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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
The time has come to start Hitachi, Ltd. web conference on the third quarter fiscal year 2021 earnings. Thank you very much for your participation despite your busy schedules today.
The accompanying materials for today's meeting, they are available on the Hitachi, Ltd. IR site and the news release site for your reference.
I will now introduce the speakers for today: Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO; Tomomi Kato, General Manager of the Financial Strategy division; Masao Yoshikawa, Executive General Manager of the Investor Relations division.
Mr. Kato will be participating online as a precaution against COVID. Therefore, there could be some time lag in terms of the interaction, but we will do our utmost to facilitate the process.
Regarding the outline of the results, the CFO, Kawamura, will start the presentation. We will be setting up the screen now. Mr. Kawamura, please.
Thank you very much for the introduction. My name is Kawamura of CFO. I'm very happy to talk about the financial results for the third quarter ended December 31, 2021.
The Omicron variant infections are increasing significantly, and I would like to express my gratitude for everyone who is making effort to overcome this challenge.
This is the table of contents of what I would wish to cover today. I would like to give a qualitative explanation in number one. And the second item is Q1 to Q3 fiscal year 2021 results followed by Q3 fiscal year 2021 results. And lastly, I would like to talk about the fiscal year 2021 forecast.
Let me now explain the materials to you. Please refer to Page 3. Here, I would like to talk about the macroeconomic outlook that is changing very rapidly. The upper table shows the macroeconomy outlook by region. GDP is recovering even with the pandemic. The consumption is recovering for the calendar year 2021. You can see that in all the regions, GDP is likely to recover. But this has also had a significant impact on our orders received as well. It is growing very significantly on the back of the economic recovery.
But in the near term, having said that, there are some negative factors as well. First and foremost, the material prices such as steel as well as copper prices are soaring. So the more semiconductor shortage is continuing.
Ukraine is also a risk, I would like to address this if there is time. GlobalLogic has a development center in the Ukraine. So therefore, there is a concern in this area.
Interest rate is likely to increase. We have been enjoying low interest rate environment in the past. But as interest rate changes, the balance sheet may be impacted. And therefore, in the near term, we are faced with a very difficult management environment.
Even though we are faced with challenges, as you can see in the following page, we have implemented these measures. In Astemo, semiconductor shortage as well as the soaring material prices as well as the COVID-19 re-expansion is making the business conditions very harsh. However, we have been able to implement measures to overcome these challenges. And therefore, we have been able to maintain the fiscal year 2021 forecast.
Regarding semiconductor as well as material impact will be explained in the following page. JPY 100 billion negative impact was incurred, but it has been recovered. We have not changed the outlook for the year.
The bullet points should be referred to here. For semiconductors having impact in Hitachi Astemo as well as the Measurement & Analysis Systems. As for material cost increase, it's having an impact on Hitachi Astemo, Energy as well as Building Systems business.
COVID-19, with the Omicron variant, the overall business is also being impacted as well. But we have not changed the outlook for the year and the forecast has not changed.
Number two is related to what I have already covered. Orders are proceeding very well, I will show you a chart later. Especially in the area of the environment, such as Hitachi Energy and Railway System business has enjoyed very strong orders.
The first, I mentioned under number one. Even though semiconductor shortage as well as soaring material prices is challenged, but if this challenge can be overcome, we will be able to recover the business. Therefore, orders received will be an important driver for the recovery of the performance.
Regarding Lumada business, it has proceeded very successfully.
GlobalLogic is showing significant growth today. As already mentioned here, Hitachi Energy orders remains very strong and done while Q3 orders was to the tune of USD 4.2 billion. Order backlog is USD 14 billion. There is significant backlog is what we have today.
Railway Systems has been reported very recently JPY 300 billion in terms of the bullet train in the U.K.
Lumada on an organic basis is growing by 15%. GlobalLogic on the other hand, is increasing by more than 50%.
And therefore, in terms of environment as well as Lumada, GlobalLogic, for these strategic business have continued to grow significantly.
Number three, portfolio reshuffling or transformation is taking place as scheduled, as already announced. In fact, the Construction Machinery shares will be partly the disposal.
We had 22 entities that were parent-child listing. But with the sales of the Hitachi Construction Machinery shares, this issue will be behind us. Fully consolidated [ series ] will not be included anymore. Therefore, the portfolio transformation has run its course this fiscal year.
Now please refer to Page 5. Vertical axis show in the various businesses. The horizontal axis shows the various factors such as semiconductor shortage, soaring material prices and activity constraint due to pandemic and logistics and others. For each sector, we have identified here what have been the impact.
What is noteworthy is the area that is highlighted in black solid line, significant impact was found for Energy. Hitachi -- what used to be HAPG has been impacted by the electrical steel sheet. Supply is very tight, and prices increasing having a significant impact here.
For Mobility, on the other hand, in the area of material prices, the Elevator business has been impacted significantly in the second half.
For Hitachi Astemo, the semiconductor is having a significant impact and as well as steel and copper prices having an impact as well. I can address questions later regarding the impact in terms of monetary terms.
In terms of our income for semiconductor on a consolidated basis, the impact is around JPY 75 billion downward. And therefore, this will have to be recovered. In terms of material cost, the impact is JPY 90 billion. Compared to previous year, negative numbers have been presented. But we have not achieved the forecast for the fiscal year. Therefore, these 2 negative factors have been absorbed. And by so doing, we have not changed our forecast.
Page 6. Here, we have the highlights of the orders. Significant increases are shown here for IT, Hitachi Energy, Industry, Railway System and the Hitachi High-Tech. Y-o-Y for the third quarter as well as Q1 to Q3 numbers should be referred to. You can see that on Y-o-Y basis, IT, the increase was 112% to 106% on a cumulative basis for the 3 quarters. You can see that orders have increased in all these areas year-on-year. The basic factors are shown on the right-hand side.
If you look at IT, DX has remained very strong. Lumada solutions have been proceeding very successfully. GlobalLogic is having a significant positive impact.
For Hitachi Energy, on the other hand, as you can see here, the new grid has been established, renewable energy so will be accommodated and therefore the grand upgrade is taking place. And we have been able to respond to this need. Saudi-Egypt interconnector is a good case in point. In Denmark, on the other hand, the fast-charge EV operations business has been won.
