Hitachi (HTHIY) Q1 2015 Results - Earnings Call Transcript

| About: Hitachi Ltd. (HTHIY)

Hitachi (OTCPK:HTHIY) Q1 2015 Earnings Call July 31, 2014 2:45 AM ET

Executives

Toyoaki Nakamura - Chief Financial Officer, Executive Vice President, Representative Executive Officer, Executive Officer and General Manager of Consumer Business Division

Mitsuyoshi Toyoshima - Former Corporate Auditor

Operator

[Japanese] We would now like to start the meeting of consolidated financial results for the first quarter ended June 30, 2014 for Hitachi, Ltd. The speakers today are the following: Toyoaki Nakamura, Executive Vice President and Executive Officer, CFO; Mitsuyoshi Toyoshima, General Manager of the Financial Strategy Division; and Ken Mizoguchi, Executive General Manager of the Corporate Brand and Communications Division.

I would like to call upon Mr. Nakamura for the explanation.

Toyoaki Nakamura

Now I would like to start the explanation, referring to the materials that have been distributed to you, and talk about the outline of the results.

Please refer to Page 4. This is the highlight of the first quarter. Our revenues was JPY 2,136.3 billion, up 3% from the previous year. This is because Information & Telecommunication Systems, as well as Electronic Systems & Equipment and Social Infrastructure & Industrial Systems and Automotive Systems segments were better than the previous year.

And operating income was JPY 80.1 billion, plus 45% over the previous year or JPY 24.6 billion year-on-year. This is because of Smart Transformation.

Now in terms of Electronic Systems & Equipment, Smart Life & Ecofriendly Systems, Information & Telecommunication Systems and Automotive Systems segments.

EBIT was JPY 85.1 billion, up 45% or JPY 26.6 billion year-on-year. Bottom line was JPY 28.8 billion, up 167% over the previous year or JPY 18 billion year-on-year.

Now in terms of the stockholders' equity ratio, 27.9%, up 0.5 point from the previous year. And core free cash flow was JPY 43.5 billion, an improvement of JPY 52.3 billion year-on-year. And free cash flow was JPY 57.2 billion, up JPY 73.4 billion year-on-year.

Please turn to Page 6. Now as I mentioned, this is the change of the operating income that I have referred to. In terms of the Thermal Power business, as well as Maxell, they have been a business [ph] of reorganization. The impact was minus JPY 4 billion. Lower sales price, as well as investments in business development and increase of labor costs and depreciation had a negative impact. There was also a decrease of our Power Systems business, JPY 7 billion. And however, this was offset by improvements in large projects, as well as higher capacity utilization and also cost reduction. As a result, we have -- had an increase of JPY 24.6 billion year-over-year.

In terms of sales price and cost reduction, the benefit of the Hitachi Smart Transformation Project was plus JPY 26 billion.

I will skip over some pages. Please refer to Page 9. The revenues by market. Japan was JPY 1,106.7 billion. That's 102% year-over-year. Outside Japan, JPY 1,029.6 billion, 103%. For the -- outside Japan, China, North America and Europe saw increases.

And in terms of the total of 103%, as I mentioned earlier, the Thermal Power was consolidated, as well as Maxell, has impact, on period-to-period basis, was 108% [ph]. And therefore, we have seen that increase in all of the regions. This is because of the high-end capacity utilization rate.

Now in terms of the balance sheet, please refer to the following page. And move on to Page 11. And this is the balance sheet looking at Manufacturing, Services and Others; and Financial Services. The upper side is manufacturing and services. Total assets was JPY 8,854.7 billion, and that is a decline of JPY 213.1 billion. This is because the working capital -- we have had better recoveries in terms of receivables. And that's a reduction of around JPY 220 billion. In terms of total liabilities, there was also a decrease, JPY 5,309.7 billion, as a result. As you can see below, we are looking at the cash conversion cycle as well. This has been stipulated [ph].

