Hitachi Ltd (HTHIY) on Q4 2020 Results - Earnings Call Transcript
by SA Transcripts, https://seekingalpha.com/author/sa-transcriptsHitachi Ltd (OTCPK:HTHIY) Q4 2020 Earnings Conference Call May 29, 2020 2:30 AM ET
Company Participants
Yoshihiko Kawamura - Representative Executive Officer, SVP, CFO, & GM, Finance Group
Tomomi Kato - Deputy General Manager, Financial Strategy Division
Conference Call Participants
Toshihiro Ihara - Analyst
Unidentified Company Representative
It is now time to start the web conference on Hitachi's FY 2019 earnings and web conference on the progress of 2021 Mid-term Management Plan.
Ladies and gentlemen, thank you very much for attending despite your busy schedules. Although the government lifted the state of emergency, in order to prevent the spread of COVID-19, we're going to organize this meeting in a video conferencing format. We are taking thorough measures to prevent the spread of the infection within the venue, running this with a minimum number of staff. And for speakers, so that their voices can be heard more clearly, they will not be wearing masks when speaking.
My name is Osamu Naito [ph] from Hitachi. Thank you for your attention and cooperation. This meeting is comprised of 2 parts. Between 3:30 through 4:45 p.m., we're going to have an earnings meeting, followed by a 15-minute break. Between 5 to 6 p.m., we're going to have a web conference on 2021 MTMP. With respect to the presentation materials, they are posted on Hitachi Limited's IR site and news release site. Please check them.
At this moment, we would like to start the web conference on Hitachi's FY 2019 earnings. First, I would like to introduce the speakers: Hitachi Limited Senior VP, Executive Officer and CFO, Yoshihiko Kawamura; General Manager of Financial Strategy Division, Tomomi Kato; Executive General Manager, Investor Relations Division, and Corporate Brand and Communications division, Yasuo Hirano. So there are three speakers who will be speaking today.
With respect to the outline of the business performance, Kawamura will explain. We'll switch the presentation material on the screen. Please bear with us for a moment. Mr. Kawamura, please.
Yoshihiko Kawamura
Thank you very much for the introduction. My name is Kawamura. And today, we will be providing the explanation by video conference. Now the results have been announced today. Because of the impact of the COVID-19, there has been some delay, but we are now happy to announce them today. Now with COVID-19, I understand many people have been infected. We would like to offer our feelings for them and offer condolences for the people who have lost their lives during COVID-19. This is the first time for me to participate in such a meeting. So let me introduce myself.
From April at Hitachi Limited, I have become the CFO. So I had the handover from the predecessor in April. I have been waiting for 2 months then. And 5 years ago, I headed Hitachi Limited corporate planning as well as investment and loans, as well as future investments as well as development of new businesses, are the areas that I have been working in. Prior to that, 35 years, I have been working at Mitsubishi Corporation. Out of that, for four years, I was dispatched to World Bank in Washington D.C., half of the remaining time was in Tokyo and the half of -- the other half was in the overseas countries. I've headed IT as well as financial services business as well. And I went to Cambridge as well as Boston in terms of training, and I have worked at Washington D.C. and New York and Chicago while I was at Mitsubishi Corporation.
Now I understand the materials have been uploaded. I would like to talk about the 2019 results as well as the outlook of fiscal year 2020 and the impact of COVID-19. There are some 40 pages, and I would like to allocate enough time for questions as much as possible. Therefore, I would just like to highlight the major points in the PowerPoint presentation.
First of all, please refer to materials and refer to Page 3. These are the highlights of fiscal year 2019 results. On Page 3, you can see the revenues as well as adjusted operating income. The bar graph on the left-hand side there is the actual for fiscal 2018, the middle bar is the exclusive of the COVID-19 impact and the actual for fiscal year 2019 is on the right-hand side. As you can see in the revenues, we're at ¥9.48 trillion in fiscal 2018 and fiscal year 2019 was ¥8.767 trillion.
Looking at the adjusted operating income for fiscal year 2018, ¥754.9 billion. And inclusive of the impact of COVID-19 on the right-hand side was ¥661.8 billion. The ratio is shown about at 7.5%, which is the income ratio. So we had a decline in revenues as well as a decline in operating income as well.
Right-hand side, other numbers are provided. The net income is also shown, which is ¥87.5 billion. Year-on-year, it was minus ¥134.9 billion. Therefore, we had a decline in net income as well. For fiscal year 2019, we had a decline in revenues as well as earnings.
But please now refer to ROIC, return on invested capital, on the right-hand side. The ratio was above by 0.9 points at 9.4%. In the last year of the Mid-term Management Plan next year, we hope that 9.4% can be increased to 10%, which is the plan. So we are close to achieving the target for the plan, which is 10%. So those are the highlights of the fiscal year 2019 results.
Please now refer to Page 14 -- Page 4. It's a breakdown of the 5 sectors as well as listed subsidiaries. Left-hand side, the -- we have the items and 5 sectors, right, and the listed subsidiaries. High-Tech and Chemicals was included in 2019. You can see Hitachi High-Tech, Hitachi Construction Machinery, Hitachi Metals and Hitachi Chemical are listed subsidiaries. And total is shown on the right-hand side in terms of revenues.
