The time has come to start Stagio noted web conference on the fiscal year 2020 second quarter earnings briefing for the media. Thank you very much for attending. Despite your busy schedules, I would like to, 1st 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.
Yoshiko Kawada, Senior Vice President and Executive Officer and CFO of Hitachi Limited Tomomi, Kato, General Manager of the Financial Strategy Division Yasuo Hirano, Executive General Manager of the Coffee Brand and Communications Divisions. Regarding the outline of the results, we would like to have Mr. Carmela explain. We will be switching over the screen shortly. 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 Limited Q2 of fiscal year 2020 results will be explained. First of all, please refer to Page 3 of the material. These are the key messages.
There are 3 major points to refer to. The numbers will be presented later, but I'd like to say that IT segment is leading Hitachi's performance overall. This trend is continuing from the Q1. Overall, the 5 sectors for Hitachi noted, Major improvement has been made, up and 1 5% achieved for 5 sectors. And the number was JPY 136,700,000,000 improvement was made.
As mentioned here, in particular, IT segment, our Mobility segment was strong. And in the Flat Life segment, measurement and analysis business maintained very high profitability. 2nd point is regarding the Hitachi ABB apart grid. We have been able to internalize this. We have been able to execute from July.
It has been proceeding very successfully. In the Q2, dollars 2,200,000,000 of orders were recorded. For the plan is $1,000,000,000,000 for the year. Dollars 2,200,000,000 is down to 2 30,000,000,000 yen So we are proceeding according to plan. 1 quarter has been registered for the 2nd quarter.
On the other hand, 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 a core strategic business. We are allocating significant resources to drive growth in the MADA 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, We will continue to make significant cadence in terms of investments in this area. So that is all in terms of the key messages. Please refer now to Page 4. 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. And the dark gray is 3,760,000,000,000 yen 360,000,000,000 yen And the adjusted operating income is 180.7 percent. And the breakdown is shown on the right hand side.
The very strong was strong performance was by ID, JPY 18,000,000,000. And together with Muroge, this accounted for about 60%. And there's minus 1.9 for this is subsidiaries and minus 7 for Energies after ABB is included. So the slide like this is shown on the right hand side highlighting IT segment and Building Systems business, the upper graph should be referred to. Left hand side is the 2nd quarter numbers.
And to the right, the first half comparison is made to the last year. And if you compare fiscal 'nineteen and fiscal 'twenty, the curve is showing the margin. It has now improved to 13.5% in terms of adjusted operating income ratio. This is the highest lever compared to our competition dedicated to IT. This ratio is now double that of peers.
So the operating income ratio is becoming very strong. And looking at the first half, if you look at the operating income ratio, it is 11.4%. You can see that double digit has been maintained in a safehouse 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 the Q2 against the previous year. If you look at the first half, in fiscal year 2020, we have reached a level of 11.7%. Once again, we are showing strong profitability in this area. Please now refer to Page 5. This is what I was referring to earlier in terms of the ABB power grid.
The activities are highlighted in this business on this page. We have sharpening our winning portfolio in the middle and left hand side is the accounting growth engine. The right hand side is driving world class execution, but they are all connected in its business. Looking at the Powergrade Growth business, the second should be highlighted, which is Eco efficient Digital Solution. We have received this order in Norway for eco sufficient substation.
And in the middle, driving e mobility it should be highlighted on the right hand side, the very bottom. Synergies with Hitachi Limited 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 of we are aiming to enhancing environmental value and contributing to a low carbon society by powering sustainable energy future. With ABB Power, together, we can enhance environmental value in a strategic manner.
Page 6. This is an explanation regarding the Lumados versions. The two bar graphs should be referred to. Left hand side is the first half comparing this year and last year. The red is the core business, the so called ID peripheral business are included here.
Agree are the related businesses, utilizing ID, railway systems as well as industry. Lumada has applications. And 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 1,000,000,000,000. Now we are aiming for 1,100,000,000,000 for fiscal year 2020 in our forecast.
