Hitachi Ltd Ord

It is now time to start the Hitachi Limited web conference on Q1 fiscal year 2024 earnings. Thank you very much for attending this conference despite your busy schedules. I would like to first of all inform you that explanation materials will be available on the Hitachi Limited IR site as well as the news release site. I will now introduce the speakers for today. Tomomi Kato, Senior Vice President and Executive Officer, CFO. Masao Yoshikawa, Corporate Officer, Executive General Manager, Investor Relations Division. Hiroaki Ono, Deputy General Manager of the Finance Division. Now, we will shorten the presentation time from this conference moment. There is no change in the Q&A period. Now, I would like to ask Mr. Kato to start the explanation. We will be switching over the screen. Mr. Kato, please. First of all, I would like to explain to you the contents for today's presentation, the key messages. And Q1 fiscal year 2024 results as well as the forecast and performance by business segment and appendix. Let me explain the key messages. For the first quarter, results of 2024, DX and GX market has been captured, driving the growth in revenues as well as profitability improvement. In three sectors, we have achieved increase in revenues as well as... profit. Cash flow management has led to the free cash flow improvement, so we are off to a very good start in terms of the fiscal year 2024. These are the five KPIs. For the three sectors, revenues increased by 21%, green energy mobility and digital system service grew, and excluding the foreign exchange impact, grew by 14%. Adjusted EBITDA grew in terms of green as well as digital, increased by 55% year-on-year. Adjusted EBITDA margin was 11%, increased by 2.4 point year-on-year. Hitachi Consulted numbers are presented below. Net income tripled to Hitachi Limited stockholders, achieved 175.3 billion yen, increased by 100 billion yen year-on-year, for core free cash flow, increased by 40 billion at 70.9 billion yen. Next, I'd like to talk about the focus for fiscal year 2024. It is likely that we will achieve the target for 2024. DX, demand and generative AI. New business opportunities will be captured to increase revenues and profit for the three sectors. Corporate cash flow is likely to focus for 1.5 trillion yen. which is 300 billion yen greater than target next KPIs. Regarding gross revenues excluding forex, a 6% increase in adjusted EBITDA increased by 20%. Therefore, growth rate is similar to fiscal year 2023. Adjusted EBITDA margin improvement over the previous year, 11.5%. Hitachi Consolidated numbers presented below for net income increased by 600 billion yen. Core pre-cash flow of 480 billion is forecast. From the previous year, there is increase in capex, leading to decrease, but exceeding the mid-term management plan. And in terms of net income, we will aim for 80% as per mid-term management plan in terms of conversion rate. Roic and Justin EBITDA, improvement by 9.5% during the forecast. For fiscal year 2024, there is no change for what we have announced previously. The first quarter, the orders shown here, digital system service and DSS segment grew by 20%, especially in domestic energy and public area. A major project as well as storage, domestic as well as overseas, made a contribution for the GEM project. segment increased by 10% around the year. Railway systems and energy is subject to a reactionary decline. However, because of the nuclear power project as a segment increased And because of the foreign exchange impact as well, the first quarter major projects has been concluded for 4.5 billion yen European contract for HVDC converter status for a station for wind power generation. The gem sector railway system, the GTS of Thales has been acquired in May, and the first quarter remains very strong. Next, I'd like to talk about the connective industry, CI sector, smart life, eco-friendly system. Joint venture company Johnson Control Hitachi Air Conditioning's share transfer has been agreed to. The closing is expected for fiscal year 2025. Therefore, there is no impact for the forecast of this year. At the same time, we have acquired the commercial air conditioning business to expand offering to the data center market. Next, I would like to extend the highlight for the first quarter of 2024 in terms of revenues on a consultative basis. Because of the business reorganization of last year, there was a decrease, but the freight sector has increased by 21%, excluding the foreign-exchanging bank, the increase of 14%. DX demand was very strong. The demand of the business increased as well. And there were projects that had been templated in the first quarter, and a business relating to the new banknote in Japan also was significant. Additional EBITDA was impacted in terms of operating income because of the business reorganization. Three sectors increased. was also shown. In terms of net income, adjusted EBITDA increases as well as foreign exchange has led to increase. Free cash flow was because of DSS improvement as well as energy increase in revenues, improvement of working capital has led to increase. Next, I'd like to talk about the adjusted EBITDA. The waterfall chart will be explained. Upper is revenues, and I would like to explain from the left to right. Because of the stake has been sold, similar revenues decreased, but Thomas GTS business was acquired, and foreign exchange was In terms of foreign exchange, Weikian has little higher revenues. Organic growth was a change, especially in GX-related Hitachi Energy, as well as GX-related DSS from business and IT business groups. Lower part is adjusted EBITDA. Similar to revenues for others, there was increased by 70 billion yen. Organic revenue increase included scale increase as well as the selling price change. These are positive and they succeeded the negative impact of soaring procurement cost as well as increasing investment. Adjusted EBITDA increased. Next, I'd like to talk about the financial position as well as the cash flow. At the top is the asset as of the end of this quarter, 13 trillion 400 trillion yen. That is an increase of 1.1 trillion