Hitachi Ltd (OTCPK:HTHIY) Q1 2021 Earnings Conference Call July 30, 2020 4:30 AM ET
Yoshihiko Kawamura – SVP, CFO, & GM, Finance Group
Tomomi Kato – Deputy General Manager, Financial Strategy Division
Claudio Facchin – CEO, Hitachi ABB Power Grids
Conference Call Participants
Thank you very much for waiting. It is time. So we would now like to start consolidated financial results briefing of Hitachi, Ltd. for the first quarter ended June 2020. Thank you very much for taking time out of your busy schedule to attend this meeting. We are holding this meeting in web conference format to prevent the spread of COVID-19. The materials are posted on Hitachi, Ltd. IR website and news release website, so please refer to them.
Now let me introduce the speakers. Yoshihiko Kawamura, Senior Vice President and Executive Officer, CFO; Tomomi Kato, General Manager of Financial Strategy Division; Masao Yoshikawa, Executive General Manager of Investor Relations Division. In addition to the 3, we also have Claudio Facchin, CEO of Hitachi ABB Power Grids.
First, Kawamura will explain the overview of the financial results. Please give us a moment to change the screen. The floor is yours Mr. Kawamura.
Yes. Thank you. My name is Kawamura, the CFO of Hitachi, Ltd. Thank you very much for taking time for this meeting. As COVID-19 weeks havoc with much effort of all the stakeholders, so we are now — we are able to conduct our business I would like to take this opportunity to express my thanks to everyone. So let me discuss the online of consolidated financial results for the first quarter ended June 30 this year, and the annual outlook. We have 1 hour. In the first 15 to 20 minutes, we would like to deliver the presentation, and the rest will be spent on questions and answers.
I look forward to your kind attention. If you could please turn to Page 1. The status of quarter 1 is highlighted in text 1, 3, 5. #1. We are putting together an annual outlook, and there are assumptions behind that, especially a potential impact from COVID-19. The assumptions that we use have not been changed from the assumptions we used in the initial forecast. In the first half, there will be a heavy impact from COVID-19. There will be 70% or so of impact seen in income. But in the second half, there will be fluctuations, but the impact from COVID-19 will start to fade. So those are the assumptions that have remained unchanged. And #2, the 5 sectors and the listed subsidiaries that we have for both. There is difference or contrast in the performance or income. The 5 sectors are quite firm, especially the IT segment is performing quite well.
Now in terms of the absolute volume of profit, 50% of our income or revenue is from IT segment, and the same with income. So compared to other sectors, IT segment is delivering double the performance. And #3, IoT SSP, we are now concentrating management resources in these areas, trying to expand the Lumada business. And there’s a new IT related business demand because of COVID-19 that we are aggressively after. And #4, we are sharing this for the first time. And our Hitachi ABB Power Grids initiative is coming to a milestone. The accounting standards used for us and ABB are different. So we are scrutinizing the numbers. And we would like to share with you the numbers that we can share with you as of this moment. And to give you the conclusion, because amortization of intangibles is quite large, ABB Power Grid operating loss will be incurred, and that will be absorbed by our performance, including industry and mobility because there will be upgraded provisions in those 2 segments. So the bottom line forecast remains unchanged overall. #5, given the very tough situation, cash management is crucial. So we will continue to enhanced cash flow management to secure sufficient liquidity. We have over JPY 1 trillion of liquidity secured. So we have enough cash for operating our business. So those are the overall conditions.
Now taking a look at Page 4, please take a look at our Q1 results. On the left-hand side, revenues in the middle, adjusted operating income, you can see 3 bullets. On the far left, is the number for Q1 FY ’19. In the middle is Q1 FY ’20, excluding COVID-19 impact. On the far right, the bar includes COVID-19 impact. The same arrangement for the middle section, adjusted operating income. Unfortunately, we have seen a decline both in revenues as well as adjusted operating income. But as you can see from the bars, by comparing FY ’19 and FY ’20, excluding COVID-19 impact, you can see that our performance has not changed very much from fiscal year ’19, especially, adjusted operating income is the same this year as last year if we exclude COVID-19 impact. And COVID-19 impact revenues, EBIT, net income, EBITDA, cash flows, the numbers are given on the far right.