The right red area is JPY 66,000,000,000,000,000 yen for the core business and related business, respectively. The 2nd quarter BAMADA topics are outlined on this page as well. Please refer to the right hand side. In the IT segment, we're 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 2 other companies. But with these two companies, we have received globally high evaluation. Because of the number of use cases as well as the flexibility in applications on the path of users have been evaluated very highly. Please refer to the IT segment. We are now collaborating in the area of 5 gs.
In the middle, and this is the mobility segment, against the backdrop of COVID-nineteen, cash flow solutions are becoming very important. The Zomada is playing a very important role in this area. In the industry area, we have co creation with Alfaison. This is a wholesale medical as well as a device. That has revenues around JPY 2,000,000,000,000.
And as Japan's first platform value chain has been established utilizing Lumada. Very specific deployments have been made. Now please refer to Page 7. Major topics will now be reported. There are 3 in to 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 Auckland. The signal control system, JPY 85,000,000,000 has been awarded.
It's a major contract that has been awarded to us. In Europe, business is difficult because of COVID-nineteen, but we are going to be increasingly focused on North America. And this is the first success that we have achieved. 2nd area is regarding Power Grid. It's about 1,000,000,000,000 in terms of acquisition fund that has been subject to consolidation.
And after that, JPY 430,000,000,000 will be refinancing because of the very high evaluation of the environmental assets. And therefore, we have been able to receive refinancing by growth investment facility of JAPEC to this amount. Now in terms of the this is going to continue to be very strong in environmental business. The third area is the Hitachi Automotive System and Honda Motor Company Limited, the 2,850 companies integration. The name of the company has been decided.
It's Hitachi Asamo Limited. Asamo 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 9.
This is the highlight of the results for the 2nd quarter and the first half. Left hand side graph is the comparison of the 2nd quarter year on year. And in the middle, we have the first half 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 172,800,000,000.
It has gone down to 122,400,000,000. 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 have a decline in revenues as well as operating income. Light gray is operating income. The first half last year was JPY297,200,000,000 this year, JPY 180,700,000,000.
That is around 60% of the previous year. To give you a verbal explanation, out of this amount for this quarter, JPY 53,800,000,000 and for JPY 123,400,000,000 and JPY 58,300,000,000. So in the second quarter, the profit is increasing 2 fold. And now looking at the right hand side, what I would like to emphasize is that cash items have improved significantly. More specifically, the 3rd from the top is EBIT, 386,200,000,000 on a y o y basis is plus JPY 95,600,000,000 EBITDA below is improvement of the JPY 112,700,000,000 at the JPY 6124,600,000,000 cash flows from operating activities, JPY 214,400,000,000, improvement of JPY 8,800,000,000.
You can see that the cash basis improvement was very significant.
Next Page 10, please. So this is the parent results and listed subsidiary, which we have 2, so Hitachi Chemical and Hitachi Metal. So 5 sectors, as you see at the top, is revenue increase. This is an increase, but the income decreased. And the listed subsidiaries, both revenue and income decreased.
As you see at the bottom of the graph, you can see the revenues, Y o Y, 103%. So this is where I mentioned revenue increase. And adjusted operating income is JPY182.7 billion minus JPY 47.2 billion. And on the right side, you see the list of subsidiaries, 56% year on year. And for operating income, minus JPY 69,200,000,000.
So both revenue and operating income declined. But the next line, adjusted operating income ratio, the 5 sector parent basis, it is 6.0% and listed subsidiaries was impacted by COVID-nineteen, so it was negative. But the 5 sectors are relatively strong and generating profit. Next please, Page 11. This is 2019 Q1 and this year's Q1 comparison and the difference thereof shown in the waterfall chart.
The upper half is revenue and lower half adjusted operating income. In revenues, the far left, first half last year was JPY 4,221,000,000,000 as a starting point and divestiture of Hisachi Chemical was negative JPY 316,600,000,000. But with the Power Grid acquisition that was plus RMB233,600,000,000 foreign exchange minus RMB31,000,000,000 and others as I will elaborate, the metals and AMS negative that's negative KRW 347.3 billion. So fiscal year 2020 fiscal first half is KRW 3,760,000,000,000. Bottom half, you can see the adjusted operating income.
