Hitachi, Ltd. (6501) Earnings Call Transcript & Summary

[Interpreted] The time has come to start the meeting regarding the acquisition of Thales railway system. Now thank you very much for participating despite your very busy schedules today. First of all, I'd like to talk about the materials that will be used today. Please refer to the news release site of Hitachi, Ltd. I would now like to introduce the speakers to you. The speaker will be Alistair Dormer, Executive Vice President and the Chief Environmental Officer of Hitachi, Ltd. Today, Mr. Dormer will be making a presentation. And after that, we will start the Q&A session. Mr. Dormer will be switching over the screen now. Dormer-san, please.

Thank you very much. So good afternoon and good morning for those in Europe, ladies and gentlemen. My name is Alistair Dormer, Executive Vice President for the Mobility Sector in Hitachi and Chief Environmental Officer for Hitachi, Ltd. Today, I am super excited to announce that Hitachi, Ltd. has agreed to purchase Thales' ground transformation (sic) [ transportation ] business for an enterprise value of EUR 1.6 billion, approximately JPY 215 billion. I have a short presentation to introduce the business, and we'll then be very happy to take your questions. So please turn to Page 2. Thales GTS is a business I've admired for many years and is a perfect fit for Hitachi Rail's business growth strategy. As long ago as 2016, after the successful acquisition of AnsaldoBreda and Ansaldo STS, our Chief Executive Higashihara-san announced the ambition for Hitachi's railway business to become a JPY 1 trillion top line business. With this acquisition, we will deliver on this promise by 2026 with double-digit operating income. We have conservatively calculated run rate synergies of EUR 100 million from 2026. The closing of the transaction will take around 18 months to complete with standard regulatory and antitrust clearances. During this time, GTS will be carved out from the parent group. So the requirement for cash-out from Hitachi is forecast to be in late FY 2022. This deal is at the core of our railway business strategy to focus our growth in our digital and railway control or signaling segment rather than the lower-profitability rolling stock sector. The GTS business is extremely complementary from a geographic perspective with key bases in Germany, France and Canada and key references in Asia, notably, Hong Kong and Singapore. This is a nice fit with Hitachi's strength in Japan, U.K. and Italy and growth in the U.S. We are impressed with GTS' digital capability, particularly in ticketing or revenue collection systems, which when combined with Hitachi's GlobalLogic capability, can lead the technological revolution to digital mobility as a service. From an environmental perspective, rail is a key sector for green infrastructure and contributes towards CO2 reduction. We will be acquiring some excellent energy-saving technology, such as GreenSpeed driver advisory system, which calculates and advises drivers of the optimum energy savings speed to meet the timetable. And finally, we expect the trend of revenue and EBIT growth to continue so that by deal closing, the implied EV/EBIT valuation multiple will be around 10. Please turn to Page 3. Please see the overview of the acquisition. GTS employs around 9,000 people and operates in 42 countries around the world, with segment headquarters in Germany, Canada and France. The company's portfolio of products and services includes main line signaling, urban or metro signaling, integrated communication systems and revenue collection systems. The grid valuation of EUR 1.66 billion or approximately JPY 215 billion will be adjusted at closing, as is normal in M&A deals. As mentioned before, the deal is expected to close later in FY '22 and will be paid in cash. Please turn to Page 4 for a reminder of our railway strategy. We are focused on the transformation of our product mix to boost profitability and strengthen our market position. Over the last 12 months as well as supporting our customers through the pandemic, we have been winning new orders in the U.S. and expanding operations. Our future long-term focus is to grow and strengthen our core rail control technology with digital to expand into mobility as a service. Please turn to Page 5. Here, you can see the relative market position of the company and our target market position. We are a full lineup player with a huge potential of exploiting wider synergies across the Hitachi Group with digital. Scale is important in the rail sector, as you can see by the 2 large players' relative profitability. However, we are more focused on the digital and rail control part of our capability, which commands higher margins. This acquisition will position Hitachi as the global leader in the rail control sector. Please turn to Page 6. Page shows the 4 main lines of business within GTS. Main line signaling includes European Train Control System technology as well as rail control systems. Urban signaling includes computer-based train control, interlocking, and energy-saving driver advisory systems. ICS, or integrated communication systems, includes operational control, rail telecoms, preventive maintenance systems, and light rail control systems. And finally, revenue collection systems includes automated systems for railway fare collection, road charging and car park payments, which has huge potential for expansion into mobility as a service. In summary, over 50% of the business is digital and gives access to new markets for Hitachi's wider portfolio. Please turn to Page 7. This slide shows Hitachi's strategy on a page as we progress our mobility technology on a digital journey from the edge of the smart grid supported through synergy with GlobalLogic. In summary, this acquisition will create the global leader in railway control systems and is 100% in line with our wider Hitachi strategy to focus on the digitization of our core businesses and to grow. So finally, on Page 8, we see the road map. We expect to close late in FY '22 after carve-out, regulatory and antitrust clearance. After closing, we intend to fully integrate the business into Hitachi Rail, as we did with the Ansaldo businesses, to deliver the synergy and leverage the exciting growth potential with the new customer base for mobility and beyond mobility. Thank you.

