Hitachi (HTHIY) Q4 2015 Results - Earnings Call Transcript

| About: Hitachi Ltd. (HTHIY)

Hitachi, Ltd (OTCPK:HTHIY) Q4 2015 Results Earnings Conference Call May 13, 2016 4:00 AM ET

Executives

Mitsuaki Nishiyama - SVP, Executive Officer & CFO

Operator

The time has come to start the meeting of the Consolidated Financial Results for Fiscal 2015 for Hitachi Ltd. First of all I'd like to introduce speakers for today. Mitsuaki Nishiyama, Senior Vice President, Executive Officer and CFO; and Mitsuyoshi Toyoshima, General Manager of Finance and Accounting Department; Ken Mizoguchi, Executive General Manager of Corporate Brand and Communications Division. I would like to ask Mr. Nishiyama to start the explanation.

Mitsuaki Nishiyama

I'd like to refer to the Power Point presentation entitled, the outline consolidated financial results for fiscal 2015. I please refer to Page 4. These are the highlights for the fiscal 2015 results. Revenues was ¥10.0343 billion and which is up 3% year on year. It was higher in social infrastructure and industrial systems, information and telecommunication system and automotive systems segments. Adjusted operating income was ¥634.8 billion, down 1% or ¥6.4 billion decline year on year. And there was automotive system was strong, but profitability of construction machinery segment declined because of the slowdown. EBIT was ¥531.0 billion due to higher cost recorded for business structure reforms. Net income attributable to Hitachi Limited stockholders is ¥172.1 billion. This is down ¥45.3 billion year on year. The factors will be explained later. The total Hitachi Limited stockholders' equity ratio from manufacturing, services and others was 25.6% and free cash flow ¥324.4 billion, which is up ¥187.1 billion from the previous year. The yearend dividend for fiscal year 2015 was ¥6 per share.

Now regarding the results of the MHI announcement in May 9th for the South Africa project, the ¥379 billion request of payment was made by MHI. Now to this point, we cannot accept this request and in fact this is being already referred to them on April 6th. However we have set aside the asset in reserve regarding this matter.

Page 5 is the statement of profit or loss. At the very top, revenues was ¥10.0343 trillion, which is an increase of ¥259.3 billion. 210 billion regarding [Indiscernible] impact is included and if we exclude the reorganization, it will be around 100% flat. And next is adjusted operating income ¥634.8 billion. There was a demand decline in China as well as resource nations. And 15 billion was the impact of the foreign exchange, we have not been able to reflect this, and we have seen a deterioration. EBIT was ¥531 billion. Income tax changed significantly at 165.2 billion, which is increase in burden of tax by ¥43.1 billion. There were three factors relating to this. First of all in 2014, the income increased for listed companies therefore there was pushing of DTA, which went to May in 2015. Secondly, because of the consolidated transition Group profit improved, therefore we have to start paying tax again. And Hitachi Capital reorganization, they have been some transfer of stake. And tax relating to DTA, they had to be posted in 2015 because of this reorganization and the impact was ¥43 billion in terms of tax increase and this is having an impact on the bottom line as well. On the right hand side, we have shown the previous forecast comparison. In terms of revenues, there was difference of ¥84.3 billion positive. Adjusted operating income plus 4.8 billion, but in terms of income tax, there was further increase by ¥38.2 billion, which is relating to Hitachi Capital as well as Hitachi Transportation Systems reorganization required these cost to be posted. Another change is loss from discontinued operations to the tune of ¥57 billion. Out of the thermal power business, there were projects that were not transferring to the joint venture, which we dealt with buying Hitachi Limited.

In terms these projects ¥39 billion has been posted. This is being subject to negotiations with various customers. Therefore, we cannot give you details about cost relating to contracted terms and that required additional reserves in 2015. And that means that compared to the previous forecast, there was deterioration of ¥67.8 billion.

Page 6 is the factors affecting changes in adjusted operating income year-over-year. Now, on the right had side, cost reduction etcetera ¥231.5 billion and left hand side however there was ¥120 billion in terms of lower sales price. Furthermore investment in business development ¥43 billion, an increase in labor costs and depreciation at ¥70 billion. This was covered by the cost reduction. However as you can see toward the middle, there was lower utilization, inventory optimization of ¥20 billion incurred. This is for construction machinery as well as materials and automotive system product demand decline and production had to be downsized.

