Hitachi, Ltd.
Q1 2022 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Now the time has come to start the Hitachi, Ltd. Web Conference for Institutional Investors and Financial Analysts on Fiscal Year 2021 First Quarter Earnings. Thank you very much for participating despite your busy schedules today. Let me, first of all, talk about the materials for today's explanation. Please refer to the materials on the IR site of Hitachi, Ltd and our news release site. I would now like to introduce the speakers to you. Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO; Tomomi Kato, General Manager, Financial Strategy Division; Masao Yoshikawa, Executive General Manager of the Investor Relations Division. And the outline of the results will be presented by Mr. Kawamura. We will be switching over the screen. Mr. Kawamura, please?

[Yoshihiko Kawamura:]

Hello, everyone. Thank you very much for the introduction. My name is Kawamura. Thank you very much for participating in this web conference despite your busy schedules. The pandemic is still running, running rampant. It is having a significant impact on health care services as well as society. We appreciate the fact that we can still pursue our business in this environment. I would like to give you the outline result of Q1 first and then the full year forecast will be presented later. Now let me, first of all, talk about the 2 major things underlining this presentation. DX, digital transmission; and GX, green transmission. The major strategies pursued by our company. The major characteristic is that for DX, GlobalLogic, which is Silicon Valley, company of DX, the deal has been completed. So now they have joined us. As for green transmission, last year, exactly 1 year ago, ABB, Power Grids business has been included into Hitachi, which is called HAPG. It is going to be changing its name to Hitachi Energy going forward. We have strengthened this business. And with Green, we will be able to provide this stable business in the DX and . We now have strategic tools to enable this process. Furthermore, I would like to mention that the pandemic recovery in Japan is somewhat delayed. But there are market services that are already recovering mainly North America, Europe as well as China. In terms of the corporate strategy, we have allocated significant resources to the overseas market, this is being reflected in the performance. Overseas business is increasing and increasing revenues as well. These are the 2 major factors that are driving the performance. Please refer to Page 3. Key messages outlined here. First is the result remained firm led by reforms of the business and cost structure. As a result, first quarter performance has been very strong. The first bullet point says that 5 sectors, Hitachi Astemo, Hitachi Construction Machinery and also Metals are having increased revenues and profits year-on-year. We have secured outcomes of reforms of low-profit business and cost structure bearing fruit. We are -- I'm going to mention a record highs on 2 occasions today. And the first record high is in the IT segment, it has remained firm, pursuing record high adjusted operating income and ratio of 9.8%. This is the first record high that I would like to emphasize. The next record high is the overseas business. Building System in China, Railway Systems business in Europe and Industry business in North America expanded successfully, achieved a record high average revenues of JPY 1.459 trillion and overseas revenue ratio of 62%. So this is also a record high. These record highs are the major characteristics of this performance.

[Operator:]

Now we'd like to proceed to the Q&A Please note that video of person asking question will now be shown today. We will take questions from the Japanese channel first, and then proceed to the English channel.

[Unidentified Analyst:]

I have 2 questions. First question is regarding the Power Grid business. So there has been a downward provision for the year. Please elaborate further. For the first quarter, related account JPY 23.2 billion is mentioned here in the percentage material, it seems that this number is very significant. Is it a one-off and amortization. What is the breakdown? Please elaborate. For the downward revision for the full year, the adjusted operating income is where you have the downward revision, why is this the case? Please elaborate. And related to cost is being revised upward inclusive of the first quarter, why did you change the forecast for the full year? For energy, there are 3 subsegments, that JPY 30 billion, does not add that for -- other than the subsegments. Is there a change in plan? So it seems that there is a deviation of JPY 5 billion, please elaborate? So that's the first question. Now Smart Life segment is where I ask my next question. High-Tech business is down in terms of revenues and earnings. But the full year forecast is increase in profit, although decrease in revenues. The first quarter did not perform well, so there is concern for second quarter onward. How are you going to revert back to profitability, what is the likelihood? Please elaborate. That's all.

[Yoshihiko Kawamura:]

Now regarding Power Grid, I would like to ask Mr. Kato to respond.

[Tomomi Kato:]

Now regarding Power Grid, as you rightly mentioned, Page 19, the related cost is shown here. Let me give you the breakdown. For the first quarter, JPY 23.2 billion is shown here. PPA amortization, JPY 13.7 billion is included and others is related to cost of PMI and IT system structural reform expenses are included here. For the full year basis, JPY 72.8 billion, out of which PPA is JPY 43.6 billion is included here. And apart from this are similar to what I mentioned earlier. So PPA amortization is accounting for more than half.

