Hitachi's (HTHIY) Management on Q3 2017 Results - Earnings Call Transcript

| About: Hitachi Ltd. (HTHIY)
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Hitachi Ltd. (OTCPK:HTHIY) Q3 2017 Earnings Conference Call February 1, 2017 2:30 AM ET


Mitsuaki Nishiyama – Chief Financial Officer

Ken Mizoguchi – Executive General Manager-Corporate Brand and Communications Division



We would now like to start the announcement of the Consolidated Financial Results for the Third Quarter Ended December 31, 2016 for Hitachi, Ltd. I would like to introduce the speakers, Mitsuaki Nishiyama, Senior Vice President and Executive Officer, CFO; Mitsuyoshi Toyoshima, General Manager of Financial Strategy Division; Ken Mizoguchi, Executive General Manager of Corporate Brand and Communications Division.

Now I'd like to ask Mr. Nishiyama to start with the explanation, Hitachi report as well releases have been distributed to you.

Mitsuaki Nishiyama

I shall refer to the power point presentation for my explanation. Please refer to 1-3. This is the consolidated statement of profit and loss. Right hand side for the performance of the three quarters from April to December, at the very top revenues was JPY6,519.3 billion that is 10% decline from the previous year. This is mainly the impact of foreign exchange. The strong yen has had an impact. For the loan portfolio the organization impact is included in the slide.

Adjusted operating income was JPY373.1 billion, which is a decline of $35.2 billion year-over-year and 5.7% is the operating profit and for the third quarter this is the highest level and EBIT was JPY362 billion. At the very bottom, the net income attributable to Hitachi stockholders was JPY191.2 billion, which is 11% increase over the previous year after JPY18.2 billion income tax, although it is not written here while the 29.1% last year. This year has reduced to 24.3% income tax, the total has declined. Although revenue has declined, the net income increased by JPY18.2 billion.

I will skip over 1-4 and go to 1-5. This is the adjusted operating income year-over-year for the three quarters. Left hand side is the waterfall chart for revenues. The exchange impact was JPY460 billion negative and there was impact of reorganization of Hitachi Transport System, impact of reorganization of Hitachi Capital and also of the air-conditioning business which were negative. However there was organic growth impact of the positive JPY282.1 billion.

The organic growth was driven by the Railway business as well as the automotive products business. And in fact our technology is business we’re the drivers for the organic growth. Right hand side is the adjusted operating income. Similar to revenues there was a significant negative impact of the exchange of JPY61 billion, impact of reorganization of Hitachi Transport System and Hitachi Capital as well as covered the air-conditioning business and these were negative impacts. However beyond that there was organic profitability improvement of JPY65.8 billion.

Although it is not in yen, if I may give you a further breakdown, business development as well as lead time, as well as depreciation have increased. And there have been investment increase for growth, which were negative impact. That is about JPY31.5 billion negative impact, price decline of about JPY80 billion. I think that the business field has increased.

Impact of JPY36 billion and cost reduction as well as the impact of cost reduction to the tune of JPY140 billion impact are included. So doing if we exclude the reorganization with foreign exchange we have been able to achieve organic operating income improvement.

1-6 revenues by market, for Japan, accounted for 51% which is 91% year-over-year. Outside Japan accounting for 49%, 89% year-over-year were the results. Altogether 90% is the year-over-year growth. Although not written here, if we exclude the foreign exchange the total portfolio reorganization impact for Japan will be 99%, outside Japan 105%. Overall it is 102% which is the growth of Japan, outside Japan organic growth.

You can see that outside Japan growth was the driver, we have seen in Europe 104% year-over-year. If we exclude the foreign exchange impact the growth was at the level of 116%.

Now moving on to 1-8, cash flow toward the bottom of this page, the numbers are presented left hand side is for the Manufacturing, Services and Others. Cash flows from operating activities JPY388.3 billion and cash flow – that’s 6.1% in cash flow margin. And cash flow from investing activities minus JPY15.9 billion last year spend the whole end down samples – investment expenditures have fallen off. As there have been business transfer proceeds that’s the reason why is limited to JPY15.9 billion. As a result of cash flow was JPY372.4 billion which is an increase of JPY326.5 billion year-over-year.