yen from the previous year, especially in terms of the Thales GTS acquisition as well as the weekend. interest-bearing debt increased. Because of the Thales GTS business increased by 400 billion yen, the ratio increased to 0.26 times. Cash flow has been explained. Cash flow from investing activities has increased because of GTS Thales acquisition. Next, I'd like to talk about the different regions. Starting with Japan, a 14% increase was achieved. We saw growth in DSS, where DX orders was very strong. Front business, such as finance, social, as well as public, increased. In terms of IT service, a 18% increase was achieved. For North America, three sectors, 34% increase was achieved. Hitachi Energy, the transformer, HVTC was very strong. Green energy mobility, or The part of GEM increased by 50% for DSS. Globologic grew. Hitachi Vantara storage business grew, increased by 19% was achieved. In terms of Europe, for three sectors, increased by 31%. Mainly, this is Hitachi Energy. HVDC orders received increased and germ increased by 45% as a result. Other regions, three sector growth was 50%. This is driven by germ, 57% increase. Hitachi Energy's Middle East project showed progress, and this is also reflecting foreign exchange impact. Overseas business accounted for 64%. Now, let me talk about the segment-based orders results. GEM, Hitachi Energy, and railway systems, as well as sea, water, and environment, looks lower in terms of growth because of the reactionary decline from the previous year. Focus for 2024. Let me give you the highlights. As explained at the outset, the KPI of the mid-term management plan has almost been achieved. I will give you more details later, but for DSS and GEM segment, in terms of the revenues as well as adjusted EBITDA were revised upward. For a static and solid basis, we have only finished the first quarter. Therefore, the focus has not changed. Furthermore, for adjusted EBITDA, additional improvement was incorporated as well. In terms of revenues, for fiscal 2023, ASTEMO has an impact leading to a minus 7% for three sectors, excluding foreign exchange with 6% growth adjusted EBITDA. Because ASTEMO became an equity method affiliate, nevertheless, we have been able to increase the revenues. This is despite the absence of 120 billion, a non-operating process of ASTEMO becoming an equity method affiliate in fiscal year 2023.

In summary, three sectors are forecasting revenue and profit increase. Lastly, FX assumption from Q2 onward, initial rate of 140 yen to a dollar is kept unchanged. Next, factors affecting year-on-year changes in revenue and adjusted EBITDA for FY24. The upper half, revenue, decreased from divestiture of Hitachi Astemo, an increase from acquisition of Thales, DTS, and FX was a negative factor year-on-year. And in others, increase in Hitachi Energy, GX-related and DX-related service and platform, and in CI segment, Hitachi iTech, High-tech will increase the revenue and adjust the EBITDA on the lower half, similar trend as the revenue. The others will increase by 150 billion yen. Increase in the business scale and selling price change included in organic growth over our positive factors. This more than offset soaring procurement costs and increase in investment and resulting in higher adjusted EBITDA year-on-year on a consolidated basis. Next, performance by business segment. First is digital system and service. Revenue increased by 16% in Q4. and 11% increase excluding FX. Adjusted EBITDA margin is 12.4%, which is up in revenue and profit year on year. Revenue in front business and IT service increased, and service and platform also increased. Global logic grew by over double digits, and storage grew in Japan and abroad. I will explain this later. Backed by strong DX demand, Lumada business increased by 19%, drove overall growth. Next, right side, FY24. This time, we revised upward. In FY23, excluding FX, the revenue grew by 6%. But in FY24, we expect 8% revenue growth. Next, green energy and mobility, GEM. For GEM overall, revenue in Q1 increased by 41% and excluding FX, 28% growth. So sales, revenue and profit grew year on year. In revenue, Hitachi Energy and Railway Systems, BU, and all segments grew by double digits and achieved revenue and profit growth. In Hitachi Energy, in addition to equipment growth including transformers, HPVC, system integration, and maintenance managed service, all these Lumada business also grew. For FY24, we revised upward. For GEM, the revenue is 15% growth when we expect similar level growth as FY23. Next, Connective Industries, CEI. The revenue grew by 3% in Q1. Adjusted EBITDA margin is 11.1%. So both revenue and profit grew. Revenue, a smart life and eco-friendly system declined, but all other BU's increased, especially in water environment BU and industrial products. Next, FY24, for CI overall, revenue growth by 33%, including FX, 4% growth, which is up. from 1% in FY23. This time, smart life and eco-friendly systems, revenue and profit were revised downward and declined from sales of domestic home appliance business. On the other hand, we expect room for improvement in other BU's and kept full year forecast unchanged. Next, Lumada business. Left side, Q1 revenue will increase by 17% year-on-year. FY24 revenue grew by 14% and profit margin is 16%. So it will be up by 1% point year-on-year. This remains unchanged from last time. Now this time, quarterly revenue by sector is disclosed from this time. In DSS, DX-related system integration grew by and front business and IT service increased, and global logic digital engineering also grew, so total 19% growth. In GEM, Hitachi Energy managed service and system integration grew, and railway systems managed service also grew. So overall growth was 29%. Now, as topics, we signed strategic partnership with Microsoft and Google Cloud on generative AI, and we also jointly developed a generative AI solution called Hitachi IQ with NVIDIA and started the sales. This Lamada business growth and profitability improvement will contribute to higher revenue and profit of Hitachi overall. That concludes my explanation on first quarter results and FY24 forecasts.