Last year, CNY 297,200,000,000 and this is in line with the revenue. And in others, you see negative CNY85.3 billion. Various adjusted items are included here, the largest of which is the decline in the business size that was negative and the fixed income depreciation, So the biggest was KRW 16,700,000,000, which was the downsizing of the business scale and ended at RMB 180.7 billion. So 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. Now the right side, the numbers that we are announcing this time is JPY 300,000,000,000 net income attributable to Hitachi Limited stockholders. JPY 400,000,000,000 in adjusted operating income.
So those 2 are the ones that we will be announcing this time. EBIT, this is a cash item. On a year on year basis, this is plus JPY402,300,000,000. So we have the JPY 300,000,000,000 net income and EBITDA will be exceeding JPY 1,000,000,000,000. So this will be an increase of JPY 433,900,000,000.
Y o Y, this cash flow from operating activities will decline by JPY 60,900,000,000. Next, Page 14, please. Forecast by 5 Sectors and Listed Subsidiaries. Full year has the same trend as the first half. 2nd from the top, adjusted operating income.
Five sectors, RMB 375,000,000,000 and listed subsidiaries, RMB 25,000,000,000. So both are decline. And adjusted operating income ratio on a full year basis, 5 sectors, 5.8 percent and listed subsidiaries, 1.7%. So consolidated total is 5 percent. And next page, Page 15.
So the waterfall chart, last year's full year figure is on the far right far left and far right is this year's forecast. In revenues, JPY 8,767,000,000,000 and then Hitachi Chemicals, Hitachi Power Grid is added, foreign exchange and the chemicals and construction metals and construction machinery. Forecast is RMB7.940 billion and adjusted operating income likewise starting from KRW661.8 billion down to KRW400 billion. Next, Page 16, please. So this is a chart that we are showing for the first time.
So the difference between JPY 400,000,000,000 and JPY 300,000,000,000 are shown here. RMB 400,000,000,000 this is target adjusted operating income. And net income will be down to RMB 300,000,000,000. So the detail is shown here. First, Hitachi Chemical and Diagnostic Imaging related business, that's plus RMB 390,000,000,000.
Then Hitachi Capital, impairment loss, negative RMB30,000,000,000 Hitachi Metal impairment losses, negative KRW 30,000,000,000 and structural reform expenses, KRW 144,000,000,000 EBIT, KRW 586,000,000,000. After that, income taxes is deducted and net income is $300,000,000,000 The remainder are appendix. I will use this in the Q and A session, but just the highlights. 1st, 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%. And then energy, likewise, the adjusted operating income in the center, the right bar graph, minus JPY76.4 billion. This is because of ABB Power Grid, the structural reform and PPA. In 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 60,000,000,000. And life, smart life, Page 22. In the center, adjusted operating income. Light gray is AMS. It's in a difficult situation, but JPY 22,000,000,000 operating income will be secured.
RMB 39,000,000,000 and margin, 5.1 percent. And RMB 24, this is Hitachi Metals. Hitachi Metals is hit hard by the COVID-nineteen, so negative JPY 14,000,000,000 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, RMB 7.9 40,000,000,000,000 adjusted operating income ratio, 5.0 percent. 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 Q1, 7% growth. Under COVID, they are pretty much completely recovered. On the other hand, North America, far left, is still struggling minus 16% and Europe, minus 8% Japan, minus 14%. ASEAN, India is also hit hard, minus negative 21%. Overseas revenue is JPY 1,900,000,000,000.
Total is JPY 3,800,000,000,000. So the ratio of overseas revenue is 51%. It was 48% or 49% till recently. So now overseas revenues account for more than half. Last page, Page 28, the financial position.
Balance sheet is on the upper half. Total assets at the end of last year, JPY 9,900,000,000,000 and this September end is exceeding JPY 10,000,000,000,000. This is thanks to ADD. So plus JPY 685,900,000,000, majority of which is thanks to the acquisition of ABB. And third, total liabilities is also increasing up to JPY 7,000,000,000,000.