Please move on to Page 5. Here are the numbers for the 5 sectors and listed subsidiaries. In terms of listed subsidiaries, we only have 2 left Hitachi Construction Machinery and Hitachi Metals. If you could pay attention to the revenues, the first line, the gray shaded part in the 5 sectors, JPY 1.2 trillion plus of revenues, listed subsidiaries, JPY 324.9 billion. And the next line shows adjusted operating income for the 5 sectors, JPY 62.9 billion. And listed subsidiaries negative JPY 4.6 billion or operating loss. And adjusted operating income ratio for 5 sectors, 5.0% and listed subsidiaries, negative 1.4%. And net income for the quarter for the 5 sectors is JPY 225 billion, and listed subsidiaries, negative JPY 1.7 billion. With the 2 combined, the total comes to JPY 223.2 billion in terms of net income. So this is for the unconsolidated performance of Q1 and the listed subsidiary’s performance for Q1.
Please move on to Page 6. This is a waterfall chart from fiscal year ’19 to fiscal year ’20. In the first quarter, you can see the factors affecting our numbers. At the top are our revenues. In the first quarter of FY ’19, revenues were JPY 2 trillion. Hitachi Chemical was divested. There was impact from foreign exchange AMS and JRA. Such impact is added. And you come to the gray bar, JPY 1.894 trillion. This is excluding COVID-19 impact. And to the right of that, the COVID-19 impact is shown to be JPY 299.8 billion. Hitachi Construction Machinery, Hitachi Metals, AMS and so forth, that is subtracted. And Q1 FY ’20 result is JPY 1.594 trillion. And the same for adjusted operating income on the far left, JPY 124.3 billion, Q1 FY ’19. And Q1 FY ’20, excluding COVID-19 impact, JPY 124 billion, which is not much different from last year. COVID-19 impact, JPY 65.7 billion. Therefore, the actual result is JPY 58.3 billion.
And Page 7 is for 5 sectors alone. I would like to skip this for now. If necessary, I can come back to this slide later. If you could please move on to Page 8. This shows the financial position and the cash flow. Financial position is, as of June 30, it’s a snapshot of the balance sheet at that time. The top total assets, the gray shaded column as of June 30. Total assets came to over JPY 10 trillion. It’s been accumulating. What are the reasons? Below that, there’s cash and cash equivalents. The second line on the far right, change from merchant, and there’s increase for more than JPY 1 trillion. ABB Power Grid was acquired and funding for that is reflected in this line. And interest-bearing debt increased by JPY 956 billion. And as I may be repeating, this is as of June 30, this amount is already paid. So JPY 1 trillion increase in cash and cash equivalents is already gone because it’s spent on acquisition. And cash flow below, this is as planned. Cash flow from operating activities, JPY 153.7 billion. Cash flows from investing activities, JPY 357.4 billion. Free cash flow of JPY 511 billion. Core free cash flow, JPY 80.7 billion as planned.
Moving on to Page 9. As I said, Lumada is a big part of our strategy. We are concentrating our management resources there and to show the status, FY ’20 forecast on an annual basis, JPY 11 trillion. We’re coming close to this plan. You can see that it’s broken down into 2, gray and red. Red represents Lumada core business that is inherent in Lumada business. The gray part is Lumada-related business. Using Lumada technology — Lumada technology is applied to energy or railway. And so Lumada technology is applied to various areas, and these are generating income. Please take a look at the second half of the page. In text, Lumada-related events are described. So Lumada-related business, scale by business, if you will, scale by digital, if you will, this is being strengthened. Mr. Gajen Kandiah, who used to be with Cognizant, is invited as the CEO, Hitachi Vantara. With his leadership, we want Hitachi Vantara’s business to be grown substantially. That’s our expectation. And below our alliance with Microsoft, our collaboration with Teijin and Daikin they’re described. So that is the status of the numbers as of Q1.
Next, is the fiscal year 2020 full year forecast. Page 11, please. So the table is the same as the first quarter. Revenues on the left and center is adjusted operating income. And we have the same trend. Excluding COVID, we compare last year and this year, and the level is about the same. But in reality, we have COVID impact. So the right side of the 3 bar graphs, revenue forecast is JPY 7,880 billion, and adjusted operating income, JPY 372 billion. And in the circle, you can see the operating income ratio, 4.7%. On the right side, you can see the COVID-19 impact, EBITDA — EBIT, net income, EBITDA, cash flow from operating activities. Net income attributable to Hitachi, JPY 335 billion has remained unchanged, as I mentioned at the outset.
