Hitachi Ltd

TSE:6501

Earnings Call Analysis

Hitachi's Strong Start in FY2024 Driven by Digital and Green Sectors

Hitachi started FY2024 robustly with a 14% revenue increase, primarily fueled by strong demand in Digital and Green sectors. Revenues from these Three Sectors grew by 21%, and Green Energy & Mobility and Digital System Services saw revenues jump by 41% and 16% respectively. Adjusted EBITA for the Green and Digital sectors grew by 55%, reflecting a 2.4 percentage points increase in the EBITA margin to 11%. For FY2024, Hitachi projects a core free cash flow of ¥1.5 trillion, a ¥300 billion rise from targets, with an adjusted EBITA margin improving to 11.5% .

Strong Start to 2024 Driven by Digital and Green Energy

Hitachi has commenced its fiscal year 2024 on a robust note with significant growth in its key sectors—Green Energy & Mobility (GEM), and Digital Systems & Services (DSS). The company reported a 21% increase in revenues for these sectors, excluding foreign exchange impacts, which translated to a 14% organic growth. Adjusted EBITA saw a substantial 55% year-over-year increase, improving the adjusted EBITA margin by 2.4% points to reach 11%【4:0†source】【4:1†source】.

Forecast for 2024: Ambitious Yet Achievable Goals

Looking ahead, Hitachi remains optimistic about achieving its targets for fiscal year 2024. The company anticipates capturing new business opportunities in Generative AI, GX (Green Transformation), and DX (Digital Transformation). Revenue growth, excluding the effects of foreign exchange, is projected to be around 6%, with adjusted EBITA expected to rise by 20%. The adjusted EBITA margin forecast has been set at 11.5%, a slight improvement over the previous year【4:0†source】【4:1†source】.

Sector-Specific Performance: DSS and GEM Lead the Way

In the first quarter, the DSS segment grew by 20%, driven predominantly by strong domestic demand in energy and public sectors. The GEM sector also showed a 10% year-over-year increase, particularly buoyed by major projects and strategic acquisitions like Thales GTS. The Lumada business, a cornerstone of Hitachi’s digital strategy, grew by 19%, further propelling overall growth【4:1†source】【4:2†source】【4:3†source】.

Challenges and Risks

While the start to 2024 has been strong, Hitachi is aware of potential challenges. The company has observed declining demand in its domestic white goods market, which affected the Smart Life & Ecofriendly Systems segment. Although Hitachi hopes for a recovery in the second half of the year, the first half is expected to continue facing difficulties. Additionally, Hitachi must carefully manage major projects in DSS and GEM sectors to mitigate risks related to project execution【4:4†source】【4:5†source】.

Financial Stability and Strategic Investments

Hitachi’s financial position remains strong, with total assets increasing by JPY 1.1 trillion from the previous year to JPY 13.4 trillion, partially due to the Thales GTS acquisition. Interest-bearing debt also rose by JPY 400 billion, adjusting the debt ratio to 0.26x. Nevertheless, the core free cash flow for the first quarter improved thanks to better working capital management and increased revenues from Hitachi Energy and DSS【4:6†source】.

Revenue and Profitability Breakdown

The company's Digital Systems & Services division reported a 16% increase in Q4 revenue, with adjusted EBITA margin standing at 12.4%. GlobalLogic, a part of DSS, showed double-digit growth, while the GEM segment achieved a remarkable 41% increase in Q1 revenue. Excluding the effects of foreign exchange, this translated to a 28% growth, indicating strong performance across all segments, particularly in Hitachi Energy’s managed services and system integration【4:3†source】【4:7†source】.

Future Outlook: Sustained Growth Amid Market Changes

For fiscal year 2024, Hitachi expects continued growth in its key sectors. The company has revised its revenue forecast upward to 8%, excluding foreign exchange impacts. GEM sector revenue growth is anticipated to be around 15%, following a similar upward trajectory as seen in 2023. In the CI segment, although the Smart Life & Ecofriendly Systems segment witnesses a decline, other BUs like Water & Environment are expected to offset this downturn【4:1†source】【4:3†source】【4:8†source】.

Earnings Call Transcript 2025-Q1

[Operator]

It is now time to start the Hitachi Limited Web Conference on Q1 fiscal year 2024 earnings. Thank you very much for attending this conference despite your busy schedules. I would like to first of all, inform you that explanation materials will be available on the Hitachi Limited IR site as well as the News Release site.

I will now introduce the speakers for today. Tomomi Kato, Senior Vice President and Executive Officer, CFO; Masao Yoshikawa, Corporate Officer, Executive General Manager, Investor Relations Division; Hiroaki Ono, Deputy and General Manager of the Finance Division.

Now we will shorten the presentation time from this conference onward. There is no change in the Q&A period.