Next page is the consolidated balance sheet. At the right hand top the total assets was JPY9,640.1 billion that is a decline of JPY2.9 trillion this is because of reorganization Hitachi Capital. The balance sheet has been reduced.

In terms of Manufacturing, Services and Others total assets was JPY9,640.1 billion reduction of JPY277.7 billion. As a result, the cash conversion cycle was 70.8 days. Last term that will compare to March end. Improvement has been made by 0.8 days from 71.6 days to 70.8 days.

In 2015 at the end of December, when compared to the end of last year was 73.6 days. So 2.8 days improvement has been made. Now Hitachi’s stockholder equity ratio was 29.9% we have been aiming for 30% from the past. We are coming very closer to this number. The ratio was 0.31 times is also included.

Next page please 1-10 and 1-11, let me explain the revenues and operating income by segment. So by segment the increase in operating income was Information Telecommunication Systems JPY14.2 billion and electronic systems and equipment plus JPY8.6 billion. So these were the increase in operating income.

Other segments because of the portfolio reorganization and foreign exchange suffered from decline in operating income but excluding the portfolio reorganization and foreign exchange factor all nine segments enjoyed the increase in operating income.

Information Telecommunication Systems, operating income increased by $14.2 billion. The business restructuring effect project management, improvement and establishment were effective.

EBIT went down by JPY19 billion year-over-year, this is because of the business restructuring that is continuing into this year. Information telecommunication, IT hardware, restructuring is continuing and that is why we're seeing a decline in EBIT.

In the Electronic Systems & Equipment, Hitachi High Technologies SCE improvement was seen. So that helped push up the operating income. Hitachi Construction Machinery because of the foreign exchange factor, Hitachi Construction Machinery, 92% and operating income down by 4.2% – JPY4.2 billion. And High Functional Materials & Components, because of foreign exchange factor this was down by JPY5.2 two billion. And operating income automotive systems is growing by organic bases but due to foreign exchange factors the operating income went down.

Smart Life & Ecofriendly Systems reorganization of the air conditioning system and other segments. The reorganization of the logistics system, financial system because of the reorganization of Hitachi Capital.

Next please move to Page 16 Slide 2-1. Let me explain the outlook for fiscal year 2016. Now this forecast, out of this table you can see at the top the foreign exchange assumption for the fourth quarter, JPY110 to the U.S. dollar and JPY115 to the euro. Last time it was JPY100 to the U.S. dollar and JPY110 to the euro. This time we changed to JPY110 and JPY115 respectively. Based on this assumption forecast is revenue of JPY9 trillion yen, adjusted operating income JPY560 billion. The previous forecast was JPY540 billion, so it’s up to JPY520 billion.

EBIT JPY450 billion, no change. And the net income, income attributable to Hitachi, Ltd. stockholders JPY200 billion unchanged. So operating income is up by JPY20 billion. But in operating loss in – there is an increase in the impairment loss. So including this impairment loss risk we increased the non-operating loss and we have kept the EBIT unchanged.

Now by segment, please move to Slide 2-2 and Slide 2-3. First information and telecommunications systems. Operating income on the far right you can see previous forecast comparison, operating income is the same as last time. But EBIT because of the additional structural reform, IT product – IT product structural reform is taking place throughout the world. So we added the additional restructuring reform. We’ve included that in corporate items and eliminations last time, but this time with better plan we are now including this in information telecommunications system. So changed by JPY9 billion.

Social infrastructure and industrial systems operating income is now JPY85, billion, down by JPY15 billion from JPY100 billion. Overseas project, especially Middle East projects, is now coming to end completion, but we are reviewing the cost and cost up is factored in. In social infrastructure and industrial system EBIT is down by JPY80 billion, a big downward revision.

Operating income and EBIT downward revision, in October, this was included in our corporate items and eliminations as risk. But this time in EBIT a non-operating loss we have GE, Hitachi joint venture, GE, Hitachi nuclear energy business. Apart from our nuclear power, nuclear power generation business, there is the laser uranium enrichment business which we are trying to commercialize but now we are studying with a possible withdrawal or a disposal of selloff of a business and we are having a better prospect for this. We will make a decision by March. So the impairment risk of this business JPY70 billion is included here, last time it was JPY50 billion in September in corporate items and eliminations but this time, we have a better prospect.