Next Page 12, please. This is the forecast by 5 sectors and listed subsidiaries. The trend is pretty much the same as the first quarter. So the first one, the revenue. 5 sectors, JPY 6,360 billion. Listed subsidiaries, JPY 1,520 billion. Next, adjusted operating income. 5 sectors, JPY 338 billion; listed subsidiaries, JPY 34 billion. Next, adjusted operating income ratio. 5 sectors, 5.3%; listed subsidiaries, 2.2%. And the bottom, net income attributable to Hitachi, Ltd. stockholders. 5 sectors, JPY 331.5 billion; listed subsidiaries, JPY 3.5 billion, total JPY 335 billion. No change there.
But now the 5 sectors and listed subsidiaries are showing some differences. Page 13, please. This is the Power Grids numbers. As I mentioned, we just did this in July, July 1. Hitachi has IFRS and ABB Power Grids is based on U.S. GAAP. So the accounting measure is different, and we cannot do an apple-to-apple comparison. So we are now involved in trying to adjust it to IFRS. So this includes some estimate. And we correct using our past knowledge. And therefore, this is not fixed, but this is our best estimate that we are sharing with you today. On the left side, you can see Hitachi ABB Power Grids, the joint venture numbers, and we did this in July. So we have not included April to June. So this is 9 months’ worth of numbers. And to the right, you can see related costs. Various costs are incurred. One is the structural reform expenses, and the other is the acquisition-related amortization, PPA, amortization of intangibles. So we net the 2 items from the forecast and the far right, this is the total forecast. Second, from the top, adjusted operating income, JPY 43.7 billion, 6.3% is the operating income ratio. And on the right side, you can see COVID impact. It is heavily impacted by COVID. So JPY 43.7 billion is the business. And on the right side, you see structural reform expenses, JPY 15.9 billion and PPA is JPY 60.5 billion. So netting the 2 numbers, the far right, adjusted operating income is JPY 32.7 billion negative.
Now what about cash? Second from the bottom, adjusted EBITDA — EBITA. In gray, JPY 45.2 billion and adjusted EBITA ratio is 6.5%. And on the far right, you can see JPY 29.3 billion. So on a cash basis, we are taking in a big bulk of cash here.
On Page 13. In the forecast, the gray part, the adjusted operating income and the ratio is 6.3%. On Page 12, adjusted operating income ratio, the third line from the top, on the far right, you can see 4.7% on a consolidated basis. So 4.7% and 6.3% shows that this is a profitable business that we are taking in now.
Next page, please. This shows the waterfall chart for the full year. Consolidated and the 5 sectors on the next page. In bottom, you see the Hitachi Chemicals impact. Page 14, revenues. FY ’19 figure is shown and COVID-19 impact. And next comes the divestiture of Hitachi Chemicals, and Hitachi ABB Power Grids. And on the far right, FY ’20 forecast. And this is offsetting the COVID-19 negative impact, JPY 7.880 trillion.
And same story for adjusted operating income from left to right. Page 15, this is the 5 sectors. I will skip this page. And if we have time, I will explain this later again in the Q&A session. There are several more slides together. I refer to Claudio Facchin in Switzerland. He’s the CEO of Hitachi ABB Power Grids. He will explain the next few slides. Claudio?
Hello, U.S. LATAM. So could you talk about the slide which you prepared. So those are the members here. Thank you.
Thank you, and good afternoon to everyone. If we go to the next slide, please. Transformation position us for profitable growth. Hitachi ABB Power Grids is well positioned as leading when it comes to market, technology, installed base and offering and portfolio. We are in attractive markets, roughly $100 billion worth of market that we’re serving, growing on average, 2% to 3% per year. With also many high growth segments, as you can see, whether it’s digitalization of the grids or electrification of transportation that are growing 2 to 3x faster than average.
Our transformation is well underway. Over the past few years, we have been investing in growth in sharpening our portfolio, developing new business models and driving continuous improvements in our operations and leveraging people and innovation as the 2 foundations at the core of our transformation. These efforts and a strong global leadership team position us to grow faster than the market and continue to strengthening our leading market position in line with the 2025 strategic plan.
