Hitachi, Ltd. (HIT) Q2 2012 Earnings Call November 1, 2011 8:00 AM ET
Takashi Miyoshi – Representative Executive Officer, Executive Vice President and Executive Officer
Toshiaki Kuzuoka – Senior Vice President and Executive Officer
Yoshihito Kitamatsu – General Manager of Finance Department
Ladies and gentlemen, thank you very much for attending the presentation for the Consolidated Financial Results for the second quarter ended September 30, 2011 for Hitachi Limited. We will be ending today’s meeting at 6 o'clock this evening. Now, I would like to introduce the speakers for today. In your middle is Takashi Miyoshi, Executive Vice President and Executive Officer; to your left, Toshiaki Kuzuoka, Senior Vice President and Executive Officer; to your right, Yoshihito Kitamatsu, General Manager of Finance Department 1.
I would like to ask Mr. Miyoshi to start the information.
Now, I would like to give you the results for the first half of the fiscal year ending March 2012. Please refer to page 5. This is the consolidated statement of operations. For the first half, revenues were 4,572.7 billion Yen, 102% year-over-year. Operating income 170.6 billion Yen, an increase; income before income taxes, 133 billion Yen; and net income attributable to Hitachi was 50.9 billion Yen.
In the first quarter, the earthquake impact was significant and therefore, on a year-on-year basis, we recorded increase in revenue, but decrease in earnings. Please refer to the right-hand column; previous forecast comparison is presented. Revenues was 104%; operating income was 70 billion Yen increase.
Net other deductions was negative because of the foreign exchange impact; income before incomes taxes 58 billion Yen; and net income attributable to Hitachi was 40.9 billion Yen increase. 1-3, which is the impact of the great East Japan earthquake. For the first half, revenues was impacted by 190 billion Yen; operating loss is 70 billion Yen, and other deductions 20 billion Yen.
Although not stipulated here, I'd like to talk about the second quarter impact. Revenues was impacted by 60 billion Yen; operating loss impacted by 20 billion Yen; and other deductions, 5 billion Yen. We have seen some recovery in the second quarter, but there is still impact of the earthquake, with respect to the supply chain, as well as the customers' situation. But all-in-all, we believe that we have normalized our operations in the second quarter.
Next, please refer to 1-7 on page 10, and this is the revenues by market. I have already given you the total previously. Japan was 102% year-over-year. Outside Japan, 101%; as a result, outside Japan accounts for 44%.
In terms of the regional breakdown, China was at 92% year-on-year. It has continued to grow over the years. However, in the first half, because of the tightening of the monetary policy, we recorded a decrease in revenue. But Asia, ex-China, as well as North America and Europe, we recorded increase in revenues. Now, for other areas, we have recorded 109%. This is the significant increase in Africa, as well as Europe.
Next, page 11 and the consolidated balance sheet. Total assets was flat compared to the previous year. On the other hand, the interest bearing debt was 2,641.1 trillion Yen, this increased from the June end, which was 2.860 trillion Yen. But this has decreased from the level of June end. But this is because of the fact that inventories is high and decline in account receivables in the first half. As a result, the stockholders’ equity ratio was 15.8% and D/E ratio was 1.08 times deterioration from the previous year-end.
Next, I would like to move onto 1-9, consolidated statements of cash flows. Cash flows from other new activities were 93.1 billion Yen, decreased significant because of the increase in inventory and a decrease in the account receivable receipts.
Last year, we posted proceeds from the sales of business, which we did not have this fiscal year. Because of M&A, there was increase in expenditure; that is the reason why it deteriorated. Therefore, the negative free cash flow was 128.6 billion Yen. However, for the fiscal year, we have set an objective; we will improve in the second half, and we would like to end the fiscal year with a positive cash flow.
1-10 on page 13. This is the balance sheet breakdown by Manufacturing, Services & Others, and Financial Services. Please refer to the stockholders' equity ratio and the D/E ratio. In particular D/E ration for Manufacturing, Services & Others was 0.76 times and deteriorated some 0.68 at the end of last fiscal year.