So now we are including it in Social Infrastructure and Industrial Systems segment. Electronic Systems and Equipment Hitachi high technology is strong so up by JPY6 billion in operating income. High Functional Materials and Components Hitachi chemical, revenues and operating income, so operating up by JPY3 billion, Automotive Systems EBIT up by JPY5 billion and Smart Life and Ecofriendly systems EBIT improvement by JPY8 billion. This is because of the gain on sales of real estate. So those are the main factors.

Lastly, let me give you some topics in 3-1, business portfolio reform. As been announced and as we are aware we in the third quarter, we conducted business portfolio reform transferring the stock of Hitachi Koki to KKR Group.

Transferring stock of Hitachi Security Service to ALSOK and Hitachi Construction Machinery and Hitachi Chemical’s M&A are being conducted. And the progress of IoT platform Lumada, the number of used cases is reported every time. In October it was 170 but in as of December 31, the number is up to 190 and we are targeting 200 cases by the end of fiscal year 2016.

Last page is 3-2 Topics 2. Strengthening business structure to achieve the business growth strategy, as you can see in the release distributed today, we are strengthening business structure to expand the social innovation business using digital technologies. We are reclassifying 14 business units, Smart Life & Ecofriendly Systems business and Automotive System business total 16 BUs into four focus fields to create a synergy effect and lead the growth by Executive Vice President and Executive Officers who are responsible for each field.

CEO of Hitachi Consulting Corporation will promote the Social Innovation business, in three regions the Americas, Asia Pacific and Europe, Russia, Middle East and other areas. And we are appointing Chief Lumada Officers, this is equivalent to Chief Digital Officers in our Company in each BU, in order to accelerate the global rollout of Lumada. So we will have someone responsible in each BU. And we are setting up two new divisions.

The investment in loan strategy division, to plan investment strategy for the next stage growth and the investment of the future division to establish new businesses from a mid to long-term perspective. That is all, thank you.

Question-and-Answer Session


Thank you. We’d like to move on to the Q&A period. And please state your name and affiliation before asking your question.

Unidentified Analyst

I have two questions. The first question is regarding what you have explained with respect to confirmation of what items have been factored in or not factored in. You have mentioned that the – what has been included but what was not included at the interim?

Mitsuaki Nishiyama

So that’s increase of JPY20 billion is related to this, in terms of uranium enrichment business, we have been considering [indiscernible] business inclusive of possible withdrawal. And therefore that one has included, JPY50 billion was included but now we have increased that to JPY70 billion.

Unidentified Analyst

Now the real estate proceed is also included.

Mitsuaki Nishiyama

So that’s increase of JPY20 billion, and as a result of the JPY20 billion EBITDA has been reflected. At the time of interim, the consolidated corporate items and eliminations buffer the impact of JPY10 billion EBIT was JPY20 billion, now this JPY10 billion is related to the social infrastructure industrial systems. We have been looking at this on individual basis, which has been realized the upper level so for the current forecast, comprehensive buffer is being considered.

There have been some in flow and out flow but – on the operating profit level around JPY10 billion has been considered, EBIT and non-operating JPY20 billion so altogether JPY30 billion are included so the risk factor is at the similar level to the last time we spoke.

Unidentified Analyst

The second question is regarding the new forecast. Increase and decreases is what I would like to ask about. At the press conference you said that half is foreign exchange impact, what about the other items can you sort of elaborate.

So at the interim results foreign exchange JPY40 billion reduction was made and now it has recovered at the level of JPY10 billion but the rate has not recovered completely. So I think the foreign exchange impact could have been larger, it could be a matter of timing but please elaborate further as that.

Mitsuaki Nishiyama

Overall, JPY10 billion, JPY20 billion improvement has been made out of that JPY10 billion is a result of foreign exchange. So I’m not satisfied with this level yet, there’s the fourth quarter to follow, therefore – the difference JPY100 – JPY110 compared to JPY100 at the interim and should be subject to fund and harvest so that the total incremental numbers can be achieved.

