Hitachi Ltd Ord

Thank you very much for waiting. Time has come, so we will now begin the financial results briefing of Hitachi Limited for the third quarter ended December 31st, 2023. Thank you very much for taking time out of your busy schedule to join us today. First of all, today's presentation materials are available on Hitachi Limited IR website and the news release site, so please check them as you need. Let me now introduce the three speakers. Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO of Hitachi Limited. Tomomi Kato, Vice President and Executive Officer, Deputy CFO. Masao Yoshikawa, Executive General Manager, Investor Relations Division. Kawamura will now give an outline of the financial results. Please wait for a moment while we switch screens.

Mr. Kawamura, please. Thank you very much for gathering for this meeting today. Now, we would like to start the explanation of the results of the third quarter for Hitachi Limited. Now, please look at page one. There are four points I'd like to emphasize today. First is the key points of the third quarter. Second, the results of the third quarter. three, the fiscal year 2023 forecast, and also number four is the appendix. These are the points I would like to cover. Now, please refer to page three. Here, I would like to give you the key messages for the results. There are three points that are covered here. In terms of the results, three sectors are included. Hitachi ASTEMO for automobile parts have been reorganized. They are no longer consolidated. Therefore, it is only for three sectors that we are showing performance for Hitachi Limited. That is the reason why we are referring to this as three sectors. The third quarter results will be presented. Revenues came in at 2 trillion, 128.9 billion yen, 11% increase. Iran adjusted EBITDA to 121.8 billion yen, YOY, 34.1 billion yen increase. So we have revenues and profits for the accumulated from Q1 to Q3. Revenues was 6 trillion, 53.7 billion, YOY increased by 12%. Adjusted EBITDA 581.5 billion yen YOY plus 83.4 billion yen increase in revenues as well as profit. Now, based on the three quarters, I'd like to talk about the forecast. Revenues, 8,285.6 billion yen. This is a 4% increase from the previous forecast. Adjusted EBITDA, 829.3 billion yen. an increase of 11.3 billion yen from the previous forecast. Therefore, we have revised upward in terms of revenues as well as profits. Now, in terms of consolidated total forecast, net income 530 million yen, that is 10 billion yen, increased from a previous forecast. Core free cash flow 440 billion, increased by 100 billion yen from the previous forecast. I would like to talk about major transactions for DSS, additional systems and services as well. We have had very strong orders, inclusive of that for Hitachi Energies for DSS. Epoch-making deals have been won, as mentioned here. The next generation nationwide load dispatching system has been won. This is not on a region basis, but rather nationwide, the load dispatching system has been won. Now, Hitachi Energy has also been very strong. And as mentioned here, from Tenet, we have won a business of 14 billion yen under the framework agreement for Hitachi Energy and Petrofac. and Hitachi Energy will supply its HPTC converter stations. This is a framework agreement for this deal or arrangement. With this, advance payment can be provided. This will also have a positive impact on our cash flow. Furthermore, for Trane Italia, we have won a deal of 140 billion yen deal for high-speed trains in Italy. Digital services and systems for the three quarters orders has exceeded 2 trillion. Iran Air up 9%, backlog of 1.5 trillion yen. Hitachi Energy orders for the three quarters came to 2 trillion 620.9 billion yen, up 51% year-on-year backlog of 4.3 trillion yen. So we have businesses worth 2 trillion and therefore we have a backlog of about two years. These are the major highlights of the third quarter. Now I would like to refer to specific details. Please refer to page five. These are the highlights of the results for the third quarter only. Please look at the text above. For the three sectors, we grew revenues 11% YOY basis and adjusted EBITDA by 18% organically. Please look at the table. Referring to the three sectors to the right, in terms of revenues, ¥2,128.9 billion up 11%. This is the growth of 11%. And 8% is the Iran air changes, excluding the impact of foreign exchange rate fluctuations at 8% adjusted EBITDA to 21.8 billion yen, YOY increased by 34.1 billion yen and Here, the YOY increase of 18% has been achieved. Adjusted EBITDA margin has also improved at 10.4% for the three sectors. Net income has increased significantly as well at 244.1 billion yen. Core free cash flows is also mentioned. This is an important KPI for our mid-term management plan. and it has increased significantly to 147.4 billion yen, increased by 97.1 billion yen. In terms of foreign exchange, yen is becoming weaker, and therefore we are assuming 148 yen. The sensitivity will be explained further later. Now please look at page six. Page 6 and 7 are the results of the business segments. Page 6, digital systems and services as well as green energy mobility. Page 7 is for the connected industries. Please look at page 6 for digital systems and services. On the very top, Y-on-Y basis increased by 9%, adjusted EBITDA increased by 16.1 billion yen. Therefore, increase in revenues as well as profit for the sector. Looking at the dynamics on the right hand side, front business increased revenues and learnings IT services increased also revenues as well as profit. Service and platforms revenues was flat. However, The cost reduction has led to an increase in profit, as shown below. Global logic continues to grow strongly, increasing revenues as well as profits. Just to do a bit, 87 billion yen is the highest ever record for a digital system service. Next, moving to green energy mobility, please look at the top line. YOY basis increased by 21% for revenues and almost went to around 100 million yen for adjusted EBITDA. Hitachi Energy Trail has increased revenues, but power grid related costs has increased somewhat. And that is the reason why adjusted EBITDA is almost flat. Now, nuclear energy Hitachi Power Solutions is also mentioned here. YOY increased by 32% or plus 0.6 billion Hitachi Energy. Here, there has been a significant contribution to revenues increased by 25% in terms of revenues and adjusted EBITDA 9.2 billion. The market environment as well as the framework agreement has had a positive impact. Therefore, making significant contributions to the profitability-related cost is also shown here. Railway systems for the third quarter has an increase in revenues but a decline in profit. This will be explained in further details in later pages. If you look at it on a year-to-date basis, it is increased by revenues as well as earnings. Therefore, this situation is special to the third quarter. Next, looking at the connective industries, looking at the very top, in terms of the revenues flat, EBITDA has increased by 400 million yen. Down below, the building system is shown here, declined by 1% instead of revenues, increase in adjusted EBITDA by 1.9. This is linked to the Chinese real estate market correction is taking place. In our case, there have been significant impact. But even with less revenues, profit is increasing. This is because from hardware, we are now shifting away to focus on services. which is shown in this result. Smart life and eco-friendly systems, which is home appliances, minus 7%, minus 0.7 in terms of adjusted EBITDA. We believe that this will be the bottom this year. Next year, we are poised for recovery. The reason why I say this is that because of the pandemic over the three years, home appliance had a significant increase. So we are now in a reactionary decline. And this correction will be reaching a bottom this year. And next year we are poised for recovery. Next, measurement and analysis systems, Hitachi high-tech, YOY basis, minus 7%, just decreased by 6.5 billion, decreasing revenues as well as profit. The measurement and analysis system for medical is growing very well, but the semiconductor manufacturing equipment around last year, this time last year we thought that semiconductor cycle will recover but there's been delay of one year and therefore this year will be the bottom and therefore That is the reason why we have a decrease in revenues as well as profit, which is at the bottom. Industrial and digital, water and environment, and the industrial products, industrial areas are all posting increasing revenues as well as earnings. remaining very strong here we are looking at the sub series at the very top we have hitachi as demo but in october it has converted to equity method affiliate and therefore on a yy basis the second half will be less and therefore it does negatively touchy The construction machinery, we only have 25%, so it is not in the scope. Hitachi Metals is also being deconsolidated, and therefore there will be no impact in the fiscal year. Page 9. Based on what I've explained, looking at revenues on top and adjusted EBITDA on the bottom, this is the waterfall chart showing the movement. As for revenues at the top, at the left-hand side is the third quarter result for last fiscal year, right-hand side is for this year. The movement is shown in the middle. First of all, there have been the divestiture of the Hitachi metals, minus 279 billion. Divestiture of Hitachi estimals, minus 383.6 billion. And foreign exchange was impacted positively, 5 billion. And there have been sales efforts made and increase altogether by others 163.6 billion and we end up at 2 trillion 258 billion so it is declining revenues for adjusted EBITDA we start with 231.1 billion the items are the same uh the vestibules metals uh a steamer and foreign exchange and other efforts made and we end up at 231.2 billion as i have mentioned earlier in terms of revenues are declining, but for just EBITDA, you can see that it remains flat. Revenues are declining, but profit is being secured in these results. Page 10, please. here at the end of the quarter and the balance situation is explained here a cash flow situation is explained here the gray area is as of uh December 31st 2023 end of the the third quarter now we are at the 12 trillion and 73.2 trillion 12 trillion 73.2 billion And looking at the difference with last year, in terms of assets, minus 428.2 billion because of Hitachi's stimulus below. Looking at 51.5 days, and in terms of cash conversion cycle, it is improving by 6.6 days. This is because of the cash flow improvement for Hitachi Energy. You can see that the cash conversion cycle is improving significantly. The ratio is also improving to 0.32 times. In fact, on a full-day basis, it would be even better than this. In terms of cash flow, on the other hand, there is operating activities, investing activities, and free cash flow is around 70.8 billion, increased by 136 billion yen. uh core free cash flow which is most important to uh kpi one of the most important uh is increasing about 193.6 billion to 268.5 billion yen page 11 please now let me update you on lumada situation so there are three tables first upper left

