Earnings Transcript for 6501.T - Q2 Fiscal Year 2024

Unidentified Company Representative: It is now time to start Hitachi Limited’s web conference on the Second Quarter of FY 2024 Earnings. Thank you very much for taking time out of your busy schedules to join us today. With respect to the presentation materials used today, they are posted on Hitachi Limited’s IR site as well as the news release site, please check accordingly. Let me introduce those who will be on stage. Senior Vice President and Executive Officer, CFO, Tomomi Kato; Senior Vice President and Executive Officer, CEO of Power Grids business unit, CEO of Hitachi Energy Limited, Andreas Schierenbeck; Corporate Officer, Executive General Manager, Investor Relations Division, Masao Yoshikawa; Deputy General Manager, Finance Division, Hiroaki Ono. So these are the four who will be on stage. On the Zoom Japanese channel by choosing the language, the English translation of the speakers can be heard. The location of the icon depends on the device. But in the case of the PC, at the bottom of the Zoom screen, there will be an icon. Please choose the language of your choice. Regarding earnings, Kato will explain and Hitachi Energy presentation will be made by Schierenbeck. We are going to switch the screen, please, bear with us for a moment. Kato-san, please.

Tomomi Kato: First of all, I would like to explain the structure of the presentation materials. The first is key messages to the second quarter of the fiscal 2024 results, fiscal 2024 forecast, performance by business segment and appendices. I would now like to explain the key points. First, the results of the second quarter of fiscal 2024. We achieved an increase in revenues and profits across all 3 sectors. This was driven by the DSS, additional systems and services, which benefited from the growing demand for DX and modernization in the domestic IT market and GEM, green energy and mobility, which performed well in areas such as renewal demand for power grid facilities and renewable energies as well as data center-related projects. Five KPIs will be explained. The upper row shows the total for the three sectors. First, revenues increased by 11% year-on-year. Growth was centered on GEM and DSS. Adjusted EBITA also increased by 23% year-on-year with growth centered on green and digital. Furthermore, the adjusted EBITA margin achieved 10.7%, an improvement of 1 point from the previous year, below consolidated results for Hitachi. Net income attributable to Hitachi was ¥116.9 billion. Adjusted EBITA for the three sectors increased but due to deterioration in equity in profit of affiliates for Hitachi Astemo, Hitachi consolidated EBITA decreased by ¥22.1 billion year-on-year. And meanwhile, core free cash flow increased to reach ¥97.6 billion. Next, the outlook for fiscal year 2024. GEM, which is currently benefiting from the strong demand for GX has revised its forecast upward and the total revenue for 3 sectors has been revised upwards by ¥150 billion. Adjusted EBITA by ¥19.5 billion. In addition, core free cash flow is expected to reach ¥1.5 trillion, ¥300 billion higher the medium-term target over the 3-year period. Let me explain the 6 KPIs. The upper row shows the 3 sectors. First, revenues are expected to increase by 7% year-on-year. The software division was improved – has improved the previous forecast of 6% year-on-year increased by 1 percentage point. Adjusted EBITA is forecast to increase by 23% year-on-year, which is expected to exceed the growth rate of 2023. Adjusted EBITA margin is forecast to improve by 1.5 percentage points year-on-year to 11.5%, the same as the previous forecast. The figure below that is consolidated figures. Net income is forecast to be ¥600 billion. Adjusted EBITA has been revised upwards for the 3 sectors. But the previous forecast for Hitachi’s consolidated EBITA remains unchanged due to the Hitachi Astemo’s equity in loss for the same and core free cash flow is ¥480 billion, although this will decrease from the previous year due to factors such as increased capital investment, the – for the 3 years, it is expected to exceed the medium-term target. ROIC is forecast to improve from the previous year due to increased adjusted EBITA and expect it to be 9.5%. In summary, we are revising upward our forecast for revenues and adjusted EBITA for the 3 sectors combined. On the other hand, for Hitachi as a whole, adjusted EBITA and net income remain unchanged from the previous forecast and only revenue has been revised for it. Now for the main topics. Orders for – I’d like to, first of all, talk about the trends for the first half of fiscal 2024. Orders by digital systems and services, which have captured demand for DX increased by 9% year-on-year to ¥1.5 trillion in the first half. Front business, IT service and platforms increased by roughly 10%. Meanwhile, DSS revenues for the first half of the year was ¥1.3 trillion, 10% increase year-on-year. In particular, Energy and Public Sector, front business increased by 15%. And IT services and services and platform also grew steadily. Next, orders received by GEM, which came to demand for GX increased 42% year-on-year to reach ¥3.1 trillion. In addition to the significant growth of Railway BU, which concluded large scale maintenance service contracts overseas and Hitachi Energy, which performed well in HVDC and other areas. The nuclear power business also grew due to a major contracts in Japan. In the first of the year, GEM’s revenue was ¥1.8 trillion, 33% increase year-on-year. In addition to HVDC, this is mainly due to growth in railway BU, which acquired the DTS business of Thales centered on signaling business as well as growth in Hitachi Energy, which saw growth in HVDC, transformer switchgear and other products in the first half of the year, both DSS and GEM, so orders increase – exceed revenues. The second point is the capture of new business opportunities in the data center related field domestically, we have already made the progress in forming partnership with the domestic companies related businesses. For the overseas, we have agreed with the Singtel a major telecommunication companies in Asia to expand our strategic partnership. In addition, with regards to expansion of our digital service business, we have received an order from Copenhagen Metro for a digital asset management service HMAX. Going forward, the NVIDIA’s AI technology will be used to accelerate, to expand our digital services through operational and maintenance support for trains and signaling services. Next, I’d like to talk about the interim dividend decided today. In line with our shareholder return policy of paying stable dividends while securing funds for growth, we will be increasing dividends by 10% from the previous fiscal year-end dividend to ¥21 per share. This represents an annual increase of 31% from the previous year’s interim dividend. In addition, we are proceeding with the share buyback of ¥200 billion announced in April as planned. Next, highlights of the second quarter of fiscal year 2024. Revenues from the 3 sectors grew by 11% year-on-year and adjusted EBITA grew by 23%. Furthermore, profit margin, up 1 point year-on-year increasing profitability. Net income remained flat year-on-year due to a decrease in nonoperating foreign exchange gains compared to the previous year. Hitachi consolidated results were down in – year-on-year, adjusted EBITA and net income due to a decline in the equity in earnings of affiliates, Astemo. On the other hand, core free cash flow was up year-on-year. Next, I would like to talk about the breakdown of the changes in the revenues as well as adjusted EBITA. Please look at the revenues. And looking at the fiscal 2023 2Q results on the far left to right the explanation we provided , although revenues declined during the deconsolidation in previous fiscal year. GTS business and Thales was a quite increase in revenue due to the depreciation of yen and organic growth in revenues, mainly GX-related technology, energy and GX-related DSS, front business increase. Next, I’d like to talk about the adjusted EBITA. The trend is similar to revenues as