1-11, page 14; this is the capital investment and research and development expenditure. I would like to highlight the internal use assets, 154.6 billion Yen. And this is increase of 30% year-on-year and this is in the area of Hitachi Construction Machinery as well as the automotive plants, so we have made investment to increase the production in these areas. And also we have made investment for restoration after the earthquake, causing this increase. The consolidated research and development expenditures was 199.1%, percentage of revenues were 4.24%.
Next, I would like to talk about the segment information and first of all starting with revenue. I’m pleased to note the year-over-year numbers, which shows the characteristics. Information & Telecommunication Systems, the storage solution was strong globally showing a significant growth. And also there was a steady improvement seen in Japan, for the Solutions business, showing a steady recovery we ended with 103%.
Next, there was growth in the Construction Machinery. China was slow, but we saw a strong growth in other countries, including Japan. Mining is also very strong. And this segment increased to 106%.
Next, Automotive Systems; this segment is also recovering, not only in our manufacturing ability, but also customers are recovering significantly at 102%. Others include logistics and because of the Vantec acquisition, this increased to 125%.
On the other hand, in terms of the Power Systems that has been impacted the earthquake especially nuclear power generation and in the first quarter the power device plant was damaged causing a decrease in revenue.
In terms of the Components & Devices, there was impact of the earthquake, as well as price decline and there was also impact of Foreign Exchange. We saw a decrease in revenue for the Hard Disk Drive business. And for Digital Media & Consumer Products, in and after July television was unfavorable, and optical disk drives was also faced with difficulty.
Air conditioning as well as white products, increased significantly but overall there was a decline in this segment. Our Financial Services is mainly domestic business, 97% year-on-year.
Now as for the previous forecast comparison, on the right hand side, for construction machinery, there was a downside for the China business causing a decline in revenue, but otherwise we recorded increase vis-à-vis the forecast.
Next, 1-13, operating income by industry segment. The most significant factors for the decline was the earthquake impact, as I mentioned earlier. In terms of segment, it has had the most significant impact. The non-earthquake related decline includes the social infrastructure where the Hitachi Plant Technologies posted a decrease in revenues, and High Functional Materials & Components is minus 16.4 billion in this area was the impact of the earthquake. There was difficulty in terms of Hitachi Chemicals, Hitachi Cable and Electronics.
As for the Digital Media & Consumer Products, we posted a decrease in profit. Otherwise, segments recorded increase in profit, if we exclude the impact of the earthquake. On the right-hand side, the previous forecast comparison is given. Each segment recorded increase over the forecast.
So far, I have talked about the situation in the first half and now I'd like to move on to page 18 and talk about the fiscal 2011 outlook. There are assumptions that we have laid down. In Japan, a strong Yen is having an impact, but economy should be driven by the earthquake recovery demand. U.S. revenues are difficult. Europe is beset with the Sovereign crisis and therefore, a protracted economic downturn is expected.
In China, on the other hand, the tightened monetary policy is having an impact and therefore we must continue to watch this carefully. As for the emerging economies, because of concerns of inflation tightened monetary policy is likely to have an impact.
Flood damage in Thailand is impacting the supply chains for components in some companies. It is very difficult to identify the actual impact yet and this is a concern for us. Otherwise, we believe that the external environment remains difficult. And against this backdrop, we will implement our strategies in a steadfast manner, including the acceleration of global development of the Social Innovation business, and bolster the ability to propose total solutions including operation and maintenance, not just engineering and thereby changing our business model in a phased manner, and also, steadily contributing to the recovery from the Great East Japan Earthquake and also drive robust cost structure reforms.
Next is page 20. Outlook for fiscal 2011; the exchange rate assumptions for the second half is 75 Yen to the U.S. dollar and 105 Yen to the Euro. On that basis, revenue is 9.5 trillion Yen. Operating income 400 billion Yen and net income attributable to Hitachi Limited, 200 billion Yen have not changed. We will work to achieve this initial plan.
