Hitachi, Ltd. (HIT) F3Q12 Earnings Call February 3, 2012 3:15 AM ET
Takashi Miyoshi – EVP and Executive Officer
Toshiaki Kuzuoka – SVP and Executive Officer
Thank you for attending the Presentation for the Consolidated Financial Results for the Third Quarter of Fiscal Year 2011 despite your busy schedules and despite the cold weather. We would now like to start this meeting. We are expected to end this meeting at 6:15 p.m.
I would now like to introduce the speakers to you. In the middle is Mr. Takashi Miyoshi, Executive Vice President and Executive Officer; to your left, Mr. Toshiaki Kuzuoka, Senior Vice President and Executive Officer; to your right, Mr. Yoshihito Kitamatsu, General Manager of Finance Department One.
I would like to ask Mr. Miyoshi to start.
Thank you very much, the third quarter results will now be presented. Please refer to the news release that have been distributed. First of all, starting with the revenues is ¥2.2549 trillion which is 100% year-on-year. Now this comprised of 102% domestic and 100% outside of Japan.
Now, operating income was ¥95.1 billion and net income was ¥34.2 billion, a reduction or decline year-on-year. To the right is the nine-month ended December 31. Revenue was ¥6.8376 trillion, which is 101% year-on-year comprising of 102% domestic and 100% overseas.
Operating income was ¥265.7 billion and net income ¥85.2 billion. As explained last time, for us the impact of the earthquake has been very significant. For the first three quarters, the impact has been calculated as follows: revenue impact was ¥230 billion, operating income ¥75 billion, and net income at ¥65 billion. This was officially significant for the first half.
Now, for the first three quarters compared to the year before last year, there was a significant difference in other deductions. In 2010 IPS also technology transfer proceeds was posted and with respect to the Hitachi Global Storage Technologies, we’ve been trying to sell – divest in the next term. These factors are linked to the significant difference.
Now, in – the 2010 third quarter was a reflection from the recovery after the Lehman shock and it was a record third quarter result. In this fiscal year, environment is difficult. But since we have started to disclose consolidated results from 2001, this fiscal year’s 30 – third quarter was the second highest.
The overall situation, vis-à-vis, the plan as already explained in previous time is that for Information and Telecommunication System as well as Automotive Systems and whether it be in parts or materials, we’re very strong, posting increase in revenues. On the other hand, the Power Systems, the Construction Machineries, as well as Electronics posted a decline in revenues against the plan. Revenue was at a 98% level.
In terms of the operating income, we have been able to post a slight upside although there are variations amongst the segments. Now please refer to the page on the financial position. Total assets at the end of third quarter was ¥9.3572 billion, and this is an increase of ¥171.6 billion compared to the previous term. Interest bearing debt is ¥2.8 trillion increase of approximately ¥270 billion.
Now in terms of Information & Telecommunication System as well as Projects and Power Systems, in the third quarter is typically such that the revenue tends to be slow and inventories increase. In Hitachi Construction Machinery, we have posted increase in inventory.
In terms of materials for rare earth related business, the strategic inventory are held and there was an increase in inventory significantly leading to an increase in interest bearing debt. Now the stockholders equity ratio was 15.7%. D/E ratio was 1.14 times.
Now let’s refer to the cash flow. What I’ve explained is also reflected here. Free cash flow was negative 75.5 million and our nine months ended December is 204.2 billion negative. We did not have a good situation here, but in the fourth quarter as already mentioned, the business divestiture and decrease in inventory and increase in revenue is expected. And therefore, we would like to achieve a positive free cash flow of ¥100 billion for the fiscal year, improve our financial position and to achieve the D/E ratio target in the midterm plan in the year – fiscal year 2012.
Next, I would like to move on to talk about the segment Information. I’m sorry that this is a very busy task. We have here the three months ended December 31 and nine months ended December 31. Let’s look at the financial side first. In terms of revenues, Information & Telecommunication Systems and Electronic Systems & Equipment, Construction Machinery, Automotive Systems and the Component Devices posted increase in revenue. And with respect to others, this also increased because of the acquisition of Sunpak by Hitachi Transport System.
Now on the other hand the Power Systems and Social Infrastructure & Industrial Systems, Digital Media & Consumer Products and basically domestic business of Financial Services posted a decline in revenues.