Next slide, please. COVID-19 has brought, obviously, new challenges. We have, since then, reprioritized focus on protecting people, preserving business continuity and preparing for the new norm by taking the learnings from the crisis. And the team has shown a great resilience and actually further improved customer collaboration across all markets despite all the challenges. While we address the challenges on the short term, we also see clear medium to long-term opportunities, such as the significant stimulus packages that would allow to accelerate decarbonization efforts through the green energy transition in most of the markets. One of those examples, you can see on the slide is offshore wind, which is a promising in many of our related businesses and technologies. When you look at offshore wind, you need high voltage, direct current interconnections. You need renewable integration technology, you need digitalization, power quality, and we are all at the core of those technologies. Of course, we’re still in the midst of the pandemic, and there is still uncertainty on how fast and what shape that recovery will take.
Next slide, please. Now COVID-19 has, for us, rather a short-term impact. Here, you see on the slide on the right-hand side — on the left-hand side of the slide, the impact on the market. That obviously will reflect impact on our top line growth. 2020 will be a challenging market condition for us. Now given the long business cycle nature of our business, on average 18 months to convert orders to revenues, part of the impact that we see on orders in 2020 will also be reflected in 2021 revenues. Now this will continue to put pressure on earnings. However, we continue taking all necessary cost measures, and we do not change our ambition level to the double-digit margin in the time frame ’21, ’22. And that, of course, again, will depend on how fast the recovery will be implemented. Now the fundamentals of the market drivers also remain intact in our view. And that’s why we remain positive on a medium to long-term growth. And this should then also support the revenues and the earning growth as we aim to the upper end of that margin corridor, as you can see on the right-hand side of the slide, by 2024 or 2025.
Next slide, please. Now we’re charting the course for the future. And obviously, the opportunities that we’ve already been sharing with you in early calls on addressing the market with the combined heritage of technology but also with the combined scale and investments that on the Hitachi ABB Power Grids side, we have done on the energy platform, on the energy technology and the Hitachi investments and scale that we get through Lumada and through the digital technology, creates a unique opportunity for us to add, accelerate, add value and create new growth and cost synergies going forward. So we are combined, can show 2.5 centuries of technology heritage, but we also have an enhanced talent pool across both energy and digital. There is a unique contribution that we will drive going forward for the growth plan that we have as committed to the 2025 plan. Thank you.
Thank you very much, Claudio. Very good.
Well, then let me go to the additional slide, supplementary slides. Please go to Page 22. By sector, using bar charts, you can see the fluctuations in revenue and adjusted operating income. Just to highlight, Page 22. In the middle, please take a look at this section regarding adjusted operating income. On the left, Q1 FY ’19 and Q1 FY ’20 are compared. Q1 FY ’20, 8.9%, the number that you see above. This is a record high number.
And moving on to Page 23, Energy sector. ABB Power Grid was just discussed. If you could please take a look at the middle section, adjusted operating income, a negative JPY 76 billion or so. That’s related to Page 13, structural reform JPY 15.9 billion and PPA amortization JPY 60 billion, they are reflected in this number. Please take a look at Page 24. At the outset, as I said, industry is having an upward revision in itself forecast as is in the middle, FY ’20 forecast, adjusted operating income for industry is revised upward by JPY 10 billion, the same with mobility upward revision in forecast, JPY 26 billion worth of revision.
Page 26, Smart Life sector. I would like to direct your attention to adjusted operating income in the middle. To left bars, FY ’19, JPY 21.6 billion negative. That’s because of deteriorating performance of automotive business, so that’s Q1. And Hitachi Construction Machinery, please take a look at adjusted operating income. Last year, it was JPY 75 billion. And the number that you see right now is as shown, it’s been impacted. And Hitachi Metals, please take a look at adjusted operating income, very tough. There were quality problems that were reviewed, a negative JPY 5 billion. That is the forecast.
Moving on to Page 30, appendix. On the gray shaded part on the right, forecast for FY ’20, starting from IT sector and onward, adjusted operating income and margin, as you can see, IT is contributing to half of the operating income ratio. As you can see, Page 31. This is the Hitachi Construction Machinery and Metals performance. And Page 32, what are the assumptions behind COVID-19 impact? This has remained unchanged more or less from May. We look at segment as well as region. We accumulate the factors from macro as well as micro perspective, we have come out with these assumptions.