[Unidentified Analyst:]

What about the JPY 5 billion?

[Tomomi Kato:]

The JPY 5 billion is being investigated now. Let me talk about High-Tech. Please refer to Page 22. Now as you can see, the operating income, the first quarter has declined. Last -- first quarter was subject to special circumstances last year. So revenues were high. But now for this fiscal year, we reverted back to cruising mode. So that is how it should be interpreted. On a full year basis, as you can see on the right-hand side, now the medical is very good and the front end of SPEs also making contribution as well. So overall, contribution is made. It isn't as if there is a peculiar risk to consider.

[Yoshihiko Kawamura:]

Yoshihiko, I'd like to talk about Smart Life. Now let me give you further details. For the first quarter, the decline in revenues is related to medical equipment. It is remaining strong in semiconductor. Nontechnology solutions is somewhat below, but we are receiving good orders, there is no concern. For Industrial Solutions, on the other hand. For this area, we are revising the transaction terms, and we are also withdrawing from a low profit business that foreign revenue has declined. In terms of profit for the first quarter as well as for the full year, the analytical solutions and nanotechnology, medical and the semiconductor has -- is planned to have a margin of 15% or more. But Industrial Solutions, we are revising the transaction conditions, and withdrawing from low profit business. And this will continue. So the mix will differ. And as a result, we will end up with the lower revenues and higher profit. Regarding your question, regarding Energy, JPY 5 billion Power Grid, we will confirm later and get back to you. Sorry that we can't respond now.

[Unidentified Analyst:]

Power Grid. The adjusted operating income, there is a downward revision. Why is this the case? Kawamura-san, can you elaborate.

[Yoshihiko Kawamura:]

The impact of COVID-19 is very significant in India and Indonesia, the planned utilization has declined significantly, which has been reflected in this number.

[Operator:]

Thank you very much. I'd like to receive the next question.

[Unidentified Analyst:]

In the first quarter and the second quarter, for the IT segment order situation, I have a question. Looking at the recent results, the strong investment mentality, but what is the order situation or registration in your company about IT orders.

[Toshiaki Higashihara:]

Mr. Kato will answer.

[Tomomi Kato:]

About orders received for IT, foreign exchange, based on some adjustments, 102% compared to previous year. And in total, 116% and 102%. So this is increasing steadily. Thank you.

[Unidentified Analyst:]

So in the second quarter, what are your forecasts for second quarter? Do you think the increase in trend will continue?

[Tomomi Kato:]

For the second quarter, I want to show you the results not for our company, but what is the view of the market, I like to introduce IT market in Japan out of that IT service business, this year, is the focus made by the market forecast company, 3.3% is a forecast. So compared to that, we want to achieve a similar level orders or a level higher than that.

[Unidentified Analyst:]

My second question. In your first quarter operating income, compared to your company plan, what is the difference? Do you have a breakdown for that?

[Tomomi Kato:]

With regards to the general in the first quarter, operating income compared to the budget, it has increased by about JPY 15 billion. And more than half of that is the influence of foreign exchange. Compared to the project in first quarter, operating income has increased by JPY 15 billion. And for the breakdown. For your information, for revenues has increased by JPY 130 billion. Out of that, the foreign exchange has an impact of about JPY 90 billion. So most of that is foreign exchange. Excluding that is a slight increase of about JPY 40 billion. Almost all of that -- almost all sections -- segments revenue has increased. And as for income, as Mr. Kawamura mentioned, is increase of JPY 15 billion. Out of that JPY 12 billion is foreign exchange. The majority of the increase is foreign exchange. But compared to the plan, there was a slight drop for Power Grid because of the impact of the pandemic, there was a slight decline in automobiles, Astemo, because a shortage of semiconductors with the customers, there was a slight decline. And for the rest, income has increased compared to the plan. That is all.

[Operator:]

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

[Unidentified Analyst:]

Now first of all, I have a request. Kawamura-san, your presentation in 30 minutes, you talked about the first quarter performance. But you did not talk about that in detail. That was my impression. For Hitachi, I understand that full year focus is very important but numbers that have been disclosed as well as acquisition information was rather significant. I understand that there are many people present. But perhaps the change in the 3 months may not be significant. But I hope that you will spend more time on the first quarter results. So I hope you can bear this in mind going forward. Based on that, I have 3 questions. First question was what Kato-san explained, it seems that demand is increasing, but there is a problem in terms of supply parts so revenues go down, and in terms of profit of JPY 12 billion. For compared to January, March, it seems that profit level has declined. So in terms of revenues as well as profit changes, please elaborate further. Second question is regarding Mobility revenues, it seems that there is a significant increase but profit did not increase in line with the increase in revenues. In terms of revenue, buildings as well as the Railways, there increase in revenues. Why did you not increase marginal profits? Third question is regarding the GlobalLogic acquisition in the 3 months, there is a cash outflow. And with GlobalLogic, there is going to be a debt as well as cash that will be brought into Hitachi. Please elaborate further in detail.

