Hitachi (OTC:HTHIY) Limited (ticker: 6501) reported a positive financial performance in its latest earnings call for the third quarter ended December 31, 2023. The company saw an 11% increase in year-on-year revenues, reaching ¥2.28.9 trillion, and a rise in adjusted earnings before interest, taxes, and amortization (EBITA) by ¥34.1 billion. Hitachi also revised its full-year forecast upwards, with an expected revenue of ¥8,285.6 trillion and adjusted EBITA of ¥829.3 billion. Notable achievements included securing significant deals in Digital Systems & Services and Green Energy & Mobility sectors, while the Smart Life & Ecofriendly Systems segment declined due to the pandemic. The digital solutions business, Lumada, was a significant contributor to the company's revenue and adjusted EBITA.
Key Takeaways
- Hitachi reported an 11% increase in year-on-year revenue and a ¥34.1 billion rise in adjusted EBITA.
- The company revised its full-year forecast, projecting higher revenues and adjusted EBITA.
- Significant deals were secured in Digital Systems & Services and Green Energy & Mobility sectors.
- Lumada's revenue and adjusted EBITA increased, contributing significantly to the company's financial performance.
- Revenue and profit in the Railway Systems segment experienced a slight decrease in Q3, but overall growth is expected.
- North America showed revenue growth, particularly from Hitachi Energy, despite global fluctuations.
- Hitachi is focusing on growth opportunities in North America and plans to allocate resources to enhance enterprise value.
Company Outlook
- Full-year forecast revised upward, with an 8% increase in projected revenues.
- North America expected to drive future growth, especially for Hitachi Energy.
- Hitachi is diversifying its supply chain and bringing manufacturing back to Japan.
- The company remains committed to China, expecting the Hitachi High-Tech semiconductor production equipment business to recover in the latter half of the next fiscal year.
Bearish Highlights
- Smart Life & Ecofriendly Systems segment declined due to the pandemic.
- Nuclear Energy and Railway Systems segments experienced order declines.
- The growth rate of GlobalLogic has slowed due to a decrease in IT investments.
- Connective Industries saw a decrease in sales, particularly in the building sector.
Bullish Highlights
- Digital Systems & Services and Green Energy & Mobility sectors showed strong order growth.
- Lumada's revenue and adjusted EBITA increased, with growth in system integration and managed services.
- Infrastructure-related legislation in North America positively impacted power grid and railway businesses.
Misses
- The Railway Systems segment experienced fluctuations in numbers due to adjustments and the inclusion of Thales.
- The DSS business in China saw a decline in sales due to a domestic product focus.
Q&A Highlights
- Hitachi plans a significant wage increase based on added value and productivity.
- The company is acquiring companies overseas to secure engineering talents.
- Hitachi Energy has a backlog of orders expected to convert to revenue over the next three years.
- Lumada business is growing, especially in Generative AI, with over 100 projects in various industries.
- Hitachi Energy sees potential for investment in renewable energies under the Biden administration.
In conclusion, Hitachi Limited has demonstrated resilience and strategic growth in key sectors despite some challenges. The company is optimistic about its future performance, with a focus on North America and digital innovation as primary growth drivers.
InvestingPro Insights
Hitachi Limited (HTHIY) continues to show promising signs of growth and resilience in the industrial conglomerate space. With a solid financial performance in the latest earnings call, the company's strategic initiatives are reflected in its market valuation and investment metrics.
InvestingPro Data provides a snapshot of the company's current financial health:
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- A Price-to-Earnings (P/E) Ratio of 13.71 indicates that the stock is trading at a reasonable valuation relative to its earnings, which may appeal to value investors.
- The Price to Book (P/B) Ratio as of the last twelve months ending Q3 2024 is 2.01, suggesting that the stock is potentially undervalued in terms of its assets.
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Full transcript - Hitachi Ltd (HTHIY) Q3 2023:
Operator: Thank you very much for waiting. Time has come, so we will now begin the Financial Results Briefing of Hitachi Limited for the Third Quarter Ended December 31, 2023. Thank you very much for taking time out of your busy schedule to join us today. First of all, today's presentation materials are available on Hitachi Limited IR website and the news release site, so please check them as you need. Let me now introduce the three speakers, Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO of Hitachi Limited; Tomomi Kato, Vice President and Executive Officer Deputy CFO; Masao Yoshikawa, Executive General Manager, Investor Relations Division. Kawamura will now give an outline of the financial results. Please wait for a moment, while we switch screens. Mr. Kawamura, please.
