Hitachi Ltd Ord

The time has come to start the Hitachi Limited Web Conference on the second quarter of the fiscal year 2023 earnings. Thank you very much for joining us despite your busy schedules today. The presentation materials are available on the Hitachi's IR site and the news release site for your convenience. I would now like to introduce the speakers for today. Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO Tomomi Kato, Vice President and Executive Officer, Deputy CFO Masaru Yoshikawa, Executive General Manager, Investor Relations Division. Now, in the beginning, CFO Kawamura will provide the outline explanation of the results. We will be switching over the screen. Mr. Kawamura, please. Hello everyone, this is Carmela speaking. Thank you very much for participating in this earnings call today. I would now like to give you the outline of the consolidated financial results for the second quarter ended September 30th, 2023. And I would like to also talk about the upward revision for the full year. Please now refer to page one. These are the the contents that I wish to cover today. I would like to first of all cover the key messages of the results in the second quarter. Second, the Q2 fiscal year 2023 results will be covered. Then the fiscal year 2023 forecast will be presented. There is also appendix that is provided the first and second quarter. In other words, the first half results are included in the appendix. Please refer to page three. and this is the key points regarding the results of the second quarter and number one is the results and it is also included at the continuing consolidated business which is the three sectors digital air system services and green energy and mobility as well as the connective industries for the second quarter the numbers are presented here in terms of revenues a two trillion 96.5 billion yen and that is a 13% increase Iran just said EBITDA was 202.7 billion yen increased by 17.3 billion yen we had the increase in revenues as well as the profits for the first half Revenues was ¥3,924.8 billion year-on-year, a 12% increase. Adjusted EBITDA, ¥359.6 billion year-on-year, increased by ¥49.2 billion. This is increasing revenues as well as profit. Number two is the focus for the full year for the continuing consolidated business, which is the three sectors. It has been revised to upward revenues, 8 trillion yen. The comparison against the previous forecast was 2%. Adjusted EBITDA increased by ¥18 billion. They have been revised upward. Therefore, this is an increase in revenues as well as profit. If we look at the consolidated total forecast, in terms of net income, it is forecast at 520 billion yen, increased by 20 billion yen. Core free cash flow, 340 billion yen, increased by 30 billion yen from the previous forecast. Number three. Looking at the orders, we have had very firm order growth, mainly in the large-scale businesses. In digital systems and services, Q2 orders was 669.3 trillion yen, year-on-year increase of 15%. Backlog has increased up to 1.5 trillion yen. For Hitachi Energy, The orders have been very strong. The Q2 orders was 653.8 billion yen, year-on-year increase of 14%. The backlog has reached 3.9 trillion yen. Later on, I would like to give you more details. Hitachi Energy has 1.6 trillion in terms of revenues, so about a little bit less than three years of backlog has been accumulated already. So, number four is the shareholder return, which has been strengthened. The ¥100 billion share buyback has been completed in September and has been subject to cancellation. In terms of the interim dividend, it is planned to be ¥80 per share. This is 10 yen increase from fiscal year 2022 interim dividend and 5 yen increase from the fiscal year 2022 year end dividend. We are increasing shareholder returns. That is the basic outline. I'd like to now proceed to page 5, which is the highlights of the results for the second quarter of the fiscal year. The headline should be referred to. continuing consolidated business revenues and profit. In terms of a connective, there have been investment restraints by semiconductor-related customers. This is subject to a decrease in revenues as well as profit. But that is for the second quarter, but on a full year basis, it will revert back to increase in revenue as well as profit. But it has increased overall because of the digital system services and green energy and mobility Please look at the continuing consolidated business. Revenues was 2 trillion, 96.5 billion yen, year-on-year increase of 13%. And in brackets, this is excluding the forex impact. In the absence of foreign exchange impact, would be increase in 10%. Adjusted EBITDA, 202.7%. increased by 17.3% and adjusted EBITDA margin 9.7%. Net income was 144.5 billion YOY, increased by 15.9 billion yen. Therefore, increase in revenues as well as profit has been achieved in this quarter. Please look at the table below on the right. The foreign exchange impact is explained. for dollar as well as euro. The Q2 of last year was 138 yen in terms of average, but for this period, 145 yen, so there is a positive impact of the foreign exchange. Please now refer to page 6. This is once again about the second quarter. Page 6 shows the information regarding digital systems and services as well as green energy and mobility. Page 7 will provide the similar information for connective industries. Regarding digital systems and services on page 6, increase in revenues as well as profit was achieved. 