For the first quarter, we were at 73 days, which is shorter by 8.3 days compared to the previous term. We will continue to make improvements in this area going forward. And in terms of the stockholders' equity ratio, 27.9%, an increase of 0.5 points. D/E ratio, 0.4x. This has been maintained, and so the financial discipline is in place.

In terms of Financial Services. JPY 2,524.2 billion, an increase of JPY 78 billion. This is because the overseas businesses expanded. As a result, our trade receivables increased. Our specialty group business, our Social Innovation Business saw collaboration, and that is the reason why these receivables have increased. And in terms of stockholders' equity ratio, 7.1%; and D/E ratio, 5.51x. And the A [ph] rate, 7.5x has been kept, which is a requirement.

Cash flow. Please refer to Page 12. Looking at the Manufacturing, Services and Others, in terms of cash flows from operating activities, JPY 155.3 billion. This is an increase of JPY 49.3 billion. Free cash flow was JPY 57.2 billion, which is an increase of JPY 73.4 billion. Core free cash flow, JPY 43.5 billion, an increase of JPY 52.3 billion.

Page 13. Now in terms of manufacturing services, CapEx was JPY 78.6 billion, year-over-year, 85%. And in terms of consolidated depreciation, 64.2% (sic)[JPY 64.2 billion], 101%. Research & Development expenditure, JPY 79.8 billion, which is 98% year-over-year. On Thermal Power, as well as Maxell, in the absence of this, it would have been 101%. Therefore, we are seeing increases in the business segments.

Now looking at Page 17 now, by segment. This is for the 10 segments. I would like to explain this page. The second one is the Power Systems. There is the European boiler issue -- boiler trouble occurred. And as a result, revenue [ph] decreased. For Construction Machinery, in China and Australia, demand has gone down. But otherwise, there was an increase in revenues, as well as earnings. And overall, we have been able to increase revenues as well as EBIT.

Moving on to Page 20. This is for the accumulated basis outlook for the first half. Below, please refer to the table, we are assuming a JPY 98 and JPY 130 in terms of foreign exchange for the second half -- second quarter. And revenues of JPY 4,440 billion (sic) [JPY 4,450 billion] compared to the previous forecast, 101% or increased by JPY 50 billion.

And operating income, JPY 185 billion, increased by JPY 10 billion. Same for EBIT, bottom line, revised forecast is JPY 60 billion.

Now for the segments, please refer to the information on Page 23 and Page 24. Overall, in terms of Power Systems, you can see that for the Middle East, projects are subject to problems because of geopolitical issues. And therefore, revenues is at 91% for Power Systems. For operating income, on the other hand, the gross margin cannot be posted [ph]. And for the Thermal Power Systems, the boiler countermeasure issue has been encountered. Therefore, we have reduced by JPY 16 billion in terms of the previous forecast.

Construction Machinery. The impact of Hitachi Construction Machinery has been included by minus JPY 6 billion. In terms of Information & Telecommunications, we are receiving orders for Social Infrastructure & Industrial Systems. We are seeing increases in revenues.

And in terms of High Functional Materials, metals is especially good, and that is the reason why we have revised upwards. And now for the Smart Life & Ecofriendly Systems, overseas revenue is increasing, so that is why we made an upward revision for this segment. And for Financial Services, overseas business increased. So that is reflected in the forecast.

Corporate items and eliminations. We are reducing costs now, so that will be the impact. And we are also getting rid of the risk and, therefore, JPY 10 billion. Now full year basis, revenue and operating income and bottom line total has not changed. However, on a segment basis, we made some revision.

Please turn to Page 28 and 29. The changes are Power Systems and Construction Machinery, and the factors are the same as the first half. And in corporate items and eliminations, plus JPY 39 billion. And overall, no change, JPY 560 billion.

In the second quarter and third quarter, we will try to increase the numbers and working hard towards that goal.

Now 2015 Mid-term Management Plan and the progress, let me explain the progress. Page 31, please. This is the top line growth by accelerated global development of the Social Innovation Business. In Japan, as mentioned, as announced the other way -- other day, we are starting the Kashiwa-no-ha Smart City business.