Yoshihiko Kawamura: Thank you very much for gathering for this meeting today. Now we would like to start the explanation of the results of the third quarter for Hitachi Limited. Now, please look at Page 1, there are 4 points I would like to emphasize today. First is the key points of the third quarter. Second, the results of the third quarter. Three, the fiscal year 2023 forecast and also number 4 is the appendix. These are the points I would like to cover. Now, please refer to Page 3. Here, I would like to give you the key messages for the results and there are three points that are covered here. In terms of the results, three sectors are included. Hitachi Astemo for automotive parts have been reorganized. They are no longer consolidated, therefore it is only for three sectors that we are showing performance for Hitachi Limited. That is the reason why we are referring to this as three sectors. Our third quarter results will be presented. Revenues came and ¥2.28.9 trillion, 11% increase year-on-year, adjusted EBITA ¥221.8 billion Y-on-Y ¥34.1 billion increase. So, we have revenues and profits. For the accumulated from Q1 to Q3, revenues was ¥6.0537 trillion, Y-o-Y increased by 12%. Adjusted EBITA ¥581.5 billion Y-o-Y plus ¥83.4 billion increase in revenues as well as profit. Now based on the three quarters, I'd like to talk about the forecast. Revenues -- ¥8,2856 trillion. This is 4% increase from the previous forecast. Adjusted EBITA ¥829.3 billion, increase of ¥11.3 billion from the previous forecast. Therefore, we have revised upward in terms of revenues as well as profits. Now in terms of consolidated total forecast net income ¥530 billion. That is ¥10 billion increase from previous forecast. Core free cash flow ¥440 billion, increased by ¥100 billion from the previous forecast. I would like to talk about major transactions for DSS Digital Systems & Services as well we have had a very strong orders, inclusive of that for Hitachi Energy. For DSS, epoch-making deals have been won as mentioned here. The next-generation nationwide load dispatching system has been won. This is not on a region basis, but rather nationwide load dispatching system has been won. Now Hitachi Energy has also been very strong. And as mentioned here, the -- from tenant, we have won a business of ¥14 billion under the framework agreement for Hitachi Energy and Petrofac (LON:PFC), and Hitachi Energy will supply its HVDC converter stations. This is a framework agreement for this deal or arrangement. With this pre-advance payment can be provided. This will also have a positive impact on our cash flow. Furthermore, for Trenitalia, we have won a deal of ¥140 billion deal for high-speed trains in Italy. Digital Systems & Services for the three quarters orders has exceeded ¥2 trillion year-on-year, up 9%, backlog of ¥1.5 trillion. Hitachi Energy orders for the three quarters came ¥2.6209 trillion, up 51% year-on-year backlog of ¥4.3 trillion. So we have businesses worth trillion and therefore we had a backlog of about two years. These are the major highlights of the third quarter. Now I would like to refer to specific details. Please refer to Page 5. These are the highlights of the results for the third quarter only. Please look at the text above. For the three sectors we grew revenues 11% Y-o-Y basis -- increased adjusted EBITA by 18% organically. Please look at the table referring to the three sectors to the right. In terms of revenues ¥2.1289 trillion, up 11%. This is the growth of 11% and 8% is the year-on-year changes excluding the impact of foreign exchange rate fluctuations, so at 8% adjusted EBITA ¥221.8 billion, Y-o-Y increased by ¥34.1 billion and here the Y-o-Y increase of 18% has been achieved. Adjusted EBITA margin has also improved 10.4% for the three sectors. Net income has increased significantly as well ¥244.1 billion. Core free cash flows. As also mentioned, this is an important KPI for our mid-term management plan and it has increased significantly to ¥147.4 billion, increased by ¥97.1 billion. In terms of foreign exchange, yen is becoming weaker. And therefore, we are assuming ¥148. The sensitivity will be explained further later. Now please look at the Page 6. Page 6 and 7 are the results of the business segments. Page 6, Digital Systems & Services as well as Green Energy & Mobility. Page 7 is for the Connective Industries. Please look at Page 6. For Digital Systems & Services, on the very top Y-o-Y basis increased by 9%. Adjusted EBITA increased by ¥16.1 billion. Therefore increase in revenues as well as profit for the sector. Looking at the dynamics on the right-hand side, Front Business increased revenues and IT Services increased also revenues as well as profit. Services & Platforms revenues was flat. However, the cost reduction has led to increase in profit is shown below. GlobalLogic continues to grow strongly -- increase in revenues as well as profits. Adjusted EBITA is ¥87 billion is the highest ever record for Digital Systems & Services. Next, moving to Green Energy & Mobility, please look at the top line. Y-o-Y basis increased by 21% for revenues and almost flat around ¥100 million for adjusted EBITA. Hitachi Energy trail has increased revenues. But power grid related cost has increased somewhat and that is the reason why adjusted EBITA is almost flat. Now, Nuclear Energy & Hitachi Power Solutions is also mentioned here. Y-o-Y increased by 32% or plus ¥0.6 billion. Hitachi Energy here there has been a significant contribution to revenue, increased by 25% in terms of revenues and adjusted EBITA ¥9.2 billion. The market environment as well as the framework agreement has had a positive impact therefore making significant contributions to the profitability. Related cost is also shown here. Railway Systems for the third quarter has had increase in revenues, but a decline in profit. This will be explained in further details in later pages. If you look at the -- on a year-to-date basis, it has increased by revenues as well as earnings, but therefore this situation is special to the third quarter. Next, looking at the Connective Industries, looking at the very top in terms of the revenues, flat. EBITA has increased by ¥400 million. Down below, the Building Systems is -- are shown here, declined by 1% in terms of revenues. Increased in adjusted EBITA by ¥1.9 billion. This is linked to the Chinese real estate market correction that's taking place. In our case, there have been significant impact. But even with less revenues, profit is increasing. This is because the -- from hardware we are now shifting away to focus on services, which is shown in this result. Smart Life & Ecofriendly Systems, which is home appliances, minus ¥0.7 billion in terms of adjusted EBITA. We believe that this will be the bottom this year. Next year, we are poised for recovery. The reason why I say this is that because of the pandemic over the three years home appliances had a significant increase. So we are now in a reactionary decline. And this connection will be reaching a bottom this year and next year we are poised for recovery. Next Measurement & Analysis Systems Hitachi