Hitachi, Ltd.
Q2 2021 Earnings Call Transcript

Published: 27 Oct 2021

[Operator:]

We will now begin the briefing on the financial results for the second quarter of the fiscal year ending March 31 2022 of Hitachi, Ltd. Thank you very much for joining us today despite your busy schedules today. Today's presentation materials are available on the Hitachi limited IR website and the News Release website. I would now like to introduce the speakers to you. Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO; Tomomi Kato, General Manager of the Financial Strategy Division; Masao Yoshikawa, Executive and General Manager of the Investor Relations Division. The outline of the results will be given by Mr. Kawamura. We will be now switching over the screen. Kawamura-san, please go ahead.

[Yoshihiko Kawamura:]

Thank you very much for attending this meeting today. We will be giving you the first half results for fiscal year 2021 for the second quarter as well as the full term forecast. This is a table of the contents that I wish to cover. It gives the major highlights, the first half and second quarter results as well as the focus for fiscal year 2021. I would like to give you a detailed explanation today. Please refer to Page 3. Here the key messages are represented. There are three characteristics I'd like to share with you. The first is the core business, environment and digital. In these businesses, we had steady performance in terms of revenues as well as orders received. As mentioned here in the environmental-related area, Hitachi Energy's business was very strong. Hitachi Energy in October changed from HAPG to Hitachi Energy. Therefore, we will now be referring to this business as Hitachi Energy, going forward. Orders intakes was very strong, as mentioned here. For the second quarter revenues was JPY 253.6 billion, year-on-year 109%. In terms of the orders, it was very strong as well. The Q2 orders was $2.5 billion and the backlog has increased to $12 billion in terms of the digital. In July, we have acquired GlobalLogic showing strong growth for the second quarter, YoY was growing very strongly and a 152% EBITDA ratio was very strong as well. In the next area, for DX, demand was very strong. IT segment remained very strong as a result of the strong demand showing a record high operating income and the operating profit was JPY 112.3 billion, which is the highest ever. For Lumada, on the other hand, it performed very well. The first half revenue was YoY 138%. Furthermore, there were major contracts received as well, two representative examples are shown here. For Hitachi Energy, the HVDC interconnection in the Middle East and North Africa to the tune of 60 billion was received and ILSA in Spain maintenance plan has been received for Hitachi Rail to the tune of the €737 million. Now in terms of the business risk, it has come to the fore there are three that should be mentioned here. The first is the impact of the semiconductor shortage. And as I will explain later, it has had a significant impact on the automotive-related business. Furthermore, in several segments, the soaring raw material price is having an impact as well. Steel as well as copper had an impact, cost is soaring and the impact has been reflected. Regarding COVID-19, on the other hand, in the Asian region in the supply chain, the impact has been very strong. In particular, in Thailand as well as in Vietnam, for automobile as well as consumer electronics, the supply chain has been disrupted because of the stoppage of the factories and parts are in shortage. These business risks are becoming larger. This is likely to continue in the third quarter as well as the fourth quarter. These are major risks but we will absorb these risks, even in this challenging business environment. And therefore, the net income forecast will be maintained. For the five sectors, we are seeing a steady performance as well. I would like to give you a further detailed explanation later. This is the current situation. Now please refer to Page 4. Now, I would like to give you specific information regarding the growth of the GlobalLogic which has been acquired in July. And please look at the table above. Having entered July for the three months, the second quarter as well as to the fourth quarter, the numbers are shown here. Revenues on YoY basis in the second quarter show 152% and Q2-Q4 is 134% as shown on the right hand side. The DX market growth has been exceeded by a GlobalLogic growth. Adjusted operating income is shown on the next line JPY 7.6 billion for the second quarter and JPY 21.6 billion for the second quarter to fourth quarter. The operating income ratio was 22% and 21%, very high. And EBITDA was JPY 8.1 billion and JPY 23.3 billion, showing strong growth. In terms of details, we are able to unleash synergies, Vantara in the United States have been collaborating strongly with the GlobalLogic. More specifically to the GlobalLogic customers, the Vantara's cloud services are being promoted and for GlobalLogic's customers - for the Vantara customers we are also able to propose GlobalLogic business as well. So the synergies is leading to stronger growth and we believe that this will be reflected in the results going forward. Now, GlobalLogic is growing significantly. Our security service company in the United States is also an area that we have seen new business emerge. And please look at Page 5, let me give you further details regarding the Lumada business. From the past, as we have been emphasizing for this fiscal year, so forecast is shown on the right hand side. We have remained at JPY1.58 trillion and it's around JPY1.6 trillion overall. And compared to previous