Hitachi Ltd (HTHIY) Management on Full Year 2021 Results - Earnings Call Transcript

Hitachi Ltd (OTCPK:HTHIY) Full Year 2021 Results Earnings Conference Call April 28, 2021 2:20 AM ET

Company Participants

Yoshihiko Kawamura - Senior VP, CFO

Tomomi Kato - General Manager of Financial Strategy Division

Masao Yoshikawa - Executive General Manager Investor Relations

Conference Call Participants

Operator

The time has come to start the Hitachi Limited Web Conference on the Fiscal Year 2020 Earnings for Institutional Investors and Financial Analyst and for the Media for the Fiscal Year 2020 Earnings, as well as the progress on the 2021 Midterm Management Plan. Thank you very much for attending web conference despite your busy schedules.

I would like to first of all share with you the schedule for today, it will be conducted in two parts. Now, we will have the earnings presentations until 4:45. After a break then from 5 o'clock, we will have the presentation on the progress of the 2021 mid term management plan. As for materials for the presentation, so please refer to the IR site of Hitachi Limited, as well as the news release site for your reference.

Without further ado, we would like to start the earnings presentation. Let me introduce the speakers to you. Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO of Hitachi limited, Tomomi Kato, General Manager of the Financial Strategy Division, Masao Yoshikawa, the Executive General Manager of the Investor Relations Division.

Now, regarding the outline presentation of the earnings, Mr. Kawamura will be making the presentation, we will be switching over the screen. I beg your indulgence. Mr. Kawamura, please.

Yoshihiko Kawamura

This is Yoshihiko Kawamura, I am CFO, thank you very much for participating in this meeting despite your busy schedules. Now COVID-19 is still running rampant, but we have been able to pursue our business. I would like to take this opportunity to thank you for your support.

And now, I would like to talk about the results for 2020 - 2020 as well as the outlook for fiscal 2021. Please refer to page three. These are the key messages for fiscal year 2020. About this time, last year, we were bracing ourselves for COVID-19 becoming serious. So, therefore, we have to increase cash flow.

But in terms of foreign exchange, as well as a economic cycle, our areas where we have ample experience, so we have knowledge in this area. However, when we are beset with a pandemic and when there is external shock in the economy, the outlook is becoming uncertain. Therefore, we wanted to secure liquidity and operating cash flow therefore, became an important focus for us.

During the year in that regard, cash flow has been emphasized in our business management over the year. Please refer to number one, record-high will be mentioned several times and the number one and number two. For number one, we have achieved record-high net income. On a consolidated basis numbers will be presented later.

Furthermore, in terms of cash flow margin from operating activities, we have achieved a 9.1%, which is also record-high. Against the difficult business environment, out of our sectors we have that event IT segment continuing to drive our business. IT segment achieved record-high profits, it was JPY 269 billion and the ratio was also the highest ever, as you can see here.

Now in terms of number three, at 13.2%. In terms of number three, the portfolio is making improvements with Hitachi ABB Power Grids, have seen is what we're referring to. And Mobility Segment, elevate - contributed very significantly in the segment. The Honda three companies have been included in Hitachi.

Major projects are proceeding well for the Hitachi ABB Power Grids. The carbon neutral and future business is making headway. We are receiving increasing number of orders for Q4 $2.3 billion intake was achieved. Order backlog was approximately $10 billion.

Furthermore, in terms of Railway Systems business, the Washington Metro Area Transit Authority business was one. And to the tune of JPY 239.8 billion is the contract that we have been able to achieve. In terms of the Building Systems elevators was very strong, especially in China making significant contributions.

Now before we have been rearranging the business portfolio in Hitachi Chemical as well as the diagnostic imaging-related business were divested. And for fiscal year 2021, we are poised to divest Hitachi Metals and Hitachi ABB Power Grid will be included and Hitachi Astemo has been established. And we are expecting the GlobalLogic acquisition which will be completed in fiscal year 2021. Therefore, we have transformed our business portfolio significantly. The fifth point is cost structure reform. I realized cost reduction of over JPY 120 billion in fiscal year 2020.

Now, let me refer to the numbers, page four. This is the result for fiscal year 2020, as well as the focus for 2021. Please look at the left hand side, the light gray, the revenues. In dark gray is adjusted operating income and years fiscal 2019, 2020 and 2021.

From fiscal year 2019 to fiscal 2020, we have seen a reduction in revenues, as well as a profit both revenues and adjusted operating income from fiscal ‘20 to ‘21, we have increased revenues, as well as operating income. Now, please refer to the graph showing the adjusted operating income ratio, we went from 7.5% down to 5.7% and 7.8% was reached. So, we will have a V-shaped recovery making 2022 [ph] as the bottom.