Now game [ph] plan, JPY20 billion by segment – let me give you further information. It’s mixed with foreign exchange but let me give you breakdown JPY20 billion, the Information and Telecommunications systems is JPY10 billion. The Electronic System Equipment is JPY5 billion, high functional Materials and Components including Hitachi Chemicals JPY3 billion, Automotive systems JPY2 billion altogether for segments that’s JPY20 billion I have given you the breakdown by segments.

Any other questions?

Unidentified Analyst

I have one question. But before that the foreign exchange impact in third quarter alone it is JPY5 billion and on full year basis JPY10 billion. So this is a gap with your internal plan, am I correct?

Mitsuaki Nishiyama

So the third quarter result.

Unidentified Analyst

So again this JPY110 against JPY100 so is this upside of JPY10 billion against your internal plan.

Mitsuaki Nishiyama

About JPY10 billion impact in third quarter – no, third quarter alone from October to December.

Unidentified Analyst

What about the second half, about JPY10 billion?

Ken Mizoguchi

Second quarter cumulative on October 28 against our assumption of JPY100 to a dollar; third quarter weaker yen impact was JPY10 billion. Now fourth quarter is revised to JPY110 to a dollar. So this impact is JPY10 billion. So, on the operating income basis JPY20 billion comes from foreign exchange impact.

Unidentified Analyst

Still nuclear related JPY20 billion reduction. So the cause was – your assumption was JPY50 billion which increased to JPY70 billion, what is the factor behind it?

Mitsuaki Nishiyama

JPY10 billion is foreign exchange. In September we based on JPY110, but now it is JPY115 on the impairment risk calculation. And we are re-evaluating the impairment risk evaluation for more stringent height. So totaled JPY50 billion is up to JPY70 billion.

Unidentified Analyst

So foreign exchange work negatively here?

Mitsuaki Nishiyama


Unidentified Analyst

GE Hitachi Nuclear business itself, the cost factors or from business fundamentals point of view, is there anything you should review or revise?

Mitsuaki Nishiyama

GE Hitachi – Hitachi has 40% in this company. It is a joint venture with GE. The main business is the nuclear. There are no newly established plants, so they're mostly maintenance and the associated parts business, service business that this subsidiary – so we are indirectly holding 25%. So this laser uranium enrichment, development and commercialization, this is what kinds of companies working on. This value is larger. The value of this company is JPY70 billion and if we decide to withdraw this will be zero. Then the remainder will be about $100 million. So the remaining portion will be small.

However, this nuclear business itself and the zero, the uranium laser enrichment, this research and development we may withdrawal from that business, but the remaining business format or our policy remains unchanged. So there should be no impact.

Unidentified Analyst

I have two questions. First question is related to the Middle East case. During the last meeting you said that two out of three will be subject to transfer within this fiscal year. Please confirm the schedule of the transfer. But what about the transfer of the remaining one? And the residual risk and this should be explained.

Mitsuaki Nishiyama

Regarding the Middle East, in terms of the plentiful social infrastructure industrial system there was one in Southeast Asia, that will run its course this year, and the Middle East as there are three. Out of the three plants two will be running its course during this fiscal year. There are some administrative and negotiations that will remain, but most of the construction will be behind us.

The other one will take up to the end of 2017, one of the Middle East plants, and the construction work will remain. And we have set aside provision for the following; the engineering has been completed and volume has been provided and the project testing completed and shipped with construction to 50%, but there has been some additional designing that was required. So eight out of EPC 100% has been completed and PC are subject to visibility now. So we have reviewed as a constant we have identified the increasing cost.

For the remaining construction work we will do this in a systemic manner and make sure that there will be no sort of cost reference and we will continue to work on this project in a citrus manner.

Unidentified Analyst

Regarding horizon in the UK, recently on the part of Toshiba a new EPC projects from the nuclear area could be subject to withdraw for them. When you have acquired the horizon business, in doing existing maintenance you said that you must continue to maintain the technological level through new projects, new plants. In the case of Toshiba, in the absence of new projects it seems that maintenance and operations can continue. But why is it not the case for Hitachi? Why do you need the new projects in order to pursue maintenance and operations?