It has an impact in lower utilization, inventory optimization took place, which amounted to ¥20 billion negative impact. Exchange gain is ¥15 billion. However overall, because of the inventory optimization having a significant impact, it was minus ¥6.4 billion year-over-year. Next is for EBIT; as you can see in the middle, exchange loss impact is minus ¥9 billion. As I mentioned earlier, there was around ¥15 billion increased in terms of operating level, but JPY24 billion minus impact on non operating basis was incurred. And also the investment business development having a minus impact of ¥22 billion in terms of structural reform expenses. Investment in business in Hitachi construction material, ¥49.5 billion was a net gain on business reorganization and other expenses. And EBIT, however deteriorated by ¥3 billion at ¥531 billion year-over-year.

Page 10 is the revenues by market. Outside Japan ratio for 2014 was 47%; for 2015, 48% and year-over-year 105% for outside Japan. We have seen decline in Asia, China as well as other Asian countries. China was 95% and 99% for other Asia. About 88% for China and ASEAN and India and others would be 89% if not for the impact of foreign exchange. Air conditioning business was restructured, which is having an impact of construction machinery and others have seen a decline in demand in Asia, having an impact. On the other hand, for North America and Europe, there was an increase. For North America, Hitachi metals, Waupaca Foundry has been acquired, increase is seen. Europe, the unsold acquisition of railway business has led to an increase.

Please refer to page 13. This is the balance sheet summary. The upper half is manufacturing, service and others, lower half is the financial services. Total assets for manufacturing, services and others was ¥9.9179 trillion and you can see that there was an increase from the, and regarding CCC, our cash conversion cycle, it was 81.8 days at the end of 2015 March and it has been reduced by 10 days to 71.6 days. Hitachi Limited stockholder equity ratio 25.6% and D/E ratio was 0.4 times. The lower half is for financial services. Total assets is ¥3 trillion, above ¥3 trillion. Hitachi Capital global business has grown, which is included in this increase. D/E ratio is 6.74 times.

Next is page 14, cash flow. The middle is the manufacturing, services and others. Cash flows from operating activities has improved to ¥843.1 billion because of [Indiscernible] this is improvement. As a result, free cash flow came in at ¥324.4 billion, increase of ¥187.1 billion year-over-year.

Please refer to page 16, 16 and 17 the segment information for 2015 in terms of revenue as well as well as profit. Looking at the information and telecommunication systems, product related business was slow and deterioration have been overcome by system solutions and as a result increased by ¥6.1 billion. And operating profit margin was 6.7% and 7.9% for system solutions and therefore overall its 6.7% is the best operating profit margin after Lehman shock.

Next is social infrastructure and industrial systems, deterioration by ¥7.5 billion in terms of operating income. Overseas in Middle East, there are major projects as well as Asian chemical plants are coming to a close, projects have deteriorated. Oil and gas market deterioration has led to a decline in terms of compressors, associated pumps products has been negatively impacted. Projects have been negatively impacted and showing a deterioration in number for EBIT.

There was a decline of ¥81.2 billion year-over-year for 2014. There was a profit from business reorganization which is absent. Foreign exchange impact was ¥10 billion overall. That is the reason why we have negative for EBIT. For social infrastructure and industrial system, compared to previous forecast, it has deteriorated by ¥50 billion. Operating profit ¥8.6 billion, deterioration has had an impact, this is relating to infrastructure. And Middle East project has seen cost increase and we had to set aside reserve for this. In addition at EBIT basis, there was foreign exchange impact and structural reform and fixed asset impairment is included. Construction machinery the Kokusai Electric and Hitachi Koki has certain impact of--deterioration of ¥5.5 billion. And construction machinery has declined by ¥37 million because of slowness in the Chinese market; higher functional materials numbers shown here. For automotive system, in the past three years, we have continued to increase the business and ¥1 trillion has been achieved in terms of revenues. In addition, profitability has been improving as well. 2014 was 5.1% in terms of operating profit margin it has improved to 6.2%.

And next is smart life and ecofriendly system declined in revenues as well as EBIT because of air conditioning reorganization. If we exclude this, if we look at [indiscernible] only, we have seen increase in revenues as well as earnings.

Logistics and Other services, Hitachi Transport Systems improved, increasing the revenues as well as earnings, but EBITDA has declined by ¥10.4 billion because of the land proceed gain has gone away. Financial service increased by ¥6.2 billion in terms of operating income. Corporate items and eliminations, EBIT was subject to significant change. This is because in the previous year we posted the major items, which is not included in this year.