Please refer to the right hand side, Astemo has being -- become independent from the five sectors for the purpose of disclosure. This is a joint venture with Astemo. So it is easy to understand rather than including in different sectors and with five sectors in Astemo, you can see that gray is revenues and dark gray is adjusted operating income. From fiscal 2020 to ‘21 V-shaped recovery is expected and going from 6.5% to 8.3% in terms of the adjusted operating income ratio. So the target number is 8.3% for the coming one year, we will be making efforts to achieve this goal.

For fiscal year 2021, our CEO Mr. Higashihara will be talking about the progress made in the mid term management plan. And during this period, we are aiming to achieve 10%. But because of COVID-19, 2021 is expected to be around 8.3% but in the following year, we will once again aim for 10%. So that is how 8.3% should be valuated below showing the net income.

Looking at fiscal year 2020, that is a 50.6 million, which is the highest ever. For next year, we want to outperform this aiming for 550 billion, so this will also be another record-high if realized.

Now please turn to the next page. For the past one year we have been focused on cash flow management. This is had significant impact on our results. Please look at the upper side, we have rigorously implemented cash flow management. And as a result cost structure from reducing working capital and scaling up capital expenditures rigorously and promoting sales and assets were achieved, so that the cash flow can be enhanced.

Please refer to the right hand side, especially the curves shown here. This is - the ratio has gone from 6.4% to 9.1% in terms of cash flow margins, and we are aiming for 7.9% next year. Below is the information regarding the cost structure, so we are making progress in this area as well.

Please refer to the right hand side. In terms of SG&A ratio, you can see a decline, fiscal 2020, well - gross margin has been declining significantly. Hitachi ABB Power Grids shared service exists in Europe and we will try to capitalize on this leverage in the coming several years.

For 2024 - by 2025 JPY 100 billion cost reduction is what we are aiming for. And we will continue to make such efforts going forward.

Please refer to page six. The Lumada is core business Hitachi, as you can see on the left hand side, for fiscal ’19, ‘20 and fiscal 2021, numbers are presented for fiscal 2019. So a little bit above JPY 1 trillion and then JPY 1.1 trillion for fiscal year 2020. And the focus for next year is JPY 1.5 trillion.

The original plan that we have been showing was JPY 1.6 trillion. But up to then, we were behind by JPY 200 billion. But according to the valuation we've made, we believe that 2021 is likely to be as planned.

Specific topics are shown on the right hand side. The first point is the GlobalLogic acquisition of the United States. Obviously, this will have a significant contribution on the Lumado business going forward.

Next is the establishment of the Lumado Innovation Hub Tokyo in on Yaesu exit side of the station, we will have a collaboration hub with our customers and we hope that this will stimulate discussions on how Lumado can be utilized. And Hitachi and Lumada will work together. And Smart Digital substation project there has been one using AI for 1000 stores of WORKMAN Company we have started co-creation for implementation at the customer site.

Level 3 Legend of Honda will have AD engine control unit over the - yeah, updated system has been incorporated. This is autonomous Driving Level 3. As you know, Level 4 is autonomous driving. But Level 5 is complete autonomous driving. But we compared to that Level 3 means that under normal times autonomous driving is enabled, this is how we have been able to achieve.

Specific topics shown on page seven transform the business portfolio for further growth. They will - is what we are being implemented for ‘21. We are planning to sell Hitachi Metals, proceeds are expected to be around JPY 114 billion.

Now, the environmental value isn't constant - in addition to economic value and we are making the results in this area as well. In terms of environmental value, Hitachi ABB Power Grids has been awarded additional order of Dogger Bank HVDC.

Direct current [ph] system has been one additional business. We have also delivered energy storage solution for the Singapore virtual power plant. These are all environmentally friendly projects. And JPY 240 billion contract has been won in terms of Washington Metropolitan Area Transit Authority business.

For social value in healthcare business, as mentioned here, started collaboration within SOPHiA GENETICS. This is in the area of precision medicine or [indiscernible] personalized medicine.

Now with Axcelead, we will be pursuing the biopharmaceutical business, there's been progress made here. For Social Innovation Business, established principles guiding the ethical use of AI. And the track record has been achieved so far.

So I have talked about the overall font. From now on I would like to give you the detailed results of fiscal 2020. Please refer to page nine. There are two graphs shown here.

Left hand side is the fourth quarter fiscal year 2020 results comparing with the previous year. Right hand side is the fiscal year 2020 for the full year basis. And this is also comparing against the previous year.