far left and second one this is the third quarter of fy 22 and 23. at the top you can see the revenue third quarter fiscal 22 was 476 billion if up to 568 so that's one yoy 19 up and you can see the legend the revenue from the four quadrants and the two on the right bar graph. This is the full year of FY22 and FY23 forecast. FY22, this was $1,960,000,000,000 up to $2,330,000,000,000. So that's another 19% increase YOY and then adjusted EBITDA. It's 1% up from 14 to 15%. Next, the bar graph on the right. This is Lumada business ratio of overall. Left is revenues and the proportion of Lumada. And the right side is adjusted EBITDA revenues. FY21, 22, and 23 forecast this year. $8,285.6 billion, and of which $2,330,000,000 is Lumada. So that is 28% of total adjusted EBITDA. Likewise, Lumada proportion on adjusted EBITDA base is now up to 41%. Close to half is Lumada. Now you can see the horizontal bar graph. This is what I mentioned at the outset. FY 2023 revenue, the left side, $2,330,000,000 breakdown here. Digital systems and services, $1,040,000,000. YOY, 21%. Green energy and mobility, $390,000,000. YOY, 23% plus. Connective industries, $900,000,000. YOY, plus 15%. And you can see the topics at the bottom of the page. One is... is the load dispatching system. This is the largest. This is completely Lumada. And Hitachi Energy for an overseas package will be brought in. So it will be the international specification. This is big. And Global Logic on a smaller scale will acquire digital engineering companies in Australia and the US. And Suntory Beverage and Food Limited, and we have a collaboration. So this is a traceability system for raw material receipt to manufacturing, logistics and warehousing. And lastly, generative AI. We are now trying to utilize generative AI internally and externally. We're seeing new movements. So that was up to the third quarter. Now, from page 13, we will have the full year forecast. Page 13, please. So in all profit items, we have revised upward in all items, three sectors, YOY 8% up and adjusted EBITDA plus 104.4 billion, 14% up. The revenues, three sector is 8 trillion, 285.6 billion. This is plus 8%. So this is the 8% that I mentioned earlier and left side, This is the excluding foreign exchange factor adjusted EBITDA 829.3 billion, YOY 104.4 billion, and this is 14% up. Adjusted EBITDA 10%. And net income attributable to Hitachi Limited stockholders, 546.8 billion. So all profit items increased. We're revising all items up. And EPS, 588 yen. And on the left side, core free cash flow, up from 340 to 440 billion, up by 100 billion yen. And ROIC is up from 8 to 8.2%. Now, the small table on the right side is the FX sensitivity. No change from the past. 140 yen to a dollar. So if one yen depreciates by one yen, how much impact on revenues and adjusted EBITDA is shown. So with one yen depreciation, 3 billion plus on revenue and 200 million yen plus on adjusted EBITDA. Page 14. So the earlier had two pages, now a summary on one page. Digital systems and services. So if you could look at the entire sector, revenues, $2,550,000,000,000, and just EBITDA, $321,000,000,000, 12.6%. This is the highest profit. And YOY, 7%, $27.2 billion. And this is up 3%, 11% up from the previous forecast. Dynamics. revenues and profits are up. In global logic, both revenue and profit are up. Next, green energy and mobility. The top sector part, revenues 2 trillion 970 billion, just the EBITDA, 190 billion yen, and YOY, plus 20%, 26.4 billion, and plus 7%, plus 4 billion against previous forecast dynamics. So first of all, against a previous forecast revised up by 190 billion in revenue and 4 billion in adjusted EBITDA. Hitachi Energy, revenues and profits are up. And Railway, as I said earlier, on a full year basis, revenue and profit are now up. Third quarter alone is not, but full year revenue and profits are up. Connective Industries, top row revenues. 3 trillion yen and adjusted EBITDA 330 billion, plus 1%, 17.8 billion yen. Against previous forecast, it is flat. Building systems, plus 3%, plus 4.5 billion. So both revenue and profit are up. And measurement and analysis system, Hitachi Hitech, because of the reasons I mentioned earlier, revenue is flat. but it's slightly down. ASTEMO is now equity method. It will convert to an equity method affiliate. Next, page 15, please. Full-year revenue and adjusted EBITDA comparing last year and this year. So, $10,881,000,000 in FY22, Both Hitachi Construction Machinery, Hitachi Metal will be divested and Hitachi Astemo Foreign Exchange will be positive and others positive. And so it's 9,450,000,000,000 yen. I just said EBITDA. FY22 is 884.6 billion yen and same increase and decrease items. Right side, 880 billion yen. Revenues is down, but adjusted EBITDA is flat. Slight decrease, but flat. The listed companies will be excluded, and that impact is absorbed and achieving this level. So that was the full year results. From 2017 onward, this is a cumulative first, second, and third quarter. The big trend remains unchanged. Three sector grew revenue YOY 12% and increased adjusted EBITDA YOY 83.4 billion, 17%. Revenues 6 trillion, 53.7 billion, plus 12%. So that is the 12% you see on the first row. And 9% is excluding FX. Adjusted EBITDA, 581.5 billion. And plus $83.4 billion is reflected here. So that is YOY plus 17%. Adjusted EBITDA margin, 9.6%. And net income, $461.9 billion. Core free cash flow, $268.5 billion. This is cumulative third quarter, three-quarter cumulative. Next, page 18. This is quarter one through three. Big change, no change in trend. Digital systems and services, YOY. So both revenue and profit are up. Globalogic, both revenue and profit are up. Green energy and mobility, both revenue and profit are up. Hinachi energy, a big jump. And rail systems is also up in sales and profit. Connective industries. Revenue is up by 2%, but adjusted EBITDA because of the Hitachi Hitech, the semiconductor related, minus 2.9 billion in buildings. No increase in revenue, but the business composition changes. So profit is up and Hitachi Hitech number is shown here and as demo. So total here. Page 19. Consolidated statement, profit and loss. You can see small numbers, but FY23, the gray part, the numbers I already mentioned are listed. Revenues, $9,450,000,000 and adjusted operating income, $740,000,000. And you can see the ups and downs. Adjusted EBITDA, $880,000,000 and EBIT, $790,000,000. And third, from the bottom, 24.4% effective income tax rate. This is bigger than last year's 14.2%. But last year, because of the deferred tax asset and the deemed dividend, those were the factors. And 24.4% is a normal rate. Bottom net income, $530 billion. Page 20, please. This is up to third quarter cumulative by region, by market. You can see in black box, three sector total revenues and the composition ratio. Japan is 39. of the 2 trillion 354 billion in China, down by 1% to 13%. Digital systems and services, 27% down. So in China, uh you can see that's a big factor and on the right side back to the black box asean india nine percent that's up by six percent and north america fifteen percent this is plus nineteen percent on a yoy basis global logic contributed significantly in europe seventeen percent yoy accounting for a big portion, and other areas. On the far right, you can see third quarter cumulative overseas revenue, 61%. So over 60% is overseas. Page 21, by segment, order results. Digital systems and services, and then green energy and mobility, and right side, connective industries. Digital systems and services, front business and YOY, They're all strong. Order is growing from last year. Green energy and mobility. Fiscal 23, third quarter YOY. Third quarter YOY. Nuclear energy 32% down and railway system 53% down. I will answer in the Q&A session. in FY22 had large contracts. And so it's a reactionary fall from that. Connective industries on the right side. There's some triangles or a building minus 7% and smart life and eco-friendly systems and 6% in high tech. This reflects the current circumstances. But the three industry BUs are up. I went rather quickly. But that was the outline of the material we delivered today. Thank you very much.

