Hitachi Ltd

TSE:6501

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] At this moment, we would like to start Hitachi Limited's conference in Q1 of FY 2023 earnings briefing. For this, we thank you very much, taking time out of your busy schedules to attend this briefing. The materials for the meeting posted at Hitachi's IR site and also the News Release Site. So please have a look if necessary.

Now I'll introduce the 3 speakers from Hitachi Limited on the stage. Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO; Tomomi Kato, Vice President and Executive Officer, Deputy CFO; Masao Yoshikawa, Corporate Officer, Executive General Manager, Investor Relations Division. So we have 3 speakers. First, our CFO, Kawamura, will provide an overview of the financial results. Please bear with us while we switch the screen. Kawamura, please.

[Yoshihiko Kawamura, executive]

[Interpreted] Thank you very much. Hello everyone. I thank you very much for attending tis meeting despite your very busy schedules. I'd like to give the consolidated results of the first quarter ended June and February 2023 for Hitachi Limited. This is the table of contents of the materials. There are 4 items. I'd like to give the key messages. Q1 fiscal year 2023 results. The third half is the forecast for fiscal year '23 and appendix. I would like to cover each topic one by one.

Please refer to Page 3. These are the key messages on the first quarter. #1, the Q1 fiscal 2023 continuing to consolidate business revenues are presented. And this is just among the 3 sectors. These are included here. But this is what we refer to as the continuing consolidate business revenues, which was JPY 1,828.3 billion, a year-on-year increase of 12%. Most important KPI is the adjusted EBITDA, which was JPY 156.29 billion, year-on-year increase of JPY 31.9 million. We had the increase in revenue as well as earnings.

Now Hitachi Energy performed very well. And this is seen reflected in the profitability as well on the back of strong demand. It grew significantly and there was a driver for profitability.

The second point is the large-scale businesses, specifically digital. Hitachi Energy and Railway Systems are included. Orders received were very strong in the quarter. As mentioned here, in the -- as you can see on the right-hand side, the backlog for our Digital Systems was JPY 1.5 trillion. For Hitachi Energy backlog was JPY 3.6 trillion. For Hitachi Energy, the revenue is around JPY 1 trillion. So we have a backlog of 3 years' worth of revenues. Railway systems backlog of JPY 4.6 trillion revenue is around JPY 1 trillion every year. So there is a backlog of about 4 to 5 years. Backlog has been very strong for the quarter.

#3, against this backlog, performance has been very strong and forecast for the full year in year 2023 will remain unchanged from previous forecast. There are 3 bullet points mentioned here. Major topics include the Hitachi Astemo in June of this year has become an equity method affiliate and not subject to consolidation anymore. And therefore, in this budget, it is based on the assumption that it will become an equity method affiliate for the Thales GTS. This is included in the forecast for the second half of the year, JPY 100 billion is the share -- purchase that we are conducting at the moment. Everything is proceeding very well. And by September, we should reach the level of JPY 100 billion in terms of the buyback.

So those are the key messages, the qualitative messages for the first quarter, please, and look at Page 5. These are the highlights of the results of Q1 for fiscal year 2023. There are 2 messages here. The continuing consolidated business is the middle column, mainly on Hitachi Energy, it has been performing very well. And there has been the access of the impact of lockdown in China as well from the previous year. So we have an increase in revenues as well as earning. Another positive factor is that material prices are now largely offset by price pass-through. And therefore, we have been able to absorb the impact of inflation to a significant extent, leading to increase in revenues as well as earnings. And based on that, revenues was-- for continuing consolidated business was JPY 1,822.3 billion.

The Y-o-Y percentage was a 12% increase. And this is [9%] to the left. This is mentioned in footnote 3. And Yen is becoming weaker. And excluding the impact of the foreign exchange rate fluctuation is [9%]. Adjusted EBITDA was JPY 156.9 billion, and a Y-o-Y increase of JPY 31.9 billion. Adjusted EBITDA margin, 8.6% Y-o-Y 1 point increase has been recorded. And the net income for the quarter was JPY 73.1 billion, increased by JPY 32.6 billion.

Now please, look at the right hand side which is the core free cash flow. Core free cash flow was JPY 29 billion and the year-on-year increase was JPY 23.6 billion. To the right is the consolidated business. Specifically, Hitachi Astemo, Hitachi Construction Machinery and Hitachi Metals are included. Below foreign exchange information is provided. This is the actual exchange rate for the first quarter when the budget was formulated, was JPY 130 was the assumption, but for the Q1 was JPY 137 and for [ EUR 149 ]. The sensitivity will be shown later. The weaker yen is having a strong impact on the revenues. .

Please refer to Page 6 and 7, which is the result of the business segment, the first quarter results are presented. First of all, referring to Page 6. Digital Systems & Services at the top for the first quarter. The revenues was JPY 545.9 billion. Adjusted EBITDA was JPY 52.5 billion, 9.6%. And Y-o-Y basis is shown on the right-hand side for revenues as well as adjusted EBITDA. Therefore, we had to increase in revenues as well as earnings.

There are 3 subunits performance shown as well. As you can see, the servicing platform is below, was still JPY 25.9 billion in terms of revenues, adjusted EBITDA was JPY 16.1 billion, increased by 6% in terms of revenues and minus 3 for adjusted EBITDA. But as mentioned on the right-hand side, the storage business has had an impact, which is causing a slight negative. But as written below GlobalLogic's, the DX company is continuing to show a significant growth, increase of year-on-year, 26% in terms of revenues, increase in revenues as well as earnings remaining very strong. And Green Energy & Mobility is shown below and revenues was JPY 627.9 billion, JPY 43.1 billion in terms of EBITDA, plus a 23% year-on-year increase in service revenue and EBITDA increased by 19% to increase in revenues as well as earnings.

Hitachi Energy is here. As I mentioned earlier, our performance is improving very significantly for this business. The revenues was JPY 385.9 billion and 29.3% in terms of adjusted EBITDA to 7.6% for year-on-year basis, a 28% increase and 11.9 increase which is 1.8% point increase. In particular, the short delivery products is increasing in the first year. There were many that were not included in the PL. Strategically, we are capturing the short delivery products, which is making a significant contribution to revenues Railway Systems was JPY 185.7 billion. JPY 13.7 billion in terms of adjusted EBITDA 14% to 19% increase in revenues. Overall, the 2 sectors are showing revenue increase as well as earnings increase.