Page 33. This is a new chart. On the far right, this was our announcement as of May. Forecast of the COVID-19 impact, light shaded gray and darker gray. Darker gray is impact of 15% or greater. Light gray, 10% to 15% impact. And for lighter impact, no color. And in the first quarter, situation continue to evolve. Industry, Mobility from darker gray to lighter gray to no color, it has been evolving. For the 5 sectors, less than 10% impact, 9.9% for 5 sectors. Hitachi Construction Machinery, there’s heavy impact from COVID-19. The rest has remained unchanged. So towards the second quarter, the outlook is changing and evolving.
And lastly, Page 34. This is the impact in the overseas market. We’ve been tracking this number all along. So first in the clockwise manner, North America, Europe, China, Japan and then back to ASEAN and India. What is characteristic here is compared to the first quarter last year, this quarter, first quarter, in North America and Europe, 36% and 37%, respectively, very strong impact due to COVID-19. And ASEAN and India is 34%, very big impact. On the other hand, the upper right, China is minus 4%, only 4%. So of course, there was an impact in China, but the impact was smaller. And Japan is minus 15%, so in the middle.
That concludes my presentation. Thank you very much.
Unidentified Company Representative
Thank you. Let’s move on to questions and answers.
[Operator Instructions]. We would like to take questions from those of you on the Japanese channel first and then move on to the English channel. So let’s take the questions first from those of you on the Japanese channel. [Operator Instructions]. Any questions, please? I see a hand.
Question. I have two questions. Question number one is about Lumada business. It seems that Lumada business is performing quite well according to your explanation. Lumada-related business in the first quarter slightly declined. And that’s perhaps because of impact from Hitachi Construction Machinery. But then once again, if you could please explain the reasons behind slight decline in Lumada-related business? And what you earlier talked about of how are you going to recover Lumada-related business going forward for the year? That’s my first question.
Well, answer. If you could please state your questions upfront to all of them at once.
Understood. My second question has to do with ABB about structural reform cost. The cost for structural reform, or rather the content of structural reform, what is specifically done in terms of structural reform? And what’s going to be its effect, fruits that will manifest next year and onward? Is this structural reform going to be completed by the end of this fiscal year? And I understand that you are still looking at the numbers, but the cost of amortization for intangibles next year and onward, if you can share such numbers to give us an image or perception, please.
Answer. Thank you. To address your first question regarding Lumada business, I would like to turn to Kato san to answer your question.
Kato speaking, yes. Lumada-related business, you asked about — as you pointed out, Hitachi Construction Machinery, is being heavily affected by COVID-19 because market is deteriorating, it’s seen decline in overseas parts business. And another impact — impacted areas railway business and train car business has been delayed. And so these are the 2 factors behind the declining Lumada-related business. And the second part of your Lumada question, how are we to increase Lumada business? That’s what we’re discussing day and night. Lumada core business is constant. It’s increasing, but Lumada-related business, we have to work harder on. So applying Lumada to energy and railway businesses to drive those businesses. Well, we’ve had much focus on IT and information, but we need to expand to other areas, creating new business, so train car, signaling system, ticketing, by having a package of all of those elements in railway business. And by connecting what we have elsewhere, we would like to jointly promote or that we can promote vis-à-vis our customers.
And track data analysis that’s been done in the western countries. So there’s a vast example that we can learn from. And of course, that’s being done in the U.S. Part of that can be brought to Japan to expand our business. So through such approaches, we would like to grow Lumada-related business.
Now regarding ABB’s structural reform, the numbers will be given to you by Kato san later. And the cost for structural reform included is IT integration cost, and with acquisition, we utilized consultants — consulting firms. And so that cost is also reflected. And regarding intangibles, you asked about that as well. For 20 years, it will be shown. And the number that we are posting this year is quite large. And that is because of the orders outstanding, they are turned into cash in 1 to 2 years, but that is amortized upfront. And that is why the number is large. Overall, JPY 500 billion of amortization is needed, and it will show in several years’ time. JPY 30 billion or so will be posted on average. And this year and next year, because of the amortization, the orders placed, the numbers tend to be large. Overall, throughout the period, it’s going to be our sale. But in the first and second year, it’s going to be large. And with respect to structural reform costs, I’d like to turn to Kato san.