646.5 billion yen increased by 9% Iran-EA, and EBITDA 82.5 billion increased by 14.4. And front business IT services, services and platform shows increase in revenues as well as profit. And as mentioned here, in terms of global logic, continuing to show very strong growth, 21% increase in terms of revenues around air bases and adjusted EBITDA margin is 20%. Therefore, high profitability has been maintained, increasing both revenues as well as earnings regarding green energy and mobility. As a sector overall, increase in revenues as well as profit in terms of the 17.7 billion yen in terms of revenue, an increase of 30%, 36.5 billion in terms of adjusted EBITDA, an increase by 6.2. Nuclear energy power solutions total is provided Adjusted EBITDA was minus 2.3 billion, and 70% increase in revenues, and adjusted EBITDA minus 6.3. There is a decline here. As shown on the right-hand side, there have been projects increasing cost for nuclear energy, but this is a one-off. And for Hitachi Energy, as I mentioned earlier, orders have been remaining very strong, and therefore, The positive impact is shown, adjusted EBITDA 34.0% to 7.7%, and revenues increased by 35%, adjusted EBITDA increased by 14.4 billion, so increase in revenues as well as profits. Railway systems have also remained very strong. Increase in revenues as well as profit adjusted EBITDA was 13.2 billion yen and in terms of revenues increased by 29% year-on-year and adjusted EBITDA plus 4 billion increase in revenue as well as profits, the performance has been very strong. Now in terms of connected industries, As I mentioned earlier, for the second quarter, this is the result. But in terms of EBITDA, it is 768.5 billion, 2% increase in revenues, but adjusted EBITDA was minus 10.2. There is a specific reason for this. In terms of after building the smart life and eco-friendly systems, it has declined by 7% in terms of revenues adjusted EBITDA was 4.8 billion negative. And the reason is very clear as you can see here. When we had the pandemic, remote work has been promoted and that is when the home appliances increased. So there has been a backlash and now reactionary decline. We believe that this will Next is Hitachi HITECH, measurement and analysis systems. The medical as well as semiconductor is very strong. Medical has been very strong, but in terms of semiconductors, there has been a delay in terms of investments made by customers. Therefore, this is showing an impact decrease in revenues as well as profit. But industrial digital is plus 6% or plus 1.7% in terms of just EBITDA. Water environment has been subject to some product mix impact declined by 1.4. Industrial products increased by 7% plus 1.1. Increase in revenues as well as profit. So that is how we have been showing good performance in the second quarter. Page 8, this is a continuation of the second quarter. Hitachi Asumo should be referred to. Revenue increase as well as profit, 27.2%. Revenue is increasing by 9% and just plus 10.6 billion. Performance has been very good last year, so there is a reactionary decline, but we are reverting back to an increase in revenue from the trend. So we have zero for the Hitachi construction machinery and Hitachi metals. Now, please refer to the next page from the second quarter of last year to the second quarter of this year. The waterfall chart is provided. Revenues is provided, as well as adjusted EBITDA is shown below. As you can see on the left-hand side, we started off with $2.846.9 billion. The next area is very important, minus This is the divestiture of Hitachi Construction Machinery and Hitachi Metals. Foreign exchange impact had an uplift. In terms of dollar, 138 has gone to 145. Therefore, this has had a positive impact, increased by 70 billion yen, and 220.1 billion in terms of others, business expansion, and reaching 2,637.5 billion yen. For adjusted EBITDA, similar trends are shown here. starting with the 238.1 billion on the left-hand side, divestiture of Hitachi Construction Machinery, Hitachi Metal Postage Impact, offering exchange, there have been changes in business structure, and resulting in 239.9 billion yen.