And on the right side, you can see the increase JPY 1,379,379,000,000,000 and under that, interest bearing debt. ABB Power Grid acquisition is using debt. So that much higher. And cash flow cash flow from operating activities is CNY 214.4 billion. Cash flow from investing activities is negative CNY703.8 billion.
So this is negative because of ABB and free cash flow subtraction negative JPY 489.3 billion. Core free cash flow exceeds yen 50,000,000,000. That concludes my presentation. So Q2 and the full year forecasts were explained. Thank you very much.
Thank you very much. We would now like to proceed to the Q and A session. Please indicate when you wish to ask a question by raising hand unmute and state your name and affiliation before asking your question. And then please unmute afterwards. 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. And regarding the building systems, I understand that Chinese market was very strong. Please elaborate further on driving growth in this area.
Is it a one off against COVID-nineteen? Or is it likely to continue going forward? Please elaborate. Thank you for the question. Now regarding IT, please refer to Page 18.
The front office and the service and platform are indicated here. And out of which, in the middle, where you says adjusted operating income, if you look at the bar graph, the left hand side is the first half, 11.4% overall. And out of which, it includes year on year comparison, about 1,000,000,000 of a reduction decline. So but 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-nineteen year on year basis. In terms of revenues, it has declined slightly, but project management was conducted in a safe manner and cost reduction efforts continued. The effect thereof has contributed to this 11.4% profit margin. Furthermore, in terms of services and platform, revenues have declined. So it is profit has declined as well, but 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-nineteen, but Chinese market has already recovered. Air on Air Base's 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 it's a structural reform? So I think it is 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 Kamana speaking.
On the other hand, if you look at orders received with the remote working, touchless, our new applications that are coming to the floor, we are able to capture this business in a successful manner. Structural reform as well as cost control are contributing significantly. But at the same time, we are receiving orders in new areas, which is also contributing to this strength. 2nd question. At the time of STRING, you talked about investment size in the midterm management plan inclusive of ABB, JPY 2,500,000,000,000 growth business was mentioned.
But with the impact of COVID-nineteen, are you reducing you said that you're going to be reducing investment because of COVID-nineteen. But based on operating profit, what is the investment size you are contemplating currently? Thank you for your question. As you rightly mentioned, we did mention 2,500,000,000,000 investment under the midterm management plan and 1,000,000,000,000 yen is ABNB. So what is going to be the allocation of 1,500,000,000 yen has been debated internally over a long period of time.
High-tech business was made into 100% subsidiary. And in terms of investment budget, we have set amount, but we are also managing cash flow very rigorously. So we have to make sure that we have enough liquidity under the current circumstances. So we will look at the overall balance and also look for opportunities if it comes to our attention. But it isn't as if under the current circumstances, we will be continuing to make investment.
We have earmarked budget, but 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 2,500,000,000 budget for investment will not be subject to revision for the time being. I would also like to add the following. JPY 1,860,000,000,000 has already been used. That is the actual expenditure.
Understood. Thank you.
Could you unmute again? I have two questions. 1st is about the COVID impact. Full year and for your second half, on the operating profit basis, how big is the COVID-nineteen impact? What is your forecast?
And a related question, by sector but operating profit, any sectors that you expect to suffer a big impact? And compared to your forecast at the beginning of the year, have you changed the forecast? That's my first question. So Kato would like to respond. So our COVID-nineteen impact in May, we showed you the forecast for the beginning of the year.
And in July, when we announced our Q1 results, we showed the COVID-nineteen impact, but 6 months have passed this fiscal year. Now gradually, it is becoming unclear whether the impact is COVID-nineteen or other factors. And therefore, from this time onward, we decided not to say COVID-nineteen impact in the first half. Page 11, please. The revenue change is shown in the waterfall chart.
Others, this is the organic revenue decline. So COVID-nineteen is included in a big amount here. Large businesses are this decline of JPY 347,000,000,000. The metals, Hitachi Metals and Hitachi Construction Machinery and in 5 sectors, AMS, Automotive and IT. And the ones that are suffering the market decline are the listed subsidiaries 2 companies and AMS.