it includes the deconsolidation of Astemo in previous fiscal year and this second quarter equity in losses of Hitachi Astemo and others increased by ¥38 billion. Positive impacts of business scale increase and the selling price change outweighed negatives of procurement cost increase and increase in investment. Next, I’d like to talk about the financial position and cash flow. Total assets at the end of the second quarter at the top. Total assets ¥12.500 trillion, an increase of ¥340 billion compared to the end of previous year, the Thales GTS acquisition has an impact. Interest-bearing debt also increased by ¥340 billion. As a result, debt equity ratio increased to 0.27x. Next, cash flow. Core free cash flow improved due to factors such as the improvement of working capital by increase in advanced payments, both for the second quarter and first half. Next, I will explain the status of revenue by region. I will explain the 3 sectors highlighted by bold lines. First in North America, the 3 sectors grew by 17%. This was primarily because of Hitachi Energy, which had robust growth in orders for products such as Transformers leading to GEM’s increase by 29%. DSS, despite the growth of GlobalLogic, grew only by 6% in the second quarter, mainly due to Hitachi Vantara’s storage business project that was brought forward to Q1. Next, on Europe with a 26% increase in the 3 sectors. GEM increased substantially by 36%, mainly due to an increase in the signaling business from the acquisition of Thales GTS business in the railways BU and an uptick in orders transformers, switchgear and other equipment from Hitachi Energy. In addition, Hitachi High-Tech’s health care business grew and CI was up by 13%. Lastly, in the other areas, the 3 sectors increased by 22%. Here too, a 28% increase was posted was GEM. This growth was mainly due to Hitachi Energy’s projects in the Middle East. In total, the 3 sectors accounted for 62% of our overseas revenue. Next, I will discuss orders received by business segment. The key points are, as I have just presented regarding Q2, the growth rates of DSS front business and GEM’s nuclear energy appear to be low due to the reactionary declines from the large respective projects undertaken in the previous year. But in the first half of this fiscal year, they each increased year-on-year. Next, let me move on to the forecast for FY 2024. The highlights of the forecast. As I explained at the beginning, by and large, we expect to achieve almost all the KPIs of the medium-term management plan ‘24. As I will discuss in the performance by segment section later, we have made upward revisions to the full year forecast for the GEM segment for both its revenue and adjusted EBITA. As a result, GEM’s revenue is now forecast to grow 7% year-on-year and adjusted EBITA and net income are now going to be up year-on-year. On the other hand, adjusted EBITA and net income on a consolidated basis remained unchanged from the last time, respectively, because of loss in equity of – or rather equity in loss for Astemo. And lastly, on the assumptions regarding the exchange rates for Q3 and onwards, we have left the previous rate of ¥140 to the U.S. dollar unchanged. In terms of the sensitivity of want a change in the yen-dollar exchange rate is expected to result in ¥500 million difference in adjusted EBITA. Next is the breakdown of factors behind FY ‘24 revenue, adjusted EBITA year-over-year changes from the previous year. First, on revenue in the upper row, we’re expecting to see Astemo’s revenue drop and increase from Thales acquisition of GTS. Finally, as in others and organic revenue growth. Revenue growth is expected mainly from Hitachi Energy’s GX-related business and DSS DX-related front business and IT services. Next on adjusted EBITA in the bottom row, the trend is generally the same as for revenue. The others are expected to increase by approximately ¥160 billion. The factors, including the increase in business scale and changes in selling prices, which are part of the organic revenue growth are expected to outweigh the impact of higher procurement costs and increased investment, bringing an expected year-on-year increase in our adjusted EBITA for Hitachi on a consolidated basis. Now results by segment. The first is on DSS, Digital Systems & Services. Overall, DSS revenue grew by 5% in Q2 of FY ‘24. Adjusted EBITA margin was 13.4%, up in both revenue and profit over the previous year. The profit margin also improved by 0.6 percentage points. Revenue was primarily driven by DX and modernization work done by the front business. In IT services, cloud and security-related Lumada business expanded. While in services and platforms, GlobalLogic grew by 18% the Domestic cloud business is also expected to increase, but storage business declined due to the impact of projects brought forward to Q1, resulting in only 2% growth as a subunit. As described later, Lumada business is 14% growth on the back of solid DX demand driving overall growth for DSS. Next, for FY 2024 forecast on the right side. Previous forecast for DSS total remains unchanged this time. But excluding ForEx impact, we are projecting 8% year-on-year growth, which is higher than FY ‘23. On GEM, green energy and mobility, next, overall, GEM revenue was up 26% in Q2, both revenue and profit increases from the previous year. Profit margin also improved by 2.3 percentage points. Double-digit revenue growth achieved mainly at Hitachi Energy and Railway BU brought year-on-year increases in both revenue and profit to both. In Hitachi Energy, in addition to an increase in transformers and other equipment, Lumada business, which includes HVDC systems integration and Integrated Facility Asset Management Solutions also grew. In FY ‘24, we have revised our forecast upward mainly based on review of Hitachi Energy and rail road business units. We are expecting a 19% revenue growth for GEM as a whole, which is going to be higher than FY ‘23, excluding ForEx impact. Next, CI, Connective Industries. In total, CI revenue increased 2% in Q2. Adjusted EBITA margin was 11.2%, an increase in both revenue and profit over the previous year. Profit margin also improved by 1.1 points. Revenue declined in the Smart Life & Ecofriendly Systems by revenue was up in all other BUs. In particular, Water and Environment and Industrial and Digital grew by more than 5%. Next, for FY ‘24, CI as a whole, will see a 3% increase in revenue. Segment forecast for the year remains unchanged. Next, on Lumada business. First, please look at the graph on top left. Revenue in Q2 rose by 25% year-on-year. For FY ‘24 and full year basis, we’re projecting the revenue to increase by 18% and profit margin by approximately 16 points, up 1 point year-on-year. The forecast for this fiscal year’s revenue has been revised upward by ¥100 billion from the previous forecast, mainly due to GEM’s growth. Starting from this year, we are disclosing revenue of our segment on a quarterly basis. As shown in the table below, DSS saw a 14% increase in overall revenue due to growth in GX-related systems integration, pushing our frontline business and IT services growth was posted also in GlobalLogic’s digital engineering. In CI, industrial and digital systems integration for industry grew resulting in CI’s overall growth of 24%. And for topics, description of Hitachi Energy’s collaboration with GlobalLogic and Hitachi Digital Services to strengthen its digital business, including integrated facility asset management. Furthermore, CI completed the acquisitions of MA micro Automation, a robotics SI company; and Castle Hill, a pharmaceutical engineering services company. The plan is for these acquired businesses to contribute to the growth of industrial and digital. This growth and enhanced profitability of the Lumada business is expected to continue to contribute to Hitachi’s overall revenue and earnings growth. That concludes our presentation of the Q2 earnings results and the forecast for the full year of FY ‘24. Next, Mr. Schierenbeck, CEO of Hitachi Energy, who took office in July this year, will present the company’s management strategy. The floor is yours.