year, growth of 38% has been shown in the first half, but on a full year basis comparison growth is expected to be 42%. Please look at the right hand side for the details, they are the related business. In this area Power Grid acquisition as well as especially High-Tech integration have made a significant contribution and organically the Industrial Products business and Smart Life & Ecofriendly Systems has led the organic growth. GlobalLogics has now been acquired and integration with the High-Tech has made a significant contribution. The breakdown is shown below, 37% is accounted for by IT and the next is Mobility, 16%. Overseas ratio is now 49%. This is impact of the GlobalLogic banter. Half of the business is now generated overseas. Now please turn to Page 6. Here I would like to give you at the impact of the factors in the market. The factors that are having the impact is semiconductor shortages, soaring material prices such as steel and copper, lock-down in Asia region due to pandemic disruption and logistics and others. And the impact is shown for each of the businesses. In terms of the semiconductor shortage Hitachi Astemo has been affected the most. Obviously, it has been impacted by the parts shortage and that OEM orders is likely to decline. Therefore, the most significant impact is felt in Hitachi Astemo. In terms of material prices, let's look at Energy. There is strong impact in terms of electrical and steel achieved and leading to cost increases. For Smart Life in terms the impact has been really because of the material prices. And in terms of copper, it's having an impact on wire harness for Hitachi Astemo. Regarding the pandemic and disruption to the supply chain, Astemo is being impacted because of decrease in parts supply in India. Furthermore, in terms of logistics and the Energy is having impact and because of the large equipment. And the gray areas are the areas that have been impacted significantly. The actual amount in terms of the impact will be shared later. This has continued in the past month and is likely to continue in the second half and based on that, we have concluded the results. So that is the basic result. And now, let me give you further details regarding the numbers from Page 7, which is for the first half. Please refer to Page 8, left-hand side the revenues and the middle is adjusted operating income. In terms of revenues, YoY basis, 29% increase has been recorded. This is because of market recovery as well as the Power Grid's business and GlobalLogic and Hitachi Astemo increased by 29% in terms of revenues, reaching JPY 4.8326 trillion. Adjusted operating income on the right hand side is 1.6 points increase on a YoY basis, increase in income. And increase of the 72% from the previous year has been recorded at JPY 310 billion in terms of adjusted operating income. So we have had increase in revenues as well as increasing operating income. Major items are listed on the right hand side, overseas revenues was JPY 2.92 trillion YoY plus 52%. The Lumada business JPY 676 billion, YoY increase by 38%, EBIT JPY 425.4 billion, YoY JPY 39.2 billion and the net income was JPY 322.4 billion, increase by JPY 71.6, EBITDA JPY 689.2 billion, increase by JPY 76.6 billion. Cash flow; it's declined by JPY 53 billion at JPY 161.4 billion. This is because of the tax increase. And last year, the chemicals as well as diagnostic business was sold. Therefore profit that was posted in the last year, a bunch of taxes will have to be paid this fiscal year. The tax increase is reflected here. In terms of interim dividend, it will be JPY 60 per share, and this is an increase in dividend payments. Last year it was JPY 50, for the first half therefore, and compared to that year-on-year basis, it is a JPY 10 increase. Page 9, please. Results by five sectors, Astemo and listed subsidiaries are shown here. As shown and about five sectors, revenues and profits increased due to market recovery and the acquisition of Power Grid's business and GlobalLogic. For Astemo, Honda's three parts companies have been integrated therefore increasing revenues as well as profits. For the listed subsidiaries, Hitachi Construction Machinery and Hitachi Metals had increase in revenues and profits, the results were very strong. As you can see in the middle, you can see the adjusted operating income for the five sectors was increased by a - the ratio was 7.5%, 3% and 5.7% respectively for five sectors, Astemo and listed subsidiaries. They were all positive and in total 6.4%. As you can see here, for EBIT, which is the third line from the bottom here, on a YoY basis minus 1.5 is shown here. Last year, Hitachi Chemical so was sold. Therefore, this is backlash from the previous year. And at the very bottom net income and the right hand side, the total was JPY 322.4 billion compared to last year increased by 29%. Page 10, please. Here, over the next three pages, I would like to give you the results by the business segments in detail. Page 10, at the very top is IT. The very top revenues was JPY 976.6 billion and this is the record high and it has JPY 112.3 billion for the AOI as well. Please look at Energy next at JPY 675 billion and adjusted operating income was minus JPY 0.8 billion. On a YoY basis, it increased by 169% and 6.2 increase respectively. Increase in revenues as well as the operating income especially Energy is shown below. The revenues was JPY 518.3 billion, the adjusted operating income JPY 27.3 billion and operating ratio is 5.2%. As mentioned on the right hand side the materials having a cost increase is having an impact. On a full year basis, this 5.2% will be increase - recovering to around 6.6%. YoY