Hitachi Ltd Ord

The scheduled time has come. We will now begin the briefing session on the progress of INSPIRE 2027 Management Plan and Consolidated Financial Results for the year ended March 31, 2026. First President and CEO, Tokunaga, will say a few words. Mr. Tokunaga, please.

This is Tokunaga speaking. Thank you very much for joining us despite your busy schedules today. At this moment, Mr. Carter, the CFO, will talk about the earnings for FY2025 and the three-year management plan from 2026 to 2028, inspired 2027, I will explain. Although we operated our business in a highly uncertain environment in fiscal year 2025, we think we were able to get off to a good start toward sustainable growth that inspired 2027 aims for now. Let me turn it over to Mr. Cato for a presentation. First, I, Cato, will now explain the consolidated financial results for fiscal year 2025 and the outlook for fiscal year 2026. First, I will outline the key performance highlights of this earnings announcement. Regarding the results for fiscal year 2025, in addition to continued strong performance of the power grid business, in the energy segment, domestic IT business in DSS and railway business in mobility served as key drivers resulting in year-on-year increases in both revenue and profit for HEPA's consolidated results. adjusted EBITDA net income and core free cash flow all reached new record highs. In addition to improved earnings in energy and DSS, the expansion of the Lumada business led to a 1.3% improvement in the adjusted EBITDA margin. Furthermore, on top of the increase in profits, core free cash flow also rose due to advances received. we were able to achieve results that exceeded our initial plans for the fiscal year, moving us closer to achieving the goals of INSPIRE 2027. Key financial KPIs, as you note, include 8% year-on-year increase in revenue and a 21% rise in adjusted EBITDA. Furthermore, net income attributable to owners of the parent exceeded $800,000. For the first time, all six KPIs have improved compared to the outlook announced at the end of January. Next are the outlook for FY2026, with the energy sector performing well in the power grid business, and the DSS also showing the solid growth outlook. All four sectors are projected to see increased revenue and profit, even after factoring in increased strategic investments. and the risks associated with the Middle East in quarter one, we expect profits to grow further from the significant increase seen in the consolidated data results for FY25. Meanwhile, risks related to the situation in the Middle East could significantly impact our earnings outlook for the current year, so we will continue to monitor the situation closely. In terms of the financial KPIs, you know, revenue is projected to grow by 5% year-on-year, while core SES is expected to decline, excluding the impact of large advance payments. It's projected to exceed the previous year's level. Additionally, regarding ROIC, the forecast incorporates the impact of growth investments as an assumption and is expected to largely be in line with the previous fiscal year. Next, highlights by segment for FI25. In the DSS segment, Domestic sales for front-end IT services grew by 7% due to the expansion of domestic DX and modernization businesses centered on Lumada business. In the storage business, although annual sales decreased due to restrained customer investment in overseas markets and a focus on block storage, profitability improved thanks to a focus on core products and cost-cutting measures. In the energy segment, the power grid business saw increased revenue and profit due to Continued strong demand for power grid equipment and favorable foreign exchange fluctuations by region sales expanded across all regions, particularly in Europe, North America, and the Middle East. In the mobility segment, the Lunada business, including railway signaling systems, performed steadily and combined with favorable results. Forex fluctuations, revenue and profit both increased. In the CI segment, while overall revenue declined due to reduced demand for new elevators and escalators business in China's building systems market, revenue in the measurement and analysis systems business grew by 9% year-on-year. Additionally, profitability for the CI segment as a whole improved due to increased sales of semiconductor manufacturing equipment and expansion of the building systems, digital services business. Finally, regarding the corporate items and elimination, these results were achieved through the strengthening of corporate strategic investments. Next, here are the highlights by segment for fiscal year 2026. In the DSS segment, domestic operations are expected to expand, led by the Lumada business. Additionally, in the storage business, we will continue to expand sales of our core block of storage products and prioritize project