Hitachi Ltd Ord

Thank you very much for taking your time to join us today for Hitachi's financial results briefing. We will now begin Hitachi Limited's financial results briefing for the first quarter of the fiscal year ending March 31, 2027. Let me first introduce today's speakers. Tomomi Kato the Senior Vice President and Executive Officer, CFO, Hitachi Limited, Masashi Hatakeyama, Vice President and Executive Officer, Deputy CFO, Shinichiro Tanumai, General Manager, Investor Relations Division. Those are today's three presenters. So Mr. Kato, the floor is yours. I'm Kato, good afternoon. Before I begin today's presentation, I'd like to express my deepest condolences to those who lost their lives in yesterday's Kumamoto earthquake of 2026 and extend my heartfelt sympathies to everyone affected by this disaster. At this time, we have confirmed no material impact on the Hitachi Group. However, we will continue to closely monitor the situation and take any necessary actions as appropriate. In addition, based on conditions and needs in the affected areas, we are considering what support Hitaju can provide to assist with the recovery efforts. Now, I would like to walk you through our consolidated financial results for the first quarter of fiscal 2026, as well as our outlook for the fall year. Let me begin with the key highlights of today's earnings announcement. In the first quarter of fiscal year 2026, the revenue increased 20% year-on-year reflecting business expansion as well as favorable foreign exchange effects. Both revenue and adjusted EBITDA reached record highs for our first quarter. Led by the continued strong performance of energy power grids business, all four sectors, DSS, energy, mobility, and connective industries achieved double-digit revenue growth. The impact on the situation in the Middle East during the first quarter was smaller than we had initially anticipated. The quarterly profit was broadly in line with the previous year despite the impact of the approximately ¥50 billion special dividend associated with last year's air conditioning business reorganization. On a comparable basis, we regard this as an increase in profit. Core free cash flow also exceeded the previous year's level despite the absence of large advance payments supported by improved collection of trade receivables. Now, our outlook for fiscal year 2026. Reflecting our stronger-than-planned first quarter performance, order trends, and revised foreign exchange assumptions, we have raised our forecast for revenue, adjusted EBITDA, net income, core free cash flow, and ROIC. To support organic growth, we plan to increase capital expenditures, including investments in production capacity, and also expand corporate strategic investment aimed at accelerating AI adoption. Diplomatic developments in the Middle East remain a potential source of significant volatility depending on how the situation evolves. We will continue to monitor them closely. The results include several special factors including foreign exchange effect when comparing with the previous year. Let me explain the year-on-year changes in revenue and adjusted EBITDA. Revenue increased by 10% year-on-year given primarily by business expansion. After taking into account the negative impact of the Middle East situation, one-time effects from large projects and positive foreign exchange effects, revenue increased 20% year-on-year. Adjusted EBITDA followed a similar trend. The adjusted EBITDA Margin improved by 110 basis points through business expansion and other factors. After reflecting higher corporate strategic investment, the impact of the Middle East situation, one-time factors, and foreign exchange effects, adjusted EBITDA margin came to 11.9%. The outlook for FY2026 follows the same trend. Revenue is expected to increase by 9% YOY, primarily driven by business expansion. In addition, after taking into account the impact of the restructuring of home appliances business and ATM business and the foreign exchange effects, full-year revenue is expected to increase by 11% year-on-year. For this forecast, we have revised our foreign exchange assumptions for the second quarter onwards to 160 yen per US dollar and 185 per euro. Adjusted EBITDA is expected to follow the same trend as revenue. Business expansion and other factors are