Next is the Connective Industry. The revenues was JPY 65.8 billion, adjusted EBITDA to 67.8%, 99.8% Y-o-Y revenue. So it was a plus 4% increase in revenues as well as earnings here as well. Now looking below Building System is minus 3% on a Y-o-Y basis. This is mainly the Elevator business in China accounting for a large portion and there has been adjustments taking place in the Chinese real estate market is showing a negative number here. And High-Tech, Measurement and Analysis System Y-o-Y minus 2% or minus JPY 3.4 billion is shown here. And this is because of the semiconductor manufacturing equipment recession is taking place. It is an adjustment phase for revenues are decreasing. And last year, there have been significant orders received. So there is a reactionary decline. Industrial, digital and water and environment, industrial products, please refer to the numbers on this page.

Page 8. These are the results of the business segments consolidated basis. Hitachi Astemo JPY 94.2 billion, adjusted EBITDA was JPY 14 billion. The ratio was 2.9% rate rather low. Y-o-Y revenue 27% increase to 18.7% increase for adjusted EBITDA. Last year, we struggled. And so there is a reaction rate increase this year. Hitachi Construction Machinery and Hitachi Metals will no longer be subject to consolidation. So they are 0.

Page 9 is showing the factors affecting changes in revenues as well as adjusted EBITDA showing the trajectory. Now looking at revenue, first, at the left is the first quarter of last year, JPY 2.569 in trillion. And we will no longer have the beta construction issue. So that will be negative. I mentioned [ 137 USD and 149 EUR ] having an impact. Others is JPY 236.9 million. This is organic M&A divestitures -- without divestitures. So the organic growth is JPY 236.29 million currently in the midterm management plan. We have rearranged our portfolio. We are going to be focused on the organic growth going forward according to the Mid-Term Management Plan. And the organic growth going forward, according to the Mid-Term Management Plan, and JPY 2,322.4 billion on the right. This is without Hitachi Construction Machinery, Hitachi Metals, so it is a decline in revenues.

Look at now adjusted EBITDA. Last year was JPY 154.8 billion that is the starting point of the divestiture, Hitachi Construction Machinery and Hitachi Metals. And there is a foreign exchange impact shown on the right-hand. Otherwise, there is organic growth. And we have ended at JPY 170.9 billion, which is an increase in earnings for the quarter.

Next page, please, Page 10. This is looking at the financial position as well as the cash flow. And the middle column is as of June 30, 2023, balance sheet and cash flow. At the very top, total assets was JPY 13,155.03 billion. Changes from last year was JPY 653.9 billion. You can see a significant increase has been recorded and looking below, the total liabilities increased by JPY 350.9 billion. This is effect of the foreign exchange. Addition to that, there have been changes -- significant changes in the balance sheet. But rather, it has increased as a result of foreign exchange fluctuations.

Looking below cash conversion cycle, there has been an improvement of 2.8 days. Please look at the cash flow now. Cash flow from operating activities JPY 118.1 billion, increase of JPY 12 billion from last year. Cash flow from investing activities should be noted as well. The increment of JPY 34.1 billion free cash flow, JPY 78.2 billion increased by JPY 44.1 billion. Our core free cash flow was JPY 29 billion, improvement of the JPY 23.6 billion. So for all these cash flow items are proceeding well. .

So far I have talked about the first quarter situation. Next, I would like to discuss FY 2023 annual forecast. Please go to Page 12. As is in the bullets on the top, as I said, the forecast for the year has not been changed from April. So it remains unchanged from the previous forecast. And as I said upfront, Hitachi Astemo will be deconsolidated, and Thales GTS is included in the forecast for the second half of the year.

Please have a look at the table below. Revenues, JPY 8.8 trillion. And these have not been changed to the right, continuing consolidated business JPY 7.82 trillion for the year, up 2%, excluding the Forex impact, plus 3%, adjusted EBITDA, JPY 800 billion. So 10% -- and for adjusted EBITDA margin, net income, JPY 502 billion, EPS JPY 537 billion, 7.5% core free cash flow, JPY 310 billion. The numbers have been the same.

And Forex sensitivity is shown in the lower right. And the assumed FX rate of JPY 130 to the dollar, JPY 140 to the euro and sensitivity is shown to the right. As you can see, when yen depreciates by JPY 1, what will be the impact on revenues and adjusted EBITDA? With JPY 1, JPY 10 billion in revenue, adjusted EBITDA of plus JPY 1 billion. So these are the increases as a result of the impact from JPY 1 cheap depreciation.

Page 13 shows highlights of forecast for FY '23. So none of the BUs are shown. The large ones are uploaded. So DSS, Green Energy Mobility and Connected Industries, the very top Digital Systems and Services, the annual forecast, JPY 2.45 trillion. Adjusted EBITDA, JPY 308 billion, 12.6% in terms of margin. So Y-o-Y increase in both revenue and income forecast remains unchanged, so 0% from the previous forecast.

And GlobalLogic as I said in the beginning, it's going to a high growth, revenue of JPY 252 billion and adjusted EBITDA, JPY 52 billion 20.6%, Y-o-Y, 22% growth. Green Energy and mobility JPY 2.58 trillion of revenue, JPY 173 billion of adjusted EBITDA and margin of 6.7% Y-o-Y, both increase in revenue and income. No change from the last forecast. And Hitachi Energy on a stand-alone basis, JPY 1.502 trillion of revenue, JPY 122 billion and of adjusted EBITDA, 8.1%. Railway, JPY 925.1 billion of revenue, JPY 57.9 billion of adjusted EBITDA, 6.3%. In Connective Industries revenue of JPY 3 trillion.

Well, the top 2 around JPY 2.5 trillion of revenue as opposed to Connective Industries having revenue of JPY 3 trillion in our forecast and forecast adjusted EBITDA, JPY 330 billion and expecting increase in both revenue and income. As I said, for the first quarter results, Building Systems are affected by China's correction in real estate. Y-o-Y is down and Hitachi High-Tech measurement and analysis system is affecting the forecast down 1%. Hitachi Astemo JPY 980 billion of revenue, JPY 35 billion, 3.6% so down 49%, down 38.4%. This will be the consolidated in the second half and thus a major reduction. So on a Y-o-Y basis, this is the extent of reduction.

