Hitachi Ltd Ord

It is now time to start Hitachi Limited's web conference on the second quarter of FI 2024 earnings. Thank you very much for taking time out of your busy schedules to join us today. With respect to the presentation materials used today, they are posted on Hitachi Limited's IR site as well as the news release site. Please check accordingly. Let me introduce those who will be on stage. Senior Vice President and Executive Officer C.F. Otomami-Kato, Senior Vice President and Executive Officer, CEO of Power Grace Business Unit, CEO of Hitachi Energy Limited, Andreas Schierenbeck, Corporate Officer, Executive General Manager, Investor Relations Division, Masao Yoshikawa. Deputy General Manager, Finance Division, Hiroaki Ohno. So these are the four who will be on stage. Japanese channel, by choosing the language, the English translation of the speakers can be heard. The location of the icon depends on the device, but in the case of the PC, at the bottom of the Zoom screen, there will be an icon. Please choose the language of your choice. Regarding earnings, Kato will explain, and Hitachi Energy presentation will be made by Shirenbeck. We are going to switch the screen. Please bear with us for a moment.

First of all, I would like to explain the structure of the presentation materials. The first is key messages to the second quarter of the fiscal 2024 results, fiscal 2024 focus, performance by business segment and appendices. I would now like to explain the key points. First, the results of the second quarter of fiscal 2024. We achieved an increase in revenues and profit across all three sectors. This was driven by the DSS, Digital Systems and Services, which benefited from the growing demand for DX and modernization in the domestic IT market, and GEM, Green Energy Mobility, which performed well in areas such as renewal demand for power grid facilities and renewable energies, as well as data-centered Related projects. Five KPIs will be explained. The upper row shows the total for the three sectors. First, revenues increased by 11% year-on-year. Growth was centered on GEM and DSS. Adjusted EBITDA also increased by 23% year-on-year with growth centered on green and digital. Furthermore, the adjusted EBITDA margin achieved 10.7%, an improvement of one point from the previous year. Below, consolidated results for Hitachi. Net income attributable to Hitachi was 116.9 billion yen. Adjusted EBITDA for the three sectors increased, but due to deterioration in equity and profit of fillers for Hitachi as well, Hitachi consolidated EBITDA decreased by 22.1 billion yen in one year. Meanwhile, the core free cash flow increased to reach ¥97.6 billion next year, the outlook for fiscal year 2024. GEM, which is currently benefiting from the strong demand for GX, has revised its focus upward, and the total revenue for three sectors has been revised upward by ¥150 billion. adjusted EBITDA by ¥19.5 billion. In addition, core free cash flow is expected to reach ¥1.5 trillion, ¥300 billion higher than the medium-term target over the three-year period. Let me explain the six KPIs. The upper row shows the three sectors. First, revenues are expected to increase by 7% year-on-year. The software revision was improved has improved the previous forecast of 6% year-on-year, increased by 1 percentage point. Adjusted EBITDA is forecast to increase by 23% year-on-year, which is expected to exceed the growth rate of 2023. Adjusted EBITDA margin is forecast to improve by 1.5 percentage points year-on-year to 11.5%, the same as the previous forecast. The figures below are Hitachi's consolidated figures. Net income is forecast to be 600 billion yen. Adjusted EBITDA has been revised upwards for the three sectors, but the previous focus for Hitachi's consulting EBITDA remains unchanged due to the Hitachi ASTEMO's equity in loss. For the same rate, the core free cash flow is for ¥80 billion. Although this will decrease from the previous year due to factors such as increased capital investment, for the three years it exceeded We are expected to exceed the medium-term target ROIC's focus to improve from the previous year due to increased adjusted EBITDA and expected to be 9.5%. In summary, we are revising upward our focus for revenues and adjusted EBITDA for the three sectors combined. On the other hand, for Hitachi, the whole adjusted EBITDA and net income remain unchanged from the previous focus and only revenue has been revised upward. Now for the main topics. Orders for... I'd like to first of all talk about the trends for the first half of fiscal 2004. Orders by digital systems and services which have captured demand for DX increased by 9% in one year to 1.5 trillion yen in the first half. From this, IT services and platforms increased by roughly 10% each. Meanwhile, DSS revenues for the first half of the year was ¥1.3 trillion, 10% increase year-on-year. In particular, energy and public sector, front business increased by 15%, and IT, services and platform also grew steadily. Next, orders received by JEM, which captured demand for GX, increased 42% year-on-year to reach ¥3.1 trillion. In addition to the significant growth of Railway BVU, which concluded high-scale maintenance service contracts overseas, and Hitachi Energy, which performed well in HVDC and other areas, the nuclear power business also grew due to major contracts in Japan. In the first half of the year, JEM's revenue was 1.8 trillion yen, 33% increase year-on-year. In addition to HVDC, this is mainly due to growth in railway BU, which acquired the DTS business of Thales, centered on signaling business, as well as growth in Hitachi Energy, which saw growth in HVDC, transformers, switchgear, and other products. In the first half of the year, both DSS and JEM saw orders exceed revenues. The second point is the capture of new business opportunities. In the data center related to domestically, we have already made the progress in forming partnership with the domestic companies and related businesses. Furthermore, overseas, we have agreed with the Singtil, a major telecommunication company in Asia to expand our strategic partnership. In addition, with regards to expansion of our digital service business, we have received an order from Copenhagen Metro for a digital asset management service called HMAX. Going forward, NVIDIA's AI technology will be used to accelerate, to expand our digital services. through operational maintenance support for trains and signaling services. Next, I would like to talk about the interim dividend decided today. In line with the shareholder return policy of paying stable dividends while securing funds for growth, we will be increasing the dividends by 10% from the previous fiscal year-end dividend to ¥21 per share. This represents an annual increase of 31% from the previous year's interim dividend. In addition, we are proceeding with the share buyback of 200 million yen announced in April as planned. Next, highlights of the second quarter of fiscal year 2024. Revenues from the three sectors grew by 11% year-on-year and adjusted EBITDA grew by 23%. Profit margin up one point year-on-year, increasing profitability. Net income remained flat year-on-year due to decrease in non-operating foreign exchange gains compared to the previous year. Hitachi Consolidated Results were down in year-on-year. Adjusted EBITDA and net income due to decline in the equity in earnings of affiliates are similar. On the other hand, core free cash flow was up here on air. Next, I would like to talk about the breakdown of the changes in the revenues. This will be adjusted every time. Please look at the revenues. And looking at the fiscal 2023 2Q results on the far left, left to right explanation, we provided all those. Several revenues declined during the deconcentration previous fiscal year. GTS business intelligence was a quite increase in revenue due to the depreciation of yen and organic growth in revenues, mainly GX related energy and GX related DSS from business increase. Next, I'd like to talk about the adjusted EBITDA. The trend is similar to revenues as it includes the deconsolidation of Estomo in previous fiscal year and this second quarter equity and losses of Hitachi Estomo and others increased by 38 billion yen. Positive impacts of business scale increase and selling price change outweighed the negatives of procurement cost increase and increase in investment. Next I'd like to talk about the financial position cash flow. Total assets at the end of the second quarter at the top. Total assets 12 trillion 500 billion yen. Increase of 340 billion yen. Compared to the end of previous year, the tallest GTS acquisition has an impact. Interest-bearing debt also increased by ¥340 billion. As a result, debt activity ratio increased to 0.27 times. Next cash flow call, free cash flow improved due to factors such as improvement of working capital by increase in advance payments, both for the second quarter and the first half.

