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.

Thank you very much, Mr. Kato. We would now like to proceed to the Q&A session. If you wish to ask a question on the Zoom screen, when your name is called, please. Please unmute, state your name and affiliation and ask your question. Should you no longer require to ask your question, please release the raise hand button. We will not be showing the video of the person asking the question today. We will take questions first on the Japanese channel and then on the English channel. And we will take questions from the media, institutional investors and financial analysts together. And we are expected to close at half past five. We will take the questions from the Japanese channels first. The floor is now open. Takizawa-san? Please unmute and ask your question. Thank you very much for the opportunity to ask a question. I hope you can hear me. First point is... Regarding the Switzerland railway, a major contract was announced. TALIS, DTS, Acquisition, HMAX, Evolution have led to the transactions that you are able to obtain as well as the profitability. I would like to ask if this is the case. What has been the impact and what are the trends in terms of orders received? Although there seems to have been a slight decline recently. That's my first question. I would like to respond to your question one by one. Answer. Regarding railways, in the second quarter, orders received was as explained. For railways as well as for Hitachi Energy, these are types of business that are major projects. And the That will have a significant impact whether we are able to obtain these projects and there could be differences from quarter to quarter. In the first half for railway, there have been major projects but there's a reaction decline in this quarter. But in terms of the backlog, we are continuing to increase. Therefore, demand has remained very strong. for railways as well as for power grid. Major projects when we participate in the event, there is investment committee where I am the chair that will be assessing the projects from all over the world. from the Americas, from Asia, from Europe, as well as from the Middle East, as well as other regions. We are receiving many orders from all over the world. Basically, Globally, when we receive orders for rolling stock for trains, depending on the project, we are also receiving orders for maintenance as well as operations and services. Therefore, the profitability of this business has remained strong. In a steadfast manner, we are seeing improvements. in the mid to long term, these backlog will be absorbed and we believe that profitability will be improved. In addition, last year we announced the railway HVACs. This solution is an area we are seeing increased orders. As the ratio of services increase, And as you have mentioned, GTS has been acquired last year and the signal system has changed in terms of ratio from 4 to 6 to 6 to 4. Therefore, we believe that profitability can be improved accordingly. in the mid-term as well as in the long-term for railway system on the investor day as well as in individual IRs, we have been mentioning that we have a target we are aiming for and the steadfast improvement is being made. Second question is regarding energy backlog. You are saying that profitability is improving in that regard. What is the momentum of improvement? Is it at the same pace? On a why-on-why basis, is it accelerating or slowing down? As well as the reasons. And so, regarding the profitability of the backlog is very important as we look toward the future. We are always checking this. In that regard, we are seeing a steady improvement. There are no special significant difference We believe that backlog will be converted to the revenues. That means that profitability will be improving for us. Third question, regarding storage, block storage is now your focus, which is high growth. With that, from next fiscal year, is there going to be a top line growth in area of storage on a standalone basis? What is your view? Answer, regarding next fiscal year, The detailed business plan will be formulated toward the end of this fiscal year, and the revision will be made. But for the time being, block storage, especially in the mid-area, there is possibility of high growth, and this is going to be our focus, unfortunately. Customers are restraining investment at the moment for the first quarter, second quarter. Therefore, compared to previous year, they have been declined. But it is on a trajectory toward improvement. And I believe that the next fiscal year, we can do better than this fiscal year. Thank you.