Please look at page 10. This shows second quarter financial position and cash flows. The part highlighted in gray, please look at it. Total assets came to $13,475.2 billion. They have increased. On a four-year basis, it's somewhat different. But change from March 31, it's been an increase of $973.7 billion. Majority of that is because of Forex impact. It's not a real change. It's because of Forex. And something similar applies to total liabilities, interest-bearing debt. 2.375 billion please have a look at the number to the right 162.5 billion increase which is impacted by forex d ratio 0.41 so it's stably controlled and cash flows as well on the back of very strong performance cash flows have Improved operating cash flow, $316.9 billion, an improvement of $83.2 billion. Free cash flows, $206.6 billion, improvement of $45.3 billion. Core free cash flow, this is one of the most important KPIs for us. 121.1 billion, up 96.5 billion. So cash flow is performing quite robustly. Moving on to page 11, I would like to report on Lumad, a business. There are three sets of diagrams on the left. This shows Lumada businesses' revenues. How are they growing? The bars on the far left, comparison between Q2 this year and Q2 last year, and to their right, four-year comparison, 22 versus FY23. So if you could look at... FI23 forecast, Lumada business revenues are to go up to $2.31 trillion. So up 18% year-on-year. That's what we're expecting. And 15%, this is adjusted EBITDA margin. So this is going to be one percentage point increase from 14% last year. On the right-hand side, Lumada business ratio, there are two sets of bars. Revenues on the left-hand side, if you could look at the red portion of the bar. Yeah. FI21, FI22, FI23 forecast, it's growing very nicely. According to our forecast for FI23, the proportion of Lumada business is going to be 29%, almost 30%. On the far right, adjusted EBITDA, like revenues, adjusted EBITDA for Lumada is also growing quite strongly. FI23 forecast for adjusted EBITDA is $818 billion, ratio of 41%. Now, if you could look at the horizontal bar below, this shows Lumada business revenue composition by segments. Digital systems and services are growing, of course, but I would like to draw your attention to green energy and mobility, which includes Hitachi Energy, Power Grid and Rail. It's up 23%. So IT times OT, which we're doing strategically. We're trying to increase our business through that, and that is paying off quite successfully. And below, some of the major events in the second quarter are highlighted. If you could look at the section for digital, the two last bullets. Global Logic is making major contributions. Because it's a global company, in the first bullet, Globalogic received a large business from Continental Automotive, being awarded Supplier of the Year by the company. And Globalogic Japan is co-creating with customers, collaboration with Taisei Corporation as well as Aflac. It's doing very well. Next is the forecast for FY23 on a four-year basis, Phase 13. These are the highlights. The most important point that we would like to report on today is four-year forecast for all profit items is revised upward. So compared to the last forecast, we're going to make upward revisions to all the items. The three sectors, we are expecting increase in both revenue and profit, and as demo, We have talked about SML's divestiture, and successfully, in October, SML has moved to become Equity Method Affiliate and Talus GTS acquisition. We now have a good forecast for European monopoly law. requirement to be met, and there's been some delay, but it will be expected to be completed in the first half of 2024, so it's not included in FI23 forecast. And the great part, a total $9.15 trillion. As you can see, compared to July forecast, it's been increased. So the last forecast revenue was 8.8 trillion. It's now increased to 9.15 trillion adjusted EBITDA from 835 to 865 billion. Adjusted EBITDA margin remains the same. And net income, we reported that it's going to be 500 billion the last time. It's increased to 520 billion, so upper revision there. EPS, the same thing, from 535 yen to 559 yen. A core free cash flow, as I noted, this is one of the most important KPIs. It's been increased by 30 billion from 310 billion to 340 billion. ROIC as well is going to be raised from 7.5 to 8% for all profit items increases are to be made. So compared to the last time, continuing consolidated business is also going to see expected increase in revenue and income and lower assumed FX rate. The 140 yen to the US dollar and 150 yen to the euro, these are the assumed FX rates used. If you could look at the sensitivity, We're looking at the impact of FX in the second half, so that's what is noted here. In terms of dollars, when there's a 1-yen move in the Forex rate with the US dollar, when yen becomes cheaper by 1 yen, revenue increase of 6 billion yen adjusted EBITDA of 0.4 billion increase is going to be enjoyed. But in terms of yen-euro rate, the sensitivity or impact is going to be half of that. Moving on to page 14, highlights for forecast by sector. On a four-year basis, starting from the top, digital systems services Adjusted EBITDA 310 billion, so revenues increase of 3%. Adjusted EBITDA increase of 16.2 billion. So compared to the last forecast increase in both revenue and profit, please have a look at global logic below. As I said, it's going through high growth. So year on year, 