Now I'd like to ask Mr. Kato to start the explanation. We will be switching over the screen. Mr. Kato, please.

[Tomomi Kato, executive]

First of all, I would like to explain to you the contents for today's presentation, the key messages, and in Q1 fiscal year 2024 results as well as the forecast and performance by business segment and appendix.

Let me explain the key messages. For the first quarter results of 2024, DX and GX market has been captured, driving the growth in revenues as well as profitability improvement in Three Sectors, we have achieved increase in revenues as well as in profit.

Cash flow management has led to the free cash flow improvement. So we are off to a very good start in terms of the fiscal year 2024.

These are the 5 KPIs. For the Three Sectors, revenues increased by 21%. Green Energy & Mobility and Digital System Service grew and exclusive of -- excluding the foreign exchange impact, grew by 14%. Adjusted EBITA grew in terms of Green as well as Digital increased by 55% year-on-year. Adjusted EBITA margin was 11%, increase by 2.4 points year-on-year.

Hitachi consolidated numbers are presented below. Net income attributable to Hitachi Limited stockholders achieved JPY 175.3 billion, increased by JPY 100 billion (sic) [ JPY 105.3 billion ] year-on-year. For core free cash flow increased by JPY 40 billion (sic) [ JPY 41.8 billion ] at JPY 70.9 billion.

Next, I'd like to talk about the forecast for fiscal year 2024. It is likely that we will achieve the target for '24. GX, DX demand and generative AI, the new business opportunities will be captured to increase revenues in profit for the Three Sectors. Core free cash flow is at likely to -- is forecast for JPY 1.5 trillion, which is JPY 300 billion greater than target mix KPIs. Regarding this revenues, excluding ForEx is 6% increase. Adjusted EBITA increased by 20%. Therefore, growth rate is similar to fiscal year 2023. Adjusted EBITA margin improvement over the previous year 11.5%.

Hitachi consolidated numbers represent for net income increased by JPY 600 billion. Core free cash flow of JPY 480 billion is forecast. From the previous year, there is increase in CapEx leading to a decrease, but exceeding the Mid-term Management Plan. And in terms of net income, we will aim for 80% as per Mid-term Management Plan in terms of conversion rate. ROIC adjusted EBITA improvement by 9.5% year-on-year for the forecast. For fiscal year 2024, there is no change for what we have announced previously.

The first quarter, the orders are shown here. Digital System Service, DSS segment grew by 20%, especially in domestic energy and public area, a major project as well as storage. Domestic as well as overseas made a contribution. For the GEM segment increased by 10% year-on-year. Railway Systems and Hitachi Energy is subject to a rationally decline, however and also the Nuclear Power Project as a segment increased. And for the -- because of the foreign exchange impact, as well. First quarter major projects has been concluded for JPY 4.5 billion European contract for HVDC converter station for wind power generation. GEM sector, Railway System, the GTS of Thales has been acquired in May and the first quarter remains very strong.

Next, I'd like to talk about the Connected Industry, CI sector, Smart Life & Ecofriendly System joint venture company, Johnson Controls-Hitachi Air Conditioning has -- share transfer has been agreed to. The closing is expected for fiscal year 2025. Therefore, there is no impact for the forecast of this year. And at the same time, we have acquired the commercial air conditioning business to expand offering to the data center market.

And next I would like to extend the highlight for the first quarter of 2024. In terms of revenues, on a consolidated basis, because of the business reorganization of Astemo of last year, and there was a decrease, but for the Three Sectors increased by 21% excluding foreign exchange income, the increase of 14%, the DX demand, GX demand was very strong. The demand of this business increased as well. And there were projects that have been front-loaded to the first quarter and a business relating to the new bank [indiscernible] in Japan also was significant.

Adjusted EBITA was impacted in terms of operating income because of the business reorganization, Three Sectors increase was also shown. In terms of net income, adjusted EBITA increase as well as foreign exchange has led to increase. Core free cash flow was because of the DSS improvement as well as Hitachi Energy increasing revenues, improvement of working capital has led to increase.

And next, I'd like to talk about the adjusted EBITA. The waterfall chart above explained upper is revenues. And I would like to explain from the left to right, because of the stake has been sold, some revenues decreased. But Thales GTS business was acquired. And foreign exchange was -- in terms of foreign exchange weaken has led to higher revenues. Organic growth wasn't changed, especially in GX-related Hitachi Energy as well as GX-related DSS, Front Business and IT Business grew.

Lower part is adjusted EBITA. Similar to revenues for others, there was increase by JPY 70 billion. Organic revenue increase included scale increase as well as the selling price change. These are positive and this exceeded the negative impact of soaring procurement costs as well as increase in investment. Adjusted EBITA increased.