numbers should at 222% for revenues and 12.5 for adjusted operating income which means that increase in revenues as well as profit have been recorded. Industry is also very strong, at JPY 393 billion adjusted revenues, adjusted operating income JPY 25.5 billion, and on YoY basis revenues 108%, AOI is plus 11.5, so increase in revenues as well as profits. As you can see on right hand side, JR Automation in the United States have contributed significantly to this business. Furthermore, in terms of Mobility, increasing revenues and profit has been recorded, JPY 709.4 billion in terms of revenues, adjusted operating income JPY 44.9 billion. And on YoY basis, 132% in terms of revenues, and AOI was JPY 5.1 billion, increase in revenues as well as profit that was recorded. What is noteworthy is Railway Systems. For the Railway System and it was JPY 287.9 billion and the 6.7 in terms of AOI, which may look small but on a full year basis it will recover to around 6%. Smart Life, this is the only area that was - decline in revenues as well as profit. In terms of numbers revenues was JPY 511 billion and adjusted operating income JPY 36.2 billion, revenues on YoY basis is 84%, AOI minus 9.8. There are special factors underlying these numbers for the segment. As you can see, on the right hand side, the diagnostics have been sold to Fujifilm that is leading to decrease in revenues. In terms of the High-Tech, 60% for the consumer electronics, has led to a decline. Therefore, in terms of Smart Life we have recorded a decrease in revenues as well as profits. Page 12, Hitachi Astemo business is shown here. It has been impacted by the semiconductor shortage but compared to the previous year; overwhelming recovery has been made in terms of revenues at JPY 755.9 billion, adjusted operating income 23.3%, revenues 234% AOI, JPY 41 billion. Therefore, the Honda parts integration has had a significant impact leading to increase in revenues as well as the Hitachi Construction Machinery is recovering strongly as well on a YoY basis, 131%, adjusted operating income JPY 27.1 billion, recovery has been made. Hitachi Metals also made a significant recovery, YoY basis 134% versus JPY 27.6 billion. Significant recovery has been recorded, as you can see. In the first half, as I mentioned in the Smart Life, the divestiture has had negative impact but otherwise in all the businesses we have recorded an increase in revenues as well as a profit. Please look into Page 13. This is a comparison of the first half of last year and this year, in terms of revenues as well as adjusted operating income. The items are the same, and please refer to the revenues. Last year it was JPY 3.76 trillion. Power Grid business acquisition has added in JPY 264.6 billion, Hitachi Astemo integration increased by JPY 418 billion, GlobalLogic acquisition JPY 34.4 billion and foreign exchange impact will be JPY 133.5 billion because of the strong movement in yen. And leading to net revenues of JPY 4.832 trillion and the operating income has also followed suit, leading to JPY 310 billion. Page 14, revenues by market is shown here. Starting with the North America, Europe, China and Japan, ASEAN, India, other areas, and Other Areas are shown here. What is noteworthy here is the number in the second, which is showing the growth year-on-year. For North America 54%; Europe 53%; China 47%; for Japan, it's slow at 4%, almost flat; ASEAN, India, other areas, plus 61%; and Other Areas 42%. And therefore there is delay in Japan but the overseas market has been recovering very strongly. And the overseas revenues was JPY 2.92 trillion and accounting for 60% of our business today. Please turn to Page 15, financial position and the cash flows are shown here. As you can see in the gray area, the balance sheet is as of September 30, 2021. So it is not March yet. So, it is interim result, that I would like to emphasize. Total assets should be referred to as of the end of September, JPY 12,879 billion has been recorded, this is an increase of JPY 1 trillion. This is because of the acquisition of GlobalLogic. The increase is financed by the interest bearing debt, which is around JPY 3.3 trillion, on a net basis increase by JPY 916.2 billion which was funding for the acquisition of GlobalLogic. As a result, the total assets increased to JPY 12.9 trillion. D/E ratio was 0.54 times, increased to 0.7 times now. But with the cash flow from operations will lead to decline to around 0.5 by the end of this fiscal year. Cash flow is shown below. And cash flow from operating activities increased or decreased by JPY 53 billion. This is because of the tax payments. So, that is all for the first half. Next I'd like to talk about the second quarter. Next two slides are just on quarter two. So, Page 17, please. This is the slide for second quarter only for five sectors, Astemo and listed subsidiaries. As you can see in the top, the content is similar to the first half. Five sectors' revenue profits increased due to market recovery and the acquisition of Power Grid business and GlobalLogic. Astemo also increased both in sales and profit and listed subsidiaries increased in both revenues and profits. And now the adjusted operating income ratio, 8.5% for five sectors; 2.7% for Astemo; and 6.9% for listed subsidiaries; total 7.3%. Below that, EBIT is JPY 206 billion, which is plus JPY 132.3 billion on a YoY basis. This is because the overseas home appliances are sold to Arcelik. At the bottom, you can see the net income. Far right please? JPY 200.2 billion, on year-on-year basis, its plus JPY 172 billion. Page 18. This shows the second quarter highlights of the numbers that I just explained. Vertical axis