So, information provided here for the fourth quarter for Hitachi Chemical divestiture has been made. So, there has been impact of a decrease of revenues, as well as earnings. But similar as well is Power Grid is making contribution as well for fiscal 2019. On a quarter-to-quarter basis, we have seen an increase in revenues. And there is however, a decrease in earnings.

For fiscal year 2020 as mentioned, Power Grid, Hitachi Astemo has been integrated to having an impact of positive revenues as Hitachi Chemicals has been divested. So they will have a negative impact on operating income. And in terms of 7.5% to 5.7% is the ratio decline. However, we are poised to make a V-shaped recovery in 2021.

Please refer to the right hand side, the highlight with the numbers presented here. First of all, in terms of overseas revenues, detailed information will be provided later, it is accounting for now 52% at JPY 4.5 trillion. That's the amount of the overseas business.

The Lumada businesses is JPY 1.1 1 trillion and EBIT is JPY 850.2 billion, on a year-on-year basis increase of JPY 666.6 billion. Net income attributable to Hitachi is record high. EBITDA, this is the largest portion of the cash flow at JPY 1.343 trillion. Now, we have been tracking this from 2008. This is the highest ever for what we have tried. Cash flows from operating activities is JPY 793.1 billion, ROIC is 6.4%. For 2021 we are poised to recover to 8% percent level year end dividend. This will be decided at the AGM going forward. But we are expecting to have a dividend of JPY 55 per share. So that is increase of JPY 5 on a year-on-year basis compared to the interim last year.

Please refer to page 10. This is the result of the five sectors and listed subsidiaries. Five sectors and listed subsidiaries construction machinery, as well as metals are shown here. And basically, we have the indication of the revenues and others.

Please look at the revenues for five sectors JPY 7.15 trillion of listed subsidiaries, a JPY 1.5 trillion, total is JPY 8.729.1 trillion. On a year on year basis 113% for the five sectors, but unfortunately for listed subsidiaries it was at 64% impacted by COVID-19, as well as a unfavorable market.

Adjusted operating income is shown below, on year-on-year basis for five sectors as well as listed subsidiaries. So we have been negatively impacted. And the adjusted operating income ratio is shown here 6.5% for the five sectors and 1.7% for the listed subsidiaries, total is 5.7%. EBIT or net income rather, 519.1 billion and for listed subsidiaries minus 17.5 billion, total was JPY 501.6 million.

That's the number for net income, please refer to page 11. This page is about revenue and adjusted operating income. On the far left, the number for FY ’19, on the far right FY ’20, and here we'll see what's in between.

And in terms of revenues, revenue in FY 2019 was JPY 8, 767 billion. As you look toward the right, JPY 600 billions because of divestiture of Hitachi Chemical, and Hitachi ABB Power Grids JPY 722 billion and with consolidation of Honda’s Astemo JPY 191 billion and then there's foreign exchange adjustment and others making a FY ‘20 number 8,729 trillion, which is a decline. Adjusted operating income the same process, JPY 661 is a number for FY ’19, JPY 495 billion for FY ’20, decline in operating income.

Please take a look at the next page. Net income attributable to Hitachi stockholders, you read the graph in the same manner from left to right. And adjusted operating income, on the far left net income, on the far right, and you will see what's in between. There's reorganization of profit, Hitachi Chemical, and Diagnostic Imaging business, which was divested and railway business, Agility in the U.K. The shares thereof were also sourced a total of JPY 452 billion and because of a special severance pay, and so forth as part of structural reform expenses, JPY 128 billion, and then others JPY 31 billion. EBIT JPY 850 billion. To its right, tax expenses. Hitachi Chemicals taxes weigh heavy, JPY 325 billion, and the net income on the far right stands at JPY 501 billion.

Please take a look at page 13. Part of the balance sheet and cash flow is described. Top right, there's balance sheet, please take a look at the gray shaded part, as of March 31 2021, assets in total are now up JPY 11,852 trillion and change from last fiscal year on the far right JPY 1,922 trillion, that's because of acquisition of ABB Power Grid.

And typically take a look at interest bearing debt in the middle, as of end of 2021 JPY 2.4 trillion roughly. And on the right hand side, you can see that there's an increase by JPY 900 billion, so interest bearing debt has increased, that's a big factor.

And the very bottom there is debt equity ratio, FY ‘19 it was 0.35 times but because of the borrowings it has increased to 0.54. When it's good, our D/E ratio has been 0.2 or so, so 0.54 is very high debt equity ratio for us. But with operating cash flow, we would like to bring it down to below 0.5, further down to 0.4, 0.3 in a year's time or so.

And cash flow is stated at the bottom. Free cash flow as of FY ‘20 was JPY 334 billion. Core free cash flow JPY 419 billion. You can see the year-on-year number on the far right. We're going to - we're focusing on cash flow and the result is shown here. So that was up to FY ‘20.