Next, I will explain the status of revenue by a region. I will explain the three sectors. highlighted by bold lines. First, in North America, the three sectors grew by 17%. This was primarily because of Hitachi Energy, which had robust growth in orders for products such as transformers, leading to GEMS increase by 29%. DSS, despite the growth of Globalogic, grew only by 6% in the second quarter, mainly due to Hitachi Vantara's storage business project that was brought forward to Q1. Next, on Europe, with 26% increase in the three sectors, GEM increased substantially by 36%, mainly due to an increase in the signaling business from the acquisition of Thales GTS business in the railways BU and an uptick in orders for transformers, switchgear and other equipment from Hitachi Energy. In addition, Hitachi Hitech's healthcare business grew and CI was up by 13%. Lastly, in the other areas, the three sectors increased by 22%. Here too, a 28% increase was possible for GEM. This growth was mainly due to heat-touch energy projects in the Middle East. In total, the three sectors accounted for 62% of our overseas revenue. Next, I will discuss orders received by business segments. The key points are, as I have just presented, regarding Q2. The growth rates of DSS front business and GEMS nuclear energy appear to be low due to the reactionary declines from the large respective projects undertaken in the previous year. But in the first half of this fiscal year, they each increased year on year. Next, let me move on to the forecast for FI 2024. the highlights of the forecast. As I explained at the beginning, by and large, we expect to achieve almost all the KPIs of the medium-term management plan 24. As I will discuss in the performance by segment section later, we have made upward revisions to the four-year forecast for the GEMS segment for both its revenue and adjusted EBITDA. As a result, GEMS revenue is now forecast to grow 7% year-on-year and adjusted EBITDA and net income are now going to be up year-on-year. On the other hand, Adjusted EBITDA and net income on a consolidated basis remain unchanged from the last time respectively because of loss in equity of or rather equity in loss for SEMO. Lastly, on the assumptions regarding the exchange rates for Q3 onwards, we have left the previous rate of 140 yen to the US dollar unchanged. In terms of the sensitivity, a warning change in the yen dollar exchange rate is expected to result in 500 million yen difference in adjusted EBITDA. Next is the breakdown of factors behind FI24 revenue, adjusted EBITDA, year-over-year changes from the previous year. First, on revenue in the upper row, we're expecting to see SMA's revenue drop and increase from TALIS acquisition of GTS finally, as in others, and organic revenue growth. Revenue growth is expected mainly from Hitachan or GX-related business and DX-related fund business and IT services. Next, on adjusted EBITDA in the bottom row, the trend is generally the same as for revenue The others are expected to increase by approximately 160 billion yen. The factors, including the increase in business scale and changes in selling prices, which are part of the organic revenue growth, are expected to outweigh the impact of higher procurement costs and increased investment, bringing an expected year-on-year increase in our adjusted EBITDA. for Hitachi on a consolidated basis. Now, results by segment. The first is on DSS, digital systems and services. Overall DSS revenue grew by 5% in Q2 of FY24. Adjusted EBITDA margin was 13.4% up in both revenue and profit over the previous year. The profit margin also improved by 0.6 percentage points. Revenue was primarily driven by DX and modernization work done by the front business. In IT services, cloud and security-related Lumada business expanded, while in services and platforms, global logic grew by 18%, and the domestic cloud business is also expected to increase, but storage business declined due to the impact of projects brought forward TQ1, resulting in only 2% growth as a subunit. As described later, Lumada business is 14% growth on the back of solid DX demand, driving overall growth for DSS. Next, for FI20-24 forecast on the right side, previous forecast for DSS total remains unchanged this time, but excluding Gulf or Ximpa, we are projecting 8% year-on-year growth, which is higher than FI23. on GEM, Green Energy and Mobility. Next. Overall, GEM revenue was up 26% in Q2. Both revenue and profit increased from the previous year. Profit margin also improved by 2.3 percentage points. Double-digit revenue growth achieved mainly at Hitachi Energy and Railway BU brought year-on-year increases in both revenue and profit to both. In Hitachi Energy, in addition to an increase in transformers and other equipment, Lumada Business, which includes HVDC systems integration and integrated facility asset management solutions also grew. In FI24 we have revised our forecast upward mainly based on a review of Hitachi Energy and Railroad business units. We are expecting a 19% revenue growth for GEM as a whole which is going to be higher than FI23 excluding Forex Impact. Next, CI, Connective Industries. In total, CI revenue increased 2% in Q2. Adjusted EBITDA margin was 11.2%, an increase in both revenue and profit over the previous year. Profit margin also improved by 1.1 points. Revenue declined in the smart life and eco-friendly systems, but revenue was up in all other BUs, in particular water and environment and industrial digital grew by more than 5%. Next, for FY24, CI as a whole will see a 3% increase in revenue. Segment forecast for the year remains unchanged. Next, on Lumada Business. First, please look at the graph on top left. Revenue in Q2 rose by 25% year-on-year. For FY24, on a four-year basis, we're projecting the revenue to increase by 18% and profit margin by approximately 16 points, up one point year-on-year. The forecast for this fiscal year's revenue has been revised outward by ¥100 billion from the previous forecast, mainly due to GEMS growth. Starting from this fiscal year, we are disclosing revenue of our segment on a quarterly basis. As shown in the table below, DSS saw a 14% increase in overall revenue due to growth in DX-related systems integration, pushing our frontline business and IT services growth. It was posted also in Global Logics Digital Engineering, in CEI, Industrial Digital, systems integration for industry degree resulting in CEI's overgrowth of 24% and for topics description of Hitachi Energy's collaboration with Global Logic and Hitachi Digital Services to strengthen its digital business including integrated facility asset management. Furthermore, CI completed the acquisitions of MI Micro Automation, a robotics SI company, and Castle Hill, a pharmaceutical engineering services company. The plan is for these acquired businesses to contribute to the growth of industrial digital. This growth and enhanced profitability of the Lumada business is expected to continue to contribute to Hitachi's overall revenue earnings growth. That concludes our presentation of the Q2 earnings results on the forecast for the full year of FI24. Next, Mr. Shiran Beck, CEO of Hitachi Energy, who took office in July this year, will present the company's management strategy.