Kato speaking. Page 13, Power Grids structural reform cost. Roughly speaking, as Kawamura san said, system development cost for integration, PMI consulting costs, these are the main components. So basically, there are one-off costs, more or less. And PPA amortization, JPY 60.5 billion. Just to give you the background behind this. Power Grid business it’s been less than 1 month since it’s been consolidated. And originally, ABB has been using U.S. GAAP, we use IFRS. And so we will have to migrate. And in order to come up with initial balance sheet, it will take several months. And so based on the information that’s been made available to us, we have come up with these estimates. And so these are estimates after all. And as was said earlier, on average, amortization cost is going to be JPY 30 billion. Also, we took a closer look. And within a short period of time, there will be a larger amortization and JPY 60 billion is for 9 months this year. And JPY 10 billion or so reduction will be seen in this number year after year. In fiscal year ’23 or ’24, the amortization cost will be halved from this level. Anyway, this is PPA amortization, and we need to assess that in detail in the next few months. And once we know more, we will update you. That’s all.
Next question, please. So next question — please. Thank you, please unmute and ask your question. We hear you.
Question. I have two questions. I came in halfway. So if my question overlap, I’m sorry. First question, so what is your evaluation on the first quarter results? So how much upside or downside on the profit compared to your internal target? And your cost reduction. So in addition to the first quarter evaluation, how much cost reduction have you progressed? Or the SG&A reduction, how much impact did you enjoy? And second question is the growth rate, 2% to 3% Power Grid business. So depending on the U.S. Presidential Elections status, green new deal, Power Grid business environment may become active with green new deal. So this is only hypothetical, but depending on the U.S. government policy, what kind of opportunity can Power Grid business enjoy?
Answer. Thank you. I will start off and answer your first and second question, the general context and then Kato san will explain the numbers. In Power Grid, Claudio san will explain. So first, the first quarter evaluation. At the beginning of the year, when we formulated the numbers, COVID impact was extremely unforeseeable. We had no scientific data. So we took a conservative view. But compared to our first quarter budget, the profit was an upside of JPY 30 billion. So it depends on how you interpret it, but we have been able to confirm that we are doing a fairly good job, and this is now a lead into the second quarter. So on a full year basis, the bottom line, we think we can achieve the budgeted number. So our evaluation on the first quarter was better than we anticipated, higher profit than anticipated.
But as I mentioned earlier, COVID, the impact — half of the impact have already emerged in first and second quarter, and the impact will say it in third quarter. But looking at the U.S., we still have a big number of cases. So if there will be more impact on all industries, then our underlying premise will no longer be valid. So we are preparing to do the final evaluation. So that is our view on the first quarter and the cost, the expenses. I cannot disclose the concrete numbers. But now we are reviewing all the areas without any sanctuary. So reviewing the fixed costs and the indirect divisions, the headquarter costs, not the production sites, but the headquarter costs. And on the cash level, the CapEx is also being reviewed, revisited. In the depreciation, we had more freedom. We had pretty high level of freedom, but now we are revisiting them. And R&D investment, we’re not thinking of reducing it, but we are prioritizing and invest in high priority areas. So cost reduction and cash management are a big focus for now. For number one and two, Kato san will add some more information.
So our first quarter view was just mentioned. Compared to our internal target, it was an upside of JPY 30 billion. And roughly speaking, there are 2 main reasons. One was COVID-19 impact was smaller than we originally anticipated. The Industry and Mobility 2 segments. These 2 segments, we are revising upward the full year forecast. And second, other than COVID, the business was stronger than our plan. And the reasons were, I cannot — I don’t have something that I can use with numbers, but the cost, expenses were reduced successfully. And sales was front-loaded in the same year, but we were able to realize sales earlier. And in China, in life — Smart Life, we have elevator escalator business, and this was better than van. So China’s market recovery was faster than we thought. And in Life sector, Smart Life, the Hitachi High Tech, this is the measurement analysis equipment, and this was stronger than we thought in North America.
Question is, say, a result of the Presidential Election in U.S. in this November, perhaps something happening in conjunction with the business development with the North America markets. So how do you evaluate the, say, result of the Presidential Election in the U.S. affecting your businesses in the North America because the, say, certain result can promote the more demand in the green technology. So where you can develop the new as far as opportunities. So this is your question to you. Could you say something on this question?