Thank you very much. We would now like to proceed to the Q&A session. Those of you with questions, please use the raise hand button on the web system. When your name is called, please unmute and state your name and affiliation before asking your question. Furthermore, if you no longer have to ask the question, please release the raise hand button. We will not be showing the video of the person asking the question today. We will take questions first on the Japanese channel and then the English channel. And this time around, we will take questions from the media, institutional investors, as well as financial analysts all together. So we will now take questions on the Japanese channel. Please use the raise hand button if you have any questions. Please unmute and ask your question. I have two questions. First of all, by regions, you talked about North America. Please elaborate further on this matter. Second is regarding railway business. In terms of North America, increase in revenues, and you can see that the ratio is increasing. On the part of commerce and global logic, increase has been mentioned. But by business segment, it seems that green is growing rather than digital, I take it. Is it a correct understanding? Please confirm. And in the green, I think it's energy, basically. In North America, the growth that you are seeing what i am interested in what kind of deals are growing in north america for green and you talked about focus who said that north america is going to be the driver of growth going forward please elaborate further in the context of hitachi energy the second question is regarding railways Now, in the last result, I think there was some adjustment made. In the third quarter, it seems that there has been an upward revision, although small. Is that a correct understanding? Please elaborate. Why is it going up and down, down and up? Control and forecast seems not clear. Do we have to be concerned about this, or is there a different reason why this is the case? Answer. Regarding numbers, Kato-san will provide further details. Regarding North America, I mentioned Globalogic is very strong. This is a company that is growing significantly, but as you have rightly mentioned, I would say that the power grid, Hitachi Energy, has been very strong. We don't have a plant in North America, but because of the infrastructure-related legislation, this is having a significant positive impact. Railway business has been one in North America as well. In the green energy, there is significant contribution made by North America. Regarding Huawei systems, numbers are sometimes not fixed. TALIS inclusion will have to be adjusted in terms of numbers. TALIS will be next year. Therefore, when there is, or rather for fiscal year 2024, So now the situation is clear. That is the reason why we are presenting these numbers at the third quarter level. At any rate, for the railway systems, we have run major deals not only in North America but also in Europe. We believe that these businesses will continue to make contributions. And I just cut us on to elaborate on the numbers regarding North America as Congress on has just explained the energy. is showing a significant increase and growing overall great integration is as well as transformers are growing significantly. And today we talked about the orders backlog. We have a significant backlog and therefore we can expect further growth going forward. Thank you.