Now let me explain the revenue and operating income in more detail from page 22 onwards. First is revenue by industry segments; the revision from our announcements in the past. Please look at the forecast column.
Electronic systems and equipment has dropped to 96% compared with previous forecast. First half was firm, but second half will weaken due to the semiconductor production equipment and machinery equipment.
Electronics will become sluggish and therefore, revenue is expected to decline. Construction machinery is 95% due to the prolonged impact of the monetary tightening in China. On the other hand, Automotive Systems will recover steadily in the second half. Thanks to the strong demand.
In Digital Media & Consumer Products, as I mentioned earlier, optical disk drive will remain sluggish in the second half and revenue will decline. Due to the various concerns, the risks are adjusted under eliminations and corporation item.
Next is to 2/6. Operating income outlook by industry segment. Please look at the previous forecast comparison column. As I mentioned earlier, Electronic Systems & Equipment is 4 billion Yen. In high functional materials and components, electronics price declined, raw material cost increased and exchange rate led us to an estimated 12 billion Yen decline. On the other hand, Automotive Systems is a 6 billion Yen increase and components and devices is also an increase.
As you see on the last page of the supplementary information, Hard Disk Drive business was strong in the third quarter from July to September and that is included here. Third quarter from July to September, as we see on the last page of the supplementary information was 111% year-on-year in shipment volume, 2.5 inch Hard Disks and Servers were strong and therefore, volume increased significantly.
However, price decline is sharp and exchange rate is a big factor and therefore, revenue is 102% year-on-year. And operating income is 14 billion Yen, 118% year-on-year. The sale of this business is included in the third quarter, so Hard Disk Drive operating income up to the third quarter is included here. And therefore we enjoyed a 6 billion Yen improvement. Financial Services will improve by 2 billion Yen.
Therefore overall, we have not changed the outlook, but we will work hard to achieve this. The reason we have not changed the outlook for fiscal 2011 is due to the unforeseeable economic environment, the unclear impact of flood in Thailand as well as concerns over the Yen appreciation, raw material cost increases and issues over power demand as I explained earlier.
We factored in these elements and decided not to change the outlook. Having said that, we will enhance our measures in the second half to develop our Social Innovation business overseas and improve cost competitiveness to achieve this profit level.
Next, let me explain the result of the initiatives we took in the first half in qualitative terms. First, we are taking various actions to expand Social Innovation business globally. Page 25, starting with globally develop the information and telecommunication system business and address big data. As you know we strengthened development capabilities for big data related solutions through the acquisitions of BlueArc Corporation and expanding the cloud business in Japan and abroad.
Next is Nuclear Power Generation System business. The situation in Japan is unclear, but we were selected as the strategic investor in Lithuania, and are taking actions to sign the contract by the end of the year. There are other countries with strong energy demand that wants to pursue nuclear power. So we plan to focus on safety and overseas development.
Next is Thermal and Hydroelectric Power Generation Systems business. We expect large demand in China and India and are promoting the measures listed here. We plan to collaborate further with Mitsubishi Heavy Industries.
Next is 3-2, Water Environment Solutions business. We are working with LG Electronics to develop the business in South Korea and overseas. Next globally develop the Railway Systems business. We are continuing negotiations on IEP business in the U.K. in order to sign an official contract by the end of this physical year.
We are taking measures to expand business in other countries as well. We also plan to expand the Industrial Systems business and the Elevator and Escalator business in the Asian belt zone and implementing these initiatives.
Next, 3-3, in Smart City and Smart Grid business, we are actively participating in the demonstration projects. And in China, we will launch projects in Dalian City and Chongqing City and currently considering the way going forward.
We also decided to dissolve Japan AE Power Systems Corporation and integrate with other business and strengthen power transmission and distribution business. We also plan to globally develop the High Functional Materials & Components business. In Construction Machinery business, Hitachi Construction Machinery and Deere & Company agreed to form a joint venture in Brazil and developed business Latin America. We also plan to extend our business in Russia. It is not written here but mining demand is strong in many countries, so we will strengthen that as well.
