Thank you very much for coming despite our last-minute convocation. So we would now like to start Hitachi, briefing on the revision of consolidated financial forecast and the settlement in the South African project. First, let me introduce the presenters. Representative Executive Officer, Mr. Toshikazu Nishino. Representative Executive Officer and CFO, Mr. Mitsuaki Nishiyama. First of all, regarding the South African project, Mr. Nishino will explain.
This is Nishino, Executive Vice President and Executive Officer. Thank you very much for this last-minute notice, and thank you for attending at this late hour of the day. So we made three main announcements regarding the tender of shares of Hitachi Chemical and tender offer, and the transfer of the diagnostic imaging related business area.
They are decided to promote the selection and concentration of Hitachi Group businesses even further and focus on the digital solutions centering on Lumada so that we can accelerate the transformation to become the global leader in the Social Innovation Business that we are aiming for in our medium-term management plan 2021. These two, we do not have the press conference, but have the news release from related companies. Please take a look. In this briefing, as I mentioned at the outset, we will talk about the settlement with Mitsubishi Heavy Industries, MHI, regarding the boiler construction projects in the Republic of South Africa. Until now, we have caused concerns among the stakeholders, including our shareholders, but both parties have continued sincere discussions, and we came to an amicable settlement with agreeable conditions. The content of the settlement is listed in the press release.
Hitachi will transfer 35% of MHPS shares to MHI, and Hitachi, will pay settlement money to MHI. These two points. The financial impact regarding this settlement will be explained from our CFO, Nishiyama, later on. With this settlement, Hitachi, will withdraw from the management of MHPS, and as a result, MHPS will become a wholly owned subsidiary of MHI. So the ownership will change, but the already constructed thermal power plants and the maintenance services will be continued with collaboration with MHI to contribute to our customers. In Hitachi's energy business, in the energy sector, Hitachi, is preparing for the acquisition. We will acquire the ABB's world-class power grid business, and by combining it with Hitachi's digital technology, which is our strength, Hitachi will provide high value-added energy solutions globally.
In addition, the renewable energy, zero carbon, the eco-friendly, and nuclear energy and distributed power supply, Hitachi will contribute to the stabilization of energy supply and realization of decarbonized society by accelerating expansion of energy solutions. Next, the financial impact from the settlement and Hitachi Chemical, TOB will be explained, including the revision of the consolidated financial results. Mr. Nishiyama will explain.
This is Nishiyama speaking. I would like to talk about the forecast for fiscal year 2019. Please refer to page two of the PowerPoint material. Page number two it should be referred to. As given in the press release today, we have had the settlement of the South Africa project as well as regarding the tender of the shares of Hitachi Chemical. We have decided to revise the forecast for fiscal 2019. And the last forecast was given on October 30. We will be revising these numbers. Please refer to the third line, EBIT line should be referred to. For the third quarter in the South Africa project settlement, a loss of JPY 378 billion non-operating loss will be posted in the fourth quarter. The Hitachi Chemical proceeds for sales of JPY 278 billion non-operating profit will be posted.
As a result, EBIT will be reduced by JPY 100 billion from the last forecast to JPY 505 billion. For the net income attributable to the Hitachi stockholders, the impact of the settlement of South Africa project is JPY -338 billion. Hitachi Chemical sales impact is JPY 158 billion. The tax effect, JPY 30 billion. At the end of fiscal year, it means that it will be reduced by JPY 190 billion to JPY 170 billion in terms of net income. Regarding the operating profit, it has not changed from the JPY 685 billion that has been announced in October. Regarding the company split related to diagnostic imaging related business, it will not have an impact for 2019, although it will have an impact of JPY 111 billion in 2020. I would like to give you the explanation regarding South Africa project.