High-Tech Y-o-Y basis minus 7%. Adjusted EBITA decreased by ¥6.5 billion, decrease in revenues as well as profit. The Measurement & Analysis Systems for medical is growing very well. But semiconductor manufacturing equipment around last year -- this time last year, we felt that semiconductor cycle will recover but there has been delay of one year. Therefore this year will be the bottom and therefore that is a reason why we have a decrease in revenues as well as profit, which will be the bottom. Industrial Digital, Water & Environment and the Industrial Products, industrial areas are both -- are all posting increasing revenues as well as earnings, remaining very strong. Here, we are looking at the subsidiaries. At the very top we have the Hitachi Astemo, but in October it has converted to equity-method affiliate. Therefore, on a Y-o-Y basis, the second half will be less therefore it is negative. Hitachi Construction Machinery, we only have 25%, so it is not in the scope. Hitachi Metals is also being de-consolidated and therefore there'll be no impact in the fiscal year. Page 9. Based on what I have explained, looking at revenues on top and adjusted EBITA on the bottom. This is the waterfall chart showing the movement. As for revenues at the top, at the left-hand side is the third quarter result for last fiscal year. Right-hand side is for this year and the movement is shown in the middle. First of all, there have been the divestiture of Hitachi Metals, so minus ¥279 billion, divestiture of Hitachi Astemo minus ¥383.6 billion. And foreign exchange was impacted positively ¥65 billions. And there have been sales effort made and increase altogether by others ¥163.6 billion. And we end up at ¥2.258 trillion. So it is decline in revenues. For adjusted EBITA we start with ¥231.1 billion. The items are the same, divestiture of Hitachi Metals, Astemo and foreign exchange and other efforts made. And we end up at ¥231.2 billion. As I have mentioned earlier, in terms of revenues, declining, but for adjusted EBITA you can see that it remains flat. Revenues are declining, but profit is being secured in these results. Page 10, please. Here at the end the quarter, the balance situation is explained here. Cash flow situation is explained here. The gray area is as of December 31, 2023, end of the third quarter. Now, we are at ¥12.0732 trillion. And looking at the difference with last year in terms of asset, minus ¥428.2 billion because of Hitachi Astemo. And below, looking at 51.5 days. And in terms of cash conversion cycle, this is increasing by 6.6 days. This is because of the cash flow improvement for Hitachi Energy. You can see that the cash conversion cycle is improving significantly. D/E ratio is also improving to 0.32 times. In fact, on a full-year basis, it'll be even better than this. In terms of cash flow, on the other hand, there is operating activities, investing activities and free cash flow is around ¥370.8 billion, increased by ¥136 billion. Core free cash flow which is most important KPI, one of the most important, is increasing by ¥193.6 billion to ¥268.5 billion. Page 11, please. Now let me update you on Lumada's situation. So there are three tables. First, upper-left, far-left, and second one, this is the third quarter of FY '22 and '23. At the top, you can see the revenue through the quarter fiscal '22 was ¥476 billion, up to ¥568 billion. So that's Y-o-Y 19% up. And you can see the legend, these revenue from the four quadrants. And the two on the right bar graph, this is the full year of FY '22 and FY '23 forecast. FY '22, this was ¥1.960 trillion, up to ¥2.330 trillion. So that's another 19% increase Y-o-Y. And then adjusted EBITA it's 1% up, from 14% to 15%. Next, the bar graph on the right. This is Lumada business ratio of overall. Left is revenues and the proportion of Lumada and the right side is adjusted EBITA. Revenues FY '21, '22 and '23 forecast. This year ¥8.2856 trillion and of which ¥2.330 trillion is Lumada. So that is 28% of total adjusted EBITA. Likewise, Lumada proportion on adjusted EBITA base is now up to 41%, close to half is Lumada. Now you can see the horizontal bar graph. This is what I mentioned at the outset. FY 2023 revenue, the left side, ¥2.330 trillion break down here. Digital Systems & Services ¥1,040 trillion, Y-o-Y 21%. Green Energy & Mobility ¥390 billion Y-o-Y 23% plus. Connective Industries ¥900 billion, Y-o-Y plus 15%. And you can see the topics at the bottom of the page. One is the load dispatching system. This is the largest. This is completely Lumada and Hitachi Energy, for it overseas package will be brought in so it will be the international specification. This is big. And GlobalLogic on a smaller scale acquired digital engineering companies in Australia and the U.S. And Suntory Beverage & Food Limited and we have a collaboration. So, this is a traceability system for raw material receipt to manufacturing, logistics and warehousing. And lastly, Generative AI. We are now trying to utilize Generative AI internally and externally. We're seeing new movements. So that was to the third quarter. Now from Page 13 we will have the full year forecast. Page 13, please? So, in all profit items, we have revised upward in all items are three sectors, Y-o-Y 8% up and adjusted EBITA plus ¥104.4 billion, 14% up. The revenues three sector is ¥8.2856 trillion. This is plus 8%. So this is the 8% that I mentioned earlier. And left side, this is the excluding foreign exchange factor. Adjusted EBITA ¥829.3 billion, Y-o-Y, ¥104.4 billion and this is 14% up. Adjusted EBITA 10% and net income attributable to Hitachi Limited stockholders, ¥546.8 billion. So all profit items increased. We're revising all items up. And EPS ¥588. And on the left side, core free cash flow up from ¥340 billion to ¥440 billion, up by ¥100 billion. And ROIC is up from 8% to 8.2%. Now, the small table on the right side is the FX sensitivity. No change from the past ¥140 to $1. So if ¥1 -- depreciates by ¥1, how much impact on revenues and adjusted EBITA is shown. So with ¥1 depreciation, ¥3 billion-plus on revenue and ¥200 million plus on adjusted EBITA. Page 14. So the earlier had two pages now summary on one page. Digital Systems & Services. So, if you could look at the entire sector, revenues ¥2.550 trillion. And adjusted EBITA ¥321 billion, 12.6%. This is the highest profit and Y-o-Y 7%, ¥27.2 billion. And this is up 3%, 11% up from the previous forecast dynamics. Revenues and profits are up. In GlobalLogic both, revenue and profit are up. Next, Green Energy & Mobility. The top sector part, revenues ¥2.970 trillion. The adjusted EBITA ¥190 billion and Y-o-Y plus 20%, ¥26.4 billion, and plus 7%, plus ¥4 billion against previous forecast dynamics. So first of all against previous forecast revised upward by ¥190 billion in revenue and ¥4 billion in adjusted EBITA. Hitachi Energy revenues and profits are up. And Railway, as I said earlier, on a full-year basis revenue and profit are now up. Third quarter alone is not, but full year revenue and profits are up. Connective Industries, top row, revenues, ¥3 trillion and adjusted EBITA ¥330 billion, plus 