Moving on to Page 14. Just like we saw in the first quarter results, factors affecting changes in revenues and adjusted EBITDA. So FY 2022 to '23, the trajectory is shown. Looking at the revenues, top left, JPY 10.881 trillion HCM and Hitachi Metals are deconsolidated. Hitachi Astemo is also going to be deconsolidated so there's negative impact and Thales Railway signal is going to be acquired, a positive factor.

And foreign exchange negative number, JPY 130 is the assumption and that's this number. If it's going to be JPY 139, JPY 140. It's not as large a negative numbers as this is. This includes a buffer and organic growth, JPY 206.7 billion and so far right, JPY 8.8 trillion forecast for FY '23. So HCM, Hitachi Metals and Astemo are going to be deconsolidated. Therefore, they're going to contribute negatively for revenue.

Adjusted EBITDA. Last year, JPY 884.6 billion. This year, JPY 835 billion. So the factors are likewise. HCM and Hitachi Metals and Astemo are deconsolidated. Therefore, negative impacts. Thales has a positive impact and foreign exchange, JPY 7.5 billion and organic growth impact of JPY 78 billion. And thus, the number forecast is JPY 835 billion in adjusted EBITDA.

And if you could go to Page 15, details about Lumada, there are 4 charts. On the far left, Lumada business revenues are growing, and that is shown. On the far left, the first quarter of last year and next first quarter of this fiscal year and FY 2022 annual result and the forecast for this year. Looking at the circles at the top and there are legends describing this. Adjusted EBITDA margin of 14% to 15%. As you saw earlier, most of the other businesses at around 10%. So Lumada is shown to have higher profitability. As our strategy, we would like to increase the component of Lumada business because it will push up our profitability, and that is what we're working on. As you can see, from Q1 '22 to Q1 FY '23, 30% increase was recorded. And on an annual basis, of 14% to 15%. So Lumada is growing very strongly, very briskly.

And to the right, we are trying to increase the ratio of Lumada business. On the left revenues, on the right, adjusted EBITDA. So FY '21, '22, '23, the 3-year numbers are given. So revenue ratio is increasing from 21% to 26% to 29% EBITDA the same. And the red portion is Lumada business. So you can see that the portion of Lumada business is steadily increasing. And horizontal bar chart below, shows Lumada business revenues composition by segments. Digital System and Services, Green Energy and Mobility, Connective Industries. Connected Industries is increasing as a proportion. It's now up to JPY 910 billion, a very large portion. So it's almost close to DSS in terms of Lumada business.

And at the bottom, shown our topics in terms of business expansion. Irish digital engineering company, Sidero is to be acquired and alliances are going to be crucial. So with AWS, Microsoft and others, we are appreciating alliances. And #3, this is about Honolulu, Hawaii. A fully automated urban rail system, and this was covered in a major way in Japanese media as well. And behind this is Lumada. This is a huge project of over JPY 200 billion.

And in Honolulu, there's no major railway. There are 8 or 9 stations for 17 to 18 kilometers for about 50 minutes or so, the train will be operated fully automatically. And we just had a ceremony. It was covered extensively in the local media as well. And in terms of strengthening digital infrastructure, we have set up generative AI center. We have started various activities around this. And we also have a third corporate fund investing in generative AI as well.

So that was about the annual forecast. Now let me briefly explain the appendix. If you could please look at Page 17. On the far left, Q1 comparison last year versus this year and the right-hand annual comparison. So FY '23 shaded in gray, revenue of JPY 8.8 trillion. Adjusted operating income JPY 675, the numbers have not changed. So on the far right, a plus/minus zero because we have not changed the forecast from the last time.

Please have a look at Page 18. This shows the Q1 revenue by market. If you could look at the bottom, the composition ratio, 35% comes from Japan and overseas in total 65%. So Japan versus overseas has come to this level. What is characteristic this time is China right next to Japan. Please have a look at this column, minus 28% in Digital, Green Energy and Mobility, plus minus zero. Connective Industries down 5%. And total minus 12%. Chinese economy is in correction, having difficult times, and that is reflected in our revenues.

Now moving on to Page 19. Orders grew by business segment focusing on Q1, orders are very brisk. And from the left, DSS Digital, 11% year-on-year growth in orders and Green Energy and Mobility, Hitachi Energy, 69% increase, Railway Systems 149% Y-on-Y. To the right, connected industries building, down 14%. Hitachi High-Tech down 12% year-on-year. And that's because of the factors I explained earlier. So those are the Q1 results and the annual forecast for this year. That concludes my presentation. Thank you for your attention.

[Operator]

[Interpreted] [Operator Instructions].

[Unknown Analyst]

[Interpreted] Question, regarding the first quarter actuals as well as the full year plan, I have a question regarding the progress being made. First of all, regarding the actual EBITDA is very good. But according to the forecast you had internally, what have been the upside and downside? Please elaborate further? .

Second question. Regarding Lumada, toward the end, Kawamura-san, you mentioned the business. In terms of actual first quarter EBITDA margin, the annual plan is shown here. Do you have the actual margins, which is in line with this plan? And for Lumada, and toward the fiscal year forecast, is it doing better than expected or otherwise? Please elaborate further on the performance of Lumada business.

And if I may, I would like to ask my third question. Regarding the consolidated EBITDA plan for the full year. There is going to be divestitures, therefore, it is like going to decline over the previous year. But with foreign exchange, we believe that there is going to be an upside. Listening to your presentation, are there any possibility of increasing your forecast, which is -- it could be flat or if anything, increase other than foreign exchange, are there any factors?

[Operator]

[Interpreted] Answer. Regarding EBIT as well as Lumada will be answered by Kato-san. He has the materials.

[Tomomi Kato, executive]

[Interpreted] To your first question. And for the first quarter, the likely result will be explained. Foreign exchange is the upside. So we have generally an upside. But the -- in most of the BUs, so we are following according to the plan. Hitachi Energy, as mentioned, we have long-term projects and orders, but we also have transforming short delivery orders received results. So there has been a significant upside in terms of both revenues as well as earnings.

