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.