We would now like to begin the briefing for the consolidated financial results for the second quarter into September 30, 2019 for Hitachi, Ltd. I'd like to introduce the presenters for today, Mitsuaki Nishiyama, Senior Vice President and Executive Officer, CFO. Tomomi Kato, General Manager, Financial Strategy Division. Yasuo Hirano, Executive General Manager, Corporate Brand and Communications Division. Nishiyama will start with the presentation.
Thank you very much for gathering here today, despite it being such a late time in the evening, and some of you might have been attending for a long time today, the meeting, so thank you very much for that. I would like to use the slides for my presentation. First, please turn to slide page 1-2. My second quarter sales, the middle column, JPY 14,221.3 billion, a decline of 6% year-over-year of IT segment and industry segments had increasing revenues. With life segment had impact of business divestiture and semiconductors and automotive materials. Because of worsening market situation, Hitachi Metals, Hitachi Chemicals had also decline in revenues. Next, adjusted operating income, JPY 297.2 billion, compared to the previous year, a decline of 14%.
IT, life segment in the five sectors businesses. In particular for IT and life, there was increase in income. The listed companies, Hitachi High-Technologies, Construction, Metals and Hitachi Chemical, all had decline in operating income. EBIT was JPY 290.5 billion. The railway, Agility Trains West shares were sold, which was a gain. Hitachi Metals in magnetic materials business had impairment loss on fixed assets and goodwill impairment was posted, which led to a decline. Net income attributable to Hitachi, Ltd. stockholders was JPY 889.2 billion, down by 2% year-over-year. The next slide, 1-3. Revenue and the profit of our five sectors and the listed subsidiaries are shown. Let me start from the bottom of the table, which are the listed subsidiaries. Adjusted operating income. Hitachi Metals had a decline of JPY 27.1 billion year-over-year, which was impacted by market situation.
Total for four companies, JPY 52.8 billion decline year-over-year was seen. EBIT also, in addition to the decline of adjusted operating income, Hitachi Metals goodwill and fixed asset, JPY 61.8 billion impairment loss. It was decline of JPY 160.7 billion year-over-year and net income was a decline of JPY 57.4 billion year-over-year. The top part of the table, five sectors, adjusted operating income. The momentum of first quarter was continued and the IT sector and the life sectors were firm, a plus JPY 5.4 billion year-over-year. The first quarter, or rather EBIT, with improvement of operating income and Agility Trains West shares were sold and the risk sharing type of pension was introduced. It was increase of JPY 54.9 billion year-over-year. Net income for the five sectors was an increase of JPY 53.7 billion. The five sectors adjusted operating income in the first quarter, total, was the record high.
Next, slide 1-4. Revenues and operating income. Factors affecting the changes shown left-hand side are revenues. First, with business divestiture impact reorganization was JPY 124 billion. Hitachi Kokusai Electric was deconsolidated, and Hitachi Automotive Systems business, like Clarion, were divested. In total, this had an impact of decline of JPY 124 billion. Foreign exchange impact was JPY 80 billion decline. In others, JPY 66.5 billion. Decline of revenues was a major impact. Right-hand side, adjusted operating income. The impact of reorganization was JPY 6 billion, a negative impact of JPY 6 billion. Foreign exchange was JPY 12.5 billion, a negative impact, negative factor. In others, JPY 15.8 billion negative factor. Just like revenues, decline in sales was a major factor. In addition, investments for growth, JPY 13 billion. This is as we have planned. With this added, JPY 297.2 billion was the result. Next, slide 1-5 is our revenues by market.
First, to the right-hand side, year-over-year figures. Japan was 100% and outside Japan, 88%. Not included here, foreign exchange and divestitures impact excluded, domestic would be 102% and overseas, 95%. Relatively speaking, Japan is doing better and overseas is declining. In particular, China and other areas, ASEAN, India, excluding China, showed large declines. In North America, automotive parts and metals declined, Hitachi High-Technologies and Hitachi Construction increased. This is 95%. Foreign exchange and divestitures, when excluded, North America would be 101% year-over-year. Next, 1-6 is the financial position and the statements of cash flow. Total assets, JPY 19,719.5 billion. Compared to the end of the previous term, it is an increase of JPY 193 billion. Here, lease assets with a change of accounting rules, the lease asset liabilities is on balance, which is an impact of JPY 220 billion, and other assets were compressed.
