The time has come to start Hitachi, Ltd. web conference on the fiscal year 2020 Q2 earnings briefing for the media. Thank you very much for attending despite your busy schedules. I would like to, first of all, give you information about the materials. IR site and news release site will have the relevant materials available for you. Let me now introduce the speakers for today. Yoshihiko Kawamura, Senior Vice President and Executive Officer, and CFO of Hitachi, Ltd. Tomomi Kato, General Manager of the Financial Strategy Division, Hitachi, Ltd. Yasuo Hirano, Executive General Manager of the Corporate Brand and Communications Division, Hitachi, Ltd. Regarding the outline of the results, we would like to have Mr. Kawamura explain. We will be switching over the screen shortly. Mr. Kawamura, please start.
Thank you very much for the introduction. My name is Kawamura.
Today, thank you very much for attending this media briefing despite your very busy schedules. Hitachi, Ltd. second quarter FY 2020 results will be explained. Please refer to page three of the material. These are the key messages. There are three major points to refer to. The numbers will be presented later. I'd like to say that IT segment is leading Hitachi's performance overall. This trend is continuing from the first quarter. The five sectors for Hitachi, Ltd., major improvement has been made, 105% achieved for five sectors. The number was JPY 136.7 billion improvement was made. As mentioned here, in particular, IT segment and Mobility segment was strong. In the Smart Life segment, the measurement and analysis system business maintained very high profitabilities. Second point is regarding the Hitachi ABB Power Grids. We have been able to internalize this.
We have been able to execute from July. It has been proceeding very successfully in the second quarter. $2.2 billion of orders were recorded. The plan is JPY 1 trillion for the year. $2.2 billion is around JPY 230 billion. We are proceeding according to plan. One quarter has been registered for Q2 . For the substance, there is a very strong trend. Digital and environmental orders have been received. Further detailed explanation will be made later. Software and smart grid, e-mobility are very strong. We are making a major shift toward environmental related business. The third area is Lumada Solutions. This is on a continuous trend. It is our core strategic business that we are allocating significant resources to drive growth in Lumada Solutions. Our core business is centering on IT business, and revenues have increased 9% year-on-year.
For the related business, we are continuing to make investment to expand the business, and we will continue to make significant efforts in terms of investment in this area. That is all in terms of the key messages. Please refer now to page four. These are numbers that I'd like to report to you. Left-hand bar graph should be referred to. The dark gray is the revenues, and light gray is the adjusted operating income. As you can see on the left-hand side, this is for the first half. The dark gray is JPY 3,760 billion. The adjusted operating income is JPY 180.7 billion. The breakdown is shown on the right-hand side. The stronger performance was by IT, JPY 108 billion. Together with Mobility, it accounted for about 60%. There is JPY -1.9 billion for business securities and JPY -7 billion for energies after ABB is included.
The light is shown on the right-hand side highlighting IT segment and Building Systems business. The other graph should be referred to. Left-hand side is the second quarter numbers. To the right are the first half comparison is made to the last year. If you compare FY 2019 and FY 2020, the curve is showing the margin, and it has now improved to 13.5% in terms of adjusted operating income ratio. This is the highest ever compared to our competition dedicated to IT. This ratio is now double that of peers. The operating income ratio is becoming very strong. Looking at the H1 , if you look at the operating income ratio, it is 11.4%. You can see that the double digit has been maintained in a steadfast manner. Below is for the Building Systems business. In China, business is having strong recovery, having a significant impact.
On the left-hand side, we are comparing Q2 against a few years here. If you look at the H1 in fiscal year 2020, we have reached the level of 11.7%. Once again, we are showing strong profitability in this area. Please now refer to page five. This is what I was referring to earlier in terms of the ABB Power Grids. The activities are highlighted in this business on this page. We have "sharpening our winning portfolio" in the middle, and the left-hand side is the incoming growth engine. The right-hand side is driving world-class execution. They are all connected in this business. Looking at the power grid growth business, the second should be highlighted, which is the eco-efficient digital solution. We have received this order in Norway for eco-efficient substation.