Thank you. Next, Toshi-san, please unmute yourself and ask your question. Can you hear me? Yes. Question. Thank you for the briefing. I have two questions. I will go one by one. First, US reciprocal tariff matter. So in your results announcement on a full year basis, adjusted EBITDA and net income both improved the external environment and hitachi's own efforts if we i think we can break this down into two components so the customers are still restraining on investments i believe but what changes have you seen from when you announced your first quarter results and own efforts energy pricing pass through what was impactful positively to compress the negative impact from tariffs. Answer, so your question on tariffs. On slide 29, you have some information. Not much change, so I did not explain today, but if I could add some comments here. As you rightly mentioned, the full year forecast, as of Q1, compared to Q1 forecast, the risk is smaller. So last time, adjusted EBITDA, 30 billion negative impact was forecasted. This time, we reduced that by 10 billion. So negative 20 billion is the impact. It's been six months. That is the big factor. And so the impact are mainly twofold. Page 29, lower left, you can see the diagram. This is just an image diagram. Originally, the direct and indirect impact were anticipated. First, we understood the direct impact. With the tariff impact, cost increased. And if we cannot fully pass through the price, we incur the loss. That was the majority. That was what we captured accurately. Now, the tariff impact, this is the impact on our customers. customers behavior change and our sales opportunity reduce. We could not clearly see that, but now the direct impact because of the sales impact reducing, this impact is declining, but not a big decline from Q1, but it is on the decline. On the other hand, the indirect impact, Compared to our projection in April or at Q1, it is not emerging. The risk is not emerging. So both are declining. This time, we reviewed the indirect impact, which did not materialize as much as we thought at Q1. And for the pricing pass-through, customers are understanding the situation by explaining this carefully. Customers are willing to bear the cost. So they are understanding much of which we are thankful of. Thank you. Thank you. Question. My second question is about the business update. Open AI. And you signed an alliance agreement. And the other day, the Department of Commerce MOU was also signed. And so the top summit meeting between Japan and the U.S. was held. And the T&D and SMR investment may lead to your profit opportunity in the future. So this may directly impact this year's performance or next year's performance, but your alliance with OpenAI and your investment in the US, what is your take? How much impact do you anticipate? answer your last part broke off so could you repeat your question again hello the very last part of your question if you could repeat once again Okay, so maybe there was connection was a bit weak. He may not be able to hear me. So I understand that the question was about the investment in the US and can you hear me? Open AI and the investment in the US are forecast this year and next year. I think that is the gist of the question. Can you hear me? Okay, so I take it that that is the question. Yes, answer. So first of all, the U.S. investment, I will answer. And also about OpenAI. First of all, about Japan-U.S. relationship. As we already press released and has been covered by mass media, I think you understand quite extensively. This year, the Department of Commerce, we signed an MOU, this power grid business. Hitachi Energy is our group company. So Hitachi Energy, the transformer, production, and for the T&D equipment, local production. We will continue examining additional investment in the U.S. That is the content. The specifics will be fleshed out going forward. We have not decided on all the specifics, but the background is... In September of this year, over $1 billion investment was announced. In the US, we will do investment to build our capacity in the plant. And this one is separate from that because the demand is so strong. Apart from this $1 billion, we will study the possibility of additional investment. Please understand it like that. So we have not decided on all the concrete matters. But if we invest, after we invest and build the capacity, we take orders and ship out the products, it will have some time lag, a few year time lag. So this will not have a positive impact next year. Probably during the Inspire 2027 period or the next medium term plan period. For the power grid business, up to 2030, we say this will continue growing. But recently, we're saying not 2030, but 2035. For the next 10 years, we expect a growth. So this is a long-term perspective. But in terms of our business opportunity, this is a tailwind. We appreciate it. So we want to utilize this opportunity. So next is OpenAI. Page 25, Lumada business expansion measures. You can see some information there. On October 21st, we had a news release. Next generation AI infrastructure will be built. Open AI will be leveraged. So we signed a strategic partnership. Next generation AI infrastructure is mainly open. In utilizing AI, this will be the base infrastructure. Data center. So for data center, we need to efficiently supply power and in transmission mainly. Hitachi will work with open AI and more broadly to penetrate AI, we will supply the necessary power. That is how we want to contribute. And inside data center, Hitachi Group has been contributing in the cooling technology, storage technology and data center construction. So we will accelerate the AI infrastructure building. So that is the content of this partnership. We have come to an agreement. And as you see on this slide this time, OpenAI's cutting edge technology will be leveraged so that we, Hitachi Group, can use AI, utilize AI, Hitachi Solutions and HMACS. We will leverage AI and offer a higher value to our customers. That is another possible collaboration. So mainly three points under this agreement. This is more medium to long-term partnership. So this may not have a positive impact this year, but we have high expectations as a growth opportunity. Thank you. Thank you very much.