Next 3/4. Review Hitachi's business structure. As I mentioned earlier, we plan to sell the Hard Disk Drive business and small and medium sized display business. We are supporting the earthquake recovery effort in the first half and also in the second half. We are assisting with the Fukushima Daiichi Nuclear Power Station, and assisting with the restoration of thermal power plants, because there is a large dent.
We are proposing smart silicon sets to more than 10 cities in the Tohoku region, and hope to capture this business without fail. As other initiatives, we will strengthen business in our group.
Now last page, 3/5 as I have been mentioning all along, we are reviewing our manufacturing basis as part of our cost structure transformation and strengthening global sourcing as well as improving back office operations. In the first half, we are streamlining logistics costs under logistics management center and we reduced rent and used the buildings more effectively. These measures will be pursued aggressively since we must be more cost competitive on a global basis. This is how we plan to achieve our medium term plan.
That concludes my presentation. We will now take questions.
Thank you very much for the information. I have three questions, my first question is regarding the impact of the flooding impairment, which businesses were impacted and most significantly, could you please give further details. That is my first question.
The second question is with respect to your initiatives to strengthen your profitability there. Given the difficult macroeconomic environment in the near term, to achieve the medium term plan in the next fiscal year, how much more can you do to lower the cost, as well as SG&A, how much has been factored in? Please give specific details.
The third question is the global development of the Social Innovation business. For the first half in terms of the heavy electric machinery, as well as for the social infrastructure and industrial system, what is the orders that you are receiving today?
Unidentified Company Representative
Regarding the flooding in Thailand, we have many businesses in Thailand including manufacturing as well as sales. Basically, there are four manufacturing bases that were flooded. Our first plant has been producing compressors for refrigerators. And at Hitachi Metals two plants were flooded, and for Hitachi Chemicals, one plant. The most significant impact was for these four plants. However, we believe the impact is not too significant; the largest impact will be in the compressor plant.
We are now placing orders to other companies to recover the situation as much as possible. We have also identified specific measures to full recovery. We will continue to make efforts in this area. The challenge besetting us is with respect to the Japanese companies that are providing parts and components.
And also, the customers, such as automotive companies that have been impacted by the flooding damage. We believe this impact will be very significant. We don’t know how much the impact will be, so it is very difficult to give you a quantitative explanation at this time, but I believe that the most significant impact will be in the Hard Disk Drive business.
We have a significant plant in terms of manufacturing 2.5 inch Hard Disk Drive and Servers, but these plants were not flooded. But we have concerns about the components to be used in these months. We are now negotiating with Japanese companies on this issue, but we do expect a certain level of impact in this area.
And for the automotive business, some customers that we deal with have been impacted by the flooding damage, but we have not yet identified the significant impact. The impact will differ from customer to customer. However, the electronic components vendors have been impacted significantly. And therefore, we are yet to assess the full impact.
However, we are covered by the insurance for flooding, as well as for profit as well, for areas that have been damaged. We will do our utmost to deal with this matter in the appropriate manner. We will continue to deal with challenges in the supply chain management and minimize impact as much as possible. The most significant impact will be in the Hard Disk Drive areas.
Although, it has not been finalized, we are working with Western Digital to sell the business and by the end of the year. Now if this were to be realized, there would be an impact on the Hard Disk Drive business.
However, according to our business plan, if we sell the business by the end of the year in the numbers, up to the third quarter on a calendar basis, July to September will impact the performance. But the numbers for October to December, or the fourth quarter on a calendar year basis, will not have an impact on the performance.
So depending on the timing, there is uncertainty with respect to the impact on our results. We are not assuming unexpected impact because of flooding for the time being. But there will be an impact, and we must watch the situation very carefully.
Next, regarding cost reduction. I have shown here the initiatives that we are implementing for the first half. As I mentioned previously, with respect to the manufacturing, both domestic and overseas, plans have been aligned vertically by segment.
