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

[Interpreted] It is time. So we would now like to start the web conference on the completion of Hitachi's acquisition of ABB's Power Grids business and establishment of a new company. Thank you very much for taking the time out of your busy schedule to attend this meeting. This meeting is held in the form of video conference to prevent the spread of COVID-19. The speakers will speak without their masks on to make it easier for you to listen to. This meeting is scheduled from 3 p.m. to 4 p.m. Japan Time. Speakers, presentations and comments will be interpreted simultaneously between Japanese and English. The materials are posted on Hitachi, Ltd. News Release website and IR website, so please take a look. We will now start the web conference. Let me first introduce the speakers: Toshiaki Higashihara, President and CEO of Hitachi, Ltd.; Toshikazu Nishino, Executive Vice President of Hitachi, Ltd. and Chairman and Director of Hitachi ABB Power Grids; Tomomi Kato, General Manager of Financial Strategy Division of Hitachi, Ltd.; and Claudio Facchin, CEO of Hitachi ABB Power Grids. Four speakers will be attending today. Higashihara, Nishino and Kato are joining from Japan and Facchin from Switzerland by web conferencing system. First, President Higashihara would like to say a few words.

[Interpreted] Good afternoon, ladies and gentlemen. Thank you very much for taking time out of your busy schedules to attend this web press conference today. As you have been informed yesterday, Japan Time, Hitachi ABB Power Grids was launched as scheduled. This acquisition has brought us excellent assets that will help drive Hitachi into becoming a truly global company not just in the energy sector, but in the overall business area where Hitachi operates. The first asset we acquired through this deal is the platform to accelerate our Social Innovation Business on a global basis. The newly inaugurated company boasts the #1 technology in the world, a market share in its Power Grid business operating in over 90 countries around the world with products and service offerings to over 15,000 customers. We will combine this OT, operational technology, in the form of Power Grids and Hitachi's IT platform, Lumada, together to create an energy platform so that it can be utilized across Hitachi's entire organization and to the whole of the world. Talents are absolutely necessary for Social Innovation Business. We need to share challenges with customers and together work to provide solutions. We need such frontline staff. And in this new company, we have people from Europe, U.S., China and other parts of Asia and also from regions that we have not been able to reach very much such as South America and Middle East. They have sites in these regions. So all together, this company has a total of over 4,000 such frontline personnel. So by combining ABB's frontline personnel and Hitachi's frontline personnel, we would like to continue to promote our Social Innovation Business. The second asset we gained is the platform to accelerate Hitachi's global management. In different regions, in order for us to deploy our Social Innovation Business, we need talents that are required by that particular region. We also need to procure components that are needed in the regions. So procurement, talents, finances, for these areas, we need across-the-board shared services. And we would like to expand this on a global basis. And this new company already has shared service functions. So by combining the global operations of this new company as well as Hitachi's, we will be able to bring the costs further down. I have likened the establishment of this new company to the arrival of black ships to Japan in 1853. Back in 1853, black ships led by Commodore Perry arrived in Japan. Japan was thrown into a confusion. But this new company that we established is like the black ships that I myself invited. And we want the company to be the driving force for transformation just as the black steamships were for our country in the 19th century. The new company is off to a good start navigating in this unprecedented business environment due to COVID-19. But COVID-19 will most likely expand the use of digital technology and accelerating pace and elevate the importance of electricity as an increasingly vital lifeline. Building a decarbonized society with further introduction of renewables, amongst others, is one of the most urgent challenges of the SDGs. I am convinced that the inauguration of this new company will provide us with a significant opportunity for us to contribute to creating such a sustainable society. So I hope you will look forward to the growth of both Hitachi ABB Power Grids and Hitachi, Ltd. This acquisition deal day 1 is such that the assets from ABB were carved out, and those assets are now being checked by our auditors, and therefore, we have not been able to disclose all the financials. Our apologies for that. But at the earliest possible stage, we would like to disclose them. At the end of July, we're going to make a first quarter performance announcement. And at that time, to the extent possible, we would like to disclose the financials of ABB to the extent that we can. Thank you. That concludes my remarks.

[Interpreted] Thank you. Next, regarding the completion of Hitachi's acquisition of ABB's Power Grids business and the establishment of a new company, Mr. Nishino will explain. Please wait till we switch the screen. Mr. Nishino, please.