Thank you very much. Next, Okawa-san, please ask a question. Question. I have two questions. First is on digital systems and services front profitability. I think you mentioned this, the profitability is improving quite significantly. So the background, if you could elaborate on the reasons and the future outlook, please. Thank you very much. That's my first question. Thank you for the question. Answer. This front business. First. The project management of the phase gate management is now done very stringently so that we will not to avoid losses. And this contributed a lot. So cost side contribution was large. And the other factor was large system update, renewal, continued finance, public and energy sector. These large system renewal upgrade was done And we captured that contract without fail. So that was a big contributor. If you need more numbers, Kato-san will explain in more detail, but that is a macro perspective. Thank you very much. Question. My second question is on Lumada. Digital engineering and this by segment breakdown. I think you changed from the second quarter. So if you could explain on the changes, the amount is still small, but what is the change in your forecast by product or by segment, please? Answer. Sorry, the data at hand does not have byproduct increase. I don't have the accurate number, but just roughly, ballpark, Kato-san will explain. Fiscal 23 forecast is revised upward by 20 billion yen. System integration related and managed services. these segments, we think we can go higher. So we revised upward. So third quarter is 19% growth year on year and full year 19%. So this forecast, we think we can achieve this level. So this is some macro rough numbers, but three sectors, Year-on-year level revenue, digital engineering, around 30% up. And system integration, 20% up. And connected products, hardware, less than 30% up. So the four quadrant segments were all up by 20% to 30%. So they all pushed up the results. Thank you. I hope this answers your question. Thank you.