Next, I'd like to talk about the financial position as well as the cash flow. At the top is the asset, as of in the first quarter, JPY 13.4 trillion, that is an increase of JPY 1.1 trillion from the previous year, especially in terms of the Thales GTS acquisition as well, has weaken.

Interest-bearing debt increased because of the Thales GTS business increased by JPY 400 billion. The ratio increased to 0.26x. Cash flow -- our core free cash flow has been explained. Cash flow from investing activities has increased because of GTS of Thales acquisition.

Next, I'd like to talk about the different divisions. Starting with Japan, a 14% increase was achieved. We saw growth in DSS where DX orders was very strong. From business, such as finance, social as well as product increased. In terms of IT service, an 18% increase was achieved. For North America, Three Sectors, 34% increase was achieved. Hitachi Energy's transformer, HVDC was very strong. Green Energy & Mobility or the part of GEM increased by 58%. For DSS, GlobalLogic grew, especially Vantara storage business grew, increased by 90% was achieved.

In terms of Europe, then for Three Sectors increased by 31%. Mainly, this is Hitachi Energy. HVDC orders received increase and GEM increased by 45% as a result. Other regions, Three Sector growth was 50%. This is driven by GEM, 57% increase. Hitachi Energy's Middle East project showed progress. And this is also reflecting foreign exchange impact. Overseas business accounted for 64%.

Now let me talk about the segment-based orders results. GEM, Hitachi Energy and Railway Systems as well as CI Water & Environment looks lower in terms of growth because of their reaction rate decline from the previous year.

Focus for 2024. Let me give you the highlights, and as explained that the offset before, the KPI of the Mid-term Management Plan has almost been achieved. I will give you more details later about for DSS and GEM segment, in terms of revenues as well as adjusted EBITA, were revised upward. For Hitachi consolidated basis, we have only finished the first quarter. Therefore, the forecast has not changed. Furthermore, for adjusted EBITA, additional improvement was incorporated as well.

In terms of revenues for fiscal '23, Astemo has an impact, leading to a minus 7% for Three Sectors. Excluding foreign exchange was 6% growth adjusted EBITA, because Astemo became equity method fully. Nevertheless, we have been able to increase the revenues. This is despite of the absence of JPY 120 billion, a non-operating proceeds of Astemo will be coming an equity method affiliate in fiscal year 2023.

In summary, Three Sectors are forecasting revenue and profit increase. Lastly, FX assumption from Q2 onward, initial rate of JPY 140 to a $1 is kept unchanged.

Next, factors affecting year-on-year changes in revenue and adjusted EBITA for FY '24, the upper half revenue decrease from divestiture of Hitachi Astemo, an increase from acquisition of Thales, GTS and FX was a negative factor year-on-year. And in others, increase in Hitachi Energy, GX-related and DX-related service and platform, and in CI segment, Hitachi High-Tech, High-tech will increase the revenue and adjusted EBITA on the lower half. Similar trend as the revenue.

The others will increase by JPY 150 billion. Increase in the business scale and selling price change included an organic growth over -- are positive factors. This more than offsets foreign procurement costs and increase in investment and resulting in higher adjusted EBITA year-on-year on a consolidated basis.

Next, performance by business segment. First is Digital Systems & Service. Revenue increased by 16% in Q4 and 11% increase excluding FX. Adjusted EBITA margin is 12.4%, which is up in revenue and profit of year-on-year. Revenue in Front Business and IT Services increased. And Service & Platform also increased. GlobalLogic grew by over double digits, and storage grew in Japan and abroad. I will explain this later. Backed by strong DX demand, Lumada business increased by 19%, drove overall growth.

Next, right side, FY '24. This time, we revised upward. In FY '23, excluding FX, the revenue grew by 6%, but in FY '24, we expect 8% revenue growth.

Next, Green Energy & Mobility, GEM. For GEM overall, revenue in Q1 increased by 41%, and excluding FX, 28% growth. So sales, revenue and profit grew year-on-year. In revenue, Hitachi Energy and Railway Systems BU, and all segments grew by double digits and achieved revenue and profit growth.

In Hitachi Energy, in addition to equipment growth, including transformers, HVDC, system integration, and maintenance managed service, all these Lumada business also grew. And for FY '24, we revised upward. And for GEM, the revenue is 15% growth, when we expect similar level growth as FY '23.

Next, Connective Industry, CI. The revenue grew by 3% in Q1. Adjusted EBITA margin is 11.1%. So both revenue and profit grew. Revenue in Smart Life & Ecofriendly system declined, but all other views increased, especially in Water & Environment BU and Industrial Products.

Next, FY '24, for CI overall, revenue grew by 33%, excluding FX, 4% growth, which is up from 1% in FY '23. This time, Smart Life & Ecofriendly Systems revenue and profit were revised downward and decline from sales of domestic home appliance business. On the other hand, we expect room for improvement in other BUs and kept full year forecast unchanged.