From the demonstration project, we are starting the commercial operation, finally. And for global, the new storage platform is now being announced. And in Lithuania, we came to an agreement with Government of Lithuania to discuss the establishment of project company for a nuclear power project.

Now in China, selected to deliver the world's fastest elevator for the tallest skyscraper. And in the Americas, bolster automotive product manufacturing capacity in line with stronger alliance with global automakers. In Mexico, we are establishing a new plant. And U.S. is expanding the plant.

Now next is global management structure reinforcement. For the Rail Systems Business, we are creating the -- we are trying to accelerate the globalization and to service more to the customers. We are establishing Global CEO post in Information & Telecommunication Systems. We are trying to accelerate the decision making. And therefore, we are posting an executive officer in North America. And global European Big Data business is now being focused.

So we acquired Information Management Group Limited of the U.K. In Infrastructure Systems, we acquired Valcom of Italy to strengthen engineering capability of the engineering oil and gas business and strengthen overseas frontline engineering capabilities and created Regional Director post in 6 overseas regions and launched Hitachi Infrastructure Systems.

Now promotion of the global talent management. In order to maximize the performance by strengthening the alignment between management and individual objectives, we introduced a Global Performance Management system to align the organizational and individual objectives.

Now Page 33, this is Smart Transformation Project, STP. I mentioned JPY 26 billion impact earlier. On an annual basis, we are aiming for JPY 90 billion. We are aiming for JPY 100 billion for fiscal year 2014.

And in creation of cash flow, we are trying to accelerate process-focused reform from the optimal overall E2E perspective. With this, we will strengthen earnings power and cash generation capacity.

Now some initiatives in the first quarter are listed here. Global logistics reform. We commenced joint group transportation using group gateway platform between China and Japan to expand transportation between Southeast Asia and Japan. And in global SCS -- SCM reform, we commenced full scale operation of the global shared PSI system for mass production operations. And for refinement of global procurement, we launched a new group procurement, global procurement scheme using professional functions with the group, including Hitachi High-Technologies, Capital Corporation and transport system. We're planning to expand this in Europe and China.

That concludes my presentation. [Japanese] We would now like to start the Q&A.

Unknown Executive

The floor is now open.

Question-and-Answer Session

Unknown Analyst

I have 3 questions. First question, regarding the first quarter, in terms of operating income, now please give us the comparison compared to the internal plan. Now for the loss-making projects, it seems that the -- in the social infrastructure, industry, you were able to reduce red ink, but what is the outlook going forward? In terms of the Middle East, there is loss-making projects of JPY 16 billion for the first half. And for the whole year, JPY 19 billion for Power Systems. Do you think that JPY 19 billion will be enough? What is the outlook in terms of the ongoing projects? Question three is somewhat different in nature. In terms of the global fund investors, many investors are asking questions about the ROE of Hitachi. In the -- placing importance on stewardship, this question is increasing. So please share with us the ROE or other indicators that you are using internally.