Esawa-san, please. Lisa, mute. and ask your question. Thank you for the opportunity. I have a question on Power Grid DSS and investment for growth. Regarding the Power Grid, first of all, data center related Power Grid business in the near term has been announced by the company. There have been much reporting about this business Hitachi's high-power grid business is the upstream. High voltage is the main area, but data center is closer to the downstream, the consumption side, according to my understanding. Is that the case? What is occurring now is that for Hitachi Energy, mid voltage as well as low voltage areas could be poised for growth going forward? Or for the data center, is it mainly the high voltage substation business will continue to grow? Is that the case? What is the new aspect of this business? Please elaborate further. And so, regarding data center and voltage, the relationship between the two will be explained. As we set up new data centers, the power generation can be created together in some cases, and it could be separate in other cases. So that will have a difference on the voltage, and it will also differ according to scale. So we cannot say whether it is more high voltage or low voltage. That is not the case. For the time being, for data centers, we are receiving various orders. However, so far, Hitachi Energy's scale of receiving orders are mainly the Renewal as well as connectivity for renewable energies as well as grid strengthening are the main business. And in addition to that, we have HPTC. But it isn't as if the impact is so strong that it will change the mix of the Hitachi energy business overall. The conventional demand is growing and data center is added on top of that. Therefore, going forward, we have high expectations for this business. Thank you. Second question is regarding DSS. In US, AI is becoming more prevalent and SaaS business is receiving negative impact in terms of performance. This is occurring in the overall industry. For global logic, what about the US business? Is there a similar impact? With the implementation of AI, are you seeing reduction in work or subject to price competition? Is this a phenomenon that is occurring in the US? In the recent past, there is a decline in performance. You said that this is because of the customer is restraining the investment. But what is the structural change occurring in the industry? Is there a deterioration? unfavourable deterioration. regarding global logic in terms of pressure for price has been occurring in the past one year. We believe the main reason is restraint in investment. But as you have mentioned, with AI, there is higher expectations of customers to increase productivity. Therefore, the factors are mixed. We cannot differentiate one from the other. In that regard, against this backdrop, we have to try to increase the price so that profitability can be improved. As mentioned in the materials, AI is growing. Therefore, technological power must be enhanced for our side. and provide more AI services dealing with data increasingly with higher capabilities so that we can seek growth and also increase profitability. That is the reason why in September, as I mentioned earlier, we have acquired a German company. But this is a bolt-on type of acquisition. It's not very significant. But by continuing on this direction, We hope that the capability of global logic to provide solutions to customers can be enhanced so that this will lead to further profitability of our business. Question regarding the investment for growth. Many of the companies with earnings results are saying that they have made investment for acquisition. So it seems that this is being welcomed overall. But what is the basic stance of Hitachi in terms of making investment? Kato-san, you are the head of the investment committee. What is the discipline that you are applying? Is it being more relaxed or is it becoming more stringent? Please elaborate further. And 500 billion in terms of shareholder return was also announced. Do you think this is sufficient for this fiscal year? Because you're making a strategic investment, is this going to have an impact on shareholder return? Please elaborate. Answer. Regarding our stance for investment for growth, I would say that according to the Inspire 2027, We need to seek growth in a steadfast manner, not just in M&A, but also we must make investment of growth organically as well. We have made this decision. This is the direction we are pursuing, but we will also seek M&A opportunities. As I mentioned today, Lumada's digital service are the focus areas for M&A, basically bolt-on type M&A. But if there is opportunity before us, we will also consider major M&A as well. As we mentioned in April, as well as in June, our discipline in investment is to seek returns. And also ROIC is very important. It has to have a positive impact And even if it takes time, it has to become positive. This is a discipline that is unwavering for us. On the part of the CFO, We are trying to seek investment for growth, but on the part of the investment committee, the discipline remains unwavering. It remains unchanged. A balanced approach is being taken, according to my personal view. And a similar question is received from board members, and I'm responding in the same way. To your second question, regarding the $500 billion for shareholder return, According to the current pace, $300 billion share buyback will be completed without bail within this fiscal year, so we have to consider what to do thereafter. we will take the financial position into consideration at that time. We are also reshuffling our portfolio as well, so proceeds will have an impact as well. We also look for opportunities for growth. All these factors will be taken into consideration. If there is no such case, we will consider shareholder return. Regarding share buyback, we will do that in an agile manner. Agile thinking will be applied. Thank you.