Andreas Schierenbeck: Thank you, Kato-san. Today’s presentation will be split into 3 areas. I will first share our perspective on the strong market momentum, followed by our journey as Hitachi Energy and last here, I will cover how we see priorities and ambitions. Next slide, please. But before we start, a few words about my background. I’m an electrical engineer with international experience across the energy value chain and industry. I have global transmission distribution experience as CEO of Uniper. I also spent 20 years in Siemens in the T&D business in the buildings sector, and I worked 7 years as CEO of thyssenkrupp Elevator. I have experience of power generation, energy trading and with experience of driving service and digital transformation for several companies for many years. Most recently, I spent 3 years in various start-ups in green hydrogen, solar and electrolyzers and in my role as CEO, I’m very excited to continue to support the acceleration of the energy transition together with our customers and partners. Next slide, please. Let’s have a look at the market and the situation where we stand today. Globally, we are facing energy challenges in 3 areas. We need to reduce carbon emissions to meet our net 0 goals. We need to secure energy supply so we can keep the lights on and use electricity for heating and cooling, et cetera. And we also to meet the increased electricity demand across the sectors and geographies. Next slide. So if you are talking about reducing carbon emissions, we immediately started to talk about energy safety and electrification and demand increase. Decarbonization leads, first of all, to electrification of industrial processes. Every industrial process, which can possibly be decarbonized and electrified will be electrified. There are a lot of processes in industry and society where we can use green electrons, such as electric cars, transportation, team protection and so on. And the drive for data centers is further fueling the increase in demand, and then I will only add to that. There are processes, of course, which are hard to decarbonize with electricity as you need chemical molecules for some processes or high temperatures and these processes will need something else, if we need green molecules. So in summary, you need both green electrons and green molecules to decarbonize the society. Next slide. Now when you talk about decarbonization and more electrification, it leads automatically to the addition of renewable energy generation, such as solar, onshore and offshore. Today, renewables are the cheapest and fastest way to meet electricity demand. If you look at it from a timing perspective, installation of renewables, solar, onshore/offshore wind takes about 1 to 7 years depending on the complexity. It takes longer to integrate other power generation sources into the grid, such as SMRs and nuclear power plants, where the planning horizon is up to 10, 15 years. And of course, we have to hurry up because there is not much time to reach our goals for 2030. Now adding renewables also come with complexities like volatility and geographic location. First, of course, volatility because it’s not always sure if the wind is blowing and the sun is shining. And additionally, the location is an issue because where you generate electricity is not the same location where the demand is. Renewable energy sources are often remote and located far from centers of high electricity demand or of consumption. So the additional way would be to install energy generation assets where the demand is and void transportation. Now for renewables, this is not possible anymore. The power grid is actually in the middle. You have to transport the electrons from where they are generated, for instance, offshore wind farms, to where they are used in the industrial complex in big cities. And to deal with volatility on long distance transportation, you need digitalization as an enabler. You need new processes, new solutions and maybe even AI. So to meet demand increase, we need renewable power and renewable power need grids and digitization. One example where a lot of renewables have been integrated into the power grid as shown in the picture, U.K. and Ireland. Here you clearly see the load centers in red and the renewable centers in green. And you see as well multiple HVDC links to exchange and transmit power across the ocean to other countries. Next slide. Now let’s have a look at the global energy supercycle, which is expected to continue for the next 20 years. According to an IEA report, the length of the planning horizon are increasing to 10 to 20 years across the globe. Maybe 10 or 20 years ago, the grid was not even in the focus, but now the Power Grid is much more important than before and will play a key role in enabling a sustainable energy future, which now requires more planning and with that planning, of course, as well as the budgeting for more CapEx. If you view the CapEx planning for a lot of utilities around the world going up significantly. Another example for a long-term perspective is also the regional transmission approach announced by FERC this year. They are now asking for a 20-year planning horizon that goes ahead with budgeting for these periods of time. Next slide. If you look at our plan for 2030, we are making good progress and focusing on those 3 areas

A - Unidentified Company Representative: Kato-san and Schierenbeck-san, thank you very much. We will now proceed to the Q&A period. [Operator Instructions] We will not show the video of the person asking the question today. We will, first of all, take questions from the Japanese channel and then the English Channel in that order. We will receive questions from the media, institutional investors as well as analysts at the same time. First of all, we will take questions from the Japanese channel. Because of the interpretation operation, please only ask questions in Japanese language on this channel. So the floor is now open. Harada-san, please unmute and ask your question.

Unidentified Analyst: Thank you very much for this opportunity today. I have two questions in Japanese. First of all, regarding the IT digital system domestic margin for the front business as well as for IT service improvements are seen. There has been improvement from the previous quarter as well, so please elaborate further. GlobalLogic, you said that you are going to use and utilize overseas engineers of GlobalLogic, this is going to become a margin driver for you. You’ve mentioned this in the past. Are you making progress in this initiative? And/or is it just a one-off in terms of the margin improvement we are seeing today? The other question is the following. Regarding the Connective Industries, in the Industrial and digital, I understand that profitability is improving. Domestic IT is a similar situation in terms of margin improvement? Are you making progress in improving margins? From this year, Harada-san has taken the helm and digital collaboration is making progress, it seems. Based on digital the – has it been changes in the business portfolio for the connective industries? So that is all two questions in Japanese first.

Unidentified Company Representative: Thank you very much for the question. To your first question regarding domestic IT. In the slide on Page 15, DSS breakdown is provided here. In terms of growth, from business, IT business have increased 9% and 6%, respectively. Therefore, a strong growth has been shown here. Demand trend is that there’s not been much change in the first quarter. But in the area of front business as shown here on this slide, DX and modernization and migration have driven demand, especially for the second quarter, the social BU. For domestic energy customers and the public institutions, public sector Company – public sector are placing orders to us. There is growth in this area. And revenues have increased and margins have improved from the previous year. For IT service, on the other hand, basically, there is no change in trend. Lumada business is the mainstay, especially in the cloud related as well as security-related sophistication thereof, showing a significant increase in demand. Revenues are increasing and margins has improved by 0.6 points. Regarding SAP, the GlobalLogic 1% on a dollar basis, 14% is seeing it is very strong. In terms of profit, we are seeing an increase as well. Centering on Europe, customers are keen to invest. And in North America, we have received orders as well. Furthermore, as already mentioned, within Hitachi Group, the utilization is increasing in a steadfast manner, leading to a revenue increase as well as earnings increase. As mentioned in the topics today, for the railway system BU, digital asset management service, HVACs was an area that we received orders, we will be working with NVIDIA to strengthen this business further going forward. The front is the railway system BU, but for IT North America, Hitachi Digital will be leading the process together with the GlobalLogic. And inclusive of digital service, we will provide service with all hands on deck. And for Hitachi Energy software, modernization is taking place. And now it can be counted as the Lumada business. GlobalLogic is providing significant support in this area as well. This is the domestic IT DSS situation today. Now regarding CI, the breakdown is provided on Page 17, Industrial & Digital. This is not just domestic IT but also including robotics SI, such as JR Automation. Overall, it’s 5%, but that is a revenue increase year-on-year. But if we look at IT only, then the growth rate is even higher. Therefore, this is the industrial customers front that we are pursuing in this area, and the demand remains very strong. That is the reason why business is increasing for us. Margins is also improving as a result of this process. Now Abe-san has taken the helm and digital collaboration is making headway. And it’s only been 6 months, and the results are to be manifest going forward. Various measures have been implemented. And example that I mentioned is GlobalLogic and GEM collaboration are in good cases in point. The collaboration with CI is expected to increase going forward. That’s all.