In the middle, driving e-mobility should be highlighted on the right-hand side, the very bottom. Synergies with Hitachi, Ltd. has been brought to bear in terms of the environmental areas in various levels. Synergy meetings have been conducted with ABB, and we believe that new synergies can be brought to bear. Please look at the caption at the bottom. We are aiming to enhancing environmental value and contributing to a low carbon society by powering sustainable energy future. With the ABB Power Grids, together, we can enhance environmental value in a strategic manner. Page six. This is a explanation regarding the Lumada Solutions. The two bar graphs should be referred to. Left-hand side is the first half, so comparing this year and last year. The red is the core business, the so-called IT peripheral business are included here.
Gray are the related businesses, utilizing IT, railway systems, as well as industry. Lumada has applications. Right-hand side is showing the comparison of the first half. Or rather, the right-hand side is for the full year. On the right-hand side, total was JPY 1,037 billion, and now we are aiming for JPY 1.1 trillion for FY 2020 in our forecast. The right red area is JPY 66 billion and JPY 44 billion for the core business and related business, respectively. The second quarter Lumada topics are outlined on this page as well. Please refer to the right-hand side. In the IT segment, we are very happy to report that we have been named the leader in 2020 for the Gartner Magic Quadrant for Industrial IoT Platforms.
As you can see here, on the right-hand top quadrant is the highest evaluation, and we have been chosen as a leader of the industry. There are also other companies, but with these two companies, we have received a globally high evaluation because of the number of use cases, as well as the flexibility in applications on the part of users have been evaluated very highly. Below, please refer to the IT segment. We are now collaborating in the area of 5G. In the middle, this is the Mobility segment. Against the backdrop of COVID-19, touchless solutions are becoming very important. Lumada is playing a very important role in this area. In the industry area, we have co-creation with Alfresa. This is a wholesale medical as well as a device. It does revenues around JPY 2 trillion.
Japan's first platform value chain has been established utilizing Lumada. Very specific deployments have been made. Please refer to page seven. Major topics will now be reported. There are three into report. The first one is regarding railways. In San Francisco Bay Area, the Rapid Transit District is to upgrade its train control system in the U.S., going to Oakland. The signal control system, JPY 85 billion has been awarded. That's a major contract that has been awarded to us. In Europe, business is difficult because of COVID-19. We are going to be increasingly focused on North America, and this is the first success that we have achieved. Second area is regarding the power grid. It's about JPY 1 trillion in terms of acquisition fund that has been subject to consolidation. Of that, JPY 430 billion will be refinancing because of the very high evaluation of the environmental aspects.
Therefore, we have been able to receive refinancing by Growth Investment Facility of JBIC to this amount. This is going to continue to be very strong in environmental business. The third area is the Hitachi Automotive Systems and Honda Motor Co., Ltd., two EV companies integration. The name of the company has been decided. It's Hitachi Astemo, Ltd. ASTEMO stands for Advanced Sustainable Technologies for Mobility. The schedule for integration is January to February of next year. We believe the schedule is achievable. Please now refer to page nine. This is the highlight of the results for the second quarter and the first half. Left-hand side graph is the comparison of the second quarter year-on-year. In the middle, we have the H1 comparison year-on-year.
Looking at the Q2 on the left, it is very clear to see that it is a reduction in terms of revenues as well as operating income. The lighter gray, operating income, last year was JPY 172.8 billion. It has gone down to JPY 122.4 billion. That means that 70% level is what we have been able to achieve this year. Looking at the middle for the first half, again, looking at the graph, it is very clear to see we had a decline in revenues as well as operating income. Light gray is operating income. The first half last year was JPY 297.2 billion. This year, JPY 180.7 billion. That is around 60% of the previous year.
To give you a verbal explanation, out of this amount for this H1 , JPY 53.8 billion and the JPY 123.4 billion and JPY 58.3 billion. In the second quarter, the profit is increasing twofold.