The cash conversion cycle, CCC, is 71.6 days. Towards the end of fiscal year, we will aim at achieving a level below 70 days. Total Hitachi, Ltd.'s shareholders' equity ratio was 34.4%, and D/E ratio, 0.31 times. Cash flows from operating activities was JPY 205.6 billion, a similar level as the previous year. Cash flows from investing activities, expenditure was JPY 27 billion, so there is a decline of JPY 64.6 billion, which is an increase of outflow from the previous year. In the previous year, there were sales of shares, but this term, there were no major divestitures. Yungtay Engineering in Taiwan, the Taiwanese elevator company, with TOB, this is now an equity method company, and this outflow happened during this term. Compared to previous year, there was an increase of outflow and free cash flow is JPY 1.3 billion. After 1-7, these are our revenues by segments.
First, for IT, increase of system integration led to 102% increase in revenues year-over-year. Operating income, strategic investments were increased. With increase in revenues, it is increase of JPY 10.8 billion year-over-year. Next, energy, mainly at nuclear power BU, there are problems related to new regulations which we had last year, but this decreased this year, there is a decline in revenues and operating income. The next page, slide 1-8, industry. For industry, revenues increased by about 2%. The sales increase in air conditioning system business for industry field was seen. On the other hand, after adjusted operating income, as a result, there is a slight increase of about JPY 0.3 billion. For mobility, the impact of foreign exchange was seen. For building systems and railway systems, in both, there was a big impact of foreign exchange.
For railway systems BU, there was a decrease of revenues in the U.K. market, and also building systems in China, average sales price went down. Revenues declined by about 9%. On the other hand, adjusted operating income, revenues declined, but buildings cost reduced, so we could maintain a similar level of operating income as the previous year.
Please move on to 1-9 for smart life. For the Automotive Systems business, because of the divestiture of the business, there was JPY 97 billion of a negative impact, that is why year-on-year, there was 88% of revenues. For the Automotive Systems and also for the appliances and also for healthcare business unit, all these because of structural reforms and also for cost reduction, we were able to realize this. Therefore, there was an increase of JPY 10.3 billion of adjusted operating income. The main factor is the four listed subsidiaries, starting with Hitachi High-Tech. There has been an increase in the semiconductor processing equipment. However, there was a decline in the sales of liquid crystal display exposure system, and also the FX impact. That is why we are seeing JPY 4.8 billion of a decline. 1-2, it is the Hitachi Construction Machinery.
The FX impact was quite large. In North America, Japan, and Europe, the sales was quite brisk, but there was a large impact from FX. Therefore, year-over-year, there was 98% in terms of revenues. Because of FX, an increase in indirect expenses, there was a decline in profit by JPY 8.3 billion. For Hitachi Metals, for auto and semiconductor, and FA related demand decreased. The impact was quite large, ending at 88% in terms of revenue year-on-year. Accordingly, because of the revenue decline, adjusted operating income deteriorated by JPY 27.1 billion. Also, revaluation loss in inventories is a JPY 27.1 billion of decline EBIT. It is declined by JPY 94.4 billion year-on-year. EBIT, it was in deficit. It is in red. Because of the magnetic materials, there was posting of impairment loss of fixed assets and goodwill.
For the impairment loss amount, this is Hitachi consolidated and Hitachi Metals, the amount is different. For Hitachi on a consolidated basis, it is JPY 61.4 billion. For Hitachi Metals, JPY 42.6 billion. There is a difference in terms of the impairment loss. The reason being back in 2014, prior to consolidated into IFRS, Hitachi Metals went by J-GAAP, whereas Hitachi, Ltd. consolidated went by US GAAP. In terms of whether it is good for amortization or non-amortization, because of that difference, there has been a historical difference in terms of the impairment loss. JPY 61.4 billion is the consolidated amount. Moving on to Hitachi Chemical. For semiconductor and automobiles, the demand had decreased. The revenue has declined by 8%, and adjusted operating income came down by JPY 7.9 billion. Moving on to 1-11.