For Industry, overall, the market is recovering. Especially the U.S. business is now recovering having an impact here.
For Railway Systems, as I have already mentioned, the U.K. bullet train has been won -- new businesses have been won.
And for High-Tech, new businesses have been won. So for these segments, we have been able to receive significant orders.
Page 7. Here, I would like to talk about the highlights of major business. Starting with GlobalLogic then Hitachi Energy, Hitachi Astemo and Railway Systems.
For GlobalLogic, as I have already mentioned, this has been a very strong business for us. As you can see in the table, the revenues on a Y-o-Y basis has grown by 151%. This is on a yen base and is 139% on a dollar basis, but nevertheless, growing very successfully.
To the right, Hitachi Energy. As I have already mentioned, the material cost is increasing, having a significant impact. Orders are very strong. However, impact is felt from cost increase. So revenues is 103%, AOI at minus 0.4.
And Astemo has been impacted very significantly by semiconductors as well as material costs. Y-o-Y basis, 164% increase in revenues, but AOI decreased by JPY 6.4 billion.
To the left, Railway Systems. Foreign exchange is having an impact and there is a revenue increasing impact, but material cost is having an impact. Project cost is increasing. As a result, revenues year-on-year was 112% AOI was minus 0.2. Therefore, the semiconductors as well as material cost is having a significant impact on our operations.
Page 8, Lumada. As I have already mentioned at the onset, this is growing as planned. And the bar graph should be referred to, the red is showing the Lumada core business and gray is the related business for Lumada. And at the end of the fiscal year, I'd just like to show to JPY 1.06 trillion, growth by 40%. This is organic growth. Without M&A, 70% growth -- organic growth is expected.
Right-hand side, pie graph should be referred to, you can see that revenues are increasing. But the mix is changing. There are 2 factors to be mentioned here. If you compare the 2 pies, Energy is different. It was 3% last year. With the Hitachi Energy collaboration is making progress, so it has increased to 7%.
Smart Life. Left-hand side is 6%. To the right, it has increased to 12%. This is because of collaboration with High-Tech having an impact.
So the mix is changing. And in fact, this is a scenario that we have aspired to achieve.
Now so far, I have talked about the major characteristics of the third quarter results. From the next page onward, I would like to talk about the Q1 to Q3 results.
Please refer to Page 10. This is showing Q1 to Q3 results. Revenues and adjusted operating income is shown here. This is an increase in revenues as well as increase in operating income. Now if you look at the operating income on an adjusted basis, there was JPY 316.9 billion increased to JPY 484.4 billion, which is an increase by 1.5x.
And the right-hand side, some things are presented. Overseas revenues has increased by 41%. Lumada business has grown by 40%. EBIT increased by JPY 97.8 billion. And the net income attributable to Hitachi has increased to JPY 450.7 billion, increase of JPY 142.9 billion. The annual target is JPY 550 billion. So we have already achieved 82% now.
EBITDA is JPY 1 trillion. And operating cash flow is negative, but operations are making progress. Therefore, the inventory is increasing, and as a result, free cash flow is being impacted negatively. Working capital is increasing by JPY 200 billion.
Please now refer to Page 11, results by 5 sectors. Astemo and listed subsidiaries results are shown here. Now for the 3 quarters, please look at the caption. About the 5 sectors, on hand, revenues, profits increase. Astemo, on hand also, revenues and profit increase. Listed subsidiaries also recorded an increase in revenues and in profits. So please refer to the numbers below.
The second from the top is adjusted operating income. For 5 sectors, it's JPY 368.7 billion; Astemo, JPY 34.5 billion; and listed subsidiaries, JPY 81.1 billion. Y-o-Y number is also shown here. And total is JPY 484.4 billion. This was the bar graph in the middle. This has increased by JPY 167.5 billion year-on-year.
Adjusted operating income ratio is also shown here. Well, the 5 sectors, 7.7%. Astemo has been struggling because of the factors aforementioned at 3%. Listed subsidiaries improved significantly at 5.7%. Total is 6.6%.
Page 12 and Page 13, Page 14, the detailed segment information. So let me highlight the areas that are difficult.
First of all, referring to Page 12, IT. For -- the grayed out area should be referred to, the adjusted operating, JPY 70.6 billion. Margin was 11.4%. But if you look at the Y-o-Y comparison, it's minus JPY 3.2 billion. The reason is shown on the right-hand side. GlobalLogic was acquired, so there is PPA amortization that has begun to the tune of JPY 10 billion. Therefore, this is also having an impact as well.
For IT, there is also Services & Platform that is not noteworthy. Y-o-Y AOI is plus JPY 1.3 billion, but if it is decreased by 0.4 points. The semiconductor shortage is having an impact for the storage business in the United States. We have orders, but I cannot accommodate because of the parts are in shortage having an impact on delivery and shipment.
Energy, Y-o-Y is plus JPY 15.6 billion. That's a 1.9 point increase. Recently, we have been discussing Hitachi Energy power grid. If you look below, Hitachi Energy is included here. The [indiscernible] basis for the 3 quarters, JPY 47.6 billion. Margin was 6.0% for Hitachi Energy. And to the right, Y-o-Y. AOI is JPY 12 billion, which is negative 1 point. In addition to this, as shown below, the related costs that have been incurred to the tune of JPY 52.7 billion, inclusive of PPA amortization. Therefore, this is the situation of Hitachi Energy.
Page 13, Industry. All the segments are recovering for the past year because of the pandemic. Customers have curtailed investment, but now this is coming back. For Industry, at the very top, Y-o-Y basis, AOI basis was JPY 29.6 billion or increased by 4.4 points. To the right, it is mentioned that the U.S. JR Automation for robotics in the United States has been recovering very significantly.
Mobility. Y-o-Y basis is plus JPY 5.3 billion or 0.9 point negative. The reason is because of the Building System Elevator business. In China, on a continuous basis, we have been expanding the Elevator business. But renewal business we have in Japan for our customers' buildings and hotels are not making progress. This is having an impact on this number.