Page 19 please. Let me talk about fiscal year 2016 outlook. Starting with 19, this is underlying premise of our forecast. Regarding the business environment, there is continuing uncertain situations due to sluggish economic growth mainly in China and natural resource and oil producing countries. And the summary for fiscal year 2016 forecast the conversion of Hitachi Transport System and Hitachi Capital Corporation to an equity method affiliate are factored in. The exchange rate assumption is ¥110 to the U.S. dollar and ¥120 to the euro.

Now let me explain the numbers on page 20. Revenues ¥9 trillion. Adjusted operating income ¥540 billion 6%. And there is a yen strengthening impact and Hitachi Transport System and Hitachi Capital impact and so, the number will go down, but the operating income ratio will be maintained at 6%, EBIT ¥450 billion and net income attributable to Hitachi Limited stockholders is ¥200 billion.

Next page 21 please. This is the increase and decrease of revenues and operating income, centering on the business portfolio restructuring. Left side is revenues, exchange loss of strong yen is minus ¥380 billion, impact of reorganization of Hitachi Transport Systems is minus ¥490 billion, Hitachi Capital Corporation reorganization minus ¥135 billion and air conditioning business reorganization impact is minus ¥100 billion, so ¥9 trillion. Adjusted operating income on the right side; exchange loss negative ¥60 billion, impact of reorganization of Hitachi Transport Systems minus ¥28 billion, Hitachi Capital Corporation impact minus ¥27 billion and air conditioning business impact minus ¥8 billion, ¥540 billion is the forecast. Now Hitachi Transport Systems, the sale of some of our shares will be in the first quarter, Hitachi Capital in the second quarter. This is one when expect to complete the deal.

Next is page 22 and 23. Let me talk about forecast by segment. Information and telecommunication systems will be down by 3% in revenues, but operating income will be ¥143 billion, up ¥1.6 billion. On the other hand, EBIT will be minus ¥25.1 billion year on year. Server and storage, the product type business will have the business restructuring expenses. Next social infrastructure and industrial systems, large loss in the previous year, large costs in the previous year will no longer be there and so we will see an improvement. Electronic systems and equipment, Hitachi High Technologies development cost will increase and Hitachi Kokusai Electric Semiconductor Equipment will go down. So, it will be down by ¥2 billion. Construction machinery sales will go down by 5%, but with the positive impact of the business restructuring in 2015 and improvement of product mix will push up the operating income by ¥11.3 billion. High functional materials and components will be improvement of 6 billion, but EBIT, Hitachi Metals sold the shares and impact will no longer be there on 2015, so minus 29 billion. Next automotive systems; operating income down by 1.9 billion ADAS autonomous driving development costs will go up. Smart life and eco-friendly systems, this is the impact of the reorganization of air conditioning business, so down in operating income. Others, Hitachi Transport System is included, but this will be gone from the first quarter. And so, the revenue will be 51% and operating income will go down too. Financial services 36%, down by ¥30.2 billion, there is Hitachi Capital reorganization impact. Now others segment has had transport systems and services and others, logistics services and others, but we have changed the name to others, because of the reorganization.

Last page 25 and onward let me talk about the summary of midterm management plan. Page 25, it shows some numbers. It shows adjusted operating income ratio. Fiscal year 2012, operating income ratio was 4.7%. Fiscal year 2015 is 6.3%. Our initial target for fiscal year 2015 was over 7%. We could not achieve that, but we were able to secure over 6% ratio. We saw a big improvement in system solutions business and information and telecommunication systems, that was 6.7% and automotive systems, 6.2%. So these segments businesses were the driver of the improvement in the operating income ratio. Second from the bottom, cash flows from operating activities, fiscal 2012 was 503.4 billion. Fiscal year 2015 was 843.1 billion and it's not listed here, but cash flow margin ratio 2012 was 5.7%. Fiscal year 2015 was 8.6%. So, we realized an achievement. This is the record high level. So, we now have more cash generating capability.

Next Page 26, please. On the other hand, there are some challenges. At the bottom you can see challenges, number one is speedy the response to changes in the market, we could not be speedy enough. IT related projects, management, IT product type business, we had some delays in keeping up with the market environment changes. We are trying to reorganize our business to speed up. So, we need to accelerate our management further. Under the new organization, we will accelerate the decision making. Other is the thorough project management. In IT type business, in information and telecommunications business, we had some unprofitable projects and we no longer have that. We now have good phase gate management and project management.

