Hitachi, Ltd.
Q3 2021 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

The time has come to start Hitachi, Ltd. Web Conference on the Third Quarter Fiscal Year 2020 Earnings for Institutional Investors and Financial Analysts. Thank you very much for participating in this web conference despite your busy schedules. The materials for this meeting will be available on the Hitachi IR site as well as the news release site for information. Let me now introduce the speakers for today. Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO; Tomomi Kato, General Manager of the Financial Strategy division; Masao Yoshikawa, Executive General Manager of the Investor Relations division. The outline of the financial results will be explained by Mr. Kawamura. We will switch over the screen for the presentation. Mr. Kawamura, please.

[Yoshihiko Kawamura:]

Thank you very much for attending this conference despite your busy schedules. At the outset, I would like to say that in the third quarter, impact of COVID-19 was very strong. But we are appreciative of the fact that we are able to continue business, so trying to express our gratitude and respectful of the people who have made this possible. Now I would like to report you on the Q3 results for fiscal 2020. Before going each of the numbers, let me give you a basic outline. The impact of COVID-19 was a significant issue in fiscal 2020. This was a factor that we never experienced before. But having concluded the third quarter, it seems that we have been able to generate profits according to plan. In fact, we have had some upside as well. In terms of cash flow, we were somewhat concerned. There was a concern regarding liquidity as well. But we have been able to overcome these concerns, and we have been proceeding according to plan. Having entered this fiscal year, the environment value, the importance thereof has come to the 4 as important management issue. This will be elaborated upon later. We are going to position the enhancement of environmental value as a major management challenge going forward. Thirdly, in terms of the profits, it has declined because of factors that I've talked about, but cash flow remained very strong in various aspects. In terms of the profit and loss statement, I think I can give you further details on these matters later. Please refer to Page 3. These are the key messages for the third quarter. There are 4 points to be made. First is that we have captured DX demand. As a result, the IT segment has driven the profitability of the company. For the third quarter, the record high adjusted operating income ratio of 13.5% was achieved. Second, with respect to the China business, this will be elaborated later. We have seen more than -- a faster expected recovery in China, elevator business as well as automotive business. We're able to experience a market recovery expanding our business in China. Third is relating to environmental values. Hitachi Astemo has been established from January of this year and focus on EV-related business. In terms of in replacing the internal combustion engine, we are focused on . ABB Power Grid has also been incorporated, and this is proceeding very well as well. $2.9 billion third quarter orders was achieved, and order backlog was $12 billion, so it has been proceeding very well. JPY 1 trillion revenues is expected for the whole year. So USD 2.9 billion for the third quarter, orders is well within the plan.

[Operator:]

We will first take questions from the Japanese channel, and then take questions from the English channel thereafter. First, we will take questions from the people on the Japanese line.

[Unidentified Analyst:]

I hope you can hear me.

[Unidentified Company Representative:]

Yes, we can.

[Unidentified Analyst:]

I have 3 questions. Your first questions is relating to automotive business integration, so I'd like to ask these 2 questions together. The first question is regarding the impact on consolidated results. Page 15 shows the numbers, but -- so the revenue is JPY 185 billion, it seems very strong taking into consideration the last year's results. With the integration, have you received more orders? Or what are the assumptions in terms of in the revenues? PPA is around JPY 25 billion. I think that was the explanation given. But now it's JPY 7 billion. Is this correct? And from next fiscal year onward, what is going to be the PPA? For the third quarter OP margin, it seems that there is going to be a significant improvement. You also talked about impairment in the fourth quarter. Taking that into consideration, OP margin is around 10% according to my calculation. For the automotive business before or after integration, what is the actual level margin in terms of the strength of the business? With the automotive business now consolidating, I think that is going to be added in fourth quarter. What is going to be the impact on the balance sheet? Please clarify. You have talked about the balance sheet, but with the 3 company integration, the asset as well as the ratio and liabilities. What is going to be the impact for the fourth quarter? Please elaborate further. The other question will be asked later.