Smart Life, Y-o-Y is minus JPY 10.8 billion. That's plus/minus 0 points. The reason why it has declined by JPY 10.8 billion is because of the diagnostic imaging-related business, and that has been sold to Fujifilm. And the home appliances at Smart Life & Ecofriendly Systems Arcelik has acquired business, which is having an impact.
Page 14. This is Astemo. For the 3 quarters Y-o-Y was -- AOI increased by JPY 34.6 billion. It is different on a stand-alone basis, but for the 3 quarters this is the number.
Hitachi Construction Machinery recovering by JPY 42.9 billion, recovered by 5.3 points.
Hitachi Metal, a significant recovery at JPY 29.2 billion, plus 4.6 points.
At the very bottom, total Y-o-Y basis, AOI increased by JPY 167.5 billion or 1.3 point increase has been achieved.
Page 15, the upper graph is showing revenues and below is adjusted operating income. To the left is the 3 quarters for last year and to the right is the 3 quarters for this fiscal year. The waterfall chart is shown between the 2 numbers.
So let me talk about revenue because it's the same for AOI. Now this year, various measures have been implemented. What are significant are shown here. First is the acquisition of Power Grid business. Next, Hitachi Astemo, Honda parts companies have been integrated, the acquisition of GlobalLogic and the foreign exchange has had an impact as well. Yen is becoming weaker. This is having an impact leading to the number on the right-hand side. AOI showed similar trends.
So please refer to Page 16. This is the revenues by market. On a clockwise basis North America, plus -- a 46% increase was achieved in terms of revenues. Europe, pandemic was having -- running rampant, but Energy has grown by -- and overall 33% increase. China grew by 37%. Japan is in a very difficult situation, it is almost flat. And ASEAN, India, other areas increased by 54%. Other areas increased by 35%. Energy, Astemo has driven the recovery.
As you can see below in the overseas revenues, the ratio is 61% for overseas in the first quarter, second quarter. It was 62% for the first quarter. Second quarter was 60%. Therefore, in the third quarter, there is no significant change.
Please take a look at Page 17. This shows the financial position and cash flows. On the far right, there's a change from March 2021. This is part of the balance sheet. So what we're comparing against is end of fiscal year 2020 and the end of the third quarter this fiscal year. There are 2 or 3 features to focus on: debt-bearing debt (sic) [ interest-bearing debt ] has increased by JPY 1.1 trillion. When we acquired GlobalLogic, we used that debt for funding and so that is reflected.
Below that, total Hitachi stockholders' equity. Of course, we are gaining a profit. This is elevated by JPY 424.6 billion.
And going below cash conversion cycle, the number of days with respect to cash, we are strenuously collecting debt and so this has improved by 4 days. D/E ratio at the bottom, debt-equity ratio. The funding for GlobalLogic acquisition was funded by debt. So on a short-term basis, it has risen to 0.72x, increased by 0.18 points. But on a full year basis, it is seeing improvement. So by the next fiscal year, with increase in operating profit, we will bring this down to 0.5% or so, which is the level that we have planned. It's above 0.7, but it is coming down and it will be back to 0.5 or so next fiscal year.
And cash flow, cash flow from operating activities because of increased working capital, it has deteriorated. And the cash flows from investing activities, it has risen by JPY 261 billion and that is because of a reactionary change from the sale of Hitachi Chemicals from last year.
So that is where we are in terms of financial position and cash flows. So far, I talked about our performance on a cumulative basis up to the end of the third quarter.
Now please take a look at Q3 results, specifically on Page 19. Revenue, adjusted operating income, both revenue as well as AOI have gone up. Please take a look at AOI in the middle. One year ago, it was JPY 136.1 billion; this year, JPY 174.4 billion. So it has increased by more than 30%. It's 1.3x or so increase year-on-year.
And overseas revenue on a year-on-year basis, 24% increase. The Lumada business, up 43% year-on-year. EBIT increased by JPY 58.6 billion. And net income attributable to stockholders JPY 71.2 billion. EBIT, JPY 68.2 billion. Because of the reasons I stated, cash flow from operating activities are down, but basically both revenue and AOI have risen.
Pages 20 and 21, these are details. On Page 21, just like we saw earlier on a cumulative basis, 5 sectors, Astemo and listed subsidiaries, their performance is listed. Please take a look at the caption at the top. Five sectors have seen both increase in revenues and profits. Astemo, on a cumulative basis, up until the third quarter increased in revenue and profit. But for the results only, it has increased our revenue but down in operating profit. Listed subsidiaries, both revenues and profit increased for HCM, Hitachi Metals.
For 5 sectors, you can see that JPY 133.9 billion; Astemo, with JPY 12.2 billion down; listed subsidiaries, 28.2% (sic) [ JPY 28.2 billion ]. And the ratio, 8.2% for the parent, Astemo, 3.1%; for Astemo -- listed subsidiaries, 5.9%. Total, 6.9%.
Page 21. We are facing with a harsh business environment. And for those businesses, what are the details that is described here on Page 21? As I said for our IT business, please take a look at AOI, 11.2%, so down by 2.3%. So transportation and traffic-related areas, especially where Railway business is concerned, there was reduced investment from our customers and the semiconductor shortage is affected. Lumada is robust. And so if you net against the pluses and minuses, this is where we are. And GlobalLogic, JPY 10 billion or so of amortization has kicked in.
And Hitachi Energy, this is an extension of what I said earlier. So rising material prices have had a major impact, and so down by JPY 0.4 billion. But orders are up.
And Building Systems, down JPY 1 billion. China has seen a recovery, but customers here in Japan are not having renewals, and therefore, that is negatively impacting our business in Japan.
Railway Systems. Orders are quite firm, but product mix and -- product mix change and increase in project ramp-up, overall, it's negative.
Hitachi High-Tech Industrial Solutions business, the trading house business we have been quite selective in choosing what is profitable at the micro level. This is the reason behind the reduction in revenue and operating income. And semiconductor shortage is also impacting. Hitachi Astemo, JPY 6.4 billion down year-on-year.
So these are the factors -- some of the factors negatively impacting our business. So that was the third quarter results.
Page 23 and onwards, inclusive of the fourth quarter, what is going to be the forecast for the full year, I would like to explain. Page 23, revenue, AOI, both are listed. Both revenue and AOI are expected to increase.