[Interpreted] Nishino speaking. Thank you. So regarding the new company, I would like to make a presentation. The next slide, please. This is the first slide. Perhaps this slide may not be included in your package, but these answers to the frequently asked questions in the form of photos. Just briefly on the left, there are 3 photographs. Is there chemistry? Can we combine our forces? Well, actually, the answer is yes. We are fully prepared to be together. The young leaders of both companies, Hitachi and Hitachi ABB Power Grids, are gathered and working together very well. On the right-hand side, the members of the management of both companies are shown. And in terms of chemistry, working together, no problem. And lower-right, we had a panel discussion yesterday. And on the left in the middle is Dr. Birol of IEA, the top person of IEA. And what's going to be the future of energy? Is there going to be increased investment? We had a panel discussion with IEA, and they said that they would like to support Hitachi's business strongly. And so these are some of the pictures from yesterday's event. And as Mr. Higashihara explained, situation around energy is changing very rapidly: decarbonization, renewables introduction and electrification, distributed power supply, large-scale centralized power supply. The next slide. This is a slide that was prepared by the IEA that I mentioned. So investment into renewables, including investments into new grids. This is to increase for the time being. That's what this says. This is the outline of the deal. There's almost no change from what we have already announced. What we would like to get across is that we have completed our deal process as scheduled. There were some concerns raised, but in terms of cash and the enterprise value, they are all in line with our expectation and was as scheduled. The next slide, please. Mr. Higashihara earlier talked about this. By combining energy technology and Lumada, we will be able to deliver social, environmental and economic values on a global basis. In order for us to be a truly global leader, what are the assets that we can leverage that we have acquired this time? They are threefold: business basis, management basis including customer base and business infrastructure. Let me elaborate on them. Business basis. I'm repeating this many times, but we have the #1 market share in many areas, very good products and software solutions we have acquired. By combining this with Lumada, social systems and energy technology can be combined, creating huge changes and new business opportunities, we expect. And this is the management basis. So we have very important customers that we have acquired. Hitachi itself has an important customer base. But on top of that, we have a huge customer base added this time of 15,000, and frontline staff are as crucial. As you can see from this slide, on the left-hand side by region -- on the right-hand side by region, how many we have acquired. And highlighted in red the regions we have not been able to focus on very much. We have acquired these personnel. And as a result, we will be able to increase overseas revenue quite substantially. You will see that Hitachi will be transformed quite substantially as a result of this acquisition. Mr. Higashihara said that we have to create value that is fit for the region, that meet the needs of the region. We have so many diverse frontline staff that we acquired. We will be able to create and deliver values that are right for the region. And I think this picture shows how that can be done. So I'm often asked about synergy. This is hop, step, jump. This is the value that we plan to create. And I'm often asked about value as the business value, the final year of the next medium-term plan, 2022. We think the value will be about double. Aside from products, we have very compelling software. The company's asset management or the business management can be -- can leverage the software. And this is used on a global basis. So Hitachi Group and Lumada will have this as part of us, so we can expect bigger change going forward. Next slide, please. Now needless to say, from energy to the final users, we can combine with Lumada, and this will promote the social transformation in the medium to long term. Next, please. So Hitachi and ABB are now joining hands to back up the success of this new company. And as President Higashihara said, Hitachi will become even stronger top leader, and we can go up the stairs or the steps for that goal. Thank you for your attention. And lastly, this is the management team of the new company. The detail of the business will be explained by CEO, Mr. Claudio Facchin, and the directors from Hitachi. We have 5 and 2 from ABB. And the 2 from Hitachi are non-Japanese: 1 in the U.K. and 1 in Switzerland. So that concludes my presentation. Thank you.

[Interpreted] Thank you very much. Let's continue with the program. From Switzerland, the new company's CEO, Claudio Facchin, will deliver greetings and a presentation. Please bear with us while we switch the slides on the screen. Mr. Facchin, the floor is yours.