Next, Lumada business. Left side, Q1 revenue will increase by 17% year-on-year. FY '24, revenue grew by 14% and profit margin is 16%. So it will be up by 1% point year-on-year. This remains unchanged from last time.

Now this time, quarterly revenue by sector is disclosed from this time. In DSS, DX-related system integration grew and Front Business and IT Service increased and GlobalLogic, Digital Engineering also grew. So total 19% growth. In GEM, Hitachi Energy Managed Service and System Integration grew and Railway Systems Managed Service also grew. So our overall growth was 29%.

Now as topics, we signed strategic partnership with Microsoft and Google Cloud on generative AI, and we also jointly developed a generative AI solution called Hitachi iQ with NVIDIA and started the sales. This Lumada business growth and profitability improvement will contribute to higher revenue and profit of Hitachi overall.

That concludes my explanation on first quarter results and FY '24 forecast.

[Operator]

We will now proceed to the Q&A session. [Operator Instructions] We will first take questions on the Japanese channel and then take questions from the English channel. So we will take questions altogether for the media institutional investors as well as the financial analysts.

We will now invite questions on the Japanese channel. [Operator Instructions] Yasui-san, please unmute and state your question.

[Kenji Yasui, analyst]

I have two questions. Regarding Digital, in terms of orders is prevailing very high levels. And you see, [ Fujitsu ] have been very strong as well, but it seems that your orders are very strong. Is your share increasing? And what is your relative competitiveness, inclusive of the IT service market today?

Power grid orders received was very strong. In terms of regions, it seems that GEM is increasing. But in terms of power grid, Europe, U.S. as well as the Middle East, what is the market trend as well as the orders environment?

[Tomomi Kato, executive]

Thank you for your question. First of all, regarding DSS, in terms of orders received. In the presentation material, we have given you a breakdown by BU. As we have shown, in terms of the DSS overall, increase by 20% was achieved. For three business units, we have been able to grow across the board. Front Business increased by 24%; IT, 19% increase; Service & Platform increased by 16%.

In terms of the Front Business, in particular, in finance as well as social. In terms of finance, there was a major project last year, and there was a decline because of a reactionary decline. But social is very strong. Public system and social system, there have been major orders received. For IT service on the other hand, HISOL and HISYS we have two companies. We have seen growth in both areas.

For HISOL, there have been major domestic projects remaining very strong. You've seen an increase for HISYS in the public area, there have been major projects won.

Basically, the front office as well as IT service characteristic is that our Lumada business, data utilization to create value has been very strong. In the terms of cloud as well as generative AI have businesses that are increasing.

Servicing platform is such that the GlobalLogic has been growing from the past. Now storage has seen growth in this time in domestic as well as overseas, especially with the foreign exchange impact. And cloud has been growing very significantly domestically.

But on to your second question, Hitachi Energy. In this area, the trend has been maintained from the past, HVDC major projects, orders have been captured and projects are underway in various regions. As I mentioned earlier, in terms of revenues in North America as well as Europe and the Middle East. In these regions, sales have been achieved. Beyond the HVDC, transformers as well as switchgear have been growing very strongly as well.

In terms of transformers, there is projects relating to data centers. We are receiving inquiries in this area. In terms of the trend, the prevailing trend, there is no change in globally all over the world, HVDC major system as well as transformers as well as switchgear equipment are growing.

[Kenji Yasui, analyst]

A follow-up question. In terms of power grid, for quarterly revenues is JPY 600 billion, very high. Is that after inventory has been released? So if we multiply this by 4, can we get the number for the full year? And I would also like to ask you regarding relative competitiveness in the area of IT.

[Tomomi Kato, executive]

Regarding power grid, revenues for the first quarter increased by 49%, inclusive of the operating exchange 31% increase has been achieved even on a dollar basis. For fiscal 2023, 20% increase, excluding foreign exchange. So it seems it is one level higher in terms of inventory.

The last year, human resources as well as capacity was maximum in terms of manufacturing. Therefore, we were not able to fully respond to the orders from our customers. It isn't as if it has been resolved. But we have made capital expenditures. Therefore, there has been improvement recently.

For the first quarter, revenue growth is driven by the relieving of the bottlenecks that existed in the previous year. On the other hand, 30% revenue increase for the quarter is very high. Weather and for the full year, 15% yen basis and excluding foreign exchange is 16%. We have to evaluate the forecast going forward.

Now in terms of IT, from the past, we have been making efforts in cloud business, especially for the use of generative AI, not just open, but also on-premise usage of the cloud is increasing in terms of demand. Hybrid cloud is what we are offering. The combination thereof is the service and response that we've been providing to our customers. This is our strength characteristics. And especially in the area of security, there is a heightened need for better security. We are also making efforts in this area. Centering in this area for DX-related demand is leading to increasing orders. That's all.