Unidentified Analyst: Thank you very much. I have a follow-up question regarding social BU, you said for public sector. Do you also have defense business increasing margins? Please elaborate.

Unidentified Company Representative: Defense is also included, but mainly it’s a public sector mainly.

Unidentified Analyst: Understood. Thank you. That’s all for me.

Unidentified Company Representative: Thank you very much. To continue with the questions, please unmute and start your question. The next person to ask questions. Thank you, question.

Unidentified Analyst: I have 2 questions, if I may. My first question is directed to Mr. Schierenbeck. Earlier, as a target for revenue, $3 billion you mentioned, I believe. On the other hand, CapEx of $6 billion, I think you mentioned between ‘24 and ‘27. So revenue target of $3 billion, is that to be achieved in 2027 or in a different year? If you could please elaborate on the timing of achieving that target, please?

Andreas Schierenbeck: Yes. Thank you for the question. The revenue target to reach $30 billion is in around 2030, and that puts it in a perspective of the CapEx we are spending in the next 3 years.

Unidentified Company Representative: Thank you. Well, upon hearing that, seeing from the outside, we would like to see an overall picture where there is going to be good growth, but it’s a business that you’re running. In the next 3 years, roughly, what are the factors that could negatively impact your performance? Inflation or geopolitical factors or projects being stalled or suspended? Well, you have new types of contracts to ensure safety and security, even so if we have any potential concerns that could negatively impact your performance on a realistic basis.

Andreas Schierenbeck: No, thank you for the question. At the moment, we are evaluating our risk very carefully, as you have seen in the presentation, and I think I see very minimal risk at some more from geopolitical things, a lot of things already considered. Since we have a lot of local production, we have local hedges for that as well. Our revenue and our backlog is saved by capacity reservations and of course, framework agreements. Of course, there is a risk that a project is slipping. But even if a project is slipping, there are normally 2 or 3 other projects hoping to getting a slot for production. So that could be very much be filled. And on the other hand, a lot of projects, which are started, especially in the HVDC area are multiyear projects. They need 2, 3, 4, 5 years of completion. So if you have started them, you see maybe a slowdown but hardly any cancellations on that. So I would expect that there are very low risk profiles attached to our business, and the revenue for the next 1, 2, 3 years is very much safe and secure. Inflation is an issue, and we’re dealing with that. But most of our newer orders have precautions in the contracts that we’re having price adaptation clauses for raw material going forward, especially for production slots, which are far out. And of course, some old projects and old contracts actually, which don’t have all the safeguards we’re revenue out any way shortly.

Unidentified Analyst: So you’re taking a very careful approach. I can see that. But if you were to single out one single factor, if this factor goes unexpected that it could negatively affect what would that be? So when you acquired this, you must have reduced EPC and electric line business to implement structural reform, but there must be remaining potential risks, so any hint as to what could go wrong that negatively will affect your business?

Unidentified Company Representative: Yes, actually, we are very, very careful how we are driving our business, especially because we are coming from a past where these risks have materialized running EPC as well in a time where capacity was not fully utilized. So from that point of view, yes, we are very carefully going forward with our investments. I see a risk that some projects could be delayed probably, but as already highlighted, as there are other projects we could kick in. If that is not done timely, directed by 1 month, you could see maybe some smaller shifts in revenue. But overall, I don’t expect any deviations from our growth plans. You see our growth performance over the couple of last years and quarters has been very strong. We see that it will continue and if there are some movements of revenues from one quarter to another or one order intake is moving from one quarter to another or fiscal tier to another. It has only minimal, I would say, nearly no material impact on our balance sheet or on our performance.

Unidentified Analyst: Thank you very much. .Next, about the earnings, so domestic IT service, I have a question regarding that. In Q1, surprisingly, the performance was very robust and strong. I do hope that similar momentum will continue. But when we look at other quarters compared to Q1, increase in revenue as well as increase in EBITA has gone down. So your forecast in the second half is that the trend we are seeing in Q2 is expected to continue. So from Q1 to Q2, it seems that momentum has dropped somewhat apparently, if you can explain as to why, please?

Tomomi Kato: Thank you for the question. So as you rightly pointed out, in Q1, it was very strong. And we surprisingly took a look at the numbers. Numbers were surprising to us. There were several factors behind this. Number one, so projects were brought forward, for example, for storage. In other areas, projects have been accelerated, brought forward, and there was a concentration of that. And this year, in Japan, the bills and notes changed. And that work continued into Q1, but that work no longer exists in Q2 because it’s complete. And so that accounts for a major difference between the two quarters. And ForEx compared to Q1, relatively, the yen is stronger in Q2. So combining these factors from Q1 to Q2, the growth rate has dropped because of these. But if we look at the absolute amount of revenue in Q1 versus Q2, in Q2, 7% growth is achieved and in the first half, 10% growth has been achieved. So growth has not stopped. And what you pointed out, so a full year forecast, the first half and second half. In the second half, well, in the first half, Q1 was very strong. That’s these numbers. But currently, in Japan, we are receiving a large number of inquiries from our customers. And it’s been difficult for us to allocate human resources for all the customer demands. So we will have to keep an eye on that as we come out with the forecast. And of course, there may be some changes in the future, but these are the numbers that we’re looking at right now. And as I said earlier, over the medium to long term, Japan’s IT demand is expected to be strong. So, robust growth will continue. That’s our take. Thank you.

Unidentified Company Representative: Next to Yasui-san, please. [Operator Instructions] Please unmute and ask your questions.

Unidentified Analyst: I have two questions. First question is for Mr. Schierenbeck. You talked about the energy cycle, and it is likely to continue for 10, 20 years. It’s a supercycle that you mentioned. This means that Hitachi Energy’s high performance will continue for 10 years, 20 years out. Second question is that your take as well. Please elaborate further. And the second question is regarding Kato-san. U.S. and Japan, situation is such that in the United States, we don’t know who is going to be the President. We don’t know what the political situation is going to happen in Japan. So on the part of Hitachi, are you working on different scenarios in terms of impact as well as risks? What kind of discussions are you having within the company? Those are my two questions.

Andreas Schierenbeck: For the question, I think you are right, we are looking at a very special moment in times of the utility industry, the supercycle, which will continue, as you mentioned, and as we explained for 10 to 20 years. It’s just underpinned by demand growth, by data center, which are growing exponentially in a way which was nobody really foreseen. And I think we are really believing that the strong trend will hold on for this mentioned period because if you look at the planning cycle, 10 years, 15 years, 20 years, doing a grid planning for projects which have – after they are really starting, running for 7, 8 years, we’re really underpinning that the cycle will continue to deliver. So if you’re doing a – if you’re looking at the industry, if you’re doing today, a grid planning for 10, 15 years, you’re looking at the demand, you look what you need to build and you get approval from the regulator. Then of course, you’re getting the CapEx as well, which are attached to that project. So we have a very good foresight what is happening on the market. And then, of course, if you look at the project execution cycle, you need 4 to 5 years for planning and for permitting and then 3 to 4 years of construction, sometimes in parallel, that gives us enough confidence that we believe that, that will drive our industry. And you are right, the supercycle holds, and we’re assuming that you will see a strong performance of Hitachi Energy going forward for that period of time. Thank you for the question.

