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Executives

Takashi Miyoshi – EVP and Executive Officer

Hitachi, Ltd. (HIT) F1Q 2011 (06/30/11) Earnings Conference Call July 29, 2011 4:30 AM ET

Unidentified Company Speaker

[Interpreted]

I will now like to introduce the speakers for today. In the middle is Takashi Miyoshi, Executive Vice President and Executive Officer; to your left Toshiaki Kuzuoka, Vice President and Executive Officer; to your right Yoshihito Kitamatsu, General Manager of Finance Department 1.

I would now like to call upon Mr. Miyoshi to start the explanation.

Takashi Miyoshi

[Interpreted]

I would like to explain based on the news release. First of all, please refer to the summary page. This is the first quarter for fiscal year 2011. Our revenues was 2,150.6 trillion Yen, 100% year-on-year; operating income 52.4 billion Yen; and net income attributable to Hitachi 2.9 billion Yen. And, because of the impact of the earth quake, first quarter was unfortunately difficult.

I would now like to explain the impact of the earthquake for the first quarter. 130 billion Yen for revenues, 50 billion Yen for operating income, and 65 billion Yen for income before tax, and net income impact was 50 billion Yen. Compared to the President Nakanishi's announcement for the fiscal year forecast, the first quarter results had an upside of 86 billion Yen for revenue, 56 billion Yen for operating income, and 37 billion Yen for net income. Details will be presented later.

Next, I would like to move on to explain the financial position. Please refer to the balance sheet. Total assets was 9,433.6 trillion Yen, increase of 250 billion Yen year-on-year. Interest bearing debt was 2,860 trillion Yen, increased by approximately 340 billion Yen. But we have increased inventory because of strategic purchasing of the materials as well as dealing with the supply chain issues.

For the second half we are increasing inventory to manage the increase in demand. We have also increased funds at hand because of the impact of the earthquake and because of the concerns over the US. This increase in funding is shown on the balance sheet. As a result, the stockholders’ equity ratio was 15.3% and D/E ratio, including non-controlling interests was 1.17 times. Compared to the previous year, there was a deterioration in these numbers. For the stockholders’ equity ratio, we are aiming for 20% next year and we would like to make improvements in this regard. As for the D/E ratio, we are aiming for 1 or below by the end of this fiscal year we will be implementing measures accordingly.

Next, I would like to refer to the cash flow on the following page. Unfortunately for the first quarter as I mentioned earlier, we have increased inventories and this is also impacted by the payment of the bonus, and therefore first quarter is always difficult. Cash flows from operating activities is negative and cash flows from investing activities is also negative. Negative free cash 100 billion Yen has been posted. As for the table below, we have revised slightly the forecast for the first half. I would like to give you details later.

Next, I would like to refer to the segment information. Next is segment information. As you can see here, we suffered the impact from the great East Japan earthquake. Power Systems, Social Infrastructure and Industrial Systems, Electronic Systems and Equipment, High Functional Materials, and Components and Automotive Systems segments were greatly impacted. So let me explain the key points.

Information and telecommunication systems segment had impact from the earthquake. But as shown in the supplementary information, overseas storage solution was strong and revenues grew by 12% year-over-year. In addition some domestic projects were front loaded and demand for BCP, BCM is emerging. And therefore overall revenue was an increase of 1% year-over-year and operating income improved year-on-year to 2.1 billion Yen.

On the other hand Power Systems also suffered the impact from the earthquake and in Japan the number of preventative maintenance deals of nuclear power plant is decreasing. Also power semiconductor manufacturing base in Ibaraki was damaged by the earthquake. In addition there were non-earthquake related factors such as troubles in overseas thermal power generation project. And therefore revenues dropped by 6% year-over-year and the segment recorded operating loss due to the impact of the earthquake that I just mentioned.

Next is Social Infrastructure and Industrial Systems, overseas monorail project is emerging and industrial machinery handled by Hitachi Industrial Equipment Systems had big demand related to recovery. And elevators, escalators business in China is strong. However, the number of power-related projects was small in the first quarter centering our Hitachi Plant Engineering and Construction Company and the damage of the earthquake. And therefore both revenue and operating income declined.