To MHI, the settlement money will be JPY 200 billion, and JPY 70 billion will be subtracted because of the credit transfer to MHI, which means that JPY 130 billion will be paid in March. Furthermore, regarding the shares held by Hitachi, in MHPS, will be transferred to MHI in the first half 2020, after the clearance is given by the antitrust authorities of the relevant countries. As a result, we will be posting JPY 248 billion in the third quarter of 2019. And as a result, we will be posting JPY 378 billion loss in the third quarter as an impact of this matter. For free cash flow, the payment outflow will be JPY 130 billion. When the transfer of shares of MHPS is completed in 2020, the tax loss will also be fixed. And the corporate tax for 2020 will be reduced by JPY 109 billion.
Therefore, the accumulated impact on net income attributable to Hitachi stockholders for 2019 and 2020 will be JPY -269 billion. In terms of the free cash flow for this year, there will be outflow of JPY 130 billion. However, as already mentioned, the corporate tax will be reduced by JPY 109 billion in 2020. Therefore, when the payment of tax is made in 2021, it will be subtracted. Therefore, in terms of free cash flow for 2019 and 2020, the outflow will be JPY 21 billion. I would now like to refer to the impact of the tender of shares of Hitachi Chemical. When the TOB is completed in the fourth quarter of 2019, the sales proceeds will be JPY 495 billion. The proceeds minus book value of JPY 278 billion.
The amount will be JPY 278 billion, and the impact on net income will be after subtracting JPY 120 billion in terms of corporate tax, amounting to JPY 158 billion. Free cash flow for 2019 will be JPY +422 billion. For fiscal year 2019 and 2020, JPY 302 billion cash inflow is expected. In terms of the challenge besetting our company, we have been recognizing EPC projects of the past, inclusive of the South Africa project. We have withdrawn from the overseas EPC projects, and last fiscal year, we have frozen the nuclear project of Horizon in the U.K. And the only remaining project was the South Africa project. With the settlement reached today, we will be revising downward the forecast for 2019. However, the risk relating to major EPC projects will now be behind us. With the minimum in cash outflow, we have been able to resolve this issue.
Therefore, the cash outflow impact on the 2021 mid-term management plan is very limited. Therefore, we will continue to make investment in our business inclusive of M&A, and have stable shareholder returns. This policy will remain intact. We will continue to work hard to achieve the objectives of the 2021 mid-term management plan and implement the strategies accordingly. Thank you very much.
Now we will start the Q&A session. Any questions? The front row to the end, please.
Question. For y our MP business, so you will do the existing thermal power plant maintenance. So, is there a delineation with what you do? And the other is the nuclear power business. MHPS turbine generator were equipped in some of them. For the nuclear power business, is there an impact?
Answer. So i n terms of maintenance, there are areas that Hitachi is strong in and where MHI is strong at. Hitachi's subsidiary, called Hitachi Power, has been doing this, and this will remain unchanged. So what I mentioned earlier is MHI and MHPS, and we executives have already agreed on, and MHPS probably said the same thing, the framework will not change. The capital will transfer and ownership will change, but from the customer's point of view, it will not change from customer's viewpoint. Now, nuclear.
Nuclear is similar to thermal power and is done in similar locations, but same story. It's just the ownership transfer. So on the actual site, front line, nothing will change. The investment situation, more money is now flowing into renewables. So the structural reform will be necessary accordingly. But regarding the capital transfer this time, will not have a change in the supply chain in the nuclear.
Any other questions? Next question, please.
Question. With respect to MHI, at the press conference they had, they said that the amount, JPY 550 billion, was recognized, and they are able to also post a profit from this transaction. But according to Hitachi's numbers, there is a difference. The question was posed accordingly, and it was said that they have not tried to align the numbers, but it is JPY -248 billion for MHPS is subject to valuation loss. That is probably why it looks smaller. That was the response from MHI. Please confirm.
Now, as I explained earlier, this amount of JPY 248 billion, the breakdown will be provided. Let me give you the breakdown. MHPS, the equity method stake is JPY 280 billion. For the credit is JPY 70 billion, and for MHPS is JPY 283 billion. And the provisions reversal was JPY 1.5 billion, and the net thereof was JPY 248 billion. Thank you.
Any other questions? The gentleman next.