On the left-hand side, revenues, we're seeing market recovery and Power Grid business, GlobalLogic acquired. And therefore, revenues will hit JPY 10 trillion. We will recover to the JPY 10 trillion level for the first time in several years.
On the right-hand side, adjusted operating income, JPY 227.8 billion. And this number remains unchanged from the previous forecast. As I'm repeating, because of semiconductor shortage and material costs increase, more than JPY 10 billion of impact we're overcoming that.
On the right-hand side, on net income, JPY 550 billion, that remains unchanged. Therefore, no change from the previous forecast. Cash flow from operating activities, JPY 750 billion, no change. Core free cash flow remains unchanged. ROIC, there was a somewhat reduction in profit. ROIC has deteriorated. It was 8.1% in October. It now is going to be 7.6%. And FX rate that is assumed this time, JPY 110 to the dollar, JPY 130 to the euro. The last time it was JPY 105 and JPY 125 to the dollar and euro, respectively, but now we have changed the assumptions.
If there's JPY 1 change in the FX, what would be the sensitivity? On a U.S. dollar basis, in terms of revenue, plus JPY 5.5 billion; in euros, JPY 2 billion difference in revenue.
Take a look at Page 24. Forecast for the full year for 5 sectors, Astemo and listed subsidiaries, please take a look at the bullet points. Five sectors are expected to have increase in revenue and profit. Astemo on a full year basis, the same increase in revenue and profit. Listed subsidiaries, the same. And in total, revenues will reach JPY 10 trillion in total.
And AOI, 5 sectors, JPY 546 billion; Astemo, JPY 68 billion; listed subsidiaries, JPY 109 billion. And the total comes to JPY 723 billion we saw earlier and year-on-year increase of 227.8%. AOI ratio, 8.3%, 4.3% and 5.8% totaled 7.2%. It's an improvement by 1.5 points.
Page 25, please. By segment, what is going to be the forecast? The major trend is such that it is basically the same as the trend we saw on a cumulative basis until Q3. IT, no change from previous segment forecast. JPY 263 billion, 12% in AOI. The U.S. storage business, depreciation and amortization because of DTA is impacting.
Energy, JPY 30 billion, 2.3% in AOI. And year-on-year increase of JPY 77.7 billion, up to 6.6 points.
Hitachi Energy, JPY 64.7 billion; AOI forecast, 6.2%. And this is up by JPY 32.5 billion, 1.7 point increase and PTA (sic) [ PPA ] amortization now JPY 4.4 billion will be added, and that's this number.
Page 26, Industry segment. FY 2021 forecast in gray. AOI, JPY 80 billion margin, 9.0% year-on-year, increase by JPY 34.4 billion, up by 3.5 points. Across the board, there's recovery.
Mobility, as I mentioned, the Building Systems Elevator business because of material cost increase and renewal not advancing in Japan. So in terms of absolute number, it's up. But revenues up, operating income down, so it's down.
Smart Life, plus JPY 11.6 billion, up 2.8 points. However, home appliances are down. We have sold overseas home appliances business to Arcelik, that is impacting.
Page 27, Astemo. So take a look at Y-o-Y AOI. You can see that all the segments or entities are seeing plus numbers -- positive numbers and the trends are the same. So JPY 10 trillion in revenue, JPY 723 billion in AOI. And this is up by JPY 227.8 billion in total in terms of AOI increase.
Page 28. This shows the transition from last fiscal year to this fiscal year. The factors behind have not changed in terms of revenue at the top, so last year's number on the far left and acquisition of Power Grid business, Hitachi Astemo integration, acquisition of GlobalLogic and FY impact in terms of revenues is this much.
On the right-hand side, you see the number forecasted for this fiscal year, JPY 10 trillion. And AOI below JPY 495 billion, up to JPY 723 billion. The factors are the same.
Page 29. We try to be creative in showing this, this time. At the time what we reported in October, the numbers as of October last year and this time the forecast below. JPY 723 billion on the far left, unchanged. JPY 550 billion on the right, no change there either.
In between, there's change. Hitachi Metals sales gain was expected to happen in October, but it's taking longer than expected because of anti-monopoly regulation clearance. And so the slippage in terms of the time line it will be deferred to next fiscal year. So this is eliminated. With business reorganization structural reform, because of these initiatives, we are reducing cost. So what we expected to be JPY 50 billion is down to JPY 30 billion, JPY 63 billion to JPY 7 billion.
On the right, tax was expected to be JPY 180 billion. It's now down to JPY 140 billion. We have credits in the U.S. We were able to utilize that for tax purposes. And so though Hitachi Metal sales is deferred -- postponed we are able to keep the net income forecast number the same at JPY 550 billion. So that is the content of the report.
Page 31 and onward, the appendix. FY 2020 on a Q3 specific basis and cumulative numbers. Page 31, you can see that the forecast has not changed. 100% revenue as well as AOI and net income.
Energy, Industry on Page 33; Mobility, Page 34; Life, Page 35; Astemo, HCM and Metal on Page 36; and the total is on Page 37.
I'm sorry for rushing through. But that concludes my report. Thank you.
Thank you, Mr. Kawamura. We will now proceed to the Q&A session. [Operator Instructions] We will not share the video of the people who are asking questions. We will take questions in order of the Japanese channel media: institutional investors, analysts, then English channel participants in this order.
So first, we will take questions from the media on the Japanese channel. [Operator Instructions]
I hope you can hear me. I have 2 questions, first is regarding Lumada. Currently, the Lumada profit contribution, please elaborate. On the IR day, in '25, JPY 500 million out of AOI of JPY 1 trillion is to be achieved in 2025. What is the progress made so far? And what is necessary in order to realize this goal?
And if there are any interesting segments where Lumada has not taken root, what are the challenges that must be overcome?
For Lumada profitability, we only have the number in aggregate. We don't have a breakdown by industry segment. And Mr. Kato will respond later.
On Page 8, looking at the high graph, I think you alluded to the fact that it has not taken root fully. But as you can see here in this graph, IT is a very large segment. Energy is a recovering industry is also growing. Mobility, in line, are following. Therefore across the board, the Lumada utilization is increasing. As I have already mentioned, in terms of Railway Systems and Energy, Hitachi Energy, effective utilization has been made. And therefore, there is no sector that is lagging behind in terms of Lumada utilization. According to the numbers, that is not the case. There is no sector that is behind.