governance, focus on possibility to further improve earnings. For the DSS segment as a whole, we expect both revenue and profit to increase further from the growth seen in fiscal year 2025. In the energy segment, the power grid business is expected to see increased revenue and profit as demand for power transmission equipment remains so strong. In mobility, Lumada businesses such as railway signal systems are performing well and revenue and profit are expected to increase. The order backlog increased in FY25 and we anticipate long-term growth. In the CI segment, while revenue is expected to decline due to the capital restructuring of Kipachi's, GLS, home appliances, revenue and profit are projected to increase driven by expansion of Lumada businesses across various sectors, including measurement and analysis systems and building systems. Finally, regarding corporate item and elimination, this outlook incorporates an increase of 30 billion yen in corporate strategic investment and a 20 billion yen risk impact related to the situation in the Middle East in the first quarter. Next, I will explain the impact of the situation in the Middle East. In the Middle East, Delays in some production processes have occurred since March, but as of today, the impact remains limited. In this FY2026 forecast, we have estimated the direct impact on our company for the first quarter based on current assumptions and incorporated this as a Middle East risk. The situation in the Middle East is highly fluid, and we have not been able to incorporate the direct impact on earnings from the second quarter onward, nor the indirect impact on our company, resulting from effects on our customers. We have incorporated a risk of a 40 billion yen decline in revenue and a 20 billion yen decline in adjusted EBITDA into the corporate item and elimination as direct impacts on the first quarter. This primarily reflects potential delays in major projects in the Middle East, as well as shortages and cost increases for certain roles, We expect this to potentially affect sectors such as energy, C.I., and mobility. The risks factored in here reflect our outlook as of today, but we believe the impact of the situation in the Middle East could fluctuate significantly in the future. So we will continue to closely monitor the situation. Here I will explain the progress of DSS's growth strategy. Looking back at the major achievements of FY2025, We further improved profitability across the entire DSS, achieving an adjusted EBITDA margin in the 15% range for the first time. Regarding our domestic, foreign, and IT services businesses, CX and modernization businesses grew steadily, and we promoted the application of AI in system development for domestic asset projects, achieving an average 10% improvement in production efficiencies. In the services and platforms segment, we strengthened our high-value-added service business, Leveraging AI. GlobalLogic is expanding synergies through initiatives such as HMAC solution development for other internal sectors, and in quarter four, revenue including synergies grew 44% year-on-year. Furthermore, AI and IT services in North America are performing well. In Q4, Hitachi Distort Services revenue grew by 10%. Meanwhile, in the storage business, as a result of cost optimization and business restructuring, the U.S. dollar-based profit margin improved by 2.6 percentage points year-on-year in Q4. Additionally, driven by launch of new products in our high-end block storage segment, revenue also increased compared to the same period last year. Regarding our future growth strategy, what will drive the digital transformation of the the OT and product domains within the Hitachi Group through initiatives such as the development of HMAC solutions. We will support this effort through an integrated delivery effort led by Globalogic and Hitachi Digital Services. Furthermore, we will thoroughly implement AI to further improve productivity in system integration development and operations and continue to expand sales and profits in the DSS segment. Next, I will explain the progress of Hitachi Energy's growth strategy. Sales revenue has grown steadily thanks to measures to expand production capacity and improve productivity in response to long-term upward trend in order backlog. We will continue to aim for long-term sales growth. We will also actively expand our service business. Last year, we acquired a minority stake in SHRMCO, an electricity services company in North America. and are working to strengthen our service delivery capabilities. Regarding HMAX, the core of Lumada Diesel Services' business, we are expanding sales of HMAX Energy, a next-generation AI service solution for energy infrastructure that we began offering in March. Furthermore, through collaboration with Microsoft, we have enhanced our AI-powered Lumada facility management solutions.