expected to improve the margin by 100 basis point. After reflecting corporate strategy investment and the impact of the Middle East situation, foreign exchange and other factors, we expected the adjusted EBITDA margin to reach 13%. Next, first quarter results and full year outlook by segment, as shown in here, including special factors, DSS. First quarter orders increased 7% YOY, revenue rose 11%, and profit also increased. In Japan, growth was driven in particular by our AI transformation business, which supports customers' AI adoption together with our modernization business. which upgrades at the underlying systems. Profit increased thanks not only to higher revenue but also to stronger project management, expansion of the Lumada business and productivity improvements through AI. For the fall year, we have raised our forecast by 30 billion yen for revenue and by 8 billion for adjusted EBITDA. In energy power grids, orders increased significantly YOY in the first quarter. Supported by continued strong demand for transmission equipment and including foreign exchange effect, revenue increased 37%. Higher revenue together with productivity improvements also led to higher profit. For the full year, we have increased our revenue forecast by 360 billion yen and adjusted EBITDA forecast by 76 billion yen. Adjusted EBITDA margin is expected to improve by 130 basis points to 14.2%. Mobility. First quarter orders increased 25% YOY driven by large signaling and control projects together with foreign exchange effects. Revenue and profit also increased, supported by strong performance in Lumada businesses such as railway signaling systems together with favorable foreign exchange. For the full year, we have raised our revenue forecast by 100 billion yen and adjusted EBITDA by 9 billion yen. The adjusted EBITDA margin is expected to improve by 120 basis points YOY, reflecting growth in Lumada business such as railway signaling. In Connective Industries, first quarter orders increased 25% YOY led by the measurement and analysis equipment. Revenue increased 13% YOY including foreign exchange driven by the expansion of service business in building systems and growth in semiconductor manufacturing equipment as well as semiconductor measurement and inspection equipment. For the full year, we have raised our revenue forecast by 100 billion yen and adjusted EBITDA by 14 billion yen. Consolidated basis, first quarter revenue increased 20% YOY. However, as I mentioned before, differences in the scale of special factors, including foreign exchange effects, mean that foliar growth is expected to be 11%. Next slide. I will explain the results excluding these special factors. I'll explain the first quarter results and the foliar up book by segment, excluding special factors. Excluding special factors such as foreign exchange and business reorganization, Hitachi's consolidated revenue growth Thank you very much. resulting in foliar growth of 6% in FY26. As in the first quarter, AI transformation and modernization are expected to remain the primary growth drivers. We also expect the profit margin to improve. In energy, the revenue growth rate may appear to moderate from the second quarter onwards. However, in absolute terms, revenue growth is expected to exceed YOY increase recorded in the first quarter. Supported mainly by planned capital investment in the power grids business, expanded production capacity through workforce growth and productivity improvement, we expect revenue to increase 21% year-on-year for full-year Excluding special factors with the corresponding improvements in the profit margin in mobility, we expect to maintain the first quarter revenue growth rate throughout the year. We also expect the profit margin to improve through a better business mix in railway signaling and roading stock business with cost reductions. In connective industries, we expect to sustain the first quarter revenue growth rate through the remainder of the year, resulting in foliar growth of 6% year-on-year. The key growth drivers include expanding demand for semiconductor manufacturing equipment and clinical analyzers, measurement and analysis systems, equipment, and as continued building service business grows. And also expansion, including the mother business, is expected to improve profit margin.