[Yoshihiko Kawamura:]

Regarding Hitachi Astemo, Kato-san will provide the detailed explanation.

[Tomomi Kato:]

I would like to respond to the questions one by one. First of all, Page 15. As you have rightly mentioned, the impact of integration is for the 3 companies. Revenues and earnings are included. However, it's not been long since we had the integration. This is as of January in terms of the forecast. So -- but it's not just a reflection of the past performance. It was a forecast made at that time. Now regarding intangibles, this is not a final number, but the number that is incorporated are as follows

[Unidentified Analyst:]

I would like to ask my third question. For next fiscal year, what is going to drive the increase in earnings? In the third quarter, it seems that the 5 sectors' impact of COVID that has been recovered, so there was no significant decline in profit. Now looking at the next fiscal year, what do you think is -- which sector will be driving growth? From the point of view of CFO, what are the areas where you are increasing market share, such as automotive system where margins are improving? And what are the areas where you can expect further margin improvement next fiscal year and beyond?

[Yoshihiko Kawamura:]

Regarding the plan for next year, we will be starting discussions internally shortly. So we are now in the discussions of numbers that are still rough. For fiscal year 2020, we have made significant acquisitions. The contribution to be made is going to be very important, ABB as well as Honda parts company. In both cases, there are no significant issues, and profitability according to plan can be expected. For power grid, in North America environmental investment is likely to be increasing. And if we can capture this for Hitachi Astemo. In China, we are seeing recovery. There could be a recovery in the automotive business in North America as well. These 2 acquisitions could contribute significantly if all goes well. So secondly, it is also an important focus. The investment behavior of the customers are changing. In the past, there was focus on hardware, but the control of the hardware is becoming more important. So there is increasing investment in terms of software and applications. I think we can capture this business. So it will be an important focus, and it will be an important focus for us going forward on the part of government as well. So I think we can have high expectations for IT. That’s the second point. Third point is regarding new areas such as medical. We have now high tech within the portfolio. Hardware is outside. But in terms of testing as well as analysis and data processing, the work can be promising. Inventory-related business is expected to increase as well. So in the – there are 3 factors. The contribution by the 2 companies that we have acquired it related business is likely to grow. And thirdly, environment as well as mobility and the society-related business is likely to increase. So for fiscal year ‘21, it is difficult to say definitely, but I think we are likely to see a recovery.

[Operator:]

We'll move on to the next question. Mr. , please mute and ask your question. For a moment, we will move to the next question. Mr. Ezawa.

[Kota Ezawa:]

Yes, this is Ezawa from Citigroup Securities. I have one question. In the medium-term plan, you mentioned the capital allocation plan. You have a little over one year left in your medium-term plan. So how do you plan to achieve this capital allocation? The situation probably changed greatly. So the cash generation and cash usage, the cash generation side, you're probably right on the strike zone. But on the cash usage side, strategic investment do you have plan of using the cash as planned in the next one year and the shareholder return and CapEx and shareholder return? I think you have to increase shareholder return going forward. So in the next one year or so, how do you plan to increase? Or do you have a plan of increasing the shareholder return?

[Yoshihiko Kawamura:]

Thank you for your question. So first point on capital allocation, in the 2021 medium-term plan, we have allocation of JPY 2.5 trillion. ABB Power Grid and high tech were consolidated. So of the JPY 2.5 trillion, we are now up to JPY 1.8 trillion. This much has been allocated already. So based on JPY 2.5 trillion, we still have a few hundred billion yen. And this plan remains unchanged. We are exploring various consolidation opportunities. And therefore if we have good opportunities, we will aggressively invest. And in the background as you mentioned earlier, because we have strong operating cash flow, so we do not have to borrow money to do something. We have strong operating cash flow, and asset divestiture has progressed much. So this remaining portion of the JPY 2.5 trillion can be invested without impairing our balance sheet. And the information-related business, we are now exploring opportunities. So if there are good, economically reasonable deals, then we will go ahead. Next, shareholder return. This is deeply related to the first half of the cash allocation. So if we invest, how much can be allocated to the shareholder return? This is part of the overall balance. And so we cannot say we will do this for sure, but dividend and buyback, share buyback, we will look at the overall capital allocation and take appropriate steps. Shareholder return is within our sight. It’s part of our plan. So we will look at the overall cash allocation balance and decide accordingly.