Next, Electronic Systems and Equipment. Hitachi High Technology’s trading function’s revenue declined due to the earthquake. On the other hand, Hitachi Medical Corporation recorded higher sales as a result of consolidating sales as a result of consolidating Aloka Company and Hitachi Kokusai Electrics Eco and Thin Film Process Division increased its revenue. Therefore revenue declined by 2% due to the earthquake, but operating income was up to 7.1 billion Yen year-over-year.

Next is Construction Machinery. Except for China, all regions including Japan is strong in demand. Revenue decline in China was offset and posted 6% increase. And therefore operating income was highest in this segment at 11 billion Yen.

Next High Function Materials and Components is mainly for automobile. And there fore we are seeing various impacts. Hitachi Cables industrial infrastructure, cable for wireless base station and high function metal products are strong. This made up for the impact from Hitachi Chemicals Group Company in Namie Town and revenue was flat year-over-year. On the other hand, due to the raw material costs increase and impact from Hitachi Chemicals Group Company in Namie Town, operating income dropped.

Next is Automotive Systems. As I mentioned earlier, domestic automotive manufacturers’ capacity utilization dropped significantly which had an impact. But despite the low profitability, we pursued structural reform and cost reduction, which improved our operating income.

Next is Components and Devices. January, March result of hard disk drive is included here. And PC environment was favorable on a year-on-year basis in generating profit, but price impact was large. In addition, display plant stopped temporarily due to the earthquake. And therefore both revenue and operating income dropped.

Next Digital Media and Consumer Products also had an impact of the earthquake. And last year was strong with the surge in demand from eco-point system. And TV and home appliances demand was brisk, but the price environment was harsh in the first quarter of this year. Despite the strong TV demand, there was a shift to smaller models and optical disk revenue declined and therefore the revenue declined. So both revenue and operating income dropped, but on the other hand, home appliances centering on air-conditioners is strong. Overall, however, revenue and operating income declined. Financial Services is mainly domestic and revenue decline, but operating income improved, reflecting higher earnings.

Next, Others segment. Hitachi Transport System made Vantec a consolidated subsidiary and therefore revenue rose. Operating income declined due to a large cost in new businesses. Overall, revenue was flat and operating income declined due to the earthquake. However, compared with our plan at the beginning of this fiscal year, operating income is higher in all the segments.

Next, I would like you to refer to the supplementary information, the last page on the hard disk drive. As I mentioned earlier, the hard disk drive near-term outlook will be explained. I have already explained the revenue and operating income for the period from April to June.

Now I would like you to refer to the column four of the second quarter. In terms of revenue based on dollars, 95% year-on-year and on the Yen basis it’s 84% because of the strong Yen impact. Lower half is the information on shipments. The smartphone has had an impact on the 3.5-inch size. It is struggling in terms of volume as well. However, we saw growth in products where servers are strong. But in terms of revenue, sales were a subject to price decline. And therefore operating income in terms of dollars was 45% year-on-year. That is all in terms of the numbers for the first quarter.

Next I would like to talk about the revised forecast. For the first half, we have revised upward the operating income as well as the net income. We have also provided here the revised numbers by segment. Now, in terms of revenue in Automotive Systems revised upward by 20 billion Yen. In terms of operating income, the Social Infrastructure Industrial Systems, the Electronic Systems and Equipment, the Construction and Machinery, Automotive Systems, and Component and Devices have been revised upward. The total is 20 billion Yen. In the first quarter, as I mentioned earlier, comparing to the plan we have handled significant upside. But in the second quarter, there are still supply chain challenges facing us. And in the near term and the outlook for the second quarter onwards, the foreign exchange is 80 Yen for the Dollar and 110 Yen for Euro. Near-term factors include Yen’s appreciation going forward and also escalation in material prices, especially for rare earth products.

Now, after the earthquake, we have been dealing with the requests of our customers and we are seeing still uncertainties. There are some customers that are pushing back investment projects. This is the source of concern for us.