So from here, I will explain the progress of the DSS growth strategy. First, I would like to talk about domestic IT service business. In the first quarter, revenues increased by 8% YOY, so was profit. Growth was centered around the AI transformation and modernization by industry, the financial sector, lead-bind insurance, and the social sector, including government agencies and local governments and transportation. Each grew by double digits or more, driving us to overall domestic IT services business. For this fiscal year, we are aiming to increase orders by 7% YOY. To accelerate the growth of this AI transformation business, we newly developed and announced last week the Agendic AI Integration Platform. This platform, combining Hidachi's domain and knowledge with our partner's frontier AI, enables us to achieve both high-quality and rapid development speed. We'll apply it to large projects for system integration, starting in September. Next is Overseas IT Services Business, specifically GlobalLogic and Hitachi Digital Services. These two have been operated as one entity from this fiscal year. The total of synergy and standalone revenues increased by 28% year-over-year in Q1. Synergy revenues expanded significantly compared to last year, primarily in energy and mobility. Despite a challenging market environment surrounding the digital engineering business, standalone revenues exceeded the previous year's levels. For further growth in S-energy, we opened an experience center in India in Q1 where customers experienced benefits of HMAC's solution for building systems. We're also strengthening our physical AI capabilities with other companies through Alliance. Moreover, Chris selling projects that offer end-to-end services from digital engineering to operations expanded in high-tech and manufacturing sectors contributing to the revenue increase in Q1. As announced today, we welcome Anand Biljai, who will lead overseas IT service business to accelerate business transformation. Next is the impact of the Middle East. In Q1, a large project in the Middle East was affected, along with some raw material shortages and a cost increase. However, the impact was rather limited than initially anticipated. We have factored in the risk of impact from Q2 onward in the current forecast, but there will be so much uncertainty and subject to change. We'll continue to monitor it closely. From here, I will explain the highlights of the Q1 FY2026. Revenues and profit increase across all four sectors as of core free cash flow. We spend more on organic growth, primarily capex for facility investment with focus on energy. For inorganic growth, Mobility completed the acquisition of Clever Devices, IT service company for public transportation in North America. Moving forward, we will expand our business into the multimodal domain beyond the railway sector. With regards to shareholders' return, we bought back ¥150 billion of our shares in Q1, reaching 27% of the plan for this fiscal year. Here I will explain the quarterly profit and cash flow on a year-on-year basis. Quarterly profits remain roughly the same as the previous year, despite the impact of special dividends associated with the air conditioning business reorganization in the year before. As for record free cash flow excluding the impact of large advance received, it increased by over ¥200 billion year-over-year attributed to higher adjusted EBITDA and improvement in net working capital driven by better turnaround of receivables. Now I will explain the financial position. Total asset at the end of Q1 FY26 stood at about 15 trillion yen, staying at nearly the same as the end of FY25. Cash conversion cycle dropped from the end of FY25 mainly due to less receivables and more advanced payments to improve the capital efficiency even more. Next is revenue by region. We expanded overseas led by Europe, including forex impact, energy grew across all regions including Europe and North America, hitting 35% in total. Mobility grew by 18% total overseas led by the rail control business, particularly in Europe. CI grew by 21% in total over the years, mainly in China driven by an expansion in building system services as well as semiconductor manufacturing and inspection and measurement equipment system. This page is order result by segment. DS has increased by 7% driven by growth in the domestic AI transformation business, modernization business, and global storage business. Energy saw a significant increase despite nuclear energy's rebound from large The power grid business benefited from solid demand for power grid equipment in several large-scale HVDC projects in Europe. Order backlog exceeded 10 trillion yen. Mobility increased overall due to large orders in a rail control project. Order backlog increased compared to the end of FY25, including for ex-impact. CI expanded as a whole, driven by increases in semiconductor manufacturing and inspection measurement equipment, as well as clinical chemistry and immunology analyzers. These are the highlights of the FY26 forecast. As for organic growth investments, we plan to increase capex by over ¥170 billion with focus on power grids and energy. With regards to shareholders' return, there is an unexecuted buyback of about 400 billion yen for Q2 onward, and it will continue with share buyback. We are also revisiting a forex rate set for Q2 onward. Here I will explain the net income and cash flow on a YOY basis. Net income is expected to increase year over year due to higher operating income despite a fluctuation in non-operating gains and losses from business reorganization and portfolio reforms executed in FY25. Core free cash