[Operator]

Next. The name is not indicated. From NHK, please go ahead.

[Unknown Analyst]

Today, BOJ decided on the rate hike. And you have your forecast, your investment strategy or business will be impacted in any way from this BOJ policy change? And how do you see the impact on the Japanese economy overall?

[Tomomi Kato, executive]

Thank you for your question. So today, BOJ made an announcement. Regarding the content, we had been anticipating a rate hike this year, and that was our understanding. So this was in line with our expectation. Basically, our performance this year, we were based on the assumption that the rate hike will take place this year. And so no impact there. But until now, the interest rate was negative for a long time. And this time, it's being raised. So the interest cost will increase, which will change the WACC and this may change the clients' investment activity. So this may appear in the medium term. So we have to focus and watch that. But basically, we are now going to enter a world with positive interest rate, which is normal environment. So that is our interpretation.

[Unknown Analyst]

Regarding interest rate, FX, could you also touch on FX as well?

[Tomomi Kato, executive]

FX, as shown in the slide, the FX sensitivity on revenue and operating profit, adjusted EBITA, with a weaker yen, the amount will increase. And so this will push up our revenue and profit. So revenue is like that. But on the profit side, there are also costs. So profit will not increase like in the same proportion as revenue. So operating profit margin may decline. That's one impact.

With weaker yen, the overseas M&A will become more expensive. So weak yen is not 100% better for us. But basically, as we run our company, we want the stable market. Stable market is very important for us. So basically, if Japanese economy becomes stronger and gradually turn to stronger yen, that is a favorable desirable scenario.

[Operator]

Next, there is no name indicated. [indiscernible] Investment Management, please.

[Unknown Analyst]

I hope you can hear me. I have three questions. Regarding Lumada business, the profitability there of EBITA, 16%, for the full year forecast is presented. This is only the first quarter, but is there an upside trend, especially digital engineering that is accelerating. Do you think there will be an upside? Is it going to be a positive contribution in terms of mix?

[Tomomi Kato, executive]

Thank you very much for your question. You're right. For the fiscal year, 16% is the forecast. There is no change from the last time. For the first quarter, in terms of the revenue, overall increase of 17% was achieved, 14% increase for the fiscal year. Therefore, the first quarter actual was very strong.

However, in terms of profitability, as I mentioned previously, we had the overall increase in profitability. Profit margin has increased year-on-year. So we are bullish. But regarding the 16%, compared to '23, that's a 1 point increase. It is a high profitability business. It's different to other businesses. Therefore, we believe that it is within the expected range. But for the first quarter, 70% increase in revenue is stronger than expected. So the margin forecast for 2024, it does remain intact. But in the second quarter, no matter, if there is going to be a continuous trend, we may evaluate. We may further revise.

[Unknown Analyst]

Regarding GlobalLogic, it has increased by 12% on a dollar basis. You said that the investment is suppressed. But organic, I think it is improving, was single digit previously, do you -- are you seeing a recovery in this area? Please comment.

[Tomomi Kato, executive]

Regarding GlobalLogic, last year as well as from previously, North America as well as European customers, investment in IT has been growing, but it has been slowing down compared to the past. Unfortunately, this trend is still continuing. Depending on the customers, we are seeing some growth. But overall, we have not recovered to the level of fiscal year 2022 in terms of momentum. In the second half of this year, or even after the second half, we are expecting a recovery. But given these circumstances, it is still growing at double digit.

[Unknown Analyst]

Regarding Hitachi Energy, adjusted EBITA, 11.4% is shown. If this is upside to the fiscal full term, getting this is sustainable. Or is it because of the mix of the major projects, there are one-off factors? Please comment.

[Tomomi Kato, executive]

Regarding the first quarter, I think we did better than expected. Therefore, for the fiscal year forecast has remained intact, no change. But currently, we are expecting the first full year to be at this level on a stand-alone basis, 10%. In terms of revenues, the first quarter tends to be strong. Before, at the time of second quarter results, we will revise.

[Operator]

Next, Peter [indiscernible] san. Please unmute yourself and ask you question.

[Unknown Analyst]

I have two questions. It may overlap with the previous question, but on Hitachi Energy, the profit margin is now improving significantly. And other companies are enjoying higher profitability as well. So the Hitachi Energy's profitability from your orders that you have captured may be even higher. So current existing orders and the long-term lower profitability ones, what is the breakdown? And in 2 or 3 years' time, what will this look like? If you could enlighten us.