Furthermore, downside will also be shared as Connective Industries, High-Tech and home appliances. Connective Industries building system was better than expected. So overall, it is according to plan. But if you look at the details of the high-tech, the semiconductors, the customers plan has -- did not do as well. Home appliances underperformed against the plan as well.

But on the other hand, for building systems in the China business, the new buildings did not grow. But in terms of services, maintenance as well as renewals were very strong, better than expected. So all in all, for Connective Industries, we have been able to achieve the plan.

To your second question, Lumada business. As you have rightly mentioned, on an annual basis, 15% profit is the plan or the forecast we have today. In the first quarter, we did not reach the 15% level. However, toward the latter half profitability tends to increase. So we believe that the forecast is achievable. Thank you very much.

Regarding your third question. On a full year basis, the consolidated outlook was what you have asked about. We have not changed the forecast. The most significant upswing factor which is possible is Hitachi Energy. For the first quarter, very high revenues and earnings have been posted. But as I mentioned earlier, we have a significant back orders -- backlog. And we are also making investment in terms of facilities and we are trying to accelerate the conversion going from backlog into revenues.

We are following the plan but if we are able to do a better job in terms of conversion, this is likely to become the most significant upside for adjusted EBITDA. As you have rightly mentioned, the foreign exchange will be impacted by BOJ announcement made today. We are assuming JPY 130, but there could be incremental impact as well. But what is most significant is Hitachi Energy, How the backlog can be converted to P&L is the most important factor. However, having said that, there is no clear visibility yet. Therefore, that is the reason why we did not change the forecast at this point in time. That's all. Thank you.

[Operator]

[Interpreted] Let's continue. Please unmute and state your questions, please. We're not hearing your voice.

[Yusuke Matsuura, analyst]

[Interpreted] I would like to ask 3 questions. First, regarding Hitachi Energy. So there was an increase. So Hitachi Energy seems to be a rather -- the number has been rather conservative, although it's doing very well. I think you had a cautious assessment of Hitachi Energy's revenue initially. So I wonder why that was the case because it's doing very well. And there has been quality problems with respect to grid networks. So what would be the impact on that delayed delivery for Hitachi Energy?

And my second question has to do with elevator chart on revenue, Page 9. And so excluding Forex impact, JPY 236.9 billion. And on a full year basis, Page 14, excluding FX impact, JPY 200 billion. So in the first quarter, I think you have already achieved the target. So revenue seems to be growing more successfully than you have planned, it appears. So in Q1, over 10% growth, do you think this can be sustained? Well, apparently, it seems possible. So I wonder what your views are?

And question number 3, regarding the storage business, GlobalLogic is involved, and it is looking to increase revenue, but storage is not good. So [ legacy server ] is being switched to AI server, which means that there's difficulty ahead. So if you could elaborate on that, please.

[Yoshihiko Kawamura, executive]

[Interpreted] So question 1 and 3, storage, I would like to answer. And the second question, what was the breakdown of organic growth? I would like to turn to Kato-san for an answer.

First, regarding Hitachi Energy, as you rightly pointed out, when we came out with the plan at the beginning of the year, we had intensive discussions Well, profitability was slow to show despite good orders. We had lots of discussions with the local management. But partially there is still a lingering impact from inflation and sourcing of electric sales sheets is difficult and labor coming back after the pandemic at what time will that happen? We're not sure. So there were uncertainties at the beginning of the year.

So all of these come back at a very rapid rate. We were not able to see that upfront. So we were very conservative in formulating the plan. But after 3 months, of course, there is impact from war in Europe, the labor is back and resources materials that can be sourced and electric sales sheets are still expensive, but can be procured. And CapEx in production capacity increase has happened. So in 3 months, things have changed quite rapidly.

And the speed at which backlog reflected in profit and loss, that has hastened and short delivery time products that are delivered and reflected in profit and loss in 1 to 2 years. We are strategically capturing sales from those products. So although this combined translated into a major increase this time that we're seeing after 3 months. And we do believe that this will continue into the second half. And Hitachi Energy, well, as we said before, so there's going to be a major positive impact from Hitachi Energy into the second half. That's where we are right now. Well, the second question will be answered by Kato.

[Tomomi Kato, executive]

[Interpreted] Kato speaking. What we explained earlier, if you could please look at Page 13, once again. So here are the highlights of the forecast for FY '23 on a full year basis. GEM, Green Energy and Mobility, Hitachi Energy in the first quarter, it performed very well, much better than our assumption. And so for the full year forecast, it increased revenue up 10% and income up JPY 9.5 billion. So upward revision is made.

In terms of the sector, railway M&A is considered and the timing has to be considered. So in terms of the sector, it's not changed. So JPY 170 billion of risk is being reflected in the revenue. Now if you could have a look at Page 14, as you rightly pointed out, so JPY 230 billion in Q1 and a full year JPY 2.067 trillion. But if we add the risk at JPY 380 billion, so it's not lower than what we're seeing in Q1. As Kawamura-san said, Power Grid Hitachi Energy's business, we will monitor its performance in the second quarter and see how much upside we can expect. Well, thank you.

Now to address your third question regarding the storage business in the U.S. As you rightly pointed out, this fiscal year, because of various development plans ongoing, we're not going to launch new products this year. We'll have to wait until next year. So we're going to compete with legacy products this year.

And what approach are we taking in that regard? Well, we have reshuffled the top management. And for 1 thing, we are restructuring the sales channels. We're trying to strengthen sales channels for storage and reduction of fixed cost and R&D costs. Not reduction, but reallocation of R&D costs strategically. So we're performing cost control to respond. Next year, we will have new product launch that will translate into market expansion. But this year, we're having new products, therefore, difficulty will continue this year. That's what we're expecting.

[Yusuke Matsuura, analyst]

[Interpreted] Well, so Hitachi Energy quality problems. So a follow-up question. And storage is going to shift to AI. So is storage business likely to weaken?

[Tomomi Kato, executive]

[Interpreted] Well, I'm sorry, I failed to answer that. So Hitachi Energy's quality problems. There has been no report at this moment. So is that going to blow up into a larger problem? We do not believe so. There's no negative report so far yet. I don't think it will be a drag at this moment.