As already mentioned here, in terms of environment related, the utilization of Lumada is increasing. As mentioned here on the topics on Page 8, decarbonization applications in terms of data management or visualization of data, areas where Lumada is very effective, therefore, environment is an important pillar for our company. And therefore, going forward, across the board, especially in the area of the environment I'm sure that Lumada will continue to be increasingly utilized.
Regarding profit, I'd like to ask Kato-san to supplement.
Let me add the following. From the past, for Lumada business, profit was somewhat qualitative in terms of our response. 10% to be exceeded in terms of profitability. And for our core business and related business, we should achieve this level. So we will continue to focus on profitability increase. Revenues are increasing, and therefore, in line with that, profitability increase will also be promoted.
Now to your second question, a 10% profit objective for next year. But the semiconductor shortage is having an impact. What is the probability of achieving this? With the Hitachi Metals, there could be a delay. And operating profit margin, 10%, what is the progress made and what is the outlook for the next fiscal year?
Thank you for your question. This is something that we have been discussing from the past. The 10% profit margin was the goal that we have set for this midterm plan. But last year has been impacted by the COVID pandemic, therefore, it has been different to next fiscal year. The current situation is such that, for the 5 sectors on an individual basis as well as the PPA amortization is also included. But on a stand-alone basis, if excluding these factors, we believe that 10% is achievable.
For Astemo and for our subsidiaries, the profitability increment will have an impact on whether we can achieve this number. About the 5 sectors, for the time being and if we exclude the PPA amortization, we believe that 10% is achievable according to our plan.
Next, [ Yamamata-san ].
Can you hear me?
Yes.
There are 2 questions I wish to ask. Question number one, with respect to GlobalLogic. Upfront, Kawamura-san talked about GlobalLogic. There's a large development center in Ukraine held by GlobalLogic, but because of rising tension in Ukraine, what is the impact that you are feeling in Ukraine? And what is the outlook from your perspective going forward? That's my first question.
And the second question is detailed. Because of shortage of parts and components, U.S. storage business is being affected. What is the value or amount that's affected?
Thank you for the questions. So first question regarding Ukraine, we are concerned about Ukraine very much. We are following up on CNN news and other news reports. There are several thousands of employees in Ukraine GlobalLogic. But has there been any substantial impact so far? No, so they're operating as usual. If something happens, I think the problem will be concentrated on the borders. So for the time being, we are not expecting any major impact on the operations.
But if invasion extends to Kiev, how should we protect the safety of our employees? We have to think, and so they will inevitably be impacted. But so far, as far as GlobalLogic's usual operations are concerned, they are not affected from what we're told. We just hope that it will not turn into a major conflict or war. And so we are closely monitoring the U.S. response and situation with the hope that this will not end in a conflict or war.
And the second question will be answered by Kato-san, the impact from semiconductor shortage.
Yes. So your second question regarding semiconductor shortage impact. Of the overall impact we explained earlier, we're not giving you the breakdown, but not on the order of 10 -- more than JPY 10 billion. So that is where we are.
Are there any further questions from the media on the Japanese channel? [Operator Instructions] There seem not, we will proceed to the institutional investors and analysts on the Japanese channel. [Operator Instructions] Ezawa-san?
I just have 1 question. In the materials, you talked about a D/E ratio at 0.5 you want to improve going forward. That was mentioned in the presentation. For next fiscal year, cash flow will be generated as Kawamura-san has explained. But cash flow from the sale of a subsidiary is expected, I believe, and there is also cash flow from business to be generated. So it seems that the 0.5 can be exceeded very significantly in terms of improvement.
So what will be the capital allocation from the that point onward? And how much share buyback will you contemplate from the original plan? For Hitachi Metals, timing has been delayed from the original schedule. So how has this impacted the capital allocation going forward? Please elaborate.
Regarding capital allocation, in fact, this is being formulated as we speak under President [indiscernible], the new midterm management plan is being formulated. And around the Golden Week after the end of the fiscal year, we will be able to give clarity. We'll be able to announce it. Basically, we do not intend to make a significant change in terms of capital allocation. In other words, we are not contemplating significant M&A. For example, so 1/3 each is what we have been setting. 1/3 is M&A, 1/3 is return to shareholders and 1/3 for business. This has not changed.
Regarding D/E ratio, according to the calculations that we have made, at the end of March, we should be able to recover to a level of 0.63. At that time, whether we want to do more than this will depend on the operating cash flow for next fiscal year. On business-as-usual basis, we will be recovering to the level of 0.63.
And if you -- if we have excessive cash flow, what are we going to do is the question. And comprehensive consideration will remain on capital allocation, but this isn't as if we're going to do something conspicuous. A balanced approach will be emphasized.
Regarding buyback, we have the intention to do so at the level of top management. And I mentioned this at a forum recently, acquisition of company or divestiture request is very significant. We want to do this, but the open windows are hard to come by. So we are looking for such opportunities at the same time. So the amount that has been contemplated will depend on cash flow that is to be generated.
In terms of budget, JPY 100 billion or even higher than that, around JPY 100 billion is being contemplated. But it could be just one-off -- onetime, but there could be different methods that will be taken into consideration.
So that is how we are going to comprehensively deal with capital allocation. Depends on operating cash flow generation, that is very important. Based on that, we will consider what to do in next fiscal year.
I have a follow-up question. You said it could be onetime implementation or it could be a different method that could be contemplated. But regarding D/E ratio and capital allocation, as such, that is not just -- it should not just be focused on the 1 year going forward. For now, a new midterm plan will be announced next spring. D/E ratio is 0.5 is a certain standard and 1/3 allocation each in a balanced approach has been mentioned.
Is this is the new policy? So for shareholder return, it is not just a onetime, but when there is excess, there will be incremental allocation. May I understand that to be the case?