The gray area is inclusive of the COVID-19 impact for the 5 sectors, and it was -- revenues was ¥5.729 trillion, and the revenues was ¥3.138 trillion. The total was ¥8.767 trillion.
Now in terms of the adjusted operating income, 5 sectors was ¥476.3 billion; listed subsidiaries, ¥185.4 billion; and the total ¥661.8 billion. The ratio are 8.5%, 5.9% and 7.5%, respectively. Year-on-year comparison shown here for the 5 sectors is ¥8.3 billion increase. But for the listed subsidiaries, there was a decline of ¥100 billion. So therefore, between the 5 sectors and the listed subsidiaries, there is a significant difference that is highlighted here.
What I would like to emphasize here is that in terms of the adjusted operating income, the IT contribution was very significant in this area. For the IT sector, ¥250 billion operating income was posted. On Page 24, more detailed information will be provided. So you can see that the IT sector contributed significantly.
The other important point I would like to highlight there is below. That 8.5% was the 5 sectors operating income ratio. To the right, 8.9% is shown here. In the absence of COVID-19, we would have achieved 8.9% for the 5 sectors, which is very high. Now in the Mid-term plan, we are aiming for 10%. We are making steady progress for the achievement of the Mid-term Management Plan. Net income is for the 5 sectors is ¥66 billion; for the listed subsidiaries, ¥21.5 billion; and total was ¥87.5 billion.
Please refer to Page 5. This is a wonderful chart showing the changes in the profit. To the left is fiscal year 2018. There has the impact of reorganization, foreign exchange impact, others impact as well. Now in the absence of COVID-19 shown in gray. And there was a COVID impact. And to the right is the ultimate fiscal 2019 result.
Lower is similar, showing the adjusted operating income. The gray, this is a number without COVID-19. With that impact, the actual is shown to the right. For fiscal 2019, it was from January to March, the fourth quarter was when the impact of the COVID-19 has come to the fore, and so the impact has been rather limited.
Page 6, this is talking about the 5 sectors, showing the waterfall chart from revenues to operating income. Left-hand side -- upper is revenues and the lower is adjusted operating income. For the revenue, starting at ¥5.984 trillion. The gray area is excluding COVID-19 impact of ¥5,729.3 billion. There is the impact of COVID-19. And we ended up with ¥5.628 trillion.
Similar for adjusted operating income, starting with -- and ending with ¥476.3 billion. 2018 was ¥468 billion. So that means that the increase of ¥8.3 billion has been achieved. This is the highest record ever. And that's 8.5%. And the gray area, if we exclude COVID-19, 8.9% is achieved. So it has become very high.
Page 7 should be referred to, this is revenues by market. Starting with North America, Europe, China, Japan, ASEAN, India and other areas are shown here. The ratio is half in Japan, and North America, Europe, China, ASEAN, India and other areas are all growing around a ratio of 10%.
What is characteristic here is that revenues have gone down in all regions. The ratio of the decline is shown in the circle. For China, there was more than 10% decline. The impact was felt accordingly. As shown below, the overseas business account for 48%.
Page 8 is the financial position. The balance sheet and cash flow is shown here. What is noteworthy is cash flow. On the left-hand side, the cash conversion cycle is shown here, that's CCC. Now at the end of '19, from 69 we have gone up to 74.2, increased by 5 days. This is the impact of COVID-19. Inventory was held higher. Account receivables payments have been delayed. Therefore, it deteriorated by 5 days.
The middle is on hand. The gray area seen in the footnote is the cash and cash equivalents shown in gray, and the dotted area is the commitment line provided by megabanks. So together, you can see liquidity overall for 2019 in terms of cash as well as equivalent ¥800 billion has been achieved and commitment line of ¥500 billion is available. So ¥1.3 trillion in terms of cash liquidity is on hand.
Debt/equity ratio is shown on the right-hand side. If you have questions, I can refer to the debt. But you can see that it has deteriorated to 0.35, but we are going to control it at 0.25.
Page 9 should be noteworthy too, which is cash flow from fiscal year 2015 to fiscal year 2019 is shown here. Sorry that it is difficult to see, but there are backlash as well as a curve showing this. The gray has 3 tones. The middle gray is on the left-hand side, which is cash flows from operating activities. The red is the cash flows from investing activities, which is negative. And light gray is the core free cash flow. This is a unique indicator of our company that will be explained later. And the dark gray is free cash flow. The curve is showing the operating cash flow margin.
Now in terms of core free cash flow, please look at the graph on the right-hand bottom. We have cash flow from operating activities, and going to free cash flow. But in the middle, we have core free cash flows indicated as well. M&A can be adjusted on a current basis. That is the reason why we have the core free cash flow for the purpose of management for 2019. The left-hand side is the -- was a decline of ¥49.1 billion decline, with Mitsubishi Heavy Industries payment was made, which has had this impact. And ¥360 billion in terms of cash flow investing activities. This is because of the consolidation investment made for JRA.