And storage market growth Well, yes, there's been negative impact from AI, but -- so the market may not grow substantially, but there's a shift to cloud and overseas business. And so the pie overall is stable. So would the market shrink considerably all of a sudden? We do not believe so. With the launch of new products, we think we can still capture market. Would the market change all of a sudden structurally? We do not expect that to happen.

[Operator]

[Interpreted] Please unmute and ask your question.

[Unknown Analyst]

[Interpreted] I have 2 questions. First question is regarding the evaluation of the first quarter, especially organic growth. JPY 236.9 million. How are you -- how do you evaluate this? And this is the first result after the deconsolidation. I think it's a good result. What is your take? Now in order to maintain the organic growth momentum, what do you think you have to do? And in order to sustain this, other prevailing risk? And please elaborate further. That's my first question.

[Yoshihiko Kawamura, executive]

[Interpreted] Answer. Regarding the first quarter results, actually the first half is not over yet, tough. So it is difficult to say this in a fixed manner but I think the first quarter, we did very well as there have been a foreign exchange impact that we have been discussing. But Hitachi Energy made a significant contribution, making a significant change in our performance, which is related to the next question.

It is organic growth after taking over Hitachi Energy. Integration is almost complete. Now organically, it is making contribution because it's working. As I mentioned at the outset, this is a very important part of the midterm management plan. So this is a good first step, a successful first step in terms of achieving organic growth.

Know our intentions going forward will now be addressed. Large asset business must translate into revenues and earnings. There are 4 important points to bear in mind. There are different ways of thinking about this. So JPY 1 trillion -- we have 4 businesses that are JPY 1 trillion. GlobalLogic, digital transformation-related business is one. We have Railway business and Hitachi Energy as well as Hitachi High-Tech. These 4 businesses are the main engines for our group. .

So return mostly generated, which is a commission to the asset. That is going to be very important as we aim for organic growth going forward against this backdrop. But what are the risks that we are contemplating? When the assets increase in terms of investment as well as business assets as well as major contracts can accumulate, that we said risk management will have today strengthened as well. They must go hand-in-hand. So that 4 main engines can be fully operating and control the risk that may emerge. That is our intention for the second half.

[Unknown Analyst]

[Interpreted] And second question, BOJ said the [indiscernible] cost of control has been adjusted. So it's virtually a rate increase. What impact will this have for your business going forward? What is your take on this?

[Yoshihiko Kawamura, executive]

[Interpreted] Before coming here, I was looking at the news. So it is not an official comment. It's only an impression that I can share with you at this point in time. According to the cost of control of the BOJ is that for 10-year,JGBs, 0.5% to 1.0% of flexibility will be provided. So the intention behind us is that having entered this week in 25 basis point rate was conducted in Europe as well as in the United States. But Japan cannot do that because this is not a sector that is inflation. We saw in some industry, there is more than 2% in other areas that is not the case. So we cannot change the policy rate in Japan.

That is the reason why difficult maneuvering is required by the BOJ. The JGB flexibility is being enhanced. So then through the bond market in terms of rate of formation flow is provided. This is under the very difficult inflationary environment in Japan, the policy was compelled because of this difficult environment. In the bond market, interest rate formation is going to be utilizing the market.

So against this backdrop, what is -- will Hitachi do? In terms of policy view is going to go up immediately or the funding cost is not going to increase immediately. But for the time being, according to what we have heard today, the interest-bearing debt is we have JPY 2 trillion also on the balance sheet. Japanese yen debt is around JPY 200 billion plus. That means that it is on resolving issues and there is refinancing and new interest rate.

So every year, JPY 200 billion interest rate rise will have an impact every year. But under the -- it's on the same continuum control. So I think the impact will be very limited, but we are assuming that. Furthermore, foreign exchange is going to have a more significant impact for us. With the BOJ announcement, the impact on the foreign exchange market is not clear because we're going to go into the weekend. We have to look at what is going to happen next week. Will curve control will have an impact on foreign change. And this will have a more significant impact on our performance.

The third point is internal. Interest rate going up and in the capital market. The equity cost may be impacted as well. That means that investment threshold within the company and the hurdle rate may have to undergo change. Therefore, in terms of investment, we will have to consider the rising interest rate environment, and this will have an impact on our direction going forward. So interest bearing debt, interest rate burden, as well as the impact on foreign exchange, as well as impact on the investment are criteria decisions will be impacted.

So these are my first impressions after looking at the report coming out of BOJ. At any rate, the interest rate will have an impact on market overall. Therefore, we have to watch the situation very carefully so that we can take appropriate measures going forward. Thank you.

[Operator]

[Interpreted] Please unmute and ask your questions.

[Unknown Analyst]

[Interpreted] Question. I have 3 questions that I wish to ask. Question #1, regarding Lumada. First quarter revenue are your assessment of that year-on-year 30% increase based on the Japanese yen. This is above your full year forecast increase. So excluding FX impact, first quarter 30% increase, how will that look like? How is it different? And the 3 segments, DSS, AGM, of the 3, which is growing? It seems like Connective Industries is growing more, if you could offer a qualitative assessment.

[Yoshihiko Kawamura, executive]

[Interpreted] Yes. So answer. Lumada's Forex impact will be explained by Kato-san. Yes, on the Lumada 30% increase in Q1 and there is not much FX impact. Even excluding FX impact, a 27% increase was recorded. So only a 3% difference. So basically, even excluding FX impact, organically, it's growing strongly. Thank you.

And so Lumada in particular, was going to grow. We have not attached this as part of today's presentation material. I do have some numbers. However, what's going to grow substantially. Well, you may think that Connective is growing more, but year-on-year, sector by sector, they are going to grow digital on a full year basis, a 15% increase in revenue, AGM, 18%, CI 17%. So all of them are growing at a similar high level Connective seems so large, but last year's Connective Industries number was smaller. So it appears large in terms of growth. So Industrial, for example, was not large last year, it's growing. Overall, all 3 are going to grow at around 16%, 17%, very similar. Thank you.

[Unknown Analyst]

[Interpreted] Well, then question number 2, Hitachi Energy's profitability was improved in Q1, and you talked about several factors behind that. But what was the greatest factor impacting the upside in profitability? In a descending order, what are the greatest factors and would -- do they be sustained in the second half? You talked about short delivery products and what would be their impact on impact? And will the impact continuing to the second half?