As you've rightly mentioned, it isn't as if there is a set formula. We are not bound by a certain formula. We want to be flexible in this area. For D/E ratio, historically, for our company, we have been very strong, 0.3% or 0.4% has been the number in the past. So therefore, mentally reverting back to this level seems to be appropriate. But on the other hand, companies must continue to grow. Investment to grow -- investment for growth is necessary. So when there is a good opportunity, because we have a strong balance sheet, using debt for acquisition is a possibility we will consider.
Therefore, D/E ratio 0.5 is not something we are bound by or a shareholder return, 1/3, is not something that we -- that is set in stone. But we do -- but having said that, we need a standard. That is the reason why we are talking about 1/3 rule. That would be the basic standard, but we are not bound by that. Debt-equity ratio is 0.5 or 1/3 is not something that we are -- that is rigid for us.
To continue, Yoshizumi-san.
I have 2 questions to ask. Question number one, about shortage of parts and components and rising material prices and the impact. You talked JPY 750 billion of impact for semiconductor shortage, Material costs increased JPY 90 billion. Are these net numbers? Are these the impacts on a net basis?
Well, the last time, I think semiconductor and parts and components price increase was JPY 15 billion, JPY 5 billion and JPY 10 billion, respectively. And so, is that right? And how have you responded to this, inclusive of passing on the rising price to customers? Have you done so? And when do you think that these trends will ease? If you have an outlook, if you could share that with us, please?
Thank you for your questions. On Page 5, as I said, semiconductor shortage in terms of AOI, JPY 75 billion and parts and components, JPY 9 billion (sic) [ JPY 90 billion ] at the operating income level. This reflects our measures. We have made various responses and measures. On a net basis, these are the impacts. So net impact.
And Kato-san will provide you with more details. Over to Kato-san.
In terms of the gross impact, this time, JPY 120 billion; and with improvement, JPY 90 billion. Last time, it was JPY 150 billion in gross and JPY 80 billion in net. Deterioration by JPY 15 billion year-on-year, that's correct. So total of JPY 15 billion. [ JPY 100 billion -- JPY 80 billion ] in semiconductor, parts and components from JPY 75 billion. So a negative JPY 10 billion change.
And so how are we going to respond to that was the second part of your question. We're talking about semiconductors and parts and components. What is happening is inflation. Inflation is happening not with components and semiconductors alone, labor cost and freight transportation. So inflation is happening across the board. And the question is, what are we going to do with them?
In terms of the inflation, the overall cost structure is up. It's shifting upward. So passing on increased price to customers. We'll have no choice but to ask our customers to take on price increases, and we will be doing this firmly going forward.
And of course, cost control will be implemented. We did not give you details, but considerably, we are reducing costs. How are we doing that? Three ways: one, we are having the long-term stable contracts. That is the basic approach. And even with a long-term contract in place, because of supply and demand situation, steel, copper, these material prices move on a short-term basis. So we are buying them on a spot basis from time to time. And number three, now that the market has become very tight partially, depending on the cases, we have to think of manufacturing some of the parts and components in-house internally.
Well, power semiconductors, we do make in-house. So inclusive of that, to what extent should we manufacture in-house? And once the price adjustment happens once again, taking things on board in-house may become difficult.
But -- so long-term contracts, spot price purchases and some of the strategic parts and components we're partially thinking of manufacturing in-house. So these are the measures we are taking or preparing to take.
Just to add to that, the impact of the price hike, when will that show? Have you already seen the impact of that? That's my question.
We're trying to raise prices where we can. And in terms of orders, next fiscal year, we may take orders. Parts components are procured and they are going to be manufactured in the plant, and that all -- it could have a major impact. And so passing on price increase that will have to happen in the sales and marketing activities starting next year.
So we may have an order received, but with inflation happening in the meantime, our production yield may deteriorate. So we will have to amend the contracts with our customers, if necessary, and renegotiate the prices with our customers, if that is necessary. So we're asking customers to share in terms of increased costs. So full-fledged activities as such will start next year.
My second question. Q4 results, if I may ask about the details. Q3 profit and Q4 profit, the way in which it's generated, there seems to be a jump or gap in 3 areas. Number one, IT Q4 profit and Hitachi Energy, there seems to be increase in profit for Q4; and Hitachi High-Tech. So it seems that Q4 profits are considerably higher compared to Q3 for these 3 areas. Is there a skew or focus in those 3 areas and is that wise?
Let me ask Kato-san to answer this. Are we manipulating this in a complex manner? No. These are pretty straightforward, but I would like to ask Kato-san to answer.
So allow me to explain. Kato speaking. Starting from the easiest, IT. In the area of IT, as we explained today, Lumada Front Business and SAP GlobalLogic, these are doing very well. As we said, for performance, Q1 through Q3, there is a lot of demand. But unfortunately, because of shortage of semiconductors, we have not been able to produce enough storage products and so we are taking measures to secure more semiconductors. And that effect in the fourth quarter will start to show. That is what we expect to see. So that's perhaps easiest to explain.
And the rest, Energy, bringing fixed cost an appropriate level we are taking measures. And the impact from that is reflected in the fourth quarter forecast. So that's another reason.
And Hitachi High-Tech, semiconductor manufacturing equipment or blood analytical equipment, there's a lot of demand. But discrete semiconductors are in shortage. We're taking measures for that.
So in the fourth quarter, we believe that we can do more than what we did in Q3. So there are constraints, restrictions and we're taking measures to alleviate them for the fourth quarter.
[ Takisa-san ], please?
I have 2 questions. First of all, regarding GlobalLogic orders received. In your explanation, you said that U.S. and European major companies are the deals that you're achieving. But what about the GlobalLogic on a stand-alone basis, have they missed opportunities or other cross-sell contracts on Energy and Railway System? You said that there is collaboration. Is that already included in the orders received?
This is Yoshikawa speaking. I would like to respond. Regarding Hitachi Vantara, we have this company in the United States. There is cross-sell activities that are underway already. Whether this is included in orders received or not cannot be responded to at this point in time. But it's not just with Vantara. But with Hitachi Energy Power Grid, there's energy digital solutions, collaboration is expanding in this area.
In Tokyo, on the other hand, there are co-creation projects underway. It has already begun. Whether it has led to specific orders received are mixed. That is how you should understand the situation. So rather than a stand-alone basis, activities are already underway.