Let me give you a forecast for FY ‘21. Please go to page 15. Here's the highlight in terms of the forecast. Revenue adjusted operating income are given, Y-o-Y numbers show that we're going to increase revenue up 9% and adjusted operating income, plus JPY 244.8 billion is planned.

Take a look at the graph. Revenue planned is JPY 9.5 trillion and on the right, adjusted operating income targeted is JPY 740 billion. This is the officially announced number. And the operating margin will be up from 5.7% to 7.8%. It's different from the five sectors 8.3%, but overall with 7.8%.

And on the far right, as I said Lumada is on plan. Revenue is expected to be JPY 1.5 trillion. EBIT JPY 820 billion, we're going to have another record high next year and EBIT JPY 1.37 or rather JPY 1,370 trillion, that's a record high as well. ROIC will come back to 8.3% and ForEx JPY 105 to the dollar.

Please take a look at page 16. This separates five sectors versus listed subsidiaries. From this year Astemo is separated from five sectors and then there are listed subsidiaries. Both the five sectors, plus Astemo, as well as listed subsidiaries will see increase in both revenue, as well as a profit.

Five sectors, plus Astemo is going to enjoy a market recovery acquisition of Power Grid, as well as Astemo’s increase in both revenue and profit, listed subsidiaries well also due to market recovery see increase in revenue and profit.

And please take a look at the graph. For five sectors JPY 7.77 trillion, listed subsidiaries JPY 1.73 trillion, total 9.5 trillion, and the percentages as well in total 109%. And you can see the Y-o-Y numbers to see that there's going to be an increase in revenue, as well as profit.

Adjusted operating income ratio 8.3% for five sectors, listed subsidiaries 5.5% and 7.8%. And at the very bottom, net income attributable to Hitachi JPY 529 billion, plus JPY 21 billion, coming to a total of JPY 550 billion. Adjusted operating income is going to increase by JPY 740 billion as well.

And moving on to the next page, you can see the evolution of FY ’22, FY ‘21. It's the same for revenue, as well as adjusted operating income. There's a lifting from Power Grid, as well as lifting effect from Astemo and GlobalLogic is acquired, it will start to kick in from July. And there's ForEx impact. And so revenue will be JPY 9.5 trillion, the same with adjusted operating income.

Please take a look at page 18. Here net income attributable to our Hitachi stockholders is given, on the far right JPY 740 billion. This is net income attributable to the parent. And it will come down to net income on the far right, there is proceeds from the sale of Hitachi Metal, which will be incorporated and there will be expenses from structural reform and other adjustments.

So EBIT will be JPY 820 billion, interest will worsen by JPH 20 billion and tax expenses will also weigh in, and net income will be JPY 550 billion. So these are the main numbers.

In terms of the forecast for FY ’21, starting from page 20. Sector wise numbers are given. Just to give you the highlight, page 20, the IT sector, in the middle adjusted operating income, there are three bars on the left is for FY ‘19, in the middle FY ’20 on the far right, FY ‘21.

Light gray caution as a bar is service platform. GlobalLogic is part of this. And the darker part of the bar is the front line business, front business. Adjusted operating income ratio will be down from 13.2% to 12.5%. And please take a look at the tax. That's because of disposal of intangibles from GlobalLogic.

And page 21, Energy sector, please take a look at the middle bars, adjusted operating income, FY ’19, ‘20 and ’21, FY ‘20 and ’21, you can see that light gray portion is underneath a zero. That's because of acquisition of ABB PG. Structural reform expenses had to be paid and PPA amortization and these accounted as negative numbers.

Moving on to the next page, Industry. FY ‘21 not just the manufacturing sector in Japan, but manufacturing sectors around the world are going to recover. So, profit is expected to rise. Please take a look at the middle set of bar, adjusted operating income will rise from 5.5% in FY ‘20 to 8.1% in FY ’21.

Page 21 Mobility, again in the middle on adjusted operating income, profit margin will rise quite substantially to JPY 102 billion in FY ’21. This is greatly contributed to by the elevator business.

Page 24 Smart Life sector, again, adjusted operating income, you can see light gray portion at the bar which is Astemo. As I said, FY ‘21 will be separated from the five sectors, so on the right hand side of the bar, so you will no longer see that part. And what will happen to Astemo automotive business.

On the next page adjusted operating income in FY ’20, there was a problem with the supply of semiconductors. So it was down, but in FY ‘21 it is expected to recover.