Tomomi Kato: I would like to address the second question from Kato. First of all, domestically in Japan. As I mentioned earlier, in terms of IT, there is strong demand. Demand remains strong. And we are also receiving orders from the public sector. But I don’t think policy is going to have a significant impact. There is a prevailing needs that is very steadfast. And domestically in terms of energy, infrastructure business is being promoted depending on the administration’s policy impact could be manifest. We are a public – we are a private company. And towards economic growth, we would like to see a stable political situation in the mid- to long term. We hope that the policy will be decided in a steadfast manner and implemented accordingly. In terms of social infrastructure, the impact is what we are going to be watching very carefully. Regarding the United States, on the other hand, here, again, we are involved in infrastructure business, especially Hitachi Energy as well as Railway Systems business. This social infrastructure investment is actively pursued by the current administration in the United States. And so depending on the next administration, there could be an impact. But on the other hand, in terms of the power grid there is – becoming old. Therefore, they need to replace. And even if there is a change in government, the need remains unchanged according to our expectation. We don’t know what is going to happen. So at any rate, we will be watching the situation very carefully going forward. Thank you very much. Thank you. Very clear.

Unidentified Company Representative: Thank you very much, next. Can you hear me?

Unidentified Analyst: I have two questions, directing my questions to Kato-san. What was that earlier demand for data centers? So in your data center-related business, there are lots of different businesses, which business is particularly growing in relation to data centers? And domestic growth, I think, is leading your data center business. But in both Japan and overseas, what is the forecast for this business and your forecast for demand in this area? And my second question, well, ¥300 billion of investment in generative AI, you announced. What is the progress of that investment, if you can share anything, I’d appreciate it.

Tomomi Kato: Thank you for the questions. Your first question related to data centers. In Hitachi’s case, a large business is Hitachi Energy’s business, transformers, we’re receiving orders for transformers and other equipment and storage, which is also used within the data center. DSS SAP Hitachi Vantara is responsible for that business. Other than that, this is in the CI sector. Air conditioner systems and industrial products, UPS and entrance and leaving system for buildings. So these are areas with a very large potential, I think. At this moment, there’s a lot more business overseas than in Japan. And as I shared, as part of the topics today, already we’re starting to see collaboration with data center operators in Japan and Singtel. In the Asia Pacific region, we are to expand our strategic alliance with the Singtel. These are the initiatives that we are undertaking. So we’re expecting Japan’s demand to grow as well. So that was my answer for the first question. Your second question, our investment for growth this fiscal year, ¥300 billion in generative AI that you mentioned. Regarding that, there are three things that we are pursuing. One is infrastructure development. For example, as we announced in Q1, Hitachi IQ which uses NVIDIA’s GPU combined with Hitachi’s platform, infrastructure solution for AI. So such infrastructure development and hybrid cloud development, that’s number one. Secondly, to strengthen service engineering, for example, depending on customer needs, generative AI life cycle service can be provided. For example, selection and building of LLM and performance analysis of LLM optimization. So these services can be provided. And within the investment, we would like to strengthen such services. And generative AI personnel reinforcement. So both including internal and external resources, there’s a need for us to strengthen human resources in generative AI. And what’s been going on since last fiscal year is R&D. And inclusive of potential M&A, we would like to continue to consider and examine this. That would be all. Thank you.

Unidentified Analyst: Thank you.

Unidentified Company Representative: Thank you. Hirakawa-san, please. [Operator Instructions]

Unidentified Analyst: I have a two questions for Mr. Schierenbeck. First question is deviating from today’s presentation. According to your experience at Siemens and at the T&D business, I understand you’ve been involved in that business at Siemens. Now you’ve come to Hitachi Energy 6 months have passed. What is the strength of your Hitachi Energy and the challenge? And compared to your experience in the past, what is your evaluation for grid and technologies? Shall I do the second question, too? Let’s do one by one.

Andreas Schierenbeck: Thank you very much for the question. Yes, it’s right. I spent the beginning of my year in the T&D business in Siemens. Actually, a few trends, which we have set at this time are now coming to fruit. If you look at the protection protocols, ESA 81650, which are now in full swing, it really shows that our industry is sometimes very conservative, and it takes very long for innovations to coming through. I think it was the same for renewables. We were talking about renewals for a long time. And now actually, we see that they are the cheapest and the best way to add energy capacity. I think the – if you look – if you’re asking my opinion about Hitachi Energy, I think let me add two things. First of all, it’s a great company with great motivated colleagues and with a lot of possibilities to collaborate inside of Hitachi, especially with the digital side, which enables very new perspectives from my side. On the other hand, we have to manage the growth, and that’s one of the challenges. It’s a positive challenge because we have managed over the last decade, everybody in the industry how to deal with capacity decrease, how to manage to actually sometimes to survive. Now we have growth, something which we have to learn again, how to adding capacity, how to run these processes. And I see great potential in that. You see with our CapEx expansion that we are able to put CapEx into the ground that we are able to manage the growth, which is resulting in our backlog margin and our revenue. So that makes me very optimistic for the future that we can really drive that business inside of Hitachi with collaboration with the digital side to complete new things. Thank you very much for your question.

Unidentified Analyst: Thank you very much for that response. I have my second question for Mr. Schierenbeck. It’s regarding the management of growth that you mentioned. In terms of CapEx, $6 billion is conducted, so that capacity can be increased according to your explanation. For the existing big 3

Andreas Schierenbeck: Of course, I can make no comments about what competition is doing. They have to read the market and take their own decisions. We are investing significant amounts into CapEx expansions, and we are doing it in a very conservative way as we have done only where it makes sense because we have capacity reservations and framework agreements and a good business case going forward, we are investing. Yes, it’s very conservative, as I explained already because it is actually only adding capacity, which was already dedicated. So, there is no – nearly no free float for new customers. So, from that point of view, I think we have to discuss how is our risk profile if this trend continues very long as we have seen it, and we see more proof points, I think we can reconsider that. On the other hand, building up new capacity is not easy, especially in the area of power transformers, where the biggest demand and waiting times of 3 years to 4 years if we have no reservation. Of course, it would be quite natural to saying, okay, let’s build a new factory. Even if you have some money, it is not that easy because, first of all, you have to get winding machines, which are very special equipment and these production – producers of winding machines are booked for years ahead now as well. Secondly, it’s a lot of manual work providing the resources and the experience to create power transformer. You need persons – people, have the colleagues who have trained for that. It takes up to 2 years to qualify a winder to do that work. So, having really capacity addition and that is not an easy task. So, I don’t expect too many new entrants in the next couple of years. But of course, if we are not able to fulfilling the demand as an industry, with existing capacities and the measurements we are doing, of course, there is a risk that new entrants will suddenly over the time come. But at the moment, I don’t see it too strong because at the moment, we are doing, I think the right thing. Thank you for your question.

Unidentified Company Representative: Thank you very much. The next person, please un-mute and start your questions.