The floor is yours. Thank you, Kato-san. Today's presentation will be split into three areas. I will first share my perspective on the strong market momentum, followed by our journey as Hitachi Energy, and last year we'll cover how we see priorities and ambition. Next slide, please. But before we start, a few words about my background. I'm an electrical engineer with international experience across the energy value chain industry. I have global transmission distribution experience as CEO of Uniper. I also spent 20 years in Siemens in the T&D business and the buildings sector, and I worked seven years as CEO of ThyssenKrupp Elevator. I have experience of power generation, energy trading, and rich experience of driving service and digital transformation for several companies for many years. Most recently, I spent three years in various startups in green hydrogen, solar and electrolyzers. And in my role as CEO, I'm very excited to continuously support the acceleration of the energy transition together with our customers and partners. Next slide, please. Let's have a look at the market and the situation where we stand today. Globally, we are facing energy challenges in three areas. We need to reduce carbon emissions to meet our net zero goals. We need to secure energy supply so we can keep the lights on and use electricity for heating and cooling, etc. And we also need to meet the increased electricity demand across the sectors and geographies. Next slide. So if we are talking about reducing carbon emissions, we immediately started to talk about energy safety and electrification and demand increase. Decarbonization leads first of all to electrification of industrial processes. Every industrial process which can possibly be decarbonized and electrified will be electrified. There are a lot of processes in industry and society where we can use green electrons, such as electric cars, transportation, steam production, and so on. And the drive for data centers is further fueling the increase in demand, and then I will only add to that. There are processes, of course, which are hard to decarbonize with electricity, as you need chemical molecules for some processes or high temperatures, and these processes will need something else. They will need green molecules. So, in summary, you need both green electrons and green molecules to decarbonize the society. Next slide. Now, when you talk about decarbonization and more electrification, it leads automatically to the addition of renewable energy generation, such as solar, onshore and offshore. Renewables are the cheapest and fastest way to meet electricity demand. If you look at it from a timing perspective, installation of renewables as solar, onshore, offshore wind takes about one to seven years depending on the complexity. It takes longer to integrate other power generation sources into the grid such as SMRs and nuclear power plants where the planning horizon is up to 10-15 years. And of course we have to hurry up because there is not much time to reach our goals for 2030. Now, adding renewables also comes with complexities like volatility and geographic location. First, of course, volatility because it's not always sure that the wind is blowing and the sun is shining. And additionally, the location is an issue because where you generate electricity is not the same location where the demand is. Renewable energy sources are often remote and located far from centers of high electricity demand or consumption. So the additional way would be to install energy generation assets where the demand is and avoid transportation. Now, with renewables, this is not possible anymore. The power grid is actually in the middle. You have to transport the electrons from where they are generated, for instance offshore wind farms, to where they are used in the industrial complex in big cities. And to deal with volatility and long-distance transportation, you need digitalization as an enabler. You need new processes, new solutions, and maybe even AI. So, to meet demand in Greece, we need renewable power, and renewable power needs grids and digitalization. One example where a lot of renewables have been integrated into the power grid is shown in the picture, UK and Ireland, where you clearly see the load centers in red and the renewable centers in green, and you see as well multiple HPDC links to exchange and transmit power across the ocean to other countries. Next slide. Now let's have a look at the global energy super cycle, which is expected to continue for the next 20 years. According to an IEA report, the lengths of the planning horizon are increasing to 10 to 20 years across the globe. Maybe 10 or 20 years ago, the grid was not even in the focus, but now the power grid is much more important than before, and will play a key role in enabling a sustainable energy future, which now requires more planning, and with that planning, of course, as well as the budgeting for more companies. We see the CAPEX planning for a lot of utilities around the world going up significantly. Another example for a long-term perspective is also the regional transmission approach announced by FERC this year. They are now asking for a 20-year planning horizon that goes ahead with budgeting for this period of time. Next slide. If you look at our plan for 2030, we are making good progress and focusing on the three areas, strengthening the core, expand digital and services, innovate and collaborate. We work across utilities, industry, transport and infrastructure and we support our customers and partners throughout the lifecycle with planning, building and operations and maintenance. We do all of this underpinned by IT, OT and IoT solutions and we leverage our energy expertise and digitalization as enablers for developing technology at scale and speed to support the energy transition. We are very well prepared for the energy transition that is happening in every single country. Now shifting to a different area. One global SIP as a digital core for all locations is now fully deployed in Hitachi Energy and working at its full capacity. This SIP is spanning all locations, countries and factories worldwide. It's fully implemented and running. That means harmonized data, harmonized processes, and visibility for projects and products on a global scale. In short, we have one platform prepared for growth and scaling at speed after harmonizing more than 1,000 work processes and migrating about 150 million data objects records. Next slide. Since we joined the Hitachi Group in 2020, we have invested already $3 billion. In the next three years, we are investing more than $6 billion in capacity expansion, $1.5 billion into brownfield transformer expansion, which is already all sold and reserved, and $4.5 billion in the remaining businesses. This year, we have so far announced investment in the US, Canada, and Mexico of $255 million, $200 million in Brazil. In India, we have announced investment of $250 million. In addition, we have announced investments across Europe, like Sweden, 330 million, Finland, 180 million, Germany, 32 million, and Spain, 87 million, and there will be more announcements coming. As well, we have expanded our workforce by more than 20% already, and we expect to another 15,000 people between 2024 and 2027, which is an addition of more than 3,000 to 4,000 people each year. If you look at the baseline of 2021, we have tripled our order backlog. For 2024, we forecast a backlog of around $40 billion for the next three years. Next slide. When we look at the investment at this magnitude, there are always questions. Is it too much? Are we running the risk of building over capacity? Are we able to deliver on what we have sold? Let me share some examples of what we are doing in operational excellence and capital efficiency. First of all, capacity expansions. The grid planning on investments that are needed and the current planning horizons are about 10 to 20 years and that includes the CapEx planning as we already discussed. We have increased visibility thanks to a triple order backlog. We also have more visibility for the future thanks to new business models like framework agreements, capacity reservation agreements which were not in place in a couple of years ago. Also, we have the widest global footprint, enabling a kind of natural hedging, which is actually a kind of downside protection, because we source, build and deliver locally and have flexible and resilient supply chains as well. We have also enabled flexible manufacturing capacity and partnerships. We worked hard to continuously improve our operational excellence as well. The new business models are driving standardizations with framework agreements and capacity reservations. We have also been de-risking our business model as we moved away from EPC to EP. Another effort has been our focus on enhanced terms and conditions, for instance, price adjustments based on commodity indexes for raw materials. We have also looked at value-based pricing. Now, a very significant milestone this year has been the completion of the Global SIP Digital Core, REWA, as already explained, which enables the automation of processes to create transparency and result in better project control. But I will come back to that and explain it in more detail. Next slide. But all these investments are not completely sufficient to meet the global demand. We have also to focus on the installed base of our customers. Actually, we have to focus on capacity increase of the installed base and efficiency on that, extension of life cycle of these assets, and that needs service business underpinned by digital technologies. That's the reason we are focusing on our service business and realigning it. For 2030, our ambition is to become the number one service provider by supporting our customers to extend the lifetime of their products and provide services. We want to more than triple our service business by 2030 against the baseline of 2021. And of course, we want to deliver a cut of margins to the bottom line. Next slide, please. Hitachi has a unique portfolio of business expertise from Hitachi Energy combined with a complete portfolio of software capabilities like Lumada, Global Logic, Digital Services, combined with Antara for all IT infrastructure needs. This combination provides a unique portfolio to deliver customer value and solutions. One example is the Hitachi Vegetation Manager, which is part of the Lumada Inspection Insights portfolio for utilities. Vegetation management, trees, greens, plans under high voltage lines is an actual issue and can create short circuits and power outages. By using photos, videos and direct accessible satellite imagery in combination with utility data, the vegetation managers leverage AI and advanced analytics to predict emerging vegetation risks before outages or fires occur. This is used to optimize the cut planes and to services for our customers and avoiding outages. It is a very good example of the collaboration within the Hitachi Group is working and how we are using digitalization and service to create unique customer solutions. Next slide. Another example of digitalization and combining IT and OT is shown on that slide. In this case, it's about how Japanese TSO handle energy reserves. We have supported the transmission system operators in Japan with a market system for operating the nationwide energy reserve balancing market. For this customer project, we have optimized a proven global solution for the Japanese market and needs. There are a number of benefits of using nationwide market management system in Japan, and here are three of them. It contributes to efficient procurement and cost reductions of balancing energy. It helps to maintain frequency and stable power supply. And another benefit of the project has been the development of new advanced technologies which are necessary and unique for the market in Japan. The first phase This project recorded around 30% annual savings during one year. Next slide. Let's shift here and focus on financials and order backlog development. Have a look at our growing backlog with a higher margin, which gives us increased visibility for the future. It is also securing continued revenue and profitability growth. We are looking at more than three times our backlog than in 2021, now around 40 billion US. We also have the framework agreements which are adding another 10 billion of US dollars. And we have improved gross margin in the board backlog. So what does it mean for future revenue visibility? Now with backlog and framework agreements we are getting closer to six years of revenue visibility. We have nearly doubled the revenue visibility compared to financial year 21. It is not just about higher volume and better margins, the risk profile of the backlog is also better. We have de-risked the business model with framework agreements, capacity reservations, there are no more APC contracts, and of course we have enhanced T&Cs, for example, price corridors, standardization, price adjustments for raw materials, etc. These factors, combined with value-based pricing, have contributed to an increase of the margin and has improved the risk profile as well. To summarize, we have a backlog with higher volume, better margins, lower risk profile, and better revenue visibility. Now the solid backlog that I just presented to you is a cornerstone for future revenue generation. Our ambition is to grow the revenue by an average growth rate of 12 to 14 percent per annum towards 30 billion US dollars. The revenue growth combined with operational excellence has already contributed to significant margin improvements. Hence, our upgraded financial year 24 forecast at a 10.5 percent adjusted EBIT margin. Our profitable and sustainable growth journey will continue. Let me summarize. The market sees the strong market momentum that drives the grid investments. This is a trend we expect to continue for the next 10 to 20 years, which is also aligned with the planning and budgeting horizons of the utilities worldwide. This solid trend will underpin and drive our strong revenue expansion and profitability growth. We are considering ourselves as a global leader in the transmission distribution business, and we expect to maintain and expand that position over the next couple of years. We are investing in capacity expansion across the globe, mainly in brownfield expansion, and we are going to invest more than 6 billion in the next couple of years until 2027. We do have a production footprint for flexible capacity and the ability to adapt for the demands and resilient global supply chains. That capacity is backed up with framework agreements, capacity reservations, avoiding overcapacity and following a low-risk approach. We will focus on service businesses enabled by digital as we have the benefit of having the largest installed base in the industry. And of course, we are prepared to invest even more CapEx going forward. For example, if we have capacity reservations and framework agreements that result in strong business cases, we are prepared to invest even more. Let me wrap it up. We are looking at a business that will grow with double digits on the revenue side in the next couple of years. We will maintain and improve our market and technology position. Due to the growth and revenue expansion, we will increase our margins absolutely and on the margin quality side. With our growth and margin expansion, we are creating significant shareholder value going forward. Thank you very much.