Mitsuaki Nishiyama

I cannot refer to other company situation so I shall refrain from discussing other companies or making comparisons. But I’d like to say that in terms of overseas plants – nuclear power plants we have the GE Hitachi business in the United States. So we are not engaging overseas plant though the U.S. and there is nothing that is new construction in the United States. And regarding the laser enrichment value was the significant portion of our business that will be subject to possible in terms of risk, so nothing significant will remain in the U.S., otherwise that we have horizon overseas.

In the UK, this is the first time we are engaged in a new plant – new nuclear projects in the United States – in the UK. We were cognizant of the inherent risk from the beginning. And therefore we work with that has experience in the UK those are – what with EPC that has global experience in terms of the local construction. For A&T that will be designed in Japan for a roll out in overseas, so risk is limited, but in terms of construction in the sea area is a first experience for us. And that is a reason why we have established a consortium. In terms of the operation of nuclear power plant we are going to be reaching fuel from Japan Nuclear Fuel Limited as well.

Therefore as the know-how of intervene congestive will be brought to them in pursuing this project with the UK Government. We are negotiating this which is uncontrollable for us, so we are negotiating the business. Yes, we are also trying to factor into the contractual times as much as possible so that risk allocation can be made appropriate that we are trying to mitigate risk as much as possible in this business, we are making preparations to achieve this goal. Thank you.

Unidentified Analyst

I have three questions. First question is your prospect for fiscal year 2016. Hitachi Koki and Hitachi Capital will go out. So without Hitachi Koki this will be about JPY5 billion to JPY7 billion, JPY8 billion and Capital JPY20 billion. So it seems that it will be difficult to increase operating income. But at this point in time for fiscal year 2017, what are some of the factors that may push up or down the operating income, in uranium related impairment, in operating or non-operating levels? If you could elaborate this point, please.

Mitsuaki Nishiyama

Fiscal year 2017 there are various carve outs in the reorganization of business portfolio. So business transfers, if we transfer business then the revenue and operating income will then go down accordingly. But on the other hand we will grow organically and also M&A, we will acquire a company and plan for some M&As. So we will work on our budget for fiscal year 2017 up to March and we will study carefully. As you just correctly mentioned, there are some factors that will reduce the revenue. In 2018 medium-term plan, we will review our business portfolio and we are – this work is currently underway and we are also considering measures to make up for it for our growth strategy.

Now regarding the uranium enrichment business withdrawal and the impairment risk for that GE Hitachi is the joint venture where Hitachi has 40% and it is a subsidiary of this company. So with the impairment the equity method affiliate investment and this will be the impairment risk and this will be posted as non-operating loss. We will make a decision of this possible so of this company and go to GE Hitachi board and post this in fourth quarter, so 40% of the JPY70 billion – 40% of JPY70 billion, the loss that we will post a JPY70 billion.

Unidentified Analyst

My second question is about the nuclear power. At the end of last year JBIC or the government affiliated fund was to support you. And so what is the scheduling of this UK project, when you start, when you end and how much and how many?

Mitsuaki Nishiyama

Nuclear horizon project, so the overall schedule is as follows. The reactor certification is underway and this will complete by the end of fiscal year 2017. So this reactor certification process is coming to an end and this will end at the end of 2017, and next site license needs to be acquired. Site license will be acquired in 2018 and EPC – the FID, the Final Investment Decision will be made in 2019. And we’ll start the construction on a full scale in 2019. And the first operation will start in the early part of 2020.

Unidentified Analyst

My third question is not just nuclear but in EPC in your overseas projects, it seems that you are having difficulty in your overseas projects. So in your medium-term plan I hear that you are trying to reduce EPC and this is seen in other companies as well. So changing the framework or integrating with other companies or risk hedging, are there many ways of thinking? So I would like to hear what your board, what your executive is thinking?

Mitsuaki Nishiyama

As you just correctly mentioned, the EPC that involves overseas construction has been a headache and we have been suffering from losses in the past. So in this current medium-term plan the industrial plans we are still struggling but Middle East, large scale construction, large scale EPC we’ve stopped taking orders, we will install equipments that we continue. But the deals that are mainly contractions will not be accepted or taking that order.