[Tomomi Kato, executive]

So this will just be an outline, but of the backlog, FY '24, the ones that will convert into revenue in FY '24 is around a little less than 1/3. The remainder are medium to long term. Now by business grid automation, software business, grid integration, high-voltage, transformer, the ones that are short term, relatively short term, which we can realize revenue within fiscal '24. And the grid integration, which is where we have to improve our profitability are longer term, medium to long term. So this structure remains unchanged. But gradually after the order quality after Hitachi acquired the business is improving and the margin profile is also improving. So this trajectory remains unchanged, and the overall structure remains unchanged, but we are improving profitability gradually. So this will continue.

[Unknown Analyst]

My second question is digital. So you revised your plan, and so this now is different from your initial plan. But what is the biggest difference from the initial plan? And when you may be up a revision in digital revenue, and how do you see Q2 and onward? Will it decelerate or accelerate or at the same pace? What is your current forecast?

[Tomomi Kato, executive]

Q1 was good. For example, revenue in public sector and energy grew and project management was thoroughly implemented. And the service menu that we provide is more higher value, added value. And so we are getting the sales price accordingly. And inflation is passed on -- passed through to the end price. So those were the good points.

So in Q1, Front was good. Likewise, Service & Platform. Storage was better than we thought. Since last year, we've changed our organization, and we are now enhancing our sales and marketing structure since last year. So in Q1, we got new customers in North America and also large projects in Europe. So we are seeing some fruit from these changes. So the strong Q1 and also backed by the FX, we made an upward revision. But Q1 revenue grew significantly. And we are not sure if this momentum can be maintained for the whole year. There is resource constraints in Japan. So it's not going to be easy. And therefore, this time, excluding FX, Q1 grew by 11%, and upward revision will be 8% on a full year basis. But Lumada-related customer inquiry is very strong. So towards Q2, we will try to ascertain the actual situation.

[Operator]

Next is [indiscernible] san, please.

[Unknown Analyst]

I have two questions. First question is regarding the first quarter adjusted EBITA. The increase and decrease, the waterfall chart was shown. You also mentioned the selling price change. What was the contribution to increase in profit? And also please give the segment-based breakdown. That's my first question.

Second question. First quarter in your main business, the performance is very good. But if you want to identify risk, what would that be? Has there been any downside in the recent past in terms of certain domain? Or what are the risks that you are considering going forward?

[Tomomi Kato, executive]

Slide 7 is the first question. Adjusted EBITA is shown here. And in others, JPY 71.7 billion, breakdown is shown here. Regarding your business scale, the JPY 70 billion was the increase in profit. In terms of selling price change, that's about JPY 23 billion increase was shown. In terms of the selling price, there have been discounting as well. So it's a net change. And within this, by segment, DSS related and PG-related have made a significant contribution in this area.

The second question is regarding the first quarter risks. For the first quarter, decrease in revenue as well as forecast decline was seen in CI in the area of Smart Life & Ecofriendly Systems or Home Appliances. Air Conditioning has been very strong. But the domestic white goods demand is declining. Revenue is declining. That is the result for the first quarter.

We are hoping to make a recovery in the second half, but we believe in the first half, it will continue, therefore, we have changed the forecast for the full year. Now we don't -- there could be variation depending on how much recovery is achieved in the second half. For the CI sector, the measurement and analysis of Hitachi High-Tech, overall revenue and profit increase.

And the clinical chemistry, immunochemistry analyzer, new product that was introduced leading to increase in revenues. But in terms of semiconductor manufacturing equipment, the investment on the part of customers is being delayed compared to what we have expected. Therefore, a decrease in revenues as well as profit, but we believe that this will recover in the second half. Orders are not declining. But depending on the changes made by the customers, it could be subject to variation.

Not specifically for any sector, but especially for DSS as well as for GEM and major projects are being taken on. Project management is conducted in a cycles manner, but the major projects are subject to this -- therefore, we have to watch this area very carefully.

[Unknown Analyst]

Regarding DSS and PG, there have been significant changes in terms of selling price. Has this been expected from the beginning because of many inquiries, do you feel that the selling price must be increased?

[Tomomi Kato, executive]

Now this is also included in the full year forecast. And so from 2 years ago, inflation is having a significant impact. Therefore, we are reflecting that in the selling price. And in the same continuum for the first quarter numbers are within our expectations. That is our understanding.

[Operator]

Next [indiscernible] san.

[Unknown Analyst]

First of all, Page 16, nuclear power business, large projects. Which regions are they? Is there any additional information you could give us? Second question is the corporate cost, headquarter cost, JPY 20 billion. Is this a buffer for you? Or is there a specific reason that you have recorded this if you have any more details, please? And lastly, Air Conditioning, the business sales. The proceeds, how will you deal with the proceeds? I think the timing will be next fiscal year. If you could give us some more information on your impact on your P&L? And how do you plan to use the proceeds? Maybe this will relate to your medium-term plan?

[Tomomi Kato, executive]

Thank you for your question. First, nuclear power. We're not doing this overseas. It's only in Japan. So this is a domestic project. And this is front-loaded than we originally planned. And so that is why we have this result in Q1. We do not disclose the details on the project, so I hope you could understand.