Now looking at the right-hand side, what I would like to emphasize is that cash items have improved significantly. More specifically, the third from the top is EBIT, JPY 386.2 billion, a year-over-year basis is a plus JPY 95.6 billion. EBITDA below is improvement of JPY 112.7 billion at JPY 624.6 billion. Cash flow from operating activities, JPY 214.4 billion, improvement of JPY 8.8 billion. You can see that the cash basis improvement was very significant. Next, page 10, please. This is the parent results and listed subsidiary, which we have two, so Hitachi Chemical and Hitachi Metals. Five sectors, as you see at the top, is revenue increase. This is an increase, but the income decreased. The listed subsidiaries, both revenue and income decreased. As you see at the bottom of the graph, you can see the revenues year-over-year 103%.
This is where I mentioned revenue increase and adjusted operating income is JPY 182.7 billion minus JPY 47.2 billion. On the right side, you see the listed subsidiaries, 56% year-on-year. For operating income, minus JPY 69.2 billion, so both revenue and operating income declined. The next line, adjusted operating income ratio, the five-sector parent basis, it is 6.0%. Listed subsidiaries was impacted by COVID-19, so it was negative, but the five sectors are relatively strong in generating profit. Next, please. Page 11. This is 2019 first quarter and this year's Q1 comparison, the difference thereof shown in the waterfall chart. The upper half is revenue and lower half adjusted operating income. In revenues, the far left H1 last year was JPY 4,221 billion as a starting point, and divestiture of Hitachi Chemical was negative JPY 316.6 billion.
With the power grid acquisition, that was plus JPY 233.6 billion. Foreign exchange, minus JPY 31 billion. In others, as I will elaborate, the Hitachi Metals and AMS negative, that's negative JPY 347.3 billion. Fiscal year 2020 fiscal H1 is JPY 3,760 billion. Bottom half, you can see the adjusted operating income. Last year, JPY 297.2 billion.
This is in line with the revenue. In others, you see JPY -85.3 billion. Various adjusted items are included here, largest of which is the decline in the business size that was negative and the fixed income depreciation. The biggest was JPY 16.7 billion, which was the downsizing of the business scale, and ended at JPY 180.7 billion. That was the first half. Next, page 13, highlights of the forecast for the full year. The left side is the revenue and right side is adjusted operating income. Revenues is evident here, and adjusted operating income is also a decline. The right side, the numbers that we are announcing this time is JPY 300 billion net income attributable to Hitachi, Ltd. stockholders. JPY 400 billion in adjusted operating income. Those two are the ones that we will be announcing this time. EBIT, this is a cash item.
On a year-over-year basis, this is +JPY 402.3 billion. We have the JPY 300 billion net income, EBITDA will be exceeding JPY 1 trillion, this will be an increase of JPY 433.9 billion. YoY, this cash flow from operating activities will decline by JPY 60.9 billion. Next page 14, please. Forecast by five sectors and listed subsidiaries. Full year has the same trend as the first half. Second from the top, adjusted operating income. Five sectors, JPY 375 billion, listed subsidiaries, JPY 25 billion, both are decline. Adjusted operating income ratio on a full year basis, five sectors, 5.8%, listed subsidiaries, 1.7%, consolidated total is 5%. Next page 15. The waterfall chart, last year's full year figure is on the far left and far right is this year's forecast. In revenues, JPY 8,767 billion.
Hitachi Chemical, Hitachi ABB Power Grids is added, foreign exchange, the chemicals, Construction, Hitachi Metals, Construction Machinery. Forecast is JPY 7 trillion, 940 billion. Adjusted operating income, likewise, starting from JPY 661.8 billion down to JPY 400 billion. Next, page 16, please. This is a chart that we are showing for the first time. The difference between JPY 400 billion and JPY 300 billion are shown here. JPY 400 billion, this is target adjusted operating income, net income will be down to JPY 300 billion, the detail is shown here. First, Hitachi Chemical and diagnostic imaging-related business, that's plus JPY 390 billion. Hitachi Capital in parent loss, negative JPY 30 billion. Hitachi Metals in parent losses, negative JPY 30 billion. Structural reform expenses, JPY 144 billion. EBIT, JPY 586 billion. After that, income taxes is deducted, net income is JPY 300 billion. The remainder are appendix.