[Operator:]

Thank you very much, Mr. Kawamura. We will now like to take questions. . Please note that video of person asking question will now be shown. We will take questions from the Japanese channel first, and then questions from institutional investors as well as analyst on the Japanese channel and then English channel. So the floor is now open for the media on the Japanese channel. Roy-san, please unmute and ask your question.

[Unidentified Analyst:]

I have two questions. My first question is regarding Page Six, the impact of the business intermediary. So in terms of semiconductor and as far as material prices and logistics lockdown, what is the actual amount of the impact for each of the different areas?

[Operator:]

Please ask the second question as well?

[Unidentified Analyst:]

Now, you said that environment and digital business is very strong. Digital is probably a growing in terms of the Lumada business, but what about the environment business? Do you have numbers to illustrate this? For your environment business overall, what is the profitability in the recent past?

[Yoshihiko Kawamura:]

Now regarding your first question regarding the impact of the various factors such as semiconductor will be responded by Mr. Kato.

[Tomomi Kato:]

Now, regarding the business environment on Page 6, the most significant impact is semiconductor shortages as well as material crisis. Over all the pandemic lockdown as well as logistics impact was relatively small. And therefore, in terms of semiconductor shortages as well as the soaring material prices, the rough numbers will be presented. For the semiconductor shortage, the most significant impact was held in Hitachi Astemo. For automobile OEMs semiconductor procurement is in shortage. On our part, we are also purchasing semiconductors in terms of scale for the annual amount that is well under JPY 180 billion in terms of revenues. In terms of profit, JPY 7 billion is the impact. Obviously, we are trying to make improvement of the situation. The planned numbers are not being impacted significantly but those are the numbers impacting this area. Next, material prices for steel as well as copper or the annual amount is the following

[Yoshihiko Kawamura:]

To your second question, currently in terms of environment, the - we don't have the profit number for this area specifically but there are three environmental related business, first is Hitachi Energy, with the power grid transmission network can be improved, renewable energies will be supported. And basically, all of these businesses will contribute to environment. So Hitachi Energy will have a significant impact. The second area is Hitachi Railways, compared to ethane, the CO2 emissions is significantly lower and electrification is also being introduced. And most of the orders received are environmental areas and third is Astemo. The internal combustion engine is the mainstream now, but EV is receiving a significant investment today. This will have a significant impact on improving the environment. So, these three businesses overall is making a significant contribution in terms of the environment. Furthermore, within our company by 2050, compliant to Japanese objectives, CO2 or carbon neutral will be achieved by 2050 and 2030, on the other hand or in 10 years' time in Hitachi's inclusive of Group companies we are going to achieve carbon neutral. So, in 10 years' time, the CO2 gases will be reduced to zero for Hitachi and the Group companies. And half will be accounted for by renewable energies, the remaining half will be by transformers, motors and compressors there will be some improvements - will be certain improvements as those pumps will be improved as well. And compressors will be increasingly introduced to achieve this objective. Lighting is also having an impact, we will have increasing use of LEDs therefore, inside the company in 10 years' time, we have the objective to achieve improvements. That is all. I would also like to give further information, Page 1, the environment related business numbers that are presented here for Hitachi Energy in terms of orders received is shown here. Compared to previous year at the level of 116% HVDC as well as transformers are driving this improvement. Furthermore in terms of revenues compared to previous year, so 109%. Therefore, a very strong demand is shown in this area.

[Unidentified Analyst:]

I have a confirmation to make, Hitachi Energy, you said the orders are increasing, so there is room for further improvement, is that a correct understanding? And regarding amortization, there's going to be negative balance? Going forward, as Hitachi Energy orders increase as well as revenue increase, do you think that the negative factors can be absorbed in one year's time?

[Yoshihiko Kawamura:]

Yes, that is a correct understanding. Currently, it's only two years. So, in terms of amortization, as well as cost is increasing but revenues are increasing. So, therefore, we will be able to absorb these costs. Orders are increasing, but this is not reflected in P&L. This is because of the pandemic impact, especially in the European trends, there is logistics delay and capacity utilization is not at peak, yet. When we come out of the pandemic, orders will be reflected increasingly in the P&L. Therefore, that is the direction we are pursuing. Your understanding is correct.

[Unidentified Analyst:]

When will it be reflected in the P&L?

[Yoshihiko Kawamura:]

Well it depends on the COVID-19 situation. It is likely that it will be difficult within this year. For next year, there will be some subsequent impact, so but from about this time, next year, I believe that the backlog of orders will be reflected in the P&L. But the external factors are very significant. Therefore, I cannot give you a specific timing, but I think within one year, we will revert back to that level. Thank you.

[Operator:]

Thank you very much. Next, Mr. , please. Please unmute yourself and ask your question.

[Unidentified Analyst:]

So the semiconductor shortage and the raw material cost increase are my questions. So starting with the chip shortage, when will this continue and the raw material increase, this raw material and chip shortage? Please give us some examples of the countermeasure you're taking? And the second question, this year with the semiconductor shortage, the company - this will push down the company wide profit but in the two to three years span with the semiconductor shortage, the semiconductor inspection machine demand will grow or because of the shortage. The logistics and the supply chain reform your Lumada and your GlobalLogic solution, demand will rise to improve the logistics, is that anticipated and with the raw material increase, the construction material will increase? So if the shortage and the raw material costs increase continues, how will this impact in your company in your group wide profit? Thank you very much.

[Yoshihiko Kawamura:]

The first one. Now, the semiconductor shortage, it's hard to tell how long this will continue. I talked with Astemo, the third quarter is, bigger problems in the second quarter that's their estimate. Astemo is interacting with customers so they understand the customer situation and that is the judgment they have. This is not just a one-off supply and demand imbalance, there's a structural problem like US and China problem. So the China is now reducing the inventory or restraining new investment, all these structural problems are behind it. So it's not going to recover very rapidly or resolved rapidly, but the semiconductor production is now increasing around the world and so we will see this impact by the end of this year. But from this time next year, the supply and demand a will loosen, will not be as tight and Astemo has used that as the basis of their business plan. Now raw material outside of semiconductor, some items are more serious, for example, steel, or iron ore and coal, this is abundant in earth. So, can be, the production can increase but copper is difficult because copper mine is limited around the world and there are no new copper mines. On the other hand with the electrification demand is soaring. So the supply and demand will continue being very difficult, very tight. So for on an item by item, we have to look at this individually, how the impacts turns out. Copper problem will take time to be resolved. So how we deal with it is for semiconductor we need to diversify the supply source. So we are dealing with suppliers that we did not have business relations before. And for new investments Hitachi High-Tech and others are now trying to start new investments. So those are the measures we're taking. Raw material side, it's about how we procure. First of all long term and stable. Stability is important and when demand increases, we will try to procure on the spot basis. But if the price remains at a high level, going forward, we need more fundamental measures. We are taking - studying various aspects now. And second point, the semiconductor shortage and the raw material cost increase, maybe we can do more business in the circumstances. Of course, that is the case. So it's difficult. In the first half cost increases, but in the second half we do business. And so how much we can offset is the key. One analogy is, in the second quarter, you can see the financial performance of the second quarter as Kato-san said it has a great impact on us. But we absorbed it and the generate profit. So the supply shortage is a big negative impact but how - I think the momentum to conduct business is a stronger factor, we think. But how much impact on our business? It's hard to say it's hard to quantify, but that is our macroeconomic view. Thank you. I hope this answers your question. So we talked about medium to long term and I'm talking about short term but semiconductor manufacturing equipment that's High-Tech. In the Smart Life sector, the first half order is very strong. On the year-on-year basis, it is 152% of which semiconductor related Nano-Technology Solution order is 317% year-on-year. And so right now the order is extremely strong. Thank you.