Question. MHPS, why at this timing did you come to a settlement, if you could elaborate? You have been disputing for a few years, so maybe you could have waited for the arbitration. And the amount from MHI, they are not incurring much loss. But Hitachi, it will be an extraordinary loss of JPY 378 billion, so it may be more beneficial to MHI. So could you elaborate on the timing and the amount?
Answer. Thank you for the question. In one word, MHPS, I was involved when MHPS was established. When this company was established, the two large plants were still in the initial construction stage, so we did not know what trajectory it will go through. It was not clear which path we will go through till completion. So our path that we thought and MHI's path was before the construction.
So there were many possibilities and many factors, and we were discussing at that initial stage. When there was a diversion, we did not have a clear path to resolve them. And the plant construction progressed in Medupi and Kusile . Medupi has three big boilers, and they are generating power. Kusile stopped and operated, but three already generate power, and the other three, the customers wanted to go slow. So we say mechanical. In terms of the progress, one was already 99%, the other was 95%. In terms of cost, it became easier to come to an agreement, come to the same understanding, and therefore it took much time, and it caused you a lot of concerns and inconvenience, but it was about negotiation, and we could not be too specific. Depending on which. We had less diversions from both sides, and that's why we came to this decision.
And yes, there was arbitration. With many people's support, we were progressing with the arbitration. This is often the case. The arbitration is progressive. At the same time, we look for a compromise. And it took a little time to find the compromise. That's why it took this long. We wanted to come to a compromise from a while ago. From customers' point of view, from shareholders' point of view, they were always asking us where we were. So my answer to your question is, yes, arbitration was necessary, so that was underway. But at this timing, when arbitration seemed to look longer, we came to an agreement. So that's the big reason.
What about the question, the amount? Initially it was JPY 770 billion, MHI said, and you said it could be a little lower, so a little over JPY 500 billion. It seems like Hitachi, bore, shouldered almost all the amount. How can I understand this difference of JPY 100 billion?
Answer. The settlement value, there's no winner or loser. This was rational, reasonable for both sides. We came to an agreement that is reasonable for both sides. So for us, it's a cash out, direct cash out of JPY 130 billion, which is a minimum amount. For our cash plan in the medium-term management plan, the impact is minimal. For MHI, and for us, this is the optimal portfolio. We came to a solution that is most optimal for our portfolio. Thank you.
Question. At the time of the integration of the MHPS, it was going to be a number one thermal power plant business in the world with the revenues of JPY 2 trillion in 2020.
But now you're withdrawing from the construction of the thermal power plant. What is your impression of this decision?
Nishino-san, please.
Answer. This integration was necessary. The management environment at that time means that it was a success. There was the turbine business as well as the boiler business. In terms of the turbine business, we are world-class compete in terms of competition. This has been announced by MHPS for larger turbines. We have been maintaining the top share in the world. In Japan, the energy requirement necessitated such an integration. EPC business has its own difficulties and challenges. Decarbonization is being called for. It is not going to become zero carbon immediately. But with the lower use of carbon, the lives of people must be maintained. So we have to make sure that technology be provided which has less CO2 emissions.
Even though it is thermal power plant, it has lowest CO2 emissions in the world, and it is very efficient in terms of the gas and turbines. Therefore, our answer is that taking into consideration the management environment of that time, integration was the right thing to do. I think we have been successful. Thereafter, discussions were required in other matters. That is the theme that we are discussing today. The difficulty of the EPC has come to the fore, and that is one point to consider. Furthermore, MHI's president mentioned that decarbonization is becoming very important. This is also a major theme for MHI as well. Therefore, the management environment for energy is changing.
We have to correspond and meet these new challenges. That is also calling for a new reform in the management of this business. Looking back, it was the correct and right thing to do, and we believe that good results have been obtained through this b usiness.
Any other questions?
Question. I have two main questions. First is for clarification. You mentioned regarding the nuclear, decarbonization is one trend. So you will continue this? Am I correct?