On the other hand in infrastructure, the Middle East construction projects and others, there are some unprofitable projects and so we lacked in project management capability there. However, we are going to focus on our strong points, so we will focus on our areas that we are strong. Next is accelerating business portfolio reform. Social innovation will be the center of the management resource and so, we will reform our business portfolio.

Next page 27 please. Initiatives for the next stage of growth; One is business restructuring. We will continue the business restructuring activities mainly around the low profit businesses in fiscal year 2015, structural reform expenses was ¥90 billion and the benefit was ¥20 billion. In fiscal year 2016, we will continue this business restructuring, especially around the low profit projects, we will go ahead with reforming the problems areas. Structural reform expenses will be ¥80 billion and benefit through the measures in 2015 and 2016 will be ¥55 billion. So in 2016, the benefit will be ¥35 billion. We will try to enjoy the benefit as well. Second is accelerating business portfolio reform. Hitachi Transport System and Hitachi Capital, which we announced today, they will be equity method affiliates. So, we will be active in reforming our business portfolio going forward.

Now Number 1and 2, if we conduct these measures, our revenue will temporarily go down, but we will not be afraid of the revenue decline, we will expand the social innovation business to grow organically and through M&A. We will focus our investment in this area to grow steadily. Fiscal year 2016, we will first do the review reform of the business portfolio, so the topline will go down by 10%, but we will do what we must do and on the other hand, we will expand and take measures to expand the social innovation business. Growth area strategy will be explained on the 18 of May from President Higashihara. That's all, thank you very much.

Question-and-Answer Session

Operator

We would like to move onto Q&A session [Operator Instructions]

Unidentified Analyst

I have two questions. First question is regarding fiscal year 2016. You talked about the price decline as well as other cost factors were explained. For this fiscal year, I would like to know what your assumptions are?

Unidentified Company Representative

Regarding the increase and decreases, it is basically regarding reorganization. From 2015 to 2016 and in terms operating profit, the most significant factor will be business structure reform impact, the increment of ¥35 billion. That is a major factor. There are others, price decline as well as cost reduction will be offsetting each other. Therefore in terms of the total, the business structure reform is the most significant factor that will influence this. Now regarding personnel cost as well as depreciation, and I think ¥113 billion was mentioned for the last term. What is the number for this term? Now for 2016, how we should evaluate this price decline, minus ¥100 billion plus is what we have assumed. In terms of personnel cost as well as depreciation, ¥30 billion especially in terms of depreciation is going to be very significant this term. Now in terms of the business structure reform, the increase in ¥35 billion and ¥170 billion for personnel cost. In terms of the development related at the time of April, Dumada was announced and that's an increase of ¥40 billion compared to the previous year minus alpha impact, which will occur anew. I hope that will suffice. Now regarding the second point.

Unidentified Analyst

In page 16, you have talked about the social infrastructure and industrial systems EBIT has declined in terms of compared to the previous forecast by ¥52.8 billion. In the beginning, you explained the increase in reserves for South Africa. Is that included in this number? Regarding South Africa, when you have accounting process, are you setting aside for your equity stake of 35%, is that the case?

Unidentified Company Representative

Regarding South Africa, I'm sorry but the details numbers cannot be to be disclosed. Regarding the accounting process as well as how it is going to be posted cannot be divulged in terms of details. However I can say that reasonable number has been set aside as a reserve. But the details of the accounting procession cannot be explained at this point in time.

Unidentified Analyst

On the part of the media, you said ¥100 billion was mentioned by the media. So, regarding this ¥100 billion, can you say that it is correct or is it out of scope? Because this is you mentioned everywhere in the media, so please comment regarding ¥100 billion.

Unidentified Company Representative

In terms of the actual amount, basically we cannot disclose information. How they are handled is not explained in details, not by MHI or not by the Hitachi and I do understand that ¥100 billion has been mentioned elsewhere, but we are not in a position to comment on this number. Regarding the reserve that we have set aside, it cannot be disclosed in terms of the actual number. Any other questions?

Unidentified Analyst

I have three questions. First, this year's business restructuring cost goes up by ¥35 billion. If you could elaborate or give us a breakdown on that. Last year was ¥20 billion, this year is ¥50 billion increase in profit so the cost will not be that much bigger, but the benefit will be so much bigger. So which segment, which division will be more prominent? So please give us the breakdown, that's my first question. Second, maybe I'm misunderstanding is, but on Page 21 and 23, the drop in sales and profit due to the non-consolidation, taking out of consolidation the numbers are different and so, why is the result and the forecast different?