[Operator:]

Harada-san, please?

[Unidentified Analyst:]

I hope you can hear me.

[Yoshihiko Kawamura:]

Yes.

[Unidentified Analyst:]

I have 2, 3 questions. First question is in the -- now, it seems that energy BU, seems that nuclear and energy BU, you have revised downward. what is the background of this? And regarding energy, ABB Power Grid has been consolidated, and environmental-related orders are being received. Please give me further details on this. In Europe as well as in Asia, I think that is the major focus in terms of regions. What is the regional mix? And what is the competitive landscape, such as competition with Siemens. In terms of the competitiveness, how do you compare against your peers? That's all for the first question.

[Yoshihiko Kawamura:]

Regarding energy, please refer to Page 20. Now in the middle, we have adjusted operating income for energy business. Left-hand side, you can see the accumulated Q1 to Q3, and the right-hand side is for the fiscal year 2020. The dark gray is power grid consolidation. Nuclear is the light gray. It says 1 46, so 14.6. There is a significant negative, minus JPY 71.8 billion. This is the adjusted item because of the HAPG in terms of PPA. And these are numbers according to the plan. Regarding the nuclear energy business, there are really factors that are operating. We have the maintenance work for these reactors. Therefore, we believe that this profit can be achieved. In terms of power grid, we do not see any problems going forward. So it is likely that we can achieve a target, but the PPA is very significant. That is the reason why we are minus 14. further details. And regarding Page '20, now you can see that operating income has declined. I think that was your question. It is regarding NBU. And there are some decline in profitability for some projects, which is a one-off. And power grid, I would like to respond to that question regarding power grid and environment-related investment after acquisition for the smart grid related. There is a transformer. The -- Norway has been achieved and e-mobility bus and commercial vehicles. The charging system has started using EV. The storage solutions are being provided. And this is in Europe as well as in the U.S. Page 6 I mentioned here that for the first time, high-voltage DC system to connect Germany and Norway has been achieved. This is a first in the world in terms of international interconnection. And for 3.6 million households in Germany, the power supply can be provided in efficient manner. Therefore, we will be contributing to carbon neutral. And on 28th of January and Lumada will be integrated to ABB Digital Enterprise. The asset management as well as management of frontline -- or 4 trillion to asset management will be utilizing Lumada for optimization and management. IBM, GE, Schneider were competing with us. In terms of the market, enterprise asset management and field service management as well as asset performance management are the different approaches we are taking. It's several billions of dollars is how we are evaluating this to be a global growth area. We are global number 1. So by utilizing digital with other digital technologies and our focus on environment is proving to be very successful.

[Unidentified Analyst:]

Question number 2 from April, Mr. Kawamura, CFO, is also in charge of investment as well as loans. Now in terms of cash allocation, you will be overseeing the overall area. M&A as well as shareholder return, the right balance is very important. When you conduct M&A, what is going to be your important focus? Is it grid possibility as well as for profitability? What is the criteria for making decisions in M&A? What will you emphasize in your decision making? Please elaborate.

[Yoshihiko Kawamura:]

As from April, as announced, I'm going to be in charge of investment as well as loans as well. So screening will be in my -- moving within my responsibility as well. I will be heading the committee, and recommendations for M&A will be presented to the management committee. In the past, profitability and future growth potential was the major focus. And it isn't that I have details now, but I think the capital efficiency must be emphasized, looking at the sectors accordingly and making sure that the investment is providing returns above the investment cost. It is not just in terms of sales potential, but we have to also look at capital efficiency as well. In terms of the environment, which is a major focus for us now, growth and profitability were the 2 axes that were important. But now going forward, the environment will be the third axis we will incorporate in making investment decisions. The specific metric will be decided going forward. But ultimately the impact on the ROE environment coefficient will have to be utilized in assessing investment. So as capital efficiency as well as environmental value will be an important points to bear in mind.