Now in terms of the operating profit, others, negative JPY 85,300,000,000 of which the product mix change and the business size decline that is down by RMB 167,000,000,000. So net is RMB 180,700,000,000. So the operating profit decline of JPY 167,000,000,000 is due to the revenue decline, not totally from COVID-nineteen, but for a big part. Thank you very much. Question?
My second question is about the T and D business that you purchased from ABB. So 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.
So when we on July 1, we closed and this is the calculation when we acquired. So total assets around JPY 1,900,000,000,000 and goodwill is around JPY410,000,000,000 and the intangible assets, our PPA has not completed, so this is still provisional, but around JPY 540,000,000,000. So this is the amount we took in.
Next question, please. Can you hear me? Question. I have a question on Page 28 regarding finance. I have two questions.
First question regarding CCC. After it seems that there is a significant volatility. Why is this the case? Why has there been so much changes? Currently, it's 79.29 days.
This is rather high compared to other periods. What is the reason for this? Is it the impact of COVID-nineteen? Regarding CCC, 79.9 days compared to end of March, increase of 5.7 days. But it's the Power Grids acquisition having impact, increasing by 7.5 days.
But with chemicals sold, that was 5.2 days having an impact because of the sale. But on a net basis, it is still increasing by about 3 days. In that regard, apart from power grid for the energy sector as well as automotive power saving units is subject to a slight increase. So if you ask me whether it's an impact of COVID-nineteen, as I have already mentioned, the automotive industry is impacted having an impact on AMX, which is also the impact of COVID-nineteen. 2nd question.
Debt equity ratio, it's 7.7 0.7 times the time, increasing. At the end of this year, the 3 Honda parts company will be integrated. There is a possibility that it will further increase. But there's also a possibility of selling the subscription series. So do you think that in the future I think the intention was to reduce around 0.5x.
Because of the semiconductor as well as acquisitions, once it's completed, when after this run this course, so when will 0.5 be achieved? Currently, our target debt to equity ratio is 0.5. And in fact, it is a very difficult equilibrium to achieve. And that equity ratio, the smaller, the better is not the case. But when it comes 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 and divestiture is one way to achieve this. But operating cash flow must be generated as much as possible.
And by financing, the investment debt can be reduced. And by so doing, we can reduce the debt to equity ratio. We don't know what is going to happen next year, but in about 1 or 2 year time frame, we would like to go closer to 0.5x. It depends on the investment that we will be making. So it isn't as if we can set a specific deadline, but within 1 or 2 years, I hope that we can achieve 0.5.
Next question, please. Thank you very much. I have two questions. 1st, list of subsidiaries going forward. So status And you will be deciding the direction by the final year of the medium term management plan 2021.
And Hitachi Metals, the investigation on the misrepresentation of quality test result is underway. Could you update us on that as well? For list of subsidiaries, nothing has changed. By 2021, the final year of the midterm management plan, we will take solid measures. However, whether we will take in or divest, there are various options.
So we are studying all options without predetermining anything and nothing has been decided at this point. So let me share with you that this is where we are. Nothing has been decided. But 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-nineteen to avoid the spread is now asking the New Year's holiday to be extended till January 11. So 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. So regarding the New Year's holiday, we have not decided on changing our plans.
But going forward, there may be some orders or instructions from the government or Keidan Japan Business Federation. So we will study as they come. Nothing has been decided as of today. Thank you. Thank you very much.
Thank you very much. We'll take one more question because we have gone here in the allocated time. Please unmute. You're very faint, but we can yes, just hear you. A question.
Please go ahead. I have a question regarding Lumada. For this fiscal year, Panacore 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. We showed you Page 6 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.
But 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 5 sectors are railway and strategic construction machinery. 4 in the railway system in the first half has been impacted by COVID-nineteen, having an overall impact for the construction Machinery, the parts service business is declining because of the market decline. So 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. So is that the part that is growing?
Out of the IT segment, the existing customers business is growing, but otherwise, that is not the case. Is that a correct interpretation? Yes, your understanding is correct. I hope that is satisfactory. Thank you very much.
The time has come to bring the Hitachi Limited web conference on fiscal 2020 second quarter earnings briefing for the media will be closed. Thank you very much for your attendance today.