Unidentified Analyst: I have two questions. Question number one. About the power grid company and the other is about Astemo, I have these questions for the CFO. First about the Power Grid., looking at the new plan that you have in the second half, revenue in dollar terms is to have a 12% growth, but profitability compared to the first half will go down in the second half. That means that the plan that you have is not very ambitious, why is this the case, if you could please explain? So, you are having a conservative plan and at the head office, did do some decide on this plan, or it’s a conservative plan, and Hitachi Energy’s, Mr. Schierenbeck is not very positive about this business or are you just saying that this is the reality. You have limitation on production capacity, so you cannot drive revenue because of the constraint. What are the reasons? What are the factors behind this?

Andreas Schierenbeck: Let me start. First of all, actually, the opposite, I am very positive and very bullish about the business, but please understand I am only three months in the business. And of course, to understanding the behaviors, it takes a little bit longer from that point of view. So, I wouldn’t exclude that we are conservative. Of course, we are careful, I would say it. Maybe there is a chance to deliver better results, but we have to look into it. At the moment, that’s the guidance we have put to the market. Of course, there is always a possibility that revenue is shifting because customers are not accepting projects and so on. These things are not like in a product business where you make a transaction and creating then revenue and profitability to go in with that. So, it’s a mixed issue. But don’t take me wrong. I am very bullish and very positive about the business. And actually, you have to look at the long-term performance and not at the quarterly results, which we are driving to really evaluate our performance and how the business is progressing. Thank you for your question.

Tomomi Kato: Well, thank you very much for the question. Well, Andreas-san has expressed his view. From my perspective, I am a little bit more ambitious or greedier should I say. In the Q1, we made an upward revision, and we are making another upward revision. So, reviews are being conducted. But perhaps in the second half, we believe we can do more and of course, it’s not reflected in the revenue. And as we talked about this in July, we are applying a stretch on the operating income. That is what we are doing, at least for the operating income. Now, that I have agreed with Schierenbeck, but that is something that I took liberty to do myself. So, did that answer your first question?

Unidentified Analyst: Yes. Thank you. Secondly, about Astemo and I think this has to do with the recall by Honda. If there is a breakdown of numbers, I would like to know. And it’s deconsolidated, so what is the decline in revenue because of that? And I think this is under equity law. But why is this elimination like this? How much of that is Astemo’s? Looking at the second half plan, it’s going to be a one-off exercise, if you will. So, Astemo’s impact will no longer be visible in the second half, am I correct, because it’s going to be a one-off?

Tomomi Kato: Thank you for the question. What I talked about earlier, so equity loss in Astemo in Q2. Well, that’s because of the warranty allowance for products sold by Astemo posted. And that’s under the equity law, it’s an equity affiliate. So, that is the extent to which that I can answer your question. But how much deterioration has Astemo seen, well, let me explain that. Earnings presentation, Page 21, please have a look at Page 21. Q2 and full year profit and losses stated here. So, Q2 ‘24 equity profit and loss, ¥26 billion deterioration is noted here. The large bulk of the deterioration is associated with Astemo.

Unidentified Analyst: What is the full year forecast for that?

Tomomi Kato: We had the last forecast, ¥17 billion. The last time, a large bulk of that is because of Astemo. So, that is the size of the impact, if you could please understand. That would be all. Thank you.

Unidentified Company Representative: Thank you very much. Next Yoshizumi-san [ph], please. Please un-mute and ask your question.

Unidentified Analyst: I also have two questions. As already mentioned today from – and the mid-term management plan progress meeting was held in April and ¥1 trillion in terms of investment mentioned by Kojima-san. I would like you to elaborate. I understand the generative AI but for GX-DX, I think there was several tens of millions that was included in as well as M&A. Please elaborate further on the progress made in the ¥1 trillion earmarked. Now, for 2027 mid-term management plan, I understand that this is being considered and numbers cannot be shared at this point in time. But can you talk about this in providing us an update in terms of a qualitative manner?

Tomomi Kato: Thank you for your question. This is Kato. I would like to respond regarding April. The announcement was made at the Investor Day in June, further explanation was provided that there are three areas that we are considering. One is generative AI, about ¥300 billion is being contemplated. Manufacturing areas where growth can be expected is the second area and service business. For DX-GX for the growth areas, for example, battery and related to inclusive M&A, we will consider possibilities. R&D in a wider sense will be contemplated, investments are considered in that way. In terms of scale, it’s about ¥200 billion is being contemplated today. And social infrastructure service acceleration, the service business, as already explained today, GEM sector as well as CI sector, mainly in these sectors, customer base and installed base are increasing, expanding. So, utilizing this installed base, we want to provide more services, not just the conventional services. About DSS, IT, power will be utilized and digital services to be provided. Inclusive of M&A, we will consider possibilities. And the scale is around ¥200 billion that is being contemplated in this area. Total is about ¥700 billion, inclusive of Gen AI. In terms of ¥1 trillion, we mentioned that M&A, if there is a good deal. And regarding ¥700 billion, this is a specific consideration we made for the ¥700 billion apart from M&A. So, I hope I have answered the first question.

Unidentified Analyst: So, ¥700 billion will be utilized within this fiscal year? Is that a correct understanding?

Tomomi Kato: That is the plan for us. But when we consider M&A and as well as other investment, we need the other party. So sometimes, the timing could be delayed. But we think that the opportunity for growth is significant. Therefore, the current mid-term management plan is until March of next year. And there might be some timeline, but we will continue this when we also enter the next mid-term management plan period. So, that – to your second question, regarding the next mid-term management plan, we are considering this at various levels. I can only say that it is under consideration today. And so please wait for the announcement to be made next year. Thank you.

Unidentified Company Representative: Next person, please un-mute and state your questions.

Unidentified Analyst: Can you hear me?

Tomomi Kato: Yes, we can.

Unidentified Analyst: Thank you. Already one of the questions I wanted to ask was answered, so only one question. So what is the impact to BOJ’s policy and interest rate changes? What is the impact, and what kind of measures are you taking at the moment?

Tomomi Kato: Thank you for the question. Regarding Japan, well, there was one interest rate hike and more is expected in the future. For what has happened this year, we are factoring that in to some extent. But for the rate to go up to 1%, it will not all of a sudden rise to 1%. It will rise very gradually over the medium to long-term. So, in that regard, I don’t think there will be a large impact on our business. And to touch upon overseas, conversely, rate cuts are being considered and factored in. But there could be impact from delays in rate cuts. For – so we do think that there is a possibility that there are going to be delays and they are being factored in. So, for the yen as well as dollar-euro overseas, the impact from these changes on our performance this year is going to be limited. That’s our view. Did that answer your question?

Unidentified Analyst: Regarding ForEx, about the yen, if you have any view, please share it with us.

Tomomi Kato: The assumptions for the ForEx rates are as presented in the material, ¥140 to the dollar. That’s our assumption. There is a gap with the actual rate. But at this moment, there is a lot of volatility. It could change more than ¥1 a day. So, it’s very difficult to forecast at this moment. But we have the assumption, as I shared with you. So, more so than our assumed rate, I don’t think the yen will strengthen any further above and beyond that. So, for this fiscal year, I don’t think there is going to be a negative impact from that. So, we do hope that the rate will move in a stable fashion going forward. That would be all. Thank you.

