Hitachi Ltd Ord

The scheduled time has come, so we will now begin Hitachi Limited financial results briefing for Q3 FY 2025. Thank you very much for taking time out of your busy schedule to attend today. The presentation materials are available on Hitachi Limited IR website and news release website, so please take a look. Let me now introduce the three speakers. Tomomi Kato, Senior Vice President and Executive Officer, CFO. Hiroaki Ono, 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. Carter, the floor is yours. First, let me explain the content of the presentation material. It includes the key points of the earnings announcement this time, which is FI25 Q3 performance, the four-year forecast for FI2025, and performance by segment Lumana Business. First, on the key points of the earnings this time, starting from the highlights of Hitachi Group's performance. During Q3 FY2025, on top of continued robust performance of our energy business, mobility and DSS backed by solid domestic IT business grew firmly, resulting in both Hitachi's consolidated total revenue and profit to increase. Core free cash flow also rose year-on-year with all of our revenue adjusted EBITDA and core cash flow to post record highs. Allow me to explain about the five KPIs. First, revenue grew by 10% year-on-year. Adjusted EBITDA was up by 60 billion yen year-on-year and adjusted EBITDA margin increased as well. Quarterly net income attributable to Hitachi Inc. also increased year on year. Core cash flow on a consolidated basis, driven mainly by CI Connective Industries and Energy, increased by 80 billion yen year on year. Compared to our internal plan, on a consolidated basis, Revenue adjusted EBITDA and also CFC overachieved our internal plan. Next on the full year forecast for FI 2025. In addition to energy, whose power grid business is performing very well, we made upward revisions to our forecast for CI and mobility as well. For Hitachi Group overall, forecast for revenue, profit, cash flow, and ROIC were all revised upward. So for the six KPIs described here, we're projecting to see improvement growth in all of them compared to the previous fiscal year. Next, highlights by sector. DSS, suffering Q2 and Q3 as well, saw an increase in both revenue and profit driven by Japan's front and IT services businesses. Although storage business revenue declined due to harsh competitive landscape in overseas markets, its profit rose because of our cost reduction efforts. The forecast for the year is such that with upward revisions to the front and IT services businesses, despite a downward revision to services and platforms due to drop in revenue in the storage business, we are maintaining our forecast the same as before for DSS. In energy, our power grid business continues to be brisk with demand for renewing and replacing transmission facilities. In Q3, both revenue and profit increase in energy, prompting us to revise its four-year revenue and profit for gas upward. In mobility as well, mobility increases revenue and profit in Q3 with railway signaling systems and Lomada business performing steadily and also the positive effects we made an upward revision to the four-year forecast. In energy, or rather in CI and Q3, industrial equipment grew, but because of the high base effect from a large-scale project done last fiscal year in industrial digital, revenue was down near or near. Profit in CI overall rose, however, driven by our Lumada business, including buildings and semiconductor equipment on top of industrial equipment, so this time the four-year forecast was revised upward. Lastly, on corporate items and eliminations, the risk of impact from U.S. tariffs that were included here are now allocated to business segment numbers now. The profit-increasing opportunities that we have included before were all allocated to each segment's numbers as well. Given the circumstances described above, I have revised Hitachi's consolidated air forecasts upward. Allow me to discuss DSS growth strategy and the status of progress. First, as a basic strategy, we are driving Hitachi Group's overall digitization and roll out globally the solutions that we have brushed up, but through internal use, which we call customer zero. We will also further strengthen our AI technology assess their customers, boost their mission-critical capabilities to expand synergies in our effort to achieve Inspire 2027. Looking back on the main initiatives we have undertaken during FI25, for Japan's foreign and IT services