Unidentified Company Representative

Which page that was that again?

Unidentified Analyst

Page 21. ¥490 billion down in revenues from the Hitachi Transport System and Page 23 others, revenue will go down by ¥600 billion or so. Why is the number so different? And same for the financial services the numbers are different? And so I would like to know why? And my last question is cash flow, you said you are having good amount of cash flow. In the new fiscal year, cash flow margin or free cash flow amount, what is your forecast? What is your plan please? That's all.

Unidentified Company Representative

First the business restructuring expenses, the breakdown. First fiscal year 2015, the headcount adjustment was ¥45 billion of the ¥90 billion and then depreciation totaled ¥90 billion and 2016 is ¥80 billion. The headcount adjustment is ¥30 billion and the impairment of fixed assets 50 billion.

In terms of headcount adjustment in 2015, 4,300 people are in the scope. In 2016, will be around 3,000 people. So, the positive impact on operating income is bigger this year than last year, so 30 billion is going to go up to ¥50 billion. In fiscal year 2015, impact is ¥20 billion, but this is mainly in the second half. So in fiscal year 2016, it will be a full year contribution, so that is around ¥45 billion and in fiscal year 2016, we are going to do the restructuring of ¥80 billion. So, 10 billion is incorporated. So total ¥55 billion. Now to answer your second question, the difference in the numbers is in revenues. It may sound strange to you. In waterfall chart, this is after the inter Company elimination. So after the elimination, it's the decline in revenue after inter Company elimination and therefore Hitachi Transport System is ¥490 billion, but in others, it's ¥600 billion minus. Now the difference between ¥450 billion and ¥600 billion, about 110 billion is the inter Company elimination. And same holds true for Hitachi Capital.

Now, let me answer your third question cash flow forecast. 2015 CCC is 71 days. It's a big improvement, but we will go back once slightly. We have more capability, but IEP, the Europe railway project sales will be in 2017 or 2018. It's a large scale project. And so the inventory will accumulate. And therefore, we will have a slight decline here. Of course, we will continue improving CCC, continue to taking measures to improve CCC. So, free cash flow total would be around ¥100 billion. We will do investment and there will be some increase in the working capital, but we would like to secure around ¥100 billion. Thank you very much.

Unidentified Analyst

I have two questions. First question is regarding the impact of business structure reforms, the total amount is 35 billion. Can you give us a breakdown of segments, what is the breakdown by segment? Second is a regular question regarding the corporate items and elimination, it was minus 36 billion, but plus 13 billion in terms of actuals, what is your view on this please elaborate?

Unidentified Company Representative

Now, I would like to address the second question first. Regarding corporate items and eliminations for 2016, the business environment continues to be opaque. And after the 36 billion, we have looked at 40 billion in terms of risk and there are various structure reforms as well as reorganizations which will incur expenses and therefore non operating versus 20 billion risk is factored in. Total EBIT basis is 60 billion risk that is being factored in for corporate items and eliminations. Now regarding the impact of restructure reform, regarding the absolute amount of 55 billion is one third each, information and telecommunication systems will account for half of the impact. The remaining half 25% is regarding infrastructure for social infrastructure industrial system and 25% for construction machinery as well as metals listed companies.

Unidentified Analyst

Regarding the increase in profit for information and telecommunication system, can it be explained in its totality by the business structure reforms? I'm talking about the information and telecommunication system increase in profit while this term and can it be explained as only 1.6 billion, but the whole thing is business restructuring impact, is that the case?

Unidentified Company Representative

Yes, there was increase in profit, which will go down. For example, system solutions is a good case in point. Compared to products, profit margins are high, but system solutions revenue will be declining. For example in 2014, 2015, there was a significant demand for the My Number System, social security and thanks number system projects, so were quite prevalent. Gross margins were very high for these projects and this will go away. There will be an absence of this and therefore, decrease in revenue will lead to the decrease in earnings. But overall, business structure reforms will be an area where we can harvest gains. With this, we'd like to offset the decline in profit, so that we can increase both revenues and earnings.

Operator

Any other questions please?