Regarding GlobalLogic orders, is it -- are the orders receiving similar to revenues at 40% level that you have shown here? Is that how it is growing?
Yes. Situation is similar.
Regarding the IT segment profitability. With the GlobalLogic integration, there must be one-off expenses that have been incurred. Is it in addition to PPA amortization, JPY 10 billion? Or is there additional expenses? And if so, how much? Please elaborate. I'm talking about Page 12.
There is a PPA that's about JPY 12 billion amortization. There are also other detailed expenses, but basically it's the amortization of the PPA. Kato-san, do you have anything to add?
Now let me give you some detailed answer. PPA amortization on Page 12 for 3Q, 3 quarters are shown here. But that's from July, so it is for 2 quarters. About JPY 3 billion per quarter, so it's about JPY 6 billion that is included. Annual basis will be JPY 9 billion. it should be around JPY 12 billion on a normal basis. But other than that, there's been no change from the last time we spoke.
Yasui-san?
I have 3 questions I would like to ask. So question number one, Page 24, the 5 sector operating income for FY '21. As the original plan for the next fiscal year, I think you were aiming at 10%. So even including PPA, you are going to aim at achieving 10% from what I remember. So you seem to have toned down the rhetoric, it seems, and so have you made a downward revision since then?
My second question, I estimated PPA myself. Roughly, it's about JPY 70 billion that's posted this fiscal year. If that is reversed, JPY 610 billion. If 10% is the target, JPY 650 billion. So there is not going to be much of an increase in profit next fiscal year. Is that understanding correct? If you could confirm or deny that. Question number three, FY '22, you're looking to increase revenue given the environment Digital Green (sic) [ Green & Digital ], GlobalLogic, you have those lined up. So for next fiscal year, with the performance of FY '21 in mind, what are the areas that we should be paying attention to for fiscal year 2022?
Thank you for the questions. Page 24, on that page, take a look at 5 sectors. AOI, 8.3%, excluding PPA, I said. So you were asking wasn't that 10%, so that was the question. Of course, it will be ideal if we can have 10%. But when we came up with the original plan, are all the potential large M&As reflected to come up with this 10%? That was not the case.
So it's not that we made a downward revision. The assumption for coming up with the medium term, there were some large M&As. And so we thought that we should exclude PPA to generate the numbers. So for the 5 sectors, excluding PPA, we are showing this number. That is the line of thinking that we had.
And second, did we have a downward revision? In principle, we're not thinking of having downward revisions at this moment. And so we're keeping these numbers as of now. And Kato-san?
The number including PPA vis-a-vis next fiscal year's profit isn't that going to have an impact. And so perhaps next year, we're not going to see a large increase in income. Although the plan is not there, might be difficult to comment. But Kato-san, if you could elaborate?
Understood. Let me first of all explain this year's situation. And the size of amortization of PPA in terms of M&A, FY '21, JPY 73 billion in total. In terms of 5 sectors, JPY 64.5 billion. So Page 24, 5 sectors, AOI, JPY 546 billion. If you add JPY 64.5 billion, that's about JPY 600 billion. So in terms of the ratio, 9.3%. Inclusive of PPA for the 5 sectors, it's going to be around 9.3%. As was said, there's material price increase as well as semiconductor shortage, COVID-19. Because of these factors, this is the number that we have right now. I hope you'll understand.
So given what Kato-san gave in terms of numbers, so margin improvement of JPY 40 billion to JPY 50 billion, so an increase in income of JPY 50 billion can be expected. And for the 5 sectors for FY '25, which areas are expected to grow very much? If you could share that thought.
Please take a look at Page 6, which is about orders. So Y-o-Y, the third quarter, Hitachi Energy's seeing increase in orders. Railway and High-Tech, these are growing in terms of order intake. And most of that is going to be orders for the coming fiscal year, next fiscal year. If we can procure materials and semiconductors, we can control that, this will all translate into profitability. So FY '22, these areas, we'll see a major recovery according to our plan.
We still have some other hands up, but we'd like to go to the English channel at this time. [Operator Instructions] There seem not, so we will return back to the Japanese channel. So we will take now questions from the media, institutional investors as well as analysts. [ Yaka-san ]?
I have 2 questions. I'm sorry, I was delayed in participating. Perhaps you have already covered this, but first question is regarding orders. For IT third quarter, 20% is very high. Front Business and Service & Platform, what is the breakdown between the two? Is this going to continue for the fourth quarter and for the next fiscal year? What is the outlook? That's the first question.
Second question, perhaps I made a miscalculation. Now according to the previous question, for fourth quarter -- Automotive third quarter 3.1% AOI. And for the fourth quarter, it is going to improve to 8%. Semiconductor is a cost increase factor to be considered as well. But how do you think you can achieve the recovery to the AOI percentage of 8%?
Now regarding orders in terms of IT, Kato-san, over to you.
Regarding IT, there is a Front office and Service & Platform. So we have a different approach in explaining these numbers. Front office, the main business is financial for 3 quarters. Last year, there was a significant order. So we are underperforming compared to previous year. The same for the fiscal year, there is going to be underperforming.
But for Lumada, it is remaining strong. For public, we will be exceeding the level of last year for the fourth quarter and for the fiscal year as well. Service & Platform, 3 quarters there is a storage shortage, so we are going to be below previous year. For the fiscal year, for the fourth quarter, we are trying to make a recovery. But the situation is very difficult. But the trend is toward the recovery.
For the fourth quarter, question, storage Y-o-Y has increased. That is that the image you have on a Y-o-Y basis? Do you think this is very difficult to achieve, recovery in the fourth quarter?
We don't have the precise numbers. We believe it's achievable, but there are some challenges remaining.
But do you think there is a visibility?
In terms of trend, the semiconductor shortage is an area that we are overcoming by implementing measures.
To your second question, let me explain the second question regarding Astemo. For the fourth quarter, we -- February and March are very close. So very difficult to implement significant measures now. But first of all, we can control the fixed cost. For example, hiring of new recruits, new graduates, that can be controlled. And for factories, the utilization ratio can be adjusted. By so doing, fixed costs can be reduced.
From common factors, there is a request for discount. We can push back because of a cost increase. So we can do hard negotiating for request for cost reduction.