1%, ¥17.8 billion. Against previous forecast, it is flat. Building Systems, plus 3%, plus ¥4.5 billion, so both revenue and profit are up. And Measurement & Analysis Systems, Hitachi High-Tech, because of the reasons I mentioned earlier, revenue is flat, but slightly down. Astemo is now equity method. It will convert to an equity method affiliate. Next, Page 15, please. Full year revenue and adjusted EBITA comparing last year and this year. So, ¥10.881 trillion in FY '22. Both, Hitachi Construction Machinery, Hitachi Metal, will be divested and Hitachi Astemo foreign exchange will be positive and others positive. And so, it's ¥9.450 billion. Adjusted EBITA. FY '22 is ¥884.6 billion and same increase and decrease items. Right side, ¥880 billion. Revenue is down, but adjusted EBITA is flat, slight decrease, but flat. The listed companies will be excluded, and that impact is absorbed and achieving this level. So, that was the full year results. From '17 onwards, this is a cumulative first, second and third quarter. The big trend remains unchanged. Three sector grew revenue Y-o-Y 12% and increased adjusted EBITA Y-o-Y ¥83.4 billion, 17%. Revenues ¥6.537 trillion, plus 12%. So that is the 12% you see on the first row. And 9% is excluding FX. Adjusted EBITA, ¥581.5 billion. And plus ¥83.4 billion is reflected here. So that is Y-o-Y, plus 17%. Adjusted EBITA margin, 9.6% and net income ¥461.9 billion, core free cash flow ¥268.5 billion. This is cumulative third quarter -- three quarter cumulative. Next, Page 18. This is quarter one through three, no change in trend. Digital Systems & Services Y-o-Y. So both revenue and profit are up. GlobalLogic, both revenue and profit are up. Green Energy & Mobility, both revenue and profit are up. Hitachi Energy, a big jump. And Rail Systems will -- is also up in sales and profit. Connective Industries. Revenue is up by 2%, but adjusted EBITA because of Hitachi High-Tech, the semiconductor-related minus ¥2.9 billion. In Buildings, no increase in revenue, but the business composition changes. So profit is up. And Hitachi High-Tech number is shown here, and Astemo, so total here. Page 19. Consolidated statement, profit and loss. You can see small numbers, but FY '23, the gray part, the numbers I already mentioned are listed, revenues ¥9.450 trillion, and adjusted operating income ¥740 billion. And you can see the ups and downs. Adjusted EBITA ¥880 billion, and EBIT ¥790 billion. And third from the bottom, 24.4% effective income tax rate. This is bigger than last year's 14.2%. But last year, because of the deferred tax asset and the deemed dividend, those were the factors. And 24.4% is a normal rate. Bottom, net income, ¥530 billion. Page 20, please. This is up to third quarter cumulative by region, by market. You can see in black box 3 sector total revenues and the composition ratio. Japan is 39% of the ¥2.354 trillion; and China, down by 1% to 13%. Digital Systems & Services, 27% down. So China, you can see that's a big factor. And on the right side, back to the black box, ASEAN, India, 9%, that's up by 6%; and North America, 15%. This is plus 19% on a Y-o-Y basis. GlobalLogic contributed significantly. And Europe, 17% Y-o-Y. This is Hitachi Energy accounting for a big portion and other areas. On the far right, you can see third quarter cumulative overseas revenue, 61%. So over 60% is overseas. Page 21, by segment order results. Digital Systems & Services and then Green Energy & Mobility and right side Connective Industries. Digital Systems & Services, our Front Business in Y-o-Y, they're all strong. Order is growing from last year. Green Energy & Mobility fiscal '23 third quarter Y-o-Y. Nuclear Energy 32% down and Railway Systems 53% down. I will answer in the Q&A session, both in FY '22 had large contract and so it's a reactionary fall from that. Connective Industries on the right side. There are some triangles. We're building minus 7% and Smart Life & Ecofriendly Systems and 6% in High-Tech. This reflects the current circumstances. But the three industry BUs are up. I went rather quickly, but that was the outline of the material we delivered today. Thank you very much.
Operator: Thank you very much. We would now like to proceed to the Q&A session. [Operator Instructions] [Indiscernible] please. Please unmute and ask your question.
Unidentified Analyst: I have two questions. First of all, by regions, you talked about North America. Please elaborate further on this matter. Second is regarding Railway business. In terms of North America, increase in revenues, and you can see that the ratio is increasing. On the part of commerce and GlobalLogic increase has been mentioned. But by business segment, it seems that Green is growing rather than Digital, I take it. Is it correct understanding? Please confirm. And in Green, I think it's Hitachi Energy basically. In North America, the growth that you are seeing, what I am interested in -- what kind of deals are growing in North America for Green? And you talked about the forecast. You said that North America is going to be the driver of growth going forward. Please elaborate further in the context of Hitachi Energy. Second question is regarding Railways. Now when -- in the last result, I think there was some adjustment made in the third quarter it seems that there has been an upward revision, although small. Is that a correct understanding? Please elaborate. But why is it going up and down -- down and up, control and forecast seems not clear. Do we have to be concerned about this or is there a different reason why this is the case?
Yoshihiko Kawamura: Regarding numbers, Kato-san will provide further details. Regarding North America, I mentioned GlobalLogic is very strong. This is a company that is growing significantly. But as you have rightly mentioned, I would say that power grid, Hitachi Energy has been very strong. We don't have a plant in North America, but because of the infrastructure-related legislation, this is having a significant positive impact. Railway business is one in North America as well. In the Green Energy, there is significant contribution made by North America. Regarding Railway Systems, numbers are sometimes not fixed. I mean Thales inclusion will have to be adjusted in terms of numbers. Thales will be next year. Therefore, when there is -- or rather for fiscal year 2024. So now the situation is clear. That is the reason why we are presenting these numbers at the third quarter level. But at any rate, for the Railway Systems we have run major deals, not only in North America, but also in Europe, but we believe that this business will continue to make contribution. I'll like to ask Kato-san to elaborate on the numbers.
Tomomi Kato: Regarding North America as Kawamura-san has just explained Hitachi Energy is showing a significant increase and growing overall great integration is as well as transformers are growing significantly. And today, we talked about the orders backlog. We have a significant backlog and therefore we can expect further growth going forward. Thank you.
Operator: Thank you very much. Next [Okada-san] please answer -- as a question.