[Unidentified Analyst:]

Thank you very much for very detailed explanation.

[Operator:]

Next, please. Please unmute and ask your question.

[Unidentified Analyst:]

I have two questions. The first question is regarding shortage of semiconductors. I have a detailed question. Regarding the IT segment, there is impact of semiconductor shortage, specifically what - where is the impact going to be, in what way? In September, the digital agency has been established centering on the IT segment. What kind of profitability increase can be expected from the digital agency establishment?

[Yoshihiko Kawamura:]

Regarding the semiconductor and IT segment storage is related, so Mr. Kato will respond.

[Tomomi Kato:]

I don't have the specific numbers, but in terms of products, according to the materials, Page 10 should be referred to, this is for IT segment. And servicing platform should be referred to for storage products, is using semiconductors, there are products that this may improve but service are also using semiconductors. So, these are the areas that will be impacted. For the first half, well, hardware sales has declined year-on-year.

[Yoshihiko Kawamura:]

Now to your second question regarding digital agency, we are watching this situation very carefully. With the digital agency established there is going to be significant change. As discussed in the media, My Number Card enhancement or the function enhancement is being contemplated with added functions. It could be very promising and My Number Card has been promoted by Hitachi over the years. And My Number and the Financial Services and extension with the insurance business so could be very promising for us. So we hope that we can capture this business going forward. Furthermore, IT or DX will be promoted through the digital agency. So beyond the My Number System, the horizontal connectivity as well as data sharing are areas that we could provide services. We believe that we can capture business in this area. In terms of data management, we have Lumada, therefore we hope that we can capture more businesses in this area, going forward. Thank you.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

We have many hands. But in the interest of time, we would like to move to the institutional investors and analysts for this time. Next is Japanese channel institutional investors and analysts question. Please raise your hand if you have any questions. First is Iza-san. , please unmute and ask your question.

[Unidentified Analyst:]

Thank you very much. I have two questions. The first half results, compared to your internal plan, was it upside or downside, if you could break down and show us where you exceeded and fall short? There are many but the main segments please? The raw material cost issue and the foreign exchange were different from the original plan, I think. So if you could give us the detail to understand so that I can understand the real actual business, so the main segments, please? So that's my first question. Second question, your full year forecast on a consolidated basis is revised downward, profit is revised downward. So what were the factors that bring the second half down and what are the upward upsides, positive and negative factors? Thank you very much.

[Yoshihiko Kawamura:]

So first, the first half BU by sector, Mr. Kato will explain.

[Tomomi Kato:]

So, first half revenue consolidated against plan was JPY 80 billion in excess. Foreign exchange was JPY 60 billion plus and other than FX, it was JPY 20 billion plus. So, that was revenues, of which five sectors is the majority JPY 83 billion increase, Astemo minus JPY 33 billion, so, that was down and the listed subsidiaries plus JPY 30 billion. The five sectors breakdown is, of the JPY 83 billion FX is about half and the other factors are half. Now, by sector, the ones that exceeded was Energy, HAPG, the Hitachi Energy order are very strong and revenue is growing, as I mentioned earlier. So thanks to that, it is showing us strong growth. And Industry, here again, system and hardened products, we do all those businesses. The market is recovering in general and there were some front loading from the second half. In revenues, Mobility, especially Building, in China the escalator, elevator business is growing in China. So that is showing a strong growth. So, of the five sectors, these three, revenue grew very strongly. Now operating income, overall that consolidated JPY 10 billion plus of which foreign exchange is 50% and the other 50% is organic factor. Five sectors is JPY 10.5 billion, Astemo minus JPY 13 billion, so that was a shortfall, and the listed subsidiaries JPY 12.5 billion plus. Now five sectors, as I said earlier, Energy, Industry and Mobility are about the same size, so total is JPY 10 billion plus. So revenues grew. In Building, the raw material cost increase was a negative factor, but profit was a positive. Thank you very much.

[Yoshihiko Kawamura:]

On the full year basis, so macro-economic view, if you could look at Page 33, please. So Astemo at the very top, on the far right, you can see the previous forecasts comparison minus JPY 29 billion in adjusted operating income. So this is the full year JPY 17 billion, so this is the majority of the reason we will have negative JPY 17 billion overall. So JPY 10 billion, remaining JPY 10 billion, we will recover with the other sectors and we will keep the negative at JPY 17 billion. And the foreign exchange is another factor, so, the key is how much of the JPY 17 billion we can absorb. So that is our challenge in the second half. And one more additional piece of information, so downside risk is the semiconductor shortage and the raw material cost increase, but the plus positive factors are the market recovery. So we are anticipating market recovery. At this moment, we are seeing this recovery. So if it exceeds our estimate, it can be a positive impact, positive factor.