Thank you very much. We will now proceed to the Q&A period. Those of you with questions, please use the raise hand button on the screen of the web conference system. We will call your name and when your name is called, please unmute, state your name and affiliation as well as your question. When you no longer need to ask the question, please release the raise hand button. We will not show the video of the person asking the question today. We will first of all take questions from the Japanese channel and then the English channel, in that order. We will receive questions from the media, institution first, as well as analysts at the same time. First of all, we will take questions from the Japanese channel. Because of the interpretation operation, please only ask questions in a Japanese language on this channel. So the floor is now open. Harada-san, please unmute and ask your question. Question. Thank you very much for this opportunity today. I have two questions in Japanese. First of all, regarding the IT digital system domestic, margin for the front business as well as for IT service improvements are seen. There has been improvement from the previous quarter as well, so please elaborate further. Global logic, you said that you are going to use. and overseas entities of global logic, this is going to become a margin driver for you. You've mentioned this in the past. Are you making progress in this initiative? Or is it just a one-off in terms of the margin improvement we are seeing today? The other question is the following, regarding the connective industries. In the industrial and digital, I understand that profitability is improving. Domestic IT, is it similar situation in terms of margin improvement? Are you making progress in improving margins? From this year, Abe-san has taken the helm and the digital collaboration is making progress it seems. Based on digital, has there been changes in the business portfolio for the connective industries? So that is all. Two questions in Japanese first. Thank you very much for the question. Answer. It's your first question regarding domestic IT. In the slide on page 15, DSS breakdown is provided here. In terms of growth, front business, IT business have increased 9% and 6% respectively. Therefore, a strong growth has been shown here. Demand trend is that there's not been much change in the first quarter, but in the area of front business, as shown here on this slide, DX and modernization, and migration have driven demand especially for the second quarter. The social BU for domestic energy customers and the public institutions, public sector company, public sector are placing orders to us so there is growth in this area. and revenues have increased and margins have improved from the previous year. For IT service, on the other hand, basically there is no change in trend. Nomadic business is the mainstay, especially in the cloud-related as well as security-related sophistication thereof, showing a significant increase in demand. Revenues are increasing and margins have improved by 0.6 points. Regarding SAP, the global logic, on a dollar basis, 14% is very strong. In terms of profit, we are seeing an increase as well. Centering on Europe, customers are keen to invest. And in North America, we have received orders as well. Furthermore, as already mentioned, within Hitachi Group, the utilization is increasing in a steadfast manner, leading to a revenue increase as well as earnings increase. As mentioned in the topics today, for the railway, Assistant P.U., Digital Asset Management Service, HBACS, was an area that we received orders. We will be working with NVIDIA to strengthen this business further going forward. The front is the railway system, but for IT, North America, Hitachi Digital will be leading the process together with the global logic. And inclusive of the digital service, we will provide a service with all hands on deck. And for Hitachi Energy, software modernization is taking place. And now it can be counted as a no matter business. Global logic is providing the significant support in this area as well. This is a domestic ID DSS situation today. Now, regarding CI, the breakdown is provided on page 17, industrial digital. This is not just domestic IT, but also including robotics SI, such as JR automation. Overall, it's 5%, but that is a revenue increase year-on-year. But if you look at IT only, then the growth rate is even higher. Therefore, this is The industrial customers fund that we are pursuing in this area and the demand remains very strong. That is the reason why business is increasing for us. Margins is also improving as a result of this process. Now Abe-san has taken the helm and digital collaboration is making headway. and it's only been six months, and the results are to be manifest going forward. Various measures have been implemented, and the example that I mentioned is the global logics and gen collaboration are good cases in point. The collaboration with CIA is expected to increase going forward. That's all. Thank you very much. I have a follow-up question regarding social B.U., you said before, public sector. Do you also have defense business increasing margins? Please elaborate. Defense is also included, but mainly it's a public sector. Mainly. Understood. Thank you. That's all for me.

Thank you very much. To continue with the questions. Please unmute and start your question, the next person to ask questions. Thank you. Question. I have two questions, if I may. My first question is directed to Mr. Schierenbeck. Earlier, as a target for revenue, $3 billion you mentioned, I believe. On the other hand, CapEx of $6 billion, I think you mentioned, between 2024 and 2027. So revenue target of $3 billion, is that to be achieved in 2027 or in a different year? If you could please elaborate on the timing of achieving that target please.

Thank you for the question. The revenue target to reach $30 billion is around 2030. and that puts it in perspective of the capex we are spending in the next three years.

Thank you. Well, upon hearing this, seeing from the outside, we would like to see an overall picture where there is going to be good growth, but it's a business that you're running. In the next 30 years, roughly, what are the factors that could negatively impact your performance? Inflation or geopolitical factors? Or a project being stalled or suspended? Well, you have new types of contracts to ensure safety and security. Even so, if we have any potential concerns that could negatively impact your performance, on a realistic basis?

Thank you for the question. At the moment we are evaluating our risk very carefully as you have seen in the presentation. I think I see very minimal risk at the moment from geopolitical things, a lot of things already considered. Since we have a lot of local production, we have local hedges for that as well. Our revenue and our backlog is saved by capacity reservations and, of course, framework agreements. Of course, there is a risk that a project is slipping, but even if a project is slipping, there are normally two or three other projects hoping to get a slot for production, so that could very much be filled. On the other hand, a lot of projects which are started, especially in the HVDC area, are multi-year projects. They need two, three, four, five years of completion. So if you have started them, you see maybe a slowdown, but hardly any cancellations on that. So I would expect that there are very low risk profiles attached to our business and the revenue for the next one, two, three years is very much safe and secure. Inflation is an issue and we're dealing with that but most of our newer orders have precautions in the contracts that we're having price adaptation clauses for raw material going forward especially for production slots which are far out and of course some old projects and old contracts actually which don't have all these safeguards we are revenue out anyway shortly.

Thank you very much in that regard. So you're taking a very careful approach, I can see that. But if you are to single out one single factor, if this factor goes unexpected that it could negatively affect, what would that be? So when you acquire this, you must have reduce EPC and electric line business to implement a structural reform, but there must be remaining potential risks, so any hint as to what could go wrong that could negatively affect your business.