Toyoaki Nakamura

Regarding the first quarter, the internal plan, in the beginning, from each of the divisions, in March, compared to what was formulated then, we have seen an improvement. But when the announcement was made, we felt that it was not enough. And therefore, we increased. And if you compare against that. In terms of what we've already announced, compared to JPY 175 billion, an increase by JPY 15 billion has been achieved. What has increased significantly is in the area of High-Technologies. And about a JPY 7 billion improvement was made in this area for Electronic Systems & Equipment. And in terms of Information & Telecommunication, an improvement of JPY 3 billion. And also in terms of -- a JPY 3 billion improvement for Smart Life & Ecofriendly systems. In terms of Social Infrastructure, as well as High Functional Materials, improvement of JPY 2 billion each. But what was unfortunate is Power Systems, JPY 7 billion lower than what we have expected. Otherwise, in terms of corporate items and eliminations, expenses have been cut. And therefore, the remaining is JPY 12 billion. And our Financial Services increased by JPY 1 billion. Now in terms of loss-making projects, for the Information & Telecommunication area, there are some remaining. It's as if everything are behind us because of the size. But we believe that the end is visible. In the second quarter [indiscernible], we believe that the situation is visible [ph]. We have responded to this in the first quarter. And therefore, from the second quarter onward, we should be free from major problems. Now in terms of infrastructure, for this fiscal year, there are no significant problems. Our PMO organization has been established. We are consolidating our efforts, and we have better visibility now as a result of this. The orders received are somewhat suppressed. In terms of the balance, the backlog, there's a decrease in infrastructure. However, we are not increasing losses and, therefore, we have good outlook for this area as well. For myself, what was extremely disappointing was Power Systems. This has been strictly as a result of thermal power generation. We have established the MHPS with MHI, and everything is going well for this company from February onward. At that time, there were some projects that were about to be commissioned. And these projects [indiscernible] starting. And in March of this year, in Germany, there were some problems incurred in the trial run for boilers. And over time, several issues arose. We are trying to elucidate the reason and also identify the responsibility for this issue. We have been trying to elucidate the situation over time. We found that we are not 100% responsible. There is also some problems on the part of our customer as well. So there is still lack of clarity in terms of accountability. But this has been insured and for what cannot be covered by insurance because for such -- such as the elucidation of the reason, we had to set aside a reserve for that, a loss contract reserve. If it's red ink, it would mean everything, but it isn't as if everything is red ink. And therefore, in the second quarter, some will be incurred. And that is the reason why it has been factored in. These are countermeasure expenses, and this will run its course in fiscal year 2014. But beyond that, as mentioned in our securities reports, we are subject to litigation. We are suing each other. Therefore, in terms of competition, time will be required to resolve this situation. But in terms of performance, as well as countermeasure expenses will be behind us in this fiscal year. Now regarding the ROE question. Last year, if you look at manufacturing services, 12% was achieved. According to the Mid-term Management Plan, we are aiming for a double-digit ROE. That is our understanding. For this fiscal year, when we make the calculation, it will be around 8%. And this is far from satisfactory. And we will pursue the Mid-term Management goal, having double-digit ROE. But [indiscernible] it can continue to increase, so we will do our utmost to maintain the double-digit ROE.

Unknown Executive

Any other questions?

Unknown Analyst

I have 2 questions. First, in the first half, operating income forecast is revised upward in some segments, 6 or 8 segments, I believe. For those segments, on a full year basis, are you keeping -- you have kept the forecast flat. So have you -- do you have a flat forecast? Is there a reason to that? So if you could elaborate if there are differences among segments. Could you explain that? My second question is the Germany -- the German Thermal Power business. You said that you are suing each other. Customer side, because of the delay of the operation, the customer is suing for the operational opportunity loss. So what is Hitachi insisting or suing for? If you could respond as much as possible, please.

Toyoaki Nakamura

In the first half, we revised upward in a few segments. But we revised downward for -- full year downward revision was the ones, the segments that we've revised downward. The company precedent [ph] are conservative, so we have not changed the full year forecast yet. Internally, as I said earlier, this fiscal year is a preparation year for fiscal year 2015. It's a year to lay the groundwork to become profitable. And so we are trying to improve revenue and operating income on a quarterly basis, on a quarter-on-quarter -- year-on-year basis. And the mindset has not been corrected. It's been only three months since we started this system and so the revision is not as big as other competitors, which are very strong. It is not that we have any specific concerns. That is not the reason. Power and Construction Machinery are of concern, and that is why we revised downward. So that's my first point. Now the fact that we are suing each other, this is the overseas project, and it's mentioned in the securities report. Originally, when we did the construction, the steel plate fell, which hindered the construction. So the suspension of operation, the delay, because of that, started this suing. As you just said, the electric power companies are complaining and in the lawsuit, we won because we were not liable in the criminal court. We have to fight in court, and it seems like it will take a bit of time.