In terms of the power supply environment, there are uncertainties surrounding in the power utilities. Therefore, there is an overall lack of visibility. There are some issues in the thermal power plant overseas as well. The most significant factor is the further uncertainty in the global area. There is further uncertainty in this area. That is the reason why we are taking a conservative approach in terms of our plan. We would like to see more clarity going forward and that is the reason why we have formulated this plan. However, in terms of the implementation, as I mentioned when I talked about inventory, we believe that in the second half, the supply chain situation should improve. And auto manufacturers are likely to accelerate its operations. So we would like to respond to these needs. We are also expecting reconstruction demand as well, however last projects are still not visible. But nevertheless in each of the different regions, we are responding to prevailing demand. And therefore in terms of implementation, we will try our utmost to make further improvements.

That concludes my explanation. I will be happy now to take questions.

Question-and-Answer Session

Unidentified Speaker

[Interpreted]

A question, you have explained to us the impact of the earthquake and also the upside to the forecast. But I believe that the upside in the first quarter comprises the earthquake impact being smaller than expected as well as the demand being better than expected. Therefore, please give us the break down between the two.

The second point is as follows. As for the operating income, you said that there was upside in the first quarter for all segments. If possible, at least comment on how much upside was achieved for each segment.

Takashi Miyoshi

[Interpreted]

Regarding your first question, regarding the earthquake impact, I would say that supply chain situation is improving daily and we are dealing with our customer’s need appropriately. And therefore the impact of the earthquake is less. For the first half overall, I would say that improvement is by 10 billion Yen in terms of operating income. Beyond that it is difficult to comment, because there is a power supply situation as well as the reconstruction demand of customers that are leading to demand. Therefore, it is very difficult to quantify. We cannot give you an exact number and that incremental demand is supporting our performance according to our view.

On the other hand in terms of the economic environment, now we are seeing improvement. For example, the Hitachi Construction and Machinery business overseas is improving except for China. It’s very difficult to give you a quantitative explanation, but both factors are contributing. And I would also add that with the earthquake there was a significant damage. Therefore, we forecast conservatively for our in-house company business.

Now, please refer to the segment information. There was improvement over the midterm plan in all segments as I mentioned earlier. Most significant improvement was seen in Construction Machinery. I will give you the order of improvement in Construction Machinery and then High Functional Materials and Components and Social Infrastructure and Industrial Systems and Information and Telecommunication Systems and Power Systems. Improvement was made overall to – by around 15% to 10%.

Unidentified Speaker

[Interpreted]

Regarding the impact of the earthquake for the first half and second half, do you have revised figures?

Takashi Miyoshi

[Interpreted]

For the second half, it is very difficult to have visibility, because the situation is changing. For the first half, the impact is as follows. In terms of revenue, we mentioned 290 billion Yen, but it has improved by 50 billion Yen to 240 billion Yen. For operating income, we mentioned 90 billion Yen, which has improved by 10 billion Yen to 80 billion Yen, and non-operating income 20 billion Yen remains flat. And net income before tax improvement by 10 billion Yen to 100 billion Yen. For net income, improvement of 10 billion Yen from 90 billion Yen to 80 billion Yen. And therefore there has been an improvement of approximately 10 billion Yen for the first quarter.

Unidentified Speaker

[Interpreted]

I have three questions. First is on Power Systems segment. In the first quarter, revenue and operating income declined. Could you explain the positives and negative factors in more detail? Specifically, how did your actions on the recovery of thermal power plants and emergency measures on nuclear power plants impact your PL and balance sheet in the first quarter? Will this situation change in the second quarter. So if you could elaborate on the positive and negative factors, I would appreciate it.

Second question is you said you had trouble with overseas thermal power generation plant. What happened? In which region what is the monitory impact and how will it be resolved?

Third question is on new projects. You mentioned the postponement of investment projects, will this have an impact? In which area are you seeing it? In your order profitability management, are you lowering your hurdle? I am asking this because I think it’s the key to profit improvement going forward.