Actually, we are very careful how we are driving our business, especially because we are coming from a past where these risks have materialized, running EPC as well in a time where capacity was not fully utilized. From that point of view, yes, we are very carefully going forward with our investments. I see a risk that some projects could be delayed probably, but as already highlighted, There are other projects we could kick in. If that is not done timely, directly by a month, you could see maybe some smaller shifts in revenue. But overall, I don't expect any deviations from our growth plans. You see our growth performance over the couple of last years and quarters has been very strong. We see that it will continue. And if there are some movements of revenues from one quarter to another or one order intake is moving from one quarter to another or one fiscal year to another, it has only minimal, I would say, nearly no material impact on our balance sheet or on our performance.

Thank you very much. Next. About the earnings, so domestic IT service, I have a question regarding that. In Q1, surprisingly, the performance was very robust and strong. I do hope that similar momentum will continue, but when we look at other quarters, compared to Q1, increase in revenue as well as increase in EBITDA has gone down. So your forecast in the second half is that the trend we're seeing in Q2 is expected to continue. So from Q1 to Q2, it seems that momentum has dropped somewhat. Apparently, if you can explain as to why, please. Thank you for the question, answer. So as you rightly pointed out, in Q1 it was very strong. And we surprisingly took a look at the numbers. Numbers were surprising to us. There were several factors behind this. Number one, so projects were brought forward, for example, for storage. In other areas, projects have been accelerated, brought forward, and there was concentration of that. And this year in Japan, the bills and notes changed. And that work continued into Q1, but that work no longer exists in Q2 because it's complete. And so that accounts for a major difference between the two quarters. And Forex, compared to Q1 relatively, the yen is stronger in Q2. So combining these factors from Q1 to Q2, the growth rate has dropped because of these. If we look at the absolute amount of revenue in Q1 versus Q2, in Q2, 7% growth is achieved. And in the first half, 10% growth has been achieved. So growth has not stopped. And what you pointed out, so for your forecast, first half and second half, in the second half, well, in the first half, Q1 was very strong. That's these numbers. But currently, in Japan, we are receiving a large number of inquiries from our customers. And it's been difficult for us to allocate human resources for all the customer demands. So we will have to keep an eye on that as we come up with the forecast. And of course, there may be some changes in the future. But these are the numbers that we're looking at right now. And as I said earlier, over the medium to long term, Japan's IT demand is expected to be strong, so robust growth will continue. That's our take. Thank you.

Thank you very much.

Next, Tsutsumi-san, please. Please unmute and ask your question. Question. I have two questions. First question is for Mr. Shirenbeck. You talked about the energy cycle and it is likely to continue for 10, 20 years. It's a super cycle that you mentioned. This means that the Hitachi Energy's high performance will continue for 10 years, 20 years out. Second question, is that your take as well? Please elaborate further. And second question is regarding Kato-san. US and Japan, situation is such that in the United States we don't know who is going to be the president. We don't know what the political situation is going to happen in Japan. So on the part of Hitachi, are you working on different scenarios in terms of impact as well as risks? What kind of discourse are you having within the company? Those are my two questions.

I think you are right. We are looking at a very special moment in times of the utility industry, the super cycle which will continue as you mentioned and as we explained for 10 to 20 years. It's just underpinned by demand growth, by data center which are growing exponentially in a way which was nobody really foreseen. And I think we are really believing that this trend will hold on for this mentioned period because if you look at the planning cycle, 10 years, 15 years, 20 years, doing a grid planning for projects which after they are really starting, running for seven, eight years, we're really underpinning that the cycle will continue to deliver. So if you're looking at the industry, if you're doing today a grid planning for 10, 15 years, you're looking at the demand, you look what you need to build, and you get approval from the regulator, then of course you're getting the capex as well, which are attached to that project. So you have a very good foresight what is happening on the market. And then, of course, if you look at the project execution cycle, you need four to five years for planning and for permitting, and then three to four years of construction, sometimes in parallel. That gives us enough confidence that we believe that it will drive our industry. And you are right, if the SUCA cycle holds and we're assuming that, you will see a strong performance of Hitachi Energy going forward for that period of time. Thank you for the question.

I would like to address the second question from Kato. First of all, domestically, in Japan, as I mentioned earlier, in terms of IT, there is strong demand. Demand remains strong. And we are also receiving orders from the public sector, but I don't think our policy is going to have a significant impact. There is a prevailing need that is very steadfast. Domestically, in terms of energy, infrastructure business is being promoted. Depending on the administration's policy impact could be manifest. We are private company. And toward economic growth, we would like to see a stable political situation in the mid to long term. We hope that the policy will be decided in a steadfast manner and implemented accordingly. In terms of social infrastructure, the impact is what we are going to be watching very carefully. Regarding the United States, on the other hand, here again, We are involved in infrastructure business, especially Hitachi Energy, as well as railway systems business. This social infrastructure investment is actively pursued by the current administration in the United States. So depending on the next administration, there could be an impact. But on the other hand, in terms of the power grid, there is becoming old. Therefore, there is a need to replace And even if there is change in government, the need remains unchanged according to our expectation. We don't know what is going to happen, so at any rate, we will be watching the situation very carefully going forward. Thank you very much. Thank you. Very clear.

Thank you very much. Next. Can you hear me? Yes, we can. Thank you. I have two questions directing my questions to Kaito-san. What was asked earlier, demand for data centers. So in your data center related business, there are lots of different businesses. Which business is particularly growing in relation to data centers? And domestic growth, I think, is leading your data center business. But in both Japan and overseas, what is the forecast for this business and your forecast for demand in this area? And my second question, well, 300 billion yen of investment in generative AI, you announced. What is the progress of that investment? If you can share anything, I'd appreciate it. Thank you for the questions. Answer? Your first question related to data centers. In Hitachi's case, a large business is Hitachi Energy's business. We're receiving orders for transformers and other equipment and storage, which is also used within the data center. DSS SAP Hitachi Vantara is responsible for that business. Other than that, This is in the CEI sector, air conditioner systems and industrial products, UPS, and entrance and leaving system for buildings. So these are areas with very large potential, I think. At this moment, There's a lot more business overseas than in Japan. And as I shared as part of the topics today, already we're starting to see collaboration with data center operators in Japan and Singtel. In the Asia Pacific region, we are to expand our strategic alliance with Singtel. So these are the initiatives that we are undertaking. So we're expecting Japan's demand to grow as well. So that was my answer for the first question. Your second question, our investment for growth this fiscal year, 300 billion in generative AI that you mentioned. Regarding that, there are three things that we are pursuing. One is infrastructure development. For example, as we announced in Q1, Hitachi IQ, which uses NVIDIA's GPU combined with Hitachi's platform, Infrastructure solution for AI. So such infrastructure development and hybrid cloud development, that's number one. Secondly, to strengthen service engineering, for example, depending on customer needs, generative AI lifecycle service can be provided. For example, selection and building of LLM and performance analysis of LLM optimization. these services can be provided and within the investment we would like to strengthen such services and generative AI personnel reinforcement so both including internal and external resources there's a need for us to strengthen human resources in generative AI and what's been going on since last fiscal year is R&D And inclusive of a potential M&A, we would like to continue to consider and examine this. That would be all. Thank you. Thank you.

Thank you.

Hirakawa-san, please. Please unmute and ask your question. Question. I have two questions for Mr. Schierenbeck. First question is deviating from today's presentation. According to your experience at Siemens and at the T&D business, I understand you've been involved in that business at Siemens. Now you've come to Hitachi Energy, six months have passed. What is the strength of Hitachi Energy and the challenge? And compared to your experience in the past, what is your evaluation? for a grid and the technologies. Shall I do the second question too? Let's do one by one.