[Toshiaki Higashihara:]

First of all, regarding the first quarter, explanation, it was not sufficient according to your view. Yes, in terms of the number of slides perhaps there was shortage but we will bear this in mind when we give you the second quarter results, and we will give you further details regarding the second quarter performance. Now. Kato-san, can you talk about Astemo?

[Tomomi Kato:]

Yes. Regarding Astemo, in terms of plan, increase in profit overall, but for Astemo because of the impact of Semiconductor, it is limited to the level shown here. If you refer to Page 23. Let me give you further details. Revenues has increased significantly compared to the previous year because we had 3 Honda subsidiaries integrated into us. 350% increase has been achieved. And JPY 180 billion out of the JPY 382 billion is due to that. The remaining JPY 100 billion is the birth of the conventional Astemo business on an organic basis. Now apart from China, there is a significant growth in all regions. In terms of profit, the Honda sums have contributed. But other than that, there was also an increase year-on-year. But if you look into the quarter specifically, there has been an impact of the semiconductor shortage. Regarding Mobility, so rather than elevators the impact of the Railway business. In the first quarter, Shinkansen-related business incurred increasing costs having an impact here. Against the revenues, the profit increase was lower than expected. This is because of the Shinkansen, the bullet train issue in the first quarter. Regarding GlobalLogic, now the impact on BS will be exchanged. So it was incorporated in July. So it's only 9 months. That will have an impact. In terms of revenue, as I already mentioned, JPY 90 billion. Operating income, JPY 70 million. Margin, 20%. That is a business that has been incorporated. Now impact on the balance sheet will be explained. Goodwill, JPY 600 billion. Others, intangibles, JPY 330 billion, a total JPY 1 trillion or so. Now the other intangibles will be amortized by PPA, will be amortized over 12 years. So that's about JPY 30 billion amortization per year that is being expected. So it's JPY 22.5 billion because it's only for 9 months. Balance sheet and Goodwill, intangibles will be included. Therefore, it will have a significant impact on the Hitachi, Ltd balance sheet.

[Unidentified Analyst:]

What about Q-on-Q revenues has increased by JPY 30 billion or JPY 40 billion. Operating income, JPY 22 billion. It seems that the revenue has declined. In fact more than that, our profit has declined. So I think better profit could have been gained, weren't other factors undermining this? Please elaborate further.

[Toshiaki Higashihara:]

As I've already mentioned, the India and Indonesia plants have been partially closed. This is having an impact. I talked about impact, but this is the same for a similar spell, impact of India and Indonesia also impact of the semiconductor is being reflected in the numbers.

[Operator:]

Thank you. Next, I'd like to receive a next question.

[Unidentified Analyst:]

I have 3 questions. First, I'm sorry to insist but about Automotive. You talked about the impact of India, Indonesia, which we could not forecast and also Semiconductors, but Q1 was behind the plan. And for Q2 and towards the end of the year, how do you plan to recover? That is my first question. And number two, having said so, Industrial business seems to be doing well, a 102% increase in terms of revenue for the full year increased but 30% increase for Q1. So what is your forecast? Do you have to be -- is that something that you must be cautious about looking towards the situation going forward? And lastly, you talked about the ratio, 0.3, 0.4, you want to drop to that level by early next year. You made that comment earlier. But until them, improved the balance sheet will be done. And then after that, you will try to focus on increasing the return to our shareholders. Those are my 3 questions.

[Toshiaki Higashihara:]