I will use this in the Q&A session, but just the highlights. First, page 18, IT. The center is the adjusted operating income. The right bar graph. In the circle, you can see the adjusted operating income ratio, 11%. Energy. Likewise, the adjusted operating income in the center, the right bar graph, minus JPY 76.4 billion. This is because of ABB Power Grids, the structural reform PPA. Industries we skip and to move on to Mobility, page 21. In the center, adjusted operating income. Building System is very strong. The right bar graph, dark gray, this is up to JPY 60 billion. In Life, Smart Life, page 22. In the center, adjusted operating income. Light gray is ASTEMO. It's in a difficult situation, but JPY 22 billion operating income will be secured. Next is Hitachi Construction Machinery, adjusted operating income.
The financial result was announced yesterday, JPY 39 billion, margin 5.1%. Page 24, this is Hitachi Metals. Hitachi Metals is hit hard by the COVID, negative JPY 14 billion operating income. Page 25 is the figures by business segments. At the bottom of 26, you can see the total. Right side, the gray part, shaded part, fiscal year 2020 forecast, revenues JPY 7 trillion 940 billion. Adjusted operating income, JPY 400 billion. Adjusted operating income ratio 5.0%. This is the target that we will operate our business in the second half. Page 27, this is by region. Clockwise: North America, Europe, China, Japan, ASEAN, India, and others. China, the circle, this is the growth from last year to this year in the first quarter, 7% growth. Under COVID, they are pretty much completely recovered. On the other hand, North America, far left, is still struggling, minus 16%, Europe, minus 8%.
Japan, -14%. ASEAN, India is also hit hard, -21%. Overseas revenue is JPY 1,900 billion. Total is JPY 3.8 trillion. The ratio of overseas revenue is 51%. It was 48% or 49% till recently. Now overseas revenues account for more than half. Last page 28, the financial position. Balance sheet is on the upper half. Total assets at the end of last year, JPY 9,900 billion, and this September end is exceeding JPY 10 trillion. This is thanks to ABB. Plus JPY 685.9 billion, majority of which is thanks to the acquisition of ABB. Third, total liabilities is also increasing up to JPY 7 trillion. On the right side, you can see the increase, JPY 1,379 billion. Under that, interest-bearing debt. ABB Power Grids acquisition is using debt. That much higher.
In cash flow, cash flow from operating activities is JPY 214.4 billion. Cash flow from investing activities is negative JPY 703.8 billion. This is negative because of ABB. Free cash flow subtraction negative JPY 489.3 billion. Core free cash flow exceeds JPY 50 billion. That concludes my presentation. Second quarter and the full-year forecast were explained. Thank you very much.
Thank you very much. We would now like to proceed to the Q&A session. Please indicate when you wish to ask a question by raising hand button. We will indicate who can ask the following question. Please unmute and state your name and affiliation before asking your question. Please mute afterward. We will now take questions. Those of you with questions, please indicate using the hand up button. First question, please. First question.
Thank you very much for this opportunity. Can you hear me?
Yes, I can.
Regarding IT and the building was very strong. Please give more details in terms of IT. I believe it generated 11%. What was the highly profitable business within IT? That's my question. Regarding the building systems, I understand that the Chinese market was very strong. Please elaborate further on driving growth in this area. Is it a one-off against COVID-19 or is it likely to continue going forward? Please elaborate.
Thank you for the question. Regarding IT, please refer to page 18. The front office and the service and platform are indicated here. Out of which, in the middle where it says adjusted operating income, if you look at the bar graph, the left-hand side is the first half, 11.4% overall. Out of which, it includes a year-on-year comparison, JPY 1 billion or so reduction decline. In terms of ratio, it has gone up from 11% to 11.4%. This is mainly in the front business, in particular SI domestic business.
Has been impacted by COVID-19 year-on-year basis in terms of revenues. It has declined slightly. Project management was conducted in a steadfast manner and cost reduction efforts are continued. The effect thereof has contributed to this 11.4% profit margin. Furthermore, in terms of the services and platform, revenues have declined. Profit has declined as well, but the structural reform has been implemented, and it has not deteriorated significantly. To your second point, regarding the building business. In Japan, we have been impacted by COVID-19, but the Chinese market has already recovered. Year-on-year basis, volume is increasing. Currently, the business is very strong. For this fiscal year, I believe we can continue on this trend. Question. Regarding IT, does that mean that the structural reform is it one-off or this is continuous? In terms of structural reform, fixed cost has declined.