[Unidentified Analyst:]

Third question is related to the previous one. Now Hitachi Astemo, the automotive parts business, what is going to be the positioning of this business going forward? Electrification investment could become very heavy in terms of investment, but nevertheless, is it going to be the core business for you? Or is it going to be similar to a listed subsidiary? Is a possibility that you will divest going forward? Now what is your basic view on this? Regarding Hitachi Astemo, it involves Honda's capital as well. So fixed cost reduction will be required because it is an integration for entities. In making this decision, how will the discussion we made between Hitachi and Honda? Are you going to be taking the lead? How is governance arranged in this entity?

[Yoshihiko Kawamura:]

Regarding Hitachi Astemo, the integration occurred in January, and therefore, the future plans will be a discussion that needs to be had going forward. Hitachi Astemo belong to Smart Life sector in the past. But size is very large, and it is a joint venture with Honda. Therefore, we decided to separate this and have the business report directly to the President. We will have better transparency. And Hitachi is now outside of the Smart Life, so there will be more clarity. Regarding the future, we have to engage in discussions going forward, but direction is clear. So we might maintain the structure, or there could be IPO, there could be further alliances. The direction ultimately will be decided in one year or 2 years down the road, taking into consideration the business environment. Regarding governance, from January, I am external director from January for Hitachi. I have been participating in the Board meeting. We have very good discussions inclusive of people from Honda as well. So it seems that we can have a good arrangement, good relationship in terms of governance, working with Honda. So I don't think there will be any divergence in terms of governance matches going forward. So we will contain the current organization going forward.

[Unidentified Analyst:]

from AMS, so Hitachi's role on Astemo and the value thereof. On January 18 in the strategy meeting, we had 3 announcements, 3 points. So cloud total system will be offered through Lumada. That's number one. Second, service business enhancement; and third is the environmental measures

[Yoshihiko Kawamura:]

Going forward, an R&D investment, you must mean investments, so let me add some information. On the 18th of January until 2025, we said we will invest JPY 100 billion. in continental, our investment to sales ratio, it seems low. But Astemo’s very focused, a very intensive strategic investment will be conducted. So the vehicle side, Astemo; cloud side, Hitachi. For example, we will divide roles and responsibilities. And for Astemo focus area, we will enhance our competitiveness.

[Operator:]

So next question, we will take questions from the English channel. Okay, we do not see any questions on the English channel. So we'll come back to the Japanese channel. Mr. Yasui, .

[Unidentified Analyst:]

Can you hear me?

[Yoshihiko Kawamura:]

Yes.

[Unidentified Analyst:]

I have 3 questions. First, is Smart Life. There are 2 questions here. So after the automotive is out, it will be a smaller segment. So Hitachi high tech, semiconductor, production equipment, the positioning of that, Hitachi after Hitachi . You spun off the SPE portion. So will you see this SPE as a core business? And next is the medical diagnostic equipment. The completion is delayed, you mentioned in May. So if you can update on the current situation. So that is on the life side question, smart Life. And second question, so 2021, calendar year 2021, the U.S. and Europe market has more visibility. Last year, it lacked visibility due to COVID-19. So in 2021, railway market, elevator market and power grid, these 3 markets, international markets, how will they evolve? Could you give us your image? And third point, the environmental value that you mentioned in your release, so the electric vehicle, focus on EV and software and power grid and railway. So environmental-friendly hardware is now in place, I think. So if you could once again, including the next medium-term management plan, please share with us your trend. Do you think you can capture this environmental value trend?