Unidentified Company Representative: Thank you very much. We now would like to go to the English channel. [Operator Instructions] There is not and we still have some time, so we will come back to the Japanese channel. There is one more person with hands up. Actually, there are four hands up. And that will be the completion. So, we might not be able to take questions on the second round for some of the people. But Hirakawa-san [ph], over to you, please un-mute and ask your question.

Unidentified Analyst: Thank you very much for this opportunity today. I have one question. Regarding second quarter forecast, what is the internal evaluation? And for the first half and second half plan is not presented to the outside, but there is a revision for the fiscal year. I have no questions. But I think further elaboration is warranted. In order to understand this I would like to know the second quarter forecast orders as well as revenues as well as profit. What is the upside, downside? What is the internal evaluation you have made for the second quarter?

Andreas Schierenbeck: Kato will respond.

Tomomi Kato: Regarding the second quarter revenues, increased by ¥110 billion. Adjusted EBITA reduction by ¥10 billion – declined by ¥10 billion. For the three sectors, our revenue is the same, ¥110 billion increase. Adjusted EBITA is increased by ¥14 billion. The PD [ph] increase for GEM. Adjusted EBITA overall has declined. This is because of the equity and losses of Hitachi Astemo, deterioration was experienced. Excluding this, there was an increase. In terms of revenues, ¥110 billion. ForEx accounted for 90%. ForEx impact accounted for 90%. Beyond that, there was organic increase.

Unidentified Analyst: What about orders received?

Tomomi Kato: In terms of orders, I don’t have the additional numbers. But basically, compared to what we had forecast, it was upside. So, the direction is similar to trends in revenues.

Unidentified Analyst: What about the second half? In terms of revenues is second quarter 2x, that’s the plan number. For the third quarter, in the next quarter, depending on how well you do, there could be further upside, can we understand that to be the case?

Tomomi Kato: As I mentioned earlier, in terms of our operating profit, the company level, we have additional improvements to be made, but we have not done that for revenues. There could be upside for revenues in that regard.

Unidentified Analyst: Thank you very much. Second question, regarding global logics, for the second quarter, in the first half, the profitability, there is about 20% of profit margin. For the second half, 20% is the plan, but the personnel expenses could increase and the revenue is going to decline in the second half. So, for this segment, what is the profit margin for the second half? What are your assumptions?

Tomomi Kato: Thank you for your question. In the second quarter, compared to the first quarter, profit margin has improved, profitability has improved. Tech as well as telecommunications orders have been received. And we have been – we have done a better job in terms of cost control. But as you have rightly mentioned, I mentioned the manpower cost is also a pressure for us. And this could occur in the third quarter and on. And that is the basis of our forecast. And this is the most likely forecast for the time being.

Unidentified Analyst: Thank you very much. That’s all for me.

Unidentified Company Representative: Thank you very much. To continue, the next person.

Unidentified Analyst: Well. Thank you. I have two questions. Question number one, Hitachi Energy’s Q2 actual results, well, our revenue is down, even the – well, due to ForEx perhaps, but there is lots of orders received yet, it’s down. And so with asset management increasing, why profitability is weak in Q2? So, if you could please elaborate on the actual numbers for Q2 for Hitachi Energy, please?

Andreas Schierenbeck: And I can maybe answer one. Order received, there was one bigger project shifted from one quarter to another, so we will see that in the future. In regards of the revenue, I would refer to Kato-san.

Tomomi Kato: Regarding revenue, Q1 was very strong. And it depends on projects depending on the progress in projects. Q1 was very strong. Based on the yen, of course it’s affected by ForEx. Excluding ForEx, lots of projects were concentrated in Q1. But over the medium to long-term, it will continue to grow stably as we explained.

Unidentified Analyst: What about profitability? Profitability is down, too.

Tomomi Kato: Profitability also differs from one project to another. So, in that regard, in Q1, projects with high margins were concentrated.

Unidentified Analyst: So, backlog margin is improving, is that correct? Because looking at the numbers, I thought there would be a gap between what you said and the numbers.

Tomomi Kato: Yes, backlog margin is improving. But if we look from one quarter to another, it all depends on the projects. So, if you could take a longer term view, 1 year or 2 years, I think you will be able to see the actual numbers improving from a longer perspective. So, if you could take a look at the numbers from a different timeline perspective, you will see that.

Unidentified Analyst: Thank you. I have the second question for Mr. Schierenbeck, you were saying that you are going to grow the service business. The margin for the service business, what is the level, is it 15%, 20%, 30%? You may not be able to share the details, but how much contribution can it make for improving margin for Hitachi Energy overall? What about the geographic regions, which area do you expect to see growth? While GE is also saying something similar, they want to grow their service business. But what is different for your service business compared to GE, for example, if there is any point of difference or differentiation, please elaborate on that as well?

Andreas Schierenbeck: Yes. Thank you for the question. I think we are in the middle of setting up our service organization to going forward and really starting it April next year, for the next fiscal year, we are in the middle of the budget period of doing that. What we are doing in service, of course I will make the no comment what we are doing different and our competition because I don’t have the insight and I would comment on that. We are focusing on our installed base. And just to make sure that with growth on products and projects we are having with new installations, we are not losing the focus on service. If you look at the service business, service sales, service management normally is a different behavior of people of processes. And it’s very easy to lose focus on service if you are selling big projects with big numbers and neglecting actually the service potential. We want to avoid that, and that’s why we are starting now to focus on that going forward that we have for this period of growth in order intake and then revenue going forward, not losing our service focus. Of course, we stated that our service margins have to be accretive. That means they have to be higher than the average of that. Of course, I would make no comment at the moment, it’s a magnitude of that, but you can expect it would be higher than the overall result that we are having now for the whole business. Thank you very much.

Unidentified Company Representative: Thank you. We have gone beyond the allocated time – the scheduled time, but would like to continue. Tanaka-san [ph] over to you, please un-mute and ask your question.

Unidentified Analyst: I have two short questions. First question is regarding energy. I understand that the seventh strategic energy plan has been formulated for the government. What is your view on that? And second point is regarding foreign exchange, compared to the first quarter, there seems to be a change in sensitivity to foreign exchange, please elaborate.

Tomomi Kato: I would like to respond to your questions. Regarding the previous question, what is going to be the impact of changing government was posed, and basically, the response is the same. In Japan, regarding energy is the business that we are pursuing. From that point of view, the strategic energy plan is going to be formulated and the direction that has been considered in the past should be remaining intact in a stable manner. This would be very much appreciated as a private company, as company in the private sector. Next, regarding sensitivity of the foreign exchange, in the second quarter and third quarter, it is only outlook, this is not actual. And in the first quarter, I talked about the coming nine months. And now we are talking about the next six months. So, that is how the numbers may differ. And basically, the number would become smaller in terms of sensitivity.

Unidentified Company Representative: Did that answer your question? Was the answer sufficient? It’s past the time, but we would like to take two more questions. We would like to switch over to the English channel to take questions from one person, Harada-san.