Unidentified Analyst: I have two questions. First is on Digital Systems & Services front, profitability. I think you mentioned this. The profitability is improving quite significantly. So the background, if you could elaborate on the reasons and the future outlook, please? Thank you very much. That's my first question.
Yoshihiko Kawamura: Thank you for the question. Front Business. First, the project management, the phase gate management is now very stringently, so that we will not -- to avoid losses and this contributed a lot. So cost side contribution was large and the other factor was large system update renewal continued finance public and energy sector these large system renewal upgrade was done and we captured that contract without fail, so that was a big contributor. If you need more numbers Kato-san will explain in more detail, but that is the macro perspective.
Unidentified Analyst: Thank you very much. Question. My second question is on Lumada. Digital engineering and this by segment breakdown. I think you changed from the second quarter. So if you could explain on the changes. The amount is still small, but what is the change in your forecast? By product or by segment please.
Yoshihiko Kawamura: Okay. Sorry, the data at hand does not have by product the increase. I don't have the accurate number, but just roughly ballpark Kato-san will explain.
Tomomi Kato: Fiscal '23 forecast is up -- revised upward by ¥20 billion. System integration-related and managed services. These segments. We think we can go higher. So, we revised upward. So third quarter is 19% growth year-on-year and full year 19%. So, this forecast, we think we can achieve this level. So this is some macro rough numbers, but three sectors, year-on-year level revenue, digital engineering, around 30% up and system integration 20% up. And connected products, hardware less than 30% up. So the four quadrant segments were all up by 20% to 30%. So, they all pushed up the results. Thank you. I hope this answers your question. Thank you.
Operator: Thank you very much. Next Hideo-san please. Please unmute and ask your question.
Hideo Noda: Question. I hope you can hear me.
Yoshihiko Kawamura: Yes we can.
Hideo Noda: I have two questions. At the beginning of January, your market cap exceeded ¥10 trillion. What is your take on that and how to enhance the enterprise value of Hitachi going forward? What are your views on this? Second question is regarding the press release. Kawamura-san, it seems that this is going to be the last earnings call for Kawamura-san because of the changes that are taking place. Were you able to achieve everything that you hoped to achieve in Hitachi after joining Hitachi? And please share with us your message to Hitachi people going forward.
Yoshihiko Kawamura: Regarding market cap exceeding ¥10 trillion, my thoughts is that this is only a midway point. Blue chip companies in the world and the companies that we benchmark with, compared to them, we believe that ¥10 trillion in terms of Japan, we could be within the top 10, but we are global company. That is our aspiration and therefore ¥10 trillion is only a midpoint in our journey, and we want to aim further higher levels. This is what I'm discussing with the President as well. How can we achieve this? We have to allocate more resources to the growth areas. This will be first and foremost. It's easier said than done, but there is customers and technology, and we have products and follow-up will be required. We can't do this all at once. However, in the midterm management plan, product, customer regions wise we have to focus our management resources as well as the effective utilization of assets that will be required. This is what I would like to ask the next generation to take on. Now I entered Hitachi nine years ago. And whether I have done everything that I have aspired to achieve is difficult to answer. About engaging in dialogue with you has been very useful for me. You've taught me a lot. I'm very happy and grateful that we've had a meaningful dialogue over the years. My aspiration was not so difficult, but I am -- regarding -- the dealing with assets as well as to define our relationship in the Capital Markets as well as disclosure and control, these are areas that I hope to improve. And I believe that I have been able to make a small contribution. So there is a sense of satisfaction on my part. From the next earnings call, Mr. Kato will be answering your questions. Thank you very much for your support over the years.
Yoshihiko Kawamura: Thank you very much. Next?
Operator: Tomoaki-san please unmute yourself question.
Tomoaki Kawasaki: Thank you for your hard work Kawamura-san. So I have a question on next year. So the economy slowdown may be expected, and the FX is unforeseeable. On the other hand, DSS and GEM and the market situation and your order backlog is strong. And so I think your general trend is revenue and profit increase. Are there any risk factors or things you need to be careful of? That's my first question.
Yoshihiko Kawamura: Thank you for the question. Fiscal 2024 in February-March, we have budget meeting to develop the FY20 budget. So we do not have the concrete plan yet, but this will be the final year of the 2024 mid-term management plan, so we have 3 plans so this medium-term plan 2024, we have measures, but if the current situation continues like the geopolitics and the financial market and the technology advancement. If this remains constant -- constantly progress then FY 2024 will be a significant increase in revenue and profit as you just mentioned, but there are many difficult things in reality. I don't want to talk much about politics. But there are many elections this year. On the Internet. We see news like if Trump wins, the trade relations will change and the security situation will change. So, it's not that a business environment or the interest rate or the Fx or the trade relations. Sudden change is a big risk, that we have to be aware of. In March, the primary Super Tuesday will be held in the U.S., so we will watch closely and see how U.S. will handle this. And of course, the relations with China and Taiwan comes into play, so the security is a big factor. And on the business side, DoJ last week and this year is starting to send out signals this week. And so our interest rate is a big factor. We are controlling debt, so there should not be a big problem impact, but the bond market will be impacted. So, the feedback from the bond market may come if the interest rate moves and the Fx may move accordingly, so the investment mindset may change accordingly. So, FY '24 in terms of environment cannot be optimistic, so we have to factor in all these elements and my successor will come up with a good 2024 plan, I think. Thank you.
Tomoaki Kawasaki: Page 20, by region revenue, you said China mainly on DSS, the proportion is declining. GlobalLogic does not have much exposure in China, if my memory is correct. And so, I think you said that the challenge is to grow in China, but maybe it's not going that well from the numbers, so what is your plan? If you have any plan you could share with us.
Yoshihiko Kawamura: GlobalLogic is a U.S. company. So, what to do with China business is a difficult situation -- difficult theme, but we have not given up. If there are business demands, we will go in and move forward. So basic stance remains unchanged. So, I will read out the numbers China DSS, as mentioned earlier, GlobalLogic -- it's not that GlobalLogic is down. Hitachi Vantara storage business. China government's policy focuses on China products and therefore sales is down.