Similar trend is seen in operating income below. So let me explain by segment. First, Information & Telecommunication System, Japan is firm, thanks to strong service and base station demand this year. Overseas, as I’ve been mentioning, storage solution is strong, and therefore both revenue and operating income increased.
Next is Power Systems. In Japan, new construction of Nuclear Power Generation System is postponed although Thermal Power Generation System enjoys recovery demand. Overseas, boiler material in Germany that we’ve been concerned has led to some schedule of delays and therefore revenue declined. Operating loss is ¥11.8 billion in third quarter due to lower overall sales and counter measures on boiler material in Germany.
We have pretty much investigated the causes and are negotiating with our customers and we have better prospect. Therefore this countermeasure expense including the estimate is posted in the third quarter, thus, led to a loss. Social infrastructure and industrial systems, in third quarter, both revenue and operating income dropped due to the lack of large systems project. On the other hand, electronic systems and equipment includes Hitachi Medical Corporation’s consolidation of Aloka and therefore, revenue increased. However, LED related equipment is difficult. Third quarter revenue and operating income increased but the situation is becoming difficult.
Next is construction machinery. Fiscal tightening in China is prolonging, causing a big impact in the third quarter. On the other hand, in Japan, recovery and reconstruction demand as well as mining are strong. Therefore, overall, both revenue and operating income increased.
Next, high functional materials and components, automobile-related products is firm. But on the other hand, electronics is becoming difficult as I mentioned last time, and therefore, both revenue and operating income declined. Automotive systems, automotive manufacturers are entering the production increase phase thanks to the recovery demand from the earthquake. And the demand in emerging markets is strong. Therefore, both revenue and operating income increased.
Components and devices, as I will elaborate later, it includes Hitachi Global Storage Technology, HDD. And therefore, this quarter was firm. Digital media and consumer products, TV, Optical, Disc for PC and some overseas air conditioners are difficult. In addition, refrigerators suffered an impact from the flood in Thailand. And therefore, revenue declined and posted loss. Home appliances was positive, but TV and optical disc were negative factors.
Financial services. Japan is difficult and sluggish, overseas increased, and therefore, both revenue and operating income declined. In others, a revenue and operating income increased, thanks to the acquisition of (inaudible) Corporation. Right side is year-to-date, nine months ended December, the overall trend is similar to what I have just explained. The impact from the earthquake is included in each segment is that mentioned earlier, operating income, in particular, decreased by ¥75 billion due to the earthquake.
Next is revenue by market. I gave the total earlier, Japan, 102% in the third quarter, overseas, 97%, among which Asia is 88%. China is included here. China alone was 88%. I referred to construction machinery earlier, the impact from the fiscal tightening is severe. The other areas, excluding China, revenue declined in the third quarter, due to the electronic systems and equipment, and was 89% overall, excluding China.
On the other hand, North America was 113%, thanks to strong storage solutions and automotive systems. Europe is becoming tougher, but third quarter was 102%. Other areas was 106%, thanks to the increased revenue in automotive parts in Central and Latin America, and thermal power generation system in Africa and Oceania.
Now please take a look at the supplementary information. Full-year forecast on revenue, operating income and net income have not been revised. However, by segment, we factored in the significant changes that are starting to emerge. Upper half is revenue, far right column is comparison with last forecast. Let me go by segment.
Information & Telecommunication Systems revenue has not been revised. However, operating income was revised downward by ¥10 billion due to the impact of flood in Thailand which made it difficult to secure hard disk volume and request from large – with four large price increase.
Next, Power Systems. Revenue declined as explained earlier particularly due to the delay in schedule for overseas thermal power generation systems.
Operating income. In third quarter, we incurred boiler material countermeasure expense overseas which is being negotiated with customers and has not reached a conclusion. However, German electric companies are facing difficult situation due to the suspension of their nuclear power plants, and therefore we have not been able to raise price as originally anticipated. That is one factor. Another factor is the damage of nuclear power plant turbine that occurred in the past in Japan. We have been negotiating with our customers through lawsuits which is partially factored in, so quality countermeasures costs regarding the damage of nuclear power plant turbine is included.