Thank you very much. Next, Hiroi-san, please unmute and ask your question. I hope you can hear me. Yes, we can. I have two questions. At the beginning of January, your market cap exceeded 10 trillion. What is your take on that and how to enhance the enterprise value of Hitachi going forward? What are your views on this? Second question is regarding The press release, Kamura-san, it seems that this is going to be the last joining school for Kamura-san because of the changes that are taking place. Were you able to achieve everything that you hope to achieve in Hitachi? after joining Hitachi, and please share with us your message to Hitachi people going forward. Answer. Regarding market cap exceeding 10 trillion, my thoughts are that this is only a midway point. Blue chip companies in the world and the companies that we benchmark with, compared to them, we believe that 10 trillion In terms of Japan, we could be within the top 10, but we are a global company and that is our aspiration. Therefore, 10 trillion is only a midpoint in our journey and we want to aim further. higher levels. This is what I'm discussing with the president as well. How can we achieve this? We have to allocate more resources to the growth areas. This will be first and foremost. It's easier said than done. But there is customers and technology and we have products and follow up will be required. We can't do this all at once. However, in the midterm management plan, product, customer, regions wise, we have to focus our management resources as well as the effective utilization of assets that will be required. This is what I would like to ask the next generation to take on. Now, I entered Hitachi nine years ago. And whether I've done everything that I have aspired to achieve is difficult to answer, but engaging in dialogue with you has been very useful for me. You've taught me a lot. I'm very happy and grateful that we've had a meaningful dialogue over the years. my aspiration was not so difficult but i'm regarding the dealing with assets as well as and to define our relationship and the capital markets as well as a disclosure and control these are areas that i hope to improve and i believe that i have been able to make a small contribution So there is a sense of satisfaction on my part. From the next earnings call, Mr. Kanto, I will be answering your questions. Thank you very much for your support over the years. Thank you very much.

Next, Umegaki-san, please unmute yourself. Question. Thank you for your hard work, Kawamura-san. So I have a question on next year. So the economy slowdown may be expected and the FX is unforeseeable. On the other hand, DSS and GEM and the market situation and your order backlog is strong. And so I think your general trend is revenue and profit increase. Are there any risk factors or things you need to be careful of? That's my first question. Answer. Thank you for the question. Fiscal 24. In February and March, we have budget meeting to develop the FY24 budget. So we do not have a concrete plan yet. But this will be the final year of the 2024 midterm management plan. So we have three plans. So this medium term plan 2024, we have But if the current situation continues, like the geopolitics and the financial market and the technology advancement, if this remains constant, constantly progress, then FY24 will be a significant increase in revenue and profit, as you just mentioned. But there are many difficult things in reality. I don't want to talk much about politics, but there are many elections this year. On the internet, we see news like, if Trump wins, the trade relations will change and the security situation will change. So it's not that our business environment or the interest rate or the FX or the trade relations, sudden change is a big risk that we have to be aware of. In March, the primary Super Tuesday will be held in the US. So we will watch closely and see how US will handle this. And of course, the relations with China and Taiwan comes into play. So the security is a big factor. And on business side, BOJ last week and this year is starting to send out signals this week. And so interest rate is a big factor. We are controlling debt. So there should not be a big problem impact, but the bond market will be impacted. So the feedback from the bond market may come if the interest rate moves and the FX may move accordingly. So the investment mindset may change accordingly. So FY24 in terms of environment cannot be optimistic. So we have to factor in all these elements. And my successor will come up with a good 2024 plan, I think. Thank you. Question. Page 20, by region revenue, you said China. Mainly on DSS, the proportion is declining. Global Logic does not have much exposure in China, if my memory is correct. And so I think you said that the challenge is to grow in China. But maybe it's not going that well from the numbers. So what is your plan, if you have any plan you could share with us? Answer. Global Logic is a US company. So what to do with China business is a difficult situation, difficult theme. But we have not given up. If there are business demands, we will go in and move forward. So basic stance remains unchanged. So I will read out the numbers. China, DSS. As mentioned earlier, global logic is down. It's not that global logic is down. Hitachi Vantara, storage business. China government's policy. The focus is on China products, and therefore sales is down. Understood. Thank you.