[Interpreted] Mr. Dormer, thank you very much. I would like to complement some information. Mr. Dormer said GTS. As you can see, this is related to their railway business of Thales, as mentioned in the release. We would now like to proceed to the Q&A. In addition to Mr. Dormer, we will have other people joining the Q&A, Tomomi Kato, General Manager of the Financial Strategy Division; as well as Mr. Luca D'Aquila, CFO of the Railway Systems Business Unit. [Operator Instructions] We will not be showing the video of the person posing the question. First of all, we'll take questions from the Japanese channel from the media and then institutional investors as well as analysts. And then we will go to the English channel to receive the questions. The floor is now open for the Japanese channel and to the press. [ Hiro-san ], please unmute and ask your question.

[Interpreted] I hope you can hear me. I have 2 questions. The 2 companies, it will mean that mass domain can be expanded going forward. Specifically, what kind of service are you contemplating? What kind of technologies will be combined to bring to that this new strength? I have another question. With Lumada, is -- it can be also combined. I understand that. So what do you contemplate in terms of combining Lumada as well as GlobalLogic capabilities in this new initiative?

Thank you very much for your question. So regarding mobility as a service, this is a core part of the digitization of the passenger experience from the complete journey. So we have been developing a number of technologies within Hitachi, such as what we call [ be in, be out ], which is technology to charge people based on where they are in terms of the usage of public transport. This is highly complementary with the Thales GTS revenue collection systems. So Thales has got a significant market penetration with regard to fare collection but also road charging and also car park charging. So we believe that the complementary technology with Hitachi Rail and within Thales GTS fits together quite nicely. But ultimately, the combination of Lumada to acquire this full data set and to provide services via the cloud using GlobalLogic technology is the direction that we will be moving. So we see a combination of technology from Thales GTS, technology from Hitachi Rail but underpinned by Lumada and GlobalLogic's chip-to-cloud technology to really provide the overall digital service to allow people to experience optimum journeys and passenger experience.

[Interpreted] Now regarding fare collection of -- from that point of view, how will the normal consumer feel the service? Can you visualize this from a point of view of a regular passenger?

Yes. I mean currently, at the moment, people will either buy with a smart card or they will buy a ticket for a journey that they want to take. But if there was a combination of different modes of transport, such as rail or bus or taxi, then those are currently completely independent, and, therefore, are charged independently. Or if you are going on the same journey repeatedly, so you're traveling from one city to the other on a regular basis, sometimes the fares will change or you would not have the optimum fare. So what this kind of systems can do is ultimately can provide you with the lowest -- advise you of the lowest form of travel. They can advise you of the integrated nature of that travel. But also from a transport operator point of view, it gives you the ability to adjust a fare depending upon the usage of the train or the bus or the time of day. So it becomes an extremely dynamic situation where you can choose in advance where you want to travel and how you want to travel and compare lots of different potential options in terms of your travel. Then when it comes to traveling, potentially, you don't need to buy a ticket. You're charged just according to where -- which form of transport you're using and how, by your mobile phone, i.e., where are you, at what time and in what mode of transport. So these are -- this kind of digital experience or digital capability will increase the attractiveness of public transportation, will further integrate the modes of public transport but will also make sure that people are getting the optimum charge, the optimum fee for the journey that they want to take.

[Interpreted] Thank you for the questions. Let's continue. [ Takahashi-san ], please unmute and state your questions. [ Takahashi-san ], please unmute. We can't hear you. [Technical Difficulty] [ Takahashi-san ], our apologies, but we would like to get back to you after adjustment later. There seems to be some audio problems. So let's move on to another person. Osaka-san, please unmute and state your questions.

[Interpreted] Can you hear me?

[Interpreted] Yes, we can.

[Interpreted] Osaka-san, Toyo Keizai. I have 2 related questions. My first question is on the IR Day in June, FY '25 revenue to be around JPY 850 billion. And Thales business, was that included in that number? So that's my first question. And second, FY '22, when the closing occurs, and after acquiring Thales business, what's going to be the size of the revenue post acquisition? So 2 questions, please.

[Interpreted] Thank you for the questions. To address your first question, when we organized Investor Day in June, the number that we mentioned, JPY 850 billion, GTS deal -- this deal was not reflected. So this is going to be on top of the number that we mentioned back then. So that's our answer to your first question. And to respond to your second question, so revenue for the year, if you could take a look at the materials -- bear with me for a moment. Well, a little less than JPY 200 billion, that's the size of the annual revenue that will be added on. But then, of course, we would like to proceed with our plan and see what the number is going to be more precisely. Thank you.

[Interpreted] [ Shinobi-san ], please unmute and ask your question.