The other is power semiconductor equipment that were severely damaged by the earthquake. The operation was resumed before long, but the resumption expense was higher than expected, so this was also a drag. Therefore, Power Systems fiscal year 2011 full year operating loss is revised downward to ¥34 billion. Negotiation is still under way in some cases so we will set this as the minimum level and do our best to improve them.
Next is Social Infrastructure and Industrial Systems. Revenue increased, thanks to reconstruction demand but earnings decreased due to lack of large projects and deals.
Electronic Systems and Equipment, third quarter was strong but Electronics-related especially LCD and HDD-related machinery equipment are sluggish. So the revenue forecast is a decrease. And therefore, we’ve advised you ¥5 billion decrease in operating income.
Next is High Functional Materials and Components. As I mentioned in third quarter, Automotive related is firm but Electronics related will be tougher and therefore revenue is expected to decline. However, operating income originally incorporated risks and will also be covered by cost reduction, and therefore, no change in operating income.
Automotive Systems. The situation I explained earlier will continue and therefore, auto manufacturers’ production increased and emerging market demand are the basis for the forecast of the revenue and operating income increase.
Components and Devices. Hard Disk Drive business that we are considering to sell was originally planned for December last year but now seems to take up to March. And therefore, fourth quarter revenue and operating income of Hard Disk Drive business is included here, and therefore, revenue and operating income are forecasted to increase.
On the other hand, Visual Media and Consumer products. As I mentioned earlier, TV business and Optical Disk business are difficult. However, although I said refrigerator was sluggish, home appliances is strong in the third quarter, so we hope to recover in fourth quarter. That said, overall revenue and operating income is forecasted to drop, and operating loss is expected with the largest impact from TV.
Financial services, revenue will decline due to sluggish domestic sales, but operating income, it will increase. Others segment was revised to increase both in revenue and operating income. Eliminations and corporate items, partly due to the risks incorporated already, we revised to ¥15 billion this time. This includes the insurance payment regarding the earthquake damage in the fourth quarter. The results will be distributed amongst segments, but cannot allocate it yet, so the insurance payment is included here, and therefore, eliminations and corporate items will decrease on a year-on-year level. So those factors are included.
Overall figures have not been changed, but the concerns I mentioned last time are unfortunately emerging, so they will be factored in, in each segment, and we will try to achieve the total figure. In addition, we are seeing a slight impact from the flood in Thailand in the third quarter. The impact will mainly be seen in the fourth quarter which is included in this forecast. The forecast is based on our estimates of the impact, ¥100 billion in revenue, ¥30 billion in operating income, and ¥25 billion in net income.
Now please refer to the page of the hard disk drive in the supplementary materials. This is looking at the business of the hard disk drive. The information is provided on a calendar basis. In the upper table, we are showing the results for July to September. This is reflected in the third quarter for Hitachi Limited. The lower table shows the actual for October to December. The numbers that are factored in the third quarter in the upper table was driven by the strength in the Services as well as the 2.5 inch hard drives that was increasing revenue as well as profit.
For the lower table from October to December, please refer to the shipments. The impact of the flooding in Thailand was very significant. Although shipments were 57% year-on-year, the service was very strong at 127%. However, prices have been increased by many companies. Therefore on, again, denominated basis, revenue was 76% year-on-year and operating income was 108% year-on-year. These factors are reflected in our fiscal year forecast.
The overall situation is that are concerned that I have talked about during our last meeting has come to the four such as the recent trends in the Electronics business as well as the European situation. However we have reflected these factors in our forecast. We will do our utmost to achieve these numbers and provide results according to the original forecast.
With that, I would like to conclude my explanation. I am ready to take questions.
The question – I have questions on three segments. First of all regarding the Information & Telecommunication Systems. You said that the floods have had an impact on the Hardware business side. But what about the Software Service business, please talk about the trend in orders received as well as the business environment.
Secondly, regarding the past systems, you have given detailed explanations. You have revised downward by 44 billion including the complementary expenses for boilers as well as turbines, how much has been factored in for this fiscal year?
Regarding the boiler, specifically, in the third quarter, one-off provision has been pursued. May we assume that for the Power System business will not have a negative impact to next fiscal year and beyond, do you think that there will be a recovery? Please comment.