Thank you. Next, Yasui-san. Please unmute yourself and ask your question. Could you please unmute yourself? Oh, I'm sorry about that. Can you hear me? Yes. Thank you. Question. So Tamai-san talked about OpenAI. If I could go one step deeper, Outside of data center, is it transmission distribution or the transformer? And inside data center, 800-volt HVDC, and you said that this will be from 2027 onwards. So in the rack, where can you contribute in HVDC, 800-volt HVDC? What is the size of the business? Could you be more specific where you can do your business? OpenAI has a big Stargate project. So in the next two, three years, can this be an opportunity that you can capture? Answer. Thank you for the question. Kato-san mentioned earlier, outside of data center, first of all, it is the transmission. As Kato-san said, the location of power generation and the data center, how close or how distant they are, the equipment differs depending on the distance. In any case, the power generated cannot be brought into data center as is. It has to go through our switch gear and the T&D equipment. And right now, this is a strong growing area, which will accelerate even further. So they asked us to work together, and that is why we assigned this MOU. So our main business, Power Grid. This will be a big opportunity for our business. And 800-volt VDC. Recently, 800-volt VDC. It's not that we have anything that is commercialized in this area. We need to do more development. But Hitachi Energy, as you know, has core competence, which is the conversion of voltage and the DCAC. And the key expertise is power electronics, power semiconductor. We have in-house R&D. And using this key device, power controller, PCS, and battery energy storage control, and EV charger, we have these broad-based product offering. So PCS and EV chargers are close as the spectrum to 800 volt DC. And as use case, We have the transformer for data center, the power quality, the voltage and the power quality is guaranteed. And we are now the top class track record in this area. So, Hitachi Energy has a big opportunity, we think. Thank you. Question. My second question is the Japan IT Services. Yesterday, Fujitsu and today NEC also announced the order is now the low single digit or negative. So year on year, there may be large deals that impact the changes, but In the US, SaaS may be a bit slowing down. So what is the IT projects in Japan? It has been strong going forward in the second half and next year. Is it a comfortable market environment or not, including AI? Which is larger, risks or opportunities? Thank you very much. Answer. Ono-san will answer. So Japan front businesses in Q2, 13% growth, 13% growth in our business and IT is 3% growth. So Japan DX modernization projects are trending strongly. So in the second half and FY2026, we expect more growth. So a little more comment, IT services. In orders, we showed you some numbers. In IT service, the overseas projects are also conducted. On the overseas side, customers are restraining their investment. So that is a decline. But in Japan, we are seeing strong movement. so q2 and in the first half overseas portion is slightly down may seem a little down but in japan as onosan just said dx and cloud cloud related projects are strong that said we need to watch closely including the overseas market thank you thank you

Taruno-san, please unmute and ask your question. I hope you can hear me. Yes. Question. Regarding energy, power grid business is what I would like to ask a question about. As mentioned by Kato-san, for this is a business that will continue to grow into 2030 and even to 2035. I would like to ask the reason why this is the case. What is the response you're receiving in the recent past in terms of demand? And recently, MOU has been concluded with the Commerce Department of the US, AI and data centers. outlook of demand? Is it related? What is your outlook for the US market going forward in this area? Answer. In the long term, You're asking how we are evaluating the response. Regarding the major orders received, the bid or the business will be evaluated at the headquarters. And for Huawei, demand is strong globally. But we are only looking at the major orders. transactions at the headquarters. This is also the same for Power Grid. HVDC, the main projects, when the scale is large for North America, as well as Asia and in Europe, we are seeing demand is very strong. We are looking at various transactions and we are feeling that the demand is very strong. I am saying that growth should last to 2035. I believe this is feasible. The background is driven by EV, the electrification as well as a replacement because of old facilities. And with the renewable energies, there is a need for stability. A data center is also a new demand that is emerging, which is added to the conventional. Therefore, we believe that this will continue to grow in the long term. Now, regarding the MOU, we have concluded with the Commerce Department. Specifics are to be discussed going forward. With respect to the American market for the power grid business, are evaluating that the demand is very strong. We have the intention of producing in the United States, and we are increasing local production. Demand is very strong, and it isn't as if we can respond to the strong demand totally in the United States. Therefore, going forward, we hope that production capability will be enhanced in the United States.