[Unidentified Analyst:]

I see. I understand. Oh, yes, I'm fine. Thank you very much.

[Operator:]

Next, -san, please. Please unmute and ask you a question.

[Unidentified Analyst:]

Thank you very much for this opportunity today. I have two questions. Regarding orders for the five sectors for the second quarter, what is the growth rate year-on-year? Please elaborate. Second question is regarding material shortage. What is the actual amount? You mentioned for semiconductor on an annual basis profit, the basis is about JPY 70 billion but if you look at the second quarter only, what is the impact of semiconductor and what is the impact of the material shortage, in terms of profits? You said that in the third quarter the problem with are more serious, so, what is going to be the impact assumed for the third quarter?

[Yoshihiko Kawamura:]

Regarding the second quarter orders, orders will be covering first for the second quarter, let me explain. For the second quarter year-on-year basis, Hitachi consolidate basis, in terms of results in terms of both these, its 116% and foreign exchange as well as other M&A adjustment will be made resulting in 106% for the second quarter, year-on-year basis. By segments, let me give you the breakdown, increase has been seen in Smart Life, 119%. As I mentioned earlier, High-Tech is having an impact, very strong at 170%. The next is Mobility, 103% overall but for Building Systems, Chinese businesses is mainly very strong at 119%. For industry the overall is 100% but for hardware product it's 120%, remaining very strong. In terms of semiconductors, as Kato-san has already mentioned today, adjusted operating income basis for the first half of JPY 20 billion is negative impact, for the second half impact of the JPY 50 billion. And so the overall impact is JPY 70 billion for the full year. And JPY 20 billion in the first half will increase to JPY 50 billion impact in the second half. Therefore, I said that three to 3Q and 4Q is going to be stronger in terms of impact. And overall negative impact for the full year is JPY 70 billion but I cannot give you a breakdown for the third quarter and fourth quarter but third quarter is going to be having a stronger impact compared to the second quarter.

[Unidentified Analyst:]

A follow up regarding IT and Energy. Please elaborate the growth rate for industry? You said that it is flat which doesn't sit well for me. I thought it was going to be stronger. Is it impacted by the materials shortage? Is that the case?

[Yoshihiko Kawamura:]

Regarding IT, year-on-year 94%, it has been adjusted. The full GlobalLogic is not included and therefore this is based on conventional basis. For Energy 69%, the newly included business is not included for Industry, I mentioned products earlier, but on the other hand for Industry business unit or IT business compared to previous year is at 88%. For products per se it's growing by 20% however, the other areas is declining year-on-year.

[Unidentified Analyst:]

Well IT minus six, can you comment about that? I thought it was going to be recovering? Revenues could be subject to backlash, but I thought that your orders will be improving?

[Yoshihiko Kawamura:]

Regarding the front side, we are seeing growth but in the hardware, as mentioned in our explanation, in terms of storage as well as service this has been impacted by the shortage in semiconductor. Therefore declining, overall deterioration. For the financial side, the financial business unit as well as social business unit are 1% and 113% respectively, growing year-on-year. Thank you.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

Next, Mr. , please. Please unmute yourself and ask your question.

[Unidentified Analyst:]

Thank you for today. I have two questions. First is Hitachi Astemo, some detailed questions. First quarter and second quarter, the revenue only went down by a few percentage points, so, this is different from the automotive situation? And for the second half, only three percentage points increase. So, it doesn't seem like it's including the recovery production. So, this seems like a different movement from the market. So, how should I understand this? So, the automotive is the conservative part? Second question, at the beginning of the year, you said that the adjusted operating income you will aim for 10% next year. So, have you changed your objective after the second quarter results? Thank you very much.

[Yoshihiko Kawamura:]

Starting with Hitachi Astemo. As I mentioned in the presentation, the OEM we have close communication with OEMs when we formulate our numbers. Our main customers Honda, Nissan, and overseas Ford and OEMs, they are all reducing their production by 30% to 40%, they've informed us. And the discussion on when this will recover has not been completed. So based on that we are bringing or formulating this number. So, it may seem like conservative to you, but the US automotive market may recover more faster than expected. Then they will correct, revise the production forecast in which case we may be able to present to you the new forecast. But so far, the OEM is giving us very stringent numbers so that is the basis of our numbers. And next, what our 10% target looks like now. To 2021 medium term plan, the two 10% is included, adjusted operating income 10% and ROIC 10%, those two numbers are included. This fiscal year is the final year of our medium term plan and it is as mentioned today, this fiscal year 10% for both are difficult but depends on the market trends. Next fiscal year in fiscal '22 we want to achieve the two 10% targets by next year. It will be one year later, but we want to achieve. So, we are not gearing up of the 10% now, we are trying to achieve this one year later. Thank you. I hope this answers your question.