However, going forward, we will develop horizontally for the areas in common. For the first half, as I have mentioned previously we would like to concentrate in three to four plants, the package assembly. This is a business – the operation of placing components on the substrate. We are improving competitiveness of overseas has planned as well.
Now, in terms of direct materials, I have given you information on a quantitative basis. We are expanding the pool purchase ratio as well as the global procurement ratio. In terms of the pool purchase ratio, the objective was to achieve 30%, but we have already achieved 30% in the first half.
In terms of the global procurement ratio, we have achieved 37% in the first half. We will proactively pursue these initiatives going forward, procure low-cost parts, and reflect these in our products with our technological and capability. As for indirect operations, we are implementing measures as I have already explained, we have an internal target, but we do not disclose this information. However, we do believe that this is important initiative for us and therefore we will be proactively pursing this going forward.
As for the orders received for the Social Infrastructure business in the first half, we are always receiving this question, but we do not disclose this information. So I cannot give you a quantitative information, but as for the second half, I only have management [evasive] information, not exactly aligned with the consolidated results.
However, I can say that the management basis the second quarter recovery is seen in terms of orders. We have already mentioned this in terms of the revenues outlook. For the Information and Telecommunication Systems and for the Social Infrastructure & Industrial Systems and Construction Machinery, as well as automotive parts the second quarter orders are increasing. However, in terms of Power Systems, this has impacted by the nuclear power generation business in the domestic market.
However, the thermal power generation is an area we are seeing increase in revenue as well as orders. However, because of the domestic nuclear power generation business unfortunately, we are experiencing decline in orders.
Next, in terms of components, for the electronics business inclusive of the components and devices, as well as Digital Media & Consumer products, we are facing difficulty. In terms of the High Functional Materials, we are seeing increase, but the increase is almost flat. It is likely to be difficult in the second half for the manufacturing equipment components and other equipment.
I have two questions. You said the operating income is 70 billion Yen higher than the previous forecast, thanks to the high revenue than expected. The impact of the earthquake on the first half operating income was 80 billion Yen as you said last time and you exceeded 70 billion Yen this time. So could you give us the breakdown of the 70 billion Yen overachievement? Was there a procurement cost reduction or other factors?
Next is a related question. In a way, this 70 billion Yen is the new risk you are estimating in the second half. You said that the flood in Thailand is unforeseeable, but could you quantify the new risks in the second half including exchange rate or raw materials?
Unidentified Company Representative
There were no major factors for the higher revenue in the first half. On the segment by segment basis, in Information and Telecommunication Systems storage was strong, operating income should have been higher, but hardware was somewhat sluggish. So the increase was not that significant.
Power Systems also improved, thanks to some of the thermal power generation and preventive maintenance that were being front loaded. Social infrastructure in Industrial Systems improved slightly, thanks to the recovery demand.
Electronics Systems & Equipment enjoyed a higher than expected demand and exceeded before tax in the first half. Construction Machinery, the situation in China is difficult, but mining and other businesses were strong in other countries and regions and we are focusing on service and maintenance components, which are increasing in proportion and cost reduction also contributed.
In High Functional Materials & Components, Hitachi Metal was firm and demand is recovering in automotive parts. Automotive, we started our production and customer’s demand recovery exceeded our estimate. In Components & Devices, Hitachi Maxco battery improved. Digital Media & Consumer Products, Air Conditioner and Home Appliances performed well in Japan and abroad and cost reduction is bearing fruit. It is difficult to quantify this, but this is the overall trend.
Now regarding the risks in the second half, we have not changed our outlook as the second half is unforeseeable. We would like to ascertain the situation more. Exchange rate was – I have mentioned earlier 75 Yen to the U.S. dollar and 105 Yen to the euro.
Raw material costs will rise mostly in the second half by about 40 billion Yen. Part of it will be passed on to our customers, but other than that, we are working on engineering and rare earth recycling to reduce cost aggressively. That said, raw material costs will have some impact.