Page 10. Let me talk about the return to shareholders to allow to write -- should be referred to from fiscal year 2011 to 2019. The -- from ¥40 to ¥95 increase has been made. Every year, we have been increasing dividend payments, as you can see here.
Page 11. These are major topics on a qualitative basis. There are 3 major areas to refer to. First is a business reinforcement for growth, specifically M&A and consolidation are included here. In the middle, we have the business portfolio transformation. And third is the settlement on the South Africa project with Mitsubishi Heavy Industries.
In terms of business reinforcement for growth. In Europe, Chassis Brakes International were acquired. And in Chicago, in the U.S., the JR Automation Technologies system integration business was acquired. And Hitachi High-Tech Corporation became a wholly owned subsidiary. For ABB, well, is also included, scheduled for the first half of 2020. And AMS and Keihin, Showa, Nisshin Kogyo, the three parts manufacturers of Honda are -- have been integrated in terms of management. So significant business reinforcement has been made.
In terms of business portfolio transformation, we tendered all the shares of Hitachi Chemical Company to Showa Denko. For Fujifilm Corporation, we decided to transfer the diagnostic imaging-related business, and we are planning to realize this in this fiscal year. Similar efforts have been made in 2019. Page 12 is Lumada. This is the core of our company's business. We are focused in growing this business in 2017. As you can see on the left-hand side, ¥1 trillion was achieved. And after 2 years, we are at the level of ¥1.2 trillion. The gray is the Lumada SI business, and the red is representing the Lumada core business. Core business is also increasing constantly and so is SI business. However, the definition of Lumada has been divided into the SI business and core business. In Page 20 -- Page 19, we have explained the changes in the definitions. This business is expanding, therefore, we are now categorizing this as a related business.
There are two progress points made here. First in the area of expansion of the Lumada business. The solutions business have been expanded. The number of use case has reached more than 1,000. And we have a specific business in terms of Vietnam as well as the Japan Exchange Group. In terms of reinforcement of management base, we are securing human resources for this business. In North America, we have established a holding company for industrial. Lumada IoT will be the major focus here. We have -- also we have management integrated with Vantara. And in terms of Lumada business expansion, we are allocating more resources to drive growth. So far, I have talked about the fiscal year 2019 highlights. Here on, let me refer to the fiscal year 2020 forecast. There will be a full year impact of COVID-19 for 2020. In terms of the calculation of the numbers, in the first half, we believe that impact is going to be more significant in the second half. On the other hand, automotive may be -- continue to be impacted, but we believe that the impact of COVID will be lower in the second half. That is the assumption in these numbers. If there is going to be a second wave with more significant impact, that may not be the case. But in the absence of that, we believe we can achieve these numbers.
Now this is similar to what I have referred to for last year. On Page 14, we have shown here revenues, adjusted operating income and the impact on the right-hand side. 2019 was ¥8.7 trillion for revenues. Excluding COVID-19 is shown in the middle. And the right-hand side, there is the forecast for fiscal year 2020, which is ¥7.080 trillion. The middle is the adjusted operating income. Left-hand side is 2019, ¥661.2 billion. Impact of COVID is shown on the middle and -- excluding that. But with the impact of COVID-19, we will have fiscal year 2020 forecast of ¥372 billion. And the ratio is 5.3%.
Now in terms of revenues as well as adjusted operating income shows that we are going to have a decline in revenues as well as earnings. But in terms of net income, it will increase up to ¥335 billion. So that's a full-time increase for fiscal year 2019, which was ¥67.5 billion. So this is focus that we have, and foreign exchange is assumed at ¥105 to the U.S. dollar. Very conservative assumptions are being made.
Page 15, this is a breakdown of these numbers for the 5 sectors and listed subsidiaries. Similar to fiscal 2019, for the listed subsidiaries, they will be impacted significantly by COVID-19. But for the 5 sectors, in the gray area is the outlook of -- design. Revenues for 5 sectors will be ¥5.560 trillion and for listed subsidiaries, ¥1.52 trillion. Total is ¥7 trillion. And adjusted operating income, ¥338 billion for the 5 sectors; for listed subsidiaries, ¥34 billion; and a total of ¥372 billion.
Here, once again, the IT sectors are expected to make a significant contribution. If you look at the IT sectors on Page 24, in terms of revenues, ¥2 trillion; adjusted operating income ¥200 billion; and 10% contribution would be made by IT according to this forecast. Now if you look at the adjusted operating income ratio, the ratio is 6.1% for the 5 sectors and 2.2% for listed subsidiaries. You can see that there is a significant difference between the 2.
Here, what is noteworthy is -- if we exclude the COVID-19 impact, it was 8.7% in terms of operating income ratio. Below, the net income will be ¥331.5 billion for 5 sectors, ¥3.5 billion for listed subsidiaries, so it will be impacted once again. And the total is ¥335 billion, for the total.
Page 16. Here, this is a similar set up for fiscal 2019, a waterfall chart is shown. The gray area, COVID-19, excluding this impact is showing -- ¥8.1 trillion is shown here. For fiscal 2020, it will have a full year impact, so ¥1 trillion negative impact will be felt. And the fiscal year 2020 forecast for revenues were ¥7.080 trillion.
