Earnings Transcript for 8001.T - Q2 Fiscal Year 2023

Keita Ishii: Greetings, ladies and gentlemen. I’m President Ishii. Thank you for gathering here today. I will now give you an overview of the financial results for the first half of FYE ‘23. Please refer to the disclosed presentation materials. First, here is a summary of the financial results for the first-half of FYE ‘23. Please refer to Page 2 of the document. Consolidated net profit for the first half was JPY483 billion. The second highest level after last year's record JPY500.6 billion. The first-half post tax profit of JPY483 billion implies, 69% progress rate against the initial full year guidance of JPY700 billion, progress rate against the upward revised guidance of JPY800 billion announced on October 4 is also at a high level of 60%. On a quarterly basis, Q2 generated JPY252.4 billion in profit in comparison with JPY230.6 billion recorded in Q1 indicating enhancement of the underlying earnings power capability as well as continuation of the trend of strong momentum. Although, profits in the first half declined year-on-year due to the large one-time gains recorded in the same period last year, core earnings, which indicates our underlying earnings capability reached a record high of JPY430 billion and progress rate against the initial guidance of approximately JPY710 billion is 61%. With the upward revision that core profit guidance is set to record a historical high of JPY770 billion. Progress rate against this is 56%, which demonstrates steady enhancement of our earnings power. Next, I'll explain segment performance for the first half as well as the revised guidance and progress. Please refer to Page 3. First, machinery as well as energy and chemicals companies posted record profits in the first half. Metals and Minerals and General Products and Realty performed solidly while Textile, Food and The 8th Company were more or less in line with the initial plan. ICT & Financial Business was the only company behind in terms of the progress rate. I will explain the first half results of each company in the order progress rate against the initial full year guidance. First is Machinery Company, which drove our first half performance. In addition to strong performance in all business, including marine and automobile-related businesses due in part to a one-time gain from the sale of Maintenance business in North America. Machinery Company achieved a record high first half profit of JPY71.4 billion, which implies 98% progress rate against the initial guidance. Next is General Products and Realty Company. Pulp prices remain more elevated than we expected. In addition, the North American Building Materials Body business related which is run-in a hands-on fashion is performing well. Moreover, there is a revaluation gain from the organization of the housing related business in North America. As a result, the company profit was JPY63 billion with progress rate of 87%. Next is The 8th Company. Daily sales of FamilyMart are improving due to new product development as well as eye catching promotions such as bigger volume campaigns. In addition, optimization of inventory and delivery route through digitalization has resulted in cost reductions. As a result, we booked JPY19.5 billion of profit representing 81% progress rate against the initial guidance. This is in line with our expectation. Summer is a peak season for the convenience store business, pushing the progress rate to a high level for the first half. Moving on to our Metals and Minerals Company. Although, the market price of iron ore is on a down trend, the price in the first half was higher than expected. And the price of coal price remained elevated, resulting in strong earnings at an Australian resource development company. Also, the steel products business continued to perform well, especially in North America. Therefore, the company booked profit of JPY134.7 billion, securing progress rate of 68%. Next, the Energy and Chemicals Company posted a record JPY48.5 billion in the first half of the year achieving a particular high level progress rate of 56% given this companies -- usually given the company is usually skewed to the second half. The strong performance was driven by all businesses including the Energy Chemicals and Electronic power domains as they capture the benefits in the face of soaring market prices. In Textile Company, DESCENTE has established a well-balanced structure between Japan, China and Korea for profit generation. And apparel-related businesses such as LEILIAN and EDWIN recovered due to a recovery in demand accompanying the easing of mobility restrictions. This resulted in a profit of JPY11.6 billion with progress rate of 45%. Next is Food Company. High raw material and logistics costs and the yen depreciation costs profitability deteriorate in the fresh food-related businesses in Japan and overseas. However, the grain business in North America and the domestic food distribution business remained strong resulting in JPY27.7 billion of profit and a 40% progress rate, generally in line with expectations. Lastly, ICT and Financial Business. The ICT sector BPO and other related businesses performed well. However, the fund related business, which had enjoyed strong performance last year is suffering from a deterioration in valuation gains on stocks due in part to sluggish equity market. Moreover, the mobile phone related business saw a decline in profits. In addition, the replacement of assets has been slower than initially planned, given this company's earnings