Good afternoon to everyone. It's a pleasure to be here and taking the time to walk you through Hitachi ABB... [Audio Gap] ...market. And you heard already from Nishino-san that there is a tremendous transformation ongoing in the energy space. And this is about obviously driving for decarbonization. It's about higher integration of renewables. It's about energy efficiency. And if you look at the way the transmission and distribution infrastructure -- it's going to be managed going forward, it has tremendous additional complexity because of the change of the pattern of the generation of the electricity from centralized to decentralized, from more renewables that create variability, a need of exchanging on bi-directional, but also very much increased complexity on the patterns of consumption of that electricity. If you look at consumption from data centers, they require highly reliable and high-quality power supply. If you look at electrical vehicles and electrification of mobility, all of that is driving increase in consumption. While the overall energy consumption is still expected to increase at a lower pace, the electricity is gaining a larger share of that energy provisioning. And if you look at -- in the next 10, 15, 20, 30 years, there is a clear need to look at this overall grid infrastructure more interconnected. If you want to continue with investing on resilience, if you want to make sure that, that infrastructure provides electricity in a crisis time like we're just living now on a global scale, then interconnectivity, resilience and, obviously, in order to manage that digitalization is an essential part of technology investments and innovation. Next, please. As part of that market, that we see in average growing 2% to 3% because of what I just mentioned before, there is a driver for increased electrification. There are also parts of that market that are actually growing much faster. If you look at on the right-hand side, we talk about EV charging infrastructure; we talk about electrification and increased need of mobility; rail transportation; distributed energy resources are growing double digit; data centers, the need of providing electricity -- reliable electricity to data centers. All those are what we call in our strategic plan high-growth segments. They're growing 2x to 3x the average of the market growth, and we have specific initiatives. And when you look at what we're going to share later on, where do we see opportunities to create synergies with Hitachi, that is one area where Hitachi is present both in terms of technology but also in terms of market, in terms of customer relationship. And those are the areas that we will then be focusing on to support our growth plan. Next, please. Our global footprint, you heard also Higashihara-san highlighting that, it's about our 36,000 employees worldwide. If you look at the footprint, very well balanced: 1/3 in Europe; 1/3 in the Americas; 1/3 in Asia, Middle East and Africa. But I think important is to also highlight that we have close to 6,000 -- between sales engineers and field engineers that are present out there fronting, being close to our customers. And obviously, our customer base, 2/3 utility, energy space; but 1/3 and growing faster obviously on the industry, on the transport and on the infrastructure. Very important also with our strengths in innovation, more than 2,000 engineers and scientists in also many parts of the world that allow us to have a better understanding and be close on developing technology in all the key markets. Global footprint and 4 business units that have been also working to preserve an unparalleled installed base that we have, which is an essential part of the asset. Us understanding that installed base and sharing with our customers how to optimize managing that installed base is an essential part of our growth plan and creating value for our customers. Next, please. With a bit more granularity, Power Grids, its 4 businesses. And if you start from the bottom of the chart, the foundation or the product, technology, the components. We're clearly #1 across the portfolio both on transformers and high voltage, which are the essential parts of the grid on the transmission and distribution side. On the transformers, we have a complete range that goes from distribution to ultra-high voltage including traction transformers, including dry type liquid insulation, low losses that support the decarbonization. And we have a unique also footprint with more than 60 factories with many adjacent also service centers. High-voltage products, also the broadest portfolio, covering all the way up to the highest voltage levels, 1,200 kV on the AC side, 1,100 kV on the DC side. And on the next one is grid integration. That's where we concentrate our efforts to preserve our leadership and strengthen our leadership on power quality, flexible AC transmission systems that allow AC transmission lines to provide more electricity, to provide better quality of that electricity and upgrading the infrastructure in many parts of the world. And we're also clearly leading on the high-voltage DC technology. We've been the first one commercializing that technology over 60 years ago. We've been innovating since then. And we're now basically with 130 gigawatt worth of installed capacity. We're #1 with more than 50% of the installed base worldwide based on ABB technology. And on top of that, we said it. We need more automation. We need more software. We need more digitalization to cope with the higher complexity. And currently, if you look at the top 250 global electric utilities, we're supporting about 1/2 of them. And if you look at our software solutions, whether it's on the power generation plant side, whether it's on the transmission, distribution, whether it's on the utilization of that electricity, our software solutions support over $4 trillion of mission-critical infrastructure assets. And that's the value that we create with our customers. Next, please. If you look at the digitalization, it's very important for us to understand that digital grid is not just about digitalizing the components and making it more intelligent. This is an essential part of what we do. We're investing in digitalization in all those 4 business units that we just walked you through. It is important to also, though, digitalize the processes across the value chain. So our digital grid approach is starting with helping our customers to also digitalize the planning phase so that, that planning phase help them in optimizing OpEx, optimizing CapEx and then moving to optimizing OpEx further down during the life cycle by providing