Material cost procurement is an area we can improve by reducing material costs.
Now in terms of the passing on the price increase, we want to recover several hundred million yen by implementing these measures, by controlling costs and working towards this target. That's all.
My question, I have a follow-up. In achieving the goal, it seems that you'll find it very difficult to achieve the target. Is that the correct understanding?
The management environment is extremely difficult. And February, March, of course, it's not business-as-usual anymore. Given this is a very difficult environment, we have to do our utmost in dealing with the challenges. So challenging times will continue. So that is a correct understanding on your part. So this is if we can achieve these numbers on a business-as-usual basis. That is not the case.
Next, Ayada-san.
I have 2 questions. My first question. This is a follow-up to earlier questioner's question. Page 6, IT, a 12% increase in the third quarter. In Social Infrastructure BU, there was a large project. So if you exclude such large projects, was IT sector able to gain a positive increase in the third quarter? Financial sector is doing well. So inclusive of what happened in the third quarter in the Financial business, what was the case? That's my first question.
Page 26. That's my second question. So this year's forecast, in terms of Mobility, AOI for building and Railway Systems, I think there's a downward revision looking at the comments noted here. For the Building Systems, our top line because of increase in China business, it seems that it's looking good. But in terms of income because of deteriorating the credit in the real state sector, it's down. So it's hard to see whether it's up or down. So what's the status as of the third quarter and the forecast for the full year and what's going to happen next year onwards?
Railway, AOI is 4% this time. And this is perhaps due to a potential deterioration of profitability in some of the projects. Is this something temporary? But orders are up. And so in terms of profitability, is it going to hold into the next fiscal year?
So the first half of the question regarding IT, I would like to turn it over to Kato-san.
Kato speaking. Thank you for the question. So definition of large projects is very hard to state. So I cannot really answer you in terms of what happened excluding large projects, be it Finance or other projects.
DX demand is very strong. So Lumada-related demand is very strong. We're getting a lot of inquiries, orders as well as revenues. So the feel that we have is very strong and good. So I think we can be upbeat for the coming fiscal year.
An answer for the second half of the question, Elevators business. Starting from the start of the year, there have been negative factors. And the largest impact has come from material price increase. It's been up by JPY 10 billion compared to our original plan. And we have tried to recover through FX impact and others. But as I said, elevator renewal business here in Japan is worsening. And so it's down by tens of billions of yen here in Japan. Because of that, compared to the budget, downward revision is needed.
As I said, material price increase on the order of JPY 10 billion. If we can control that next fiscal year, the impact from this will become smaller. And elevator renewal business in Japan with pandemic placed under control, and once the investment activities resume, this will be better.
So as far as Elevator business downward revision is concerned this time, it's because of one-off factors mainly. And so we're looking to recover this business in next fiscal year.
And regarding the Railway business, there are a number of factors that came into play. For one thing, project cost rose. There were quality issues that happened so we had to rectify that, increasing cost. And in specific projects on a one-off basis, cost increases occurred on a one-off basis. So these are temporary factors and next fiscal year we will no longer see them.
On a more strategic note, the profitability from train cars in railway signals and service business compared to such other businesses, profitability there is not very high. So we have to adjust that. So we will have to shift investment resources away from train costs to other railway-related business. And we're about to begin making such shift or adjustment.
So one-off factors, medium- to long-term factors are both at play. We're looking at both.
So question, just to clarify. On the Elevator business side, so China real estate-credit deterioration. Because of that, you are making downward revision, it says, but we need not be too concerned about that. Looking at this, you would be very worried for the next fiscal year.
Yoshikawa speaking. Inclusive of our outlook for the China business, if I may add a few comments. As Kawamura-san said, most of what he said, from my perspective, what I can say is that we are looking at the trends of the peers in the industry, information from capital markets. In the West, we have competitors. For example, U.S. company, O, recently came up with a statement. Their fourth quarter, our third quarter, their orders in the fourth quarter in terms of the number of units has improved by 10%, they're saying. So our European competitors, their orders and revenue guidance will be affected by this U.S. company's statement.
On the other hand, orders in the third quarter and orders for the full year, given the 10% that one of our peers has stated, not that we are inferior to their level. So if you break down the profit and loss level, there could be varying factors coming into play. But in terms of the outlook, robustness of the market in China remains on a fundamental basis in terms of the number of units. Those who have #1, #2 in the China market, leveraging that position, fundamentally, we would continue to be strong, not being beaten by our peers. So it's not all doom. So let me just add that comment. Thank you.
We still have many hands up. But in the interest time, the next question will be the last. Yamasaki-san, please.
I hope you can hear me.
Yes. We can hear.
So I have a question other than performance. You have all talked about the organization change. I have 2 questions regarding this change in organization. Regarding Hitachi Digital, there is going to be a North American base. We'll have a name change to enhance the functions. What kind of functions do you intend to increase or enhance?
Second question is regarding the very simplified structure with 3 pillars. What used to [ belong ] in Mobility, and it seems that Railway is going to become separate. But how did you reorganize the business into the 3 areas?
Yoshikawa-san, can you address that?
We have the digital holdings existed in Silicon Valley. And it was a vehicle for the purpose of investments. But on this occasion, we want to develop this further, evolve into a different structure. So it will have a substance. There will be about 100 employees in Hitachi Digital.
Lumada business deployment headquarters will be established here. Lumada was based in Tokyo, Japan, but we will have a base in Silicon Valley so that we can globally develop Lumada.
So it is different to the digital holdings company we had in the past. It's completely different. So it has a strategic intention in establishing this company from Tokyo. Person in charge will be seconded to this location.
Now to your second question, Railways is now separate from the Building System or Elevators. Now for the Railway System, it's very close to the environmental business. That is our understanding of this business. In the past, it is different from the diesel railways. Hybrid and electrification is promoted in railways. So it has a very high affinity with the environment business. So we've positioned this Railway System in the environmental area, where Elevator is more industrial equipment. That is the reason why we separated the two. That's all.
Thank you. Time is up. So with that, we would like to conclude the earnings briefing for the third quarter results for the year ending March 2022. Thank you very much for taking time out of your busy schedules to attend us. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]