First about Astemo. Semiconductor has the largest impact in the second quarter seeing the impact of semiconductors will continue in the current plan. For the third quarter, we are thinking of measures to be taken against the situation in terms of sourcing semiconductors, which will have impact from Q3 onwards. So the reduction of the first quarter will be recovered, by Q3 or Q4. So the full year budget remains unchanged. To be more specific, there are many types of semiconductors. And there are various types, very light switching office semiconductors to high advanced semiconductors. So from where are we going to procure? We are having -- making very detailed plans. What the business cannot do cannot replace by somewhere else, we are thinking of measures. And then we will start to see effects on the third or fourth quarter, supply will recover by then, so budget remains unchanged. And about the industry, as we talk about the orders currently, Q1 order situation. In total, I mentioned increase of 16%. In particular, for industry situations are good as the industry sector increase is 21%. Part of that, Industry Products is an increase of about 30%. So order is quite active, and we can look forward about the situation going forward. And about the D/E ratio and return to shareholders. As you have mentioned, it's not that sequential that we will provide return to shareholders after the ratio recovers. That's not how we think. Funds are already prepared. So what is about the dividend? In general, we are thinking of general measures to be taken. And about the dividends, last year JPY 50 in the first half and JPY 55 in the second half. Now we are looking at registration, and we think that would be around the level. But if a buyback, we want to make a buyback more flexible. Including site information, there is a lot of information going on. So we are looking at the timing when the window will be open. So it's not sequential. It's not going to take place in a sequential manner. So we look at the D/E ratio and we are also considering the shareholders' return. We are looking at overall situation. And about the semiconductor issue of Astemo, Yoshikawa-san will answer.

[Masao Yoshikawa:]

Unless you talk about Astemo -- I'm Yoshikawa from IR. On Q-on-Q basis, it looks as if the situation is not good, but looking from a different perspective, on a year-on-year basis, what's the situation in Q1, we are trying to verify that. And actually, there was an integration. So up to Q3, it is a single. And from Q4 onwards, it is will be integrated. The Q1 information by Honda, when it was listed was more than JPY 110 billion and for AMS itself was JPY 109.3 billion. So in total, more than JPY 200 billion. And when you compare the year-on-year basis, Q1 performance shows a growth of 73%. So with Tier 1 -- compared to also Tier 1 in Japan, it's not bad compared to others. So from Q4 towards Q1 this year, -- we must verify whether Astemo was on the case where a decline was shown. But performance in Q1, relatively speaking, compared to other Tier 1 suppliers, was loss? No, we don't think so. So Astemo, throughout the year, compared to situation by this time last year, it is very difficult to make a comparison. But I think we must look from this perspective. In terms of units for Q1 on a global basis, is increasing by 50%. Then revenue has increased by 73%. So relatively speaking, in terms of competitive advantage, it's not that we have only losers. So quarter-by-quarter, we have very favorable figures. Thank you.

[Operator:]

From the moderator, I would like to provide the following information regarding low impact, we're talking goodwill as well as intangible, JPY 650 billion. And JPY 330 billion was mentioned. But it is JPY 710 billion and JPY 390 billion for the goodwill and intangibles, respectively. The JPY 390 billion. We would now like to take questions from the English channel now. From the English channel, are there any questions? There seems not. We still have some time left. So we will go back to the Japanese channel for any further questions.

[Unidentified Analyst:]

Regarding the Power Grid business for domestic, renewable energy-related business, government-wide effort is made for investment in this area. Is there any domestic business development that you can share? Or is there going to be a project emerging within this fiscal year will also be received in this area? But what is the outlook going forward for the domestic business? Please elaborate.

[Toshiaki Higashihara:]

Thank you for your question. Specifically, we are engaged in discussions, and we cannot provide specific information yet. But generally speaking, regarding the Grid business, -- We have 2 basic technologies, HVDC technology is an area of strength. And the long distance transmission is an overwhelmingly strong business. This is incorporated into Japan, to the HVDC provision as well as the adjustment of the supply and demand lines can be overcome. We believe that the projects can be won in this area. There is no project that has been decided yet, but these are the strong technologies of the ABB that can be brought to them in Japan as well. Renewable energy is had to be -- those grid issues can be overcome and high utility costs can be reduced going forward.

[Tomomi Kato:]

Now regarding the question that we have received. Energy sector, JPY 5 billion. That was a pending question. You asked a question about this. In this graph, it is not mentioned here, but for the sector overall, profitability improvement activities are underway and the accumulated effort is the JPY 5 billion that you have referred to. Is the question, is the cost reduction? Yes, optimization of fixed cost is what we are implementing here. Regarding Japanese market, I would like to add the following information. After China and U.S., it's the #4 in the world in Japan. And subs -- HVDC switchgear, GIS, is one of the businesses, and we have a scale of #3 in the world. However, in terms of the growth potential, it is now. So for Africa and for Central Africa, Asia and Europe growth profile has not been established yet. Therefore, for decarbonization to be realized, we hope that we can provide more products in the domestic market going forward.

[Operator:]

Thank you very much. Now, it is time. So, with this, we would like to conclude the web conference on the Q1 FY 2021 earnings. Thank you very much for your participation.