For other segment, operating income went down by JPY 5.9 billion because of the impact of deconsolidation of Hitachi Kokusai Electric. For corporate items and eliminations, it's been declined by JPY 9.4 billion in terms of earnings. Adjusted operating income, because of the consolidated increase in investment, a strategic investment, that is the reason for that. Moving on to 1-2 for the topics. First topic is related to Lumada business, the progress so far. On a Q2 cumulative basis, the revenue of JPY 558 billion increased by 12% year-on-year for the first half of the year. On a full year basis, as we have made a forecast previously, JPY 1.17 trillion is the expected amount, which is an increase by 4% year-on-year. We have Lumada, and also Social Innovation Business related topics are listed here. Various activities have been conducted.
With Hitachi Vantara Corporation and Hitachi Consulting Corporation, there's a decision to integrate it as of January of 2020. It will serve as the core entity for the core and the frontline business to drive the Lumada business. Frasers Property Limited, we have a collaborative creation to digitalize cities and buildings in the Asia-Pacific region. Agreement has been made to promote the business related to human-centered smart city. This could be perceived as one form of smart city, is this topic, the fact that Hitachi Vantara Corporation announced a strategic alliance with Disney Parks. First, as far as Disney Parks is concerned, first we will start with the maintenance of the facilities to enhance the operational efficiency of shows and attractions in the U.S. Several tens of millions of people visits this Disney park.
It could be perceived as one form of smart city. Making use of Hitachi's portfolio, we would like to expand the smart city business. Moving on to page 13, as this year onwards, we have adopted ROIC as one of the important management indices. We would like to leverage this in our daily operation. We have formulated the ROIC tree by business and established the model, as you can see here. We have 500 items or so of action items. Those have been presented to the business units, and various ROIC tree has been formulated in accordance with the nature of the business. Also, there is a target set for each of their tasks and work.
To increase the employees' consciousness on improving ROIC in their daily work, we try to gain their understanding by introducing e-learning in Japanese, English, and Chinese. The outlook for the full year fiscal 2019. 2-1. In terms of the number, in comparison to the previous forecast, which is on the very right-hand column, down by JPY 300 billion to JPY 8.7 trillion in terms of the forecast. The adjusted operating income, down by JPY 80 billion, a downward revision from the previous forecast of JPY 685 billion. EBIT, JPY 605 billion. Net income attributable to Hitachi, Ltd. stakeholders, down by JPY 75 billion to JPY 360 billion. This is the forecast for the full year. This is because for the first half of the year, so for the five sectors, they were able to absorb the FX impact, and they were able to perform more than initial plan.
In terms of the There has been decline in the demand for automobiles and metals and chemicals. The FX was quite large for the construction machinery as well. There has been decline in the revenue and the earnings for the subsidiaries. We believe this operating climate will continue into the second half of the year. Also, the foreign exchange, the US dollar, JPY 110-105 to the dollar. Euro, there has been change from JPY 125-JPY 115 in terms of euro. That impact of the assumption of the Forex has been incorporated into these numbers. Please move on to 2-2, the outlook for five sectors and listed subsidiaries. In comparison to the previous term, so five sectors, JPY 4.4 billion of increase.
Of course, there was an FX impact here, they were able to absorb it and still able to increase the earnings. Adjusted operating income of JPY 472.5 billion. This is a record-high number. We would like to make sure that we can exceed this number. 2-3 onwards, we have the revenues by business segment. I would like to skip these slides. That is all for myself. Thank you. We'd like to move on to Q&A session.
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Question. Thank you for your presentation. You have explained that in the first half, the five sectors results were more than the plan. On page 27 of the material, there are additional information for the second quarter compared to the previous year. There's information included. If possible, for the second quarter only, the five sectors and the subsidiaries results compared to the original plan, how did they perform? Is there any specific features could you give me additional comments?