How big is the drop in operating income when exchange rate impact is revised?
Unidentified Company Representative
1 Yen fluctuation has an impact of 2.7 billion Yen for U.S. dollars and 500 million Yen for euro in the second half of this year. Exchange rate is 5 Yen higher for both U.S. dollar and euro from last time, 75 Yen and 105 Yen respectively. So overall, the negative impact against the previous operating income forecast is 18 billion Yen.
I have a similar question to the previous one. On page 23, operating income by industry segment were presented and the outlook was presented, but you have realized an upside for the first half into – if you look at the second half, it seems that for Information and Telecommunication System is 1 billion and Power Systems of 5.6 billion. For the Electronic Systems & Equipment, there is a clear downside, but there are also segments where you have left the forecast unchanged, because of uncertainty. Please explain which segments you did not change because of uncertainty and segments clearly revised downward for the second half.
And second question is a general question. In the past several weeks, many other companies have been announcing significant downward revisions, but for Hitachi you’ve posted a significant upside for the first half, it is likely you will have an upside for the full year as well. Do you feel the business structure reform focused on Social Innovation has been effective to solidify your profit base? From a top down basis, what is your impression? If it was Hitachi 10 to 20 years ago, you might have had a downward division as well. But please comment from the management point of view?
Unidentified Company Representative
Regarding the impact in the second half, we would like to give you more quantitative details by segment, but we do not want to have too much variability. So, we changed the numbers only when there are significant areas, with respect to concerns. In terms of Power Systems, as I mentioned earlier, and has been explained in the first quarter, there is the material issue in Europe in Power Systems that is being considered that it is being negotiated with the customers, which is a concern for us.
As for the Information Telecommunication Systems, if the current situation continues, the storage solution is [fine], we are seeing recovery in the domestic market as well. Therefore, this forecast could be conservative. And furthermore, clearly difficult segments include the Electronic Systems & Equipment and high functional materials and components, especially in the area of electronics.
We believe that these businesses will be difficult. Furthermore, there is impact of Thailand, so it is very difficult to give you details. But Automotive Systems will depend on the activity of the automotive companies. If the trajectory for the first half can be maintained, we could do well. However, it is very difficult to give you a quantitative explanation, but I have tried to give you the general trend.
Regarding the eliminations in corporate items, you have reduced by 11.5 billion Yen for the second half. Is this a pure buffer?
Unidentified Company Representative
Not really. Our headquarter expenses tend to increase in the second half. This whole amount is not just looking at risk. Why we didn’t have to revise downward is related to the business structural change. We decreased ownership level of high volatility business. For example, television is a very difficult business and in and after July demand has been declining, cost competition is intensifying. Therefore, further business structural reform will be necessary. But the ratio of such business is decreasing.
And as I've already explained, regarding cost reduction, as we have been mentioning in every meeting, we believe that in order to pursue the social infrastructure business in the emerging nations, we have to take into consideration the prevailing price levels in the emerging nations, and also new emerging country companies are becoming stronger. So, we have been dealing with these measures to increase our cost competitiveness.
Thirdly, I would like to mention the In-house Company System, which has proved to be very effective in terms of mentality, initiatives, as well as speed in management, although we still have to make further improvements.
We have delegated authority in two of the in-house companies and made them fully accountable and therefore new measures are implemented more expeditiously. As for planning of numbers they are taking risk into consideration therefore the numbers presented are more critical when compared to the past. However, we still have to improve further because in terms of speed we are behind the competition and our profitability levels are still at low levels. We will take initiatives to make further improvement going forward.
I have three questions, first, is on thermal power plant in Europe. You said you followed the raw material standard, but how much risk should we expect, if you could give us an update on the negotiation if possible? Second question is on Hard Disk Drive business which maybe sold. Your plant in Prachinburi is intact and Western Digital Plant in Navanakorn was flooded. So are they showing stronger interest in buying your HDD business? Please give us the progress and the current capacity utilization?