22% increase in revenues and adjusted EBITDA increase of 6.8 billion and green energy and mobility. For this as well, on a four-year basis, both increase in revenue and adjusted EBITDA, revenue increase of 13%, adjusted EBITDA 22.4, and Hitachi Energy, Adjusted EBITDA 137.1%. The margin is 8.2%. Revenue up 18%. Adjusted EBITDA plus 36.1. So very robust. Railway systems very firm as well. adjusted EBITDA 56.1 billion revenue up by 10% year-on-year adjusted EBITDA is going to be increased by 8.6 billion so increase in both revenue as well as profit connective industries as I said at the outset in the second quarter and in the first half increase in revenue but decline in profit but on a four-year basis increase in both revenue as well as profit is expected Adjusted EBITDA, 330 billion, 11% margin. Revenue up 1% year-on-year. Adjusted EBITDA up 17.8 billion. Building systems. China's real estate sector continues to go through correction because China is our main market, we were concerned. And because of that, new installations, new installments are going to be declining, but adjusted EBITDA is up by 1.1 billion, as is noted on the right. In a strategic manner, rather than new installations, existing elevators are being serviced. We're focusing on that, and that is contributing. Next, Hitachi Hitech, there's more correction needed for semiconductors, so decline in both revenue as well as income. Hitachi ASEMO is going to be deconsolidated in the second half, so that is why we have negative numbers here. So given all of this, moving on to page 15. So FY20-23 total, how will the numbers change? Like we saw with Q2, revenues at the top, adjusted EBITDA at the bottom. From the left, last year's numbers. So revenue, $10,881,000,000,000 was the number we saw last year. Divestiture of Hitachi Construction Machinery and Hitachi Metals, it pushed down by $1.322 trillion. ASTEMO is divested. There's another drop and foreign exchange to contribute and others. So we expect a nine point one five trillion this year. The same trend is seen for just to be there on the left. We're going to start from eight hundred and eighty four point six billion. And likewise, with divestiture of construction machinery and heat-etched metals, 73.8 billion, divestiture of SAMO and foreign exchange, others, to come to 865 billion. Next appendix, as I said. We are highlighting the total of Q1 and Q2 numbers, the first half numbers. As is highlighted in the caption, digital systems and services and green energy and mobility revenues and profits increased. Connected industry saw increase in revenue but slight decline in profit. And consolidated business revenues and profits, please have a look at the middle column, increase in revenue and profit. So revenues, $3,924.8 billion. Year-on-year, 12%, without forex, 10%. Adjusted EBITDA, $359.6 billion. So year-on-year, increase of $49.2 billion. Adjusted EBITDA margin, 9.2%, which is an increase of 0.3 percentage points. Net income, $217.7 billion, increased by $48.5 billion. Core free cash flow, $121.1 billion, increased by $96.5 billion. So, as you can see from the results of the first half, including Q1 and Q2, we've seen increases in both revenue and profit. Next, highlights of results, H1 only, just briefly. So, both increase in revenue and profit for DSS. green energy and mobility as well, but connective industries, as I said, because of high tech, we're seeing slight decrease in profit, although there's an increase in revenue. Moving on to page 19, this shows consolidated statement of profit and loss. On the left-hand side, FI2022, Q2 and Q2-FI23 year-on-year comparison. And for the full year as well, FY23 revenue, 9.15 trillion in adjusted operating income, 920 billion, and a negative 130 in the middle. And there's a footnote. This shows business reform, restructuring, and so forth. EBIT, 775 billion net income. 520 billion, which is an upper revision of 20 billion. If you could please go to page 20, these are first half numbers as well. So revenue by market is shown. Now, if you could look at the middle part highlighted in black box, consolidated business continuing. What I would like to draw your attention to is China. China is struggling. Minus 2% is YOY growth. Now to the right, North America, 21% increase. Europe, 20% growth. So while China is struggling, it's offset by North America and Europe's growth. And consolidated total, what I would like you to see is The ratio, bottom right corner, 64%. And continuing consolidated business accounts for 61%. And so if we look at consolidated total, overseas ratio is 64%. Next, page 21 is about orders. I have repeatedly said that orders are very strong. From the left, DSS is doing very good year-on-year, up by 13% overall, and green energy and mobility below this is extremely strong if you could look at hitachi energy second from the bottom up 42 percent and uh railway 148 so orders are growing very rapidly uh to the right connective industries when it comes to orders Elevators for buildings are affected by correction in China's real estate market, so orders are slightly down. And appliances, home appliances are plus minus zero, and semiconductor business is still correcting, so down 9%. But orders increase in railway and others, so overall orders are very firm and robust. So our second quarter performance overview and upper revisions made to a full year forecast. That concludes my presentation. Thank you for your attention.