Third, I would like to ask a question regarding the additional medium in consumer products betting is expected for the fiscal year especially TV is dragging down the business. Because of – for Hitachi, this is mostly a domestic business. The end of the year prices must have had been very difficult. What about the next fiscal year and onwards. If issue are not focused on volume shipment, and I’m sure that you have implemented measures. I would like to know what is the outlook for the TV business going forward.
Regarding the Information Telecommunications business, the situation in domestic market is improving somewhat. However, overall, the situation remains to be difficult at price environment is particularly difficult. Major process are expected next fiscal year and beyond, but there are also other projects that are preceding in a fair manner. But, there will be an increase in the Cloud business and intensifying the fresh competition is likely. Therefore, we need to seek further improvements in terms of efficiency as well as cost reduction.
As for the Power Systems on the other hand as mentioned earlier, the countermeasures for boilers as well as measures for past nuclear power plant business are included. However, this is an ongoing discussion with customers. I would like to tell you how much is involved clearly to you but I cannot do that.
But I can say that the two aforementioned factors are the most significant and for both areas the risks involved and the outlook going forward have been taken into consideration to post provisions during this fiscal year. Therefore, to your question regarding next year the Power System outlook will be subject to budget formulation going forward.
But it will be difficult to undertake new nuclear power plant business domestically. But on the other hand, nuclear power generation related measures are areas that we’re involved in. Furthermore in the overseas market especially in Asia, there are many projects in the thermal power generation area. We should be able to capture such business going forward.
There are also activities in the Smart Grid business which is our strength. We will focus efforts in this area. I’m not going to say that everything will go well but on can sense that we have identified have been factored in already. Therefore, for next year, we will exert efforts to achieve the mid-term plan. Details will be presented to you at a later date.
Regarding the digital media and consumer products, currently TVs and optical disks are dragging down the performance. For the sector TV as already explained to you on previous occasions. We have been focused on our lighter operation.
However – but in some products, we are still designing ourselves, manufacturing in our plants and selling basically in the domestic market. We would like to outsource in this business going forward. However, there are unique technologies of Hitachi that we would like to transfer to the outside manufacturers to come up with unique products. At any rate, we will focus on the lighter operation thoroughly.
As for white goods, the TV is an important phase, if you will, in the homes. Therefore, overall systems including Home Security will be pursued for customers requiring such a service in a limited manner. Therefore, these are likely not to drag down performance going forward. It may not be profitable but we have decided on a measure not to incur red ink. We will implement this measure without fail. I hope that will suffice as an answer.
In the Nuclear Power Plant business, there are new projects for Hitachi that have been suspended. Will there be further expenses occurring towards next year?
It is subject to discretions of the customers therefore I cannot give you details. However, all risks that have been identified have been factored in. We do not know with certainty because this will be subject to a discussion. But it has been reflected in our plan.
I have three questions. First question is regarding the updated forecast for the fiscal year. According to your explanation, the risks that have been factored in have been actualized and allocated to segments accordingly but what about the new plan? May we – I understand that no further business has been factored in, please speak to the new ones of which you had mentioned.
Second is regarding the Storage business, it has remained strong, however, there has been a slowdown in the growth rate in the third quarter. Is this because of the impact of the foreign exchange, or is there a decline in the investments overseas for IT? Has there been a change in the environment that’s surrounding this business?
Now, the third question is regarding the Hard Disk Drive business, there seems to be a delay in terms of divesting this business. Is there a risk of not being able to close by the end of the fiscal year, and what must be surmounted? Please give me details regarding this area. Regarding the hard disk drive, there was the impact of strikes at the end of last year. Even with the return of the workers, is there still risk remaining? Please comment on this area. I am referring to the strikes that has occurred in China.
We are now in the month of February, and the risks have been actualized, and the perceived risks of also been factored in to the segments. However, generally speaking, the situation in Europe is still uncertain, this is also factored in for the segments, I emphasize that for the eliminations and corporate items, there was a significant amount included for insurance payment, so you might be concerned about the decline here, but please bear this in mind, although I cannot give you the specific number.
Storage solution is firm, but there was the impact of flooding, it was difficult to supply products. Demand is very strong, however, we have not been able to deal with the demand prevailing amongst our customers. For the overall volume, we are negotiating and there is visibility and we have received consent from our customers.