Takashi Miyoshi

[Interpreted]

First, on positive, negative factors in Power Systems segment. There are mainly two factors. First is due to the current nuclear power plant situation, preventive maintenance that we planned seems difficult. I will refrain from giving numbers.

Next, on the overseas thermal power plant, and let me respond to your second question together. The issue is raw material incurring additional cost which is a big factor. The overseas material we use is steel certified in Germany, Europe, and the US, but there was a leakage in boiler welded part and so we’re taking measures. This problem occurred even though we used this certified material and therefore we will negotiate with the customer to resolve the issue. Our research lab is also involved to settle the matter as soon as possible. So that was the response to your first and second question.

Now, the response to your third question regarding customers’ investment project, one is IT department. We receive inquiries on emergency BCPs and datacenters, but the IT investment originally planned are being pushed out in some cases and this is the situation behind my remarks earlier. We would like to ascertain the situation a little more, but the overall situation is improving so it shouldn’t be postponed for that long. That said we don’t know how much can be materialized this year.

Unidentified Speaker

[Interpreted]

If I could get some additional comment regarding Power Systems, you are taking actions in thermal power plant and emergency recovery, but is this a positive factor on your first quarter PL or no impact? If not, why?

I know it’s difficult for you to talk about Fukushima, but is it profit-loss neutral in the first quarter? If you could at least touch on that please.

Takashi Miyoshi

[Interpreted]

It is a sensitive matter, but in the grand scheme of things it was not a big positive factor in the first quarter. We are steadily working on supplying power to our customers, so it should bear fruit in the second quarter. We are taking measures in Fukushima. And given the customer situation, we haven’t had any special circumstances. We will negotiate with our customers going forward.

In Power Systems, revenue and operating income declined. This segment had the biggest impact from the earthquake. Excluding the earthquake impact, both revenue and operating income are flat year-over-year. That’s all we can say for now and I hope you will understand.

Unidentified Speaker

[Interpreted]

I have two questions. You mentioned that you will be holding larger than usual inventory to respond to the increasing demand in the second half. But currently in which segments are you expecting increase in demands? Now with respect to increase in inventory, does this include incomplete power generation system projects which are not yet subject to acceptance inspection? Please give details.

For the Power Systems and Social Infrastructure Industrial Systems, in terms of Power Systems power and semiconductor and the elevator business for the latter has been difficult because of the damage from the earthquake. Will there be further cost incurred in the second quarter? That’s my second question.

Takashi Miyoshi

[Interpreted]

With respect to inventory, in the materials areas, there were escalation in prices for materials such as rare earth and that is the reason why we are holding a strategic inventory to secure these materials. In Automotive System, significant increase in demand is expected in the second half and therefore we are holding incremental inventory for this business as well. As you have mentioned for the power utilities, we are currently in discussion with our customers such as TEPCO and so we are holding some inventory for this purpose.

Now, production is operating smoothly for all segments. Therefore, there is nothing dragging us down in terms of production. However, the supply chain is critical. We must secure materials and the parts, and this is likely to have an impact in the second half, although if the situation is improving daily, and therefore it is likely to improve over time. I hope that will suffice.

Unidentified Speaker

[Interpreted]

What is the most significant constraint in the supply chain?

Takashi Miyoshi

[Interpreted]

The most significant constraint is in the area of semiconductors. But as you know we are seeing improvement on a daily basis and we are requesting front loading further going forward.

Unidentified Speaker

[Interpreted]

You expect 86 billion Yen upside in the first quarter and 50 billion Yen improvement in the first half year-over-year. Then if I subtract that second quarter will be 36 billion Yen worse than the estimate. How should I interpret this?

Takashi Miyoshi

[Interpreted]

I only mentioned the impact from the earthquake. We factor in the risks of the entire revenue in the second quarter.

Unidentified Speaker

[Interpreted]

Second question is related to the earlier question. Is your Power Recovery business included in your inventory stock taking? If you cannot collect the payment in the first half or third quarter, how will you treat it?