Thank you very much for the question. Yes, that's right. I spent the beginning of my year in the T&D business in Siemens. Actually, a few trends which were set at this time are now coming to fruit if you look at protection protocols ESA 81650 which are now in full swing. It really shows that our industry is sometimes very conservative and it takes very long for innovations to coming through. I think it was the same for renewables. We were talking about renewables for a long time and now actually we see that they are the cheapest and the best way to add energy capacity. I think if you ask me my opinion about Hitachi Energy, I think let me add two things. First of all, it's a great company with great motivated colleagues and with a lot of possibilities to collaborate inside of Hitachi, especially with the digital side, which enables very new perspectives from my side. On the other hand, we have to manage the growth and that's one of the challenges. It's a positive challenge. because we have managed over the last decades, everybody in the industry, how to deal with capacity decrease, how to manage to actually sometimes to survive. Now we have growth, something which we have to learn again, how to add in capacity, how to run these processes. And I see great potential in that. You see with our CapEx expansion that we are able to put CapEx into the ground, that we are able to manage the growth, which is resulting in our backlog margin and our revenue. So that makes me very optimistic for the future that we can really drive that business inside of Hitachi with collaboration with the Digital Decide to complete new things. Thank you very much for your question.

Thank you very much for that response. I have my second question for Mr. Schierenbeck. It's regarding the management of growth that you mentioned. In terms of CapEx, 6 billion is conducted so that the capacity can be increased, according to your explanation. For the existing big three, StatG, Siemens and GE, In your case, framework agreement and capacity reservation is being utilized. You're taking a very conservative approach, very cautious looking at demand, so we can be rest assured about that. But what about other players in the grid demand increase? They're making investment. They're also trying to gain share in the market. We are seeing this in the market today. So against this backdrop, beyond the top three, Do you think that they're going to make too many products and oversupply and destroy the market? What is your take on that possibility? Perhaps it's all right for you because there is no overlap in terms of products. That could be your response too. But if that is not the case, how are you going to exclude and overcome this risk going forward?

Of course, I can make no comments about what competition is doing. They have to reach the market and take their own decisions. We are investing significant amounts into CapEx expansions and we are doing it in a very conservative way as you have done, only where it makes sense because we have capacity reservations and framework agreements and the good business case going forward we are investing. Yes, it is very conservative as I explained already because it is actually only adding capacity which is already dedicated so there is nearly no free float for new customers. So from that point of view, I think we have to discuss how is our risk profile. If this trend continues very long, as we've seen it, if we see more proof points, I think we can reconsider that. On the other hand, building up new capacity is not easy, especially in the area of power transformers, where there's the biggest demand and waiting times of three to four years if you have no reservation. Of course, it would be quite natural to think, okay, let's build a new factory. Even if you have some money, it is not that easy because first of all, you have to get winding machines which are very special equipment and these producers of winding machines are booked for years ahead now as well. Secondly, it's a lot of manual work providing the resources and the experience to create a power transformer. You need people, FDM colleagues who have trained for that. It takes up to two years to qualify a winder to do that work. So having really capacity addition and that is not an easy task. So I don't expect too many new entrants in the next couple of years. But of course, if we are not able to fulfill the demand as an industry with existing capacities and the measurements we are doing, of course, there is a risk that new entrants will suddenly over the time come. But at the moment, I don't see it's too strong because at the moment we are doing, I think, the right thing. Thank you for your question.

Thank you very much. Thank you very much. Next. The next person, please unmute and start your questions. I have two questions. Question number one. about the power grid company and the other is about ASTEMO. I have these questions for the CFO. First about the power grid. Looking at the new plan that you have in the second half, revenue in dollar terms is to have a 12% growth, but profitability compared to the first half will go down in the second half. That means that the plan that you have is not very ambitious. Why is this the case? If you could please explain. So you're having a conservative plan at the head office. Did Kato-san decide on this plan? Or it's a conservative plan and Hitachi Energy's Mr. Schierenbeck is not very positive about this business? Are you just saying that this is the reality? You have limitation on production capacity so you cannot drive revenue because of the constraint. What are the reasons? What are the factors behind this?

Let me start. First of all, actually the opposite. I'm very positive and very bullish about the business but please understand I'm only three months in the business and of course understanding the behaviors takes a little bit longer from that point of view. So I wouldn't exclude that we are conservative. Of course, we are careful, I would say it. Maybe there's a chance to deliver better results, but we have to look into it. At the moment, that's the guidance we have put to the market. Of course, there's always a possibility that revenue is shifting because customers are not accepting projects and so on. These things are not like in a product business where you make a transaction and creating then revenue and profitability to go into. So it's a mixed issue. But don't take me wrong. I'm very bullish and I'm very positive about the business and actually you have to look at the long-term performance and not at the quarterly results which we are driving to really evaluate our performance and how the business is progressing. Thank you for your question.

Well, thank you very much for the question. I would like to supplement the comments made from Kato. Well, Andreas-san has expressed his view From my perspective, I'm a little bit more ambitious or greedier, should I say. In the Q1, we made an upward revision and we're making another upward revision. So reviews are being conducted. But perhaps in the second half, we believe we can do more. And of course, it's not reflected in the revenue. And as we talked about this in July, we are applying a stretch on the operating income That is what we're doing, at least for the operating income. Not that I have agreed with Shirenbeck, but that is something that I took liberty to do myself. So did that answer your first question? Yes, thank you. Secondly, about ASTEMO, and I think this has to do with the recall by Honda. If there's a breakdown of numbers, I would like to know. it's deconsolidated so what is uh the decline in revenue because of that and i think this is under equity uh law but uh why is this elimination like this how much of that is uh as demos looking at the second half plan uh it's going to be a one-off exercise if you will So ASTEMO's impact will no longer be visible in the second half, am I correct? Because it's going to be a one-off. Thank you for the question. What I talked about earlier, so equity loss in ASTEMO in Q2, well that's because of the warranty allowance for products sold by ASEMO posted, and that's under the equity law. It's an equity affiliate, so that is the extent to which that I can answer your question, but how much deterioration has ASEMO seen? Well, let me explain that. Earnings presentation pays 21. Please have a look at page 21. Q2, full year profit and loss is stated here. So Q2, 24, equity profit and loss. 26 billion yen deterioration is noted here. The large bulk of the deterioration is associated with ASTEMO. And what is the four-year forecast for that? We had the last forecast, 17 billion yen, the last time. Large bulk of that is because of ASTEMO. So that is the size of the impact, if you could please understand. That would be all. Thank you.

Thank you very much.

Next, Umekaki-san, please. Please unmute and ask your question. I also have two questions. As already mentioned today, And the midterm management plan progress meeting was held in April and 1 trillion yen in terms of investment mentioned by Kojima-san. I would like you to elaborate. I understand the general VUI, but for GXDX, I think there was several tens of millions that was included as well as M&A. Please elaborate further on the progress made in the 1 trillion earmarked. Now, for 2027 midterm management plan, I understand that this is being considered and numbers cannot be shared at this point in time. But can you talk about this and provide us an update in terms of qualitative manner? Thank you for your question and answer. This is Kato. I'd like to respond. Regarding April, the announcement was made and at the investor day in June, further explanation was provided. There are three areas that we are considering. One is the generative AI. About 300 billion is being contemplated. Manufacturing areas where growth can be expected is a second area. And service business. For DX and GX, for the growth areas, for example, battery and Related to inclusive M&A, we will consider possibilities. R&D, in a wider sense, will be contemplated. Investments are considered in that way. In terms of scale, it's about 200 billion is being contemplated today. And social infrastructure, service acceleration, the service business, as already explained today, GEM sector, as well as CI sector, mainly in these sectors, customer base and store base are increasing expanding so utilizing this installed base we want to provide more services not just the conventional services but DSS, ID, PAL will be utilized and digital services are to be provided inclusive of them in day we will consider possibilities and the scale is around 200 billion that is being contemplated in this area total is as well as $700 billion inclusive of Gen AI. In terms of $1 trillion, we mentioned that M&A, if there is a good deal regarding $700 billion, this is a specific consideration being made for the $700 billion apart from M&A. So I hope I've answered the first question. Question. So 700 billion will be utilized within this fiscal year? Is that the correct understanding? Answer. That is the plan for us. But when we consider M&A as well as other investment, we need the other party. So sometimes the timing could be delayed. But we think that the opportunity for growth is significant. Therefore, the current mid-term management plan is until March of next year. There might be some timeline, but we will continue this when we also enter the next mid-term management plan period. So your second question. And so, regarding the next mid-term management plan, we are considering this at various levels. I can only say that it is under consideration today, and so please wait for the announcement to be made next year. Thank you. Next.