For adjusted operating income, excluding COVID-19 is ¥673 billion. But it will have a full year impact of negative ¥301 billion, and the forecast for 2020 is ¥372 billion. So year-to-year impact of COVID-19 will be felt in 2020. Page 17 for the 5 sectors. Similar information is provided from the left to right. The numbers can be referred to. If you look at the -- excluding COVID-19 and with COVID impact for the 5 sectors, in terms of revenues -- excluding COVID-19, it will be ¥6.320 trillion. And COVID impact will be ¥760 billion for the 5 sectors. And forecast will be ¥5.560 trillion. Similar for adjusted operating income, excluding COVID-19 is ¥552 billion and the COVID impact will be ¥214 billion, amounting to fiscal year 2020 forecast of ¥338 billion.
Page 18. So we are in a very difficult situation. Cash and bottom line must be improved. In parallel, we are implementing various measures. First point is the enhancement of the cash flow management, specifically, 4 measures are in place in parallel. First of all, reduce inventories and working capital in response to revenue decline. Because of the ratio decline, we are implementing these measures. Conduct screening of the capital expenditure. And further promote sales of assets. For low profitability assets, we will continue to promote this effort. And maintain commitment line agreements with multiple financial institutions. Below, accumulating orders, improving gross margin and reducing SG&A. First is promotion of digital transformation and reinforce front line functions side, developing digital talents. With the impact of COVID-19, there are areas that are changing. For example, automation as well as remote working, et cetera, solution development are being expedited so that more orders can be received. Furthermore, Smart Transformation activities will continue to steadily reduce cost.
Page 19 is the Lumada's new definition. On the right-hand side, you can see the red is Lumada core business. This is basically the same. The gray area is the Lumada related business. This is what used to be referred to SI business. The amount is becoming larger with related business. Therefore, we have recategorized the definition. On the left-hand side, the breakdown of the segments are shown here. IT, OT and Lumada components are included in many of these businesses. In terms of the targets for 2019, you can see according to -- there was ¥1.2 trillion in terms of revenues. But if we realign according to the new definition, we go to ¥1 trillion plus. But for forecast fiscal year 2021 is achieving ¥1.4 trillion. But the target is ¥1.6 trillion, so for the ¥200 billion, which is result for, alliances as well as M&A measures will be contemplated to achieve this. Below, you can see the 2019 Lumada sector base breakdown for your reference.
So far, I discussed the goals for fiscal year 2020, the budget for fiscal year 2020. From Page 21 and onward, I would like to discuss our views on the impact of COVID-19. Page 21, when reflecting COVID-19 impact on our budget, what are the assumptions? This is a table thereof. In the middle, there are supplementary data. On the horizontal axis, you'll find regions: Japan, North America, Europe, China, ASEAN and India; and vertically, segments: IT, Energy, Industry, Mobility, Smart Life and so forth. And what's written in text describes the impact in each respective business.
And you will find bar graph horizontally, color coded. Dark gray is the area where there's potential of more than 15% impact from COVID-19. Light Gray is expected to have 10% to 15% impact from COVID-19. Please take a look at IT. Japan does not have a bar, meaning that Japan is going to be not affected. And you will find light gray for North America and Europe in IT, so impact is going to be 10% to 15%. China, not impacted. And likewise, ASEAN and India, 10% to 15% impact from COVID-19 in IT. Now in Industry segment, throughout the world, there will be impact. And the impact will be severe in Japan and North America; in Europe and China, less impact; ASEAN, India, a larger impact. So that is how it's described.
By product and by region, in a matrix, what's going to be the likely impact with assumptions, we have taken a look. Please move on to Page 22. This is by business segment. What's going to be the impact from COVID-19. On the left, FY 2019 impact and for FY 2020, there will be impact throughout the year. So these are the numbers. If you could look on a consolidated basis, adjusted operating income in '19 was ¥46.9 billion in total. Please look at the 2020 forecast. Because of the full year impact from COVID-19, adjusted operating income impact is going to be ¥301 billion. On the far right, COVID-19 impact ratio is given. You can see different shades of gray. Overall, a negative 12.6% impact. And dray gray, it may not be easy to see, but in the Industry segment impact is negative 16.1%. Mobility, a 17.1% negative impact. And listed subsidiaries at the bottom, the impact is estimated to be 14.6% negative.
IT, Industry, Energy, Mobility in the pages to follow. Starting on Page 23, Hitachi Construction Machinery, Hitachi High-Tech and so forth, listed subsidiaries are also given in the following pages. If you could please go to Page 33, we wanted to enhance disclosure, that is what is most noteworthy in our disclosure. Well, disclosures, we have been making, but we decided to disclose more numbers than before so that we can deepen our dialogue with investors. If you could please take a look at Page 33, ROIC, R-O-I-C, by segment is disclosed. Are we exceeding the capital cost? We would like to communicate that better with the external parties. So ROIC is disclosed. And adjusted operating income by segment as well, and EBITDA by segment is also disclosed from this year onward.