[Yoshihiko Kawamura:]

Thank you very much. So the life sector, Hitachi high tech semiconductor business, yes in the Hitachi Kokusai Electric, yes, we did take that action. But semiconductor, on the other hand, is the medical diagnostic medical analysis equipment. It's a very high correlation there. So our decision now is in high tech, Hitachi Hi Tech, has high affinity with the business. So we will hold this semiconductor business for now. We have no plan of spinning off in the short term. Next, the anti-monopoly law was, taken up by the media, possible delay. But by the end of this fiscal year, by the end of March, we think we can complete this transaction for the hardware. And second, Europe, China and U.S. railway, as you see in this material, the main plant is in Europe. And as you saw in the numbers, Europe was heavily hit by COVID-19, and there's a big backlog. So once the factory comes into operation, it will be converted to cash. But because the capacity utilization is down, railway business is difficult this year. But once COVID-19 situation improves, then the factory utilization will improve. So this profit drop is just one-off, and this will recover, we think, and the railway department thinks so. And furthermore this was mainly centering on Europe, but now railway business, we're capturing business in the U.S. as well. As we mentioned last time, San Francisco Bay Area BART and other deals, in other regions in America, we are taking -- getting -- capturing deals. So we think we can get more railway business in the U.S. Railway business can contribute greatly to the profit going forward as part of the global operation. Next, elevator. China market is very big. It's growing very strongly. So the China economy recovers and the building construction resumes, we can get more business there. We think we are confident in this sector. In North America and Europe, there is no elevator business. So it will be only China and Japan. In Japan, given this circumstance, new elevator order is still small. So we are now focusing on maintenance service, and we're doing this remotely. In China there are still new installations, but in Japan it's mainly the service maintenance service. And lastly, grid. We have global coverage, including China and North America and Latin America. We have global coverage. So this business, the environment will be a big theme going forward. With grid, we can minimize the leakage, and furthermore the optimal integration with green will start. So as you mentioned, you are -- it's not just U.S. and Europe. We think this business will grow globally. So this global business international business towards 2021 will progress greatly, we think. And lastly, environment. Power grid and Astemo, we have individual deals underway. Hitachi-wide cooperation as mentioned today, Mr. will lead and strategize and decide on the investment and capture return. So in the future at the right timing, we will announce again. So if you could give us a little more time, we'd appreciate it. So President Biden, so the business opportunity from this new administration, the railway network improvement is a big need. And so high-speed light rail and Texas and West Coast, you're getting business. And so you are encouraging and promoting the traditional business. MPG, HVDC technology is used, so the transmission lines, modernization and the quality improvement, energy efficiency and utilization of digital. So for that, it will be a tailwind for us. And lastly, the EV, electric vehicle, so the infrastructure including surrounding infrastructure, there's a power grid angle and the transformer and goal so vertical in horizontally. Hitachi can get on this new current, we think, big opportunity.

[Tomomi Kato:]

Power grid, let me give you some orders and numbers in PG. So I mentioned the 12 billion. This is 5% growth year-on-year. Right now, we are trending very firmly strongly.

[Operator:]

Oka-san, please.

[Unidentified Analyst:]

I have one question regarding ABB performance. In the second quarter, profit margin is 6%. And third quarter, it has increased to 8% net of cost. What is the background as well as sustainability? For related expenses, so there was a decline from 26 billion to 18 billion. Is this 18 billion unlikely to continue going forward? That is all for me.

[Yoshihiko Kawamura:]

Regarding power grid PPA amortization, from the beginning of the year, we have been evaluating. And although it is not final yet, analysis has made progress. So we have reviewed this. For the full year, we estimated JPY 60.5 billion in terms of amortization. But is likely to be JPY 55.9 billion, so it is lower by JPY 6 billion. And the impact of the review has been reflected, and profitability has improved in the third quarter. But the business remains very strong and making progress. Therefore, regarding the profit margin, we believe it is sustainable going forward. Thank you.

[Operator:]

Thank you very much. With this, we would like to conclude the Hitachi, Ltd. Web Conference for the Third Quarter of Fiscal 2020 Earnings for Institutional Investors and Financial Analysts. Thank you.