[Yoshihiko Kawamura, executive]

[Interpreted] Well, thank you for the question. Hitachi Energy has a business size of JPY 1 trillion. So Hitachi Limited is always involved in monitoring its business. And there are 3 main factors behind the profitability improvement advancing. There are over 100 plants and factories, small and large around the world. We have made an effort in consolidating these plants and factories and driving down fixed costs and it's showing its effect now. So that's one.

And secondly, we have narrowed down R&D strategically, grid automation, especially software development. We have been concentrating R&D on that. So large -- transforming large products rather than doing R&D on those large products, we're shifting our R&D on software. So selective and strategic approach to spending R&D.

And #3, inflation is somewhat down, and -- so costs as well. Although cost remains high still, it has become stable and cost increase is passed on to the customers. driving profitability. So these are the 3 main factors behind the profitability improvement for Hitachi Energy.

And how will this fair in the second half? These are still uncertainties. But what I just mentioned, for example, consolidation, streamlining of plants and factories and procurement cost is stabilized. Cost is passed on to customers. I think they will evolve in a stable fashion. So I think these trends can be sustained into the second half. That's all.

[Unknown Analyst]

[Interpreted] So question #3, regarding Connective Industries in your presentation, well, in the first quarter, High-Tech was low, you mentioned. Now looking at your peers, projects are being extended, it seems so downside risk of High-Tech business. How do you view that? And suppose that there's a downside for Hitachi High-Tech and if we look at Connective Industries segment alone, would there be any other upside impact from anything else so Building System business in China, for example. So any positive factors that would offset the negative? If you could share with us?

[Yoshihiko Kawamura, executive]

[Interpreted] Answer. About a downside risk of High-Tech. This is because of semiconductor manufacturing equipment. Intel has been suffering with AI, well, there's been shift away from Intel to MBI. MBI is now the dominant player in the market. So very difficult condition has continued by the end of this fiscal year, I think the correction in semiconductor manufacturing equipment market will end. There will be recovery next year, we're expecting.

And in terms of High-Tech, we also do a medical analytical instrument that we do with wash for the past 3 years because of the impact from pandemic, there has been a very high demand for these instruments business, has been very robust. So without this medical business, I think a semiconductor segment business would have been down more severely for Hitachi High-Tech, but medical has been a positive factor offsetting that impact. That's this number. And Kato-san will share with you some numbers. .

[Tomomi Kato, executive]

[Interpreted] Well, just to add to what was said in the first quarter, well, customers' plans have been changed and shifted. In terms of timing, the plans themselves will not change that much, but it was lower in the first quarter. But I think semiconductor equipment sales will be the same or flat FY 2022.

And medical equipment in the first quarter, there was more upside than planned. For the full year forecast, we are seeing an increase so semiconductor equipment flat from the last time. But second quarter and onwards for semiconductor equipment business, we would like to closely monitor the market. So overall, Hitachi High-Tech is in a difficult. question.

Are there any positive factors that we can look to you asked? Well, High-Tech business has a business of JPY 1 trillion. When it's sluggish, we need to have a counter factor, but because of the size of its business, it's very difficult. But overall, elevator business in China, it's true that it's not easy there. But we are dynamically reallocating our resources to service business. So constant revenue from that.

And home appliances are recovering steadily. So we may be able to that to absorb digital water environment and industrial products, they are not large, but they are evolving in such a way that they would contribute more to the bottom line. So even if High-Tech continues to be difficult for CI overall -- connective industries overall, we do hope that we will be able to absorb negative impacts and achieve the plant numbers. That's all. Well, Yoshihiko wishes to add a few comments. .

[Yoshihiko Kawamura, executive]

[Interpreted] So semiconductor market conditions. U.S. etching company's financial results, I'm not sure if you're monitoring them, but WFE have made an upward revision to their forecast, which is a very good sign, we think. So now no technology solution. This segment is in the negative compared to the etching company in the U.S. year-on-year, Q-on-Q, our business is moving almost in the same direction. So inclusive of that WFE forecast was revised upward.

So investment appetite and as Kojima-san said in Investor Day, AI is going to be a boom so processor-related business where Hitachi High-Tech is involved. Energy consumption with respect to that and technology innovation will be activated as a result. And I think they will increase going forward. And if that is going to be the case and it depends on the manufacture of the customer, of course. But I think we can expect the market to bottom out in the second half. That's our hope.

So we would like to closely monitor the market for nano technology business. And in other industries, just said, home appliances, GLS. Lumada business there is to be grown. We're trying to do so. And Lumada's business in the first quarter for industrial equipment, well, as a part of the midterm business plan, we have this narrative so connected home appliances and Hitachi some keys Lumada business in North America, that is ongoing. So that is something that I would like to add. Thank you.

[Operator]

[Interpreted] Please unmute and ask your question.

[Unknown Analyst]

[Interpreted] Question. I have 3 questions. First question is you said that the backlog is quite significant. So please give me more detailed information regarding this business. Last year, significant growth was shown. It seems that this year, it is increasingly strong. So please elaborate further on this business.

[Tomomi Kato, executive]

[Interpreted] Page 19, the orders are shown here in DSS from business. For DSS is about 70%, which has been a very strong start. So all of these businesses are very strong financial major deals have been achieved. And social major deals have been won. And in power major deal has also been won. So compared to last year, last year was rather weak, but we have been able to receive all this. And for the communication areas we have had the front loading of the orders received. And that is the reason why for the front business, we have achieved a 70% growth.

[Unknown Analyst]

[Interpreted] Question. Second question. For Lumada, Connective has increased. You said that Home appliance as well as Hitachi industrial equipment system has also grown as well. But in terms of home appliances, it is becoming connected. However, I don't think it is going to translate to significant revenues. But Connective is growing significantly. There must be other major factor driving this growth. Please elaborate. So Connective and Lumada are in close vanity. So please elaborate further on the relationship between the 2.

[Tomomi Kato, executive]

[Interpreted] Regarding Connective, 120% has been achieved. What is characteristic is High-Tech and first and foremost, connected products in High-Tech in hardware, data enabled and connected are increasing. And they are not all Lumada products. We refer to them as non-Lumada. So shifting from non-Lumada to Lumada is now occurring. So High-Tech is increasing for this business.