Tomoaki Kawasaki: Understood. Thank you. Thank you very much.
Operator: Harada-san, please. Please unmute and ask your question.
Ryo Harada: Thank you very much. Kawamura-san over the years. I have three questions. The first question is somewhat covered by the other questions. The margin is high for the Front Business, so please talk about the continuity of this business, the Front Business is receiving many others and IT resources are incurring higher costs. There could be wage increases that is forthcoming. Is this going to have an impact on the margin, but it put downward pressure on margins.
Yoshihiko Kawamura: As you have rightly mentioned, system integration is a main part of the business. Therefore, the personnel cost is very important and there are many major projects regarding Generative AI system engineer work will be replaced somewhat by such technology, so we have a large scale project that is ongoing so that the speed can be enhanced and absorb the HR costs. Numbers will be presented by Kato-san later. And for financial and public sector as well as energy in these areas, we believe that we have a significant backlog that we are assuming that orders will continue. And therefore, we don't think there will be a significant decline in the Front Business. It will continue to be a viable business for us with good profitability.
Tomomi Kato: Now regarding the backlog, as I mentioned, -- late -- on Page 21, Front Business, the backlog is increasing by 10%, therefore it remains very strong. IT service is also similar. Therefore, as Kawamura-san has already explained even with the cost increase, measures are being implemented accordingly. And therefore, more than ever, we believe that even higher profitability can be pursued.
Ryo Harada: So if anything there is possibly an upside?
Tomomi Kato: We believe that this business will continue to grow.
Ryo Harada: Regarding the second question is regarding Hitachi High-Tech, the semiconductor production equipment. You mentioned that recovery will come from next fiscal year. Is it going to be the second half or later part of the second half, what timing next year will we see a recovery?
Yoshihiko Kawamura: According to industry consensus, I think it is going to be next -- is second half. The semiconductor industry correction has run its course, but there is going to be somewhat of a time lag. Therefore, for our business, I think we'll see recovery in the second half of next year. Now third point is regarding shareholder return. In the three years ¥800 billion to ¥900 billion communication has seen made last year to the tune of ¥800 billion to ¥900 billion.
Ryo Harada: What about the share buyback core free cash flow? Outlook has been increased and Renesas shares have been sold recently. Therefore, I believe that there are also asset sales made as well. So, is there a possibility that you can increase this further or is it you remaining with ¥800 billion to ¥900 billion for the mid-term management plan period please elaborate further.
Yoshihiko Kawamura: Regarding the shareholder return, we have not started discussions yet. This is something that will be discussed going forward. In terms of the midterm management plan, story is that core -- half of the core free cash flow will go to growth and half will be returned to the shareholder. That is the basic principle that we will be following. However, there are different areas of possible growth. We may accelerate our investment for growth. So, we have to look at the overall picture in considering the return to the shareholder. But basically for the core free cash flow, half of that is what we are considering. This basic policy remains unchanged. And based on this premise, please look forward to further announcements. Now in terms of dividend as well as whether we are going to do a buyback or not, that has not been discussed yet, nothing has been decided yet on this topic.
Ryo Harada: Thank you very much for the answer. That's all from me.
Operator: Thank you very much. Next in must please unmute yourself and ask your question.
Operator: Next, [indiscernible]. Please unmute yourself and ask your question.
Unidentified Analyst: You mentioned this earlier, but I have two questions on China. The Japanese companies that are in China about 50% are planning to reduce their business. So what is your current status of China business? And in the short and medium to long-term, what is your thinking on China investment? And the other question is, Kawamura-san earlier you said China, Taiwan, geopolitical risk. The supply chain base will be shifted -- studied to be shifted to Japan or the allied countries. How -- is any update, progress in that initiative?
Yoshihiko Kawamura: Thank you for the question. What we think of investment in China. We have big business blocks in China. One is elevator, escalator, elevator business. And as Kato-san said earlier, IT-related, storage-related business and Astemo, With Japan OEM, we have parts and so these are big businesses in China. So reducing China investment suddenly is not something we do or disinvest in China, no, we will not withdraw our investment. Fresh capital may not be invested in from Tokyo, but we already have capital accumulated on site and so we will reinvest. And if necessary, we will use that. And the trade with Japan and trade with the U.S., we still have minimum level -- necessary minimum level, but it's not like before where mass-produced products in China will come to Japan or the U.S. We're not doing that. So, the business completes in China, in trading and manufacturing and investment, so that is our current policy. As I said earlier, elevator business, initially there was the Evergrande problem and so we were worried. But now in case of new installation, we get upfront payment. And in maintenance, we are now shifting to maintenance for -- so we have quite good profit in China. Going forward, fresh money injection from Tokyo will be restrictive. And for trade, we will continue the current level. And the Taiwan issue -- at the beginning of January, there was an election and the Democratic party, they won, and they are close to the U.S. How Beijing exerts its impact or influence will be watched, so it's difficult. Regarding supply chain, our Shanghai regions, home appliance-related parts, we're partially manufacturing in China still, but we are returning to Japan too. Initially we thought of somewhere in Southeast Asia, but now we are basically bringing this back to Japan. I cannot go into details and share with you the numbers, but we are on schedule. The supply chain risk is now diversified and we will bear this in Tokyo. And the biggest problem is the semiconductor problem. For Taiwan, we have various semiconductor-related business of the production equipment to Taiwan. So the geopolitical and security judgment needs to be made. Our current judgment is that China will not use the armed forces to Taiwan. We think that is unlikely. But in any case, it will be a Hong Kong style entry. So relating semiconductor, we're not thinking of taking any particular action at this point in time. Thank you. I hope that answers your question.
Unidentified Analyst: Thank you very much.
Operator: [indiscernible] next please. Please unmute and ask your question.
Unidentified Analyst: I have two questions. First of all, regarding GlobalLogic, what is the organic trend in the first half? There was impact of acquisitions, 6% or 7% growth was mentioned. From the third quarter, is it going toward recovery or is there still headwind?