Second question, so in corporate item, it is JPY 20 billion negative. In the slide, I briefly touched on this. In the past, the segment deterioration risk was included in the corporate item as a buffer. But this year, we're not doing it. When we get -- got the forecast in April, we thought that there will be more room for improvement on the segment side. And so we included additional improvement. This time in DSS and GEM.

In Q1, we already had the upward revision. And so this portion was used. So for this year, the corporate item does not include the risk buffer. And Air Conditioning, as you rightly said, this will be Q1 of FY '25. That's the closing time. At that point, with our current calculation, JPY 125 billion gain on sales and also JPY 195 billion proceeds. And I touched on this in June Investor Day. For the asset disposal, we are thinking of using it in two ways. One is the growth investment like M&A, and the other is shareholder return buyback. So these two will first be the target, the main use of proceeds. And on the same return scale, we will compare and use it for the one that is better. That is our basic thinking. But it's 1 year from now, and so once we become closer, we will study further.

[Operator]

Now at this point in time, we would like to take questions on the English channel. [Operator Instructions]

Any questions on the English channel? There seem not. So we will revert back to the Japanese channel.

Harada san, please unmute and ask your question.

[ハラダ, analyst]

I have three questions. First question is regarding energy. Now question was raised regarding the price change, especially in terms of energy for transformers in particular, for the short term, overseas manufacturers as well as Shanghai, Korean makers are increasing their price significantly. But you also have a short-term, you also have mid-to long-term projects as well. Therefore, it isn't as if you are following suit. But in terms of price change, how much is impacted by the market conditions? Please elaborate.

[Tomomi Kato, executive]

Thank you for your question. It isn't as if we can give a clear answer. As you have rightly mentioned, for the power grid equipment, depending on the product, supply and demand is very tight. And the market price is increasing for some equipment. So depending on the market conditions, we are proposing price. So we have been benefiting from this. But we cannot -- I cannot give you a specific answer in terms of scale. For this fiscal year, it is within our expectations.

[ハラダ, analyst]

Regarding the price increase, is it higher than the original expectation?

[Tomomi Kato, executive]

For this fiscal year, compared to the original forecast, it is within expectations.

[ハラダ, analyst]

Second question, regarding the hybrid cloud that you mentioned. From June or July, Hitachi iQ has started service. Is this additional inquiries to be received in the second half? Is this going to push up the expectations? Or do you think that it is already incorporated into the original forecast?

[Tomomi Kato, executive]

Now with NVIDIA, GPO has been incorporated into service and related equipment as well as software, and our storage as well as affiliated -- related software have been combined into a solution. And if the revenues go up, in terms of storage as well as software-related service will increase in terms of revenue. Therefore, we have the high expectations for Hitachi iQ. But in terms of storage, we believe there will be an increase, but we have to look at the orders to be received in the second quarter in order to have the better understand of the full year.

[ハラダ, analyst]

Regarding Air Conditioning, with the commercial Air Conditioning will be internalized. Is this only for the domestic market? Google, Amazon and the hyperscalers are making more investments in Japan in terms of data centers? Is it -- is this related to this area? Are you already achieving orders in this area? Do you think that more orders will be received in the second half and onwards?

[Tomomi Kato, executive]

Hitachi brand and commercial Air Conditioning have been provided to the domestic market. JCH has been a manufacturing, developing and also sold through the Hitachi GLS. And in terms of the sales and maintenance, in case of the development and manufacturing of Hitachi GLS. So we'll be in charge of all the business in Japan. But in terms of revenues, it is being already posted, therefore, there is no change.

But with the integration poised for next year, we will have manufacturing as well as sales combined, therefore, we can bring to bear our strength in this area. We hope that this will lead to increase in business.

Now regarding the commercial Air Conditioning reorganization, as you have rightly mentioned, the calling mechanism is required in data centers as well as buildings. There is increased demand in this area. Therefore, going forward, it is our intention to grow this business. But currently, we have not received any major inquiries yet. This is what we are going to promote going forward.

[Operator]

Time is coming up, but we have -- we want to take all the questions of those who are raising their hand. Hirakawa san [indiscernible] Takahashi-san, Ezawa-san, in that order, we want to take the questions. So first, Hirakawa san.

[Mikio Hirakawa, analyst]

So this may overlap with the previous question, but in the Air Conditioning business, you said you want to grow the data center field. Are you thinking of investment in Japan? Do you have that already in place? And overall, the net profit has grown quite significantly. Is there some one-off that pushed up your net profit?