Sure. So maybe let me take it first from a global perspective. And if you look at IEA, the International Energy Agency, they’ve been recently issuing a report that looks at the post-COVID recovery plans. And they clearly identify that there is, first of all, roughly $1 trillion opportunity with all many of these recovery plans, funds across the markets to be focusing on the energy transition. And as part of that, an important — a relevant part of this investment will be focusing on the electricity and on the grid infrastructure. The needs upgrades in mature markets and the needs extension, expansion in emerging markets. So this is a clear indication.
And we already see — if you look at Europe, we already see quite some decisive actions on ensuring that the EUR 750 billion package, many of those investments will be addressing acceleration of investments for the energy transition. And that’s obviously right at the center of what we see. It was mentioned also other markets, and particularly the U.S. We do expect to see the same. But there, I think the timing for that to materialize as we see now it might take a little longer. So in this aspect, Europe is still clearly taking the lead on focusing on funding for accelerating their energy transaction. And as I said, the core element in addition to, obviously, energy efficiency investments, is investments in the grid, and we are right at the center of that opportunity.
Claudio, excellent. And Mr. Yoshihiko, can you make some comments in addition to what you’re not talking.
Yes. I will add some comments. When we were to close this deal, Executive Vice President, Ishino mentioned this, and I will repeat that. In the U.S., we are doing the modernization. The existing facility is now being upgraded using digital, and this is now becoming a global move. And this can attract investment and the pension funds, and the capital market is changing accordingly. And this is already happening. In the U.S., this power efficiency using digital is already starting in the U.S. So even before the Presidential Election, this may increase in the demand, the Power Grid demand and our recovery plan towards 2021. It will contribute already. So thank you very much.
To continue with the questions. There’s another person with questions.
I have two questions that I would like to ask. Question number one, with respect to IT business conditions, if there are any changes to that, perhaps impact from COVID-19, but then I understand that you have not changed your plan. So compared to April and May, perhaps the situation has improved and has settled down. And because of technology development, well, and utilization and digitization to be utilized is there improvement if you have a feel as to how the conditions of that business are changing. And the second question has to do with the power grid. As Claudio san earlier explained, digitization will further advance going forward. But on the other hand, renewable energy, I think we see a clear trend of shifting more and more towards renewables. And so investment concentrated in centralized power sources. That’s what you’re doing. And it seems that business for transmission and distribution is becoming more active. And power generation may perhaps suffer and shrink. So how do you view the potential reduction or shrinking of the hardware market in the power business?
Answer. Well, thank you very much for your questions. IT overall, I would like to give you an overview. And with respect to the specifics, I would like to turn to Kato san. And regarding ABB, I will turn to Claudio san later for his comments. First, to address your IT question and how do we see the IT business conditions. Well, it’s being affected by COVID-19 quite substantially. Well, we have not been able to confirm in detail. We are seeing rising new demand, however. Well, because of COVID-19, people are working remotely. And in education, in health care, IT introduction is advancing. There was a shortage of IT resources initially. And so there’s demand. And in retail business as well, there’s rising new demand for IT. So for both the private sector and the public sector, there is growing demand for IT. And I think we are seeing signs of that. So we need to be quick in capturing that. And that is being reflected in our business already, and that is why the first quarter performance is quite good, and that is expected to continue into the second quarter. And so we are seeing signs that this will further grow. Turning to Kato san.
Well, Kato speaking. Well, there are positives as well as difficulties. On the positive side, for new normal, digitalization is advancing. We are seeing increasing number of online meetings and reinforced VPN networks, remote work environment being enhanced. So manned and staffed operations, increased security necessary. So expenditure for these is expected to rise, and we’re getting a lot of ideas and approaches for this. On the other hand, although we did not change our annual forecast, face-to-face sales activities are so hard to conduct given the situation in various sectors because of sluggish economic activity, there’s adjustment made, downward adjustment made to investment and others. So for the IT investment, COVID-19 impact perhaps may become manifest in the second half of the fiscal year. So in the first quarter, as we said upfront, we have seen record high profitability. But because there could be further impact in the second half, we have not changed our annual forecast.
Yoshihiko speaking, regarding Lumada business, even under COVID-19, why is it growing? Let me supplement. Even under COVID-19, Lumada core business is so growing. And the reason is because of new work style, lifestyle, remote contact less operations. There is need and demand. Therefore, the Lumada core business can meet that demand. That is why we have Lumada registration. We have Lumada cases, 300 of them. And 300 cases, DX experiments that are being conducted, I think we can meet that need. Claudio san.