We will now proceed to the Q&A session. Those of you with questions, please use the raise hand button on the web conference system. We will call your name and when your name is called, please unmute, state your name and affiliation and ask your question. If you no longer need to ask the question, please release the raise hand button. We will not show the video of the person asking questions. We will first take questions on the Japanese channel and then take questions from the English channel. So we will take questions all together for the media institutional investors as well as the financial analysts. We will now invite questions on the Japanese channel. Those of you with questions, please utilize the raise hand button. Yasui-san, please unmute and state your question. I have two questions. Regarding digital, in terms of orders, it is prevailing very high levels. And you see 42 have been very strong as well, but it seems that your orders are very strong. Is your share increasing? And what is your relative competitiveness, inclusive of IT companies? service market today. Power grid orders received was very strong. In terms of regions, it seems that the GEM is increasing, but in terms of power grid, Europe, US, as well as the Middle East. What is the market trend, as well as the orders environment? Answer. Thank you for your question. First of all, regarding DSS, in terms of orders received. In the presentation material, we have given you a breakdown by BU. As we have shown, in terms of DSS overall, an increase by 20% was achieved. For three business units, we have been able to grow across the board. Front business increased by 24%. IT, 19% increase. Service and platform increased by 16%. In terms of the front business, In particular, in finance as well as social. In terms of finance, there was a major project last year, and there was a decline because of reactionary decline. But social is very strong. Public system, social system, there have been major orders received. For IT service, on the other hand, HiSol and HiSys, we have two companies. We have seen growth in both areas. For HiSol, There have been major domestic projects remaining very strong. We have seen an increase for high-systems. In the public area, there have been major projects won. Basically, the front office as well as the IT service characteristic is that our limited business Data utilization to create value has been very strong in terms of cloud, as well as generative AI have businesses that are increasing. A servicing platform is such that the global logic has been growing from the past. Now, storage has seen growth at the same time, domestic as well as overseas, especially with the foreign exchange impact. And cloud has been growing very significantly domestically. But the second question is about the energy. In this area, the trend has been maintained from the past. HPDC, Malaysia projects, orders have been captured and projects are underway in various regions, as I mentioned earlier, in terms of revenues in North America, as well as Europe and the Middle East. In these regions, sales have been achieved. Beyond H3DC, transformers as well as switchgear have been growing very strongly as well. In terms of transformers, there is projects relating to data centers. We are receiving inquiries in this area. In terms of the trend, the prevailing trend, there is no change. Globally, all over the world, HVDC, major systems, as well as transformers, as well as switchgear equipment are growing. A follow-up question. In terms of power grid, for Coeur d'Alene, revenues are $600 billion, very high. Is that after inventory has been released? So if we multiply this by four, can we get the number for the full year? And I would also like to ask you regarding relative competitiveness in the area of IT. Regarding power grid answer, revenues for the first quarter increased by 49%, inclusive of the foreign exchange. 31% increase has been achieved even on a dollar basis for fiscal year 2023. 22% increase excluding foreign exchange. So it seems that it is one level higher in terms of inventory. Last year, uh human resources as well as uh capacity was maximum uh in terms of manufacturing therefore we were not able to fully respond to the orders from our customers it isn't as if it has been a result but We have made capital expenditures. Therefore, there has been improvement recently. For the first quarter, revenue growth is driven by the relieving of the bottlenecks that existed in the previous year. On the other hand, 30% revenue increase for the quarter is very high. For the full year, 15% yen basis and excluding foreign exchange is 16%. we have to evaluate the forecast going forward. Now, in terms of IT, from the past, we have been making efforts in cloud business, especially for the use of generative AI, not just open, but also on-premise. Usage of the cloud is increasing in terms of demand. Hybrid cloud is what we are offering. The combination thereof is the service and response that we've been providing to our customers. This is our strength characteristics, especially in the area of security. There is a heightened need for better security. We are also making efforts in this area. Centering in this area for DX related demand is leading to increasing orders.