We believe that this is a sustainable cost reduction.
This is Kawamura speaking. If you look at orders received, with the remote working touchless, our new applications that are coming to the fore, we are able to capture this business in a successful manner. Structural reform as well as cost control are contributing significantly. We are receiving orders in new areas, which is also contributing to this strength. Second question. At the time of spring, you talked about the investment size in the midterm management plan, inclusive of ABB, JPY 2.5 trillion growth business was mentioned. With the impact of COVID-19, you said that you're going to be reducing investment because of COVID-19. Based on operating profit, what is the investment size that you are contemplating currently? Thank you for your question.
As you rightly mentioned, we did mention JPY 2.5 trillion investment under the midterm management plan, and JPY 1 trillion is ABB. What is going to be the allocation of JPY 1.5 trillion has been debated internally over a long period of time. High tech business was made into 100% necessary. In terms of investment budget, we have set amount, we are also managing cash flow very rigorously. We have to make sure that we have enough liquidity under the current circumstances. We will look at the overall balance and also look for opportunities, if it comes to our attention. It isn't as if under the current circumstances, we will be continuing to make investment. We have EIMR budget. It depends on the transactions before us, looking at the liquidity of our business as well. We will make appropriate allocation of resources.
A JPY 2.5 trillion budget for investment will not be subject to revision for the time being. I would also like to add the following. JPY 1.86 trillion has already been used. That is the actual expenditure. Understood. Thank you.
Hi.
Could you unmute again? Question.
I have two questions. First is about the COVID impact. Full year and for your second half on the operating profit basis, how big is the COVID-19 impact? What is your forecast? A related question, by sector, by operating profit, any sectors that you expect to suffer a big impact? Compared to your forecast at the beginning of the year, have you changed the forecast? That's my first question.
Kato would like to respond.
Answer. Our COVID-19 impact. In May, we showed you the forecast for the beginning of the year, and in July, when we announced our first quarter results, we showed the COVID-19 impact. Six months have passed this fiscal year. Now, gradually, it is becoming unclear whether the impact is COVID-19 or other factors, and therefore, from this time onward
We decided not to say COVID-19 impact in the first half. Page 11, please. The revenue change is shown in the waterfall chart. Others, this is the organic revenue decline. COVID-19 is included in a big amount here. Large businesses are this decline of JPY 347 billion. The metals, Hitachi Metals and Hitachi Construction Machinery, in five sectors, AMS, automotive, and IT. The ones that are suffering the market decline are the listed subsidiaries, two companies, and AMS. In terms of the operating profit, others, negative JPY 85.3 billion, of which the product mix change and the business size decline, that is down by JPY 167 billion. Net is JPY 180.7 billion. The operating profit decline of JPY 167 billion is due to the revenue decline, not totally from COVID-19, but for a big part.
Thank you very much. Question. My second question is about the T&D business that you purchased from ABB. When you announced this acquisition, the total assets and goodwill and the intangibles were announced on a rough calculated basis. This time, you are including it in your balance sheet, so could you give us the numbers?
Yes. On July 1st, we closed, and this is the calculation when we acquired. Total assets, around JPY 1.9 trillion. Goodwill is around JPY 410 billion. The intangible assets, PPA has not completed, so this is still provisional, but around JPY 540 billion. This is the amount we took in.
Thank you very much.
Hi.
Thank you very much. Next question, please. Can you hear me?
Question. I have a question on page 28 regarding finance. I have two questions. My first question regarding CCC. It seems that there is a significant volatility. Why is this the case? Why has there been so much changes? Currently, it's 79.9 days. This is rather high compared to other periods. What is the reason for this? Is it the impact of COVID-19?
Regarding CCC, 79.9 days. Compared to end of March, increase of 5.7 days. It's the Power Grids acquisition having impact, increasing by 7.5 days. With Chemicals sold, that was 5.2 days having an impact because of the sale. On a net basis, it is still increasing by about three days. In that regard, apart from Power Grids for the energy sector, as well as the automotive parts ASTEMO is subject to a slight increase.