Now, Southeast Asian plants – chemical plants this is where we also struggled. There is a big price competition, so we will not take any large scale orders on this point too. So industrial, medical where we have strong points, we will focus in our strong suites. In nuclear power, the power production, the EPC, this is a form of EPC this time, but as I said earlier, this is something we had never experienced. So including the UK Government we are dividing the risk – and include the risk warned by others in the contract and the cost associated with that. So we make sure that we do good negotiation, solid negotiation and working consortium, so that we can leverage other company’s knowledge and expertise. Next question please.

Unidentified Analyst

I have three questions. And first question is an easy question, regarding foreign exchange and sensitivity. On an annual basis for the dollar and euro, I think you mentioned 1 billion, 2 billion respectively for JPY1 movement. But what is the impact now? What is the sensitivity now?

Mitsuaki Nishiyama

Please refer to page 28. This is for the remaining period. We have showed here the foreign exchange sensitivity. The upper box graph shows that for every JPY1 movement on the yen U.S. dollar and Asia’s impact will be JPY5 billion of revenues, adjusted operating income will be JPY1 billion for euro, JPY1 movement will have an impact of JPY50 billion in terms of revenues as well as JPY300 billion for the adjusted operating income.

Unidentified Analyst

This is only for the fourth quarter? What about the annual? You might have hedged but there will be potency for these numbers I guess for the $4 billion for the U.S. dollar, may understand that due to the case.

Mitsuaki Nishiyama

Yes. The structure is not changed.

Unidentified Analyst

Second question from the revisions that you’ve made if we subject the fourth quarter it seems that there are three factors for information and telecommunication. You have not changed the number. And so that’s a JPY51.3 billion that means that it is going to be a reduction profit by JPY12 billion, so what is the background to this?

And other logistics – others after the third quarter, it has been prevailing around JPY5 billion to JPY7 billion in terms of profit increase, if my calculation is correct, since that for fourth quarter it will be a reduction of JPY3 billion. As already mentioned in terms of corporate items and eliminations if we make this traction that’s minus JPY8.8 billion negative, it could include buffer here. Please elaborate because it does not fit well for me and please elaborate regarding the buffer.

Mitsuaki Nishiyama

You have a good eye. You have a good interpretation. In terms of information telecommunications, for the fourth quarter, we have a conservative number that has been identified. On the other hand, for hardware, the overseas, inclusive of overseas, the organization has changed we have implemented restructuring on a global basis. And therefore there is concern regarding the revenues in this area.

For the financial services, as well as public sector doing well, but there are other concerns that is the reason why we are taking a conservative view for others. We have a conservative analysis of this area as well. Furthermore, regarding corporate items and eliminations, as you have rightly mentioned, explicitly operating income JPY10 billion a risk factor hence being allocated.

Unidentified Analyst

In the absence of special events JPY560 billion is the plan there is upside?

Mitsuaki Nishiyama

What is uncertain is the following: for high functional materials, Hitachi Metals, as well as Construction Machinery, areas where there is market uncertainty therefore there is some concern. That is the reason why we are taking a conservative approach.

Unidentified Analyst

For fourth quarter and beyond for the major businesses, for example, information, telecommunication system, from the fourth quarter throughout the first half of next fiscal year. Please elaborate further on your outlook in terms of information telecommunication, IT business, how does it look to you?

In terms of orders for social infrastructure and industrial systems, how is it prevailing and system investment in the industrial area. For the parent company basis for the automotive systems, inclusive of China, as well as in Europe, as well as the U.S. What is your outlook in terms of business, as well as the outlook going forward? And with the administration of Mr. Trump what is going to be the impact this is to be significant activity taking place. How will you be impacted in terms of the business environment going forward?

Mitsuaki Nishiyama

Regarding information, telecommunication systems first, for financial as well public sector solutions for business remains strong. Our profitability is improving and just continuing to improve. Project management is being done in a steadfast manner. Therefore, as we have done so in the recent past, project management will be implemented rigorously and I believe that this will continue to drive strong business. For 2013, 2014 we have experienced the financial services integration and the social security and touch number system was introduced. But beyond that we can expect a certain level of workload for AI, IoT, there is prevailing needs in emerging we would like to capture business opportunities in these areas, as well.