businesses, DX and modernization progressed and grew steadily, more so than we initially planned. The front business Q3 orders were up by 10% year-on-year. In services and platforms, we reinforced high-value-added services business, leveraging AI. Globalogic is expanding synergies with other departments internally, developing HMAC solutions amongst other initiatives, and grew by 21% in Q3 year-on-year. In storage, on the other hand, business structure reform, including cost optimization, was implemented. Although its sales in overseas markets are declining, it's working to improve its profitability, resulting in a 2.4% point improvement in profit margin in Q3 compared to the year before. Next on our growth strategy going forward for the front business, front engineering functions for SIs will be consolidated into DSS and strengthened. As part of the measures to shore up the structure, DX unit for industry that's been under the CS sector will be moved over to DSS starting next fiscal year. For the services business, we are looking to strengthen our capabilities to offer AI services and expand the development and offering of HMAC solution. To reinforce the business structure, Globalogic and Hitachi Digital Solutions will be integrated. Customer Zero approach will also be advanced. For the storage business and IT products, Business structure reforms are ongoing for the time being. In addition to the improvements we can make on our own, we will promote partnering and other measures to fundamentally strengthen the business's market competitiveness. To give you a breakdown of DSS based on the growth strategy I have just discussed, it will look like the lower right-hand side table. The profit margin for the front-end services business combined will be 16% because domestic S-side business sales within the group will be netted on a consolidated basis for DSS. This number, however, is for reference. I would like to now discuss the main initiatives to enhance our corporate value. We were able to advance business portfolio reform during the quarter following Q2. Our stake in Hitachi Construction Machinery now stands on the order of 18%, and the company is now outside the scope of the equity method as a result of selling part of the holdings in November last year. In December last year, we agreed with Honda to transfer part of our stake in ASTEMO, a manufacturer of automotive components to them. We expect the transfer to be completed in next fiscal year, but this will decrease our stake to 19%, taking ASTEMO outside the scope of the equity method. Business portfolio reform will continue going forward. Regarding capital allocation, shareholder return for this fiscal year of about 500 billion yen was completed as planned in December. On top of that, in view of increases in cash due to additional asset sales we conducted during this fiscal year, we have made a decision to carry out an additional share buyback. The scope is 100 billion, including this. The total shareholder return this fiscal year will amount to 600 billion yen, up by 200 billion yen from last fiscal year. From this point onward, I will discuss the Q3 actual performance. The actuals are, as I have explained at the beginning, Next, to explain the breakdown of changes year-on-year for Q3. For revenue, even excluding the positive Forex impact, with increases in DSS from business and mobility, revenue was up by 7%. Adjusted EBITDA saw a similar trend as the revenue. Growth in sales, enhanced productivity, improvements in project management increased the adjusted EBITDA margin by 1.4 points year-on-year. core free cash flow, even excluding the effect of large advance payments received, increased because of larger adjusted EBITDA and reduction in working capital. Next on our financial position, total assets at the end of Q3 FY25 stood at roughly 14 trillion, 600 billion yen, up by 1.4 trillion yen compared to the end of last fiscal year. Because of sales expansion in energy and positive forex impact, we were able to bring down CCC or cash conversion cycle to a lower level than at the end of last fiscal year due to increased advances received. Next on the status of Q3 sales by region. With energy's power grid business and mobility's railway signaling system leading the performance, we saw growth in Europe, which was up 21%, North America up 12%, ASEAN and India and other areas up 17% year-on-year, respectively. Europe, in particular, grew substantially year-on-year, driven by large projects in power grid business.