Answer. Compared to the plan. In general, first, please look at page six, first sector, the five sectors and the listed companies. I have a total of the first half only for the details. Compared to the plan, second quarter in total, compared to the plan, for five sectors, revenues was better by about JPY 1 billion, and operating income was +JPY 6 billion compared to the plan. Among those, forex change impact, compared to the plan, was -JPY 2 billion. Organically, it is +JPY 8 billion compared to the plan. For the total list of subsidiaries, sales revenue compared to the plan, was a decline of JPY 41 billion, and operating income compared to the plan was lower by JPY 16 billion. Compared to the plan, the foreign exchange impact was -JPY 300 million, and organically, was a drop of JPY 13 billion.
Compared to the previous year, in the waterfall chart, I mentioned that there was a impact of foreign exchange. The same basis, if we divide the JPY 12.5 billion, the five sectors is impact of minus JPY 5 billion, and listed subsidiaries, minus JPY 7.5 billion impact.
In the first quarter, I think for the five sectors, was about better by about JPY 5 billion, and the others was minus JPY 5 billion, it was in line. For the second quarter, FX included, it is better by JPY 8 billion for second quarter. For second quarter only, maybe it was better by JPY 3 billion. Five sectors, IT was doing well. Yes, IT. The economic environment, the market environment, is also influencing. CapEx in Japan, looking at the situation, there is a drop overseas, but domestic CapEx, including investments to reduce manpower, is taking place in particular software investment. According to the BOJ Tankan, compared to the previous report, the outlook is the same, is about 12% or 12.8% increase of software investment compared to the previous year.
We want to capture these going forward, and relatively speaking, the environment in Japan will continue to be better.
Question. My second question is for the annual outlook. On slides 19 or 20, I'd like to make some confirmations. This may be a little detailed, but on page 19, five sectors in total is minus JPY 10.5 billion compared to the previous forecast, and on page 20, everything is almost in line. Are write-offs included? Elimination are included?
Yes. For the five sectors, the figures are for the listed four subsidiaries, and the rest is subtracted. The elimination, other eliminations come under the five sectors. The impact, the corporate, and elimination on page 21, JPY 9.5 billion is the operating income. For corporate elimination, as measures in common with other companies, reduction of material cost, the reduction of indirect material, reduction of indirect cost is included.
Each sector, these were realized and reflecting that this comes out from the whole corporate sector. This negative part comes under the upper category. In substance, looking at the situation by sector, operating income is revised downwards for Mobility, JPY 1 billion. This is impacted foreign exchange.
Question. Lastly, about IT. In the first half, there was increase in income, but it remains flat for the full year. In the second half, you expect a decline in income.
Answer. So far, strategic investments for growth were planned, and we will implement those. Here, this is firm and the domestic environment, well, we will capture the deals that we can get. It's quite busy, but though it is busy, if we stretch it too much, that may lead to lower profitability. We must do proper project management to avoid this from happening.
We want to capture the demand in this sector.
Question. I have two questions. First is related to the figures by segment for energy. In the first half, profit and loss was not really profitable, but you haven't changed the full year forecast. What is the operating profit for the second half? Are you expecting to see an increase in the second half if you were to have a flat number on a full year basis? If you can share with us your input.
Answer. These are impacted by various projects. In terms of energy, in the first half, it was not performing well because of the decline in the sales of nuclear power, it was worse than expected. Aside from nuclear power, there were one-time loss and some provisioning related to the one-time loss.
Because of those, the first half of the year for energy sector was not performing well. That would no longer be the case for the second half. There would be no impact from specific projects. For the second half, it will normalize.
Question. Just to supplement. The absolute number may be Oh, sorry. This is to supplement answer.
The energy for the first half and second half, the sales are skewed towards the second half. The first half, the revenue is going to be small. Also, in comparison to the internal plan, there's not much change. Therefore, the absolute number seems fairly worse, but in the second half, we do not believe this is a stretch target.