If you ask me whether it's impact of COVID-19, as I have already mentioned, the automotive industry is having an impact on AMS, which is also the impact of COVID-19. Second question. Debt/equity ratio. It's 0.7 times this time, increasing. At the end of this year, the three Honda parts company will be integrated. There is a possibility that it will further increase. There is also a possibility of selling these subsidiaries. Do you think that in the future, I think the intention was to reduce around 0.5 times. Because of the divestiture as well as acquisitions once it's completed, after this run its course, when will 0.5 be achieved?
Answer. Currently, target debt/equity ratio is 0.5. In fact, it is a very difficult equilibrium to achieve. Debt/equity ratio, the smaller, the better is not the case. When it becomes larger, there will be higher risk.
The most appropriate level is around 0.5 according to our experience. That is the reason why it has been set as a target. We are trying to achieve this by reducing the current level. The asset sales divestiture is one way to achieve this, but operating cash flow must be generated as much as possible. By financing the investment, debt can be reduced, and by so doing, we can reduce the debt equity ratio. We don't know what is going to happen next year, but in about one or two year time frame, we would like to go closer to 0.5 times. It depends on the investment that we will be making, so it isn't as if we can set a specific deadline. Within one or two years, I hope that we can achieve the 0.5.
Thank you.
Hi.
Next question, please.
Thank you very much. I have two questions. Listed subsidiaries, going forward. Construction machinery and metals, there were some news coverage about the possible divestiture. What is the status? You will be deciding the direction by the final year of the medium-term management plan 2021. Hitachi Metals, the investigation on the misrepresentation of quality test result is underway. Could you update us on that as well?
Answer. For listed subsidiaries, nothing has changed. By 2021, the final year of the Midterm Management Plan, we will take solid measures. Whether we will take in or divest, there are various options. We are studying all options without predetermining anything, and nothing has been decided at this point. Let me share with you that this is where we are. Nothing has been decided. By the end of fiscal year 2021, this current Midterm Management Plan, we will clarify. Thank you.
Thank you. Question. My next question is, the government, regarding COVID-19, to avoid the spread, is now asking the New Year's holiday to be extended till January 11th. What are you studying regarding that?
Hirano would like to respond. Answer. Thank you for the question. In Hitachi, since October, we have been working from home, so we are continuing our infection countermeasure. Regarding the New Year's holiday, we have not decided on changing our plans. Going forward, there may be some orders or instructions from the government or Keidanren, Japan Business Federation, so we will study as they come. Nothing has been decided as of today. Thank you.
Thank you very much.
Hi.
Thank you very much. We'll take one more question because we have gone beyond the allocated time. Please unmute. You're very faint, but we can Yes, I just hear you. A question. Please go ahead.
I have a question regarding Lumada. For this fiscal year, the core business is growing, but the other business is not doing so well. It seems that in Lumada, what is specifically growing? What is the part of Lumada that is struggling? Please elaborate.
Answer. We showed you page six to explain the situation regarding Lumada. The gray area is the related business. This is products as well as services are included here. This is not growing. If you look at the core business, red here, is growing significantly. Specifically, as mentioned here, the infrastructure related digital solution business for finance and others are growing significantly. The struggling areas, specifically out of the five sectors are Railway and Hitachi Construction Machinery. For the railway system, in the first half, it has been impacted by COVID-19, having an overall impact.
For the construction machinery, the parts service business is declining because of the market decline. It is in high contrast. There seems to be significant difference between core business and the related business. Core business is very strong. Now, in terms of finance and public sector. Question. These are the businesses for your core customers, I believe. Is that the part that is growing? Out of the IT segment, the existing customers business is growing, otherwise that is not the case. Is that a correct interpretation? Answer. Yes. Your understanding is correct. I hope that is satisfactory.
Thank you very much. The time has come to bring the Hitachi, Ltd. web conference on fiscal year 2020 Q2 earnings briefing for the media will be closed. Thank you very much for your attendance today.