Thank you very much. Next. Harada-san, please. Please unmute and ask your question. No question. Thank you very much, Kawamura-san, over the years. I have three questions. The first question is somewhat covered by the other questions. The margin is high for the front business. Please talk about the continuity of this business. The front business is receiving many orders and IT resources are incurring a higher cost. There could be wage increases that is forthcoming. Is this going to have an impact on the margin? Would it put a downward pressure on margins? Answer. As you have rightly mentioned, system integration is a main part of the business. Therefore, the personnel cost is very important. There are many major projects regarding generative AI. System engineer work will be replaced somewhat by such technologies. We have a large-scale project that is ongoing. so that the speed can be enhanced and absorb the HR cost. Numbers will be presented by Kato-san later and for financial and public sector as well as energy in these areas we believe that we have a significant backlog that we're assuming that the orders will continue Therefore, we don't think there will be a significant decline in the front business. It will continue to be a viable business for us with good profitability. now regarding the backlog um as i mentioned in late on page 21 from business the backlog is increasing by 10 therefore it remains very strong id service is also similar therefore as karma sun has already explained even with the cost increase measures are being implemented accordingly therefore more than ever we believe that even higher profitability can be uh pursued So if anything, there is possibly an upside answer. We believe that this business will continue to grow. Regarding the second question, regarding the semiconductor production equipment, you mentioned that the recovery will come from next fiscal year. Is it going to be the second half or later part of the second half? What timing next year will we see a recovery? According to industry consensus, I think it is going to be next year's second half. The semiconductor industry correction has run its course, but there is going to be somewhat of a timeline. Therefore, for our business, I think we'll see recovery in the second half of next year. Now, third point is regarding shareholder return. In the three years, $800 billion to $900 billion. Communication has been made last year to the tune of $800 billion to $900 billion. What about the share buyback? Corporate cash flow outlook has been increased. Rena says shares have been sold recently. Therefore, I believe that there are also asset sales made as well. Is there a possibility that you can increase this further? Or are you remaining with 800 to 900 billion for the mid-term management plan period? Please elaborate further. Answer. Regarding the shareholder return, we have not started discussions yet. This is something that will be discussed going forward. In terms of the mid-term management plan, the story is that half of the core free cash flow will go to growth and half will be returned to the shareholder. That is a basic principle that we will be following. However, there are different areas of possible growth and we may accelerate our investment for growth so we have to look at the overall picture in considering the return to the shareholder about basically for the corporate ash flow and half of that is what we are considering this basic policy remains unchanged and based on this premise please look forward to further announcements now in terms of dividend as well as whether we're going to do buyback or not has not been discussed yet nothing has been decided yet on this topic thank you very much for the answer that's all for me thank you very much next please unmute yourself and ask your question question

You mentioned this earlier, but I have two questions on China. The Japanese companies that are in China, about 50% are planning to reduce their business. So what is your current status of China business? And in the short and medium to long term, what is your thinking on China's investment? And the other question is, Kawamura-san, earlier you said China, Taiwan, geopolitical risk. the supply chain base will be shifted, studied to be shifted to Japan or the allied countries. Is there any update, progress in that initiative? Answer. Thank you for the question. What we think of investment in China. We have big business blocks in China. One is elevator escalator, elevator business. And as Kato-san said earlier, IT-related, storage-related business, and ASTEMO. With Japan OEM, we have parts. And so these are big businesses in China. So reducing China investment suddenly is not something we do. or disinvest in China, no, we will not withdraw our investment. Fresh capital may not be invested in from Tokyo, but we already have capital accumulated on site. And so we will reinvest and if necessary, we will use that. And the trade with Japan and trade with the US, we still have minimum level, a necessary minimum level. But it's not like before where mass produced products in China will come to Japan or the US. We're not doing that. So the business completes in China in trading and manufacturing and investment. So that is our current policy. As I said earlier, elevator business, initially there was the evergreen problem. And so ever great problem. And so we were worried, but now in case of new installation, we get upfront payment and in maintenance, we are now shifting to maintenance for, so we have quite good profit in China going forward. fresh money injection from tokyo will be restrictive and for trade we will continue the current level and the taiwan issue at the beginning of january there was an election and the democratic party they won and they are close to the u.s how Beijing exerts its impact or influence will be watched. So it's difficult. Regarding supply chain, Shanghai regions, home appliance related parts, we're partially manufacturing in China still, but we are returning to Japan too. Initially, we thought of somewhere in Southeast Asia, but now we are basically bringing this back to Japan. I cannot go into details and share with you the numbers, but we are on schedule. The supply chain risk is now diversified, and we will bear this in Tokyo. And the biggest problem is the semiconductor problem. For Taiwan, we have various semiconductor-related business, the production equipment to Taiwan, So the geopolitical and security judgment needs to be made. Our current judgment is that China will not use the armed forces to Taiwan. We think that is unlikely. But in any case, it will be a Hong Kong style entry. So really relating semiconductor, we're not thinking of taking any particular action at this point in time. Thank you. I hope that answers your question. Thank you.

Thank you very much.

Next, please. Please unmute and ask your question. Thank you. Question. I have two questions. First of all, regarding global logic, what is the organic trend in the first half? There was an impact of acquisitions, 6% or 7% growth was mentioned. From the third quarter, is it going toward recovery or is it still headwind? Kato-san will answer that question. Regarding global logic, as you have rightly mentioned, on the part of the customers, IT investments are slowing down. It is continuing to grow, but the speed of growth is slowing down and that is continuing from the first quarter to the third quarter. So organic growth is around 4% year on year. Therefore, it is declining somewhat, but compared to the previous quarter, it is increasing. Now, question. DSS, you said that there is an effort making deal that has been achieved in terms of the So the capabilities have been brought to bear in the acquisition of the steel regarding the load dispatching system with the involvement of RDS as well. So how can you capture deals that transcend the different sectors? Please elaborate further. Answer. You have explained this well. Now, regarding Tokyo, one of the business of a load dispatching system, it is on one Hitachi basis through collaboration amongst different sectors. Hitachi Energy, uh has the is providing the system um hvdta converter system so we are transcending uh geographical areas as well as business sectors and working in collaboration and global logic knowledge is also brought to bear so u.s is also involved this is effort making in that regard In the power sector of Japan, it is epoch-making, but for Hitachi, it was epoch-making as well. Tokyo and Switzerland, the grid, and USIT have worked in collaboration to achieve this deal. So for Hitachi, internally, this has been epoch-making, and I think this will become more prevalent going forward. This will be a very good opportunity for us to pursue such businesses as One Hitachi. We will continue to do so. This is Yoshiko escaping. Prime vendor is Hitachi. Hitachi Energy is the secondary vendor to Hitachi. Globalogic are not a contractual party, but they are providing a Hitachi Energy packet solution development support to Hitachi Energy. Therefore, we have had good collaboration amongst the different divisions of Hitachi.