Tomomi Kato: Regarding GlobalLogic, as you have rightly mentioned, on the part of the customers, IT investments are slowing down. It is continuing to grow, but the speed of growth there is slowing down. And that is continuing from the first quarter to the third quarter. So organic growth is around 4% year-on-year. Therefore, it is declining somewhat, but compared to the previous quarter it is increasing.
Unidentified Analyst: DSS, you said that there is an epoch-making deal that has been achieved in terms of the -- so your capabilities have been brought to bear in the acquisition of Diehl Steel regarding the load dispatching system with the involvement of DSS as well, so how can you -- capturing deals that transcend the different sectors? Please elaborate further.
Yoshihiko Kawamura: You have explained as well. Now regarding Tokyo one of the business of load dispatching system, it is on One Hitachi basis through collaboration amongst our different sectors. Hitachi Energy has -- is providing the system HVDC converter system. So, we are transcending geographical areas as well as business sectors working in collaboration. And GlobalLogic knowledge is also brought to bear, so U.S. is also involved. And this is epoch-making in that regard. In the power sector of Japan, it is epoch-making, but for Hitachi, was epoch-making as well, Tokyo and Switzerland, the grid and U.S. IT have worked in collaboration to achieve this deal. So, for Hitachi internally, this has been epoch-making. And I think this will become more prevalent going forward. And this will be a very good opportunity for us to pursue such businesses as One Hitachi. We will continue to do so.
Masao Yoshikawa: This is Yoshikawa speaking. Prime vendor is Hitachi. Hitachi Energy is the secondary vendor. So, Hitachi GlobalLogic are not a contractual party, but they are providing a Hitachi Energy package solution development support to Hitachi Energy. Therefore, we have undergoing collaboration amongst the different divisions of Hitachi. That's all.
Unidentified Analyst: Thank you very much.
Operator: [Operator Instructions] Vincent, please unmute yourself and ask your question.
Unidentified Analyst: Thank you. I have one question. First question. Question about wage increase so what is your plan on the wage increase going forward? And digital talents IT engineers wage increase. If you have any information you could share with us? Thank you very much.
Yoshihiko Kawamura: Wage increase. In our case, we have the electric union and the union is a big factor. So it is basically decided upon the negotiation with the union. But continuing from last year, we're planning on a big wage increase this year. We have confirmed that within the management, but the percentage increase is up to the negotiation. We have a basic principle though, added value and the productivity will determine the wage increase using a company logic. So it's not irrational. We will reflect the productivity improvement in the wage increase. And so this stance remains unchanged. At any rate, we will decide this with the union negotiation in March. And we're thinking of a significant wage increase and trying to budget it in the next year. And the digital talents. This is a difficult problem. Japanese companies it's very scarce. The engineering department, university graduates, it's mostly machine engineering. And so the talent supply is small, to begin with and so the supply demand is very tight. So for Japan, we are -- we have to take some unique measures. On the other hand, if we try to hire the talents in Japan, the macro labor market factor is in play. So we have to hire on the other overseas side. GlobalLogic has a big function of hiring people in North America. Labor market in North America is also tight, so we acquire a company in East Europe to acquire talents or Latin America or Australia and the U.S. like we acquired this time. We will acquire companies and acquire engineers there. So we're doing this in a two-pronged approach. Japan and overseas. Thank you. I hope this answers your question.
Unidentified Analyst: You announced the human personnel refreshment. Abe-san and Tokunaga-san, the position change. So if you could explain the reasons.
Yoshihiko Kawamura: I am not the one with HR authority. So I cannot talk about the intention behind but Tokunaga-san in fiscal '24 will be heading the DSS and the growth strategy. So, he will discuss the backbone of the next medium-term plan, but his role has basically been unchanged. Abe-san. [Indiscernible] will step down this time with this announcement, so Abe-san will move after that. So Abe-san's assignment will be BSS to Connective Industries. Abe-san's change, the Connective Industries is the merge of the hardware and IT. This integration is crucial, and Abe-san understands both sides. So I think he is the best fit. Thank you.
Unidentified Analyst: Thank you very much.
Operator: Next [indiscernible]. Please unmute and ask your question.
Unidentified Analyst: My question. I have two questions, both related to Hitachi Energy. The first is regarding the backlog of Hitachi Energy. How is that converted to revenues in a surplus manner? On Page 14 the supply chain management as well as strengthening of production capabilities are mentioned. Specifically, how do you intend to tackle this initiative. Page 20 regarding the regional aspect Green Energy & Mobility other areas is growing by 42% Other Regions which regions which products and solutions are growing in this category of other areas for Green Energy & Mobility.
Yoshihiko Kawamura: Regarding Hitachi Energy, as I mentioned at the outset, the order backlog is accumulating. In the third quarter, the backlog is exceeding ¥4.3 trillion. And how it is this going to be posted in the P&L, out of ¥4.3 trillion for '23, 10% will be converted to profit and loss, '24, 40% and the remaining 50% is '25 and beyond. So it takes about three years for the backlog to be registered in the P&L. And we need more capacity to enable this. Hitachi Energy will make a significant investment in ¥8 billion to ¥100 billion investment will be made, so that our production level can be enhanced. There are many suppliers as well, so we will combine the resources of suppliers as well to increase capacity. Now regarding your second question, Kato-san will respond to the question.
Tomomi Kato: Now other areas, specifically as Middle East, Hitachi Energy, Saudi Arabia has received the order for grid integration related as well as high-voltage products business is growing in this area. So the other areas is Middle East for Hitachi Energy. Now regarding CapEx increase for GEM sector overall for this fiscal year compared to 1 year before it, we are going to be increasing by ¥30 billion. This is mostly for Hitachi Energy. So for this year as well, that is the investment increase that is going to be named as an increment.
Operator: Thank you very much. Next, Ayada-san please, please unmute yourself and ask your question.