structure, it tends to be skewed to the second half, the company profit was JPY25.4 billion resulting in a progress rate of 30%. CITIC, which is included in the other segment is making strong progress due to the impact of yen depreciation and a one-time gain related to the evaluation of its securities business. Next, I will explain our full year guidance. As I mentioned at the recent press conference announcing the upward revision, we have examined all segments and operating companies more closely than ever in this uncertain business environment. As a result, we have upwardly revised our guidance by JPY100 billion from the initial forecast. The upward revision consists of JPY60 billion for the core earnings due to steady profit growth, mainly in the known resource sector. JPY30 billion for an increase in one-time gain such as the revaluation of CITIC Securities and JPY10 billion for a reduction in the loss buffer. In each segment, as I explained earlier, we have revised our guidance in line with the progress of the segments. We have made an upward revision to the following four companies to historical high levels, Machinery by JPY27.5 billion, Metals and Minerals by JPY36.5 billion. Energy and Chemicals by JPY11.5 billion. General Products and Realty by $22.0 billion. The guidance for Textile, Food and The 8th Company remain unchanged. ICT and Finance business, which has been behind must be revised down by JPY22 billion. The 8th Company had businesses that were cross held with other companies up until the first half, but we have decided to terminate them as of the end of the first half. As we believe the initial aim for strengthening FamilyMart-related businesses of other companies through The 8th Company has been achieved. Going forward, The 8th Company will focus on the development of new businesses from the market oriented perspective is FamilyMart as the access of the intercompany cost functional framework. Please refer to Page 6 for cash flow. As a result of solid performance in Machinery, Metals and Minerals, Energy and Chemicals, core operating cash flow was JPY467 billion, a record high as a semi-annual performance. In terms of operating cash flow, we achieved the second highest in our history. Net investment cash flows amounted to JPY244 billion of outflow mainly due to proactive investments into businesses such as Hitachi Construction Machinery as well as housing related business products in North America. As illustrated by the table at the bottom of this page, the financial standing was further strengthened with shareholders' equity increasing approximately by JPY670 billion to a record high of approximately JPY4,870 billion. Other indicators also record reached new highs. As shown on Page 5, we have received high evaluations from credit rating agencies. Next, please refer to Page 7 for the assumptions for the upward revision. As noted above, in light of the historical week yen and high resource prices in the first half, we have revised our forecast for the exchange rate from JPY120 to JPY135. The U.S. dollar interest rate to 3.5%, up 1 percentage point from our initial assumption and the crude oil price to U.S. $95 per barrel. Although, we are unable to disclose iron ore prices due to our contractual agreement, we are conservative in our key assumptions taking into account changes in the business environment in the second half of the fiscal year. Finally, I'd like to talk about our shareholder returns policy. Please take a look at Page 8. As we announced on October 4, in conjunction with our provision, we have increased the dividend per share to JPY140, which is up by JPY30 from JPY110 in the previous year, up JPY10 from the JPY130 announced at the beginning of the fiscal year. We have also come out with a share repurchase program for the seventh consecutive year with a budget up to JPY35 billion, as of the end of October, approximately 30% as the total amount has been repurchased as disclosed on the 1st of November. Again, we will continue to commit to the incremental increases to the minimum dividend during the period of a medium term plan for a new deal 2023. We also commit to a dividend payout ratio of 30% by FYE 24, the final year at the medium-term plan. As we will continue to take into account the progress of the financial results and the sincerely to the markets opinion and in order to meet investor expectation, we will continue to address our shareholders' return policy from a medium to long term perspective to enhance our corporate value. Into the second half of this year, the situation is clearly different from the past few years, making it more difficult for governments around the world to steer its economic policies. That is highlighted with the global economy, we'll head into shop recession. It is in such an environment that we believe Hitachi can demonstrate its strength by achieving steady profit growth through our strength of disciplined cost management and resilience against market conditions and achieving a solid earnings base of JPY800 billion. I believe such a demonstration will be appreciated by the market, and this concludes my presentation. Next, we would like to show a video. Hitachi believes it's important to continuously evolve work style, which can lead to enhancement of liver productivity. Today, we have implemented a series of measures in this video titled measures of work style reforms to support earnings growth. We have compiled all those measures. Please take a view. [Video Presentation]

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