[Interpreted] I have 2 questions. Regarding the GTS acquisition from Thales, I understand that Hitachi already had a signaling business and receiving orders for this business as well. There is a complementarity in terms of regions that was mentioned. But beyond that, with the signaling business of Thales, inclusive of hardware functionality, what is the strength? In terms of customer base as well as in terms of railway operation and supporting system, is there incremental advantage to be provided by GTS? That's my first question. Second question is as follows. PMI will be pursued going forward. What are the challenges you can foresee? That's all.

Okay. Thank you very much for your question. In terms of the Thales technology, there is some area of overlapping technology in terms of European traffic control and computer-based train control systems. But as you pointed out, the customer base is quite different. So Thales is extremely strong in Germany and in the U.K. and in Canada, whereas Hitachi Rail is strong in the U.K., in Italy and a growing business in North America or the U.S. in particular. So we see a real complementary set of customers that we can work with. But secondly, the technology of today is moving. So we are investing in research and development, as is, I'm sure, Thales GTS business as signaling becomes more and more digital. So we see a huge synergy in terms of the R&D effort as we develop signaling systems going forward. Having said that, signaling is part of the business. The other parts of the business are a number of technologies that we don't have, such as driver advisory systems, such as some elements of overall traffic control and scatter control; and as mentioned by the previous question, the revenue control road charging and car park charging, which is an expansion beyond our traditional rail business into the adjacencies of mobility. So we see, from a customer point of view and from a technology point of view, a strong strengthening of our business. With regard to your second question in terms of post-merger integration, we, in the rail business, have very successfully integrated the AnsaldoBreda business into Hitachi. But in fact, Luca D'Aquila, the CFO of Rail who's on the call today, joined Hitachi from AnsaldoBreda back in 2015. So the management team is now a combination and will be a further combination of the Thales GTS senior executives and the Hitachi Rail senior executives, and we will be building the organization together so that we have one seamless business. So it's an exciting challenge for us. It's a challenge that we've done before. So I'm super confident that we can make it a success.

[Interpreted] Earlier because of the audio trouble, we were not able to get questions from [ Takahashi-san ]. So [ Takahashi-san ], once again, please unmute yourself and ask your questions.

[Interpreted] Hello?

[Interpreted] Yes. We can now hear you.

[Interpreted] Well, earlier, my apologies. So I have 2 questions as well. First, regarding financing, the deal size is EUR 16.6 billion, how is this going to be financed? At this moment, what is the plan for financing the deal? And another question, the other question, JPY 10 trillion of revenue and operating income of 10% or so. To achieve that, from what we can see, I don't think you need another acquisition, another M&A deal. So what is your view? Are you thinking of revising the numbers upward going forward? What is the possibility of doing that? So 2 questions, please.

[Interpreted] So to respond to your first question. The deal is expected to be closed toward the end of FY '22. There's more than a year to go. So that -- things are not decided. But then, of course, there will be a combination of cash on hand and borrowings to finance the deal. So Mr. Dormer will answer the second question.

So do we need this? I think we always need to be in a strong position with all of our businesses because this is a challenging market, as is all markets. So we have seen some consolidation in the railway sector over the last couple of years and the formation of some very strong players. This asset is a very rare asset. For these assets to become available is a really, really, to me, "once in a lifetime type" opportunity for Hitachi Rail. So if we are to cement our long-term future in the rail market and to be the global leader in rail technology, that is an opportunity that we really cannot -- we cannot pass. So I'm convinced that this is a great deal for Hitachi. In terms of the overall JPY 10 trillion and OP of 10%, I think this is part of the portfolio of Hitachi and a very important part of Hitachi. I'm sure as we formulate our plans going forward now we've got this acquisition, Kojima-san will keep the markets informed as to our future planning.

[Interpreted] We still have some hands up, but at this point in time, we would like to proceed to the institutional investors and analyst questions on the Japanese channel. And we will come back to this -- to the press later if we have time. Now at this time, we will field questions from the analysts and institutional investors on the Japanese channel. [Operator Instructions] [ Yoshi-san ], please unmute and ask your question.

[Interpreted] I have 3 questions. I understand that 18 months will be [ required ] for closing. It seems long. Is it because of the railway business nature that makes it so long? Second is a confirmation. In terms of sales, I think you said JPY 200 billion or JPY 100 billion. I'm not sure. Please clarify. EV/EBIT 10x is a multiple that was mentioned. So that's JPY 200 billion. That means EBIT will be around JPY 20 billion; operating profit margin, 10% or 20%. I want to confirm these numbers once again. Now third question is the following. Perpetuum was acquired in -- last year in August. And now GTS will be acquired. So are you eager and enthusiastic to do more M&A? With climate change as a major theme in the following years going forward, I think railway systems will be increasingly evaluated going forward. On the IR Day, this point was emphasized as well. So what is the enthusiasm in this market today? Please elaborate.

Let me -- thank you very much for your question. Let me answer the first question, and then Kato-san will answer the second question, then I will answer the third question. So regarding the first question, 18 months is a long period of time. That is because there are multiple jurisdictions that we will need to obtain regulatory clearance but also the carve-out process from the parent group. So that is why it's taking this period of time. Kato-san?