Junya Ayada: I have two questions. First is related to the earlier question. Hitachi Energy's third quarter margin, how do you summarize the margin? Year-on-year basis, the adjusted EBITA, 8.7%, so that is 0.3-percentage point improvement. First and second quarter year-on-year was 2-percentage point improvement. That was the pace. So, the pace of improvement seems smaller. So how do you understand -- how should we understand this margin? And for GEM as a whole, in the midterm management plan, 10% adjusted EBITA margin is the target. So, Hitachi Energy next year is expected to achieve over 10%. So third quarter summary and next year's margin improvement pace. That is my first question.
Yoshihiko Kawamura: The way numbers are shown this year this time, revenue grew significantly and the backlog goes to P&L and that seems margin is declining because of that reason. But towards the second half and fiscal '24, as I said earlier order backlog margin is up higher than before, and that will be reflected. So we can see an improvement from the current numbers. Now, our view on FY '24, we have not lowered the target. The strong backlog will be the foundation. And with the high gross margin, we will achieve this target. Hitachi Energy management and we are coordinating to make that happen. So 10% is our target that we are aiming for. Thank you.
Junya Ayada: Thank you. My second question is Lumada. You mentioned earlier that GlobalLogic's organic growth, but for Lumada as a whole organic growth, third quarter results if you have that number at hand please share that with us. And on a full-year basis, ¥20 billion upward revision in Lumada, but the FX assumption has changed slightly, so is this because of the foreign exchange or other factors? So that's my first question. Numbers. And based on these numbers, Page 11, Lumada business expansion is explained. Generative AI-related order is over ¥10 billion or more than 100 cases, projects. So you mentioned the augmented reality metaverse, Generative AI, Lumada business size compared to normal business, is it larger or smaller? And the current business, what kind of clients, what kind of business accounts for the big portion? I think it falls under digital engineering. If you could give us some more color on this business. Thank you very much.
Yoshihiko Kawamura: First, the Lumada details, our organic growth and others, we have only limited material, but Kato-san will explain.
Tomomi Kato: Third quarter revenue was 19% up year-on-year. Roughly speaking, excluding FX, it is still up by 15%. So it's double-digit mid-teens growth. Full-year basis, similar story. 16% up, excluding foreign exchange. So Generative AI, Yoshikawa-san will explain.
Masao Yoshikawa: So this 100 projects, GlobalLogic and DSS, mainly in Japan, these are the projects that we already acquired. In terms of the amount, the contribution to the total company is not large yet, but related -- they will lead to related systems in the future. So, we are developing them meticulously. Regarding generative AI, we've been working on this since last year, and the inquiries is increasing. In terms of industry, finance and bank and the insurance and government.
Junya Ayada: Thank you very much.
Operator: Thank you very much. Yasui-san please unmute and ask your question.
Kenji Yasui: I have two questions. First question is running the power grid market in U.S. You talked about this issue. I think it was very difficult to gain approvals in the past. But with the introduction of renewable energies was not making headway. But beyond the European market is there a possibility that is rising for North America? Is the market environment changing today? Second question is related to the question that was raised earlier, regarding Kato-san. He will be the new CFO. Now it seems that executive changes seem to be rather significant compared to the past, so it seems that overall changes are being made. So what is your aspirations? And please talk about how you will deal with the opportunities and risks in the turbulent three to five years going forward? Please give us your outlook.
Yoshihiko Kawamura: Now regarding U.S. infrastructure related and power grid, I would like to respond to that question. Under the Biden administration, infrastructure projects were emphasized, not just for grids, but road parts and other infrastructure. U.S. grids as such that for the past 20 years, it was not receiving investment because of regulations, it is becoming older in terms of infrastructure. And with the Biden administration, renewable energies are being emphasized. Therefore, when investments are made in this area, we believe that the window is now open, although we have been struggling in the past now, but if the administration is going to change again, it would be reversed. So, the grid business that is increasing could change in terms of the posture towards the environment by the possible new administration, so we have to watch this very carefully. In terms of the market growth numbers, I don't have the details with me today. So I would like to address that in the offline meeting. Now I would like to ask Kato-san to talk about his aspirations as he becomes our new CFO.
Tomomi Kato: Now regarding the executive changes, what I was most surprised is that there is going to be a significant globalization for our company. 60% of our business is global and same for human resources as well. But in terms of executives it was not so reflected, but changes have been made, especially in the corporate area, global talent has been increasingly allocated. As we pursue the growth strategy, new ideas and new experience, network and diversity is called for. Therefore, we believe that we will have a strengthened executive team. And toward the next midterm management plan, we can be poised for further growth. What we have to be careful is that corporate is not just in Tokyo, they are dispersed globally. So, we have to have more of a virtual corporate management therefore, we have to have a very close communication more than ever going forward and I'd like to ask for your continued support as well.
Kenji Yasui: I have a follow-up question. Regardless of digital numbers, would you say that the U.S. market is what you are going to pursue going forward? It is not growing significantly yet?
Yoshihiko Kawamura: The situation is different in the U.S. compared to Europe. In Europe, the Ukraine issue is having a significant impact even prior to Ukraine. The European gas pipelines are dispersed throughout Europe. But now with the Ukraine issue, there is a limit to the gas supply. And in Europe, the gas pipeline network is going to be replaced by the transmission lines, distribution lines and that is the reason why Hitachi Energy is coming to the fore. But in the U.S., they have not reached that stage. They have their own natural gas, they have also oil and the pipelines doesn't have to be replaced for the grid significantly. So that is the difference between Europe and the United States. But under the Biden administration, they are focused on the environmental issue. That is the reason why we have made headway. So far. In 2021 in Texas, there was a major blackout, therefore, the network is very old and modernization is called for. Renewal demand is very significant in the U.S. In South Carolina, there was a terrorist attack and the grid security needs is also coming to the fore. In Maui, there was a fire and the grid is where the fire started. Therefore, the grid infrastructure in the U.S. is becoming obsolete and therefore we need more renewal. That is our take.
Kenji Yasui: Thank you.
Operator: Thank you very much. We had everyone raise their hand, asked all questions. So, with that, we would like to close the financial results briefing for the third quarter ended December 2023. Thank you for your attendance.
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