Question: You've announced today the management integration in the automotive business. For CBI, integration has been completed. In the automotive business, I think there's a visibility for the new system going forward. In the last year of the midterm plan, ROIC 15% and OPM of 10%, that is the target you have in mind.
I'm pretty sure you have some level of visibility, but after making this official formal announcement, this auto system under a new scheme, do you believe you're approaching closer to the achievement of this medium-term management plan from the perspective CFO? You may feel that could be because of some of different factors, it may seem that the target is actually further away.
In the previous session, it's the point that has been discussed. Hitachi's IoT business is related to products and the operational technology, OT, and we have the product and the OT and the IT. IT needs to approach the product and the OT. As the vice president has mentioned, that is a way to link the cyber physical world. In this world, we would like to provide the products, and also we have the OT relation to that.
We believe both of these are very important components of our business. We would continue to strengthen on those end. Just by owning the products will not be suffice. We need to have strong products into the market. That has been already incorporated into the original midterm plan. Based on that, we have established the target for OP margin and also for the ROIC. Chassis Brakes International, CBI, and also the four companies, the integration. To combine these factors together, of course, we need to focus and also selective and be focused on our effort. At the same time, we will conduct the structural reforms. As of this moment, it is very difficult to quantify the synergy because we will still need to do a number of processes such as TOB and various audit.
Of course, needless to say, we need to have the synergy effects, especially cost synergy. That is important. In order to realize that, we need to have the structural reforms. For 2021 medium-term management plan, we would like to get closer to the target. These initiatives will bring us closer to the achievement of the medium-term management. It has been mentioned the new entity will be launched in about a year time. In the last year of midterm plan, you've mentioned about selection and focus and structural reforms, and will that give you enough time to achieve these in terms of the timeline? In terms of the timeline, at some timing, so the post-merger integration needs to be conducted. Of course, we need to conduct this in a speedily manner from day one.
Of course, if there is an effort or a fruit that we can have, of course, we like to have that from day one as much as possible.
Question. Thank you for your presentation. I have three questions. For IT, the demand trend in the first quarter, second quarter, are there any changes? In the second half, towards the second half or towards the next fiscal year, I think the situation has been very good, but I think you always mention that you are achieving ahead of the schedule. Will that continue, or do you think there will be a decline?
Yes.
Answer.
As you have mentioned.
Are we implementing in advance or there is increase in receiving orders?
It's difficult to distinguish. In the first half, the orders that we have received for 5 sectors, these were good. Among them, IT was 108% compared to the first half of previous year in terms of orders received. The firm situation continues. My impression is that IT sector is very busy. I don't think, in particular for Systems Integration business, I don't think there is a major change felt. One reason for concern is for hardwares. New storage was announced two weeks ago, high-end storage introductions in the market, by doing so, we want to expand sales to the high-end. As for this third quarter, I understand the pipeline is getting full. Are we able to really start? That is one focus area.
Question.
My second question is the integration with Honda's business, which was announced today. It was stated earlier that it is non-cash and basically this will be conducted by exchanging shares, there is no cash out from Hitachi. Is that right? Without cash out, on operating income basis, I believe your adjusted operating income for a full year, there will be a consolidation of about JPY 70 billion. Is my understanding correct? About goodwill, how much write-off there is going to be? If JPY 70 billion is a simple addition, how much of that will be offset? Do you have an image about it?
Answer. First, the acquisition is non-cash acquisition. Mr. Kato will answer. Operating income? The operating income on a performance basis, about JPY 80 billion is amount of the three companies. There may be differences in the figures, but that is the level that we expect.
What I have been saying is a simple addition of past figures, but there are some which will be out of scope. Before closing, each company may sell to third parties, may sell their non-core business to third parties. It's not a simple addition. At the moment, based on the results that we have from the three companies, that is the scale of a level that we expect. In general, as was mentioned by Dr. Koch, for operating income in total, a simple addition would be about JPY 110 billion, but there may be some that will be out of scope from there. As for the details, we will quantify those in details later. Correction, JPY 70 billion is the addition that we expect. For goodwill, we are now studying the content, so at the moment, I will refrain from disclosing exact situation.