Page 21. Listed Subsidiary, Hitachi construction machinery, again, take a look at the middle part of the page, you will see the margin in the circle in FY ‘20 the situation was very severe, margin was 3.9%. But in FY ‘21, it is to rise and recovered to 6.9%.

Page 27, Hitachi Metals, FY ‘20 was unfortunate. There was a lot of depreciation and amortization. So a negative 0.7% margin, but in FY ‘21 profit margin is to recover to 4% in positive territory.

Page 28 and onward, this is by segment, FY ’19, ‘20 and ‘21 you will see the comparison and what I would like you to focus on is the IT sector, third line is adjusted operating income ratio Y-o-Y the far right with PPA amortization 0.7 points are down year-on-year, but Energy's is adjusted operating income ratio 2.7% in FY ‘21, which is year-on-year 7% of Industry, 8.1% Mobility, 8.2% Smart Life, 9.7% Automotive, 6.1% Construction Machinery, 6.9% Hitachi Metal, 4%. So other than IT, all the other sectors are expected to recover, IT alone because of PPA amortization the number is going to go down slightly.

Take a look at page 30. This is revenue by region or market. Clockwise, top left starting from North America, Europe, China going down Japan to its left ASEAN, India other areas and other areas. This shows the growth rate year-on-year. North America more or less flat, Europe is recovering by 10%. China is up by 20% and Japan is very tough down 8%, ASEAN, India as well down by 5% and other areas up 24%. Well, they're not shown here, North America, Europe and including other areas, because we are incorporating ABB PG, the contribution is quite substantial. Overseas revenue is JPY 4.574 trillion, it's 52% and this will further rise. But now the ratio is 52%.

Lastly about our disclosure on page 31. We have been working hard to improve our disclosure and we're going to take a step forward. ROIC is going to be a disclosed by a sector as you can see and as is described here, EBITDA will also be disclosed sector wise.

On the far left, IT JPY 378 billion, EBITDA, this is the largest chunk of the cash flow starting from that energy, power grids and conventional energy is separated out. Industry, industry and industrial products are separated, mobility, building systems versus railway systems, Smart Life is divided into two Smart Life versus some measurement and analytics. And then Astemo, Hitachi Construction and other listed subsidiaries and the total comes to JPY 1,370 trillion. And I hope this will provide a reference for the analysts and others.

That concludes my presentation. Thank you very much for your attention. I will be happy to answer your questions. Thank you.

Unidentified Company Representative

Thank you, Kawamura.

Question-and-Answer Session

Operator

Now we’d like to proceed to the Q&A. Those of you with questions please utilize the question function on the zoom screen and indicate by the raise hand button. So, after raising your hand and being delegated, please state your name and we will refer to the name on the system. And when your question is no longer necessary, please lower your hand in the raise hand function. Now video will not be presented today. We will take questions from the Japanese channel, the media first and then the institutional investors, analysts and then go to the English Channel. Now, at the same time, we will open the floor for the media on the Japanese channel. Please indicate by the raise hand button, if you wish to ask a question. Please unmute and ask your question.

Unidentified Analyst

Question. Hope you can hear me? So I have three questions. The first question is regarding the presentation that you presented, the Hitachi Metals is expected to be divested, what is going to happen to Hitachi Construction Machinery, 6.9% recovery has been made in terms of operating profit margin. But in the -- from the past there are challenges for them to become globally competitive. So what is your take on that?

Second is a more detailed question for ABB shared service, you are going to be consolidating functions there, JPY 100 billion cost reduction is expected. What functions are going to become common in what areas? Please elaborate further.

Third question is regarding Lumada revenues, 42% for this year, that is a sudden growth that is expected. GlobalLogic contribution is likely as well, what is the contribution to be made by them? And as a result, what is going to change in terms of the overseas ratio for Lumada sales? So that's all, in terms of my three questions.

Unidentified Company Representative

Thank you for your questions. For one and two, I’d like to respond and for the Lumada question, I would like to ask Mr Kato to respond. First of all regarding Hitachi Metals, it has been decided what is going to happen to Construction Machinery. For ‘21 mid term management plan, we want to identify the direction going forward.

This is unwavering. Nothing has been decided yet, but the best capital structure will be identified and we are now investigating all the possibilities and there is no change. In terms of our direction for in Construction Machinery, the optimization of business fulfilling [ph] remains unwavering. And in the last year of the mid term management time period, we should be able to identify the direction for this entity.

For the shared service for ABB, we are thinking about three areas. First of all in terms of procurement, purchasing, ESC purchasing will become increasingly important going forward. Therefore, we believe that it is necessary to integrate because they have knowledge on the part of ABB.