And third question is not on the financial results, but on the overall formation or structure. Hard Disk Drive and Display business will be separated. Could you give us an update on your display business? I think the two will be the focus going forward. So could you share with us your view on the business?
Now in this formation, I have an additional question. Regarding medical care it is fragmented among Hitachi High Technologies, Hitachi Medical Corporation or Hitachi Limited. Do you have a plan to consolidate this? GE and Siemens position it as growth area. So please explain the direction and strategy of your medical business please? I’m sorry to digress from the financial results.
Unidentified Company Representative
Regarding the material for thermal power plant in Europe, we are investigating the root cause, but the situation is becoming much clear than in June. I do not know much about the technical side but that’s what I’ve heard so far. We will begin dealing with the customers from now on. I’m sorry for not being able to share with you the quantitative risk since we are in the middle of the negotiation.
Regarding the sales of our Hard Disk Drive business to Western Digital, I am not in the position to talk about their stance, but objectively speaking as we just mentioned earlier, our plant has not suffered the damage of flood. I mentioned the issue of supply chain but we will not have any major problem until the end of November. Correct me if I’m wrong, but there will be disruptions after that.
Therefore, regarding the sales of the business to Western Digital, they have not changed their stance of doing this as soon as possible and we are working together to make this happen.
Now regarding display, we are working with Toshiba and Sony to integrate and strengthen this business. We are currently studying how to reinforce the business and identifying the challenges so that it will succeed in the way we decided to move forward.
Regarding the portfolio as a whole, our business portfolio needs to be reviewed more on a continuous basis. Our basic stance, as I’ve been mentioning so far is to review it in the way that will strengthen each business further with the possibility of increasing or decreasing the ownership level.
Now regarding the Medical business, as you just correctly mentioned it is handled by a few companies, Hitachi High-Technologies, Hitachi Medical Corporation, and Information & Telecommunication Systems were also be involved as well as we will focus on medical information going forward. These three companies and R&D plus Hitachi Hospital are working on Medical business to strengthen it in an integrated fashion. And therefore, R&D, customer handling and our new business additions and expansions are promoted together, and we do not feel the need to integrate Hitachi High-Technologies and Hitachi Medical Corporation now.
In display, Panasonic is in a terrible situation. Do we have to worry about you having to do something about their Mobara plant, which used to be your plant? And another question, I heard that Mr. Miyoshi told the overseas institutional inventors that you will work hard and do better in the second half. It doesn’t seem like you are working that hard, not quite hard enough. So if you could tell us, if you can do better or not, please?
Unidentified Company Representative
Panasonic is an individual deal. So I will refrain from making any comments. We will work to keep the plant. Regarding the financial results, I will do my best. There are concerns and the situation is extremely unforeseeable, so I cannot be too optimistic. So I will try to get a bit better picture and improve the results as much as possible.
Let me complement on Hard Disk Drive, I’m sorry for being a bit repetitive. Due to motor, VCM, parts procurement, production at HGST Thailand is reduced. Capacity utilization needs to be kept low until the end of November, but after that, we will replace suppliers, and suppliers will also start production in their other plants, so the situation should recover. And furthermore, Hard Disk Drive for 3.5-inch servers is procured from outside the disaster area, so the impact can be minimized. The impact on 2.5-inch mobile and 3.5-inch desktop is large.
I have three questions. First of all regarding the storage solution business, please give us the second quarter result in U.S. dollars, what is the increase in revenue ratio. The result for July to September increased by 14% but for the fiscal year, the increase is 4%, is your forecast of a slowdown in the second half a conservative forecast, please confirm?
Second question is regarding the automotive system, you have made an upward revision in terms of the fiscal year revenue regardless of the decrease production in Thailand. Please give the reason why you were able to revise upward, despite this challenge. Regarding the Power Systems, I would assume that, inherently, Power Systems should be the core of the Social Innovation business, however, the profit level in this business is low. When will it improve into the average level? Please give us your long-term view?