[Tomomi Kato, executive]

Thank you for the question, Air Conditioning, the investment plan in Japan. We will be closing this next year, so we will prepare towards next year. As of now, we do not have a plan yet. In Q1, net profit was good. This was because in the non-operating profit, there were two main items -- three main items: One, is the business divestiture. Hitachi's Power Electronics, HPSD. This company was transferred to MinebeaMitsumi. So that's JPY 17 billion gain on sales. And others, foreign exchange gain, and U.K. Horizon project, land was sold. So those three combined are all onetime one-off impact and this pushed up our net profit in Q1.

[Operator]

[indiscernible] san, please.

[Unknown Analyst]

I have also a question regarding the Air Conditioning. What is your positioning going forward in terms of home appliances?

[Tomomi Kato, executive]

Thank you for your question. Regarding Air Conditioning for the household. Hitachi Brand Air Conditioning equipment will be provided by Hitachi Global Life Solutions, 100% sub. Therefore, there is a change from the perspective of our customers. So we will continue this business.

[Unknown Analyst]

Regarding the refrigerators as well as home appliance solutions.

[Tomomi Kato, executive]

Regarding home appliances, whitewoods. Within Hitachi, we have a social infrastructure business. And home appliance is an important touch point with the consumers. As we pursue social innovation business, it has an important positioning. There is no change. Does this answer your question?

[Operator]

Next, Takahashi san. Please ask your question.

[Mariko Takahashi]

I have two questions. One is, now we are entering the world with positive interest rate. And so you said this is within your expectation, but do you finance? Are you financing beforehand in terms of the financial policy strategy?

[Tomomi Kato, executive]

Of our borrowings, long-term accounts for more than 50%, about 70% are long term in nature. So that part is not impacted by the interest rate. And the remainder are short term, so that will be impacted. But as I mentioned at the outset, this fiscal year, we expected that the interest rate will rise and are planned accordingly. So no impact there question.

[Mariko Takahashi]

My second question is, has been mentioned. So the home use Air Conditioning. A similar kind of selection and concentration, prioritization will continue going forward. And one is affinity with Lumada, I think. So if you could elaborate on that point.

[Tomomi Kato, executive]

Thank you for that question. So no change from what we've been saying in the past. We think of core business Lumada, the high growth and high added value business under Lumada. So we can expect value under Lumada. And where we have a certain level of presence in the domain that we are active in. So that is our judgment criteria and no change there. Now for the business portfolio rebalancing, we will continue doing what we've done. In other words, how can we maximize the corporate value and business value. So no change there. But we're not targeting any particular business. This is the business for Hitachi overall.

[Operator]

We will now take the last question. Ezawa-san please unmute and ask your question.

[Kota Ezawa, analyst]

I just have one major question regarding balance sheet, and the debt borrowing that you have. With the rate increase, this is not related to what happened today, but the securities board was presented in the second quarter and third quarter and fourth quarter, the interest paid has increased significantly on the profit and loss statement. It seems that the borrowing rate is becoming higher. Can you elaborate on this? Why is this the case?

And for this fiscal year and on, the rate in terms of borrowing, is it going to be 6% or 7% at high levels? Please give us your take on this as well as GlobalLogic as well as the energy and Thales, the assets overseas is increasing significantly. And you have many non-Japanese employees globally. And therefore, in terms of borrowing, how you borrowing is going to be -- what is most important in terms of the group financial management. So please elaborate on this matter.

[Tomomi Kato, executive]

Thank you for your question. Regarding the previous fiscal year, I don't have the materials with me, so we will get back to you. But as I mentioned earlier, for this fiscal year, for Japan, the rate increase has been expected for overseas market in the U.S., Europe, we believe there's going to be a rate cut, but it's not going to be a sudden. And we don't see that the Japan's rate is going to increase significantly suddenly.

So in terms of interest repayment, the borrowing burden is likely not to increase significantly. As I mentioned in the Investor Day, we will make investment for growth going forward. For leverage day ratio has gone down to 0.2%. With Thales JTS acquisition, there has been an increase. But we are still below 0.3%. Therefore, we are considering further leverage going forward. There is no change in this outlook. As I -- we mentioned, the interest rate outlook but there is going to be more borrowings. There will be new borrowings as well. So we will manage this very carefully.

Furthermore, in terms of the debt borrowing policy, the lowest interest rate will be prioritized in Japan, the interest rate was overwhelmingly low. So there was more debt in Japan. About going forward with the narrowing of the interest rate gap, we may consider otherwise, but it is not going to change suddenly. So the foreign exchange as well as interest rate trends will be taken into consideration to get favorable conditions within the group. We are conducting cash pulling as well. Within the cash companies, we are utilizing this process for overseas acquired entities as well.

So borrowing cost will be decreased by utilizing this process.

[Operator]

With that, we would like to bring the Hitachi Limited web conference on Q1 fiscal year 2024 earnings to a close. Thank you very much for your attendance despite your busy schedules.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]