Question.
About the JPY 70 billion, how much of that will be amortized? I don't want to be misleading, so I will avoid making any guesses. If the figures are more clear, we would like to inform you later.
Question. My third question related to this subject. If there's no cash on a GAAP basis, if JPY 70 billion or JPY 80 billion is added to your income, this may be a good story for you. In judging investments, I think that may accompany the risk of being too lenient in making your decisions. In the current medium-term plan, by using Lumada, your plan of the current phase is to give more value added. This integration is to strengthen the frontline automotive parts business that will be strengthened and to give more value added by using Lumada to enjoy more synergy.
I think the effect of a synergy could be delayed by several years. You talked about diversifying resources, but could you explain a little more about it? If it is only conventional parts, Lumada maybe, or in the world of CASE, and the addition, ADAS and electrification related software, these are very costly areas. Because of that, we are joining our resources. On the other hand, the products, to strengthen the products or scale up the products, by doing so, we need a cash cow. That is one purpose. With a non-cash acquisition, we will be able to capture those so that the cash will be able to rotate.
It is non-cash, it doesn't mean that we will take it easy, we will look strictly to the impact on the balance sheet of our life sector, impact on consolidated finance, the total risk will also be considered. Also, we will maintain fiscal discipline. We will look into those, it doesn't mean that we will be taking this as something for easy.
Question. I also have three questions. First question is related to the press. About the elevator business for Yungtay Engineering, it will be entering into bidding. Toshiaki Higashihara-san mentioned, JPY 2 trillion is the number he's mentioned, but in the 2021 medium-term management plan, you have JPY 2 trillion-5 trillion amount allocated for investment for growth. Would you be executing investment above this particular amount? Or what is the possibility of taking more risks than that is above the fiscal discipline?
Answer. In terms of the financial fiscal discipline, we'd like to maintain it. That is our basic policy. In terms of D/E ratio, 0.5 times or below, that is the level we're aiming for. In terms of interest-bearing debt, the EBITDA ratio, 2 times or below. Those are the two metrics we use for the fiscal discipline. This is for [Tsusino]. Excuse me, [Tsusino]. In terms of the asset divestiture, we need to look into the timing for the asset sales, and also what is the timing we would spend the cash. Depending on the timing of the deals, of course, it may change. The number may actually spike, but in the next year, the following year, it may come down. It is not as if we would buy everything because it is available out there.
We need to have more of a comprehensive view of our portfolio to make that decision. We have to make sure that the overall Lumada business will be strengthened, and whether it would strengthen the SI business as a whole, and of course, we look at the price tag as well. We take a more of an integrated view in making that final decision.
Question. I apologize to hang on to some of the words, but even if you were to go above that fiscal discipline, you are saying that in the following year, it would come down to this level?
Answer. Yes.
Question. Similar question related to the previous one about the goodwill. ABB, if you were to add that JPY 1.5, could be the total amount. Related to this, in comparison to shareholders' equity, how much risk are you willing to take?
Answer. As we speak, in comparison to the global competitors, the goodwill proportion to shareholders' equity is still low. Of course, we have ABB, and we would have the closing of the large products, so that proportion is bound to increase.
What % is viable? What % would be the discipline would like to have?
That sort of number and that sort of metrics, we do not adopt right now. We have projects related to Systems Integration. Of course, there are some business risks arising from those projects. We need to have a total of risk management. We need to have more of a comprehensive view overlooking the entire projects. In terms of yes or no, we don't have a set target for the goodwill ratio. Even if goodwill were to be large, of course, some of the business are stable and some business may be large, but are highly volatile. The size of the goodwill may not actually give you the entire view. We need to have a comprehensive risk management.
Question. It seems as if many projects are going to run simultaneously or concurrently. In terms of the movement of balance sheet, are there any problematic areas, or are there any ways to hedge the risks? Are there any concrete ways, for instance, the intangible assets and so forth?