That's all.

Thank you very much. So we will switch to the English channel. Please use the raise hand button if you have any questions. Participants on the English channel, if you have any questions, please use the raise hand button. Okay, I do not see any hands, so we'll come back to the Japanese channel. Winsome, please unmute yourself and ask your question. Thank you. I have one question. First question. Question about wage increase. So what is your plan on the wage increase going forward? And the digital talents, IT engineers, wage increase. If you have any information you could share with us. Thank you very much. Answer, wage increase, in our case, we have the electric union and the union is a big factor so it is basically decided upon the negotiation with the union but continuing from last year we're planning on a big wage increase this year we have confirmed that within the management but the percentage increase is up to the negotiation we have a basic principle though added value and the productivity will determine the wage increase using a company logic so it's not irrational we will reflect the productivity improvement in the wage increase and so this stance remains unchanged at any rate we will decide this with the union negotiation in march and we're thinking of a significant wage increase and trying to budget it in in the next year and the digital talents This is a difficult problem. Japanese companies, it's very scarce. The engineering department, university graduates, it's mostly machine engineering. And so the talent supply is small to begin with. And so the supply demand is very tight. So for Japan, we have to take some unique measures. On the other hand, if we try to hire the talents in Japan, the macro labor market factor is in play. So we have to hire on the other overseas side. Global logic has a big function of hiring people in North America. Labor market in North America is also tight. And so we acquire a company in East Europe to acquire talents or Latin America or Australia in the US like we acquired this time. We we will acquire companies and acquire engineers there. So we're doing this in a two pronged approach, Japan and overseas. Thank you. I hope this answers your question. Question. You announced the human personnel refreshment of a son and took another son position change. So if you could explain the reasons I'm not the one with HR authority, so I cannot talk about the intention behind but took another son in fiscal 24 will be heading the DSS and the growth strategy So he will discuss the backbone of the next medium term plan. But his role has basically been unchanged. Abe-san, Aoki-san will step down this time with this announcement. So Abe-san will move after that. So Abe-san's assignment will be DSS sub to Connective Industries. The connective industries is the merge of the hardware and IT. This integration is crucial, and Abe-san understands both sides, so I think he is the best fit. Thank you.

Thank you very much.

Next, Sagi Saka-san, please unmute and ask your question. My question. I have two questions, both related to Hitachi Energy. The first is regarding the backlog of Hitachi Energy. How is that converted to revenues? In a steadfast manner, on page 14, the supply chain management as well as strengthening of production capabilities are mentioned. Specifically, how do you intend to tackle this initiative? Page 20, regarding the regional aspect, green energy and mobility. Other areas is growing by 42% other regions. Which regions, which products and solutions are growing in this category of other areas for green energy and mobility? Answer. Regarding Hitachi Energy, As I mentioned at the outset, the order backlog is accumulating and the third quarter, the backlog is exceeding 4.3 trillion. And how is this going to be posted in the P&L? Out of 4.3 trillion, 4.23 10% will be converted to professional loss, 24, 40%, and the remaining 50% is 25 and beyond. So it takes about three years for the backlog to be registered in the P&L. and we need more capacity to enable this. Hitachi Energy will make a significant investment, 80 billion to 100 billion investment will be made so that the production level can be enhanced. There are many suppliers as well, so we will combine the resources of suppliers as well to increase capacity. Now, regarding your second question, kato san will respond to the question now other areas specifically as middle east hitachi energy in saudi arabia has received an order for grid integration related, as well as high voltage products, businesses growing in this area. So the other areas is Middle East for Hitachi Energy. Now, regarding CapEx increase, for GEM sector overall for this fiscal year compared to one year below before, we are going to be increasing by 30 billion. This is mostly for Hitachi Energy. So for this year as well, that is the investment increase that is going to be made as an increment.