Next person, please unmute and state your questions. Can you hear me? Yes, we can. Thank you. Already, one of the questions I wanted to ask was answers, so only one question. So, what is the impact of BOJ's policy and interest rate changes? What is the impact and what kind of measures are you taking at the moment? Thank you for the question. Regarding Japan, Well, there was one interest rate hike and more is expected in the future. For what has happened this year, we are factoring that in to some extent. But for the rate to go up to 1%, it will not all of a sudden rise to 1%. It will rise very gradually over the medium to long term. So in that regard, I don't think there will be a large impact on our business. And to touch upon overseas, conversely, rate cuts are being considered and factored in. But there could be impact from delays in rate cuts. So we do think that there's a possibility that there are going to be delays and they're being factored in. So for the yen as well as dollar, euro overseas, the impact from these changes on our performance this year is going to be limited. That's our view. Did that answer your question? Regarding Forex, about the yen, if you have any view, please share it with us. The assumptions for the forex rates are as presented in the material, ¥140 to the dollar, that's our assumption. There's a gap with the actual rate, but at this moment there's a lot of volatility. It could change more than ¥1 a day, so it's very difficult to forecast at this moment, but we have the assumption as I shared with you. So more so than our assumed rate, I don't think the yen will strengthen any further above and beyond that. So for this fiscal year, I don't think there's going to be a negative impact from that. So we do hope that the rate will move in a stable fashion going forward. That would be all. Thank you. Thank you very much.

And now I'd like to go to the English channel. Those of you with questions, please indicate with the raise hand button on the English channel, please. Any questions on the English channel, please indicate if you wish to ask a question by using the raise hand button on the English channel. There seem not. And we still have some time, so we'll come back to the Japanese channel. There is one more person with hand up. Actually, there are four hands up. And that will be the completion. So we might not be able to take questions in the second round for some of the people. But, Fukuhara-san, over to you. Please unmute and ask your question. Question. Thank you very much for this opportunity today. I have one question regarding second quarter forecast. What is the internal evaluation? And for the first half and second half, a plan is not presented to the outside, but there is a revision for the fiscal year. I have no questions, but I think further elaboration is warranted. In order to understand this, I would like to know the second quarter forecast orders as well as revenues as well as profit. What is the upside downside? What is the internal evaluation you have made for the second quarter? Kato will respond. Answer. Regarding the second quarter revenues, increased by 1 in 10 billion. Adjusted EBITDA, reduction by 10 billion, decline by 10 billion. For the three sectors, revenues are the same, 1 in 10 billion increase. Adjusted EBITDA is increased by 14 billion, 1 in 4 billion. The PEG increase for GEM, adjusted EBITDA overall has declined. This is because of the equity and losses of status demo deterioration was experienced. Excluding this, there was an increase. In terms of revenues, 110 billion. Forex accounted for 90%. Forex impact accounted for 90%. Beyond that, there was organic increase. Question. What about orders received? In terms of orders, I don't have the digital numbers, but basically compared to what we had the forecast, it was upside. So the direction is similar to trends in revenues. Question, what about the second half in terms of revenues is second quarter times two. That's the plan number for the third quarter in the next quarter. Depending on how well you do, there could be further upside. Can we understand that to be the case? Answer. As I mentioned earlier, in terms of operating profit, the company level, we have additional improvements to be made, but we have not done that for revenues. There could be upside for revenues in that regard. Thank you very much. Second question. regarding global logics. For the second quarter, in the first half, the profitability is about 20% of profit margin. For the second half, 20% is the plan. But the personal expenses could increase and the revenues is going to decline in the second half. So for this segment, What is the profit margin for the second half? What are your assumptions? Thank you for your question. In the second quarter, compared to the first quarter, profit margin has improved, profitability has improved. Tech as well as telecommunications orders have been received. And we have done a better job in terms of cost control. But as you have rightly mentioned, manpower cost is also a pressure for us. And this could occur in the third quarter and onward. And that is the basis of our forecast. And this is the most likely forecast for the time being. Thank you very much. That's all from me. Thank you very much. To continue.

The next person. Well, thank you. I have two questions. Question number one, Hitachi Energy's Q2 actual results. Well, our revenue is down even due to Forex perhaps, but there's lots of orders received yet it's down. And so with asset management increasing, why profitability is weak in Q2? So if you could please elaborate on the actual numbers for Q2 for Hitachi Energy, please.

I can maybe answer one. The order received, there was one bigger project shifted from one quarter to another, so we will see that in the future. In regards of revenue, I would refer to Kato-san.

Regarding revenue? Q1. was very strong, and it depends on projects. Depending on the progress in projects, Q1 was very strong. Based on the yen, of course, it's affected by Forex, excluding Forex. Lots of projects were concentrated in Q1, but over the medium to long term, it will continue to grow stably, as we explained. Question, what about profitability? Profitability is down, too. Well, answer, profitability also differs from one project to another. So in that regard, in Q1, projects with high margins were concentrated. Question, so backlog margin is improving, is that correct? Because looking at the numbers, I thought there would be a gap between what you said and the numbers. Yes, backlog margin is improving. But if we look from one quarter to another, it all depends on the projects. So if you could take a longer term view, one year or two years, I think you will be able to see the actual numbers improving from a longer perspective. So if you could take a look at the numbers from a different timeline perspective, you will see that. Thank you. I have the second question for Mr. Schierenbeck. You were saying that you're going to grow the service business. The margin for the service business, what is the level? Is it 15%, 20%, 30%? You may not be able to share the details, but how much contribution can it make for improving margin for Hitachi Energy overall? What about the geographic regions? Which area do you expect to see growth? Well, GE is also saying something similar. They want to grow their service business. But what is different for your service business compared to GE, for example? If there is any point of difference or differentiation, please elaborate on that as well.

Thank you for the question. I think we are in the middle of setting up our service organization to going forward and really starting it April next year for the next fiscal year. We are in the middle of the budget period of doing that. What we are doing in service, of course I will make no comment what we are doing different than our competition because I don't have the insights and I would comment on that. We are focusing on our installed base and just to make sure that with this growth and products and projects we are having with new installations, we are not losing the focus on service. If you look at the service businesses, service sales, service management, normally it's a different behavior of people, of processes. It's very easy to lose focus on service if you're selling big projects with big numbers and neglecting actually the service potential. We want to avoid that and that's why we are starting now to focus on that going forward that we have this period of growth in order intake and then revenue going forward, not losing our service focus. Of course, we stated that our service margins have to be accretive. That means they have to be higher than the average of that. Of course, I would make no comment at the moment at the magnitude of that, but you can expect it would be higher than the overall result that we're having now for the whole business. Thank you very much.

Thank you very much.

Thank you.