Our cash flow is largest in EBITDA. D, depreciation; A, amortization, these are the largest. When M&A takes place, D&A becomes large. So we need to reflect that. So how much is the extent of cash flow reflected in EBITDA? That's what we would like to disclose. And below, you will find EBITDA disclosure from FY 2015 through FY 2020 forecast. Please take a look at the number for FY 2020 forecast. The largest cash flow lump ¥1 trillion plus. Light gray is EBIT -- or rather dark grade is EBIT and D&A accounts for ¥407 billion. In total, we're going to have more than ¥1 trillion. That is the extent of our earning power. And the rest is supplemental information, 34, 35, 36, 37 by segment.
Page 38 gives definition -- redefinition of Lumada business and the current status of Lumada business. I'm sorry for rushing through. I have exceeded the allotted time. I take 25, 26 minutes from our presentation, but that concludes the fiscal year 2019 business performance and the forecast for fiscal year 2020. Thank you for your attention.
Question-and-Answer Session
A - Unidentified Company Representative
[Operator Instructions]. Japanese press will be asked for questions. And the next, institutional investors and analysts, and those on the English channel, that will be the order. So those are on the Japanese channel, Japanese press, if you have questions, please press the button for raising your hand.
Mr. Toshihiro Ihara, [Operator Instructions].
Toshihiro Ihara
Ihara from Nikkei. Can you hear me?
Unidentified Company Representative
Yes, we can.
Toshihiro Ihara
There are three main points I would like to ask. My first question is as follows. Coronavirus' impact, on Page 21 you have shown the information by segment, Industry, Mobility. In these segments, in which areas is the impact likely largest -- likely to be largest? If you could give us further breakdown and elaborate.
Yoshihiko Kawamura
Thank you for your question. So on Page 21, in my presentation, I did not go into the tax. So just to go over once again. In Industry, in terms of the region, I've already explained. And first, Industry and distribution BU. Aviation and automotive business is going to be affected, there's going to be a decline in demand, and water and environment business as well. Centering the around Japan, decline in demand is likely to happen. And in terms of products, centering around North America, our product business is also going to be negatively affected. So overall, there's going to be an impact. So across the board, it seems that there's going to be an impact. That's our assumption.
And Mobility, as you can see, building systems BU. In China, we are expecting a recovery, but new installations are going to be affected still. So the service model will have to be focused upon maintenance business, in other words. Railway systems BU, between January and March, for European factories, they've had to be suspended, but they are now resuming. So in the second half, I think they will be normalized. That's how we're putting our numbers together. Thank you.
Unidentified Company Representative
Just a supplement, what was said, Page 22. COVID-19 impact by segment. Please take a look at this. On the far right, COVID-19 impact ratio for FY '20 is given. This is a likely fluctuation in revenue. Overall, 17.1% for Mobility; building, negative 10% railway, down 25%. So looking at the numbers, the impact on railway business is going to be severest. Thank you.
Toshihiro Ihara
For the remainder of my questions, I have questions about Lumada. So you are redefining Lumada business. SI is now changed. The difference is simply that you included most of everything into SI. But IoT, AI, you have narrowed down the definition. Is that the difference, if you could elaborate?
Yoshihiko Kawamura
Thank you for your question. Yes, you are right, basically, because that business tends to be narrow. And Lumada, of course, has a lot of implications. And so we included related business more broadly. Your understanding is correct.
Toshihiro Ihara
So you are redefining what's related to Lumada and Lumada itself more clearly?
Yoshihiko Kawamura
Correct.
Toshihiro Ihara
Solutions business and applications business related extended business is included?
Yoshihiko Kawamura
Correct.
Toshihiro Ihara
Last question. Lumada overseas sales ratio, before you said about 10%, but what is the current number? And FY '20 goal is to expand the Lumada business to North America to raise it to 30%. But because of being impacted by COVID-19, has the forecast have been changed?
Tomomi Kato
For fiscal year 2019 according to the previous definition, Lumada's overseas sales ratio is 10%. Under the new definition, as was discussed, core business versus SI, that was the old definition, but we changed it to related business. So according to that new definition, fiscal year '19, the ratio is 40% core; business, 30%; related business, 50% overseas revenue ratio. And we would like to exceed 50% in fiscal year '20. That's our goal. Thank you.
Unidentified Company Representative
Are there any other questions?
Unidentified Analyst
Regarding the Lumada business, I have a follow-up question. You have mentioned ¥6 trillion previously. What is the source of this? Is it in comparison to your peers? What is the rationale for this target? Please elaborate.
Yoshihiko Kawamura
Please refer to Page 19. I think that is what you're referring to. Now with the review that has been made, the growth ratio is where we are focused on. For fiscal '19 and '20, 12%, and furthermore, we are aiming for 20% to reach ¥1.6 trillion. So we are hoping to have a significant growth rate. And we also have high expectations for the systems and products in terms of related business. In addition, with this, we want to grow further. So we are not especially conscious about the prevailing growth in the industry. It is a reflection of our intention.
Unidentified Analyst
Regarding the focus for fiscal year '20. In terms of revenues and operating income, it is likely to decline because of COVID-19. But the net income will be reaching the ¥334 billion by -- and with the South Africa impact, what are the other factors that is going to contribute to the increase in net income?