Unknown Analyst

This is not the lawsuit regarding the boiler in Germany?

Toyoaki Nakamura

The steel plate issue was Germany.

Unknown Analyst

It's different from what you just mentioned this time? The boiler case -- is this the same project as the boiler case?

Toyoaki Nakamura

Same project.

Unknown Executive

Next question, please.

Unknown Analyst

I have 3 questions. Question one is regarding the boiler issue for Thermal Power business. For the first half, JPY 16 billion revision, JPY 3 billion for the second half has been revised. And there's also a Middle East risk that has been factored in as well. And so what is the breakdown in terms of the problem, as well as the Middle East risk? Please indicate the breakdown. Question two, cash conversion cycle number has been presented to us on this occasion. And you implied that it is going to decrease this going forward. What is the improvement that you are aiming for and what time frame? Question three, regarding Information & Telecommunication, especially for Telecommunication, there seems to be red ink in the first quarter. But on the other hand, the second quarter, you are factoring in a significant improvement. What are the measures and the likelihood of achieving this goal? That is all.

Toyoaki Nakamura

Now regarding the Thermal Power business issue…

Mitsuyoshi Toyoshima

Regarding boiler issue. In the first half, it's about JPY 2 billion to JPY 3 billion and JPY 26 billion for the fiscal year we have factored in -- we have set aside this for this problem. And it was mentioned that there's JPY 19 billion, but there is also positive JPY 7 billion. This is for the fixed expenses, as well as for new energies, for example, photovoltaic as well as wind power is having a positive impact. And the Middle East projects are also being absorbed. Organically, we are making improvements as well.

Toyoaki Nakamura

In terms of the cash conversion cycle. For this fiscal year, at the end of fiscal year March 2015, we would like to be at 75 days at the end of fiscal year. And end of March was 81, March 2014. So that is the decrease we would like to achieve. E2E project will be implemented and working capital will be reduced. We are -- have announced this initiative. In terms of operating profit margin, it's not very high yet. In fact, it is better than the past. When the profit margins increase, the generated profit will be accumulating working capital. But that means that it cannot be used for investment. So when the profit margin increases and when the turnover is better, we can expedite the investment on a proactive basis. So for -- we are trying to share this with the in-house companies. We have agreement to move toward this direction. So that is the reason why we are showing this number from this term. Now in terms of Telecommunication red ink profit -- red ink business, the legacy and exchange business was the pillar. We were depending on this. However, our investment on the part of the carriers are being suppressed. And the reason why we have red ink is because of the fixed expenses. So we have to implement countermeasures against these fixed expenses. We have already resized the organization with [ph] 270 people. Therefore, we should not be incurring significant red ink going forward. Going forward, it is very important to provide solutions toward the 2015. We will work toward making this transformation.

Unknown Executive

Any other questions?

Unknown Analyst

2 or 3 questions. First quarter and first half and full year basis, Smart Transformation cost reduction progress, if you could elaborate on the progress. In Hitachi Chemical, Hitachi Chemical is reducing the headcount by 1,000. So that is the additional reduction in fixed cost or not? Until now -- you did not really reduce the headcount in apparent, obvious way until now. So if you could elaborate on the progress of the Smart Transformation Project, please? Second question, this may be different, I will digress from the first quarter financials. But you are going to focus on Healthcare. So it's only been 3 months since you started focusing, but if you could update on any situation, please. Third question. I asked the same question to other companies yesterday. The manufacturing -- industrial manufacturing index is bad. And so The Economist is going to lower the GDP forecast. The concern, you said, is only Construction Machinery and Power segment, but in terms of macroeconomic data, it seems like things are worse than 1997, when the consumption tax rose last time. So how is your business environment in Japan and overseas? So 3 questions, please.