flow is expected to increase while excluding the impact of large advance received. Despite increase of capex such as capital expenditure for production expansion and a rebound from special dividends tied to last year's business reorganization, higher adjusted EBIT DOT and a better networking capital will contribute. Finally, I will explain the Lumada business, a key pillar for our growth on page 27. Here is the performance of Lumada and HMUX, which is the solution for Lumada digital service business. Lumada accounted for 43% in Hitachi's consolidated revenue. For FI26, we plan to reach approximately 5 trillion yen, 22% increase YOY, which accounts for 44% of revenue, while improving adjusted EBITDA by 17%. The Q1 revenue growth was mainly driven by the amount of business such as domestic IT services and global storage and DSS building system services, NCI, and semiconductor manufacturing equipment and medical analyzers in a measurement in As for HMAX, Q1 revenue reached approximately 110 billion yen. We achieved a 22% progress towards the full-year forecast of 505 billion yen for FI2026. Key drivers are HMAX in the railway, CI, and DSS. This concludes the briefing on the Q1 performance in the full-year forecast for FI26. We recognize that Q1 represents a good start for the second year of the INSPIRE 2027. In particular, we believe that the growth drivers, excluding the one-off factors explained today, are highly sustainable. On the other hand, the Middle East affairs and external business environments remain uncertain. We'll push forward growth strategies while continuing to enhance risk management. Thank you, Mr. Kato. We will now move on to the Q&A session. Those who have a question, please press the raise hand button shown on your Zoom screen. We will call names from among those who have raised their hands, so please unmute your audio, state your company name and your name, and then ask a question where your new name is called out. Please turn off the raise hand button when you no longer need to ask questions. Please note that questionnaires video won't be displayed today. We'll take questions in order of the Japanese channel first. We'll take questions from the press and institutional investors and analysts during the same Q&A sessions. So if you have questions, please use the on the raise hand button.

Mr. Sakizawa, could you please unmute yourself and please ask questions in Japanese. My name is Sakizawa from Fidelity. Thank you very much for this opportunity. My first question about Q1 energy business, the improvement of the margin. Compared to your assumption, was it better? And compared to the fall year, I think the number is higher. And what is the reason for that? And after Q2 and onwards, do you think with the same reason it's going to be higher? Could you please explain that? Yes, thank you very much for your question. Yes, this time, Q1 performance of energy business, at first, we had a plan. However, compared to that, the number was better. There were some factors behind that. In terms of yen, There was an impact from the foreign exchange. However, in dollars, it's increasing. Mainly, the order situation, compared to our assumption, it was very strong. And the Q1 order situation I explained, large-scale orders we have received as well. But other than that, what we call base orders, They are not large orders, however, for example, transformers and those equipment, those are very Thank you very much. We have a lot of products we are making and we have so many different projects going on so as much as possible we would like to strike a very good balance and we were spending our investment on IT and that is really contributing and during the explanation I was talking about the foreign exchange and also other than temporary factors and other than special factors we have added some explanation at page 7 of the slide as you can see here. As for the revenue, the percentage I talked about after Q2, it looks modest compared to Q1. However, looking at the value in Q1, there is an increase more than three times as much. In Q2 and Q4, you can see it in terms of the growth rate. The growth rate year-on-year might be the same as Q1, and the margin as well. 100 basis point and over is our assumption. So that means basically that this should remain. However, having said that, what we cannot project right now is the enhancement of the efficiency of production in the field. This is really the contribution of the field and the effort of them, but it's possible that it might change up and down. Thank you very much. Thank you. My second question, it might be related to your explanation, and you are talking about H maxi vita ratio was 22%, and you have four segments. H-max exposure, for example, it should be different from the breakdown of Lomada business. So what is the specific sub-segment or segment that has a contribution of H-max or the improvement of the margin, profit margin? Yes, H-max last fiscal year We only had the fiscal year's number, so year-on-year Q1 growth cannot be disclosed. I'm sorry, we don't have the number here. However, we believe that there is a two-digit growth, especially the contribution comes from CI building and high-tech business and mobility, railway business. They had contributions and as for building as we have announced H-max for building for remote monitoring and as for high tech especially the predictive analysis for the equipment and also each of them really contributed and as for the margin about 20% and over evenly so Compared to the other sectors, profit margin, the growth here really looks significant. This really is attraction. Thank you very much. Thank you.