expectation is also reflected in this project thank you we will move to the english channel now any questions from the english channel please press the button if you do We do not see any questioner, so coming back to the Japanese channel. We are coming close to the closing time and we have many hands raised, but we will take two more questions. I hope you could understand. And the other questions will be followed up from the IR department. I hope you could understand. So, Hirakawa-san and Harada-san, we will take two more questions, starting from Hirakawa-san, please. Thank you. Question, I have two questions. First is Hitachi Vantara, structural reform, storage structural reform. A cost reduction was mentioned What kind of structural reform are you pursuing? And in the second half of this year and next year, what do you plan to do? And in Hitachi, so EBITDA ratio 15% or above is aimed in Hitachi. Storage business in Hitachi may fall short of this level. So what is the positioning? of storage business. Can you continue the storage business? What is your take? That is my first question. My second question is, today Hitachi Energy Investor Day will be held. So it's a bit early, but if you could give us a message. You mentioned the demand will continue growing till 2035. And so Ibita Raid, 16 to 20%. This is a very encouraging target. So what kind of message does the Hitachi Headquarters have? Thank you. Two questions. First, Hitachi Vantara. The structural reform are mainly threefold. First, the key focus areas in So block storage. Mid-range is the strongest growing area. So we will focus on that area. It's not that we will not do other areas, but we need to focus our management resource there. So we will focus on this area. And fixed costs will be right-sized and reduced, including the personnel costs and the right-sizing of the organization. we will right-size the base, the sites. So those are the structural reform that is ongoing. And as mentioned in the material, we have various types of alliances and partnerships to enhance our capability. And in storage, you mentioned that we may not reach the target EBITDA. Right now, yes, we are struggling. But This market is promising. Data center that we mentioned a few times today, data is included in the storage. So how to leverage this data is crucial in introducing AI. So this is a very important solution today. So we want to somehow make our own efforts and as mentioned today, form alliance. We have alliances. So we want to utilize alliances to be more competitive. So that was my answer for storage. Next, Hitachi energy. Because of the time, from my view, I think there are three main points. One is the medium-term, medium to long-term goal. Compared to the past, we are raising our long-term goal. So compared to the past, we are having a good traction for the demand, good view for the demand, so our target is raised. As mentioned a few times today, We were talking about up to 2030, but now it is 2035, 10 years down the road. We can expect continuous growth up to 2035. And third point, service business. Products are growing, and the next growth pillar is service. As we news released, $1 billion investment will be made and people headcount, including 5,000 people. So we are trying to enhance our service businesses. So those are the three main pillars. Anything else? Yes, thank you. Growing our service business. Hitachi's capability will be utilized as one Hitachi. HMAX, RAIL. It is developed in RAIL. So the key technology insight will be utilized to offer digital-based service, enhance our digital-based service. And the speed of development will be raised by utilizing the entire Hitachi capability. And we are stressing that point. Thank you. Thank you very much. Thank you.