The digitalization of your transmission businesses, this is favorable to develop your businesses. But on the other hand, say, looking to the current situation with the energy businesses, notably, say, renewable energy opportunity now coming. And under such circumstances, the — say, high-voltage transmission businesses probably shifting to the low voltage businesses. So under such circumstances, how you can manage the such coming situations from the high-voltage to the lower voltage or more distributable type of the system of the energy. So this is a question to you.
Thank you. Yes. So it’s clear. Renewables will continue. They’re already taking the lion share on the investments when it comes to generating electricity. And it’s also clear that we saw during the crisis how important becomes electricity and the resilience of that. Now to ensure that we deliver that electricity to mission-critical users. We need to invest on both. We need to invest on the distribution side. But as much going forward, we need to invest on the transmission side. And if you go back to the report that I was just mentioning earlier from IEA, it refers precisely to the need for modernizing, upgrading and expanding the grids, particularly on the transmission side.
If I look at, for instance, the example I gave in one of my slides, opportunities for growth on offshore wind. Offshore wind in order to be viable is developed in bulks. There is gigawatts worth of farms, offshore wind farms that are being implemented. And for that, in order to connect that power to the grid, you need transmission capacity, you need transmission investments, you need bulk renewable technology and HVDC, high-voltage direct current, is one of those where, as you know, we’re a market leader. And if you look at — from a European standpoint, you will see soon already some translation into real projects materializing in that specific area. The aspect of digitalization is essential. It’s essential across whether it’s transmission, distribution. Why? Because the generation of that electricity is much more complex, distributed variable on one end. And on the other, you have a much more complexity added into the consumption side. And that obviously then requires in order for us to maintain the resilience or further improve the resilience and the efficiency of those grid requires fundamental investments and acceleration on the digitalization. And that’s where I see a great opportunity for us as Hitachi ABB Power Grids to really make a difference by putting together the scale and the competence that we have on both side Hitachi and on the Power Grid side between the Energy platform, as we call it, and the digital platform.
[Operator Instructions]. So this will probably be the last question, please.
Question. So related to the earlier question, so offshore wind, I think the opportunity is large. Maybe I’m wrong, but there are many EPC deals. ABB, I understand, does not do much EPC. So for the offshore wind, how do you plan to raise profit? What is your business model?
Talking about the offshore wind turbine businesses, your question is that the — these businesses entail the — not only the EPC portion. And the EPC portion are always a point of our businesses. So under such circumstances, offshore wind turbine businesses, how you can create the profitable opportunity by implementing the such businesses. This is the essence of the question to you.
Thank you. And a very, very good point, and it’s like one of the areas where we’ve been investing in our transformation program. As I explained earlier, the transformation program that we’ve been implementing and investing on in the last few years, has 3 pillars: the growth, the portfolio and the new business models and, obviously, continuous improvement on the operation. And when it comes to the portfolio and when it comes to the business models, we have put in the last few years, tremendous efforts in also driving not only technologies such as HVDC to be the technology of choice to integrate offshore wind into the grids. This is already a fact.
But also we’ve been working together with our customers and our partners to create business models that allow each party in this value chain to play on its strength and focus on its core. So we move away from us providing the overall EPC for those offshore wind connections with the platforms and the station, the converter station on top into finding partners that are well established, mainly coming from the oil and gas industry with decades of experience in building those platforms, taking the overall EPC scope, and we providing to them or directly to the customer, our core technology. And there is the transmission equipment that is the high-voltage DC converter stations. And we provide this as a system, but we don’t take the overall responsibility on the EPC.
This obviously has an impact on reducing the revenues through our books, but adds much more value in those revenues. So the contribution of those revenues and also our own value-add in that case is much higher. We’ve been driving this change for the last few years. We’ve been driving also the overall market as a market leader towards that business model, which has been proven so far successful, and we continue to drive it that way.
Just one point of correction from the secretariat, Lumada Solution hub, the number of cases registered are 30 cases. It was 30. The number is 30 cases registered in Lumada Solution hub.
So we have come to the end of the meeting at this moment. We would like to bring to a close Hitachi, Ltd. web conference on Q1 fiscal year 2020 earnings. Thank you very much for participating despite your busy schedules. The meeting is adjourned.
Originally published on Seeking Alpha