What is another characteristic is that home appliance or GLS and building system in this area, connected products are increasing in terms of ratio and digital service business in terms of remote monitoring is enabled. Lumada business increasing from there is a shift occurring from non-Lumada to Lumada business. And that is the reason why Connective products have increased.

And next, let me give you a specific example for home appliances, refrigerators and washing machines are increasingly becoming connected. But what is more prevalent is the inventory of the mass merchandises and the track record of customer purchases as well as maintenance are areas where Lumada can be enabled and providing control.

So in addition to stand-alone connected in terms of sales, Lumada is making a significant contribution from water. It's not just hardware. Pumps and motors are not what we are only selling and Lumada can provide enhanced services in this area as well. So it's going beyond hardware. The operation per se can be covered by Lumada. This is the direction we are pursuing having an impact overall. Thank you.

[Unknown Analyst]

[Interpreted] Question regarding High-Tech. The connected means that the you have Lumada for Hitachi. Compared to other manufacturers, do you think that this could be a differentiating factor? That's my take. So compared to other companies, may understand this is a more advanced use case?

[Tomomi Kato, executive]

[Interpreted] Yes, that is a correct understanding. There are 2 reasons why I say this. The software and application are sold by our company, but that's not all. We also have hardware products in the background as well. We can also operate factories, we can operate training systems as well. Data can be collected and the management know-how will be captured in Lumada. This is also the source of competitiveness for Hitachi. It's not just software and applications. We have a product as well as system operation capabilities as well, which is a source of our strength.

Now in terms of characteristic of the Lumada products, vendor free, vendor agnostic, we can use Lumada for different applications. So it's not just for simple jet engine for our company. We have multiple entry points Lumada can control the overall system. But this is also another source of competitiveness on our part.

For High-Tech Lumada solution using semiconductor co-creation site. So we have the 3 such sites. We are working closely with our customers in 2022 in the United States. In Oregon, we have such a site. For this year, in Taiwan, we have established a site and Korea 2022. So I think it's easy for you to imagine what kind of clients we are working closely with. And in the area of growth, we can have laboratory jointly with our customers, we are close to our customers. That is the DNA of Lumada, the strength of Lumada that is being brought to bear in a specific manner.

[Unknown Analyst]

[Interpreted] Third question. Regarding energy, I want to clarify the following. You said that backlog is increasing for energy. And you cannot correspond to that. That is the reason why you are trying to enhance your capacity. And you're also introducing the short delivery products. But have you been able to ramp up the capacity faster than expected? And is that the reason why you are able to increase revenues in this area?

[Yoshihiko Kawamura, executive]

[Interpreted] Answer. For investment in factories is not immediate in terms of impact. It takes about 1 year to make such an investment. Capacity ramp-up will come later. But pandemic is now over. And although we have inflation, the procurement is becoming more stable and capacity utilization is increasing because the manpower has come back. And now we are reverting back to the normal level. So the impact of making further investments will come later. So with the local management, we are looking at the overall portfolio, not just long-term projects, but also on transformers, which is short delivery. So we have been able to make those changes.

[Operator]

[Interpreted] Please unmute and ask your questions.

[Unknown Analyst]

[Interpreted] I would also like to ask a few questions. First about the situation of late, where at the end of July, Hitachi Energy, Hitachi High-Tech, there are both negative and positive factors that you explained about. So have there been any changes since the end of the first quarter? If you could offer qualitative comments.

[Yoshihiko Kawamura, executive]

[Interpreted] Answer. Well, Q1 is over and we're at the end of July and half of the second quarter is almost over. The great exchange from the end of Q1 is Forex. First quarter actual rate was JPY 137 to the dollar.

But how will the rate change? Will it go up or down? We have come to a turning point, if you will. Up until recently, I think there was forecast that yen will further depreciate, but we no longer know whether that's going to be the case because of BOJ announcement and other developments. So Forex is very uncertain. That's 1 change. And secondly, in terms of the business, have trends changed in the market away from Q1 to Q2. No, the 4 engines of growth that I talked about, where there's a large asset base, they are moving. They are operating more or less as planned. So in terms of the substance of business, is there going to be any range of change in the second quarter. I do not think so.

[Unknown Analyst]

[Interpreted] My second question. Page 9 about adjusted EBITDA, others. So increase in business scale changes in selling prices? There are several factors noted here. So is this in descending order, the largest at the top. So if you could show the size of the number for each.

[Tomomi Kato, executive]

[Interpreted] Well, as you said, yes, this is in descending order, the largest of the top. So changes in business scale. So JPY 236 billion. So in correspondence to that 68 billion. So that's a change in business scale, JPY 33 billion for selling price change and rising material prices, the impact there of negative JPY 10 billion, and the remainder is the rest. And so in line with the increase in revenues, we are reinforcing a structure, which has a negative impact. But roughly, that's the breakdown for this.

[Unknown Analyst]

[Interpreted] Lastly, I would like to ask about Thales GTS. So in terms of the forecast, Thales is going to be included in this second half forecast. So the status of review and approval, you may not be able to share very much, but to the extent that you can, if you could please share with us the update.

[Yoshihiko Kawamura, executive]

[Interpreted] Well, thank you for the question. As you know, acquisition of Thales, well, that is for Thales Railway signaling system. So European continent and the U.K. From the competitive authorities of both, we have heard opinions and we're in the final leg of negotiation or coordination with the U.K. CMA or competitive -- Competition Authority. Well, Thales has signaling business and well, they are telling us that they would like to coordinate the competitive condition by changing the scope of signaling system, we have offered a counter proposal to what the authorities have said and they're looking at our counter proposal.

And whether confirmation, go or no-go, that will be heard in around October according to the media. So the actual deal will be done into the new year or at the end of December at the earliest. So by the end of August, we were looking to close the deal. But because of our coordination with the U.K. authorities, it's taking time. Therefore, we're looking to close the deal year-end or early into the new year. So there's been some delay of several months, but we are able to acquire, and that is included in the forecast. That's where we are.

[Unknown Analyst]

[Interpreted] So you're including Thales in the second half, that's 3 months' worth of business, but it could be reduced. Is that correct?