Takashi Miyoshi

[Interpreted]

That is a sensitive matter. Basically the action taken now to support TEPCO is included in our inventory. We are also pursuing R&D for the future safety measures and that is treated as the cost. But customer support is basically inventory. It’s in their inventory. And therefore we will negotiate with our customers to realize our revenue and profit.

Unidentified Speaker

[Interpreted]

How much does it account for in the inventory increase this time?

Takashi Miyoshi

[Interpreted]

I cannot mention figures but we have quite a few people over there so the amount is not small.

Unidentified Speaker

[Interpreted]

Tens of billions of Yen?

Takashi Miyoshi

[Interpreted]

Not that much.

Unidentified Speaker

[Interpreted]

Third question, could you comment on the impact from the raw material cost increase? How much can you pass on to your price?

Takashi Miyoshi

[Interpreted]

You mentioned the raw material cost increase impact?

Unidentified Speaker

[Interpreted]

Yes.

Takashi Miyoshi

[Interpreted]

It is raising everyday so it’s hard to say, but we did factor some in the budget. But it exceeded our estimate, so we think the increase is about 40 billion Yen, especially as you know neodymium and other rare earth are rising by the day, so we expect a significant rise in the second half. This will have a major impact. But we are working hard to cut our total procurement cost by about 200 billion Yen and now we are exceeding that pace. But we are implementing measures to contain the amount within this range including the raw material cost increase. However, this raw material cost increase impact this time is significant.

Unidentified Speaker

[Interpreted]

As we saw in the release, could you give us a comment on the AE Power Systems and impact if any, because this is the right direction to go?

Takashi Miyoshi

[Interpreted]

Regarding AE Power Systems as mentioned in the release, market and demand will grow rapidly throughout the world. Since we established this company, worked together and finally seem results, we wanted to reinforce the business, but each party wants to develop the business in this growth area independently. And so we made this announcement. We need to be agile and speedy, and so we explored the optimum structure and came to this conclusion. However, we think we need to strengthen this area more so we will pursue the business by ourselves organically as well as consider alliances and M&As.

Unidentified Speaker

[Interpreted]

Any impact on performance?

Takashi Miyoshi

[Interpreted]

No.

Unidentified Speaker

[Interpreted]

I have three questions. The first question is as follows: I am sorry to insist, but I would like to ask a question regarding the operating income for the first quarter. You said that it was 56 billion Yen better than forecast. Subtracting from 52.4 billion Yen means that – it was originally 5.5 billion Yen to 6 billion Yen in red ink. Is this correct? And then if that is the case, for the second quarter, the original expectation was 80 billion Yen. So the red ink of 80 billion Yen will become 85 billion Yen to 86 billion Yen of black ink and the first half will be 80 billion Yen. And the first quarter is around 50 billion Yen. So with subtraction it means that what was originally 85 billion Yen is now 45 billion Yen. Am I correct?

Takashi Miyoshi

[Interpreted]

You are basically correct.

Unidentified Speaker

[Interpreted]

If that is the case, why did you revise downward by 40 billion Yen?

Takashi Miyoshi

[Interpreted]

As I mentioned earlier, it is very difficult to explain quantitatively because of the factors including reconstruction demand as well as responding to customer needs. There was also front loading from the second quarter to the first quarter. As I mentioned at the outset, there are uncertainties surrounding us and that is the reason why we are being prudent.

Unidentified Speaker

[Interpreted]

Regarding the hard disk drive, you said that everything is proceeding according to schedule, but according to the rumors in the industry, Seagate and Samsung transaction will be delayed from the end of this year to next year. And I would expect that antitrust authorities are being critical. Although you have full resent it is proceeding according to schedule, but there seems to be difficulties involved. If it cannot be completed within this year, do you have another response? In other words, do you have a plan B? How should be interpret this situation?

Takashi Miyoshi

[Interpreted]

It is difficult to comment about other companies, but I can say that Hitachi and Western Digital and Seagate and Samsung mergers will have a significant impact on the industry. Therefore, I can understand a thorough checking will be required in each country. That is the reason why we cannot give you a definitive schedule. I cannot comment about any possible delay. We are assuming the original plan for the time being. But it could be subject to change.