Next is Q3 orders results by business segment. In DSS, overseas orders in the services and platforms decreased due to storage business, but orders in Japan remain solid in the front business, resulting in overall DSS growth for both Q3 and nine-month year-to-date basis. In energy, Q3 orders increased year-on-year thanks to strong orders in the power grids business and increase in data center-related projects. The order backlog is also increased compared to the end of FY24. Mobility orders declined, reflecting a high base effect from large-scale railway vehicle projects in FY24, but the order backlog increased compared to the end of FY24 due to FX impacts and others. CI segment as a whole showed solid growth in both Q3 and year-to-date. In particular, measurement and analysis system driven by healthcare and industrial digital driven by robotics SI business increased. next is the highlights of fy25 outlooks the main contents were explained in the topics slide at the beginning revenue income cash flow and roik are all revised upward from the previous forecast we also revised the assumed fx rate to 150 yen to the us dollar and 175 yen to euro next is the breakdown of year-on-year changes Excluding the FX impact, revenue is expected to grow by 7% year-on-year, driven by increases in energy, DSS, and other segments. Similar trend for adjusted EBITDA, which is expected to increase year-on-year despite the impact of U.S. tariffs and strategic investments. Net income is expected to increase year-on-year, primarily driven by higher operating income, despite variable factors related to asset rebalance, such as the sale of air conditioning joint venture, share transfer of Hitachi Construction Machinery and Astemo, and associated income taxes. Core free cash flow, excluding the impact of large advance payments, is expected to increase year-on-year. This is primarily due to the increase in adjusted EBITDA, despite higher capex for production increase. The upward revision to the full-year outlook is mainly due to the impact of increased advance received effect from large projects. Next is performance by business segment. I explained digital systems and services earlier. Regarding the full year outlook, services and platforms was revised downward due to revenue decline in the storage business, while front and IT services were revised upward. Therefore, the overall full year outlook for DSS remains unchanged. Next is energy. Hitachi Energy, our power grid business, saw a significant revenue growth in Q3 due to solid execution of strong order backlog and favorable lifecycle mix of large-scale projects. Profit also improved thanks to revenue growth, improved revenue profile, and operational excellence. We revised our full-year outlook upward this time and expect annual revenue growth of 26% on a U.S. dollar basis. Nuclear energy is expected to see a decline in annual revenue due to a high base effect from large scale project in FY24. In mobility, both revenue and profit increased year on year, driven by solid growth in Lumada business, including the railway signaling systems. Reflecting the review of the FX impact, we revised our full year forecast upward. Next is Connective Industries. In Q3, revenue declined in industrial AI and others, but overall CI profit increased due to improved profitability in urban systems and industrial products. Our full-year outlook of CI sector is that revenue will stay flat, but profit will increase year on year, driven by improved profitability in industrial AI and industrial products and services. This time, CI's full-year outlook was revised upward thanks to increased profits in urban systems and industrial AI. Finally, Lumada Business. Revenues for Q3 of FY25 increased by 51% 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 businesses included in digital services, and SI business using products and AI included in digitalized assets. Therefore, decided to include these in Lumada businesses from FY25. Even by adjusting to last year's standard, Lumada revenue in Q3 grew by approximately 20% year-on-year, driving Hitachi's consolidated CAGR of 10%. Furthermore, Next, let me touch on the deployment status of HMAX as part of our initiatives to expand our Lumada business. We define HMAX as digital services we deliver to customers, leveraging data collected from Lumada digitalized assets and AI enhanced by domain knowledge accumulated by Hitachi. Regarding specific solution development, we have expanded the HMAX solution for mobility first announced two years ago into energy and CI domains. In energy, we provided an AI-powered power grid monitoring solutions for an Italian energy operator, contributing to a significant reduction in on-site inspection time. In CI, we provided a factory equipment failure diagnosis AI agent to Daikin in Japan, contributing to shorter fault diagnosis time. As part of our initiatives to expand our Lumada business, I will share the progress on partner collaboration in Q3 and the development status of new HMAC solutions. This morning, we announced with Microsoft that Hitachi Energy will reinvent its enterprise asset management solution with Microsoft's AI-enabled technology. This builds on the strategic partnership announced in June 2024 to integrate Microsoft technologies into Hitachi's Lumada solutions. Regarding our collaboration with Google Cloud, we announced a partnership to accelerate RailwayDX by combining global logics, advanced digital engineering capabilities with Google Cloud's cybersecurity and AI technologies. Next, a new HMAX development status. For internal HMAX development and implementation by customer zero, we developed a solution that analyzes video footage at construction sites for building systems, including elevators, and generates alerts, and began applying the solution at domestic sites from Q3. Additionally, in HMAX development by customer collaboration, we began developing a solution with Mitsubishi Chemical that verifies troubleshooting assistance using AI agents at chemical plants. This concludes my explanation of the results for Q3 and the outlook for FY 2025. We expect to steadily improve revenue, profitability, cash flow, and capital efficiency in FY25. We will continue to implement management measures to achieve the long-term and medium-term goals of our management plan, Inspire 2027. We appreciate your continued understanding and support.