[Masao Yoshikawa:]

From IR, Yoshikawa, I would like to add some more information. I assume it is always difficult to understand. There was the M&A integration, so like first quarter, this is not necessarily the official number but the integration. Based on the integration, on a pro forma basis, the second quarter, year-on-year is considered. In that case, this number we disclosed as the Honda numbers last year, so this 93% around 7% decline on a year-on-year basis in revenues. The Tier 1 in Japan and abroad, the second quarter Street estimate are not everyone has done their financial results briefing, that's down by 7% to 8%, according to the Street. So this is in line with this level of slowdown. On the full year basis, in the Investor Day we disclosed JPY 1.48 trillion. So this is the previous year pro forma revenue and this year we made a downward revision, but on the year-on-year growth, is around 4%. This is still unforeseeable, but the OEM's production status, the other Tier 1 and Tier 2 movement is now declining. So compared to the market, we will keep our close eyes on how we compare with the market. But according to the market data, fiscal year '20 and fiscal '21 are flat in terms of production unit, so growth of 4% in revenue, this may be a bit aggressive or just right. Thank you. Thank you very much.

[Operator:]

-san, please. Please unmute and ask you a question.

[Unidentified Analyst:]

I hope you can hear me.

[Operator:]

Yes we can.

[Unidentified Analyst:]

Two questions. First question is regarding the production constraints in terms of materials as well as semiconductors there is a constraint. But in addition to that, other materials such as analog semiconductors as well as resin, even normal products are difficult to procure recently. In your company, have you been impacted as well? In terms of inventory assets for the first quarter to the second quarter, there is an increase. So, it looks as if you are not having a negative impact in terms of production, but it is a mixture of different businesses, mass production could be impacted more significantly, I want to know whether there is any production constraints? The second question is a long term perspective question, renewable energies is likely to take off, in your company brand as well as transformers as well as VPP and other businesses have promising opportunities for renewable energies in 2030 as well as in 2040. What kind of market size can you expect, are you aiming for? Domestically, you have also LED, therefore overseas market as well. What kind of business vision are you aiming for in 2030 and 2040?

[Yoshihiko Kawamura:]

First of all, regarding the production constraint, the semiconductor, steel and copper are the constraints and resin as well as derivatives of petrochemical products is also being impacted, but the most significant impact is steel, copper, aluminum as well as semiconductors. So, the heavy metals have been impacted significantly. Regarding petrochemical derivatives, we can manage there because of the relations we have with manufacturers therefore in other than hard metal the constraint is limited. Now, regarding your second question, regarding the environmental business, this is something that we are contemplating today in terms of our long term targets. Yoshikawa-san, can you give further details?

[Masao Yoshikawa:]

This is under consideration today. But in 2016 the environmental vision was formulated and mid to long term, the three pillars were identified where we hoped to provide solutions. So this is still relevant. And based on that, in May of next year, in the next midterm management plan, it will be incorporated. The first is decarbonisation, Power Grid, Railway as well as the EV, the environment-related business. Beyond that, the second area is the recycle-based society. And this is elaborated in our Sustainability Report. The sewage as well as water supply infrastructure as well as desalination of seawater being pursued, in these areas that we hope to make contribution to society. The third pillar is nature symbiosis promotion. Renewable plastic can be used as well as renewable energies promotion system, will be enhanced as a business. Fourth pillar is to utilize the IT platform, the digital strengths will be leveraged for all these three areas as I just mentioned. This is something that we have been contemplating and we - this is still subject to consideration. Thank you.

[Operator:]

Thank you very much. Next, -san, Mr. Iada. Please unmute yourself and ask your question

[Unidentified Analyst:]

I have two questions, Lumada related and Hitachi Astemo. Two questions, please. First Lumada, second quarter revenues on a like-for-like basis, on the organic basis how much growth did you see? What was the percentage of growth? And the full year plan based on the organic basis, what does it look like? Page 4, GlobalLogic, second quarter and full year forecast is presented here. So the message here is that the growth of the second quarter in revenues and profit, it seems high, higher than the full year forecast. So your implication is that the second quarter was strong. Are you trying to say that second quarter was significantly strong? So that's my first question. Second question is about Hitachi Astemo. I understand this year's situation, but the downward revision this year, how will this impact next year? If you could give us some insight? I understand that it depends on the supply chain, but if the recovery production will gain momentum, then there is not much concern for next year or the integration impact that you are planning now may delay with the various disruptions? Qualitative explanation is fine. Thank you very much.

[Yoshihiko Kawamura:]

So let me, Kato-san will explain Lumada, first question.

[Tomomi Kato:]

So Lumada, my numbers here is first half. So let me answer in first half. The overall growth in the first half was 38%. The organic was 14%. It was mainly IT and Industry. IT and Industry were the drivers and the full year, 42% growth is our plan, 16% will be the organic growth. Mainly IT and Industry will be the driver. So your second half, GlobalLogic, as mentioned in Page 4, the result and the forecast, the forecast seems conservative. But the second quarter result was stronger than our internal forecast. It was we had an upside, GlobalLogic, this is a standalone number here but other than that there's the PPA amortization and the related cost, if we include those costs, the first year, I did not think will be profitable, but with this result from second quarter, we are profitable and contributing positively even with those costs.

[Yoshihiko Kawamura:]

So let me continue on with the Astemo. So the conclusion is, fiscal year '21 numbers, this is the bottom and the reason is this profit, downward revision of profits starting from semiconductor, we've taken various structural reform measures. So cost control and price, testing all of the prices JPY 40 billion to JPY 50 billion measures have been taken. And this is not a one-off cost. It will not - this will not come back. And therefore once the semiconductor comes back, this will be positive to our profit. So this operating income will be the bottom and once semiconductor situation improves and OEMs order comes back, this will be the bottom and I don't know if we can recover to JPY 90 billion but we will work hard to achieve that level. Thank you very much.