Unidentified Speaker

[Interpreted]

On our part, we would like to know whether it is going to be excluded from a consolidation and when will extraordinary profit be posted? Should we be concerned about anything else?

Takashi Miyoshi

[Interpreted]

We are forecasting for the third quarter for the time being even if your concerns are a reality, we still have another quarter, we should be able to conclude by then.

Unidentified Speaker

[Interpreted]

This is a very simple question that I always ask. In the first quarter, cash flow was difficult, but what about the cash flow for the full year?

Takashi Miyoshi

[Interpreted]

Original plan remains intact. We would like to generate the 100 billion Yen in terms of free cash flow for the year. In the first quarter there was special factors such as increase in inventory as well as capacity – however capacity utilization is likely to improve going forward. And therefore we should be able to achieve the ratio of 1 or below. That is what we’d like to achieve.

Unidentified Speaker

[Interpreted]

I have three questions. First, software service grew by 5% in the first quarter and I think the full-year plan was 5% increase. Some projects were delayed, but you also have backup. So given this 5% increase in the first quarter, do you think 5% on a full-year basis is possible or appropriate?

Takashi Miyoshi

[Interpreted]

We want to watch closely and ascertain the situation, but this is our current plan.

Unidentified Speaker

[Interpreted]

Second question regarding AE Power Systems, I think the consolidated revenue is 100 billion Yen. It’s been 10 years and therefore there were some good projects in the Middle East and other regions separating these deals seemed difficult isn’t it?

Takashi Miyoshi

[Interpreted]

The ones tied to each company are easy, but the ones we worked on together and showing effect are subject to further negotiation. But this is the conclusion we reached. So we will divide them internally amongst ourselves and take care of customers we acquired together in a responsible manner.

Unidentified Speaker

[Interpreted]

So will it be sorted out in about six months’ time? I’m sure you’ve been working on it for sometime already, but –?

Takashi Miyoshi

[Interpreted]

We will follow through since we’ve made an announcement.

Unidentified Speaker

[Interpreted]

Third question and actually one more, impact from the earthquake is 20 billion Yen in the second half I think. Will you change this?

Takashi Miyoshi

[Interpreted]

We honestly do not know how the earthquake impact will play out at this stage, because the second half is changing. So I would like to refrain from making any comments today.

Unidentified Speaker

[Interpreted]

You were making efforts in recovery demand in relation to TEPCO. The analysts in power sector says there maybe a collection risk. I know it’s difficult to respond, but what is your view and how should we look at this?

Takashi Miyoshi

[Interpreted]

That is TEPCO’s issue, so we cannot make any comments on their behalf. But under whatever scheme, they are a large power supplier and must conduct a solid responsible business, therefore we don’t expect any huge concerns to come out. That said, the individual items that we are involved in will be discussed and decided from now on. So that’s all I can say for now.

Unidentified Speaker

[Interpreted]

I would like to ask a question regarding the impact of strong Yen. I understand the impact was very significant for the Digital Media and Consumer products. But what about for the other segments, what is the impact? Going forward, there could be a recession, we don’t really know, but there are many concerns including the strong Yen. What is going to be the most significant issue for you? Please comment about your concerns.

Takashi Miyoshi

[Interpreted]

I would like to answer about the first quarter impact of the strong Yen. The impact was around 15 billion Yen for the operating income. The largely impacted segments include Construction and Machinery and High Functional Materials and Components one quarter each, together accounting for half. In addition, the Electronic System Equipment in the high technology area as well as Automotive Systems and Component Devices accounting for 10% of the total.

Now, regarding the foreign exchange impact for the next nine months we’re assuming 1 Yen movement in $1 to have an impact of 3 billion Yen. And 1 Yen movement in Eur1 to have an impact of 700 million Yen.

Unidentified Speaker

[Interpreted]

In terms of segments, do you have concerns specifically such as Power Systems? Are there any concerns regarding segments?