Thank you very much. Next, Ayada-san, please unmute yourself and ask your question. Question. I have two questions. First is related to the earlier question. Hitachi Energy's third quarter margin, how do you summarize the margin? Year-on-year basis, the adjusted EBITDA, 8.7%. So that is point to three percentage point improvement first and second quarter year on year was two percentage point improvement that was the pace, so the pace of improvement seems smaller. So how do you understand how should we understand this margin. And for GEM as a whole in the midterm management plan, 10% adjusted EBITDA margin is the target. So Hitachi Energy next year is expected to achieve over 10%. So third quarter summary and next year's margin improvement pace. That is my first question. Answer. way numbers are shown this year this time revenue grew significantly and the backlog goes to p l and that seems margin is declining because of that reason but towards the second half and fiscal 24 as i said earlier order backlog margin is up higher than before and that will be reflected so we can see an improvement from the current numbers now our view on fly 24 we have not lowered the target the strong backlog will be the foundation and with the high gross margin we will achieve this target such energy management and we are coordinating to make that happen so 10 is our target that we are aiming for thank you Thank you. Question, my second question is Lumada. You mentioned earlier that global logics organic growth, but for Lumada as a whole, organic growth, third quarter result, if you have that number at hand, please share that with us. And on a full year basis, 20 billion upward revision in Lumada. but the FX assumption has changed slightly. So is this because of the foreign exchange or other factors? So that's my first question, numbers. And based on these numbers, page 11, Lumada business expansion is explained. Generative AI related order is over 10 billion or more than 100 cases, projects. so you mentioned the augmented reality metaverse generative ai lumata business size compared to normal business is it larger or smaller and the current business what kind of clients what kind of business accounts for the big portion of i think it falls under digital engineering If you could give us some more color on this business. Thank you very much. Answer. First, the Lumada details, organic growth and others. We have only limited material, but Kato-san will explain. Third quarter revenue was 19% up year on year. Roughly speaking, excluding FX, it is still up by 15%. So it's double digit, mid-teens growth, full year basis, similar story, 16% up, excluding foreign exchange. So generative AI, Yoshikawa-san will explain. So this 100 projects, Globalogic and DSS, mainly in Japan, these are the projects that we already acquired. In terms of the amount, but they will lead to related systems in the future. So we are developing them meticulously. Regarding generative AI, we've been working on this since last year and the inquiry is increasing in terms of industry, finance and bank and the insurance and government. Thank you very much.

Thank you very much.

Yasui-san, please unmute and ask your question. I have two questions. The first question is regarding the power grid market in the US. You talked about this issue. I think it was very difficult to gain approvals in the past, but with the introduction of renewable energies was not making headway. But beyond the European market, is there a possibility that is rising for North America? Is the market environment changing today? Second question is related to the question that was raised earlier regarding Kato-san. He will be the new CFO. Now, it seems that executive changes seem to be rather significant compared to the past. So it seems that overall changes are being made. So what is your aspirations? And please talk about how you will deal with the opportunities and risks in the turbulent three to five years going forward. Please give us your outlook. Now, regarding the U.S. infrastructure-related and power grid, I would like to respond to that question. Under the Biden administration, infrastructure projects were emphasized, not just for grids, but roads, ports, and other infrastructure. U.S. grids are such that for the past 20 years it was not receiving investment because of the regulations it is becoming older in terms of infrastructure and with the Biden administration renewable energies are being emphasized therefore when investments are made in this area We believe that the window is now open, although we have been struggling in the past now. But if the administration is going to change again, it would be reversed. So the grid business that is increasing could change in terms of the posture toward the environment by the possible new administration. So we have to watch this very carefully. In terms of the market growth numbers, I don't have the details with me today, so I would like to address that in the offline meeting. Now I would like to ask Kato-san to talk about his aspirations as he becomes a new CFO. Now, regarding the executive changes, what I was most surprised is that there is going to be a significant globalization for our company. 60% of our business is global, and the same for human resources as well. But in terms of executives, it was not so reflected. But changes have been made, especially in the corporate area. Global talent has been increasingly allocated as we pursue the growth strategy new ideas and new experience and network and more diversity is called for therefore we believe that the uh we will have a strengthened executive team and toward the next midterm management plan uh we can can be poised for further growth what we have to be careful uh is that a corporate is not just in tokyo they are dispersed globally so we have to have more of a virtual corporate management therefore we have to have a very close communication more than ever going forward and i'd like to ask for your continued support as well I have a follow-up question. Regardless of digital numbers, would you say that the U.S. market is what you are going to pursue going forward? It is not growing significantly yet. The situation is different in the U.S. compared to Europe. In Europe, the Ukraine issue is having a significant impact. Even prior to Ukraine, The European gas pipelines are dispersed throughout Europe. But now with the Ukraine issue, there is a limit to the gas supply. And in Europe, the gas pipeline network is going to be by the transmission lines, distribution lines. And that is the reason why Hitachi Energy is coming to the fore. But in the U.S., they have not reached that stage. They have their own natural gas. They have also oil. And the pipelines doesn't have to be replaced by the grid significantly. So that is the difference between Europe and the United States. But under the Biden administration, They are focused on the environmental issue. That is the reason why we have made the headway so far. In 2021, in Texas, there was a major blackout. Therefore, the network is very old and modernization is called for. Renewal demand is very significant in the US. In South Carolina, there was a terrorist attack. and the grid security needs is also coming to the fore. In Maui, there was a fire, and the grid is where the fire started. Therefore, the grid infrastructure in the US is becoming obsolete, and therefore, we need more renewal. That is our take. Thank you.

Thank you very much. we had everyone raised their hand and asked all questions so with that we would like to close the financial results briefing for the third quarter ended december 2023 thank you for your attendance