Hitachi Ltd Ord

The scheduled time has come, so we will now begin Hitachi Limited web conference on Q2 FY 2025 earnings. Thank you very much for taking time out of your busy schedule to attend today's briefing. The presentation materials are available on Hitachi Limited IR website and news release website, so please take a look. Let me introduce the three speakers. Tomomi Kato, Senior Vice President and Executive Officer, CFO. Hiroaki Ohno, Deputy General Manager, Finance Division. Shinichiro Tamai, Executive General Manager, Investor Relations Division. Mr. Kato will first explain the overview of the financial results. Please wait for a moment while we switch screens.

Mr. Kato, please. First, I would like to explain the contents. I will cover the key messages followed by the results for the second quarter of Fiscal Year 2025, the outlook for Fiscal Year 2025, business segment, performance and the Lumada business in that order. First, the key points of this earnings announcement, I will begin by explaining the performance highlights. Regarding fiscal year 2025 Q2 results, in addition to consistently strong performance of the energy power grid business, the domestic IT business also grew steadily due to expanding DX demand. This led to increased revenue and profit for Hitachi's consolidated total adjusted EBITDA and quarterly profit achieved record highs. Furthermore, core free cash flows increased significantly due to increased profits. Now I will explain the five KPIs. First, excluding foreign exchange effects, revenues increased 8% year-on-year and adjusted EBITDA increased by approximately 90 billion yen year-on-year. The adjusted EBITDA margin also improved. Quarterly net profit attributable to Hitachi shareholders increased year-on-year, driven by the improvement of adjusted EBITDA and the completion of the capital reorganization of the H-Bank joint venture. Furthermore, core free cash flows increased year-on-year, even excluding the temporary impact related to the completion of capital reorganization. Consolidated revenue, adjusted EBITDA, and core free cash flow exceeded our internal targets. Next, the outlook for fiscal year 2025. We revised upward our forecast for revenues, profit, cash flow, and ROIC across the entire Hitachi Group. The revision reflects a stronger performance in the energy segment driven by the power grid business, mobility, and Connected industries even factoring in increasing strategic investments and the impact of U.S. tariffs growth in energy DSS mobility is expected to drive year-on-year increases in both revenues and profits. Next segment highlights DSS recorded increased revenue and profits in Q2. Domestic IT business grew steadily, while overseas business saw a decline in storage sales due to customer investment restraint. However, profitability improved due to cost reduction efforts. For the full-year outlook, while revenues were revised downward, the initial profit forecast is maintained due to overall cost reductions. Energy The power grid business continues to see a strong demand for transmission upgrades and renewable energy connections. Q2 recorded increased revenues and profit, leading to an upward revision of the full-year outlook. Mobility The Lumada business, including railway signalling systems, performed well. Despite acquisition-related expenses, profits were maintained at the previous year's level. Partly due to the effect of exchange rate revisions, the full-year outlook has been revised upward. In CI, although new installation demand for elevators and escalators in China decreased, profitability improved due to strong performance in semiconductor manufacturing equipment. We have revised our full-air forecast upward. Finally, regarding the corporate items and delimitations, we have reassessed the business deterioration risk and the risk of impact from U.S. tariffs that were previously factored in. Specifically, business risks and tariffs impacts previously factored in and, conversely, revised forecasts upward. To reflect the expectations of the overall improvement, based on the above, we have revised upward four-year forecast for Hitachi Limited. Next, progress on DSS growth strategy. Overall, the orders received for DSS increased in Kyoto, and both revenues and profits grew, achieving new record highs. The front business saw robust domestic DX and modernization projects achieving growth across all areas and realizing record high Q2 revenues and profits. The reactionary decline seen in Q1 due to ATM renewals