[Masao Yoshikawa:]

So may I, Lumada. Second quarter we disclosed first quarter so if you can do the subtraction you can see the numbers as Kato-san said IT and Industry are the drivers in the organic. First quarter organic growth on the same basis will be higher and second quarter seems like it's slowing down. Now standalone GlobalLogic growth, as you know EPAM and Globant those are the pure comps. Second quarter alone, revenue you're on your is not that inferior so the 50s in the 50s, it's not inferior and second point EBIT, this is different from our AOP and EBITDA margin level, our standalone is better than the two other companies. So, PPA and the one-off cost, we have a strong base on a standalone basis to be able to absorb the PPA and the other costs. Thank you very much.

[Unidentified Analyst:]

Now thank you for the detailed explanation.

[Operator:]

-san, please.

[Unidentified Analyst:]

I have two questions. The first question is regarding Mobility business, revenues is upward. The revised operating profit remains the same. For the Hitachi High-Tech revenues are being upward revised and it's a high margin business so operating profit is not changing. Why is this? Is there room for upside? For within IT business, front business is very stronger, Lumada and GlobalLogic have experienced upside. These are very profitable businesses. So it seems that operating profit forecaster is conservative. That's my first question. Second question, Mobility business is very good 19%, for Buildings orders are increasing, what about Evergrande? Is that going to have an impact? Is the real estate bubble risk, how - what is your take on that? And do we have to be concerned?

[Yoshihiko Kawamura:]

Regarding Mobility, the first one that will be answered by Kato-san and I will address the Evergrande issue.

[Tomomi Kato:]

As you have rightly mentioned for the Building System as well as High-Tech, in terms of the revenues we have made the upward revision and their profit is fine. So for Buildings, demand is very strong the especially in China and that is reason why we made the upward revision but there is material cost increase. That is the reason why we have left the profit flat. Regarding High-Tech the revenues are being revised because of semiconductor production equipment as well as a diagnostics. But it's not these process, industrial solutions is the reason. In terms of the materials and systems are sold and revenues in this area, we thought that it is limited in terms of risk. So, we will only post the margins. So, it looks, it appears that the revenue is larger. It is not directly linked to profit. That is the reason why there is a disconnect here.

[Yoshihiko Kawamura:]

Now, regarding Evergrande, in China, when the announcement was made, there was concern about defaults and therefore we had to evaluate the situation. The elevator business in China is very large for us and therefore the Evergrande, the business is not that much. We are selling elevators, so but for the - it can be covered by the profits that we are generating and still enjoy growth. And therefore there is no significant concern regarding Evergrande. However, it's good to go beyond Evergrande and have impact on the whole real estate in China. It could have impact on credit in China, which is more significant problems. And that is reason why we are watching the situation very carefully so that appropriate measures can be taken but Evergrande will not have a significant impact on our performance. Now regarding IT and Lumada, as you have already mentioned, you may expect further profits. Well, the numbers are not being disclosed. The core business for Lumada is very close to the IT business or and profit will converge with the IT business. But for the related business so well Lumada will be provided to other businesses, high profits can be expected, even 15% or 16% can be expected for this area, which means that the data centric or data utilization based on Lumada will become an important pillar for our business going forward. Thank you.

[Operator:]

Thank you very much. It is past time, so. And we see - I still see many hands. I am sorry, we will take one last question. Mr. Katamura, please unmute yourself and ask your question.

[Unidentified Analyst:]

Can you hear me?

[Operator:]

Yes.

[Unidentified Analyst:]

Thank you very much. And thank you for today. So this is not related directly to the financial results of today. But it's an important point, so the quarterly disclosure. So Prime Minister Kishida referred to the review of the quarterly disclosure and this point has been raised a few times in the past. But have you internally studied the pros and cons of this quarterly result review? And what is your stance as of now? Thank you very much.

[Yoshihiko Kawamura:]

Thank you. I am a member of the financial consultation, a member of FSA and also the member of the financial disclosure and so we discussed this on a periodic basis. And I'm the representative of the business companies and from analysts I hear that in both Councils, we hear that this quarterly disclosure is too much. On the other hand, the disclosing side, our company side, today, we are announcing our second quarter results but in our department, we are discussing and working about the third quarter in the parallel and so this is a lot of work. So this quarterly disclosure, we are not a company that mandates this that we must do it. I think it should be voluntary disclosure like US and Europe. So that is my personal view that I expressed in the Council. And we are discussing internally. So for how long we can continue this quarterly disclosure is now being discussed. In company like Hitachi, we have resource so we can somehow manage to continue quarterly disclosure. But there are companies that are facing difficulty on disclosing on a quarterly basis. So it's not just about us. It's about the disclosure and the relationship with the capital markets. So we need more discussion in Europe and US, we are seeing some voluntary disclosure. So I think Japan will move in that direction. We don't know the conclusion yet. But that is the kind of discussion we are having with the government and internally. Thank you. Thank you very much.

[Operator:]

Thank you very much. With this, we would like to bring the earnings explanation for the second quarter of fiscal year 2021 earnings to a close. And thank you very much for your attendance today.