As you mentioned, that is definitely a concern for myself as well. A D/E ratio is one area that is of concern, and also the proportion of interest-bearing debt. Another point is goodwill. The goodwill proportion vis-à-vis shareholders' equity. These are definitely areas we need to keep a close eye on. The overall portfolio needs to be looked at. We have individual announcements for various projects.
These acquisitions or divestitures, and also asset sales will continue to be conducted. Those are all part of the consideration to assess the overall risk. Within this year, this fiscal term, we will review that and, of course, we'll be doing the update of the midterm management plan. The future picture we'll have in mind, we need to draw those. Of course, on a consistent basis, we are doing simulation. We are not at the level to share those with you. We'd like to have much more clarity on the overall portfolio related to the fiscal discipline and also risk management. Once it is clear, we'd like to share those idea with you.
Question about the business sentiment. China, the economy, the automobile sales and production seems to be quite weak in China. These two factors, China and automotive.
Could you give us your take, especially the outlook for the second half of the year?
Answer. In China, within our sector, the building system is the largest business in China. It is decelerating, as you mentioned. Given the current trend, in terms of the degree of the dropage of the pricing by models, it is actually mitigated in terms of the dropping of the pricing. In terms of the low-priced models, or what we call mid-range models, we are seeing increase in the number of unit sales. The total number of unit sales has increased, but there's been change in the product mix. There's more shift towards mid-range models. Because of that, the ASP, the average selling price, has been on the decline. We believe that trend will continue into the second half.
On the other hand, the cost reduction is also underway. It's actually progressing more so than initially expected. In comparison to three years ago, in the production sites in China, the material cost and also third-party purchase parts, the procurement cost was not appropriately managed. We have conducted cost reduction on a systematic basis. That is why this year we are progressing better than expected. The toughness in the environment continues, but we have been able to offset those by cost reduction. We believe this trend continues. Moving on to automotive business. We believe the tough situation will continue. In the automotive system, we have been progressing with many cost reduction. REAP project is the name we have given. We've conducted extensive range of cost reduction.
In 2018, in Q1, the operating income was 2.2%, in Q2, 1.9% was OP margin, in Q3, 3.6%, Q4, 7.9%. There's been a gradual increase in the OP margin. In Q1, it's 2.7%, Q2, it's actually close to 5% or so. That's for the three months. For 1.9% from last year, now it's up to 5% or so. This is because of the cost reduction, which is progressing as planned. Of course, we are concerned about the automotive market, especially in China, we are definitely seeing a slowdown. We need to make due preparation, and we do so in the elevator business as well. Cost reduction is the key. We need to accelerate the effort. We are progressing better than planned, we'd like to further accelerate the initiatives. We believe this is the best countermeasures.
I think, yes, there is a question related to market position. I think in the previous session, there was a question related to market position. I don't think there was a clear answer to that. Just simple calculation, simple addition. For the major core products, if you were to combine those together, suspension. For the 4 companies combined together for suspension, in terms of the position in the market, suspension would be number 1 in terms of our ranking. Braking system, number 2. ECU would be number 4 or so. XEV, so inverters, motors. That is based on a plan basis for 2025 for the automotive system. Number 1 is the expectation. Overall, we like to have within the top 3 on a global basis.
Depending on the products, we would be number one, number two, or number three, but we would eventually like to be one of the top suppliers in the global market. That is the kind of position we like to aim towards.
Question, in terms of the sales breakdown about powertrain and chassis and ADAS. What is the contribution to the overall sales or what is the target? Do you have those numbers?
Sorry, we don't have that number. Just to add on. That's Keihin, Showa, Nissin and also Chassis Brakes International and Hitachi Automotive Systems combined together. Brake system also has the Chassis Brake as well, CBI inclusive as well. It's a simple addition.
As a follow-up to the previous question, I would like to ask two questions. Number 1, the total for automotive parts integrated within these automotive parts-related companies and what's the % out of your revenue for the top three items? By 2025, how much % do you aim for? Do you have any specific image about that? That's my first question. Currently, there's not so many items which are in the top. In the previous categories that I have mentioned, the data I have right now are from the categories I mentioned before.