Unidentified Analyst

Regarding the South Africa project, you mentioned that you cannot talk about details and I understand that. But in the press release, you said that you do not need to pay, that's what you mentioned. But even then you are provisioning a certain amount so I would like to know the reason and in this year's guidance, have you included this provision?

Unidentified Company Representative

Regarding South Africa, we have been negotiating with them for a while and we said that we cannot meet their request and so this negotiation is still underway. However, in the end, there may be some part amount that we have to bear and so we anticipate a certain amount, and provided provision for that. Now the forecast for 2016, we have not included this in fiscal year 2016. Because, by the end of 2015, we have already provisioned the reserve based on our assumption and so it is not included in 2016 forecast.

Unidentified Analyst

This reserved amount, do you have an option to resolve this part first or is the minimum requirement to resolve the entire negotiation?

Unidentified Company Representative

I'm sorry, I cannot talk about the detail. There are 12 units in this project. It's a large scale project. And it's about the project profitability of this large project. So, total resolution or partial resolution cannot be achieved easily. So, we would like to sincerely continue with this negotiation.

Unidentified Analyst

I'm sorry to be repetitive, but the project final timing, when do you think the project will be completed and it's a little over ¥300 billion, you said that this is the minimum line. In other words, it may be bigger depending on the construction time period. So, if you could give us your forecast?

Unidentified Company Representative

The completion period will be three to four years. So the same process as what MHI has said. So we share this process. Now the amount that they've requested, it's minimum, but we think the reduction in the amount will be beneficial for both parties, because it's our common profit. So, MHPS will manage the project solidly, which they are and so we do not think that this amount will increase significantly. MHPS project President Nishizawa is the professional Project Manager and he is doing a great job. So I trust him.

On the other hand, South African labor environment is volatile, unstable and that is why the period has been extended to this much and so I do not anticipate this to go up that significantly. Regarding MHI, there's nothing we can say in specific terms. What we can say is we will have the approval of the audit firms and we are doing the accounting treatment thoroughly. And this is different from the negotiation and so we cannot make any comments on where Mitsubishi Heavy Industries is saying at the minimum amount or what other comments they're making, because it's a different story.

Unidentified Analyst

Basically, I have three questions both complex and easy. As already mentioned today, for each of the main businesses, I would like to know what is the assumption for business environment for the fiscal year? For example in IT, the orders received trend as well as some nice storage in the United States, how is that proceeding?

Regarding the information and telecommunication systems, how are you looking at the outlook in terms of hardware and software and for social infrastructure industrial systems in Middle East, there were major projects last year, but overall what is the assumption for the business environment in terms of social infrastructure and industrial systems the elevators and escalators in China and same set for others, there are some improvements, but what is your outlook?

Now regarding automotive systems, in terms of the business environment, what is your assessment, for smart life and eco-friendly systems as well in terms of business environment, when you formulated these numbers? In April of next year the consumption tax is likely to increase, how is that factored in, in terms of these numbers of all the major businesses? So, please elaborate further in terms of the business environment you are assuming for these numbers.

Unidentified Company Representative

Regarding business environment for information and telecommunication systems, in the area of system solutions and platforms and products we should separate for assessment. For 2014 and 2015 it was such that we had good demand in terms of the My Number system as well as the financial systems. There was strong performance because of the social security and tax number system. But this will only continue up until 2016, but there will be a decline in terms of the My Number system as we have seen in 2015, but there should be some increase in FinTech as well as security system supporting FinTech growing as well. We believe that there will be more projects in this area. Therefore, in the domestic market system solutions look very strong.

On the other hand, for products related business I believe that the environment will be more difficult. Service is good case in point and large projects. Market is undergoing change. So, I believe that the business is going to be very difficult, which means that another round of business restructuring will be required which has been started in 2015. Now, regarding the social infrastructure and industrial systems for China elevate us. For 2015 in the beginning, we had significant backlog and therefore was not impacted. Market was already declining, but our numbers were not impacted, because we had a backlog in 2015. However it is likely to decline in 2016 because of the absence of a backlog. In terms of the automotive systems on the other hand in the overseas market profitability is improving now. However in 2016, development expenses for driver less cars, there will be a negative impact on income but we believe that market is likely to be the same as 2015. In other words, we believe that the market will be strong in 2016 as well. In Kumamoto, the earthquake has hit and the impact is not zero but throughout the fiscal year, impact will be minimal according to our assessment.

Unidentified Analyst

What about the factors as well as impact of possible consumption tax, have you factor these in?