We would now like to proceed to the Q&A. Please use the web conference system screen and press the raise hand button. When your name is called, please unmute, state your name and affiliation and ask your question. Furthermore, if you no longer need to ask the question, please release the raise hand button. Today we will not show the video of the person asking the question. We will take questions from the Japanese channel first and then the English channel. Today, we will be receiving questions from the media, institutional investors and financial analysts together. We can now take questions. Yasui-san, please. Please unmute and ask your question. I have two questions. The first question is Power Grid. It is a very successful business in terms of orders as well as performance is very good. But at the beginning of the fiscal year, guidance showed that there would be a decline in revenues and it seems that it has been subsequently increasing. So has there been change in the market as well as renewable energies? Is that a driver for you in pushing up your business? So what is the market and what is the current situation? Are you able to maintain this for the next year as well? Now, in terms of railway, the revenue is declining, but our profit is increasing. But it seems that your competition is also beset with challenge. Those are the two questions I wanted to pose. Thank you very much. I would like to address the basic outline, and Kato-san will give you specific numbers. Now, regarding your first question for the power grid, energy sector is in a super cycle now. It's a once in decades investment increase is occurring. So the impact of the super cycle is very significant, more specifically, Because of the Ukraine issue, it originated from that. Energy supply in Europe was impacted, and from the Middle East, they have to buy electricity significantly. And as you have rightly mentioned, there is a need, there is a call for utilizing renewable energy. So in the grid, there is significant demand, and we are able to capitalize on that in terms of the market situation. It's a once-in-a-decade cycle, so it is likely to continue for 10, 15 years going forward. Up until last year, the TALIS was to be included from fiscal year 2023 until last year, but now it is going to be delayed to next fiscal year, so that has had the most significant impact. But if we compare the business on an ear to ear basis, we have been showing there has been an increase in revenues as well as profit. So it's just a matter of the talents being reflected with a delay. Question. I have a follow up question, especially for the part grade. So regarding the market do if there is significant increase in the market, can you accommodate in terms of capacity, because power semiconductors are in shortage, what can you talk about the capacity. Second, in terms of profit, Hitachi Energy is increasing profit significantly, but about 7 billion PMI expense has increased. But beyond that, it seems that other expenses are also increasing. So do you think it's going to run its course in 2023? And in 2024, you will be on a trajectory of growth and profit growth? And so orders are increasing and you're asking about the capacity for 2023 and 2024. We are trying to control ROIC appropriately. Capacity building will be promoted. Tens of billions of investment will be made to enable this. So the increase in orders can be absorbed appropriately. There will also be outsourcing. We can utilize external plants and factories as well. So we will take a two-pronged approach. So then the orders can be reflected in the problem loss. The high voltage orders are significantly increasing. So we are trying to contain this within Hitachi Energy, but there are part of the business that will be utilizing subcontractors as well, so that we can manage the capacity overall. So there will be a ramp up in terms of investment as well as utilizing external resources to meet the increasing demand. Now, in terms of capital expenditure, let me also give information as well. For 2023, compared to the previous year, 136% is the capital investment that we are planning that increases mainly in Hitachi Energy. Therefore, we will ramp up the capacity in that area. Now, related expenses are also increasing. This is mainly in IT for integration. The schedule has been somewhat delayed for this year's expenses have increased accordingly, but for next year, there will be a significant decline. That's all. Now, regarding the Hitachi Energy market that will be addressed by Yoshikawa-san, on the 25th of October, Hitachi Energy Production capacity investment is to be made as well as resources will be ramped up as well. Please read this release. It will give you information regarding the market forecast going forward for your reference. Thank you.