Unidentified Company Representative
Regarding the storage solution, the 2011 storage, the second quarter dollar base result increased by 25% year-on-year, the absolute amount was $1.078 billion. We believe that the market will grow in this area, so we would like to be bullish, but it depends on the sourcing of the Hard Disk Drives, there is concern in this respect. As for the automotive components the damage impact will be greatest in the Korean business, which has been factored in beyond this, we have not heard of a significant impact. But over time, we will see whether the components availability will impact the customer production.
Now, as for the Power Systems, as you have frankly mentioned, the profitability remains low. If not for the earthquake, we wanted to grow the nuclear power generation business domestically from this fiscal year, however, it has remained slow. We are implementing various initiatives, but depending on the outcome domestically if the business may continue to be difficult going forward. However, we would like to improve this business in this (inaudible) manner because it is our focus business.
I have three questions. First question is regarding storage. You acquired BlueArc is 400 billion Yen in fiscal 2015 appropriate, including the impact of the acquisition and excluding the problem of Hard Disk Drive or will it be higher. I heard that you made a significant progress on the dollar basis in the second quarter and Yen appreciation as well as 25% revenue increase will have an impact. So what was the margin level like?
Second question is on overseas revenue. Other regions is growing by 9%, 230 billion Yen is considerably large. So I would like to know where and what the growth was from and your view on second half onward?
Third question is on Mitsubishi Heavy Industries. They said in their financial results briefing, that they will consider business integration if synergy can be expected, which sounds more forward-looking than before. Could you comment on that please?
Unidentified Company Representative
Regarding storage, we think the demand for big data analysis will grow rapidly in many fields. That’s why we acquired BlueArc. We developed the technology, but they have their distinctive strength and big customer base. We plan to collaborate further in the software development. We believe we can strengthen the storage business dramatically and are implementing measures to that end. Our internal goal is higher and we will work hard to achieve that.
Regarding overseas revenue Others Africa and Oceania are especially growing rapidly. Africa in particular is growing in thermal power plant, power systems and construction machinery. In Oceania, Australia has Construction Machinery for mining and Central and Latin America are also starting to grow with automotive parts.
We are focusing on all these regions and hope to grow the business centering on the emerging markets. Your last question on Mitsubishi Heavy Industries, as I mentioned earlier, we both have the same goal in Hydroelectric Power Generation and Railway Systems. So we are promoting them together hoping that it will bear a bigger result.
Both us and Mitsubishi Heavy Industries are aiming at global development of social infrastructure business and strengthening of the business. We have successfully worked together in steel mill business in the past and we plan to collaborate in various fields. The President of NHI and we share the same mindset, I will explain in more detail when we make any progress.
Thank you very much for the explanation. I have two questions as for the Lithuanian nuclear power plant I understand that you have been chosen as the strategic partner. So I believe that it will be involved inclusive of something as well. What kind of financial support will be provided and what is the scale that you are contemplating? Please elaborate.
Second question is related to page 7. You have talked about the sales price decline as well as material procurement to cost. Which businesses contributed most significantly in this regard? When the Hard Disk Drive business is sold, how will this change?
Unidentified Company Representative
Regarding the nuclear power plant in Lithuania, I cannot give you details because it pertains to a specific customer. In terms of financial support there will be support provided by financial institutions both from Japan and overseas. Therefore we do not expect any issues in this regard.
As for the scale, I cannot give details of pertaining to a specific deal but it is a regular nuclear power plant and so I’m sure you can guess these scale.
Now, as for factors for changing operating income, sales price declined of 85 billion Yen, has 70% or 80% accounted for by Hitachi GST price decline.
On a consolidated basis, price decline is difficult to identify other than commodities. So it is Hard Disk Drive in this case. Margin is, however, secured by reducing cost in line with price decline. There are also consumer products included. Regarding 90 billion Yen in terms of material procurement cost reduction, the Information and Telecommunication Systems account for 30%. The overall efforts were made by the procurement team in the area of Power Systems Consumer Products and Displays.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!