asset performance management solutions, workforce management solutions that allow our customers to optimize operations and maintenance. And that's why you see in our strategy for the digital grid not only digital substations but also asset performance management, also virtual remote management technologies and, certainly, communication, which is an important part of that portfolio. And if you look at, now, these aspects, there is a clear opportunity for us to leverage what comes now from Hitachi in terms of technology, in terms of IT and OT technology that will add, for instance, artificial intelligence, machine learning capabilities into our digital grid strategy. Next, please. So when you look at how we come together, it was very natural for us to draw a chart where we both started from the very beginning sharing that in order for us to support the energy transition as we've been supporting, we need to continue and we need to do more by working together with our customers. So we serve utilities, industries, infrastructure. We have the broadest portfolio across all those. We are a technology and market leader. And if you now come and look at the need of digitalizing, then Lumada adds, and the whole Hitachi IT/OT technology, with the huge investments that have been made so far on that side, will create an opportunity for us to strengthen that position. Next, please. So how would we do this? If you start from the customer, and that also was very easy for us because if you look at the segmentation of the markets, as we mentioned, we're strong 2/3 of our business on the energy and utility side. But we also mentioned that segmentations to our industries; mobility; smart life (cities); IT, [ being ] data centers and much more, that's where Hitachi will bring a lot of value not only in terms of access to those markets and segments but also accessing the technology that Hitachi brings to then create a joint approach between the digital platform and the energy platform. We are right there bringing in all the components, all the technology needed for the energy platform, as Nishino-san would mention it, which is needed for all these customer segments, and then combining the strength across the value chain, be it on the generation side, be it on the transmission and distribution side or on the consumption side in terms of IT/OT technology and services. Next, please. Here is a very simple example. Obviously, we just started yesterday life with the joint venture, but we have already identified opportunities and here, we just want to share one as a concrete example. On the short term, what we will be able to do is take existing opportunities that we have developed with our customers to, for instance, manage better the energy with our energy management systems and then add the capability of Lumada for real-time forecasting, for helping through artificial intelligence, analyzing the data and making sure that, that energy system has that predictive aspect, as well, that will then help our customers reducing consumption, improving efficiencies and obviously create value through also then decarbonizing their own footprint. Next, please. When you look at the situation that we're in, there is no doubt that the COVID-19 impact in 2020 is felt. It's felt across the segments. It's felt by our customers and, as a consequence, is also impacting our business. And from a market point of view, Nishino-san was mentioning, we had yesterday a panel session where we had concrete inputs from Fatih Birol from the IEA. There is an impact in the first part of year 2020. But with all the plans of investing, all decarbonizing, accelerating those investments, integrating more renewables, electrification being an essential part of that, upgrading and investing on the grid infrastructure will be coming back after 2021. And we clearly see that the fundamentals of the market despite COVID, which for us is a temporary challenge, will continue as we have seen in our plan. And on our side, obviously, during this period, we have reprioritized. We have started by saying #1 priority, protecting our people but right after that, preserving business continuity. And in some markets, now we obviously start looking at preparing for what we call the new norm and leveraging some of the learnings in this process to continue collaborating even stronger with our customers and partners. Next, please. So coming back, COVID impact is there, but it's a temporary one. We don't see a change in our Vision 2025. Our aim when we established this plan in 2017 was to grow, was to leverage the opportunities that this market transformation is offering and making sure that we support our customers, again, decoupling economic growth from environmental impact. And that, if you do it right, will create opportunity for us to grow. But what you also see in this slide represented is that in order for us to create that profitable and sustainable growth, we also have invested to shift our portfolio, to invest in competitiveness but also to shift in terms of business models, also to add more software, more services. That's why we set ourselves the ambition that we want to double the service revenues in this strategic period, that we want to fully digitalize our portfolio, and we want to continue to invest in being best-in-class in quality and delivery and operations. And if you do all this right, and we've been investing substantially in the past, and we will continue to do this with the support of Hitachi, we will continue to grow faster than the market. We will strengthen our #1 position and I'm very excited the Power Grids team -- to also leverage the learning that Hitachi has in embedding the sustainable development goals in the strategy. And we have already identified a few of those that are, for sure, very relevant to our strategy. Next, please. To summarize, 3 key messages. Number one, we're committed as a global leader to the sustainable energy transition. Number two, we will, with all the efforts, with investments on technology, on people, on competitiveness, on operations, to drive for profitable and sustainable growth, and we are in an attractive market. Number three, we will continue to focus on customers and people. We've been setting those priorities since the start of our strategic plan. We have fantastic alignment with the Hitachi team on the aspect of being close to our customers and being close to our people. And yes, there is an unprecedented situation that we're facing all together due to the coronavirus, but that will be at a certain point in time over, and we will come out of this even stronger than before. Thank you.