Toyoaki Nakamura

First quarter, as I said earlier, is JPY 26 billion, so multiplied by 4, is around JPY 100 billion. We think we are off to a good start. Originally, our budget was JPY 90 billion, but now Thermal Power generation business will go out. And so our projection was JPY 90 billion, overseas production, and the centralized procurement and global procurement is now under way. And so we think we can achieve this target. Internally, we are aiming for JPY 100 billion, so that is why we included JPY 100 billion in this material. Hitachi Group tries to walk the talk, and so we have to announce this externally to commit to this target. We want to achieve this target. Next is Healthcare, our focus on Healthcare Business. Hitachi Medical staffs, who are going to be the core. The development deadline is now coming close, and so we are making progress. But Healthcare strategy is now being formulated and that is why Healthcare is included as one of the core. However, we are not seeing big progress, as much as we want to. But the prototype are being progressed steadily. And so I think we are finally laying the groundwork. Towards September, the strategy is now being formulated over and over because it's not complete. So we're working on it again. We're working on the strategy. So next time, I think we can talk more. And the industrial manufacturing index, we expected this index will -- to be low in the April, June quarter. There are some companies that are doing capital expenditures, some not. And those who are not doing capital expenditure are probably thinking about it. And they are probably waiting until they get some result of the measures they are implementing now. We are receiving inquiries, and I'm sure we will see some more going forward. Now what is different from now and 1997? Usually when consumption tax goes up, demand does not go up. Demand goes down. It is only natural. Now other countries that do not raise the consumption tax outside of Japan, how is the demand outside Japan? Back in 1997, there was Asia currency crisis. So near Japan, demand disappeared in regions close to Japan. So that was unfortunate. This time, it's not the case. I don't know much about the U.S. I heard that the 4.0% GDP growth, and it seems like U.S. is growing. Maybe this has something to do with the magic of statistics. China, now [ph] 7.5%. So demand is equal to the past level. Thailand seems to be a little sluggish. But India, April, June was not good, but I am expecting -- after Moody, the atmosphere is improving and home appliances is growing and it seems that public investment will start. So I have high hopes for July, September quarter. I think the external demand will support Japan. There is geopolitical risk. This, I am concerned, as I said earlier. In Iraq, did we sign a contract or are we planning to sign a contract? The contract is now being suspended and this, we have to live with. But for Social Infrastructure, we are not selling our Social Infrastructure business in -- where we see demand, which is unfortunate. We have to keep our eyes on the situation. I don't think Japan will see another situation like 1997.

Unknown Analyst

So you had some problem with the thermal power generation, but nothing else?

Toyoaki Nakamura

[Response not translated by interpreter. Executive nods in agreement]

Unknown Executive

Next question, please.

Unknown Analyst

Regarding the Information & Telecommunication Systems, I have 2 questions. For this segment, the first quarter, as well as the near-term demand -- orders is what I'd like to ask about. Now do you think that everything is going well for the loss-making products?

Mitsuyoshi Toyoshima

Now in terms of the Information & Telecommunication Systems orders received, for the first quarter, it's 118% year-on-year, very high levels. Inclusive of the public sector, as well as domestic and storage, we have introduced a new storage product in April, so we are seeing very strong trends in all these areas.

Toyoaki Nakamura

In terms of information systems, domestically, we are receiving orders successfully. So everything is proceeding well in this segment. And as already mentioned, issues in terms of projects, as well as cost overruns, will have to be avoided as much as possible. We will do our utmost to achieve this goal. In terms of system solutions on the other hand, all our customers are in Japan, in this area. And most of the workload are concentrated in May -- I mean, March, which means that in April, as well as through June, in the first quarter, the revenues tend to be low. Therefore, from the past, we are trying to improve this situation. And in this first quarter, we have made improvements in terms of having the contracts concluded in the first quarter. We have made headway. So system solutions profit has improved more than expected, and that is the reason why the Information & Telecommunication Systems did very well in the first quarter. So structural reform of our business is making headway in a steadfast manner.

Unknown Analyst

I have 2 questions. Lack of labor is a problem, in general. In your manufacturing field, are you seeing any shortage of manpower or the increase in the unit cost? Second question. Lithuania, you said that the negotiation will start for the establishment of the Lithuania nuclear power plant. Lithuania, I think this will be a long-term issue, but how will it impact your financials? How do you evaluate this?