Yoshihiko Kawamura
This is net income, therefore, between the operating income and net income, there are plus and minus, and that is a result of the number mentioned. And there is also the South Africa impact as well. There were increase and decreases. So in terms of operating profit is ¥372 billion, and as a result, we come up with a net income number.
So I would like to give you more further details. Please refer to Page -- I think you're referring to Page 15. Here at the right-hand side, the year-to-year difference is shown here. In terms of operating income, it is declining. But in terms of EBIT, increased by ¥430 billion is expected. The factors include that in fiscal year 2019, Energy South Africa, a ¥370 billion settlement was included but will go away. Fiscal year 2020, Hitachi Chemicals, in sales of ¥270 billion. So nonoperating income is improving significantly. That is the reason why net income is going to increase in our forecast.
Unidentified Analyst
That means that for fiscal year 2018, there was U.K., the nuclear power issue, there was some impairment. But regarding ¥335 billion shown here, how should we interpret this? Is this going to -- how is -- how do we evaluate this number in, first of all, the COVID-19 impact?
Yoshihiko Kawamura
As you have mentioned, as already explained, there are impairment from last year and it will be falling away reflected in this number. There was an impact of COVID-19. And as you can see on this page, operating profit is ¥5.3 billion and ¥370 billion in operating income can be achieved. Therefore, even though it is very difficult times, we are able to post operating income. And impairment should be considered and the backlash should be considered as well, and we end up with net income of ¥335 billion, which is evaluated favorably. The bottom line is most important. Therefore, in that sense, in terms of operating income as well as net income, we have been able to post. We are confident to provide these numbers, even under very difficult environment.
Unidentified Company Representative
Sikogi-san [ph].
Unidentified Analyst
Sikogi [ph] speaking. Can you hear me?
Unidentified Company Representative
Yes, we can.
Unidentified Analyst
For the outlook this year, life sector in particular, automotive business, I have a question. Earlier, regarding the automotive business, the impact from COVID-19 is going to linger into the second half, Kawamura-san said. Hitachi automotive has business with Nissan and Honda. Nissan, in particular, is suffering. The automotive industry per se across the board is suffering and having problems. So I wonder what your awareness is on that. And other suppliers, some have not come out with a forecast for this fiscal year. So what is the assumptions underlining this forecast? So with Honda related businesses, 3 of them are being consolidated. The size of the business will be larger and will be subjected to greater downward pressure. So what's your take on that?
Yoshihiko Kawamura
So your second question regarding AMS, Kato-san will respond to that. To address your first question, AMS, automotive parts business, what's our view on that. To respond to that, carmakers -- Toyota had a full year forecast of 5 million to 6 million, but they've had to revise it downward by several million. So car manufacturers have come out with very tough forecast. And so given that car manufacturers are faced with difficulties, AMS traditional parts business will have to navigate through these very difficult conditions. They will be severely impacted.
On the other hand, we're talking about parts business. It's not just traditional mechanical parts, but electronic parts, connected systems. They are also part of this. If we take a closer look on those aspects, there's much growth potential. So our challenge for AMS is, first, we will continue with the traditional parts business. But with what speed and magnitude? Currently, we focus our growth resources into such new and growing areas. And that is something that we need to concentrate ourselves on, and that's what we're discussing.
With Honda-related businesses, 3 of them combined, assets will grow and what will happen? We have not closed it yet. So not that we have scrutinized every aspect of their businesses. Honda has a similar policy, however, motorization, connected, that's the approach they are taking, reallocating their management resources. And so given that, we believe that we can create new businesses.
Tomomi Kato
And Kato speaking. Regarding automotive parts business, let me share with you our view. How we look at our market is such that in fiscal year '20, 20% reduction in production will happen throughout the market. That's our forecast. And as far as our numbers, the impact from COVID-19 in terms of that, if you could please take a look at Page 22. In life sector, a negative 14.8% impact for Smart Life sector; for Automotive Systems, 23% negative impact is expected.
Year-on-year revenue. In the data collection sheet, we have included detailed numbers, please take a look at them later. Year-on-year, 86% on impact in revenue. We acquired a Chassis company. Excluding that, the impact is going to be 20% reduction. So that impact is going to be quite large.
Unidentified Company Representative
We will now take questions from the analysts, Japanese channel. [Operator Instructions].
Unidentified Analyst
Can you hear me?
Unidentified Company Representative
Yes, we can.
Unidentified Analyst
First question is regarding COVID-19, regarding the numbers in terms of impact. For the fourth quarter, adjusted operating income basis is ¥46.9 billion. And for the whole year, this is about ¥310 billion, that is estimated. What is the breakdown between the first half and second half or amongst the quarters? You may not have exact numbers, but can you give us your image? For example, which quarter is going to be most severe, is it going to be first quarter? Please elaborate further. I'm sorry if I missed it before, but let me confirm. In terms of operating -- adjusted operating income and between EBITDA, it's about ¥81 billion difference. So this is quite significant. What items are included in this difference? Please elaborate.