[Interpreted] Mr. Facchin, thank you very much. At this moment, we would like to move on to questions and answers. Those of you with questions, on the screen of the video conferencing system, there's a button for you to raise your hand. Among those who have raised their hand, we will call upon your name. [Operator Instructions] Now once we designate a question, we will be releasing all the buttons for questions pressed. So if we move on to the next question, you will have to press the button once again. And the video of the questioner will not be shown this time. Now we would like to take questions first from those of you on the Japanese channel and then move on to those of you on the English channel. That will be the order. So those participants on the Japanese channel, may we take questions from you. [Operator Instructions] [ Koide-san ], [Operator Instructions]

[Interpreted] can you hear me?

[Interpreted] Yes, we can.

[Interpreted] I have a question for Mr. Higashihara. Just once again, acquisition of ABB, from Hitachi's overall point of view, well, growth investment, JPY 2.5 trillion. I understand that this acquisition is part of it. And the remainder is going to be for Lumada and IT-related investments. So this time, the customer base that ABB has had, Lumada's products will be sold to ABB's customers. And the business environment, therefore, after the acquisition, is going to have a major impact on Hitachi's business performance going forward. So once again, if you could talk about the significance of this deal.

[Interpreted] We talked about this in the medium-term business plan, JPY 2.5 trillion of growth investment. JPY 1 trillion out of it is spent on ABB. That has remained unchanged. And what has been Hitachi's strength? We have been asking that ourselves. Hitachi's strength is that OT, IT and products, we all have -- we have all of them. And there's not many companies around the world who has all 3. Well, there are lots of cybertechnology. There are lots of companies with products who are growing, but IT/OT and products, we have them all. And we provide solutions to customers' problems, and we contribute to social innovation. I don't think that there's many companies who can do that. Well, ABB Power Grid team is now joining hands with us, forces with us. So the new company, if it engages in social innovation with their technology and ours, power grid operations can be controlled. So OT and products plus Hitachi's IT combined, by so doing, Social Innovation Business can further be accelerated. So JPY 1 trillion of investment that we are making is not an expensive one. That's my belief. That's my answer. Thank you.

[Interpreted] Just to continue in relation to that, in terms of Hitachi's energy business, as was reported today, fossil fuel, power generation, nuclear power, we've been talking about all along. And energy demand is shifting from power generation to transmission and distribution. So is the shift taking place? What's your thinking on energy?

[Interpreted] Well, I think what's going to happen is as you suggested. But for details, I would like to turn to Nishino. So I would like him to answer in collaboration with ABB.

[Interpreted] Well, Nishino speaking. You are right, but there's a background to it. In terms of power generation, with respect to fossil fuel power generation, we did downscale that. But Hitachi does understand the business of power generation. As Mr. Facchin earlier said, power sources are going to change. There are going to be renewables sources. And of course, hydropower will continue to be important, as that's been the case all along. So we know about power sources. And grids, where innovation is happening a lot, that's where we're going to focus on in making investments and creating assets. That's our thinking. So as you rightly suggested, in terms of assets, we will focus on power grids and digitization. Why do you think -- do we think we can win? Well As I said, on the demand side as well, on the uses side, we've been creating a lot of innovation. So by bringing all of them together, we will be able to offer something special. And that's what we aim at. And in terms of that, grids are important.