Regarding the divestiture of the HGST, this is not directly-negotiated for us, but it is in the hands of Western Digital. So it is difficult to give you details. However, according to what we have heard so far, whether it be the United States, Europe or China, negotiations are taking place and matters vis-à-vis the authorities have been identified.
The deadline is the beginning of March. They have been telling us that they will deal with the matter by then one way or another. So it is likely that the business can be divested within this fiscal year.
Regarding the Hard Disk Drive business strike, this matter has been resolved. Our workers have come back and this is also reflected in our business plan. It did drag down performance temporarily but Hard Disk Drive business has resumed successfully.
Now I would like to complement some information regarding the strike in China. On the fourth of December in Shenzhen of China, the strike began but it was ended by the 26th of December. Production has been resumed and the production has been restored in January. Therefore, this matter has been resolved.
You said the impact from the earthquake is ¥75 billion in nine months ended December. What do you think the full-year impact will be, considering the reconstruction and the insurance payment?
Earthquake impact is estimated at ¥240 billion in revenue and ¥75 billion in operating income. In the interim forecast, we said ¥90 billion in operating income, so there is some insurance payment. As mentioned, a part of insurance money is recognized so the costs decreased accordingly.
If the operating income impact is ¥75 billion on nine months year-to-date and ¥75 billion on a full-year basis, then impact the fourth quarter is?
Impact in the fourth quarter will be minimal.
But insurance will be included, right?
It will be offset, in the impact will be zero. In the fourth quarter, power system-related business is slightly delayed, but other than that, the impact from the earthquake is minimal.
I would like to talk about your views for the next fiscal year. This is the last year of the midterm plan of 5%, or ¥500 billion is what I am referring to. What is your view now? The thing that this is high? There have been some disaster-related factors, 30 billion in Thailand, 75 billion for earthquake, that is a total of ¥100 billion. On hard disk drive business, 36 billion then will go away, and power systems one of expense of 40 billion to go away, so it can be covered. So based on 400 billion, in the absence of the ¥100 billion transient factors, 500 billion seems to be achievable. What is your view in terms of management?
You have rightly explained that situation. In fiscal year 2011, the flooding impact and the earthquake impact were significant, but in the absence of these factors, the organization capability is such that we can achieve the targets in the mid-term plan. However, competition is intensifying and environment is not favorable. And therefore, we must make further efforts in terms of cost reduction as well as overseas business development.
Although I can give specific numbers separately, but in terms of the profit margin of 5% as well as the financial structure, we would like to achieve without fail next fiscal year and then pursue further higher levels.
In terms of macroeconomic factors, I believe your most significant concern is Europe. For Hitachi, what is the focus area in Europe for you? At least it is Part Systems because you have Hitachi Parts Systems Europe. And regarding Europe, what is your important focus?
As you have mentioned, we have entity to pursue the Thermal Power Generation business. We are also aiming to develop to South Africa as well as India. But if you look at Europe alone, the business is very difficult in terms of thermal power generation. We are pursuing the business restructuring and rationalize the business further. However, know-how exist for negotiating with the customers as well as planned construction in this entity. Therefore, we would like to develop this business based on Europe and to countries such as India and South Africa. But Europe alone will be difficult.
Although this is not for the next fiscal year, I would also like to mention the rolling stock business for IEP. The final contract have been delayed but we believe that this is an achievable project. We would like to first of all to concluding the contract with IEP and manufacture locally and increase procurement locally, enhance safety as well.
I believe that this can proceed according to plan. The basic structure of the contract has been decided, although final contract has not been concluded. I believe that this is achievable.
I would also like to talk about the Nuclear Power Plant business in the future. We will take in consideration the situation of the countries in the region and thoroughly focus on risk management using external resources as well.
As for next year’s performance, Construction Machinery and Air conditioners and Information and Telecommunications are showing some weakness. However, there is strength seen in the Eastern European countries. So there should be no significant change.
In terms of Air conditioning, we will pursue production and sales collaboration, strengthen the business structure I believe that good results can be achieved.
At any rate, the environment remains difficult and therefore we will do our utmost given the circumstances.
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