And in terms of human resources, as well as corporate affairs, and this is also an area we can integrate. And finance function can also be integrated as well. In Tokyo, there are regulatory reporting. So not everything can be integrated, but we hope that we can maximize this possibility as well.

So for the Lumada, Kato, please take this one, regarding Lumada, as Kawamura san has mentioned, within the IT sector, the GlobalLogic impact will be a JPY 90 billion in terms of revenues for nine months, that is assumed. For Lumada, basically we believe this is going to be a Lumada core business. Therefore, as shown on page six, in terms of the core biz, it's going to increase by JPY 200 billion, and about half of that is going to be accounted for by GlobalLogic according to our assumptions.

Now, what about the overseas ratio? Yes, for fiscal year 2020, we mentioned its around 40%, core [ph] 30% and related [ph] is 50%, for ’21 on the other hand, for GlobalLogic’s will now be incorporated and therefore for overall 50% will be our target, that all.

Unidentified Analyst

Regarding good question, ABB, all right, I have additional question for shared service. That means that Tokyo's general affairs as well as finance and corporate, it seems that the headcount will decline, is that the case?

Unidentified Company Representative

Answer? Yes, that is the likelihood. But we have not yet identified the numbers, but when the work transfers, there should be a reduction in headcount. Thank you.

[Foreign Language] Next Hirako San [ph] Please unmute and surge [ph] your questions.

Unidentified Analyst

Thank you. Question. The question that I have is when you acquired GlobalLogic, going forward the balance sheet will increase by JPY 1 trillion because of the acquisition. But in total, there's going to be a reduction of JPY 2 trillion according to the CFO, Kawamura san.

With Hitachi Metals divestiture, I believe the balance sheet will shrink? And moving forward, well, I'm not sure if it's going to happen in one year's time or two years time. But how will you manage your balance sheet? What will the balance sheet look like? What's going to be your expectation or forecast?

Unidentified Company Representative

Well, thank you for the question. Answer. At the end of March, I made a statement and that remains the same. This is part of our efforts to replace assets. At the end of FY ’20 the balance sheet as was discussed earlier, in terms of total assets, was JPY 11.8 trillion and we're going to replace assets, inclusive of Hitachi Metal, which is divested - JPY 2 trillion of assets are divested, and GlobalLogic is JPY 1 trillion, which will come in, so on a net basis - on a net basis, reduction by JPY 1 trillion.

So total assets on the balance sheet will go down from JPY 11 trillion to JPY 10 trillion. It's the same as what I said at the end of March and how will it be managed going forward? As of today, as far as large acquisitions are concerned, we don't have no further plans, so for that, so the balance sheet will look like this for the next few years.

But then of course, operating cash flow will go up and that will be re-paid. So the balance sheet will turn more solid. But this is how it looks. And well the balance sheet does swell in a major way? No, we're not expecting that to happen in the next few years. Well, thank you for the answer.

Unidentified Analyst

There's another question. I would like to ask about the acquisition of GlobalLogic. I believe this is a trend in the last few years. And this is relevant to other acquisitions. It seems that in an acquisition, goodwill tends to be very large. GlobalLogic has repeat customers, 90% or over f their business is from repeat customers. It runs a very stable business, but because of that acquisition price, so it's going to be large. And that in itself could be a risk. So with increased goodwill, how do you see the risk? And how are you going to hedge the risk? If you have any views you can share with us, please.

Unidentified Company Representative

And so well, as you rightly pointed out with our large acquisitions, including ABB PG and GlobalLogic this time, it's true that goodwill is increased with PPA, we do automatically amortize goodwill, as well as another part that is dealt with through the generation is cash flow.

Goodwill that has the potential of impairment, we take a very close look at it. We conduct impairment tests every year, take a closer look to see if there are any uncertain factors included in goodwill, we are doing everything we can. And we manage balance sheet from a macro view.

And how much of impairment if it happens is going to be absorbed by our balance sheet or cash. We're looking at it from that perspective. So, what would be the maximum of absorption that we can make in terms of impairment and also taking a macro view, so from a both macro and micro view, we are dealing with this. Thank you.

Next, we'll take questions from the institutional investors, as well as analysts on the Japanese channel. Please raise your hand if you have any questions. Yes, the sound please. Please unmute and ask your question.

Unidentified Analyst

Question. Thank you, I have three questions. First question is regarding IT service. For fiscal 2021 the revenues in plan for profit is what I’d like to ask about, the reason GlobalLogic inclusive thereof, it seems that revenue are not going up significantly according to the numbers you presented.

Recently, IT service investment is expected to increase and looking at other companies, so it seems that the other company is assuming growth there in IT. So, in terms of the revenues for IT, it seems that you have a conservative forecast, why are you taking a conservative approach?