for new banknotes was resolved. Going forward, further growth is expected backed by increased orders. and by pursuing productivity improvements through the utilization of AI storage business or reduced revenue due to continued investment restrained by European and American customers. However, profitability is beginning to recover through rigorous project management and cost reduction. By focusing on high-growth block storage and accelerating structural reforms such as operational improvements, the business outlook of the fiscal year is declining revenues but increase in profit. As for global logic, profitability improved through increased capacity utilization. Despite a continued investment restraint, furthermore, synergies with other Hitachi sectors are expanding. For the full year, we will strengthen our high-value service business driven by AI, grow revenues and maintain profit margins close to the previous year's level. In addition to... These measures, we revised downward the full-year revenues forecast for DSS as a whole due to cost reductions across the entire organization, including headquarters. However, we were able to maintain the initial forecast for adjusted EBITDA progress in DSS global logics growth strategy. Key initiatives focus on strengthening its technical capabilities in providing AI services, supporting AI implementation for customers and internal sectors, and contributing to the expansion of the Lumanda business. As one measure to enhance AI technologies, we decided in September to acquire Simvert, a German AI services company. excels primarily in data advisory and the design and construction of data platforms. Integration with GlobalLogic will enhance our capabilities across the data value chain. Going forward, we will strengthen our solution development for authentic AI and physical AI, contributing to the initiatives such as HMAX rollout. Additionally, GlobalLogic supports the expansion of Lomada business in other sectors by leveraging AI, combining Lomada revenues across each sector, From the synergy-creating activities with Globalogic, we achieved 17% year-on-year growth in Q2. We are currently advancing initiatives in energy, mobility, and CI. Going forward, we will further expand and expand measures as one hitachi to achieve our Lumada 8020 long-term goal. Progress on initiatives to enhance enterprise value will be explained. First, to expand Lumada digital services and accelerate physical AI implementation, we executed growth investments in mobility, DSS, and energy. We strengthened key capabilities related to digital and services, which are... M&A focus areas. Regarding portfolio restructuring, we completed the capital reorganization of HVAC joint venture in August. While transferring our stake in the joint venture, we acquired a commercial air conditioning base to expand the Lumada business. Regarding capital allocation, we are proceeding as planned with this fiscal year's total share returns of 500 billion yen. The interim dividend for this period will be increased by 10% compared to the previous year's interim dividend. Next, I will explain the results for the second quarter for fiscal year 2025. The actual figures were already explained at the beginning of this presentation. I will explain the breakdown of year-on-year changes in revenue-adjusted EBITDA and core free cash flows. Revenues increased driven by growth in energy and DSS even excluding foreign exchange impacts. Adjusted EBITDA followed a similar trend to revenues. Adjusted EBITDA margin also improved year-on-year due to increased revenues, productivity gains and improved project management. Core free cash flows increased year-on-year driven by the factors such as growth in adjusted EBITDA. Next, our financial position. total assets at the end of q2 fiscal year 2025 was expressed approximately 13.9 trillion yen an increase of approximately 600 billion yen from the end of the previous fiscal year driven by increased revenues and profits cash conversion cycle reduced compared to the end of the previous year due to an increase in advanced payments next regional revenues in q2 of fiscal year 2025 Driven by the Energy Power Grid Business and Mobilities Railway Signaling System, Europe grew 17% and North America grew 10%. In Europe, large-scale power grid projects progressed, leading to significant air-on-air growth. Other regions recorded growth primarily in the Middle East power grid business. Meanwhile, in China, new demand for CI building systems continues to decline.