Yoshihiko Kawamura
Regarding COVID-19 impact for fiscal year '20 by the different quarters, overall, in terms of revenues, as you can see in Page 22, there's about ¥1 trillion decline is estimated. And in terms of the breakdown in the periods, in the first half, 70% to 80%; remaining will be in the second half. In terms of numbers, the first half impact will be the greatest.
To your second question, regarding operating -- adjusted operating income and with EBITDA, there is a difference of about ¥80 billion. What is the nature of this? And against the backdrop of COVID-19, as already mentioned, as shown on Page 21, we have assumptions for the different businesses in making these calculations. 1 year ahead remains in a flux. Therefore, impairment risk could occur. So ¥80 billion is assumed here. This is not by sector, but for corporate overall. In the corporate measures, we have included ¥80 billion. That is all.
Unidentified Analyst
Regarding the adjusted operating income, similar to revenues, do you say that 70% to 80% is in the first half? What about first quarter and second quarter? If you compare that too, how do you evaluate the impact?
Yoshihiko Kawamura
In terms of revenues, sorry, we have a breakdown. So we cannot add further.
Unidentified Analyst
On Page 24, in IT, when you explained this topic, COVID-19 impact are excluded on a year-on-year basis. If you make the comparison, I think it's a decline in revenues and earnings. As shown here in the presentation for the period ended, is there a one-off impact? And there's going to be a backlash? So that's the reason why you are looking at defining revenues and earnings? Or do you have a conservative outlook for the IT market?
Yoshihiko Kawamura
This will include various factors. The IT market outlook, overall impact is being considered. In addition to that, there were investment plans, which is putting downward pressure. And that is the reason why we have come up with these numbers.
Unidentified Company Representative
The next question.
Unidentified Analyst
I have a question about business segments, the breakdown. Actually, there are 2 questions. The first question is ABB power grid business. Keihin, Showa and Nisshin are acquired and combined. In the plan for the new fiscal year, is that reflected in the plan? I thought it wasn't, am I correct? If it's reflected and included in the plan, what's going to be the degree of financial impact? Depending on the timing of the consolidation, the impact would differ. What's going to be the amount of depreciation and acquisition price, will it not be revised any further? So that's my first question.
Yoshihiko Kawamura
ABB power grid and Honda's three businesses consolidation thereof, both have yet to be closed. So post-closure, there's much management information we will be receiving. So PPA, goodwill issues that you mentioned, those issues were not yet informed at this moment. And because of that, we're not able to disclose the numbers because we cannot perform calculations. We must receive more information. I hope you'll understand.
Regarding ABB, as I said in my presentation, at a certain timing in the first half, it will start to kick in. And we will be able to hammer the numbers out for PPA, and I hope it will be reflected in the first quarter plan. And Honda's consolidation -- Honda business consolidation will be later. And by the end of the year, we would like to hammer out the number reflected in the plan. So I hope you understand that because of the situation that I talked about, we're not able to disclose numbers.
Unidentified Analyst
I have another question. So Page 28, life segment, Smart Life segment. Adjusted operating income and EBIT plans are given. And there are 2 footnotes. If you could please provide commentary for these 2 footnotes. Healthcare business unit and diagnostic imaging business, they are sold. And the proceeds from the sales, how are they reflected in the adjusted operating income and EBIT? That's my question.
Tomomi Kato
Well, this time, diagnostic imaging business, it's to be sold, divested. So operating income and revenue, we have not disclosed numbers, but the numbers are reflected in the plan. And with respect to the proceeds of sales, they have remained unchanged from the last time. For FY '20, ¥111 billion is reflected in EBIT.
Unidentified Company Representative
Next question, please. Isayama-san [ph], please.
Unidentified Analyst
Can you hear me?
Unidentified Company Representative
Yes.
Unidentified Analyst
I have two questions. Now COVID-19 impact has been referred to Page 22, as details of this. From our new fiscal year, the adjusted operating income, 5 sectors, is about ¥20 billion, so -- ¥21 billion shown here. So there seems to be a delay in the impact and demand is also declining. There are different ways to interpret this. For fiscal year 2020, this ¥21.4 billion, it's based on certain assumptions. Based on that, in fiscal year '21, when this is going to impact it, out of the ¥21.4 billion, how much do you think is going to recover in normalized fiscal year 2021? Which areas will be return? Which areas will not?
Yoshihiko Kawamura
For fiscal year '21, it is difficult to estimate the impact. For fiscal year 2020, we have a precise estimation made, taking into consideration macroeconomic factors as well, but we don't have that for fiscal year '21. For fiscal year '21 from the beginning of the fiscal year, we're assuming that it is going to normalize. But specific numbers have not been secured yet, and we have not made the bottom half calculation either.
Unidentified Analyst
I have the following second question. For the 5 sectors, IT is going to be the major pillar. Now looking at this, minus 7.7% is the impact in terms of revenues. But what about fiscal year 2020, how do you evaluate the market? And what are the recent orders received? Are you all really seeing a downturn in the sector?