Second question, regarding ABB power grid fourth quarter, according – it seems that the revenue had an upside. But it seems that the profit - operating profit had been subject to down side, it has declined. Why was there upside in revenues, but the downside in the profit with the climate change with increasingly important power grid as an area that there is room for growth. You have talked about the orders received, but what is the current market environment in this area.

Third question, regarding Astemo fourth quarter was very strong in terms of performance. According to the numbers I have in terms of revenues, quarterly, is around JPY 420 billion and operating profit is JPY 35 billion. So this -- as your multiply this by four times and so JPY 1.6 trillion and JPY 140 billion, respectively, that is the expectation from the outside.

In terms of the internal plan, are 1you're saying that it is JPY 97 billion because of the conservative approach. Please elaborate further on these numbers.

Unidentified Company Representative

Answer, regarding GlobalLogic, as well as IT revenues will be responded to by Kato san. And the regarding ABB and Astemo will be responded to by [indiscernible] Now regarding IT for ‘21. More than half are generated in the domestic market. The outlook for the domestic market is such that we are seeing signs of recovery from fiscal 2020 but this is still gradual recovery. And fiscal 2021, in terms of IT market we believe it is going to be negative growth. It is likely to fully recover into the positive from fiscal ’22 onwards. The x orders are increasing in terms of revenues. However, for the overall, we believe that the numbers we presented are more likely.

Regarding ABB, as you have rightly pointed out in terms of fiscal 2021, it does become - was very strong. Fiscal year 2020 was only not for the full year. But for fiscal 2021 in terms of revenues, one, a little bit below JPY 1 trillion. And that is the outlook, currently, and it's not the full year, it's only partial, but that about JPY 300 billion revenues increase. So, therefore, growth is very strong.

On the other hand, as I have already mentioned today, there are structural reform cost that is increasing to the tune of JPY 10 billion. PPA will decrease going forward. However the expenses will reach a certain level by adding, but with increased revenues profit margin should recover.

For Astemo, you asked whether this is a conservative outlook. Actually, I'm Chairman of this company and recently we had a board meeting where we had discussions, that is one factor. But in terms of semiconductor there is a disruption that is in place. In the first half there was a shortage in supply that was incorporated into the numbers for the first half. Therefore, the outlook is very conservative.

But the semiconductor if it recovers faster than expected, we could have an upside, that is our take, but currently we are assuming that there will be a disruption in terms of the semiconductor supply. Kato san, please?

Regarding power grid, for 2020 in the fourth quarter, I think that's the question raised, as you rightly mentioned, it looks like a lower profit for this area. This is the impact of foreign exchange rather than the main business. In foreign exchange, we typically hedge and so hedge accounting we’ll make sure that it does not - its not persist in the P&L. But there are many projects in this business. Therefore, it's not been persistent, right. Foreign exchange impact is therefore reflected here. So it looks worse because of the foreign exchange impact.

Regarding Astemo there is additional comment by Yoshihara san. Now for this years. Outlook [ph] let me weigh in. And in terms of market data, there is likely to be a semiconductor impact, but compared to peers there is no [indiscernible] and the link. The operating profit the Street forecast is not to achieve 10%. So 8% or below 8% is the prevailing view. And that is the reason why Astemo we have a similar outlook.

In terms of revenues on the other hand, in terms of volumes, 10 to 13% recovery is expected, in terms of profit, according to the street forecast 9% to 10%, in terms of volumes, revenues seem weak. For Astemo last year number is only pro forma, but its around to JPY 1.4 trillion to JPY 1.5 trillion. That's a pro forma assumption to be made. And based on that revenue increased by 10% is not aggressive. It is in line with the overall market. So that's what I wanted to add.

Unidentified Analyst

Question, I have additional two questions regarding IT service, domestic is likely to be a negative market, according to your explanation. Specifically, do you have numbers to verify this? According to my take is that customer performance is likely to recover, so I think investment is likely to increase, but you have a negative outlook on this. So I'm thinking that there must be a rationale why you have this outlook. So please elaborate further.

Second, regarding Astemo assumptions, in terms of expenses in fourth quarter, profit capacity utilization was up [ph] and it seems that fourth quarter was very strong. I want to know whether this is sustainable or not. Please elaborate.

Unidentified Company Representative

Regarding IT Kato san will respond. Now regarding IT, as you see in numbers is what we're referring to, I don't if the numbers with me. So, let me get back to you on that. Regarding Astemo, as you have rightly mentioned, the fourth quarter the numbers were subject to significant upside. When we made the analysis of these upside, there are orders from the automobile manufacturers that we are seeing increasing orders, this is because in the first half of this year, the orders are being extradited, front-loaded and that is having an impact as well.