Next, I will explain the order results by business segment in Q2. In DSS, services and platforms decreased overseas. But orders in Japan, such as front business, expanded steadily, resulting in an overall increase of 6% in both Q2 and the first half of the year. In energy, orders decreased year-on-year in Q1 due to large order received in FY 2024, but increased in Q2 and approached last year's levels in the first half. In mobility, orders declined, reflecting the absence of last year's large overseas project, but the order backlog has increased steadily since the end of last year. In CI, orders grew steadily in both Q2 and the first half. Industrial digital, in particular, performed well in Q2 thanks to the acquisition of a robotics SIER. Next is the highlights of FY 2025 outlooks. The main contents were explained in the topics slide at the beginning. Revenue, income, cash flow and ROIC are all revised upward from the previous forecast. Regarding the assumed FX rate, the euro is revised to 170 yen from the previous 155 yen and dollar yen remains unchanged at 145 yen. Next is the breakdown of year-on-year changes. Excluding the FX impact, revenue is expected to grow 7% year-on-year, driven by increases in energy and DSS. Similar trend for adjusted EBITDA, and it is expected to increase year-on-year despite the impact of strategic investments, FX, and US tariffs. Next, net income is expected to increase year-on-year thanks to an increase in operating income despite fluctuations in factors such as the impact of the sale of air conditioning joint venture and non-operating income and expenses. Excluding the impact of large advance received in FY 2024, core free cash flow is expected to increase year-on-year thanks to higher adjusted EBITDA and improved networking capital while capex for production increase will rise. Next is performance by business segment. Digital systems and services, DSS, revenue and profit increased, as I explained at the outset, thanks to solid growth in IT services business in Japan, as well as front business. DSS revised its full-year revenue forecast downwards, but our initial adjusted EBITDA forecast remains unchanged, thanks to the headquarter and other cost reductions. Next is energy. In Hitachi Energy, which operates the power grid business, revenue increased thanks to favorable lifecycle mix of large-scale projects in Q2 and solid execution of strong order backlog. Profits also increased, driven by revenue growth, improved revenue profile, and operational excellence. FY 2025 outlook was revised upward this time. Hitachi Energy's Q2 revenue increased 31% on a U.S. dollar basis. But excluding the one-off impact of FY 2024, the increase is around 21% in the first half. We expect the full-year growth at the same level as the first half. Nuclear energy's revenue is expected to decrease this fiscal year due to the absence of a large project recorded in FY 2024. In mobility, both revenue and profit increased year-on-year, driven by solid growth in the Lumada business, including the signaling system business. Reflecting the review of FX impact, we revised our full-year forecast upward. Next is Connective Industries, CI. For CI sector total, demand for elevator and escalator weakened in China in Q2, resulting in a decline in building systems revenue. While new installations in China declined, building services business increased, including renovations. Meanwhile, most businesses other than building systems performed strongly. In particular, revenue of measurement and analysis systems increased by 17% thanks to the front-loading of semiconductor manufacturing equipment from the first second half. Regarding the full-year outlook of CI sector, revenues will remain flat year-on-year excluding the FX impact, but we will grow Lumado business, maintaining operating income at FY 2024 level and improve profit margin. We revised the full year forecast upward. Finally, Lumada business revenues for Q2 of FY 2025 increased by 47% year-on-year and revenue ratio on Hitachi consolidated basis reached 41%. We revised the classification of Lumada business to two simple categories starting from FY25. As a result of examining the target businesses, we identified businesses that should have been included in the Lumada business, such as managed services and software business included in digital services and SI business using products and AI included in digitalized assets. Therefore, decided to include these in Lumada business from FY 2025. Even by adjusting to last year's standard, Lumada sales in Q2 grew by approximately 20% year-on-year. driving Hitachi's consolidated CAGR of 8%. Finally, let me introduce our initiatives to expand the Lumada business. First, to expand the AI ecosystem, we are strengthening our collaboration with partners including NVIDIA, Google Cloud, and OpenAI. Furthermore, regarding the status of solution development, we are taking a customer zero approach where we first treat our own company as customer number zero, utilize AI, and then provide it externally. We developed solutions using AI described here and released them externally. In addition, this week, We signed an MOU with the U.S. Department of Commerce regarding the power grid business and the SMR we are jointly developing with GE Vernova is included in the scope of strategic investment between Japan and the U.S. We expect that this will lead to further growth in the future. This concludes my explanation of the results for Q2 and the outlook for FY 2025. We will continue to implement management measures to achieve the long-term and medium-term goals of our management plan in SPIRE 2027. We appreciate your continued understanding and support.