In FY25, we accelerated measures aimed at improving corporate value. Let me explain the situation. First, we continued the restructuring of our business portfolio following on from Q3. As announced last week, we reached an agreement with Nojima to establish a new company based on strategic partnership for our home appliance business. Furthermore, as announced in March, we reached an agreement with Oki to integrate our ATM business. Going forward... the ATM business will be subject to equity method accounting. Meanwhile, to expand HMAX mobility, we announced the acquisition of Clever Devices, a U.S. company specializing in intelligent transportation systems for public transport. Regarding capital allocation, we plan to increase the total amount of shareholder returns for FY26 to approximately 800 billion yen on cash basis. In line with our previous policy, aiming for stable growth, we will increase the year-end dividend for FY25 to 27 yen per share, a 4 yen increase from FY25 interim dividend. Furthermore, including the projected interim dividend for FY26, total expenditures for this fiscal year will be approximately 250 billion yen, an increase of 50 billion yen year-on-year. Regarding share buybacks, In line with our previous policy and taking into account cash flow forecasts, asset sales trends, growth investment prospects, and financial condition, we have decided to buy back approximately 550 billion yen on cash basis. This includes a portion of the amount resolved in FY25. So on FY26 resolution basis, the total will be 500 billion yen, an increase of 100 billion yen year-on-year. Now let me explain the results for FY25. The actual figures are as explained in the points at the beginning. I will now explain the breakdown of year-on-year changes in FY25. Revenue increased by 7%, even excluding the impact of foreign exchange due to increases in energy, DSS front and business services, and mobility. Adjusted EBITDA followed a similar trend to revenue. with increased profits in energy, DSS front-end services, and IT services, resulting in 1.3 percentage point improvement in the adjusted EBITDA ratio, even including the impact of U.S. tariffs and increased strategic investments. Net income improved by over 200 billion yen in operating profit, while there were impacts from the sale of the air conditioning joint venture, increased costs related to structural reforms, and increased income taxes related with share transfer, we were generally able to translate this improvement in operating profit into an increase in net income. Core free cash flow, excluding the impact of advances received effect from large projects, increased by approximately 300 billion yen year-on-year, mainly due to an increase in adjusted EBITDA. Next, I will explain our financial position. Total assets at the end of FY25 is approximately 15 trillion yen an increase of approximately 1.7 trillion yen from the end of FY24 due to increased sales in energy and other sectors, as well as FX fluctuations. Cash conversion cycle decreased compared to the end of FY24, mainly due to an increase in advance payments. Next is regional revenues. Overseas regions expanded primarily in Europe. Energy expanded across all regions, mainly in other regions, including Europe, North America, and the Middle East. resulting in a 24% growth overseas. Mobility expanded in Europe, North America, and other regions, including the Middle East and Africa, driven by rail control systems, resulting in a 15% growth overseas. Next, I will explain the order results by segment. In DSS, front business increased by 7% annually, driving the overall increase in DSS for FY25. In energy, although there was a decrease in nuclear energy due to high base effect from previous year's large-scale projects, power grid business increased by 17% year-on-year due to strong demand for transmission equipment and data center-related demand, and the order backlog also increased compared to the end of last fiscal year. In mobility... There was a decrease in the on-year due to high base effect from large-scale projects in the previous fiscal year, but in F2-4, orders for rail vehicles and rail control systems increased. The order backlog, including the impact of foreign exchange, increased compared to the end of FY24. CI as a whole grew 10% annually. In particular... The measurement and analysis systems business, which saw an increase in healthcare, and the industrial digital business, which saw growth in robotics SI, both increased. Next is highlights for FY26 forecast. The main points are as explained in topic section at the beginning. Regarding exchange rate assumptions, we've used 150 yen to U.S. dollar and 175 yen to the euro this time. I will now explain the breakdown of year-on-year changes. Excluding VFX impact, business restructuring, and Middle East risk, revenue is projected to grow by 7% year-on-year, driven by increases in energy, DSS, CI, and others. Adjusted EBITDA shows a similar trend. Excluding increases in corporate strategic investments and the Middle East risk, EBITDA margin is projected to be 13.1%. Net income for the current period will be affected by fluctuations in non-operating income and expenses and business structure reform expenses resulting from business reorganization, reflecting the business portfolio reforms implemented in FY25, but operating profit is expected to increase, resulting in an expected year-on-year increase. Core free cash flow, excluding the impact of large advance payments, is expected to increase year-on-year despite increased capex, such as capital investments for production increase due to increased adjusted EBITDA and improved networking capital. Next, regarding the performance by segment, the overview is as explained on the segment highlights page at the beginning. Here, I will explain the changes to the reporting segments. This mainly reflects changes to sub-segments within DSS and CI, and the transfer of a portion of industrial digital business from CI to DSS. Finally, I will explain the Lumada business, which is a pillar of our growth business on page 30. I will now explain the performance of the Lumada business and the HMAX solutions within the Lumada digital service business. In FY25, Lumada accounted for 40% of Hitachi's consolidated revenue and 16% of adjusted EBITDA. For FY26, we plan for revenue to reach approximately 4.8 trillion yen, a 16% increase year-on-year with revenue ratio of 44% and adjusted EBITDA of 17%. Regarding HMAX business, revenues in FY25 were approximately 300 billion yen with an adjusted EBITDA of 22%. We aim for 480 billion yen in FY26. Regarding HMAX solution, which is the core of Lumada's digital services business, the various OT sectors and DSS collaborated to develop new solutions as described here from Q3 onwards. This concludes my explanation of the FY25 results and FY26 outlook.