We have gone beyond the allocated time, the scheduled time, but would like to continue. Takahashi-san, over to you. Please unmute and ask your question. Question. I have two short questions. First question is regarding energy. I understand that the seventh strategic energy plan has been formulated for the government. What is your view on that? And second point is regarding foreign exchange. Compared to the first quarter, there seems to be a change in sensitivity to foreign exchange. Please elaborate. Answer. I would like to respond to your questions. Regarding the previous question what is going to be the impact of changing government was posed and basically the response is the same in Japan regarding energy is the business that we are pursuing from that point of view the strategic energy plan is going to be formulated and The direction that has been considered in the past should be remaining intact in a stable manner. This would be very much appreciated as a private company, as a company in the private sector. Next, regarding the sensitivity of the foreign exchange in the second quarter and third quarter and onward, it is only outlook. This is not actual. And in the first quarter, I've talked about the coming nine months. And now I'm talking about the next six months. So that is how the numbers may differ. And basically, the number will become smaller in terms of sensitivity.

Did that answer your question? So was the answer sufficient?

It's past the time, but we would like to take two more questions. We would like to switch over to the English channel to take questions from one person, Harada-san.

Hello, thank you very much. Thank you very much for taking my question again. And I have two questions to Andrea-san on Hitachi Energy and liquid business, short-term and long-term. Firstly, short-term, of course, the Hitachi Energy's margin has improved from the previous quarter, previous year. But if you could improve the margin and sales growth rate even more in the near term, what you can increase, improve from here, like maybe short-term, the number of short-term products increases or maybe pricing environments, et cetera, because I do believe that your, I think, the fiscal year's guidance is, I think it's conservative as well. So it's not necessarily maybe this year, but even like a one or two years' timeframe, if you can change from the previous leadership, what you will change for the short-term?

Thank you for the question. I think what you're seeing in profitability, especially short-term, is still an effect on the backlog because we still have in the backlog projects which we're taking in with more risk or with different terms of conditions because some of the projects are having a multi-year durability. So from that point of view, you see that the order backlog margin going forward is improving, but you don't see it immediately in the revenue. So actually a big effect of that is If you revenue the old projects out and deliveries and of course you see naturally a better behavior creeping in. Of course you will see a little bit of volatility in that depending which projects is creating revenue, getting customer acceptance and so on. But the impact of the older projects will become tendency of course smaller going forward and the newer projects will be taken over the majority. Of course, it's very hard to predict actually the seasonality in that business because it depends on a lot of other things. If you're doing HPDC links which are on offshore, whether it can impact that as we're moving from one quarter to another. So it's not a short-term business which is only transaction-based. It depends as well on customer readiness to accept things on qualification of products. So there will always be some shift in that. Of course, I will make no comments about prior leadership. I think going forward you will hear from me more what we are planning, what we are doing. Definitely we have to find the balance to how we are forecasting because if we are too bullish normally the same question is coming why we have forecasted more and not delivering on our promise. So from that point of view I expect that we are probably getting improvement in our accuracy of forecasting but I still believe that over delivering and under promising is probably better than the other way around. if it is an acceptable benefit, I would say. But we will have the discussion with Kato-san on how we are improving going forward and find a mutual agreement. Thank you for the question.

Great. Thank you very much for your comment. So the second question is a long-term perspective. So clearly Hitachi Energy's core kind of strategy is that how to digitalize the infrastructure and then how to improve the margin. That's kind of... the strategy. And, yeah, of course, like, I think based on your background, I think you have a strong background like TechSendClub or Siemens. And then I think you should have a good kind of best practice to improve the, like, recurring type of the revenue. So, what will you be able to bring Hitachi the, like, yeah, your kind of experience-based, I mean, best practice or, like, how to improve the imagine how to digitalize those products.

Thank you for the question. Of course, it's a complex one and not everything I've done in my life can be transferred immediately. And it's even harder to measure it on the impact on the margin, especially in the long-term business. But if you look at my track record, I definitely look very much into digitalization, rolling out cloud solutions and IoT and the service business, where I believe service business nowadays can benefit massively from IoT, from asset monitoring, improvement of these processes. And to deliver customer value on that is definitely something where I have some experience. Of course, we have to say that some of our customers are very, very, very conservative. especially in respect of data sharing and seeing the benefit of that. Our customer groups like data centers have probably different entry barriers and hurdles, so we'll see a kind of mixed picture going forward. So it will take some time to transform this industry into seeing the benefits of digitalization, but I'm an optimist on that. We will see the effects, and actually the margin improvements will contribute to our business in the long term. Thank you very much.

Yeah, great. Thank you very much. Yeah, that's it from my end.

Thank you very much. Thank you very much.

We will now take the last question. Please unmute and ask your question. Question. In the interest of time, I have two questions. First question is regarding the results. Regarding JEM power grid, second quarter margin has declined. Kato-san talked about the difference in projects. But there are different categories here. For example, the HVDC as well as grade integration. I think there are four areas mainly. Depending on the different types, is it having an... For example, I don't think there is much difference in terms of the converters and transformers, but Is it having a different impact for the different categories? Is there going to be volatility in the second half as well, depending on the type of products within this area? Depending on the category, the profit margin, I assume, is different. So please talk about the difference and how it impacts the performance.

For the question, of course there is some impact. I think we don't share concrete results from the different businesses in Hitachi Energy, but of course there is intercompany business as well, transformers delivered from transformers to HVDC in grid integration, that then delivered to the customer. So when you are considering revenue on which margins, of course there is some volatility. because of the consolidation from that point of view it's a complex view. Of course we have different margins and different businesses so it depends on the mix. Software businesses are naturally sometimes a little bit higher than pure product businesses then you have all these kind of impacts. So from that point of view I think if you look at the past and looking into the future there will be some volatility from that The tests, of course, stay in certain bandwidth because it's de-risked. But, of course, it will be not just a fine, clear line going straight and without any bumps in the road. Of course, we're trying to get better with forecasting these results, especially with the waiver installation, because now we have actually the project controlling on our fingertips. It shows exactly what is going on. Normally that would take three years, not years, days or weeks to prepare and you only look at certain projects. Now we have much better overview on that. So I think we will be able to get the volatility on the bandwidth a little bit down, but don't expect the volatility is going away completely due to these facts. Thank you for your question.

Thank you very much. Regarding second question, regarding DSS, service and platform. The second quarter profitability has declined. You said that there was some shift in terms of Vantara. Regarding service and platform for the second half, compared to the first half, it seems that the profit is likely to jump up year-on-year basis. Comparing the second half, profitability is likely to increase according to your forecast. In terms of storage, I understand the orders are received and the probability is high. Is that the case? From the first half to the second half, if it continues in the next fiscal year, can we see a significant increase in the next fiscal year as well? How much visibility do you have? Please elaborate further. Thank you for your question and answer. Kato will respond. Regarding storage, in the second quarter, There was some front loading to the first quarter and competition is becoming more intensified. Sometimes we're not able to sell according to the plan. Therefore, sales are not posted according to plan. In some cases, regarding profitability, we underperformed the plan. This is because of memory cost has increased. And we were not able to reflect that in the price driving down the margin. We are taking countermeasures for memories. The application of the different memories is being considered so that we can recover the reduced margins. Mid-range new products has been announced in the first quarter. And gradually, we are receiving orders for these products. It should contribute to revenues in a full-fledged manner from the third quarter. For the time being, regarding the recovery in the second half, we believe it is possible. But we have to recover in a short period of time, so it could be subject to volatility. But basically, we are keen to achieve this. From last year to this year, there have been improvements made And whether momentum is going to be sustained for next fiscal year is uncertain. So for this fiscal year, as I mentioned earlier, we want to recover in the second half. And that is reflected in the numbers presented here today. Thank you. Understood. Thank you very much. Thank you very much.

It's past the time to close. Thank you very much for being with us for many hours. With that, we would like to conclude Hitachi Limited's web conference for Q2 2024 earnings. Thank you very much for being with us for many hours.