Yoshihiko Kawamura
The orders received, the numbers will be presented by Kato later. But let me, first of all, talk about the IT market overall. On the part of the customers, it is likely that we'll start to control investment. So it is likely that there will be impact. However, on the other hand, with the impact of COVID-19, remote working is increasing. There was request for different services as well. Therefore, the investment market will become smaller, but there will also be new demand as well. So IT business overall is likely to break even according to our view. On the other hand, for hardware, especially in North America, the server market, I think it is going to take time to recover in that market. So the impact is likely. But in domestic market, that is not the case. But I think the impact in the hardware in North America will be quite significant.
Tomomi Kato
This is Kato speaking. Let me also add my comment. For IT in the recent times, the impact is limited. I think there's going to be a time lag impact to follow going forward. Page 22, the first half and second half breakdown will be given. About 70% to 80% will be in the first half. For IT, the first half impact is smaller. And there is more weight on the second half compared to the overall trend.
Unidentified Analyst
Domestic IT market, you said is flat. Is that your assumption?
Yoshihiko Kawamura
Answer, yes. That is the basic assumption according to our calculations.
Unidentified Company Representative
Any other questions from those on the Japanese channel, institutional investors and analysts? [Operator Instructions]. If not, let's move on to the English channel. Those of you on the English channel, please ask questions. Your questions will be translated by interpreters consecutively, and the answers will be given simultaneously. [Operator Instructions].
It seems that there are no questions from the English channel. We still have some time left, so let's take questions once again from those on the Japanese channel. [Operator Instructions]. There's a question.
Unidentified Analyst
I have one question. IT sector is doing very well. If you could please comment on why it's performing so well.
Yoshihiko Kawamura
Thank you for the question. In the IT sector, there are roughly 4 business components. One is social and public sector business. That's systems-related business for the government and so forth. The second is financial services. And the third is solutions related -- service-related business. And the fourth is hardware business. What is doing very well is social and public sector business. Order intake and delivery is doing very well. Financial services are sluggish, but this first segment is doing very well, social and public sector business. And because of that IT segment overall is performing well.
Unidentified Analyst
What about the storage business, including North America?
Yoshihiko Kawamura
I would like to ask Kato to give you numbers.
Tomomi Kato
Storage business, we have a focus on high-end storage business. Storage market overall is such that, unfortunately, the size of the market is gradually declining and shrinking. Amidst that, we are launching products in the midrange and that is what we want to grow. In terms of profitability, Hitachi Vantara, starting from January, has started a new organization that's strengthening the business and they are engaging in structural business. And in digital area, they are to drive Lumada business. So that is the plan.
Unidentified Company Representative
We are reaching the time to bring this meeting to a close. So I would like to take the last question before we close.
Unidentified Analyst
On Page 18, capital expenditure priority will be reviewed as mentioned here. Specifically, what areas are you going to screen? Which segments are you referring to specifically? Furthermore, in terms of CapEx for the total amount compared to the previous fiscal year and this year, will there be a revision from the original plan? Please elaborate.
Yoshihiko Kawamura
Now in terms of CapEx numbers, Kato will provide a detailed explanation. Now to your first half of the question, our views in terms of the capital expenditures are twofold. First of all is reinforcement around the factory-related environment as well as investments for growth. In terms of renewal for old facilities, we are scrutinizing the details. In the past, in the -- there was a renewal in the components of depreciation, but it should not perhaps be limited to that. Not allocating everything to renewals, but also focus on new areas as well. So this is how we are going to change the allocation of investment to have overall control.
In terms of numbers, capital expenditure will be reallocated away from renewal and it will be focused on new growth. So there could be a real decrease, but we are going to reprioritize our investment for our future. Furthermore, in terms of numbers, from this term, we have 2 slides, the slide that we explained and also there is supplementary information for the results attached as well. On Page 15, there is a capital expenditure and the numbers for '18 and '19 are shown here. For fiscal year 2020, we are in the reprioritization of -- therefore, that is the reason why we are not yet disclosing numbers for fiscal year 2020.
Unidentified Analyst
What about R&D expenditure? Please elaborate further. It might be on the same page, but please elaborate, inclusive of your views.
Yoshihiko Kawamura
Regarding R&D expenses for a company like us, it is the driver for growth. And therefore, significant control is not something that we are contemplating. On the other hand, R&D expenditure will be significant. Therefore, we will have the priority set, and the order of R&D expenditures will be subject to review as well. Overall, it isn't as if we are going to reallocate the resources significantly. There are contributions to be made in the mid-term as well as long term. Therefore, inclusive of the time frame, we want to make sure there will be a return enjoyed. We'll have prioritization and rearrange the order as well. Overall, we are not thinking of strict control.
In terms of the numbers, the supplementary information on Page 17, a detailed information is provided for 2019 and 2020 compared. 90% is shown. It looks as if the asset number has declined, but the Hitachi Chemicals was accounting for 10%, which is now dropping off. Therefore, there is a decline. In terms of ratio against sales, so 3.4% in '19; and for 2020, increased to 3.7%.
Operator
The time has come to bring this meeting to a close. The fiscal year 2019 earnings briefing will now be concluded. From 5:00 this evening, we will start the conference on the progress of the 2021 Mid-term Management Plan. Thank you for your attendance today.