[Yoshihiko Kawamura, executive]

[Interpreted] Yes. If it cannot be closed in September, if it's going to be closed in December, yes, 3 months' worth of business to be subtracted from the forecast. That is correct. Thank you.

[Operator]

[Interpreted] Now at this time, I like to now take questions on the English channel. [Operator Instructions] Any questions on the English channel? There is not. So we will revert back to the Japanese channel. Please unmute and ask your question.

[Unknown Analyst]

[Interpreted] Question. I have 3 questions. First of all, regarding Building System. Revenue was better than expected. In terms of backlog, minus 14%, how can we evaluate this? In terms of real estate market is in a correction period. And has there been any changes in the competitive landscape? And taking into the orders into consideration, is still on the course of increasing revenues based on services?

[Tomomi Kato, executive]

[Interpreted] Regarding the building system in the first quarter, as you partly mentioned, for building system minus 14% in terms of orders. This is mainly a reduction in China. For new build, the number of units is decreasing compared to the previous year. So that is a decline. But as I have -- we have explained in terms of service business, so maintenance as well as retrofitting elevators for existing buildings and renewals are very strong. For the first quarter, the performance was good.

And for the new buildings has decreased. There is also a time line in terms of [indiscernible] sales. Therefore, with the first quarter orders, it isn't safe for the forecast for the year will change for the focus for the fiscal year is still achievable according to our view.

[Unknown Analyst]

[Interpreted] Second question. Regarding GlobalLogic a 22% increase for the full year and 19% for 3 months. So it seems that you're slightly behind. Is this impacted by the global recession? What is your take? Please elaborate.

[Tomomi Kato, executive]

[Interpreted] Regarding the first quarter, there has been no significant change, about 20% growth is being achieved. In the first quarter, on a part of the customers, investment is being restrained. This is not only for our company but for the industry overall. This is having a slight impact. But basically, this is a business that is poised for growth in the medium to long term is on a growing trajectory. We believe that those numbers are achievable for the full year.

[Unknown Analyst]

[Interpreted] My last question. Regarding DSS service platform profit, is what I'd like to ask you a question about. Storage is declining and growth investment is expanding. Specifically, what kind of investment at what scale are you contemplating?

[Yoshihiko Kawamura, executive]

[Interpreted] Answer. There are 2 points to be made here. Research and development, continuous investment will take place and there is also M&A. Onetime significant amount may be invested as well, mainly around Lumada and generative AI areas, there is investment main research and development on a cruising mode. It is as if we are contemplating investment for a large acquisition. It's a generative AI around Lumada, where we are continuing to make investment.

For example, for cloud, especially for hybrid cloud, we want to grow this business going forward. The full solutions will be enhanced as well as sales effort will be stepped up. That is where we are making investment for growth. Regarding the first point, building orders. Last first quarter, in terms of units, the business was very strong compared to the quarters before and after. The last year's first quarter was 110% in terms of orders.

And then the subsequent quarter, it was below 100% because of the slowdown in China. So if we make a year-on-year comparison between the first quarter last year was very strong. So minus 14% is a numerical impact that is manifest.

Regarding the growth rate of the GlobalLogic business, 2 competitors exist in the United States, organic and inorganic are mix in the performance. But on surface, numbers are larger, but the impact of M&A must be considered as well. There is also synergies that have been brought to them with other businesses. So if we exclude that, compared to competitors, we are in line with in the industry. But on the other hand, we have other sectors, and we can bring to them and enjoy synergies. So that is the advantage of the GlobalLogic belonging to the Hitachi Group. So in this way, that is how the trajectory of growth for GlobalLogic should be evaluated. Thank you very much.

[Operator]

[Interpreted] There seems to be quite a number of hands being raised, but we're approaching the time to close. So the next 1 will be the last question, and we would like to follow up on other questions later individually. So lastly, Ishino-san, please unmute and start your questions.

[Unknown Analyst]

[Interpreted] So question. What comments and talked at the beginning. So Japan accounts for 35% of revenue and overseas 65%. It's in the flash performance report as well. So for Hitachi Group, in terms of profitability in Japan -- in terms of profitability, what is the percentage that Japan accounts for? And how are you trying to control global profitability? In that context, well, Asia, North America, Europe, there are other regions. So how are you controlling profits Japan versus overseas?

[Yoshihiko Kawamura, executive]

[Interpreted] Well, thank you for the question. Well, the number for Japan alone, we're not tracking that any longer. Each sector, each business unit has a global business, including Japan, we're looking at over numbers only. So we're not carving out numbers just for Japan. We're not able to give you an immediate answer. So please take your question --please let us take your question back as homework.

[Unknown Analyst]

[Interpreted] Well, when monetary policies changed substantially, I think that's going to be a very relevant question. So I look forward to your answer at a later timing. And another question. GlobalLogic generative AI-related business orders, what is the percentage of such orders?

[Yoshihiko Kawamura, executive]

[Interpreted] Well, another very difficult question. We do not have relevant data at hand. So let us look into that and get back to you with an answer later.

[Unknown Analyst]

[Interpreted] And lastly, about High-Tech, Hitachi High-Tech. So orders -- so there was mentioned about WFE's upward forecast revision. So the extent of improvement is limited, it's minus 30 to minus 25. So Hitachi High-Tech's order growth, are orders are going to slow down, given the situation of the industry? Does that mean that it's going to have a tough time next year?

[Yoshihiko Kawamura, executive]

[Interpreted] I think I talked about this in earlier discussions, but Hitachi High-Tech not only does semiconductor manufacturing equipment, but medical analysis and measurement instruments, data processing as well so they're balanced out. So manufacturers here are dedicated to semiconductor manufacturing equipment. They're in a very difficult position, but Hitachi High-Tech is not. Medical business is doing very well. It can be balanced out, an offset.

So semiconductor manufacturing equipment decline will be bottoming out. And we believe that there will be a recovery in that market into the next year. So in the second half of FY '23 next fiscal year, we're not being pessimistic about our semiconductor manufacturing equipment business. Thank you.

[Operator]

[Interpreted] So the time is to bring the Hitachi Limited web conference on our first quarter of fiscal year 2023 earnings to a close. Thank you very much for your attendance despite your busy schedules.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]