Suspension, currently, estimated market share for suspension is 11.1%, ranking number 4. The three companies added, then it would be 19.2%, ranking number 1. In brake systems, currently 4.7%, ranking number 8. With Nissin Kogyo and Chassis Brake International added, this would be 17%, the second rank. ECU at the moment is 6.5%, sixth rank. This will be 12.6%, ranking number 4. xEV inverter motor, if we are on our own, then it is 14%, ranking number 3. With Keihin together, this would be 17.3%, ranking the top. A simple addition, and this also includes estimates, that is the overall image. Question. About the major items like brake, suspension, ECU, inverter, these added together, how much % would that be out of the revenue of the integrated company? Answer. Excuse me, that is difficult to answer.
Question. My second question.
With M&A and fiscal discipline, you mentioned that you talked about D/E ratio and interest-bearing debt EBITDA ratio are very important indicators and also goodwill. As capital allocation, you have invested JPY 2 trillion-JPY 2.5 trillion of strategic investment, the original indicator, if that is cleared, then if there are good candidates, you would bid there?
Answer. Yes. To maintain fiscal discipline of JPY 2 trillion-JPY 2.5 trillion? Yes, I think it is consistent with that. JPY five trillion, JPY six trillion, JPY 10 trillion, are we going to acquire a certain amount and maintain D/E ratio? No, that's not possible. The current cash allocation, as we have indicated as of June, it is up to about 2021, showing the financial framework and investment for growth. I think it is generally consistent with that. Thank you.
We may buy if there's any good potential, but it's not that we will sacrifice our fiscal discipline. We may exchange with something and sell something else instead.
Question. There are many other briefings, and I cannot attend your automotive session, the integration announcement. One question. XEV motor inverter business, this is a question related to that. Honda, I think before there was a plan to exclusively supply to Honda. Recently in the Nidec, recently, Have already constructed plans to make major investment. Likewise, Mitsubishi Electric, they're building their sites in Himeji and Meiden. Also, Meiden, they're also building quite a large capacity. This time around, it is not as if you're investing in a lot of capacity or plants. We do not receive that impression. In terms of xEV motor inverter, if you can give us an update of this particular business. The Honda is part of the picture. If Honda is not able to do it, then of course it doesn't make sense to produce it.
We think as if the other companies are making investment and increasing the capacity. We have the visibility of other companies, we cannot say that for Hitachi. You are striving to become number one in 2025, we cannot see the clear picture. I think the key point here is electrification. What is the current state now? You have added with Keihin, now it's up to 17% in terms of the market, there are different types of motor inverters. What is the exact state right now? What is your future initiative? If you can give us an update, that would be helpful.
I don't have all the information in my head right now. JV, we have a JV business, motor business with motor. On a phase basis, we will launch the business.
It is not as if we would launch a large amount at once. That is not the case. We have Japan, China. On a phase basis, we would like to progress with the business. It is not as if that we would launch something large on a lump sum basis. Japan, we would do it within fiscal year 2019, and China within the fiscal year 2020, and U.S. 2022 or beyond. That is the timeframe we have in mind. Normally, I think this is the timeframe that is required. In China, we need to acquire the land, and also construct the buildings and test and so forth. We'd like to establish the company at the earliest phase possible. Start with Japan first, and then move on to China, and then eventually to U.S. That is the plan we have in mind.
In terms of the EV motors, this is xEV drive application and also for power generation application motors. These are what we have in mind. We would like to progress with this on a phase basis. This involves not just Honda, but also other OEMs as well. The new company will supply to, or will aim to supply to other OEMs as well. In terms of Nidec, about JPY 500 billion to JPY 1 trillion investment in five years, that's quite phenomenal. Sorry, this is question. That Nidec number is quite extraordinary, but if you can have an update. Answer. Sorry, I don't have an update. In the next briefing session, I'd like to compile the numbers and share those with you.
Question. If it's not in the CFO's head, then probably it's not that substantial. Answer. It is not JPY 500 billion or large.
With that, we would like to conclude today's briefing session on the results for the first half of the year. Thank you very much.