Answer. Well, the earlier question was if the nuclear supply chain is okay, and I answered it is okay. For the nuclear business, Hitachi's thinking, I will briefly explain. For Japan, resumption and decommission, and the resumption and the reconstruction of Fukushima, so that remains unchanged. And we have been preparing for that. Just one year ago, Horizon was reported. There is nothing to report today exactly for that reason, because there is no change. No change, so there is nothing to report. But as has been mentioned, the general election just ended, so a new policy may come out. But as of today, there is no change that we need to communicate to you.
Question. You mentioned selection and concentration.
The three announcements will be the reorganization in that aspect. So enhancement of Lumada, M&A is not included. Right now you are trying to build up your physical capability to reorganize, put things in perspective.
Is that where you are right now?
Answer. Difficult question. I think you are asking whether we are preparing for something, but nothing we could share with you today, like I say always. You are right, we are thinking of many options and trying many things, but there is nothing I can say today. That is all. I mentioned two businesses will be brought outside of the group. As President Higashihara always says, in Hitachi, we are thinking of building a big business under Lumada or collaborating with other parties and combining with others' assets to enhance the business. We are trying to think which is better.
It is not whether it is important for Hitachi or not. It is different way of development. It is important for society. But Hitachi, has chosen Lumada. So is it better to utilize Lumada, or is it better for other companies to do it with their management asset? That is the difference.
Question. You are reorganizing right now, and you are trying to go for the right option. Now you are trying to enhance Lumada, JPY 2 trillion, JPY 2.5 trillion industry in IT will be enhanced. You are working on this behind the scene, but you will accelerate?
Answer. I think my answer will be the same. Thank you for that question, though. I appreciate it. We are working on many things. I am sorry, that is all I can say. But I'm sorry, that's all I can say.
Thank you very much.
Any other questions?
Question. Perhaps my understanding is not up to speed, and it might be a similar question to the one before. What about the option of maintaining the joint venture by paying the settlement money as well? Did you consider such an option?
Answer. I do not know if I should be responding to this question, but let me try. The numbers were elaborated for both companies before. It took time to come to this stage. In order to reach the same stage, we had to make progress in terms of the construction work. As Mr. Nishiyama has already explained today, why this is good for management should be considered as well. MHI's view may not be the same as us. The use of management resources will differ between the two companies. There were different options that we have considered over time. Both companies' strategies was the base in terms of money as well as stock as well. And based on that, we have come to this conclusion. In terms of responding to your questions, we have exhausted all the options in terms of consideration.
And the use of capital as well as the allocation of funding for Hitachi as best course was decided. On the part of MHI, they have come to the conclusion based on what is good for them.
Question. You mentioned that EPC is very difficult in terms of the overseas projects. Is that the case for all energy business, or is it Hitachi being more prudent for overseas EPC projects? Please elaborate.
Answer. In the past, we have had significant red ink in large EPC projects. For example, power grid business is a good case in point. We provided the equipment, did the installment, construction work was provided. But in terms of thermal power, as well as nuclear power, for the projects that we have withdrawn in the past, are mainly EPC projects. Compared to that, what we are trying to pursue going forward is a smaller portion.
Therefore, it would be easier to control for us. That is the type of business we will be focused on going forward. Construction and civil works in the EPC projects, which are large scale, will be avoided. That is the policy we will be pursuing in terms of chemical plants overseas, as well as the nuclear power plant business in the U.K. These are major EPC projects, and we want to distance ourselves from such large projects. That is the policy we have been implementing so far.
Question. It is not just limited to energy business, for the plant business overall, you are going to be more prudent on the part of Hitachi, for large projects?
Answer. ABB, that will be acquired. The power grid business is such that was a good example. In the past we had the offshore EPC wind, and that has been subject to red ink. But in the case of ABB, we have reduced this type of business, and we will be taking projects that is onshore rather than offshore, where risk is smaller. Therefore, we are being very careful in the selection and the operation of these projects.
Any other questions? Gentleman at the center, please.
Question. Thank you for the explanation. You will have base your business centering on Lumada going forward. Just to be sure, for nuclear, you will use Lumada to expand business. Is that the kind of model you are thinking of, or is this more for the country, for the people in the country? Is it for a bigger cause? If you could elaborate on that, please.