Unidentified Company Representative

Regarding the impact of consumption tax, has been factored in. But in terms of white goods, we believe that with the consumption trends, we can have increase in revenues as well as earnings.

Unidentified Analyst

Whether it be automotive deals or industry products, there is surge in demand before the consumption tax. So, for automotive systems, last minute surge before the hike is factored in?

Unidentified Company Representative

Regarding the automotive systems, we are not so cognizant. We are not so conscious about that.

Unidentified Analyst

Second question; in terms of increase/decrease analysis the electricity charge as well as material cost, how is that factored in, because I'm sure there is decline. And last year, the power companies had significant profit. Therefore, it is likely to have an impact on first half. In terms of material cost, this is also declining. How is this factored in? This is my second question.

Unidentified Company Representative

In terms of material cost; for materials overall, the actual number for 2015 is an impact of 10 billion. For 2016, the price decline impact or the cost reduction impact is around 20 billion for materials for 2016. Crude oil related on the other hand, with $1 change in the barrel cost, the impact will be 800 million domestically per year. So, it is difficult to quantify. Currently, 5 billion is impact of crude oil, according to our assumption.

Unidentified Analyst

What about and the utility charge?

Unidentified Company Representative

That is what I mean, utility charge and we're also using some crude oil that is also included in this number.

Unidentified Analyst

I would like to confirm the balance sheet for this fiscal year. Manufacturing and services are separated, but the capital will go away. So that means that manufacturing and services will be the only component we'll be looking at. And then we have to subtract the Hitachi Transport System, is this the correct understanding? But Hitachi Transportation Systems, when it becomes equity method affiliate, what is going to be the impact on the balance sheet?

A - Unidentified Company Representative

No, the offset relationship is very complex. So, it's very difficult to answer your question, but what we can say is that for manufacturing and services the Hitachi Transportation Systems was in a better position, is about 700 billion or so in terms of sales and the asset size is around 500 billion, so it is more favorable. So in terms of asset turnover, is about 0.99 times and because of CCC improved, it's about 1 times. 0.93 or 0.94 is likely to be the number going forward. So, 9 trillion revenue and that means that a little bit less than 10 trillion because of the Hitachi Capital and Hitachi Transportation Systems going away. That means that we'll have 10 trillion in terms of asset with 9 trillion sales, which means it's not 25% or 26% in terms of the equity ratio and we are assuming 30% going forward.

Operator

One last question please.

Unidentified Analyst

I have two questions. First is regarding Hitachi Capital that you announced today. So Hitachi Capital, you're doing this for positive purposes, but you will still hold 33% of their shares. What is the significance of owning 33% in MUHG Group if it's a collaboration with MUHG and you may not need to have 33% I think. So why 33%? If you could, give us the reasons please. Why not 20% or 10%?

Unidentified Company Representative

Hitachi Capital is for our social innovation business, it plays a very important role. For social infrastructure business, the financial function cannot be sufficiently played only with Hitachi Capital and therefore we would like to reinforce this and utilize this more. So, you said that maybe the shareholding can be even lower, but our operating companies this is the common financial platform that we would like to utilize as the Group. And so, we wanted to secure the governance on this company. And therefore, we will send directors and do this solidly and that is why we are still the largest shareholder. So 33.4% will be maintained. That is why we led to this decision.

Unidentified Analyst

In mass media, President Higashihara said that he will consolidate the business that is less than 5%. But this may not be a good example for the Group. You will do more business restructuring this year. When will you continue, until when will you continue this reform? So your understanding on the low profitability and your forecast please, regarding this 5%?

Unidentified Company Representative

So 5% is the one of the guideline, which we talk about internally. In fiscal year 2017 and onward, the ones that are less than 5% will be reviewed but BU, not just single BU or by segment, we will look in more detail by business and make decisions appropriately. That's what President Higashihara meant. So we will, in brackets, we will see the low profitability businesses and the ones that have low future, not viable, we may collaborate with other companies or wind down or exit or turnaround, so we will decide on what measures to take.

So, our direction is to do as much as possible by the end of fiscal year 2016, but there are some businesses that will become obsolete with over time. So, maybe things are okay now, but maybe risky in the future or already becoming outdated or the market is changing. So, for those businesses, we will continuously do this. This activity is endless. Despite the economic fluctuations this is something we need to do, no matter what.

Operator

With this we'd like to bring this meeting to a close. Thank you very much for your participation.

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