Toyoaki Nakamura

So shortage of manpower. In the manufacturing field, a normal assembly line does not exist in Japan anymore much. So I do not see much shortage in Japan, but in Hitachi Transport, for example, truck drivers or those who do the packaging, it seems it's becoming more difficult to secure people. So maybe this is because the employment is improving, the offering to -- the job opening to position is now 1.1. When I joined the company, it was terrible. But before that, it was better. I think the structural environment in Japan is now coming close to U.S. and Europe, and we are finally getting out of deflation. That's my feeling. So in this shortage of manpower, the blue collars in the manufacturing sites, I think we will see more relocation or shift to overseas. But the added value business can remain in Japan. Now for Lithuania nuclear power plant business, we are trying to establish the preparatory company. Estonia and Latvia will also come into play. So Lithuania government will first lay the groundwork. I think we can shape the form by the end of this year. It will take some time from there. So maybe we cannot include it in the next midterm, so one after that. I think this will be a project around 2020 and beyond.

Unknown Analyst

I have 3 questions. Regarding the consumption tax increase impact. Looking back at the quarter, what has been the impact on the business as well as performance? And Hokkaido Electric Power has decided to increase tariff, so tariff is going to increase further. How do you assess the impact? What is your concern in this area going forward? The third question is as follows. Samsung, today, announced their results. And they had a decrease in revenues and earnings, so there is a slowdown of their performance. Is this going to have an impact for your business?

Toyoaki Nakamura

Regarding the impact of consumption tax hike. It was not as significant as we had expected. We don't have food product, we don't have apparel, and it is only the home appliances that will be impacted significantly. And also parts for automobiles. But we do not manufacture automobiles. So it's only the parts. These are the areas that will be impacted. Domestically, there have been some decline. However, overseas, we saw increases. Therefore, overall, revenues increased year-on-year. And therefore, in this regard, the impact was within our expectations. Now Hokkaido Electric Power Company has decided to increase its tariff. To this point, we don't have many plants in Hokkaido. So direct impact is limited. But in 2014, Hokkaido Electric Power Company, before increasing tariffs by them, was already increasing -- the impact of the tariff increase was about 6% compared to the previous year. Last year, the impact was around 14%. Therefore, that has already been an increase of 20%. Therefore, the manufacturing cost in Japan has now become very high for us. So the future impact will have to be considered. And now FIT, F-I-T, feed-in tariff has been approved for PV, as well as in wind power. And if everything approved has been completed, the charge will go to the electric power company. And the electric power company will have to add that onto the tariff. And the impact is considered to be JPY 2.1 trillion. And therefore, if we remain on this course, the thermal power increase, as well as increase in renewable energy will mean that for manufacturing as major parcels compared to overseas, the tariffs here in Japan is going to be significantly higher. Therefore, this is a concern for us, indeed. Regarding the results of Samsung. The area that we will be impacted, in terms -- is the Electronic Systems & Equipment. We have a semiconductor manufacturing equipment that we're selling to them. So there'll be some impact there. But that is also within our expectations.

Unknown Analyst

Regarding the tariff increase for power, it may be increasing for other electric power companies as well, not just limited to Hokkaido. Is it going to have an impact on manufacturing for you?

Toyoaki Nakamura

If it continues to increase in terms of competitiveness, compared to other global competitors, for example, in China and Taiwan, as well as Korea, as well as in other Asian countries. And compared to our competitors overseas, we are going to be impacted negatively. And our competitiveness will be eroded over time. In the past, we were impacted by the strong yen. That has been rectified. But now with the power tariffs, as well as in terms of geographical position, the impact will also be negative. So we have to make sure that appropriate measures will be introduced to resolve this challenge.

Unknown Executive

Since we don't see any more questions, we would like to close the financial results briefing for the first quarter ended June 30, 2014. Thank you very much.

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