Harada-san, please unmute and ask your question. Thank you very much. Question? I have two questions. The first question is regarding Hitachi Energy. You have been discussing this point today in terms of open AI. Now, it seems that the business with the US as well as open AI are long term initiatives. And it seems that there is going to be backup from the Japanese government as well, according to what we have heard yesterday. So if business risk is limited, In the past, you had overcapacity and you were quite prudent in terms of the capacity increase. But for Hitachi, is it easier now to increase capacity? And in terms of investment decision, risk is mitigated? Is that your understanding? Please elaborate. Now, regarding service business, It seems that hardware is growing, which will be followed by service business. I think it will take a longer time. But when will the service business contribute to the overall business in a full-fledged manner? On the part of GE and Siemens Energy, also focused on service business. Do you have a competitive edge against your competitors? Where is the value that can be created uniquely by Hitachi? Answer regarding Hitachi Energy. As we have explained today, in the mid to long term, demand is expected to grow. But when we make capital investment, we are more disciplined. For example, most likely case, a growth scenario will be evaluated. And we want to make sure that even in the worst case, we have to be able to recoup our investment. That is the reason why we are very stringent, rigorous. In the past, there was a period of low growth. Hitachi Energy members said, fully realize this. Therefore, risk management is always emphasized, but not losing the opportunity for growth. Striking the right balance is of utmost importance in making capital investment and planning. As we have been emphasizing from the past, framework agreement can be concluded with customers so that we can have surety in terms of future investment. Regarding hardware, after order is received and when we deliver, we can post revenues, but service business is not the case. It is not similar to the hardware business. Therefore, it is a type of business that will grow gradually. So we have to sow seeds for the service business. Andreas is a new CEO in this area. And service unit has been established for this purpose. New company will receive an investment in this area. We are implementing various measures. And it is likely that within the next Inspire 2027, next medium-term plan, when numerical impact will be brought to bear. But this is very important. The competitiveness of Hitachi Energy will be explained. And we are going to mention this in the rest of the day, but we have been maintaining the number one position. Therefore, footprint is most significant for us. This is our first and foremost strength. In this industry, we have a track record, and products and solutions are areas of our strength. And we have the largest footprint in the industry, in industry. Rolling out our service business is going to be a major weapon and advantage for us. Thank you. Second question is regarding a strategic issue for the whole industry. Regarding providing service business related to hardware is conducted by your company Mitsubishi is also trying to do the same. The SoftBank Group ABB robot business has been acquired recently. Therefore, software companies are now making inroads into hardware. This is epoch-making, I believe. You said that the footprint is very large. What about hardware companies going into software and software companies coming to hardware? Both are occurring. And there could be somewhere in the middle as well. What is your understanding of the changes taking place in the industry as a big picture? Answer. In AI, we are increasingly moving to physical AI. Therefore, robotics are likely to increase significantly. That is our understanding as well. The stance we have for robotics is that in CI, We have what used to be a JR automation company. They have the robot line building business. Therefore, they are a system integrator and they can construct lines for robots in factories. So we are trying to strengthen this business as well. But we are not going to manufacture robots per se, but in terms of physical AI, we are very much focused. We provided explanation recently. As we have outlined in that meeting, within our business, physical AI is likely to generate added value in certain areas. Obviously, Hitachi Energy and Railway are areas we have hardware. CI sectors, on a relative basis, Each business scale is not that large, but by utilizing physical AI, we can provide higher value for the customers. We can expect that to occur. This is not just about products. We can also provide maintenance and other services as well. And we can provide better productivity for maintenance people and better safety for the workers. There are many applications. This is our strength. We have both IT and products. And we have products. This is the strength of our company. And this is our significant position. That's very clear.

Thank you. Thank you very much. With that, we will close this web conference. Mr. Tamai IR Head would like to say a few words. One piece of announcement. As mentioned earlier, today, October 30th, UK time, 1700, Hitachi Energy Investor Day will be held in the UK. Japan time, it will be midnight, and I'm sorry for the late time. And with this briefing, the material will be on the IR website news release column. So please take a look. Thank you very much. So with that, we will end Hitachi Limited Web Conference on Q2 FY 2025 earnings. Thank you very much for taking time to attend today's briefing.