[Interpreted] Well, if I may add to that, going forward, we should not look at just either demand or supply. We have to look at both to strike the right balance and control effectively. So in that regard, power grids are going to be very important.

[Interpreted] One last question about numerical targets. Mr. Facchin in his presentation said that there's no change to the plan for 2025. And the operating margin of 10%, that should be the threshold for acquisition for Hitachi. But right now, the margin is lower than that. So ABB is now undergoing structural reform, I think. So Hitachi's 10% margin target of 2021, given that, how will the margin change? Could it be raised to 10%? So what is the scale and the time line?

Well, Nishino will answer.

[Interpreted] Well, we had discussion on this with Mr. Facchin and has come to an understanding and has -- we have drawn up a business plan. But because of COVID-19, factories are suspended, so it will have to be delayed somewhat, unfortunately. So it's unfortunate, but a few percentage points' reduction may have to be accepted. But as I said, we are implementing structural reform, and it's been done very well, actually. So to give you the conclusion, 2021 MTMP, the last year of the plan, I think we will be able to meet all the goals that we set. And for the next MTP, the enterprise value of this company is such that, well, 10% is the -- on the stand-alone basis. Of course, we will create synergies, but in '21 on a stand-alone basis, we would like to create synergies. And as Mr. Facchin said, we are preparing for such synergies to be generated. So toward 2024, we would like to increase the size of the business, to double that it was at the time of acquisition.

[Interpreted] so the size being double, does that mean operating margin is going to be double as well?

[Interpreted] Well, I'm talking based on the enterprise value. Well, if we acquired that A, it should be 2A in several years' time. That's what I mean. Thank you.

[Interpreted] So next question, please raise your hand. Next, Mr. [ Nakamura ]. [Operator Instructions]

[Interpreted] Do you hear me?

[Interpreted] Yes, I do.

[Interpreted] So 36,000 overseas employees will join. So Hitachi grew -- more than 50% will be foreign nationals. And in the energy sector, it will be mostly foreign nationals. So the speed of Hitachi becoming a global company especially in the energy sector, which used to be a domestic business, so I want to ask you if you can keep up and how to mix the components. How do you think this can be worked out?

Nishino will answer that.

[Interpreted] Thank you for a very fundamental question. I was a CFO for 8 years: the rail business acquisition and Johnson Controls and HVAC, been doing all that, and there were lessons learned. For this time, I have 2 answers. We prepared ourselves significantly to launch the system, establish the system. So this template was rail. When we started the Rail business, we struggled, but now it's working very well. And the leadership is Japanese and an Italian or British men. So we have -- this company is run by diverse talents. And there's one British man as the Vice President in the management meeting. So after all this experience, we now have Claudio-san and other members, we've discussed for 18 months. So as I showed you at the beginning, the young members are learning each other, and they are highly motivated to create a new culture. So I have 2 answers to your question. So whether we can manage this, we already practiced and trained ourselves significantly. And we've come this far. And secondly, Claudio-san and others, what we've done in the past, Claudio-san and other members learned so much from us from what we've been through. And now joining the new members to Hitachi, they are now recognizing the big value. So that's a big difference. So long story short, we already practiced. Claudio-san, please?

Yes, Claudio-san, please. Yes, the question is the integration of the culture and the management, yes, why myself and you believe it can lead everybody to the success.

Yes. Thank you, Nishino-san. And I think you have described it already very, very well. There is -- as I mentioned also in my presentation, there was almost a natural way of looking at things when we put the 2 aspects on how, obviously, we manage the business but also how we see this team and joining forces can really, on the long term, support not only the business as such but the bigger vision and perspective that Hitachi brings in with social innovation. And the aspect of addressing, first, the customer and creating an environment and business models that allow us to collaborate and co-create with our customers. We had that same approach. But discussing with Hitachi, discussing with Nishino-san and his team, we found out actually that in many aspects, they have developed their approach already, and we can leverage from that. We can share experiences. Nishino-san also triggered already a couple of young talent sessions that helped us in understanding that we -- it's more what we have in common. We're all passionate about technology. We're all passionate about our people. We're all passionate about this energy transition. And we're all passionate by doing it in a green way. And I think that's a fantastic opportunity and a foundation for us. Now the challenges are there, but I think together, we're much stronger to drive those changes and to deal with the short-term challenge and create the opportunity with our customers.