Answer. Very difficult question. The business Hitachi does is called social innovation. Basically, of course, profit is important, but from investors' point of view, return, of course, it is a business, so we have to focus on that, but we want to focus on business with social significance. If nuclear is needed, then yes, Hitachi will work hard on that. That is our vision on nuclear. So how is it related to Lumada? Complex plans have big room for digital to come in, to utilize digital. For example, in nuclear power generation, we can link it with the user side to have it used efficiently. Then it is digital that can come into play. The basic components are necessary, but we should not make redundant production or use it for 24 hours, or there may be some excess or some in shortage. Digital is necessary.
Energy and digital are very close. I am not just limiting myself to nuclear. That is why we acquired power grid business. Equipping it with digital is extremely significant. It will grow so fast. The answer to your question is, why nuclear? It is not just nuclear. Hitachi's business has social mission. Those complex systems are the ones that can really utilize digital. Thank you.
Question. You sold the healthcare business, but the heavy particle therapy part you still retain. You retain it because of the same reason you just explained? Could you elaborate?
Answer. I think I have said this before, but there are cancers that only this can cure. We have been treating so many people, allowing them to come back to the society. It has very little damage on the patients. You may think why we sell some, why we retain this, but healthcare is not something we should do in general. We want to focus on what we have strength in. So that is our aim this time. So I may not be the right person to explain this, but some components will remain in Hitachi. So my answer to your question is, it is a thin, fine beam and to cure with very little invasiveness.
This can be combined with AI, which is the strength of Hitachi. That is why. Thank you. So regarding the healthcare business that we are keeping, healthcare is one of our core businesses.
The businesses we keep are the ones, the in vitro diagnosis that will allow the detection of the disease or the PBT, proton beam therapy, less invasion, and the cell production for regenerative medicine, and the medical data analysis to improve the informatics, to improve the efficiency. We have strong technology there, and we can expect the market to grow. This is one of our core businesses that we will focus on going forward. Thank you very much.
Next question, please.
Yeah, question. First question is regarding the diagnostic imaging related business. What is the impact of cash? In the presentation material, page three the information is provided. It seems that the tax has not been explained. So please give me the net impact.
Regarding the answer, regarding the diagnostic imaging related business for 2020. In the second quarter, we will have closing of this transaction. Therefore, we are only showing the impact on the fiscal year 2019. That is the reason why there is no information regarding the diagnostic imaging related business. Let me give you some information. In terms of P&L , there will be precision sales, JPY 174 billion, and the enterprise value is JPY 178 billion.
As already explained to you, there will be JPY 5 billion in terms of net cash, or rather net debt of JPY 5 billion is being assumed. That means that JPY 174 billion is the proceeds. The book value is JPY 63 billion. Operating income level is JPY 111 billion. Tax will be subtracted to the tune of JPY 21 billion. Net income level, for 2020, bottom line impact will be JPY 90 billion. In terms of cash, there will be JPY 174 billion in terms of proceeds, and JPY 6 billion will be subtracted. Net cash in will be JPY 168 billion assumed. Thank you.
Question number two is relating to the South Africa project. I do not know if my memory is correct, but it seems that when MHPS was embarked upon, I understood that it is not going to go on the balance sheet because the price was not decided upon integration. In terms of P&L as well as BS, for Hitachi, I believe that there was impact of the South Africa project. Now with 100% transfer, does it mean that it is already no risk now?
Answer. Regarding MHPS, when it was established as a South Africa project, the profit loss was very close to breakeven, according to our assumption. At that time, significant loss was not expected. Therefore, as we transfer the business, all the assets and liabilities will be transferred. Therefore, there will be no residual risk relating to this project.
Question. The impact of asset is very limited when it does not involve cash?
On the balance sheet for the South Africa project. In terms of profit loss and balance sheet, I understand that asset has already been posted. Regarding MHPS, we are going to transfer the business.
Therefore, there is nothing remaining relating to the South Africa project anymore. Thank you.
Any other questions? If not, we would like to close the briefing for today. Thank you very much again for your attendance.