Therefore, going back to what I was referring to earlier for the first half, we have conservative outlook. So we had a significant increase in the fourth quarter. Taking that into consideration, we have taken a conservative outlook for the first quarter and second quarter fiscal year 2021, what is likely to be occur in Q1 and Q2 had been front-loaded into Q4 of last year. Thank you.

[Foreign Language]

Operator

Thank you. Please continue, Yoshizumi san. Kazutaka Yoshizumi [ph] SMBC

Unidentified Analyst

I have three questions. This is a follow up to an earlier question, IT, fourth quarter order impacts increase, as well as increase in order backlog. If you can elaborate on that, OP margin of 15% is quite high compared to the growth and revenue, growth in operating profit is higher and why such high profitability, if you could please explain?

Unidentified Company Representative

Well, Kato will talk about IT. Yes, fourth quarter for the IT sector. Order intake is affected by ForEx and so forth, after adjustment in the fourth quarter 96% of last year for the full year and 95%. So order intake is robust, but only slightly and order balance for IT is up to JPY 1.1 trillion. This is affected by COVID-19. But this is about the same as a year before. Thank you.

Unidentified Analyst

So if you could provide the background to OP margin improvement in the fourth quarter as well?

Unidentified Company Representative

Answer. With respect to the OP margin, the same with IT and others, the fourth quarter number in IT in terms of revenue was very large. And I think the same trend applies here. And we conduct ESI business in domestic margin and projects as well. And the risks accepted did not manifest. In overseas last year, we performed structural reform, reducing fixed costs that started a year before and that impact was borne out. And that's why profitability came high.

Well, question. So in the fourth quarter order down 4%, for the full year minus 5%. So you're correct.

Unidentified Analyst

My second point has to do with cost or expenses. So corporate elimination, there was an upside of a JPY 47 billion for the plan in FY ‘20. So you have not spent all the expenses, so JPY 47 billion is a quite large number. So why did this happen? And growth investment of JPY 26 million what was the actual and in the new fiscal year how much of that is going to be spent?

Unidentified Company Representative

Answer. You're talking about the IT sector all along. I would like to turn to Kato san. Question I was asking about corporate overall. Kato will answer. So corporate elimination for FY ’20, there was an upside from what was announced in February. That was what the question was about.

It's not that there was one single large factor, there were multiple factors that came into play to contribute to the upside. And this is what I said to Hitachi consolidated numbers. And there's brand revenue, because of increased revenue, it went up. And in the corporate sectors expense reduction in travels, travel expenses went down more so than expected. And in the fourth quarter investment projects were more rigorous, roughly selected more so than the plan. And because of these factors, the number went up. And for growth investment in FY ’20 increased by JPY 11 billion.

So compared to the last announcement, it's down by JPY 15 billion. I said that we're being more selective in investment projects, and that is why FY ‘21 we're not disclosing the number for this, but investments related to Lumada are to be increased, according to our plan.

Unidentified Analyst

Thank you. My last question, question number three. Earlier with respect to power grid Q4 impact in ForEx. And for the fourth quarter, I think, in terms of profit and loss, it went down is that because of differences in ForEx, and in the new fiscal year, you're going to have structural reform PPA JPY 80 billion, and for the new year, down by JPY 30 billion. Is that going to be the case? If you could please explain?

Unidentified Company Representative

Q4, for power grid, why did it go down? Impact from ForEx accounts for 50% of the change, I think it accounts for 60% to 70% of a total difference and that's the extent of the impact from the fluctuation of the ForEx rate. FY 20 versus FY ’21, if you could please look at page 21 in the slide deck, power grid, power grid it was part of ABB, there was no consolidation systems development, PMI, PPA, monetization. These are referred to as related expenses as described on page 21.

As yes, FY ’20, FY ‘21 related expenses have not changed, PPA amortization in FY ‘21 [ph] JPY 52 billion, in FY ‘21 its JPY 41 billion. So down by a JPY 10 billion and is related cost, systems development cost is part of that. So systems development cost is going to increase. So starting from FY ’21 and that's not much changed from FY ‘20 to FY ‘21. Thank you.

[Foreign Language]

Next, we're going to take questions from the English Channel. Those of you have questions, please use the Return button. Any questions on the English Channel? There is not. So we will go back to the Japanese channel once again, because we have some time. So anyone can ask questions on the Japanese channel. Any questions?

Unidentified Company Representative

There seem to be no further questions. So with this, I would like to bring the earnings presentation for fiscal year 2020 to close and we'll take a break now and start the presentation on the premise of 2021 mid term management plan from 5 o'clock. Thank you.