Ryo Harada: Hello. Thank you very much. Yes. Thank you very much for taking my question again. And I have two questions to Andreas on Hitachi Energy and the good business. Yes, in the short-term like long-term. Like firstly, the short term, yes, of course the Hitachi Energy’s margin is having improved from the previous quarter – previous year. But if you could improve the margin and sales growth rate even more in the near-term, what you can increase – improve from here, like maybe short-term – number of short-term products increases or maybe pricing environment, etcetera, because I do believe that your – I think the fiscal year’s guidance is, I think it’s conservative as well. So, it’s not necessarily maybe this year, but even like a 1 year or 2 years’ program. If you can change from the previous leadership, what you will change through the short-term?

Andreas Schierenbeck: Thank you for the question. I think what you are seeing in profitability, especially short-term is still effect on the backlog because we still have in the backlog projects which we are taking in with more risk or we have different terms of conditions because some of the projects are having a multiyear durability. So from that point of view, you see that the order backlog margin going forward is improving, but you don’t see it immediately in the revenue. So actually, a big effect of that is if your revenue, the old projects out and deliveries, and of course, you see naturally a better behavior creeping in. And of course, you will see a little bit of volatility in that depending which projects is creating revenue, getting customer acceptance and so on. And the – but the impact of the older projects will become tendency, of course smaller going forward and the newer projects will be taken over the majority. Of course, it’s very hard to predict actually the seasonality in that business because it depends on a lot of other things. If we are doing HVDC links, which are on offshore, where they have can impact that as we are moving from one quarter to another. So, it’s not a short-term business, which is only transaction base. It depends as well on customer readiness to accept things on qualification of products. So, there will always be some shift in that. Of course, I will make no comments about prior leadership. I think going forward, you will hear from me more what we are planning, what we are doing. Definitely, we have to have to find the balance on how we are forecasting because if we are too bullish, normally, the same question is coming, why we have forecasted more and not delivering on our promise. So, from that point of view, I expect that we are probably getting improvement in our accuracy of forecasting. But I still believe that over-delivering and under-promising is probably better than the other way around if it is an acceptable benefit, I would say. But we will have the discussion with Kato-san on how we are improving going forward and find a mutual agreement. Thank you for the question.

Ryo Harada: Great. Yes. Thank you very much for the color. So, second question is a long-term perspective. So, yes, clearly, Hitachi Energy is core kind of strategy is that how to digitalize the infrastructure and then how to improve the margin. That’s kind of the strategy. And yes, of course like, I think – based on your background, I think you are having a strong background like thyssenkrupp and Siemens. And then I think you should have a good kind of best practice to improve the like recurring type of revenue. So, what will you be able to bring Hitachi like, yes, you are kind of experienced based, I mean best practice or how to improve the margin or digitalize those products?

Andreas Schierenbeck: Thank you for the question. Of course, it’s a complex one, and not everything I have done in my life can be transferred immediately. And it’s even harder to measure it, the impact on the margin, especially in the long-term business. But if you look at my track record, I definitely look very much into digitalization, rolling out cloud solutions and IoT and the service business where I believe service business over days can benefit massively from IoT, from asset monitoring improvement of these processes and to deliver customer value on that is definitely something we have some experience. Of course, we have to say that some of our customers are very, very, very conservative, especially in this respect of data sharing and seeing the benefit of that as other customer groups like data centers are probably different entry barriers and hurdles, so we will see kind of mixed picture going forward. So, it will take some time to transform this industry and to seeing the benefits of digitalization. But I am an optimist on that. We will see the effect. And actually, the margin improvements will contribute to our business in the long-term. Thank you very much.

Ryo Harada: Yes. Great. Thank you very much. Yes. That’s it from my end. Thank you very much.

Unidentified Company Representative: Thank you very much. We will now take the last question. Ayada-san, please. Please un-mute and ask your question.

Junya Ayada: In the interest of time, I have two questions. First question is regarding the results. Regarding GEM power grid, second quarter margin has declined and Kato-san talked about the difference in projects. But there are different categories here. For example, the HVDC as well as grade integration, I think there are four areas mainly. Depending on the different types, is it having a – for example, I don’t think there is much difference in terms of the converters and transformers, but is it having a different impact? And for the different categories, is there going to be volatility in the second half as well, depending on the type of products within this area? Depending on the category profit margin, I assume is different, so please talk about the difference and how it impacts the performance.

Andreas Schierenbeck: Thanks for the question. Of course, there is some impact. I think we don’t share in concrete results from the different businesses in Hitachi Energy. But of course, there is intercompany business as well, transformers, delivered from transformers to HVDC in grid integration that then delivered to the customer. So, when you are recurring – when you are considering revenue on which margins, of course has some volatility because of the consolidation from that point of view, it’s a complex view. Of course, we have different margins in different businesses. So, it depends on the mix. Software businesses are naturally sometimes a little bit higher than pure product businesses. Then you have all these kind of impacts. So, from that point of view, I think if you look at the path and looking into the future, there will be some volatility from that. It has to of course stay in certain bandwidth because it’s de-risked. But of course, it will be not just find clear line going straight and without any bumps in the road. Of course, we are trying to get better with forecasting these results, especially with rAVe installation because now we have actually the project controlling in our fingertips. It shows exactly what is going on. Normally, that would take 3 years not years or days or weeks to prepare and you only look at certain projects. Now, we have a much better overview on that. So, I think we will be able to get the volatility, the benefits a little bit down, but don’t expect the volatility is going away completely due to these effects. Thank you for your question.

Junya Ayada: Thank you very much. Regarding second question, regarding DSS servicing platform, the second quarter profitability has declined. You said that there was some shift in terms of Vantara. Regarding servicing platform, for the second half, commit to the first half, it seems that the profit is likely to jump up. Year-on-year basis, comparing the second half, profitability is likely to increase according to your forecast. In terms of storage, I understand the orders are received and probability is high, is that the case? And from the first half to second half, if it continues to the next fiscal year, can we see significant increase in the next fiscal year as well? How much visibility do you have? Please elaborate further.

Tomomi Kato: Thank you for your question. Regarding storage, in the second quarter, there was some front loading to the first quarter and competition is becoming more intensified. Sometimes you were not able to sell according to the plan. Therefore, sales are not pursued according to plan. In some cases, regarding profitability, we underperformed the plan. This is because of memory cost has increased. And we were not able to reflect that in the price driving down the margin. We are taking countermeasures from memories. The application of the different memories is being considered. So, then we can recover the reduced margins. Midrange new products has been announced in the first quarter and gradually we are receiving orders for these products, it should contribute to revenues in a full-fledged manner from the third quarter. For the time being, regarding the recovery in the second half, we believe it is possible. But we have to recover in a short period of time, so it could be subject to volatility. But basically, we are keen to achieve this. From last year to this year, there has been improvements made and the weather momentum is going to be sustained for next fiscal year is uncertain. So, for this fiscal year, as I mentioned earlier, we want to recover in the second half. And that is reflected in the numbers presented here today. Thank you.

Junya Ayada: Understood. Thank you very much.

Unidentified Company Representative: Thank you very much. It’s past the time to close. Thank you very much for being with us for many hours. With that, we would like to conclude Hitachi Limited’s web conference for Q2 2024 earnings. Thank you very much for being with us for many hours.