For the hardware we are struggling somewhat because hardware is increasingly becoming a service, this trend is continuing and that is the reason why we're narrowing down the models that we're developing, so that deficiency can be improved, so that profitability can be maintained. As already mentioned, business restructuring will have to be implemented in increasingly manner and it will have to be accelerated further. We will do this towards the end of this fiscal year, as well as the first half of next fiscal year. If this is implemented successfully, I'm sure that profitability can be improved.

Regarding the social infrastructure and industrial systems, we believe that there is – real ways are expected to drive growth in exclusive manner going forward. With the acquisition or even before the acquisition of Ansaldo the UK railway business is continuing to expand. And with the acquisition of Ansaldo from various countries in the world we are receiving orders.

We believe that this business will drive the social infrastructure industrial systems business. There is a slight concern regarding real-estate market in China, there is a slowing down of this market. With that to elevator building systems business is subject to a significant price decline against this backdrop. We are trying to develop lower cost models to be introduced into this market. Maintenance business will be expanded as well through these measures we hope that profitability can be maintained.

Automotive systems, is a area that we have been making investments all over the world. Depending on the plans productivity is not at the level at which we can be satisfied yet. Values grow can be limited but by improving the productivity and we believe that further improvement of business can be expected. However, the demand in the United States, as well Chinese market is subject to uncertainty there is differences. We have been trying to promote local production for local consumption in the past therefore we will monitor the business environment, as well as the activities of the automated OEMs to deal with this business in the appropriate manner.

Now, regarding President Trump of the United States, new administration has been set up. We believe the most significant impact on our part will be volatility of foreign exchange, this is not desirable for us. It in itself I'm in a position to talk about policies of the Japanese government or U.S. government. About we have been focused on a local production, as well as local procurement as well. We have been doing this from the past. And we shall do this going forward, as well so that we will be resilient to foreign exchange volatility.

About the changes in foreign exchange is something that inevitable. It will have impact for export, import, as well as local currency settlement of our local subsidiaries and how it is going to be reflected in the consolidated statement are inevitable. Therefore we have to continue to improve the low profitability business and we will continue to make efforts in cost reduction, so that overall profitability can be enhanced. We shall continue to drive this effort going forward.

Unidentified Analyst

You mentioned the elevator business in China just now, is about JPY600 billion revenue having profit is about JPY60 billion and the half is China. Now two days ago the business was very bad but environment is very difficult, but it seems that it is on a road toward recovery. Should we have any concerns about this?

Mitsuaki Nishiyama

In terms of volume and number of units maybe achieved to a certain level, but price wise it is going to be difficult. But the level of recovery is uncertain, because it's a multiplication. We have to multiply the price with volume. So currently it’s very difficult to talk about the specific number but we shall monitor the situation very carefully at any rate. The price reduction, and maintenance, and new geographies, will be covered, not just limited to China, but also in Southeast Asia. We have established a maintenance training center, so that we can receive orders as well receive maintenance work as well. By so doing we would like to mitigate the overall negative impact through these measures.


Any other questions? Time is running out, so we’d like to take the last question.

Unidentified Analyst

Question. In CapEx is that our Lumada progress so the refrigerator temperature monitoring and crane monitoring in terms of IoT – have a good image of this but in large businesses what are the progresses and what is the prospect you have in IoT, in AI?

Mitsuaki Nishiyama

So temperature monitoring, analyzing refrigerator temperature and the end users product like food that are sold in the warehouse, it has to be adjusted. So this temperature has to be monitored 24/7 so quality and the temperature analysis and big data analysis using AI. The regression analysis, I think the application is broad-based. So distribution retail companies will be able to leverage, these solutions, so this will be our focus going forward.

Now, the crane for the manufacturers, the crane truck for the manufacturing industry, through higher efficiency and facilities we can reduce cost of our clients. So we are promoting EOC. So this is where we can provide solutions to Lumada. And at the same time, we will provide our systems or equipments and devices to expand this business.


With that, we’d like to bring this meeting to a close. Thank you very much for your attendance today.

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