Takashi Miyoshi

[Interpreted]

I have already covered this already and there is nothing beyond that.

Unidentified Speaker

[Interpreted]

I have three questions. First, you said the impact from the earthquake was 50 billion Yen in operating income in the first quarter. You gave us the impact by segment last time for January-March. So if you could do that again, please. But if it’s difficult, the weight proportion that you gave us just earlier will be fine.

Takashi Miyoshi

[Interpreted]

Impact on the first quarter?

Unidentified Speaker

[Interpreted]

Yes.

Takashi Miyoshi

[Interpreted]

About 50 billion Yen in operating income. I mentioned the impact from the strong Yen but now the impact from the earthquake, Construction Machinery is a little over 20%, High Functional Materials and Components 20%, Power Systems a little less than 20%, and Automotive Systems 10%. These are the main segments.

Unidentified Speaker

[Interpreted]

Second question, regarding the postponement of IT investment projects, could you elaborate on it? For example, you said the revenue increased by 5%, but how is the current order situation? Any variance among industry segments, have you identified any characteristics in the projects that are being pushed out?

Takashi Miyoshi

[Interpreted]

We do not disclose the orders by figures, but we are only thing sporadic postponements by some customers. It is not that the order plunged in the first quarter, but we started seeing some customers putting off their projects when we discuss their next plan, so it’s not like we are seeing a sudden drop.

Unidentified Speaker

[Interpreted]

You explained the risk factors from second quarter onward and said that you will conduct a monthly risk check on the construction manufacturers and take actions if needed. Given the current uncertainty, are you identifying some clear issues and dealing with them or nothing particular for now, and you are just being concerned?

Takashi Miyoshi

[Interpreted]

My largest concern is the impact from China's monetary tightening. It is actually affecting our Construction Machinery business. We do not hear any impact on elevator, escalators and components yet, but this impact from monetary tightening is hard to see so we are keeping our close eyes on the situation. Another factor is the impact from the US. This is difficult to fully understand, but it will be mainly automotive parts. We will closely watch the number of units and the actions taken my auto manufacturers. We haven’t seen any major impact so far.

Unidentified Speaker

[Interpreted]

I have two questions. You previously said that power shortage is considered to be a concern going forward. Specifically are you concerned about the increase in the power costs? What is your view on this and what are the measures that you are contemplating? On the other hand, interest is rising for related new areas such as Smart City, and important focus for Hitachi. Where do you see growth taking to consideration the prevailing trends? Where do you see the business opportunities going forward?

Takashi Miyoshi

[Interpreted]

Regarding the increase in the power cost, we are also required to reduce usage by 15%. In response to the request to reduce by 15% we are taking irregular holidays by divisions and reviewing the facilities to save energy and trying to be creative in various ways. So we are taking various initiatives to save energy. And based on the experience of the earthquake disaster, we believe it is necessary to strengthen the in-house power generation capabilities.

To your second point regarding the Smart City initiatives, this point has been mentioned by our President when he talked about the business policy. Demonstration tests are taking place and we would like to participate in such initiatives. Although nothing concrete has been decided, new city building projects are being contemplated in the Tohoku region. Furthermore, enhanced efficiency for buildings will be required. We would like to deal with these initiatives as well. We shall be working together with municipal governments as well as individual companies in this area.

Unidentified Speaker

[Interpreted]

First is a simple but probably difficult to answer, regarding dividend in the first half. Your dividend last year included commemorative dividend. This year you will most likely generate profit on a full-year basis. Will you decide on your dividend based on full-year results? Secondly, suppose HDSD can be sold, your profit will be that much smaller. Can this decrease be offset with other business?

Takashi Miyoshi

[Interpreted]

To your first question, we haven't decided on the dividend yet, so I cannot say anything for sure. But we had to decide our dividend on a one-off basis when the performance was bad. But now that our earnings is recovering, we will decide the dividend from a mid to long-term perspective.

Now to your second question regarding operating income after selling HDSD, we believe this is the best decision when we think of the business development going forward. Therefore, we will do our very best to make up for the loss with other divisions.

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