Page 27, when we are showing the situation for the different new segments, and for calculating invested capital, we're only looking at those amounts used for these respective businesses. But when we are calculating ROIC for the entire company, we have things like Kioxia shares, so we hold that as the company, but asset that has not been utilized in the different segments. So this comes in as a denominator.
But for numerator, and you're looking at the first tax profit of the -- each of the business. But there is also the headquarter expense as well. So in that respect, we have denominators and numerators in that way. When we take that into consideration, it becomes 6% in totality. But for the different businesses, we have 26% for Infrastructure Services, 9% each for Infrastructure Systems and the Device Product. So there are assets which have not been utilized for business, which also comes into play here.
And how are we going to reduce capital cost? And we are more or less debt-free at this point in time. And in that respect, Mr. Kurumatani has already explained, but by 2025, to what extent are we going to be able to accumulate our shareholders' equity and the -- how much the dividend, the base return are we going to do and things that we have already decided in terms of CapEx, the funds needed for that.
And in order to make up for other portion, we probably will raise debt. But in that respect, we haven't made a decision as to when, but our thinking right now is by 2025 in terms of scale or size, 30% for debt equity ratio that I referred to before and our debt EBITDA, 100%, these are the kind of levels that we're looking at.
Understood. And the second was something that someone else has asked, regarding Page 57, when you talk about capital allocation and capital allocation for the next 5 years. And the total amount, scale and the dividend, CapEx and the strategic investment. If you have an image of the breakdown, please share that with us, particularly in comparison to the past 5 years, where we are going to see more significant change in numbers, if you could highlight them, please?
Now in that respect, if we have clear numbers, we could have put that there. But if we look at the examples of others, it's difficult to come up with exact numbers.
And with regards to asset divestiture, we have basically the Kioxia shares, which I'm sure you are also assuming, and that -- and if you try to make assumption from the price that we can assume right now, I think you'll be able to come up with an estimate based on the thinking.
For raising debt, as I said before, a 100% debt-to-EBITDA ratio is what we are looking at. And so that would be, what, JPY 500 billion or JPY 600 billion. We feel that raising debt of that level would certainly be quite easy. And that would mean that we will have more than JPY 2 trillion of fund that we can utilize in that respect. And CapEx is JPY 7 trillion. We have made a decision on that.
And dividend, dividend payout ratio of 30%.
If we look at that level going forward, then what would be the actual amount of dividend payment?
We haven't actually calculated a number ourselves, but I think it's not all that difficult to calculate those levels. And I think if you do the calculation there, and the remaining portion would likely be the strategic investment, and allowing for the strategic investment, we can expect a reasonably large number.
And so for strategic investment, and how could I do this? And [indiscernible] back if we are able to achieve that and if it is something that would benefit the growth of Toshiba, then we intend to take quite a proactive stance and appropriate level of capital. If it exceeds that at a stable and if we are able to generate excess cash and if it will be the case that investment may be difficult, and it could be utilized for share buyback or other forms of the shareholder returns.
Understood. And the last question, the third question is regarding the earnings presentation, say, Page 18, the Device & Storage Solution breakdown you have given there.
In the first half of the year, the GAAP-based number, and you have also a core based number. And you're looking at this on the core basis and totals year-on-year for Hard Disk Drive. You have indicated that there is going to be an increase in revenue. How are you going -- well, how are you managing this? And how do you actually come up with these numbers?
So the track record for the net sales, this amount is correct, but the impact that you have considered, if you reflect that, the net income will be like this. And on a core basis, there's an increase in the net sales. Is that how I should understand that situation?
Well, to begin with the COVID impact, when we are calculating that, whether it be hard disk or semiconductor, not the final order from the customers per se, but the order, the expectation can be received for a certain duration. And that's the kind of business.
So from the budgeting stage, and when we're assuming that for putting together the sales assumption, we've been using that. But the impact of the COVID from there is the number as we have shown in the first half of the year.
So core base and the first half of the year difference. At the start of the fiscal year, when we have received encouragement from customers, how has that number changed? And that would be the basis of which we are actually calculating the COVID impact.
If that's the case, the demand change during the fiscal year, that is all included as part of our COVID impact. We have calculated what we were able to assume at the start of the year but I talked about Huawei before. And after the start of the year, and there have been a new phenomenon that had occurred, and that is included as a separate factor and is included as part of the core number. So as a core, we are expecting sales to come down, and that is what we have said at the outset.
Just a correction of the number, for 2021 to 2025, you said JPY 7 trillion, but that is incorrect. It is JPY 700 billion, not JPY 7 trillion. JPY 700 billion.
Next, Yasui-san from UBS Securities.
Yasui from UBS Securities. I have 3 questions myself. First question is regarding energy. And T&D, you have expected growth from the transmission and distribution. And transmission and distribution, distribution, which area do you expect expansion going forward? I wanted to confirm about that point?
The second question is the impact of M&A. JPY 230 billion in terms of net sales is what you have referred to. But given there are variable factors, it's quite unusual to show the scale in terms of net sale. So there must be a background for you to be able to come up with this type of numbers on a net sales basis. So please share that. What was that?
And the third, the LSI, the system LSI, you said that you're going to divest and you have identified this as non monetary business. And the process to reach the decision to withdraw and what type of decision was made in order for you to come to this final decision? And to the extent possible, please share with us the decision-making process, please.
Yes. First of all, with regards to transmission and distribution. We call it grid. It's more like transmission. Going forward, of course, as we see a revolution in grid, there will be a major investment made in the distribution area as well. But Toshiba has strength in transmission.
So for transmission, for example, balancing of the power, also renewable energy. If there is a difference between the demand location and where the power is generated, transmission should be done and also for the purpose of balancing, we may need some investment, and that -- those investments will come first.
For distribution as well, there will be some investments, but for distribution, we don't have a lot of visibility, and we don't -- we are not yet in a position where we can calculate our future growth.
And with regards to M&A, of course, there are some M&A possibilities of JPY 100 billion and JPY 10 billion and so on. But basically, we would like to look for small-sized M&As as programmatic M&A to expand our business area. And each business units have listed up the candidates for M&A and we would look into the feasibility. And we decided on a certain amount that we can incorporate in our plan. We don't have actual names, but we just calculate the possibilities of realizing M&A.
And LSI business. Last year, we did structural reform last year, and we have seen -- watched carefully the development since then. But this fiscal year, once again, we reviewed our business plan, and we decided that it would be very difficult for us to win in the LSI business. On the other hand, analog and discrete. In those areas, especially power device-related business, we have strength in those areas.
So instead -- even if we are to stop taking new orders for LSI business, we'd still have the room to grow in our semiconductor business. That was the conclusion that we have reached. And that is the reason why we made that decision.
System LSI was just explained. Advanced LSI is not very versatile. And a huge amount of R&D spending is necessary because it's a very sophisticated and advanced product and highly customized, too. So very hard to develop that business.
So we looked into various things. We studied it carefully. But it will be difficult to maintain a high profitability and maintain high ROIC, which will be a requirement going forward. In that situation, we thought it would be very difficult to continue making investments in this business area.
On the other hand, on Page 19 of my slides, it is mentioned there. Already, there are many that have already been developed. So advanced LSI sales itself we will be able to maintain for a certain period of time if we were to stop new developments. So there will be no negative impacts in the short term. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]